Microsoft has reported its Q1 FY2026 financial results for the quarter ending September 30, 2025, marking another strong performance for the technology giant despite a downturn in its gaming division. The company posted $77.7 billion in total revenue, an 18 percent year-over-year increase, while operating income rose 24 percent to $38.0 billion. Net income reached $27.7 billion, up 12 percent, with diluted earnings per share (EPS) of $3.72, reflecting a 13 percent annual increase.
The growth was largely powered by the continued expansion of Microsoft’s cloud business, which once again served as the company’s primary driver of profitability. Microsoft Cloud revenue reached $49.1 billion, up 26 percent from the previous year, showcasing the strength of services such as Azure, Microsoft 365, and Dynamics 365 across enterprise and consumer markets.
Segment performance remained robust across Microsoft’s three main business categories. Productivity and Business Processes generated $33.0 billion in revenue, growing 17 percent year-over-year, thanks to steady enterprise demand for Microsoft 365 and LinkedIn services. The Intelligent Cloud division, which includes Azure, reported $30.9 billion in revenue—an impressive 28 percent increase driven by sustained global demand for artificial intelligence and data infrastructure solutions. The More Personal Computing segment, encompassing Windows, Surface, and Xbox, grew modestly by 4 percent, reaching $13.8 billion.
A significant development this quarter was Microsoft’s strengthened relationship with OpenAI, following the organization’s recapitalization in October 2025. Microsoft now holds approximately 27 percent equity in OpenAI’s public benefit corporation and has invested $11.6 billion of its total $13 billion commitment. Additionally, Microsoft has entered into a $250 billion agreement to purchase Azure services from OpenAI, highlighting the strategic importance of artificial intelligence and cloud infrastructure in the company’s long-term vision.
However, Microsoft’s gaming division experienced a slight contraction. Total gaming revenue fell 2 percent year-over-year to $5.5 billion, as declining console hardware sales offset modest growth in digital content and services. Xbox hardware revenue dropped 29 percent, attributed to lower console shipment volumes and market saturation following strong post-pandemic years. By contrast, Xbox content and services revenue increased by 1 percent, driven by continued growth in Game Pass subscriptions and stable third-party content performance.
Despite the decline, Microsoft’s gaming business remains strategically important. CEO Satya Nadella recently reiterated that Windows remains the company’s “biggest gaming business,” emphasizing Microsoft’s long-standing influence over the PC gaming ecosystem. “Remember the biggest gaming business is the Windows business,” Nadella told TBPN in an interview. “Gaming on Windows, and of course Steam, has built a massive marketplace on top of it and done a very successful job of it.” His remarks reflect Microsoft’s broader shift toward cross-platform accessibility and a long-term commitment to gaming beyond hardware metrics.
The company’s financial foundation remains exceptionally strong, with $102 billion in cash and short-term investments. Microsoft repurchased $4 billion in shares during the quarter and declared $6.8 billion in dividends, amounting to $0.91 per share. Capital expenditures reached $19.4 billion, primarily allocated toward expanding AI and cloud infrastructure. The company also reported a Commercial Remaining Performance Obligation (RPO) of $392 billion, a staggering 51 percent increase year-over-year, demonstrating the durability of its long-term enterprise contracts.
While the Xbox business faced short-term headwinds, Microsoft’s overall outlook remains optimistic. The company continues to benefit from its hybrid ecosystem of productivity tools, AI partnerships, and cloud services, which together form the backbone of its accelerating profitability. As AI integration deepens across all segments, Microsoft appears well-positioned to sustain growth throughout fiscal year 2026—even as it navigates transitional challenges within its gaming and hardware divisions.
