How does Microsoft make money?
Microsoft earns money in four main ways: cloud services billed by subscription or by usage, software licenses with support, online advertising on Bing and LinkedIn, and devices such as XBOX consoles and Surface. Most of it is recurring, because businesses pay every month or year for the software and cloud capacity they use.
It reports three segments. Productivity and Business Processes, which holds Microsoft 365, LinkedIn and Dynamics: $140.0 billion in fiscal 2026, about 42.2% of revenue, up 16%. Intelligent Cloud, which holds Azure, server products and enterprise services: $137.8 billion, about 41.5%, up 30%. More Personal Computing, which holds Windows, devices, XBOX and search advertising: $54.1 billion, about 16.3%, down 1%. No single customer, and no country other than the United States, accounted for more than 10% of revenue; the United States brought in $170.8 billion, about half.
- Microsoft Cloud
- Microsoft’s own measure of its cloud revenue: Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial part of LinkedIn, and Dynamics 365. It was $214.4 billion in fiscal 2026, spread across two segments.
Which Microsoft segment makes the most profit?
Productivity and Business Processes. It earned $83.9 billion of operating income in fiscal 2026, about 54% of the company’s total, on 42% of revenue, an operating margin of about 59.9%. Software sold by subscription costs little to deliver to one more user, so most of each extra dollar stays as profit.
Intelligent Cloud earned $57.0 billion, about 37% of operating income, at a margin of about 41.3%. Its cost of revenue rose 44%, faster than its 30% sales growth, because Microsoft is spending heavily on AI infrastructure, so its margin fell. More Personal Computing earned $14.4 billion, about 9%, at a margin of about 26.6%. For the whole company the operating margin was about 46.8%; the income statement lesson shows where these lines come from.
- Operating margin
- Operating income divided by revenue: how many cents of each sales dollar are left after the costs of running the business, before interest and taxes.
What are Microsoft’s biggest products?
Microsoft also breaks revenue down by product and service. In fiscal 2026 the two largest were Server products and cloud services, which is mostly Azure, at $129.4 billion, about 39% of revenue, and Microsoft 365 Commercial, the Office apps, Teams, email and security that companies buy per user, at $102.0 billion, about 31%. Together they were about 70% of revenue.
The rest was much smaller: XBOX $21.8 billion, LinkedIn $19.8 billion, Windows and Devices $17.1 billion, Search advertising $15.2 billion, Microsoft 365 Consumer $9.2 billion, Dynamics $9.0 billion, and Enterprise and partner services $8.3 billion. XBOX revenue fell 7% as console sales dropped 29%, while Search advertising rose 9%.
- Azure
- Microsoft’s public cloud platform: computing power, storage, databases and AI services that customers rent and pay for mostly by how much they use.
Why do Azure growth and AI spending move Microsoft stock?
Azure and other cloud services grew 41% in fiscal 2026, the fastest of Microsoft’s large businesses, so each quarter the market compares that growth rate with expectations. Microsoft Cloud revenue grew 27%, but its gross margin fell to 66% because of the cost of AI infrastructure.
To meet that demand Microsoft spent $115.9 billion on additions to property and equipment in fiscal 2026, against $64.6 billion a year earlier: data centers, servers and chips. It also reported a commercial remaining performance obligation of $678 billion, up 84%, of which it expects to recognize about 30% as revenue over the next 12 months. Investors weigh the two together: a large backlog supports future revenue, and heavy spending lowers free cash flow today.
- Remaining performance obligation (RPO)
- Revenue a company has already contracted for but not yet recognized, including amounts still to be billed. It shows how much future revenue is under contract.
When does Microsoft’s fiscal year end?
On June 30. Fiscal 2026 ran from July 1, 2025 to June 30, 2026, so Microsoft’s first quarter ends on September 30, the second on December 31, the third on March 31 and the fourth on June 30. Its 10-K says revenue is generally highest in the fourth quarter, when many multi-year contracts are signed.
Watch for one-off items in net income. Microsoft owns a stake in OpenAI, accounted for under the equity method, and fiscal 2026 net income of $133.7 billion included net gains from it that added $5.0 billion. Microsoft therefore also reports adjusted earnings per share without those gains: $17.28, against $17.95 as reported. Segment results and operating income do not include them.
What should you watch in Microsoft’s earnings report?
Microsoft reports after the US market close, about four weeks after each quarter ends. As one of the Magnificent Seven it can move the Nasdaq-100 and the S&P 500. Read these each quarter:
- Azure and other cloud services growth, and the company’s outlook for it in the next quarter.
- Microsoft Cloud gross margin, a sign of what AI infrastructure is costing.
- Capital spending on property and equipment, and free cash flow.
- Commercial remaining performance obligation, the contracted backlog.
- Operating income by segment, and any one-off items such as OpenAI gains or losses; see how to read earnings reports.