The short version
Microsoft had the most profitable year in its history: $133.7 billion of net income, up 31%, on revenue of $331.8 billion, up 18%. Yet free cash flow fell from $71.6 billion to $67.0 billion.
The reason is the AI build-out. Microsoft spent $115.9 billion on property and equipment, 80% more than a year earlier: 35 cents of every revenue dollar and 63% of its operating cash flow, up from 32% three years ago. Servers and network gear on its books jumped from $133 billion to $216 billion, and depreciation rose from $22 billion to $34 billion. The Microsoft Cloud's gross margin slipped to 66%.
The biggest part hasn't started yet. Microsoft has signed $329.1 billion of leases, mostly for data centers, that begin between fiscal 2027 and 2033. With purchase commitments, construction and debt, its contractual obligations total $743.8 billion, up from $397.0 billion. On the other side, customers have signed $684 billion of revenue not yet delivered, but only about 30% of it is expected within twelve months.
OpenAI sits in the middle: Microsoft owns about a quarter of it, OpenAI paid Microsoft $24.1 billion this year, and Microsoft booked $6.5 billion of gains on its stake. What to watch next: does the Microsoft Cloud's gross margin hold above 66%, and does free cash flow grow again while profit climbs?
