Microsoft’s 32% Profit Growth Falls to 18% After Adjustment

Microsoft (NASDAQ:MSFT) reported a 32% increase in quarterly net income on Wednesday, October 28, but its profit growth slowed to 18% after excluding the impact of its investments in OpenAI. The difference raises an important question about the software giant’s latest earnings: how much of its reported profit growth came from business performance, and how much reflected investment-related accounting?

The company’s fiscal first-quarter 2027 results showed net income of $36.63 billion under generally accepted accounting principles (GAAP), compared with $27.75 billion a year earlier. On Microsoft’s adjusted basis, which excludes the impact of its OpenAI investments, net income reached $36.42 billion, up from $30.83 billion.

Both figures are accurate. But they measure different things, and the gap between them changes how Microsoft’s earnings growth should be interpreted. Microsoft’s quarterly earnings also exceeded Wall Street expectations, with adjusted earnings per share of $4.89 against an estimate of $4.72 and revenue of $92.28 billion against expectations of $90.61 billion.

The stronger-than-expected results coincided with accelerating Azure growth and rising demand for Microsoft’s cloud infrastructure. Yet the difference between reported and adjusted profits reveals another important part of the quarter.

The $3.3 Billion Swing

Microsoft’s earnings reconciliation identifies two investment-related adjustments that explain the divergence. During the September 2026 quarter, gains associated with its OpenAI investments added $207 million to reported net income. In the corresponding quarter of 2025, losses associated with those investments reduced net income by $3.09 billion.

That represents a $3.293 billion favorable swing between the two reporting periods. An Investozora analysis of Microsoft’s fiscal first-quarter earnings reconciliation found that the $3.293 billion swing accounts for the difference between reported and adjusted year-over-year profit changes in dollar terms, producing a gap of approximately 14 percentage points between their respective growth rates.

The calculation is straightforward. Microsoft’s reported net income rose by $8.882 billion, from $27.747 billion to $36.629 billion. Excluding OpenAI investment effects in both periods, adjusted net income increased by $5.589 billion, from $30.833 billion to $36.422 billion. The difference between those two dollar increases is exactly $3.293 billion.

This matters because most of the discrepancy did not come from a large investment gain in the latest quarter. Instead, it came from comparing a relatively small current-year gain with a substantial investment-related loss in the previous year. The year-earlier loss depressed the GAAP comparison base. Its absence in the latest quarter made reported profit growth appear considerably stronger than growth calculated on Microsoft’s adjusted basis.

It would therefore be misleading to describe the adjustment as a sudden deterioration in Microsoft’s operating performance. The company did not lose 14 percentage points of operating growth when the adjustment was applied. The two net-income growth rates simply use different, consistently adjusted year-earlier comparisons.

Microsoft states in its official earnings release that it excludes these OpenAI investment effects from its non-GAAP results to give investors an additional view of operating performance. The distinction is also consistent with the broader regulatory framework for adjusted financial reporting. The Securities and Exchange Commission’s non-GAAP rules require companies to reconcile such measures with their corresponding GAAP figures.

Importantly, the SEC’s interpretive guidance addresses the importance of consistent adjustments across periods and warns that excluding losses while retaining comparable gains can produce misleading presentations.

Microsoft’s reconciliation removes the identified OpenAI investment impact from both comparison periods. That makes the 18% figure useful for examining earnings growth without those particular investment effects, although it does not make adjusted earnings inherently superior to GAAP income.

Operating Profit Tells Another Story

The earnings adjustment becomes more meaningful when compared with results from Microsoft’s operating businesses. Revenue increased 19% to $92.28 billion in the September quarter, while operating income climbed 21% to $45.92 billion from $37.96 billion.

Those figures provide an important independent check on the profit story. Microsoft’s operating income is calculated before the investment-related effects that drive the difference between its GAAP and adjusted net-income growth.

Based on the company’s published income statements, operating margin increased from approximately 48.87% to 49.76%, an improvement of 0.88 percentage points. That indicates Microsoft generated more operating profit per dollar of revenue than it did a year earlier, even though the gross margin percentage declined. Azure remained central to that performance.

Microsoft disclosed Azure revenue of $33.17 billion, compared with $22.38 billion in the corresponding quarter last year, an increase of approximately 48%. Microsoft Cloud revenue reached $63.9 billion, up 30%. The company’s Agents and Infra division generated $76.8 billion in revenue, an increase of 25%, while Devices and Consumer revenue declined 3% to $15.5 billion. The contrast points to a business increasingly supported by cloud infrastructure and enterprise services, rather than uniform growth across every product category.

Investors following the company’s Azure results have therefore been assessing two different financial developments: faster growth in cloud-related revenue and the cost of expanding the infrastructure needed to deliver it.

The operating-income figures establish that Microsoft’s business became more profitable at the operating level during the quarter. They do not, by themselves, establish how much of that improvement came specifically from artificial intelligence products, pricing, infrastructure efficiency or changes in the mix of services sold.

Cash Flow Adds Context

The income-statement comparison is only part of the picture. Microsoft generated $58 billion in operating cash flow during the quarter, compared with $45.06 billion a year earlier, an increase of approximately 29%.

At the same time, additions to property and equipment rose sharply to $39.37 billion from $19.39 billion, reflecting the scale of the company’s investment program. Subtracting those capital expenditures from operating cash flow produces a simple free-cash-flow measure of approximately $18.63 billion, compared with $25.66 billion in the prior-year quarter.

That is a decline of roughly 27%, despite the company’s higher revenue, operating income and operating cash generation. The contrast is consequential because reported net income, operating cash flow and free cash flow answer different questions.

Net income captures accounting profitability. Operating cash flow reflects cash generated by operating activities, including the effects of working-capital movements and other adjustments. Free cash flow, under this calculation, deducts property and equipment additions from operating cash flow.

The latest quarter therefore shows stronger operating performance alongside a substantially heavier cash investment burden. That does not establish that Microsoft’s AI investments are producing inadequate returns. Capital expenditures can support services and revenue over several future years, and the benefits do not necessarily appear in the same quarter in which cash is spent.

It does, however, make the pace of future cash generation an important test of Microsoft’s expanding infrastructure strategy. The company’s commercial remaining performance obligation reached $677 billion, up 73% year over year. This represents contracted revenue that has not yet been recognized, rather than cash already received or revenue guaranteed for recognition in the next quarter.

A growing backlog supports the case for future demand, but the timing of revenue recognition and the costs required to fulfill those commitments remain important variables.

What the Adjustment Means

The most revealing feature of Microsoft’s latest earnings is not that its 32% reported profit growth becomes 18% after adjustment. It is that three measures of performance tell different, complementary stories.

GAAP net income grew 32%, helped by a favorable year-over-year change in OpenAI investment effects. Adjusted net income grew about 18%, removing those identified effects from both periods. Operating income rose about 21%, confirming that operating profitability improved independently of the investment-accounting comparison.

Meanwhile, capital spending expanded much faster than operating cash generation, reducing the amount of cash remaining after property and equipment purchases. The earnings reaction should therefore be considered alongside both the acceleration in Azure revenue and the rising cost of supporting cloud and AI demand, rather than judged from a single profit-growth percentage.

There is also an important limitation to the adjustment itself. OpenAI-related investment gains and losses can affect Microsoft’s reported earnings without representing operating revenue from selling cloud services or software. But those investments remain part of Microsoft’s financial exposure, and their future accounting effects cannot simply be assumed to disappear.

The next quarterly results will offer another test of the relationship between Azure growth, operating margins, investment-related gains or losses, and capital expenditure. For now, Microsoft’s October 28 results establish two things separately: its operating business continued growing strongly, and the comparison that produced 32% reported net-income growth benefited materially from investment-related accounting effects absent from the adjusted measure.