Microsoft’s fiscal first-quarter profit grew 32%, or 18% on Microsoft’s non-GAAP measure excluding OpenAI investment effects. For shareholders, that gap separates investment effects from the comparison.

The big change

  • Microsoft earns revenue from its commercial relationship with OpenAI and accounts separately for its investment. These relationships answer different questions about the company’s financial performance. Sales produce revenue; investment earnings are accounted for separately.
  • A prior-year investment loss lowers the base for reported growth, making the adjusted comparison slower. Both measures rise, but they give shareholders different comparisons.
  • Profit and cash spending describe different parts of a business. Cash paid for long-lived assets is a separate question from income reported in a period, so a profit growth rate alone cannot establish the return on a particular AI infrastructure project.

How the OpenAI adjustment changes the comparison

In its October 28 earnings release, Microsoft reported net income of $36.629 billion for the quarter ended September 30, up from $27.747 billion a year earlier. Excluding OpenAI investment effects, the comparable figures were $36.422 billion and $30.833 billion. Microsoft removed a $207 million gain from the current period and a $3.086 billion loss from the prior period.

The calculation divides the increase by the earlier figure. The prior loss reduced that starting figure; removing it raises the base used for the adjusted comparison. The adjusted number isolates those investment effects; reported net income remains the GAAP result.

The distinction has appeared before. In the June-quarter release, Microsoft reported net income growth of 31% under GAAP and 22% excluding OpenAI investment effects. That comparison also included a current-period gain and a prior-period loss. Each reconciliation needs both periods.

Why an investment appears in earnings

Microsoft's 2026 annual report describes an approximately 25% interest in OpenAI on an as-converted basis and says Microsoft accounts for it under the equity method. Its liquidation rights and priorities differ from its ownership percentage, so its calculation reflects those rights. To calculate its share of income or loss, Microsoft uses a method based on how much it would receive if the investee's net assets were distributed at book value and how that amount changes over time. It is an accounting calculation, not a statement that OpenAI was liquidated or that Microsoft received that amount in cash. The Financial Accounting Standards Board explains that equity-method investment balances also change with an investor’s share of investee activity and with distributions. This accounting view does not turn each reported gain or loss into a cash receipt.

Microsoft also reported $24.1 billion in fiscal 2026 revenue from commercial arrangements with OpenAI, including revenue-sharing payments. Commercial revenue and investment income measure different things. Adding them would mix revenue with profit.

Profit and cash answer different questions

A profit comparison cannot by itself establish the return on AI infrastructure. The SEC's financial-statement guide distinguishes income from cash flows: a profitable period and cash spent on long-lived assets answer different questions. An investor would need to consider both the revenue and costs associated with a project over time, as well as the cash required to build and operate it.

BIG CHANGE reviewed Microsoft's releases, reconciliations and annual report for this analysis.