What is an income statement waterfall?

An income statement waterfall is a bar chart that walks from total revenue down to net income, with each step showing how much a cost or tax line removes (or adds). Subtotals — gross profit, operating income, pre-tax income — are anchored to zero so the cascade reconciles exactly to the bottom line.

How much of Microsoft (MSFT) revenue becomes net income?

For TTM through Q1 2026, Microsoft turned $318B of revenue into $125B of net income — a net margin of 39.3%. The waterfall shows where the rest goes: cost of revenue, operating expenses, non-operating items, and taxes.

What are Microsoft (MSFT) gross, operating, and net margins?

For TTM through Q1 2026, Microsoft reported a gross margin of 68.3%, an operating margin of 46.8%, and a net margin of 39.3%. Each subtotal in the waterfall corresponds to one of these margins.

Why does Microsoft (MSFT) have such a high (or low) gross margin?

Gross margin (gross profit ÷ revenue) reflects how much of each revenue dollar remains after direct production costs. Capital-light software and platform businesses often show gross margins above 60–80% because their cost of revenue is mainly hosting and support. Hardware, retail, and commodity businesses show lower gross margins because raw materials and manufacturing costs are significant. The waterfall makes this visible at a glance — the size of the "Cost of Revenue" bar relative to Revenue is the gross margin complement.

What is the difference between gross, operating, and net margin?

Gross margin = (Revenue − Cost of Revenue) ÷ Revenue. It measures production efficiency. Operating margin = Operating Income ÷ Revenue. It adds operating expenses (R&D, S&M, G&A) and measures the profitability of core operations. Net margin = Net Income ÷ Revenue. It also includes interest, other income/expense, and taxes, and represents the shareholder take after everything.

Microsoft (MSFT) Income Statement Waterfall

Revenue

$318B

Gross Margin

+68.3%

Operating Margin

+46.8%

Net Margin

+39.3%

Income statement waterfall for Microsoft (MSFT) — TTM through Q1 2026

Net income: $125B

Margin breakdown for Microsoft (MSFT) — TTM through Q1 2026

Line item	Amount	Running total
Revenue	$318B	$318B
Cost of Revenue	-$101B	$217B
Gross Profit	$217B	$217B
Operating Expenses	-$68.5B	$149B
Operating Income	$149B	$149B
Other Income / Expense	$5.55B	$155B
Pre-tax Income	$155B	$155B
Income Tax	-$29.3B	$125B
Net Income	$125B	$125B

Revenue$318B
Cost of Revenue-$101B
Gross Profit$217B
Operating Expenses-$68.5B
Operating Income$149B
Other Income / Expense$5.55B
Pre-tax Income$155B
Income Tax-$29.3B
Net Income$125B

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