MICROSOFT CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended June 30, 2024 compared to the year ended June 30, 2023. For a discussion of the year ended June 30, 2023 compared to the year ended June 30, 2022, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2023. OVERVIEW Microsoft is a technology company committed to making digital technology and artificial intelligence (“AI”) available broadly and doing so responsibly, with a mission to empower every person and every organization on the planet to achieve more. We create platforms and tools, powered by AI, that deliver innovative solutions that meet the evolving needs of our customers. We generate revenue by offering a wide range of cloud-based solutions, content, and other services to people and businesses; licensing and supporting an array of software products; delivering relevant online advertising to a global audience; and designing and selling devices. Our most significant expenses are related to compensating employees; supporting and investing in our cloud-based services, including datacenter operations; designing, manufacturing, marketing, and selling our other products and services; and income taxes. Highlights from fiscal year 2024 compared with fiscal year 2023 included: • Microsoft Cloud revenue increased 23% to $137.4 billion. • Office Commercial products and cloud services revenue increased 14% driven by Office 365 Commercial growth of 16%. • Office Consumer products and cloud services revenue increased 4% and Microsoft 365 Consumer subscribers grew to 82.5 million. • LinkedIn revenue increased 9%. • Dynamics products and cloud services revenue increased 19% driven by Dynamics 365 growth of 24%. • Server products and cloud services revenue increased 22% driven by Azure and other cloud services growth of 30%. • Windows revenue increased 8% with Windows original equipment manufacturer licensing (“Windows OEM”) revenue growth of 7% and Windows Commercial products and cloud services revenue growth of 11%. • Devices revenue decreased 15%. • Xbox content and services revenue increased 50% driven by 44 points of net impact from the Activision Blizzard Inc. (“Activision Blizzard”) acquisition. The net impact reflects the change of Activision Blizzard content from third-party to first-party. • Search and news advertising revenue excluding traffic acquisition costs increased 12%. On October 13, 2023, we completed our acquisition of Activision Blizzard for a total purchase price of $75.4 billion, consisting primarily of cash. The financial results of Activision Blizzard have been included in our consolidated financial statements since the date of the acquisition. Activision Blizzard is reported as part of our More Personal Computing segment. Refer to Note 8 – Business Combinations of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. 39 PART II Item 7 Industry Trends Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces. Economic Conditions, Challenges, and Risks The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, influencing how users access services in the cloud and, in some cases, the user’s choice of which suite of cloud-based services to use. Aggregate demand for our software, services, and devices is also correlated to global macroeconomic and geopolitical factors, which remain dynamic. We must continue to evolve and adapt over an extended time in pace with this changing environment. The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins. We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services. Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units (“GPUs”) and other components. Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. Extended disruptions at these suppliers could impact our ability to manufacture devices on time to meet consumer demand. Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits. Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Fluctuations in the U.S. dollar relative to certain foreign currencies did not have a material impact on reported revenue and expenses from our international operations in fiscal year 2024. Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks. Seasonality Our revenue fluctuates quarterly and is generally higher in the fourth quarter of our fiscal year. Fourth quarter revenue is driven by a higher volume of multi-year contracts executed during the period. Change in Accounting Estimate In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate was effective beginning fiscal year 2023. 40 PART II Item 7 Reportable Segments We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). Metrics We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). Financial metrics are calculated based on financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and growth comparisons relate to the corresponding period of last fiscal year. In the first quarter of fiscal year 2024, we made updates to the presentation and method of calculation for certain metrics, revising our Microsoft Cloud revenue metric to include revenue growth and expanding our Microsoft 365 Consumer subscribers metric to include Microsoft 365 Basic subscribers, aligning with how we manage our business. Commercial Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise and partner services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance. Commercial remaining performance obligation Commercial portion of revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods Microsoft Cloud revenue and revenue growth Revenue from Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties Microsoft Cloud gross margin percentage Gross margin percentage for our Microsoft Cloud business 41 PART II Item 7 Productivity and Business Processes and Intelligent Cloud Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics reflect our cloud and on-premises product strategies and trends. Office Commercial products and cloud services revenue growth Revenue from Office Commercial products and cloud services (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Copilot for Microsoft 365 Office Consumer products and cloud services revenue growth Revenue from Office Consumer products and cloud services, including Microsoft 365 Consumer and Copilot Pro subscriptions, Office licensed on-premises, and other Office services Office 365 Commercial seat growth The number of Office 365 Commercial seats at end of period where seats are paid users covered by an Office 365 Commercial subscription Microsoft 365 Consumer subscribers The number of Microsoft 365 Consumer and Copilot Pro subscribers at end of period Dynamics products and cloud services revenue growth Revenue from Dynamics products and cloud services, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate; and on-premises ERP and CRM applications LinkedIn revenue growth Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions Server products and cloud services revenue growth Revenue from Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub More Personal Computing Metrics related to our More Personal Computing segment assess the performance of key lines of business within this segment. These metrics provide strategic product insights which allow us to assess the performance across our commercial and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we monitor metrics that are reflective of those varying motions. Windows OEM revenue growth Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel Windows Commercial products and cloud services revenue growth Revenue from Windows Commercial products and cloud services, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings Devices revenue growth Revenue from Devices, including Surface, HoloLens, and PC accessories Xbox content and services revenue growth Revenue from Xbox content and services, comprising first-party content (such as Activision Blizzard) and third-party content, including games and in-game content; Xbox Game Pass and other subscriptions; Xbox Cloud Gaming; advertising; third-party disc royalties; and other cloud services Search and news advertising revenue (ex TAC) growth Revenue from search and news advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers and news partners 42 PART II Item 7 SUMMARY RESULTS OF OPERATIONS (In millions, except percentages and per share amounts) 2024 2023 Percentage Change Revenue $ 245,122 $ 211,915 16% Gross margin 171,008 146,052 17% Operating income 109,433 88,523 24% Net income 88,136 72,361 22% Diluted earnings per share 11.80 9.68 22% Adjusted gross margin (non-GAAP) 171,008 146,204 17% Adjusted operating income (non-GAAP) 109,433 89,694 22% Adjusted net income (non-GAAP) 88,136 73,307 20% Adjusted diluted earnings per share (non-GAAP) 11.80 9.81 20% Adjusted gross margin, operating income, net income, and diluted earnings per share (“EPS”) are non-GAAP financial measures. Prior year non-GAAP financial measures exclude the impact of a $1.2 billion charge in the second quarter of fiscal year 2023 (“Q2 charge”), which included employee severance expenses, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results. Fiscal Year 2024 Compared with Fiscal Year 2023 Revenue increased $33.2 billion or 16% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Office 365 Commercial. More Personal Computing revenue increased driven by Gaming. Cost of revenue increased $8.3 billion or 13% driven by growth in Microsoft Cloud and Gaming, offset in part by a decline in Devices. Gross margin increased $25.0 billion or 17% driven by growth across each of our segments. • Gross margin percentage increased slightly. Excluding the impact of the change in accounting estimate for the useful lives of our server and network equipment, gross margin percentage increased 2 points driven by improvement in More Personal Computing. • Microsoft Cloud gross margin percentage decreased slightly to 71%. Excluding the impact of the change in accounting estimate, Microsoft Cloud gross margin percentage increased slightly driven by improvements in Azure and Office 365 Commercial, inclusive of scaling our AI infrastructure, offset in part by sales mix shift to Azure. Operating expenses increased $4.0 billion or 7% driven by Gaming, with 7 points of growth from the Activision Blizzard acquisition, and investments in cloud engineering, offset in part by the prior year Q2 charge. Operating income increased $20.9 billion or 24% driven by growth across each of our segments. Prior year gross margin, operating income, net income, and diluted EPS were negatively impacted by the Q2 charge, which resulted in decreases of $152 million, $1.2 billion, $946 million, and $0.13, respectively. 43 PART II Item 7 SEGMENT RESULTS OF OPERATIONS (In millions, except percentages) 2024 2023 Percentage Change Revenue Productivity and Business Processes $ 77,728 $ 69,274 12% Intelligent Cloud 105,362 87,907 20% More Personal Computing 62,032 54,734 13% Total $ 245,122 $ 211,915 16% Operating Income Productivity and Business Processes $ 40,540 $ 34,189 19% Intelligent Cloud 49,584 37,884 31% More Personal Computing 19,309 16,450 17% Total $ 109,433 $ 88,523 24% Reportable Segments Fiscal Year 2024 Compared with Fiscal Year 2023 Productivity and Business Processes Revenue increased $8.5 billion or 12%. • Office Commercial products and cloud services revenue increased $5.8 billion or 14%. Office 365 Commercial revenue grew 16% with seat growth of 7%, driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Office Commercial products revenue declined 16% driven by continued customer shift to cloud offerings. • Office Consumer products and cloud services revenue increased $237 million or 4%. Microsoft 365 Consumer subscribers grew 10% to 82.5 million. • LinkedIn revenue increased $1.4 billion or 9% driven by growth across all lines of business – Talent Solutions, Premium Subscriptions, Marketing Solutions, and Sales Solutions. • Dynamics products and cloud services revenue increased $1.0 billion or 19% driven by Dynamics 365. Dynamics 365 revenue grew 24% driven by growth across all workloads. Operating income increased $6.4 billion or 19%. • Gross margin increased $6.5 billion or 12% driven by growth in Office 365 Commercial. Gross margin percentage decreased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvement in Office 365 Commercial. • Operating expenses increased $159 million or 1%. Intelligent Cloud Revenue increased $17.5 billion or 20%. • Server products and cloud services revenue increased $17.8 billion or 22% driven by Azure and other cloud services. Azure and other cloud services revenue grew 30% driven by growth in our consumption-based services. Server products revenue increased 3% driven by continued demand for our hybrid solutions, including Windows Server and SQL Server running in multi-cloud environments. • Enterprise and partner services revenue decreased $306 million or 4% driven by declines in Enterprise Support Services and Industry Solutions. 44 PART II Item 7 Operating income increased $11.7 billion or 31%. • Gross margin increased $11.6 billion or 19% driven by growth in Azure. Gross margin percentage decreased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly primarily driven by improvement in Azure, inclusive of scaling our AI infrastructure, offset in part by sales mix shift to Azure. • Operating expenses decreased slightly primarily driven by the prior year Q2 charge, offset in part by investments in Azure. More Personal Computing Revenue increased $7.3 billion or 13%. • Windows revenue increased $1.7 billion or 8% driven by growth in Windows Commercial and Windows OEM. Windows Commercial products and cloud services revenue increased 11% driven by demand for Microsoft 365. Windows OEM revenue increased 7%. • Gaming revenue increased $6.0 billion or 39% driven by growth in Xbox content and services. Xbox content and services revenue increased 50% driven by 44 points of net impact from the Activision Blizzard acquisition. Xbox hardware revenue decreased 13% driven by lower volume of consoles sold. • Search and news advertising revenue increased $418 million or 3%. Search and news advertising revenue excluding traffic acquisition costs increased 12% driven by higher search volume. • Devices revenue decreased $815 million or 15%. Operating income increased $2.9 billion or 17%. • Gross margin increased $6.8 billion or 23% driven by growth in Gaming, with 10 points of net impact from the Activision Blizzard acquisition, as well as growth in Windows. Gross margin percentage increased driven by sales mix shift to higher margin businesses and improvement in Devices. • Operating expenses increased $3.9 billion or 31% driven by Gaming, with 34 points of growth from the Activision Blizzard acquisition. OPERATING EXPENSES Research and Development (In millions, except percentages) 2024 2023 Percentage Change Research and development $ 29,510 $ 27,195 9% As a percent of revenue 12% 13% (1)ppt Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content. Fiscal Year 2024 Compared with Fiscal Year 2023 Research and development expenses increased $2.3 billion or 9% driven by Gaming, with 7 points of growth from the Activision Blizzard acquisition, and investments in cloud engineering. Sales and Marketing (In millions, except percentages) 2024 2023 Percentage Change Sales and marketing $ 24,456 $ 22,759 7% As a percent of revenue 10% 11% (1)ppt 45 PART II Item 7 Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Fiscal Year 2024 Compared with Fiscal Year 2023 Sales and marketing expenses increased $1.7 billion or 7% driven by Gaming, with 6 points of growth from the Activision Blizzard acquisition. General and Administrative (In millions, except percentages) 2024 2023 Percentage Change General and administrative $ 7,609 $ 7,575 0% As a percent of revenue 3% 4% (1)ppt General and administrative expenses include payroll, employee benefits, stock-based compensation expense, employee severance expense incurred as part of a corporate program, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees. Fiscal Year 2024 Compared with Fiscal Year 2023 General and administrative expenses increased slightly as growth from the Activision Blizzard acquisition was offset in part by the prior year Q2 charge. OTHER INCOME (EXPENSE), NET The components of other income (expense), net were as follows: (In millions) Year Ended June 30, 2024 2023 Interest and dividends income $ 3,157 $ 2,994 Interest expense (2,935 ) (1,968 ) Net recognized gains (losses) on investments (118 ) 260 Net losses on derivatives (187 ) (456 ) Net gains (losses) on foreign currency remeasurements (244 ) 181 Other, net (1,319 ) (223 ) Total $ (1,646 ) $ 788 We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net. Fiscal Year 2024 Compared with Fiscal Year 2023 Interest and dividends income increased due to higher yields. Interest expense increased due to the issuance of commercial paper. Net recognized losses on investments increased primarily due to higher equity impairments and lower gains on equity investments. Net losses on derivatives decreased primarily due to lower losses on equity derivatives. Other, net primarily reflects net recognized losses on equity method investments. 46 PART II Item 7 INCOME TAXES Effective Tax Rate Our effective tax rate for fiscal years 2024 and 2023 was 18% and 19%, respectively. The decrease in our effective tax rate was primarily due to tax benefits from tax law changes, including the impact from the issuance of Notice 2023-55 and Notice 2023-80 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department. Notice 2023-55, issued in the first quarter of fiscal year 2024, delayed the effective date of final foreign tax credit regulations to fiscal year 2024 for Microsoft. Notice 2023-80, issued in the second quarter of fiscal year 2024, further delayed the effective date of final foreign tax credit regulations indefinitely. Our effective tax rate was lower than the U.S. federal statutory rate, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland. The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2024, our U.S. income before income taxes was $62.9 billion and our foreign income before income taxes was $44.9 billion. In fiscal year 2023, our U.S. income before income taxes was $52.9 billion and our foreign income before income taxes was $36.4 billion. The Organisation for Economic Co-operation and Development (“OECD”) published its model rules “Tax Challenges Arising From the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two)” which established a global minimum corporate tax rate of 15% for certain multinational enterprises. Many countries have implemented or are in the process of implementing the Pillar Two legislation, which will apply to Microsoft beginning in fiscal year 2025. While we do not currently estimate a material impact to our consolidated financial statements, we continue to monitor the impact as countries implement legislation and the OECD provides additional guidance. Uncertain Tax Positions We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest. As of June 30, 2024, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months. We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2023, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements. NON-GAAP FINANCIAL MEASURES Adjusted gross margin, operating income, net income, and diluted EPS are non-GAAP financial measures. Prior year non-GAAP financial measures exclude the impact of the Q2 charge, which includes employee severance expenses, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. 47 PART II Item 7 The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results: (In millions, except percentages and per share amounts) 2024 2023 Percentage Change Gross margin $ 171,008 $ 146,052 17% Severance, hardware-related impairment, and lease consolidation costs 0 152 * Adjusted gross margin (non-GAAP) $ 171,008 $ 146,204 17% Operating income $ 109,433 $ 88,523 24% Severance, hardware-related impairment, and lease consolidation costs 0 1,171 * Adjusted operating income (non-GAAP) $ 109,433 $ 89,694 22% Net income $ 88,136 $ 72,361 22% Severance, hardware-related impairment, and lease consolidation costs 0 946 * Adjusted net income (non-GAAP) $ 88,136 $ 73,307 20% Diluted earnings per share $ 11.80 $ 9.68 22% Severance, hardware-related impairment, and lease consolidation costs 0 0.13 * Adjusted diluted earnings per share (non-GAAP) $ 11.80 $ 9.81 20% * Not meaningful. LIQUIDITY AND CAPITAL RESOURCES We expect existing cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax related to the Tax Cuts and Jobs Act (“TCJA”), for at least the next 12 months and thereafter for the foreseeable future. Cash, Cash Equivalents, and Investments Cash, cash equivalents, and short-term investments totaled $75.5 billion and $111.3 billion as of June 30, 2024 and 2023, respectively. Equity and other investments were $14.6 billion and $9.9 billion as of June 30, 2024 and 2023, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities. Valuation In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio. 48 PART II Item 7 A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate. Cash Flows Cash from operations increased $31.0 billion to $118.5 billion for fiscal year 2024, primarily due to an increase in cash received from customers. Cash used in financing decreased $6.2 billion to $37.8 billion for fiscal year 2024, primarily due to a $5.0 billion decrease in common stock repurchases and a $3.3 billion increase in proceeds from issuance of debt, net of repayments, offset in part by a $2.0 billion increase in dividends paid. Cash used in investing increased $74.3 billion to $97.0 billion for fiscal year 2024, primarily due to a $67.5 billion increase in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets and a $16.4 billion increase in additions to property and equipment. Debt Proceeds We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. Refer to Note 11 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. Unearned Revenue Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“SA”) and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. The following table outlines the expected future recognition of unearned revenue as of June 30, 2024: (In millions) Three Months Ending September 30, 2024 $ 22,529 December 31, 2024 17,664 March 31, 2025 12,076 June 30, 2025 5,313 Thereafter 2,602 Total $ 60,184 If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable. Refer to Note 13 – Unearned Revenue of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. 49 PART II Item 7 Material Cash Requirements and Other Obligations Contractual Obligations The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30, 2024: (In millions) 2025 Thereafter Total Long-term debt: (a) Principal payments $ 2,250 $ 48,971 $ 51,221 Interest payments 1,618 27,041 28,659 Construction commitments (b) 29,892 5,499 35,391 Operating and finance leases, including imputed interest (c) 12,250 160,475 172,725 Purchase commitments (d) 68,280 3,742 72,022 Total $ 114,290 $ 245,728 $ 360,018 (a) Refer to Note 11 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). (b) Refer to Note 7 – Property and Equipment of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). (c) Refer to Note 14 – Leases of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). (d) Purchase commitments primarily relate to datacenters and include open purchase orders and take-or-pay contracts that are not presented as construction commitments above. Income Taxes As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. As of June 30, 2024, we had a remaining transition tax liability of $7.6 billion, of which $3.8 billion is short-term and payable in the first quarter of fiscal year 2025. Share Repurchases During fiscal years 2024 and 2023, we repurchased 32 million shares and 69 million shares of our common stock for $12.0 billion and $18.4 billion, respectively, through our share repurchase program. All repurchases were made using cash resources. As of June 30, 2024, $10.3 billion remained of our $60 billion share repurchase program. Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. Dividends During fiscal years 2024 and 2023, our Board of Directors declared dividends totaling $22.3 billion and $20.2 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. Other Planned Uses of Capital We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings and our investments in AI infrastructure and training. We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources. 50 PART II Item 7 RECENT ACCOUNTING GUIDANCE Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations. We have critical accounting estimates in the areas of revenue recognition, impairment of investment securities, goodwill, research and development costs, legal and other contingencies, income taxes, and business combinations – valuation of intangible assets. Revenue Recognition Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided. Judgment is required to determine the standalone selling price (“SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers. Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented. Impairment of Investment Securities We review debt investments quarterly for credit losses and impairment. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments. 51 PART II Item 7 Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a periodic basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net. Goodwill We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. Research and Development Costs Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products. Legal and Other Contingencies The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements. 52 PART II Item 7 Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements. Business Combinations – Valuation of Intangible Assets Accounting for business combinations requires significant judgments when allocating the purchase price to the estimated fair values of assets acquired and liabilities assumed at the acquisition date. Determination of fair value involves estimates and assumptions which can be complex, most notably with respect to intangible assets. Critical estimates used in the valuation of intangible assets include, but are not limited to, the amount and timing of projected cash flows, useful lives, and discount rates. While management’s estimates of fair value are based on assumptions that are believed to be reasonable, these assumptions are inherently uncertain as they pertain to forward-looking views of our business and market conditions. The judgments made in this valuation process could materially impact our consolidated financial statements. 53 PART II Item 7 STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified personnel, and a program of internal audits. The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Board of Directors, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management, internal auditors, and our independent registered public accounting firm to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Deloitte & Touche LLP and the internal auditors each have full and free access to the Audit Committee. Satya Nadella Chief Executive Officer Amy E. Hood Executive Vice President and Chief Financial Officer Alice L. Jolla Corporate Vice President and Chief Accounting Officer 54 PART II Item 7A ITEM 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK RISKS We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. We use derivatives instruments to manage these risks, however, they may still impact our consolidated financial statements. Foreign Currencies Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency positions, including hedges. Principal currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar. Interest Rate Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices. Credit Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices to facilitate portfolio diversification. Equity Securities held in our equity investments portfolio are subject to price risk. SENSITIVITY ANALYSIS The following table sets forth the potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices: (In millions) Risk Categories Hypothetical Change June 30, 2024 Impact Foreign currency – Revenue 10% decrease in foreign exchange rates $ (9,605 ) Earnings Foreign currency – Investments 10% decrease in foreign exchange rates (38 ) Fair Value Interest rate 100 basis point increase in U.S. treasury interest rates (1,343 ) Fair Value Credit 100 basis point increase in credit spreads (318 ) Fair Value Equity 10% decrease in equity market prices (1,078 ) Earnings 55 PART II Item 8 ITEM 8. FINANCIAL STATE MENTS AND SUPPLEMENTARY DATA INC OME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2024 2023 2022 Revenue: Product $ 64,773 $ 64,699 $ 72,732 Service and other 180,349 147,216 125,538 Total revenue 245,122 211,915 198,270 Cost of revenue: Product 15,272 17,804 19,064 Service and other 58,842 48,059 43,586 Total cost of revenue 74,114 65,863 62,650 Gross margin 171,008 146,052 135,620 Research and development 29,510 27,195 24,512 Sales and marketing 24,456 22,759 21,825 General and administrative 7,609 7,575 5,900 Operating income 109,433 88,523 83,383 Other income (expense), net ( 1,646 ) 788 333 Income before income taxes 107,787 89,311 83,716 Provision for income taxes 19,651 16,950 10,978 Net income $ 88,136 $ 72,361 $ 72,738 Earnings per share: Basic $ 11.86 $ 9.72 $ 9.70 Diluted $ 11.80 $ 9.68 $ 9.65 Weighted average shares outstanding: Basic 7,431 7,446 7,496 Diluted 7,469 7,472 7,540 Refer to accompanying notes. 56 PART II Item 8 COMPREHENSIVE IN COME STATEMENTS (In millions) Year Ended June 30, 2024 2023 2022 Net income $ 88,136 $ 72,361 $ 72,738 Other comprehensive income (loss), net of tax: Net change related to derivatives 24 ( 14 ) 6 Net change related to investments 957 ( 1,444 ) ( 5,360 ) Translation adjustments and other ( 228 ) ( 207 ) ( 1,146 ) Other comprehensive income (loss) 753 ( 1,665 ) ( 6,500 ) Comprehensive income $ 88,889 $ 70,696 $ 66,238 Refer to accompanying notes. 57 PART II Item 8 BALANCE SHEETS (In millions) June 30, 2024 2023 Assets Current assets: Cash and cash equivalents $ 18,315 $ 34,704 Short-term investments 57,228 76,558 Total cash, cash equivalents, and short-term investments 75,543 111,262 Accounts receivable, net of allowance for doubtful accounts of $ 830 and $ 650 56,924 48,688 Inventories 1,246 2,500 Other current assets 26,021 21,807 Total current assets 159,734 184,257 Property and equipment, net of accumulated depreciation of $ 76,421 and $ 68,251 135,591 95,641 Operating lease right-of-use assets 18,961 14,346 Equity and other investments 14,600 9,879 Goodwill 119,220 67,886 Intangible assets, net 27,597 9,366 Other long-term assets 36,460 30,601 Total assets $ 512,163 $ 411,976 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 21,996 $ 18,095 Short-term debt 6,693 0 Current portion of long-term debt 2,249 5,247 Accrued compensation 12,564 11,009 Short-term income taxes 5,017 4,152 Short-term unearned revenue 57,582 50,901 Other current liabilities 19,185 14,745 Total current liabilities 125,286 104,149 Long-term debt 42,688 41,990 Long-term income taxes 27,931 25,560 Long-term unearned revenue 2,602 2,912 Deferred income taxes 2,618 433 Operating lease liabilities 15,497 12,728 Other long-term liabilities 27,064 17,981 Total liabilities 243,686 205,753 Commitments and contingencies Stockholders’ equity: Common stock and paid-in capital – shares authorized 24,000 ; outstanding 7,434 and 7,432 100,923 93,718 Retained earnings 173,144 118,848 Accumulated other comprehensive loss ( 5,590 ) ( 6,343 ) Total stockholders’ equity 268,477 206,223 Total liabilities and stockholders’ equity $ 512,163 $ 411,976 Refer to accompanying notes. 58 PART II Item 8 CASH FLOWS S TATEMENTS (In millions) Year Ended June 30, 2024 2023 2022 Operations Net income $ 88,136 $ 72,361 $ 72,738 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 22,287 13,861 14,460 Stock-based compensation expense 10,734 9,611 7,502 Net recognized losses (gains) on investments and derivatives 305 196 ( 409 ) Deferred income taxes ( 4,738 ) ( 6,059 ) ( 5,702 ) Changes in operating assets and liabilities: Accounts receivable ( 7,191 ) ( 4,087 ) ( 6,834 ) Inventories 1,284 1,242 ( 1,123 ) Other current assets ( 1,648 ) ( 1,991 ) ( 709 ) Other long-term assets ( 6,817 ) ( 2,833 ) ( 2,805 ) Accounts payable 3,545 ( 2,721 ) 2,943 Unearned revenue 5,348 5,535 5,109 Income taxes 1,687 ( 358 ) 696 Other current liabilities 4,867 2,272 2,344 Other long-term liabilities 749 553 825 Net cash from operations 118,548 87,582 89,035 Financing Proceeds from issuance of debt, maturities of 90 days or less, net 5,250 0 0 Proceeds from issuance of debt 24,395 0 0 Repayments of debt ( 29,070 ) ( 2,750 ) ( 9,023 ) Common stock issued 2,002 1,866 1,841 Common stock repurchased ( 17,254 ) ( 22,245 ) ( 32,696 ) Common stock cash dividends paid ( 21,771 ) ( 19,800 ) ( 18,135 ) Other, net ( 1,309 ) ( 1,006 ) ( 863 ) Net cash used in financing ( 37,757 ) ( 43,935 ) ( 58,876 ) Investing Additions to property and equipment ( 44,477 ) ( 28,107 ) ( 23,886 ) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets ( 69,132 ) ( 1,670 ) ( 22,038 ) Purchases of investments ( 17,732 ) ( 37,651 ) ( 26,456 ) Maturities of investments 24,775 33,510 16,451 Sales of investments 10,894 14,354 28,443 Other, net ( 1,298 ) ( 3,116 ) ( 2,825 ) Net cash used in investing ( 96,970 ) ( 22,680 ) ( 30,311 ) Effect of foreign exchange rates on cash and cash equivalents ( 210 ) ( 194 ) ( 141 ) Net change in cash and cash equivalents ( 16,389 ) 20,773 ( 293 ) Cash and cash equivalents, beginning of period 34,704 13,931 14,224 Cash and cash equivalents, end of period $ 18,315 $ 34,704 $ 13,931 Refer to accompanying notes. 59 PART II Item 8 STOCKHOLDERS’ EQ UITY STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2024 2023 2022 Common stock and paid-in capital Balance, beginning of period $ 93,718 $ 86,939 $ 83,111 Common stock issued 2,002 1,866 1,841 Common stock repurchased ( 5,712 ) ( 4,696 ) ( 5,688 ) Stock-based compensation expense 10,734 9,611 7,502 Other, net 181 ( 2 ) 173 Balance, end of period 100,923 93,718 86,939 Retained earnings Balance, beginning of period 118,848 84,281 57,055 Net income 88,136 72,361 72,738 Common stock cash dividends ( 22,293 ) ( 20,226 ) ( 18,552 ) Common stock repurchased ( 11,547 ) ( 17,568 ) ( 26,960 ) Balance, end of period 173,144 118,848 84,281 Accumulated other comprehensive loss Balance, beginning of period ( 6,343 ) ( 4,678 ) 1,822 Other comprehensive income (loss) 753 ( 1,665 ) ( 6,500 ) Balance, end of period ( 5,590 ) ( 6,343 ) ( 4,678 ) Total stockholders’ equity $ 268,477 $ 206,223 $ 166,542 Cash dividends declared per common share $ 3.00 $ 2.72 $ 2.48 Refer to accompanying notes. 60 PART II Item 8 NOTES TO FINANCI AL STATEMENTS NOTE 1 — ACCOUNTING POLICIES Accounting Principles Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements. Principles of Consolidation The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Estimates and Assumptions Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties. In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years . This change in accounting estimate was effective beginning fiscal year 2023. Foreign Currencies Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income. Revenue Product Revenue and Service and Other Revenue Product revenue includes sales from operating systems, cross-device productivity and collaboration applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories. Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and gaming; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn. 61 PART II Item 8 Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Nature of Products and Services Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license. Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time. Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided. Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided. Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces. Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering. Significant Judgments Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided. 62 PART II Item 8 Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers. Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented. Contract Balances and Other Receivables Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses. Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront. As of June 30, 2024 and 2023, long-term accounts receivable, net of allowance for doubtful accounts, was $ 4.9 billion and $ 4.5 billion, respectively, and is included in other long-term assets in our consolidated balance sheets. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. 63 PART II Item 8 Activity in the allowance for doubtful accounts was as follows: (In millions) Year Ended June 30, 2024 2023 2022 Balance, beginning of period $ 716 $ 710 $ 798 Charged to costs and other 386 258 157 Write-offs ( 218 ) ( 252 ) ( 245 ) Balance, end of period $ 884 $ 716 $ 710 Allowance for doubtful accounts included in our consolidated balance sheets: (In millions) June 30, 2024 2023 2022 Accounts receivable, net of allowance for doubtful accounts $ 830 $ 650 $ 633 Other long-term assets 54 66 77 Total $ 884 $ 716 $ 710 As of June 30, 2024 and 2023, other receivables related to activities to facilitate the purchase of server components were $ 10.5 billion and $ 9.2 billion, respectively, and are included in other current assets in our consolidated balance sheets. We record financing receivables when we offer certain customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2024 and 2023, our financing receivables, net were $ 4.5 billion and $ 5.3 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence. Assets Recognized from Costs to Obtain a Contract with a Customer We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets. We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales organization compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities. Cost of Revenue Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain cloud-based and other online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products. 64 PART II Item 8 Product Warranty We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. Research and Development Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products. Sales and Marketing Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $ 1.7 billion , $ 904 million, and $ 1.5 billion in fiscal years 2024, 2023, and 2022, respectively. Stock-Based Compensation Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method. Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase. Income Taxes Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets. Financial Instruments Investments We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. 65 PART II Item 8 Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments. Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net. Investments that are considered variable interest entities (“VIEs”) are evaluated to determine whether we are the primary beneficiary of the VIE, in which case we would be required to consolidate the entity. We evaluate whether we have (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have determined we are not the primary beneficiary of any of our VIE investments. Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting. Derivatives Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net. Fair Value Measurements We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are: • Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. 66 PART II Item 8 • Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain cleared swap contracts and over-the-counter forward, option, and swap contracts. • Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. Our other current financial assets and current financial liabilities have fair values that approximate their carrying values. Inventories Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue. Property and Equipment Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three years ; computer equipment, two to six years ; buildings and improvements, five to 15 years ; leasehold improvements, three to 20 years ; and furniture and equipment, one to 10 years . Land is not depreciated. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 67 PART II Item 8 We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. Goodwill Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Intangible Assets Our intangible assets are subject to amortization and are amortized over the estimated useful life in proportion to the economic benefits received. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Related Party Transactions In March 2024, we entered into an agreement with Inflection AI, Inc. (“Inflection”), pursuant to which we obtained a non-exclusive license to Inflection’s intellectual property. Reid Hoffman, a member of our Board of Directors, is a co-founder of and serves on the board of directors of Inflection. As of the date of the agreement with Inflection, Reprogrammed Interchange LLC (“Reprogrammed”) and entities affiliated with Greylock Ventures (“Greylock”) each held less than a 10 % equity interest in Inflection. Mr. Hoffman may be deemed to beneficially own the shares held by Reprogrammed and Greylock by virtue of his relationship with such entities. Mr. Hoffman did not participate in any portions of the meetings of our Board of Directors or any committee thereof to review and approve the transaction with Inflection. Recent Accounting Guidance Segment Reporting – Improvements to Reportable Segment Disclosures In November 2023, the Financial Accounting Standards Board (“FASB”) issued a new standard to improve reportable segment disclosures. The guidance expands the disclosures required for reportable segments in our annual and interim consolidated financial statements, primarily through enhanced disclosures about significant segment expenses. The standard will be effective for us beginning with our annual reporting for fiscal year 2025 and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact of this standard on our segment disclosures. Income Taxes – Improvements to Income Tax Disclosures In December 2023, the FASB issued a new standard to improve income tax disclosures. The guidance requires disclosure of disaggregated income taxes paid, prescribes standardized categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. The standard will be effective for us beginning with our annual reporting for fiscal year 2026, with early adoption permitted. We are currently evaluating the impact of this standard on our income tax disclosures. NOTE 2 — EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards. 68 PART II Item 8 The components of basic and diluted EPS were as follows: (In millions, except per share amounts) Year Ended June 30, 2024 2023 2022 Net income available for common shareholders (A) $ 88,136 $ 72,361 $ 72,738 Weighted average outstanding shares of common stock (B) 7,431 7,446 7,496 Dilutive effect of stock-based awards 38 26 44 Common stock and common stock equivalents (C) 7,469 7,472 7,540 Earnings Per Share Basic (A/B) $ 11.86 $ 9.72 $ 9.70 Diluted (A/C) $ 11.80 $ 9.68 $ 9.65 Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented. NOTE 3 — OTHER INCOME (EXPENSE), NET The components of other income (expense), net were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Interest and dividends income $ 3,157 $ 2,994 $ 2,094 Interest expense ( 2,935 ) ( 1,968 ) ( 2,063 ) Net recognized gains (losses) on investments ( 118 ) 260 461 Net losses on derivatives ( 187 ) ( 456 ) ( 52 ) Net gains (losses) on foreign currency remeasurements ( 244 ) 181 ( 75 ) Other, net ( 1,319 ) ( 223 ) ( 32 ) Total $ ( 1,646 ) $ 788 $ 333 Other, net primarily reflects net recognized losses on equity method investments. Net Recognized Gains (Losses) on Investments Net recognized gains (losses) on debt investments were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Realized gains from sales of available-for-sale securities $ 22 $ 36 $ 162 Realized losses from sales of available-for-sale securities ( 98 ) ( 124 ) ( 138 ) Impairments and allowance for credit losses 23 ( 10 ) ( 81 ) Total $ ( 53 ) $ ( 98 ) $ ( 57 ) Net recognized gains (losses) on equity investments were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Net realized gains on investments sold $ 18 $ 75 $ 29 Net unrealized gains on investments still held 146 303 509 Impairments of investments ( 229 ) ( 20 ) ( 20 ) Total $ ( 65 ) $ 358 $ 518 69 PART II Item 8 NOTE 4 — INVESTMENTS Investment Components The components of investments were as follows: (In millions) Fair Value Level Adjusted Cost Basis Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments June 30, 2024 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Level 2 $ 4,666 $ 0 $ 0 $ 4,666 $ 4,666 $ 0 $ 0 Certificates of deposit Level 2 1,547 0 0 1,547 1,503 44 0 U.S. government securities Level 1 49,603 4 ( 2,948 ) 46,659 14 46,645 0 U.S. agency securities Level 2 17 0 0 17 0 17 0 Foreign government bonds Level 2 319 3 ( 16 ) 306 0 306 0 Mortgage- and asset-backed securities Level 2 944 3 ( 35 ) 912 0 912 0 Corporate notes and bonds Level 2 9,106 28 ( 318 ) 8,816 0 8,816 0 Corporate notes and bonds Level 3 1,641 0 ( 1 ) 1,640 0 140 1,500 Municipal securities Level 2 262 0 ( 13 ) 249 0 249 0 Municipal securities Level 3 104 0 ( 17 ) 87 0 87 0 Total debt investments $ 68,209 $ 38 $ ( 3,348 ) $ 64,899 $ 6,183 $ 57,216 $ 1,500 Changes in Fair Value Recorded in Net Income Equity investments Level 1 $ 3,547 $ 561 $ 0 $ 2,986 Equity investments Other 10,114 0 0 10,114 Total equity investments $ 13,661 $ 561 $ 0 $ 13,100 Cash $ 11,571 $ 11,571 $ 0 $ 0 Derivatives, net (a) 12 0 12 0 Total $ 90,143 $ 18,315 $ 57,228 $ 14,600 70 PART II Item 8 (In millions) Fair Value Level Adjusted Cost Basis Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments June 30, 2023 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Level 2 $ 16,589 $ 0 $ 0 $ 16,589 $ 12,231 $ 4,358 $ 0 Certificates of deposit Level 2 2,701 0 0 2,701 2,657 44 0 U.S. government securities Level 1 65,237 2 ( 3,870 ) 61,369 2,991 58,378 0 U.S. agency securities Level 2 2,703 0 0 2,703 894 1,809 0 Foreign government bonds Level 2 498 1 ( 24 ) 475 0 475 0 Mortgage- and asset-backed securities Level 2 824 1 ( 39 ) 786 0 786 0 Corporate notes and bonds Level 2 10,809 8 ( 583 ) 10,234 0 10,234 0 Corporate notes and bonds Level 3 120 0 0 120 0 120 0 Municipal securities Level 2 285 1 ( 18 ) 268 7 261 0 Municipal securities Level 3 103 0 ( 16 ) 87 0 87 0 Total debt investments $ 99,869 $ 13 $ ( 4,550 ) $ 95,332 $ 18,780 $ 76,552 $ 0 Changes in Fair Value Recorded in Net Income Equity investments Level 1 $ 10,138 $ 7,446 $ 0 $ 2,692 Equity investments Other 7,187 0 0 7,187 Total equity investments $ 17,325 $ 7,446 $ 0 $ 9,879 Cash $ 8,478 $ 8,478 $ 0 $ 0 Derivatives, net (a) 6 0 6 0 Total $ 121,141 $ 34,704 $ 76,558 $ 9,879 (a) Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments. Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2024 and 2023, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $ 3.9 billion and $ 4.2 billion, respectively. 71 PART II Item 8 Unrealized Losses on Debt Investments Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows: Less than 12 Months 12 Months or Greater Total Unrealized Losses (In millions) Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value June 30, 2024 U.S. government and agency securities $ 529 $ ( 12 ) $ 45,821 $ ( 2,936 ) $ 46,350 $ ( 2,948 ) Foreign government bonds 79 ( 2 ) 180 ( 14 ) 259 ( 16 ) Mortgage- and asset-backed securities 201 ( 1 ) 409 ( 34 ) 610 ( 35 ) Corporate notes and bonds 1,310 ( 9 ) 5,779 ( 310 ) 7,089 ( 319 ) Municipal securities 38 ( 1 ) 243 ( 29 ) 281 ( 30 ) Total $ 2,157 $ ( 25 ) $ 52,432 $ ( 3,323 ) $ 54,589 $ ( 3,348 ) Less than 12 Months 12 Months or Greater Total Unrealized Losses (In millions) Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value June 30, 2023 U.S. government and agency securities $ 7,950 $ ( 336 ) $ 45,273 $ ( 3,534 ) $ 53,223 $ ( 3,870 ) Foreign government bonds 77 ( 5 ) 391 ( 19 ) 468 ( 24 ) Mortgage- and asset-backed securities 257 ( 5 ) 412 ( 34 ) 669 ( 39 ) Corporate notes and bonds 2,326 ( 49 ) 7,336 ( 534 ) 9,662 ( 583 ) Municipal securities 111 ( 3 ) 186 ( 31 ) 297 ( 34 ) Total $ 10,721 $ ( 398 ) $ 53,598 $ ( 4,152 ) $ 64,319 $ ( 4,550 ) Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence. Debt Investment Maturities The following table outlines maturities of our debt investments as of June 30, 2024: (In millions) Adjusted Cost Basis Estimated Fair Value June 30, 2024 Due in one year or less $ 19,815 $ 19,596 Due after one year through five years 38,954 36,779 Due after five years through 10 years 8,028 7,242 Due after 10 years 1,412 1,282 Total $ 68,209 $ 64,899 72 PART II Item 8 NOTE 5 — DERIVATIVES We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. Foreign Currencies Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments. Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures. Interest Rate Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates. Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using option, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below. Equity Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments. Credit Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below. Credit-Risk-Related Contingent Features Certain counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $ 1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2024, our long-term unsecured debt rating was AAA , and cash investments were in excess of $ 1.0 billion. As a result, no collateral was required to be posted. 73 PART II Item 8 The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents: (In millions) June 30, 2024 June 30, 2023 Designated as Hedging Instruments Foreign exchange contracts purchased $ 1,492 $ 1,492 Interest rate contracts purchased 1,100 1,078 Not Designated as Hedging Instruments Foreign exchange contracts purchased 7,167 7,874 Foreign exchange contracts sold 31,793 25,159 Equity contracts purchased 4,016 3,867 Equity contracts sold 2,165 2,154 Other contracts purchased 2,113 1,224 Other contracts sold 811 581 Fair Values of Derivative Instruments The following table presents our derivative instruments: Derivative Derivative Derivative Derivative (In millions) Assets Liabilities Assets Liabilities June 30, 2024 June 30, 2023 Designated as Hedging Instruments Foreign exchange contracts $ 24 $ ( 76 ) $ 34 $ ( 67 ) Interest rate contracts 19 0 16 0 Not Designated as Hedging Instruments Foreign exchange contracts 213 ( 230 ) 249 ( 332 ) Equity contracts 63 ( 491 ) 165 ( 400 ) Other contracts 12 ( 3 ) 5 ( 6 ) Gross amounts of derivatives 331 ( 800 ) 469 ( 805 ) Gross amounts of derivatives offset in the balance sheets ( 151 ) 152 ( 202 ) 206 Cash collateral received 0 ( 104 ) 0 ( 125 ) Net amounts of derivatives $ 180 $ ( 752 ) $ 267 $ ( 724 ) Reported as Short-term investments $ 12 $ 0 $ 6 $ 0 Other current assets 149 0 245 0 Other long-term assets 19 0 16 0 Other current liabilities 0 ( 401 ) 0 ( 341 ) Other long-term liabilities 0 ( 351 ) 0 ( 383 ) Total $ 180 $ ( 752 ) $ 267 $ ( 724 ) Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $ 304 million and $ 800 million, respectively, as of June 30, 2024, and $ 442 million and $ 804 million, respectively, as of June 30, 2023. The following table presents the fair value of our derivatives instruments on a gross basis: (In millions) Level 1 Level 2 Level 3 Total June 30, 2024 Derivative assets $ 0 $ 327 $ 4 $ 331 Derivative liabilities ( 1 ) ( 799 ) 0 ( 800 ) June 30, 2023 Derivative assets 0 462 7 469 Derivative liabilities 0 ( 805 ) 0 ( 805 ) 74 PART II Item 8 Gains (losses) on derivative instruments recognized in other income (expense), net were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Designated as Fair Value Hedging Instruments Foreign exchange contracts Derivatives $ 0 $ 0 $ 49 Hedged items 0 0 ( 50 ) Excluded from effectiveness assessment 0 0 4 Interest rate contracts Derivatives ( 23 ) ( 65 ) ( 92 ) Hedged items ( 25 ) 38 108 Designated as Cash Flow Hedging Instruments Foreign exchange contracts Amount reclassified from accumulated other comprehensive loss ( 48 ) 61 ( 79 ) Not Designated as Hedging Instruments Foreign exchange contracts 367 ( 73 ) 383 Equity contracts ( 177 ) ( 420 ) 13 Other contracts ( 15 ) ( 41 ) ( 85 ) Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Designated as Cash Flow Hedging Instruments Foreign exchange contracts Included in effectiveness assessment $ ( 14 ) $ 34 $ ( 57 ) NOTE 6 — INVENTORIES The components of inventories were as follows: (In millions) June 30, 2024 2023 Raw materials $ 394 $ 709 Work in process 7 23 Finished goods 845 1,768 Total $ 1,246 $ 2,500 75 PART II Item 8 NOTE 7 — PROPERTY AND EQUIPMENT The components of property and equipment were as follows: (In millions) June 30, 2024 2023 Land $ 8,163 $ 5,683 Buildings and improvements 93,943 68,465 Leasehold improvements 9,594 8,537 Computer equipment and software 93,780 74,961 Furniture and equipment 6,532 6,246 Total, at cost 212,012 163,892 Accumulated depreciation ( 76,421 ) ( 68,251 ) Total, net $ 135,591 $ 95,641 During fiscal years 2024, 2023, and 2022, depreciation expense was $ 15.2 billion, $ 11.0 billion, and $ 12.6 billion, respectively. As of June 30, 2024, we have committed $ 35.4 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters. NOTE 8 — BUSINESS COMBINATIONS Activision Blizzard, Inc. On October 13, 2023 , we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) for a total purchase price of $ 75.4 billion, consisting primarily of cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The financial results of Activision Blizzard have been included in our consolidated financial statements since the date of the acquisition. Activision Blizzard is reported as part of our More Personal Computing segment. The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. The primary areas that remain preliminary relate to the fair values of goodwill and income taxes. The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows: (In millions) Cash and cash equivalents $ 12,976 Goodwill 50,969 Intangible assets 21,969 Other assets 2,501 Long-term debt ( 2,799 ) Long-term income taxes ( 1,914 ) Deferred income taxes ( 4,677 ) Other liabilities ( 3,617 ) Total purchase price $ 75,408 Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of Activision Blizzard. Substantially all of the goodwill is expected to be non-deductible for income tax purposes. 76 PART II Item 8 Following are the details of the purchase price allocated to the intangible assets acquired: (In millions, except average life) Amount Weighted Average Life Marketing-related $ 11,619 24 years Technology-based 9,689 4 years Customer-related 661 4 years Fair value of intangible assets acquired $ 21,969 15 years Following is the net impact of the Activision Blizzard acquisition on our consolidated income statements since the date of acquisition: (In millions) Year Ended June 30, 2024 Revenue $ 5,729 Operating loss ( 1,362 ) The change of Activision Blizzard content from third-party to first-party is reflected in the net impact. Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2022: (In millions, except per share amounts) Year Ended June 30, 2024 2023 Revenue $ 247,442 $ 219,790 Net income 88,308 71,383 Diluted earnings per share 11.82 9.55 These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented. Nuance Communications, Inc. On March 4, 2022 , we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $ 18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment. The allocation of the purchase price to goodwill was completed as of December 31, 2022. The major classes of assets and liabilities to which we have allocated the purchase price were as follows: (In millions) Goodwill (a) $ 16,326 Intangible assets 4,365 Other assets 42 Other liabilities (b) ( 1,972 ) Total $ 18,761 (a) Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes. (b) Includes $ 986 million of convertible senior notes issued by Nuance in 2015 and 2017, substantially all of which have been redeemed. 77 PART II Item 8 Following are the details of the purchase price allocated to the intangible assets acquired: (In millions, except average life) Amount Weighted Average Life Customer-related $ 2,610 9 years Technology-based 1,540 5 years Marketing-related 215 4 years Total $ 4,365 7 years NOTE 9 — GOODWILL Changes in the carrying amount of goodwill were as follows: (In millions) June 30, 2022 Acquisitions Other June 30, 2023 Acquisitions Other June 30, 2024 Productivity and Business Processes $ 24,811 $ 11 $ ( 47 ) $ 24,775 $ 0 $ 2 $ 24,777 Intelligent Cloud 30,182 223 64 30,469 0 ( 28 ) 30,441 More Personal Computing 12,531 0 111 12,642 51,235 (a) 125 (a) 64,002 Total $ 67,524 $ 234 $ 128 $ 67,886 $ 51,235 $ 99 $ 119,220 (a) Includes goodwill of $ 51.0 billion related to Activision Blizzard. See Note 8 – Business Combinations for further information. The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable. Goodwill Impairment We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. No instances of impairment were identified in our May 1, 2024, May 1, 2023, or May 1, 2022 tests. As of June 30, 2024 and 2023, accumulated goodwill impairment was $ 11.3 billion. 78 PART II Item 8 NOTE 10 — INTANGIBLE ASSETS The components of intangible assets, all of which are finite-lived, were as follows: (In millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount June 30, 2024 2023 Marketing-related $ 16,500 $ ( 3,101 ) $ 13,399 $ 4,935 $ ( 2,473 ) $ 2,462 Technology-based 21,913 ( 10,741 ) 11,172 11,245 ( 7,589 ) 3,656 Customer-related 6,038 ( 3,051 ) 2,987 7,281 ( 4,047 ) 3,234 Contract-based 58 ( 19 ) 39 29 ( 15 ) 14 Total $ 44,509 (a) $ ( 16,912 ) $ 27,597 $ 23,490 $ ( 14,124 ) $ 9,366 (a) Includes intangible assets of $ 22.0 billion related to Activision Blizzard. See Note 8 – Business Combinations for further information. No material impairments of intangible assets were identified during fiscal years 2024, 2023, or 2022. We estimate that we have no significant residual value related to our intangible assets. The components of intangible assets acquired during the periods presented were as follows: (In millions) Amount Weighted Average Life Amount Weighted Average Life Year Ended June 30, 2024 2023 Marketing-related $ 11,619 24 years $ 7 5 years Technology-based 10,947 4 years 522 7 years Customer-related 660 4 years 0 0 years Contract-based 38 4 years 12 3 years Total $ 23,264 14 years $ 541 6 years Intangible assets amortization expense was $ 4.8 billion, $ 2.5 billion, and $ 2.0 billion for fiscal years 2024, 2023, and 2022, respectively. The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2024: (In millions) Year Ending June 30, 2025 $ 5,892 2026 4,471 2027 2,793 2028 1,909 2029 1,728 Thereafter 10,804 Total $ 27,597 79 PART II Item 8 NOTE 11 — DEBT Short-term Debt As of June 30, 2024, we had $ 6.7 billion of commercial paper issued and outstanding, with a weighted average interest rate of 5.4 % and maturities ranging from 28 days to 152 days. The estimated fair value of this commercial paper approximates its carrying value. As of June 30, 2023, we had no commercial paper issued or outstanding. Long-term Debt The components of long-term debt were as follows: (In millions, issuance by calendar year) Maturities (calendar year) Stated Interest Rate Effective Interest Rate June 30, 2024 June 30, 2023 2009 issuance of $ 3.8 billion 2039 5.20 % 5.24 % $ 520 $ 520 2010 issuance of $ 4.8 billion 2040 4.50 % 4.57 % 486 486 2011 issuance of $ 2.3 billion 2041 5.30 % 5.36 % 718 718 2012 issuance of $ 2.3 billion 2042 3.50 % 3.57 % 454 454 2013 issuance of $ 5.2 billion 2043 3.75 % – 4.88 % 3.83 % – 4.92 % 314 1,814 2013 issuance of € 4.1 billion 2028 – 2033 2.63 % – 3.13 % 2.69 % – 3.22 % 2,465 2,509 2015 issuance of $ 23.8 billion 2025 – 2055 2.70 % – 4.75 % 2.77 % – 4.78 % 9,805 9,805 2016 issuance of $ 19.8 billion 2026 – 2056 2.40 % – 3.95 % 2.46 % – 4.03 % 7,930 9,430 2017 issuance of $ 17.1 billion (a) 2026 – 2057 3.30 % – 4.50 % 3.38 % – 5.49 % 6,833 8,945 2020 issuance of $ 10.1 billion (a) 2030 – 2060 1.35 % – 2.68 % 2.53 % – 5.43 % 10,111 10,000 2021 issuance of $ 8.2 billion 2052 – 2062 2.92 % – 3.04 % 2.92 % – 3.04 % 8,185 8,185 2023 issuance of $ 0.1 billion (a) 2026 – 2050 1.35 % – 4.50 % 5.16 % – 5.49 % 56 0 2024 issuance of $ 3.3 billion (a) 2026 – 2050 1.35 % – 4.50 % 5.16 % – 5.49 % 3,344 0 Total face value 51,221 52,866 Unamortized discount and issuance costs ( 1,227 ) ( 438 ) Hedge fair value adjustments (b) ( 81 ) ( 106 ) Premium on debt exchange ( 4,976 ) ( 5,085 ) Total debt 44,937 47,237 Current portion of long-term debt ( 2,249 ) ( 5,247 ) Long-term debt $ 42,688 $ 41,990 (a) Includes $ 3.6 billion of debt at face value related to the Activision Blizzard acquisition, the majority of which was exchanged for Microsoft registered securities in June 2024. See Note 8 – Business Combinations for further information. (b) Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt. As of June 30, 2024 and 2023, the estimated fair value of long-term debt, including the current portion, was $ 42.3 billion and $ 46.2 billion, respectively. The estimated fair values are based on Level 2 inputs. Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2024, 2023, and 2022 was $ 1.7 billion, $ 1.7 billion, and $ 1.9 billion, respectively. 80 PART II Item 8 The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2024: (In millions) Year Ending June 30, 2025 $ 2,250 2026 3,000 2027 9,250 2028 0 2029 1,876 Thereafter 34,845 Total $ 51,221 NOTE 12 — INCOME TAXES Provision for Income Taxes The components of the provision for income taxes were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Current Taxes U.S. federal $ 12,165 $ 14,009 $ 8,329 U.S. state and local 2,366 2,322 1,679 Foreign 9,858 6,678 6,672 Current taxes $ 24,389 $ 23,009 $ 16,680 Deferred Taxes U.S. federal $ ( 4,791 ) $ ( 6,146 ) $ ( 4,815 ) U.S. state and local ( 379 ) ( 477 ) ( 1,062 ) Foreign 432 564 175 Deferred taxes $ ( 4,738 ) $ ( 6,059 ) $ ( 5,702 ) Provision for income taxes $ 19,651 $ 16,950 $ 10,978 U.S. and foreign components of income before income taxes were as follows: (In millions) Year Ended June 30, 2024 2023 2022 U.S. $ 62,886 $ 52,917 $ 47,837 Foreign 44,901 36,394 35,879 Income before income taxes $ 107,787 $ 89,311 $ 83,716 81 PART II Item 8 Effective Tax Rate The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows: Year Ended June 30, 2024 2023 2022 Federal statutory rate 21.0 % 21.0 % 21.0 % Effect of: Foreign earnings taxed at lower rates ( 1.4 )% ( 1.8 )% ( 1.3 )% Impact of intangible property transfers 0 % 0 % ( 3.9 )% Foreign-derived intangible income deduction ( 1.1 )% ( 1.3 )% ( 1.1 )% State income taxes, net of federal benefit 1.5 % 1.6 % 1.4 % Research and development credit ( 1.1 )% ( 1.1 )% ( 0.9 )% Excess tax benefits relating to stock-based compensation ( 1.1 )% ( 0.7 )% ( 1.9 )% Interest, net 1.1 % 0.8 % 0.5 % Other reconciling items, net ( 0.7 )% 0.5 % ( 0.7 )% Effective rate 18.2 % 19.0 % 13.1 % In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $ 3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeded the current tax liability from the U.S. global intangible low-taxed income (“GILTI”) tax. The decrease from the federal statutory rate in fiscal year 2024 and 2023 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland. The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. In fiscal years 2024 and 2023, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated 83 % and 81 % of our foreign income before tax. In fiscal year 2022 , our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 71 % of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2024, includes tax benefits from tax law changes. In fiscal year 2024, tax benefits from tax law changes primarily relates to the issuance of Notice 2023-55 and Notice 2023-80 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department. Notice 2023-55, issued in the first quarter of fiscal year 2024, delayed the effective date of final foreign tax credit regulations to fiscal year 2024 for Microsoft. Notice 2023-80, issued in the second quarter of fiscal year 2024, further delayed the effective date of final foreign tax credit regulations indefinitely. In fiscal years 2024, 2023, and 2022, there were no individually significant other reconciling items. The decrease in our effective tax rate for fiscal year 2024 compared to fiscal year 2023 was primarily due to tax benefits from tax law changes, including the delay of the effective date of final foreign tax credit regulations. The increase in our effective tax rate for fiscal year 2023 compared to fiscal year 2022 was primarily due to a $ 3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties and a decrease in tax benefits relating to stock-based compensation. 82 PART II Item 8 The components of the deferred income tax assets and liabilities were as follows: (In millions) June 30, 2024 2023 Deferred Income Tax Assets Stock-based compensation expense $ 765 $ 681 Accruals, reserves, and other expenses 4,381 3,131 Loss and credit carryforwards 1,741 1,441 Amortization 4,159 9,440 Leasing liabilities 6,504 5,041 Unearned revenue 3,717 3,296 Book/tax basis differences in investments and debt 9 373 Capitalized research and development 11,442 6,958 Other 426 489 Deferred income tax assets 33,144 30,850 Less valuation allowance ( 1,045 ) ( 939 ) Deferred income tax assets, net of valuation allowance $ 32,099 $ 29,911 Deferred Income Tax Liabilities Leasing assets $ ( 6,503 ) $ ( 4,680 ) Depreciation ( 3,940 ) ( 2,674 ) Deferred tax on foreign earnings ( 1,837 ) ( 2,738 ) Other ( 167 ) ( 89 ) Deferred income tax liabilities $ ( 12,447 ) $ ( 10,181 ) Net deferred income tax assets $ 19,652 $ 19,730 Reported As Other long-term assets $ 22,270 $ 20,163 Long-term deferred income tax liabilities ( 2,618 ) ( 433 ) Net deferred income tax assets $ 19,652 $ 19,730 Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered. As of June 30, 2024, we had federal, state, and foreign net operating loss carryforwards of $ 476 million, $ 899 million, and $ 2.6 billion, respectively. The federal and state net operating loss carryforwards have varying expiration dates ranging from fiscal year 2025 to 2044 or indefinite carryforward periods , if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance. As of June 30, 2024, we had $ 456 million federal capital loss carryforwards for U.S. tax purposes from our acquisition of Nuance. The federal capital loss carryforwards are subject to an annual limitation and will expire in fiscal year 2025 . The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized. Income taxes paid, net of refunds, were $ 23.4 billion, $ 23.1 billion, and $ 16.0 billion in fiscal years 2024, 2023, and 2022, respectively. Uncertain Tax Positions Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2024, 2023, and 2022, were $ 22.8 billion, $ 17.1 billion, and $ 15.6 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2024, 2023, and 2022 by $ 19.6 billion, $ 14.4 billion, and $ 13.3 billion, respectively. 83 PART II Item 8 As of June 30, 2024, 2023, and 2022, we had accrued interest expense related to uncertain tax positions of $ 6.8 billion, $ 5.2 billion, and $ 4.3 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2024, 2023, and 2022 included interest expense related to uncertain tax positions of $ 1.5 billion, $ 918 million, and $ 36 million, respectively, net of income tax benefits. The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Beginning unrecognized tax benefits $ 17,120 $ 15,593 $ 14,550 Decreases related to settlements ( 76 ) ( 329 ) ( 317 ) Increases for tax positions related to the current year 1,903 1,051 1,145 Increases for tax positions related to prior years (a) 4,289 870 461 Decreases for tax positions related to prior years ( 464 ) ( 60 ) ( 246 ) Decreases due to lapsed statutes of limitations ( 12 ) ( 5 ) 0 Ending unrecognized tax benefits $ 22,760 $ 17,120 $ 15,593 (a) Fiscal year 2024 includes unrecognized tax benefits of $ 3.4 billion related to the acquisition of Activision Blizzard. See Note 8 – Business Combinations for further information. We remain under audit by the IRS for tax years 2014 to 2017 . With respect to the audit for tax years 2004 to 2013 , on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $ 28.9 billion plus penalties and interest. As of June 30, 2024, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months. We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2023 , some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements. NOTE 13 — UNEARNED REVENUE Unearned revenue by segment was as follows: (In millions) June 30, 2024 2023 Productivity and Business Processes $ 30,879 $ 27,572 Intelligent Cloud 23,117 21,563 More Personal Computing 6,188 4,678 Total $ 60,184 $ 53,813 Changes in unearned revenue were as follows: (In millions) Year Ended June 30, 2024 Balance, beginning of period $ 53,813 Deferral of revenue 148,701 Recognition of unearned revenue ( 142,330 ) Balance, end of period $ 60,184 Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $ 275 billion as of June 30, 2024, of which $ 269 billion is related to the commercial portion of revenue. We expect to recognize approximately 45 % of our total company remaining performance obligation revenue over the next 12 months and the remainder thereafter. 84 PART II Item 8 NOTE 14 — LEASES We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 17 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year. The components of lease expense were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Operating lease cost $ 3,555 $ 2,875 $ 2,461 Finance lease cost: Amortization of right-of-use assets $ 1,800 $ 1,352 $ 980 Interest on lease liabilities 734 501 429 Total finance lease cost $ 2,534 $ 1,853 $ 1,409 Supplemental cash flow information related to leases was as follows: (In millions) Year Ended June 30, 2024 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 3,550 $ 2,706 $ 2,368 Operating cash flows from finance leases 734 501 429 Financing cash flows from finance leases 1,286 1,056 896 Right-of-use assets obtained in exchange for lease obligations: Operating leases 6,703 3,514 5,268 Finance leases 11,633 3,128 4,234 Supplemental balance sheet information related to leases was as follows: (In millions, except lease term and discount rate) June 30, 2024 2023 Operating Leases Operating lease right-of-use assets $ 18,961 $ 14,346 Other current liabilities $ 3,580 $ 2,409 Operating lease liabilities 15,497 12,728 Total operating lease liabilities $ 19,077 $ 15,137 Finance Leases Property and equipment, at cost $ 32,248 $ 20,538 Accumulated depreciation ( 6,386 ) ( 4,647 ) Property and equipment, net $ 25,862 $ 15,891 Other current liabilities $ 2,349 $ 1,197 Other long-term liabilities 24,796 15,870 Total finance lease liabilities $ 27,145 $ 17,067 Weighted Average Remaining Lease Term Operating leases 7 years 8 years Finance leases 12 years 11 years Weighted Average Discount Rate Operating leases 3.3 % 2.9 % Finance leases 3.9 % 3.4 % 85 PART II Item 8 The following table outlines maturities of our lease liabilities as of June 30, 2024: (In millions) Year Ending June 30, Operating Leases Finance Leases 2025 $ 4,124 $ 3,311 2026 3,549 3,021 2027 2,981 3,037 2028 2,405 3,026 2029 1,924 2,638 Thereafter 6,587 19,116 Total lease payments 21,570 34,149 Less imputed interest ( 2,493 ) ( 7,004 ) Total $ 19,077 $ 27,145 As of June 30, 2024, we had additional operating and finance leases, primarily for datacenters, that had not yet commenced of $ 8.6 billion and $ 108.4 billion, respectively. These operating and finance leases will commence between fiscal year 2025 and fiscal year 2030 with lease terms of 1 year to 20 years. NOTE 15 — CONTINGENCIES U.S. Cell Phone Litigation Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Twelve of these cases were consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines. In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying. The parties agreed to a stipulated dismissal of the consolidated cases to allow plaintiffs to appeal the expert testimony order. Plaintiffs appealed the court’s order in August of 2023, and the parties have filed their briefs on the appeal. A hearing on the status of the stayed cases occurred in December of 2023. In July 2024, the court entered summary judgment in nine of the stayed cases on the grounds that plaintiffs had agreed to be bound by the general causation outcome in the consolidated cases. 86 PART II Item 8 Irish Data Protection Commission Matter In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In April 2023, the IDPC provided LinkedIn with a non-public preliminary draft decision alleging GDPR violations and proposing a fine. In July 2024, the IDPC provided LinkedIn with a revised non-public draft decision. There is no set timeline for the IDPC to issue a final decision, at which time Microsoft will consider its options to appeal. Other Contingencies We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. As of June 30, 2024, we accrued aggregate legal liabilities of $ 641 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $ 600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable. NOTE 16 — STOCKHOLDERS’ EQUITY Shares Outstanding Shares of common stock outstanding were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Balance, beginning of year 7,432 7,464 7,519 Issued 34 37 40 Repurchased ( 32 ) ( 69 ) ( 95 ) Balance, end of year 7,434 7,432 7,464 Share Repurchases On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $ 40.0 billion in share repurchases. This share repurchase program commenced in February 2020 and was completed in November 2021. On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $ 60.0 billion in share repurchases. This share repurchase program commenced in November 2021, following completion of the program approved on September 18, 2019, has no expiration date, and may be terminated at any time. As of June 30, 2024, $ 10.3 billion remained of this $ 60.0 billion share repurchase program. We repurchased the following shares of common stock under the share repurchase programs: (In millions) Shares Amount Shares Amount Shares Amount Year Ended June 30, 2024 2023 2022 First Quarter 11 $ 3,560 17 $ 4,600 21 $ 6,200 Second Quarter 7 2,800 20 4,600 20 6,233 Third Quarter 7 2,800 18 4,600 26 7,800 Fourth Quarter 7 2,800 14 4,600 28 7,800 Total 32 $ 11,960 69 $ 18,400 95 $ 28,033 87 PART II Item 8 All repurchases were made using cash resources. Shares repurchased during the first quarter of fiscal year 2022 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on September 18, 2019 and September 14, 2021. All other shares repurchased were under the share repurchase program approved on September 14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $ 5.3 billion, $ 3.8 billion, and $ 4.7 billion for fiscal years 2024, 2023, and 2022, respectively. Dividends Our Board of Directors declared the following dividends: Declaration Date Record Date Payment Date Dividend Per Share Amount Fiscal Year 2024 (In millions) September 19, 2023 November 16, 2023 December 14, 2023 $ 0.75 $ 5,574 November 28, 2023 February 15, 2024 March 14, 2024 0.75 5,573 March 12, 2024 May 16, 2024 June 13, 2024 0.75 5,574 June 12, 2024 August 15, 2024 September 12, 2024 0.75 5,575 Total $ 3.00 $ 22,296 Fiscal Year 2023 September 20, 2022 November 17, 2022 December 8, 2022 $ 0.68 $ 5,066 November 29, 2022 February 16, 2023 March 9, 2023 0.68 5,059 March 14, 2023 May 18, 2023 June 8, 2023 0.68 5,054 June 13, 2023 August 17, 2023 September 14, 2023 0.68 5,051 Total $ 2.72 $ 20,230 The dividend declared on June 12, 2024 was included in other current liabilities as of June 30, 2024. 88 PART II Item 8 NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in accumulated other comprehensive income (loss) by component : (In millions) Year Ended June 30, 2024 2023 2022 Derivatives Balance, beginning of period $ ( 27 ) $ ( 13 ) $ ( 19 ) Unrealized gains (losses), net of tax of $( 4 ) , $ 9 , and $( 15 ) ( 14 ) 34 ( 57 ) Reclassification adjustments for (gains) losses included in other income (expense), net 48 ( 61 ) 79 Tax expense (benefit) included in provision for income taxes ( 10 ) 13 ( 16 ) Amounts reclassified from accumulated other comprehensive loss 38 ( 48 ) 63 Net change related to derivatives, net of tax of $ 6 , $( 4 ), and $ 1 24 ( 14 ) 6 Balance, end of period $ ( 3 ) $ ( 27 ) $ ( 13 ) Investments Balance, beginning of period $ ( 3,582 ) $ ( 2,138 ) $ 3,222 Unrealized gains (losses), net of tax of $ 247 , $( 393 ), and $( 1,440 ) 915 ( 1,523 ) ( 5,405 ) Reclassification adjustments for losses included in other income (expense), net 53 99 57 Tax benefit included in provision for income taxes ( 11 ) ( 20 ) ( 12 ) Amounts reclassified from accumulated other comprehensive loss 42 79 45 Net change related to investments, net of tax of $ 258 , $( 373 ), and $( 1,428 ) 957 ( 1,444 ) ( 5,360 ) Balance, end of period $ ( 2,625 ) $ ( 3,582 ) $ ( 2,138 ) Translation Adjustments and Other Balance, beginning of period $ ( 2,734 ) $ ( 2,527 ) $ ( 1,381 ) Translation adjustments and other, net of tax of $ 0 , $ 0 , and $ 0 ( 228 ) ( 207 ) ( 1,146 ) Balance, end of period $ ( 2,962 ) $ ( 2,734 ) $ ( 2,527 ) Accumulated other comprehensive loss, end of period $ ( 5,590 ) $ ( 6,343 ) $ ( 4,678 ) NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees. Stock-based compensation expense and related income tax benefits were as follows: (In millions) Year Ended June 30, 2024 2023 2022 Stock-based compensation expense $ 10,734 $ 9,611 $ 7,502 Income tax benefits related to stock-based compensation 1,826 1,651 1,293 Stock Plans Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years . 89 PART II Item 8 Executive Incentive Plan Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years . PSUs generally vest over a performance period of three years . The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved. Activity for All Stock Plans The fair value of stock awards was estimated on the date of grant using the following assumptions: Year ended June 30, 2024 2023 2022 Dividends per share (quarterly amounts) $ 0.68 – 0.75 $ 0.62 – 0.68 $ 0.56 – 0.62 Interest rates 3.8 % – 5.6 % 2.0 % – 5.4 % 0.03 % – 3.6 % During fiscal year 2024, the following activity occurred under our stock plans: Shares Weighted Average Grant-Date Fair Value (In millions) Stock Awards Nonvested balance, beginning of year 96 $ 250.37 Granted (a) 41 339.46 Vested ( 42 ) 246.71 Forfeited ( 7 ) 270.59 Nonvested balance, end of year 88 $ 292.28 (a) Includes 1 million of PSUs granted at target and performance adjustments above target levels for each of the fiscal years 2024, 2023, and 2022. As of June 30, 2024, total unrecognized compensation costs related to stock awards were $ 20.3 billion. These costs are expected to be recognized over a weighted average period of three years . The weighted average grant-date fair value of stock awards granted was $ 339.46 , $ 252.59 , and $ 291.22 for fiscal years 2024, 2023, and 2022, respectively. The fair value of stock awards vested was $ 16.0 billion, $ 11.9 billion, and $ 14.1 billion, for fiscal years 2024, 2023, and 2022, respectively. As of June 30, 2024, an aggregate of 129 million shares were authorized for future grant under our stock plans. Employee Stock Purchase Plan We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90 % of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15 % of their gross compensation during an offering period. Employees purchased the following shares during the periods presented: (Shares in millions) Year Ended June 30, 2024 2023 2022 Shares purchased 6 7 7 Average price per share $ 339.46 $ 245.59 $ 259.55 As of June 30, 2024, 68 million shares of our common stock were reserved for future issuance through the ESPP. 90 PART II Item 8 Savings Plans We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $ 1.7 billion, $ 1.6 billion, and $ 1.4 billion in fiscal years 2024, 2023, and 2022, respectively, and were expensed as contributed. NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Our reportable segments are described below. Productivity and Business Processes Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises: • Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Copilot for Microsoft 365. • Office Consumer, including Microsoft 365 Consumer and Copilot Pro subscriptions, Office licensed on-premises, and other Office services. • LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. • Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate; and on-premises ERP and CRM applications. Intelligent Cloud Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises: • Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. • Enterprise and partner services, including Enterprise Support Services, Industry Solutions, Nuance professional services, Microsoft Partner Network, and Learning Experience. More Personal Computing Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises: • Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. • Devices, including Surface, HoloLens, and PC accessories. 91 PART II Item 8 • Gaming, including Xbox hardware and Xbox content and services, comprising first-party content (such as Activision Blizzard) and third-party content, including games and in-game content; Xbox Game Pass and other subscriptions; Xbox Cloud Gaming; advertising; third-party disc royalties; and other cloud services. • Search and news advertising, comprising Bing (including Copilot), Microsoft News, Microsoft Edge, and third-party affiliates. Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin. In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount. Segment revenue and operating income were as follows during the periods presented: (In millions) Year Ended June 30, 2024 2023 2022 Revenue Productivity and Business Processes $ 77,728 $ 69,274 $ 63,364 Intelligent Cloud 105,362 87,907 74,965 More Personal Computing 62,032 54,734 59,941 Total $ 245,122 $ 211,915 $ 198,270 Operating Income Productivity and Business Processes $ 40,540 $ 34,189 $ 29,690 Intelligent Cloud 49,584 37,884 33,203 More Personal Computing 19,309 16,450 20,490 Total $ 109,433 $ 88,523 $ 83,383 No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2024, 2023, or 2022. Revenue, classified by the major geographic areas in which our customers were located, was as follows: (In millions) Year Ended June 30, 2024 2023 2022 United States (a) $ 124,704 $ 106,744 $ 100,218 Other countries 120,418 105,171 98,052 Total $ 245,122 $ 211,915 $ 198,270 (a) Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. 92 PART II Item 8 Revenue, classified by significant product and service offerings, was as follows: (In millions) Year Ended June 30, 2024 2023 2022 Server products and cloud services $ 97,726 $ 79,970 $ 67,350 Office products and cloud services 54,875 48,848 44,970 Windows 23,244 21,507 24,732 Gaming 21,503 15,466 16,230 LinkedIn 16,372 14,989 13,631 Search and news advertising 12,576 12,158 11,526 Enterprise and partner services 7,594 7,900 7,605 Dynamics products and cloud services 6,481 5,437 4,687 Devices 4,706 5,521 7,306 Other 45 119 233 Total $ 245,122 $ 211,915 $ 198,270 We have recast certain prior period amounts to conform to the way we internally manage and monitor our business. Our Microsoft Cloud revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $ 137.4 billion, $ 111.6 billion, and $ 91.4 billion in fiscal years 2024, 2023, and 2022, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and Dynamics products and cloud services in the table above. Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss. Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows: (In millions) June 30, 2024 2023 2022 United States $ 186,106 $ 114,380 $ 106,430 Other countries 115,263 72,859 59,938 Total $ 301,369 $ 187,239 $ 166,368 93 PART II Item 8 REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Microsoft Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2024 and 2023, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2024, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 30, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Refer to Note 1 to the financial statements Critical Audit Matter Description The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs. 94 PART II Item 8 Significant judgment is exercised by the Company in determining revenue recognition for certain customer agreements, and includes the following: • Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. • The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. • Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). • Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for certain customer agreements was extensive and required a high degree of auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company's revenue recognition for certain customer agreements included the following: • We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. • We evaluated management's significant accounting policies related to certain customer agreements for reasonableness. • We selected a sample of customer agreements and performed the following procedures: - Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. - Tested management's identification and treatment of contract terms. - Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. • We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. • We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements Critical Audit Matter Description The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. In the current fiscal year, the Company received Notices of Proposed Adjustments (“NOPAs”) for the tax years 2004 to 2013, primarily related to intercompany transfer pricing. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements. 95 PART II Item 8 Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of certain transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following: • We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. • We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. • We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. • For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information, including the NOPAs received in the current fiscal year, that could significantly change the recognition, measurement, or disclosure of the uncertain tax positions. • We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations, and case law, impacted management's judgments. Business Combinations – Estimate for Valuation of Acquired Intangible Assets – Refer to Note 8 to the financial statements Critical Audit Matter Description On October 13, 2023, the Company completed the acquisition of Activision Blizzard, Inc. The Company accounted for the Activision Blizzard, Inc., acquisition as a business combination and, accordingly, allocated the purchase price to the assets acquired and liabilities assumed based on their respective estimated fair values as of the date of acquisition. Identifiable intangible assets acquired included marketing-related intangible assets, technology-based intangible assets, and customer-related intangible assets. The excess of the purchase consideration over the fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. We identified the fair value determination of certain marketing-related and technology-based intangible assets for the business combination as a critical audit matter due to the significant judgment required in determining their estimated fair values. Management’s estimates of fair value included assumptions for revenue and expense forecasts and the selection of appropriate discount rates. There was a high degree of auditor judgment and subjectivity in applying audit procedures and evaluating the significant assumptions relating to the estimates, including involvement of our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s estimates of the fair value of certain marketing-related and technology-based intangible assets acquired included the following, among others: • We tested the operating effectiveness of internal controls over the business combination, including internal controls over the revenue and expense forecasts and the selection of appropriate discount rates. • We assessed the knowledge, skills, abilities, and objectivity of management’s valuation specialist and evaluated the work performed. 96 PART II Item 8 • When assessing the reasonableness of assumptions related to forecasted revenue and expenses, we evaluated whether the assumptions used were reasonable considering historical financial information of Activision Blizzard, Inc., and the Company’s forecasted financial information. • With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates by: - Testing the source information underlying the discount rates and testing the mathematical accuracy of the calculations. - Developing a range of independent estimates and comparing those to the discount rates selected by management. /s/ D ELOITTE & T OUCHE LLP Seattle, Washington July 30, 2024 We have served as the Company's auditor since 1983. 97 PART II Item 9, 9A ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOU NTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.