What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-07-30 compared with 2024-07-30 · 247 added, 373 removed, 1320 unchanged (32% of the section changed)

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This section generally discusses the results of our operations for the year ended June 30, 2025 compared to the year ended June 30, 2024.

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.

For a discussion of the year ended June 30, 2024 compared to the year ended June 30, 2023, 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, 2024 and our Form 8-K filed on December 3, 2024.

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.

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• Microsoft Cloud revenue increased 23% to $168.9 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.

• Microsoft 365 Commercial products and cloud services revenue increased 14% driven by Microsoft 365 Commercial cloud revenue growth of 15%.

• Microsoft 365 Consumer products and cloud services revenue increased 11% driven by Microsoft 365 Consumer cloud revenue growth of 11%.

• 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.

• Dynamics products and cloud services revenue increased 15% driven by Dynamics 365 revenue growth of 19%.

• Server products and cloud services revenue increased 23% driven by Azure and other cloud services revenue growth of 34%.

• Windows OEM and Devices revenue increased 3%.

• Xbox content and services revenue increased 16%.

• Search and news advertising revenue excluding traffic acquisition costs increased 20%.

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.

Industry Trends

Industry Trends and Opportunities

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models.

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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.

Microsoft and OpenAI maintain a long-term strategic partnership originally established in 2019.

Microsoft is a major investor in OpenAI, and the companies have reciprocal revenue-sharing arrangements.

We hold rights to OpenAI’s intellectual property, including models and infrastructure, for integration into our products.

The OpenAI API is exclusive to Azure, runs on Azure, and is available through the Azure OpenAI Service.

We also have a right of first refusal on OpenAI's new capacity needs.

Economic Conditions, Challenges, and Risks

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dollar relative to certain foreign currencies did not have a material impact on reported revenue and expenses from our international operations in fiscal year 2025.

Further, global, regional, and local economic developments and changes in global trade policies such as restrictions on international trade, including tariffs and other controls on imports or exports, could result in increased supply chain challenges, cost volatility, and consumer and economic uncertainty which may adversely affect our results of operations.

Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.

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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.

Reportable Segments

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The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting.

In August 2024, we announced changes to the composition of our segments.

These changes align our segments with how we currently manage our business, most notably bringing the commercial components of Microsoft 365 together in the Productivity and Business Processes segment.

Beginning in fiscal year 2025, the information that our chief operating decision maker is regularly provided and reviews for purposes of allocating resources and assessing performance reflects these segment changes.

Prior period segment information has been recast to conform to the way we internally manage and monitor our business during fiscal year 2025.

Additional information on our reportable segments is contained in Note 18 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

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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.

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.

In the first quarter of fiscal year 2025, we made updates to our metrics in connection with the segment changes described above.

These changes align our metrics with how we manage and monitor certain businesses.

The key change was bringing the commercial components of Microsoft 365 together and creating a new Microsoft 365 Commercial cloud revenue growth metric.

Other changes include combining Windows OEM and Devices into a single revenue growth metric that brings revenue from PC market-driven businesses together, as well as elevating our cloud revenue growth metrics to align to our strategic focus on cloud growth.

Our commercial business primarily consists of Server products and cloud services, Microsoft 365 Commercial products and cloud services, the commercial portion of LinkedIn, Dynamics products and cloud services, and Enterprise and partner services.

Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.

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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

Revenue from Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365

Microsoft Cloud gross margin percentage

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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

The metrics primarily reflect growth across our cloud services.

Microsoft 365 Commercial cloud revenue growth

Revenue from Microsoft 365 Commercial subscriptions, comprising Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot

Microsoft 365 Commercial seat growth

The number of Microsoft 365 Commercial seats at end of period where seats are paid users covered by a Microsoft 365 Commercial subscription

Microsoft 365 Consumer cloud revenue growth

Revenue from Microsoft 365 Consumer subscriptions and other consumer services

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

The number of Microsoft 365 Consumer subscribers at end of period

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

Dynamics 365 revenue growth

Revenue from Dynamics 365, including a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate

Azure and other cloud services revenue growth

Revenue from Azure and other cloud services, including cloud and AI consumption-based services, GitHub cloud services, Nuance Healthcare cloud services, virtual desktop offerings, and other cloud services

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

Metrics related to our More Personal Computing segment assess the performance of our key consumer businesses.

Windows OEM and Devices revenue growth

Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel and sales of first-party Devices, including Surface 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;

third-party disc royalties;

and other cloud services

Revenue from Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, and other cloud services

Search and news advertising revenue (ex TAC) growth

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Diluted earnings per share

Adjusted gross margin (non-GAAP)

Adjusted operating income (non-GAAP)

Adjusted net income (non-GAAP)

Adjusted diluted earnings per share (non-GAAP)

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 2025 Compared with Fiscal Year 2024

Revenue increased $33.2 billion or 16% driven by growth across each of our segments.

Revenue increased $36.6 billion or 15% with 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.

Productivity and Business Processes revenue increased driven by Microsoft 365 Commercial cloud.

More Personal Computing revenue increased driven by Gaming and Search and news advertising.

Cost of revenue increased $13.7 billion or 19% driven by growth in Microsoft Cloud.

Gross margin increased $22.9 billion or 13% with growth across each of our segments.

• Gross margin percentage decreased slightly driven by Intelligent Cloud, offset in part by More Personal Computing.

• Microsoft Cloud gross margin percentage decreased to 69% driven by the impact of scaling our AI infrastructure, offset in part by efficiency gains in Azure.

Operating expenses increased $3.8 billion or 6% driven by investments in cloud and AI engineering and Gaming, including the impact of the Activision Blizzard acquisition.

Operating income increased $19.1 billion or 17% with growth across each of our segments.

SEGMENT RESULTS OF OPERATIONS

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Productivity and Business Processes

Intelligent Cloud

More Personal Computing

Cost of revenue

Operating expenses

Operating Income

Productivity and Business Processes

Intelligent Cloud

Cost of revenue

Operating expenses

Operating Income

More Personal Computing

Cost of revenue

Operating expenses

Operating Income

Cost of revenue

Operating expenses

Operating Income

Reportable Segments

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Revenue increased $14.0 billion or 13%.

• 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.

• Microsoft 365 Commercial products and cloud services revenue increased $10.8 billion or 14%.

Microsoft 365 Commercial cloud revenue grew 15% with Microsoft 365 Commercial seat growth of 6% driven by small and medium businesses and frontline worker offerings, as well as growth in revenue per user.

Microsoft 365 Commercial products revenue grew 7% driven by the Windows Commercial on-premises components of Microsoft 365 suite sales and an increase in Office transactional purchasing with the launch of Office 2024.

• Microsoft 365 Consumer products and cloud services revenue increased $756 million or 11%.

Microsoft 365 Consumer cloud revenue grew 11% driven by Microsoft 365 Consumer subscriber growth of 8% to 89.0 million, as well as growth in revenue per user from the price increase announced in January 2025.

• LinkedIn revenue increased $1.4 billion or 9% with growth across all lines of business.

• Dynamics products and cloud services revenue increased $996 million or 15% driven by growth in Dynamics 365, offset in part by a decline in Dynamics on-premises products.

Dynamics 365 revenue grew 19% with growth across all workloads.

Operating income increased $10.1 billion or 17%.

• 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%.

• Cost of revenue increased $2.8 billion or 14% driven by growth in Microsoft 365 Commercial cloud.

• Gross margin increased $11.2 billion or 13% driven by growth in Microsoft 365 Commercial cloud.

Gross margin percentage decreased slightly primarily driven by the impact of scaling our AI infrastructure, offset in part by efficiency gains in Microsoft 365 Commercial cloud.

• Operating expenses increased $1.1 billion or 4% driven by investments in cloud and AI engineering and commercial sales.

Intelligent Cloud

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• Server products and cloud services revenue increased $18.6 billion or 23% 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.

Azure and other cloud services revenue grew 34% driven by demand for our portfolio of services.

Server products revenue decreased 3% driven by a decrease in transactional purchasing with continued customer shift to cloud offerings.

• Enterprise and partner services revenue increased $166 million or 2% driven by growth in Enterprise Support Services, offset in part by a decline in Industry Solutions.

Operating income increased $6.8 billion or 18%.

• Cost of revenue increased $10.6 billion or 36% driven by growth in Azure.

• Gross margin increased $8.2 billion or 14% 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.

Gross margin percentage decreased driven by the impact of scaling our AI infrastructure, offset in part by efficiency gains in Azure.

• Operating expenses increased $1.5 billion or 7% driven by investments in cloud and AI engineering.

More Personal Computing

Revenue increased $3.8 billion or 7%.

• 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.

• Windows and Devices revenue increased $288 million or 2%.

Windows OEM and Devices revenue increased 3% driven by growth in Windows OEM, offset in part by a decline in Devices.

• Gaming revenue increased $2.0 billion or 9% driven by growth in Xbox content and services, offset in part by a decline in Xbox hardware.

Xbox content and services revenue increased 16% driven by the impact of the Activision Blizzard acquisition and Xbox Game Pass.

Xbox hardware revenue decreased 25% 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%.

• Search and news advertising revenue increased $1.6 billion or 13%.

Search and news advertising revenue excluding traffic acquisition costs increased 20% driven by higher search volume and higher revenue per search.

Operating income increased $2.2 billion or 18%.

• 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.

• Cost of revenue increased $346 million or 1% driven by growth in Search and news advertising.

• Gross margin increased $3.5 billion or 13% with growth across all businesses.

Gross margin percentage increased with improvement across all businesses.

• Operating expenses increased $1.3 billion or 9% driven by Gaming, including the impact of the Activision Blizzard acquisition.

OPERATING EXPENSES

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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.

Research and development expenses also include technology development costs, including AI training and other infrastructure costs, third-party development and programming costs, and the amortization of purchased software code and services content.

Fiscal Year 2025 Compared with Fiscal Year 2024

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.

Research and development expenses increased $3.0 billion or 10% driven by investments in cloud and AI engineering and Gaming, including the impact of the Activision Blizzard acquisition.

Sales and Marketing

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Fiscal Year 2025 Compared with Fiscal Year 2024

Sales and marketing expenses increased $1.7 billion or 7% driven by Gaming, with 6 points of growth from the Activision Blizzard acquisition.

Sales and marketing expenses increased $1.2 billion or 5% driven by investments in commercial sales and Gaming, including the impact of the Activision Blizzard acquisition.

General and Administrative

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Fiscal Year 2025 Compared with Fiscal Year 2024

General and administrative expenses increased slightly as growth from the Activision Blizzard acquisition was offset in part by the prior year Q2 charge.

General and administrative expenses decreased $386 million or 5% driven by Gaming, including the impact of the Activision Blizzard acquisition.

OTHER INCOME (EXPENSE), NET

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Interest expense

Net recognized gains (losses) on investments

Net recognized losses on investments

Net losses on derivatives

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Fiscal Year 2025 Compared with Fiscal Year 2024

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.

Interest and dividends income decreased primarily due to lower portfolio balances.

Interest expense decreased primarily due to maturities of commercial paper and higher capitalization of debt interest expense, offset in part by higher finance lease interest expense.

Net recognized losses on investments increased primarily due to higher impairments, offset in part by higher gains on equity investments in the current period.

Net losses on derivatives increased primarily due to higher losses on equity derivatives in the current period.

Other, net primarily reflects net recognized losses on equity method investments, including OpenAI.

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 for both fiscal years 2025 and 2024 was 18%.

Our effective tax rate for the fiscal year ended June 30, 2025 was primarily impacted by changes in the mix of our earnings and tax expenses between the U.S.

and foreign countries.

Our effective tax rate was lower than the U.S.

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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.

Many countries have implemented or are in the process of implementing the Pillar Two legislation, which applies 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.

We are currently assessing the One Big Beautiful Bill Act (“OBBBA”) which was enacted on July 4, 2025.

The OBBBA provides a U.S.

global intangible low-taxed income effective tax rate of 14% effective fiscal year 2027 for Microsoft.

It also provides bonus depreciation for certain assets placed into service after January 19, 2025 and an election to expense U.S.

incurred research or experimental expenditures.

Uncertain Tax Positions

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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.

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)

Severance, hardware-related impairment, and lease consolidation costs

Adjusted gross margin (non-GAAP)

Operating income

Severance, hardware-related impairment, and lease consolidation costs

Adjusted operating income (non-GAAP)

Severance, hardware-related impairment, and lease consolidation costs

Adjusted net income (non-GAAP)

Diluted earnings per share

Severance, hardware-related impairment, and lease consolidation costs

Adjusted diluted earnings per share (non-GAAP)

* Not meaningful.

We are subject to income tax in many jurisdictions outside the U.S., some of which are currently under audit by local tax authorities.

The resolution of these audits is not expected to be material to our consolidated financial statements.

Our operations in Ireland remain subject to examination for tax years 2020 and thereafter.

LIQUIDITY AND CAPITAL RESOURCES

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These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

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.

Cash from operations increased $17.6 billion to $136.2 billion for fiscal year 2025, primarily due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees and cash used to pay income taxes.

Cash used in financing increased $13.9 billion to $51.7 billion for fiscal year 2025, primarily due to a $9.5 billion increase in cash used for repayments of debt, net of proceeds.

Cash used in investing decreased $24.4 billion to $72.6 billion for fiscal year 2025, primarily due to a $63.2 billion decrease in cash used for acquisitions of companies, net of cash acquired and divestitures, and purchases of intangible and other assets, offset in part by a $22.3 billion increase in cash used in net investment purchases, sales, and maturities, and a $20.1 billion increase in additions to property and equipment.

Debt Proceeds

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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.

Refer to Note 10 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

Unearned Revenue

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“SA”) and cloud services.

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include cloud services and Software Assurance (“SA”).

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.

Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

The following table outlines the expected future recognition of unearned revenue as of June 30, 2025:

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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.

Refer to Note 12 – Unearned Revenue of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

Material Cash Requirements and Other Obligations

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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.

As of June 30, 2025, our eighth transition tax installment of $4.4 billion is short-term and payable in the first quarter of fiscal year 2026.

Share Repurchases

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As of June 30, 2025, $57.3 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.

Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

During fiscal years 2025 and 2024, our Board of Directors declared dividends totaling $24.7 billion and $22.3 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.

Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

Other Planned Uses of Capital

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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 will continue to invest in capital expenditures 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.

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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.

Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

CRITICAL ACCOUNTING ESTIMATES

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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

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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.

Costs incurred internally in researching and developing a software product to be marketed or sold to external users 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.

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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.

STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

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Stock-based compensation expense

Net recognized losses (gains) on investments and derivatives

Net recognized losses on investments and derivatives

Deferred income taxes

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Net cash from operations

Proceeds from issuance of debt, maturities of 90 days or less, net

Proceeds from issuance (repayments) of debt, maturities of 90 days or less, net

Proceeds from issuance of debt

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Additions to property and equipment

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

Acquisition of companies, net of cash acquired and divestitures, and purchases of intangible and other assets

Purchases of investments

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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

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Intercompany transactions and balances have been eliminated.

Recast of Certain Prior Period Information

In August 2024, we announced changes to the composition of our segments.

Prior period segment information has been recast to conform to the way we internally manage and monitor our business during fiscal year 2025.

These changes primarily impacted Note 8 – Goodwill, Note 12 – Unearned Revenue, and Note 18 – Segment Information and Geographic Data.

The recast of prior period information had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Estimates and Assumptions

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loss contingencies;

product warranties;

the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units;

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allowances for doubtful accounts;

the market value of, and demand for, our inventory;

stock-based compensation forfeiture rates;

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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.

This change in accounting estimate was effective beginning fiscal year 2023.

Foreign Currencies

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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.

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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.

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 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.

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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 comprises mainly unearned revenue related to volume licensing programs, which may include cloud services and SA.

Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period.

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As of June 30, 2025 and 2024, long-term accounts receivable, net of allowance for doubtful accounts, was $ 5.2 billion and $ 4.9 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.

Activity in the allowance for doubtful accounts was as follows:

(In millions)

Year Ended June 30,

Balance, beginning of period

Charged to costs and other

Balance, end of period

Allowance for doubtful accounts included in our consolidated balance sheets:

(In millions)

Accounts receivable, net of allowance for doubtful accounts

Other long-term assets

As of June 30, 2025 and 2024, other receivables related to activities to facilitate the purchase of server components were $ 8.2 billion and $ 10.5 billion, respectively, and are included in other current assets in our consolidated balance sheets.

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As of June 30, 2025 and 2024, our financing receivables, net were $ 4.3 billion and $ 4.5 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.

We record an allowance for doubtful accounts which reflects our best estimate of credit losses inherent in the accounts receivable and financing receivable balances.

We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

Assets Recognized from Costs to Obtain a Contract with a Customer

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Cost of revenue includes:

costs incurred to support and maintain cloud-based and other online products and services, including datacenter costs and royalties;

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.

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.

traffic acquisition costs to drive traffic to our websites and to acquire online advertising space;

and costs associated with the delivery of consulting services.

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.

Research and development expenses also include third-party development and programming costs and the depreciation and amortization of assets used to conduct research and development.

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.

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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.

Advertising expense was $ 2.1 billion, $ 1.7 billion, and $ 904 million in fiscal years 2025, 2024, and 2023, respectively.

Stock-Based Compensation

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Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting.

We have an investment in OpenAI Global, LLC (“OpenAI”) and have made total funding commitments of $ 13 billion.

The investment is accounted for under the equity method of accounting.

Derivative instruments are recognized as either assets or liabilities and measured at fair value.

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Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

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

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The estimated useful lives of our property and equipment are generally as follows:

computer software developed or acquired for internal use, three years ;

software developed or acquired for internal use, three years ;

computer equipment, two to six years ;

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Recent Accounting Guidance

Recently Adopted Accounting Guidance

Segment Reporting – Improvements to Reportable Segment Disclosures

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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.

We adopted the standard beginning with our annual reporting for fiscal year 2025.

The adoption resulted in incremental segment reporting disclosures, most notably disclosure of cost of revenue and operating expenses for each reportable segment.

Refer to Note 18 – Segment Information and Geographic Data.

Recent Accounting Guidance Not Yet Adopted

Income Taxes – Improvements to Income Tax Disclosures

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We are currently evaluating the impact of this standard on our income tax disclosures.

Income Statement – Disaggregation of Income Statement Expenses

In November 2024, the FASB issued a new standard to expand disclosures about income statement expenses.

The guidance requires disaggregation of certain costs and expenses included in each relevant expense caption on our consolidated income statements in a separate note to the financial statements at each interim and annual reporting period, including amounts of purchases of inventory, employee compensation, depreciation, and intangible asset amortization.

The standard will be effective for us beginning with our annual reporting for fiscal year 2028 and interim periods thereafter, with early adoption permitted.

We are currently evaluating the impact of this standard on our disclosures.

NOTE 2 — EARNINGS PER SHARE

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Net gains (losses) on foreign currency remeasurements

Other, net primarily reflects net recognized losses on equity method investments.

Other, net primarily reflects net recognized losses on equity method investments, including OpenAI.

Net Recognized Gains (Losses) on Investments

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(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.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments, measured using the equity method, or 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, 2025 and 2024, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $ 2.9 billion and $ 3.9 billion, respectively.

Equity investments measured using the equity method were $ 6.0 billion as of both June 30, 2025 and 2024.

Unrealized Losses on Debt Investments

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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.

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Other current assets

Equity and other investments

Other long-term assets

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Other long-term liabilities

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.

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $ 452 million and $ 1.8 billion, respectively, as of June 30, 2025, and $ 304 million and $ 800 million, respectively, as of June 30, 2024.

The following table presents the fair value of our derivatives instruments on a gross basis:

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Designated as Fair Value Hedging Instruments

Foreign exchange contracts

Excluded from effectiveness assessment

Interest rate contracts

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Included in effectiveness assessment

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)

Raw materials

Work in process

Finished goods

NOTE 6 — PROPERTY AND EQUIPMENT

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During fiscal years 2025, 2024, and 2023, depreciation expense was $ 22.0 billion, $ 15.2 billion, and $ 11.0 billion, respectively.

As of June 30, 2025, 2024, and 2023, purchases of property and equipment remaining in accounts payable were $ 6.9 billion, $ 4.3 billion, and $ 3.8 billion, respectively.

As of June 30, 2025, we have committed $ 32.1 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters.

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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:

The allocation of the purchase price to the assets acquired and liabilities assumed was completed as of September 30, 2024.

The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

(In millions)

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Fair value of intangible assets acquired

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,

Operating loss

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:

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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)

Intangible assets

Other liabilities (b)

(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.

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions, except average life)

Customer-related

Technology-based

Marketing-related

NOTE 8 — GOODWILL

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More Personal Computing

(a) Includes goodwill of $ 51.0 billion related to Activision Blizzard.

See Note 8 – Business Combinations for further information.

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Refer to Note 1 – Accounting Policies 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.

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Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

As discussed in Note 1 – Accounting Policies, during the first quarter of fiscal year 2025 we made changes to our segments.

These segment changes also resulted in changes to our reporting units.

We reallocated goodwill across impacted reporting units using a relative fair value approach.

In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.

Goodwill Impairment

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Contract-based

(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 2025, 2024, or 2023.

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Short-term Debt

As of June 30, 2025, we had no commercial paper issued or outstanding.

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

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2016 issuance of $ 19.8 billion

2017 issuance of $ 17.1 billion (a)

2020 issuance of $ 10.1 billion (a)

2017 issuance of $ 17.1 billion

2023 issuance of $ 0.1 billion (a)

2024 issuance of $ 3.3 billion (a)

2020 issuance of $ 10.1 billion

2021 issuance of $ 8.2 billion

2023 issuance of $ 0.1 billion

2024 issuance of $ 3.3 billion

Total face value

Unamortized discount and issuance costs

Hedge fair value adjustments (b)

Hedge fair value adjustments (a)

Premium on debt exchange

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Long-term debt

(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.

(a) Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2025 and 2024, the estimated fair value of long-term debt, including the current portion, was $ 40.4 billion and $ 42.3 billion, respectively.

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Foreign earnings taxed at lower rates

Impact of intangible property transfers

Foreign-derived intangible income deduction

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Effective rate

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.

The decrease from the federal statutory rate in fiscal years 2025, 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.

In fiscal years 2025, 2024, and 2023, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S.

rate, generated 81 %, 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.

Other reconciling items, net consists primarily of tax credits and the U.S.

global intangible low-taxed income tax, and in fiscal year 2024, includes tax benefits from tax law changes.

In fiscal year 2024, tax benefits from tax law changes primarily relate to the delay of the effective date of final foreign tax credit regulations.

In fiscal years 2025, 2024, and 2023, there were no individually significant other reconciling items.

The decrease in our effective tax rate for fiscal year 2025 compared to fiscal year 2024 was due to changes in the mix of our earnings and tax expenses between the U.S.

and foreign countries.

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.

The components of the deferred income tax assets and liabilities were as follows:

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As of June 30, 2025, we had $ 816 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 .

tax purposes.

The federal capital loss carryforwards will expire in fiscal year 2030 if not utilized.

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.

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As of June 30, 2025, 2024, and 2023, we had accrued interest expense related to uncertain tax positions of $ 8.2 billion, $ 6.8 billion, and $ 5.2 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 provision for income taxes for fiscal years 2025, 2024, and 2023 included interest expense related to uncertain tax positions of $ 1.3 billion, $ 1.5 billion, and $ 918 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

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Increases for tax positions related to the current year

Increases for tax positions related to prior years (a)

Increases for tax positions related to prior years

Decreases for tax positions related to prior years

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Ending unrecognized tax benefits

(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 .

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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.

We are subject to income tax in many jurisdictions outside the U.S., some of which are currently under audit by local tax authorities.

The resolution of these audits is not expected to be material to our consolidated financial statements.

Our operations in Ireland remain subject to examination for tax years 2020 and thereafter .

NOTE 12 — UNEARNED REVENUE

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More Personal Computing

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Refer to Note 1 – Accounting Policies for further information.

Changes in unearned revenue were as follows:

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Less imputed interest

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.

As of June 30, 2025, we had additional leases, primarily for datacenters, that had not yet commenced of $ 92.7 billion.

These leases will commence between fiscal year 2026 and fiscal year 2031 with lease terms of 1 year to 20 years.

NOTE 14 — CONTINGENCIES

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.

Irish Data Protection Commission Matter

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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.

In October 2024, the IDPC provided LinkedIn with a final decision alleging GDPR violations and assessing a fine.

In November 2024, LinkedIn appealed the final decision to the Irish courts, and the next hearing is scheduled for December 2025.

Other Contingencies

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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 February 2020 and was completed in November 2021.

This share repurchase program commenced in November 2021 and was completed in April 2025.

On September 16, 2024, 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.

This share repurchase program commenced in April 2025, following completion of the program approved on September 14, 2021, has no expiration date, and may be terminated at any time.

As of June 30, 2025, $ 57.3 billion remained of this $ 60.0 billion share repurchase program.

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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.

Shares repurchased during the fourth quarter of fiscal year 2025 were under the share repurchase programs approved on September 14, 2021 and September 16, 2024.

All other shares repurchased were under the share repurchase program approved on September 14, 2021.

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December 12, 2024

November 28, 2023

December 3, 2024

February 20, 2025

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June 13, 2024

June 12, 2024

August 15, 2024

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NOTE 18 — 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.

In its operation of the business, management, including our chief operating decision maker (“CODM”), who is also our Chief Executive Officer , reviews certain financial information, including segmented internal profit and loss statements.

The primary profitability measure used by the CODM to review segment operating results is operating income.

The CODM uses operating income to allocate resources during our annual planning process and throughout the year, as well as to assess the performance of our segments, primarily by monitoring actual results compared to prior periods and expected results.

During the periods presented, we reported our financial performance based on the following segments:

Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Refer to Note 1 – Accounting Policies for further information.

Our reportable segments are described below.

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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.

• Microsoft 365 Commercial products and cloud services, including Microsoft 365 Commercial cloud, comprising Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot;

and Microsoft 365 Commercial products, comprising Windows Commercial on-premises and Office licensed on-premises.

• Microsoft 365 Consumer products and cloud services, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other consumer 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;

• 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.

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.

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that 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.

• Server products and cloud services, including Azure and other cloud services, comprising cloud and AI consumption-based services, GitHub cloud services, Nuance Healthcare cloud services, virtual desktop offerings, and other cloud services;

and Server products, comprising SQL Server, Windows Server, Visual Studio, System Center, related Client Access Licenses (“CALs”), and other on-premises offerings.

• Enterprise and partner services, including Enterprise Support Services, Industry Solutions, Nuance professional services, Microsoft Partner Network, and Learning Experience.

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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.

• 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;

third-party disc royalties;

and other cloud services.

• Search and news advertising, comprising Bing (including Copilot), Microsoft News, Microsoft Edge, and third-party affiliates.

• Windows and Devices, including Windows OEM licensing (Windows Pro and non-Pro licenses sold through the OEM channel) and Devices, comprising Surface and PC accessories.

• Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, and other cloud services.

• Search and news advertising, comprising Bing and Copilot, Microsoft News, Microsoft Edge, and third-party affiliates.

Revenue and costs are generally directly attributed to our segments.

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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:

Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented:

(In millions)

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Productivity and Business Processes

Intelligent Cloud

More Personal Computing

Cost of revenue

Operating expenses

Operating Income

Productivity and Business Processes

Intelligent Cloud

Cost of revenue

Operating expenses

Operating Income

More Personal Computing

Cost of revenue

Operating expenses

Operating Income

Cost of revenue

Operating expenses

Operating Income

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2025, 2024, or 2023.

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Server products and cloud services

Office products and cloud services

Microsoft 365 Commercial products and cloud services

Windows and Devices

Search and news advertising

Enterprise and partner services

Dynamics products and cloud services

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.

Enterprise and partner services

Microsoft 365 Consumer products and cloud services

Our Microsoft Cloud revenue, which includes Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365, was $ 168.9 billion, $ 137.7 billion, and $ 111.6 billion in fiscal years 2025, 2024, and 2023, respectively.

These amounts are included in Microsoft 365 Commercial products and cloud services, Server 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.

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• 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.

o Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

o Tested management's identification and treatment of contract terms.

o 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.

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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.

During fiscal year 2024, 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.

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.

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 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.

• 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.

• We evaluated management’s methods and assumptions used in the measurement and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.

• We tested the reasonableness of management’s judgments regarding the future resolution of uncertain tax positions, as follows:

o We evaluated whether management had appropriately considered new information that could significantly change the measurement of the uncertain tax positions.

o We evaluated the reasonableness of management’s estimates by considering how changes in tax law, including statutes, regulations, and recent case law, impacted management’s judgments.

• We evaluated the appropriateness of the disclosures in relation to the underlying facts, judgments, and conclusions.

/s/ D ELOITTE & T OUCHE LLP

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis