10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Quarterly Period Ended March 31, 2024

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Transition Period From to

Commission File Number 001-37845

MICROSOFT CORPORATION


Washington		91-1144442
(STATE OF INCORPORATION)		(I.R.S. ID)

ONE MICROSOFT WAY, REDMOND, Washington 98052-6399

(425) 882-8080

www.microsoft.com/investor



Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of exchange on which registered

Common stock, $0.00000625 par value per share	MSFT	Nasdaq
3.125% Notes due 2028	MSFT	Nasdaq
2.625% Notes due 2033	MSFT	Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ☒		Accelerated Filer ☐
Non-accelerated Filer ☐		Smaller Reporting Company ☐
		Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of April 22, 2024


Common Stock, $0.00000625 par value per share		7,432,305,794 shares

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2024

INDEX


				Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		a)	Income Statements for the Three and Nine Months Ended March 31, 2024 and 2023	3

		b)	Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2024 and 2023	4

		c)	Balance Sheets as of March 31, 2024 and June 30, 2023	5

		d)	Cash Flows Statements for the Three and Nine Months Ended March 31, 2024 and 2023	6

		e)	Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2024 and 2023	7

		f)	Notes to Financial Statements	8

		g)	Report of Independent Registered Public Accounting Firm	31

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49

	Item 4.	Controls and Procedures		49

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings		50

	Item 1A.	Risk Factors		50

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64

	Item 5.	Other Information		65

	Item 6.	Exhibits		66

SIGNATURE				67

PART I

Item 1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS


(In millions, except per share amounts) (Unaudited)	Three Months Ended March 31,						Nine Months Ended March 31,


	2024			2023			2024			2023

Revenue:
Product	$	17,080		$	15,588	$	51,556		$	47,846
Service and other		44,778			37,269		128,839			107,880


Total revenue		61,858			52,857		180,395			155,726


Cost of revenue:
Product		4,339			3,941		13,834			13,933
Service and other		14,166			12,187		40,596			35,135


Total cost of revenue		18,505			16,128		54,430			49,068


Gross margin		43,353			36,729		125,965			106,658
Research and development		7,653			6,984		21,454			20,456
Sales and marketing		6,207			5,750		17,640			16,555
General and administrative		1,912			1,643		5,363			5,378


Operating income		27,581			22,352		81,508			64,269
Other income (expense), net		(854	)		321		(971	)		315


Income before income taxes		26,727			22,673		80,537			64,584
Provision for income taxes		4,788			4,374		14,437			12,304


Net income	$	21,939		$	18,299	$	66,100		$	52,280


Earnings per share:
Basic	$	2.95		$	2.46	$	8.90		$	7.02
Diluted	$	2.94		$	2.45	$	8.85		$	6.99

Weighted average shares outstanding:
Basic		7,431			7,441		7,431			7,450
Diluted		7,472			7,464		7,467			7,474

Refer to accompanying notes.

PART I

Item 1

COMPREHENSIVE INCOME STATEMENTS


(In millions) (Unaudited)	Three Months Ended March 31,						Nine Months Ended March 31,


	2024			2023				2024		2023

Net income	$	21,939		$	18,299		$	66,100	$	52,280


Other comprehensive income (loss), net of tax:
Net change related to derivatives		10			(9	)		28		(34	)
Net change related to investments		(202	)		753			869		(796	)
Translation adjustments and other		(294	)		69			11		(136	)


Other comprehensive income (loss)		(486	)		813			908		(966	)


Comprehensive income	$	21,453		$	19,112		$	67,008	$	51,314

Refer to accompanying notes.

PART I

Item 1

BALANCE SHEETS


(In millions) (Unaudited)


	March 31, 2024			June 30, 2023

Assets
Current assets:
Cash and cash equivalents	$	19,634		$	34,704
Short-term investments		60,387			76,558


Total cash, cash equivalents, and short-term investments		80,021			111,262
Accounts receivable, net of allowance for doubtful accounts of $616 and $650		44,029			48,688
Inventories		1,304			2,500
Other current assets		21,826			21,807


Total current assets		147,180			184,257
Property and equipment, net of accumulated depreciation of $74,945 and $68,251		121,375			95,641
Operating lease right-of-use assets		17,371			14,346
Equity and other investments		14,807			9,879
Goodwill		119,163			67,886
Intangible assets, net		28,828			9,366
Other long-term assets		35,551			30,601


Total assets	$	484,275		$	411,976


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	18,087		$	18,095
Short-term debt		20,535			0
Current portion of long-term debt		2,249			5,247
Accrued compensation		10,432			11,009
Short-term income taxes		7,311			4,152
Short-term unearned revenue		41,888			50,901
Other current liabilities		18,023			14,745


Total current liabilities		118,525			104,149
Long-term debt		42,658			41,990
Long-term income taxes		26,786			25,560
Long-term unearned revenue		2,945			2,912
Deferred income taxes		2,469			433
Operating lease liabilities		14,469			12,728
Other long-term liabilities		23,271			17,981


Total liabilities		231,123			205,753


Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,433 and 7,432		99,193			93,718
Retained earnings		159,394			118,848
Accumulated other comprehensive loss		(5,435	)		(6,343	)


Total stockholders’ equity		253,152			206,223


Total liabilities and stockholders’ equity	$	484,275		$	411,976

Refer to accompanying notes.

PART I

Item 1

CASH FLOWS STATEMENTS


(In millions) (Unaudited)	Three Months Ended March 31,							Nine Months Ended March 31,


	2024			2023				2024			2023

Operations
Net income	$	21,939		$	18,299		$	66,100		$	52,280
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		6,027			3,549			15,907			9,987
Stock-based compensation expense		2,703			2,465			8,038			7,195
Net recognized losses (gains) on investments and derivatives		49			(40	)		261			152
Deferred income taxes		(1,323	)		(1,675	)		(3,593	)		(4,171	)
Changes in operating assets and liabilities:
Accounts receivable		(2,028	)		(1,408	)		6,055			7,157
Inventories		260			106			1,229			868
Other current assets		951			1,152			880			428
Other long-term assets		(2,137	)		(554	)		(5,577	)		(1,285	)
Accounts payable		648			(407	)		(659	)		(4,032	)
Unearned revenue		(645	)		(181	)		(10,309	)		(8,689	)
Income taxes		2,622			1,414			2,493			(1,039	)
Other current liabilities		2,803			1,715			215			(490	)
Other long-term liabilities		48			6			313			451


Net cash from operations		31,917			24,441			81,353			58,812


Financing
Proceeds from issuance (repayments) of debt, maturities of 90 days or less, net		(3,810	)		0			6,392			0
Proceeds from issuance of debt		6,352			0			24,198			0
Repayments of debt		(11,589	)		0			(16,005	)		(1,750	)
Common stock issued		522			536			1,468			1,354
Common stock repurchased		(4,213	)		(5,509	)		(13,044	)		(16,541	)
Common stock cash dividends paid		(5,572	)		(5,059	)		(16,197	)		(14,746	)
Other, net		(498	)		(258	)		(1,006	)		(839	)


Net cash used in financing		(18,808	)		(10,290	)		(14,194	)		(32,522	)


Investing
Additions to property and equipment		(10,952	)		(6,607	)		(30,604	)		(19,164	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(1,575	)		(301	)		(67,790	)		(1,329	)
Purchases of investments		(2,183	)		(9,063	)		(14,901	)		(25,675	)
Maturities of investments		3,350			13,154			23,218			26,744
Sales of investments		1,941			1,239			8,871			8,725
Other, net		(1,281	)		(1,686	)		(916	)		(2,847	)


Net cash used in investing		(10,700	)		(3,264	)		(82,122	)		(13,546	)


Effect of foreign exchange rates on cash and cash equivalents		(80	)		29			(107	)		(113	)


Net change in cash and cash equivalents		2,329			10,916			(15,070	)		12,631
Cash and cash equivalents, beginning of period		17,305			15,646			34,704			13,931


Cash and cash equivalents, end of period	$	19,634		$	26,562		$	19,634		$	26,562

Refer to accompanying notes.

PART I

Item 1

STOCKHOLDERS’ EQUITY STATEMENTS


(In millions, except per share amounts) (Unaudited)	Three Months Ended March 31,							Nine Months Ended March 31,


	2024			2023				2024			2023

Common stock and paid-in capital
Balance, beginning of period	$	97,480		$	90,225		$	93,718		$	86,939
Common stock issued		522			536			1,468			1,354
Common stock repurchased		(1,512	)		(1,133	)		(4,213	)		(3,394	)
Stock-based compensation expense		2,703			2,465			8,038			7,195
Other, net		0			0			182			(1	)


Balance, end of period		99,193			92,093			99,193			92,093


Retained earnings
Balance, beginning of period		145,737			99,368			118,848			84,281
Net income		21,939			18,299			66,100			52,280
Common stock cash dividends		(5,573	)		(5,053	)		(16,718	)		(15,176	)
Common stock repurchased		(2,709	)		(4,380	)		(8,836	)		(13,151	)


Balance, end of period		159,394			108,234			159,394			108,234


Accumulated other comprehensive loss
Balance, beginning of period		(4,949	)		(6,457	)		(6,343	)		(4,678	)
Other comprehensive income (loss)		(486	)		813			908			(966	)


Balance, end of period		(5,435	)		(5,644	)		(5,435	)		(5,644	)


Total stockholders’ equity	$	253,152		$	194,683		$	253,152		$	194,683


Cash dividends declared per common share	$	0.75		$	0.68		$	2.25		$	2.04

Refer to accompanying notes.

PART I

Item 1

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation fiscal year 2023 Form 10-K filed with the U.S. Securities and Exchange Commission on July 27, 2023.

We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

PART I

Item 1

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

Investments that are considered variable interest entities (“VIEs”) are evaluated to determine whether we are the primary beneficiary of the VIE, in which case we would be required to consolidate the entity. We evaluate whether we have (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have determined we are not the primary beneficiary of any of our VIE investments. Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting.

Derivatives

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

PART I

Item 1

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain cleared swap contracts and over-the-counter forward, option, and swap contracts.

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

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

Contract Balances and Other Receivables

As of March 31, 2024 and June 30, 2023, long-term accounts receivable, net of allowance for doubtful accounts, was $4.8 billion and $4.5 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

As of March 31, 2024 and June 30, 2023, other receivables related to activities to facilitate the purchase of server components were $10.1 billion and $9.2 billion, respectively, and are included in other current assets in our consolidated balance sheets.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of March 31, 2024 and June 30, 2023, our financing receivables, net were $2.7 billion and $5.3 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Related Party Transactions

In March 2024, we entered into an agreement with Inflection AI, Inc. (“Inflection”), pursuant to which we obtained a non-exclusive license to Inflection’s intellectual property. Reid Hoffman, a member of our Board of Directors, is a co-founder of and serves on the board of directors of Inflection. As of the date of the agreement with Inflection, Reprogrammed Interchange LLC (“Reprogrammed”) and entities affiliated with Greylock Ventures (“Greylock”) each held less than a 10% equity interest in Inflection. Mr. Hoffman may be deemed to beneficially own the shares held by Reprogrammed and Greylock by virtue of his relationship with such entities. Mr. Hoffman did not participate in any portions of the meetings of our Board of Directors or any committee thereof to review and approve the transaction with Inflection.

PART I

Item 1

Recent Accounting Guidance

Segment Reporting – Improvements to Reportable Segment Disclosures

In November 2023, the Financial Accounting Standards Board (“FASB”) issued a new standard to improve reportable segment disclosures. The guidance expands the disclosures required for reportable segments in our annual and interim consolidated financial statements, primarily through enhanced disclosures about significant segment expenses. The standard will be effective for us beginning with our annual reporting for fiscal year 2025 and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact of this standard on our segment disclosures.

Income Taxes – Improvements to Income Tax Disclosures

In December 2023, the FASB issued a new standard to improve income tax disclosures. The guidance requires disclosure of disaggregated income taxes paid, prescribes standardized categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. The standard will be effective for us beginning with our annual reporting for fiscal year 2026, with early adoption permitted. We are currently evaluating the impact of this standard on our income tax disclosures.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS were as follows:


(In millions, except per share amounts)	Three Months Ended March 31,					Nine Months Ended March 31,


	2024		2023			2024		2023

Net income available for common shareholders (A)	$	21,939	$	18,299	$	66,100	$	52,280


Weighted average outstanding shares of common stock (B)		7,431		7,441		7,431		7,450
Dilutive effect of stock-based awards		41		23		36		24


Common stock and common stock equivalents (C)		7,472		7,464		7,467		7,474


Earnings Per Share

Basic (A/B)	$	2.95	$	2.46	$	8.90	$	7.02
Diluted (A/C)	$	2.94	$	2.45	$	8.85	$	6.99

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

PART I

Item 1

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:


(In millions)	Three Months Ended March 31,						Nine Months Ended March 31,


	2024			2023			2024			2023

Interest and dividends income	$	619		$	748		$	2,519		$	2,089
Interest expense		(800	)		(496	)		(2,234	)		(1,486	)
Net recognized gains (losses) on investments		(25	)		105			(63	)		103
Net losses on derivatives		(24	)		(65	)		(198	)		(255	)
Net gains (losses) on foreign currency remeasurements		(138	)		122			(203	)		26
Other, net		(486	)		(93	)		(792	)		(162	)


Total	$	(854	)	$	321		$	(971	)	$	315

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

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:


(In millions)		Three Months Ended March 31,					Nine Months Ended March 31,


	2024			2023			2024			2023

Realized gains from sales of available-for-sale securities	$	8		$	4		$	14		$	19
Realized losses from sales of available-for-sale securities		(24	)		(30	)		(78	)		(73	)
Impairments and allowance for credit losses		3			0			15			(13	)


Total	$	(13	)	$	(26	)	$	(49	)	$	(67	)

Net recognized gains (losses) on equity investments were as follows:


(In millions)	Three Months Ended March 31,						Nine Months Ended March 31,


	2024			2023			2024			2023

Net realized gains (losses) on investments sold	$	15		$	(13	)	$	29		$	77
Net unrealized gains (losses) on investments still held		(7	)		144			156			109
Impairments of investments		(20	)		0			(199	)		(16	)


Total	$	(12	)	$	131		$	(14	)	$	170

PART I

Item 1

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:


(In millions)	Fair Value Level	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity and Other Investments


March 31, 2024

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper	Level 2	$	5,535	$	0	$	0		$	5,535	$	5,535	$	0	$	0
Certificates of deposit	Level 2		2,300		0		0			2,300		2,256		44		0
U.S. government securities	Level 1		52,036		3		(3,074	)		48,965		4		48,961		0
U.S. agency securities	Level 2		23		0		0			23		0		23		0
Foreign government bonds	Level 2		352		4		(12	)		344		0		344		0
Mortgage- and asset-backed securities	Level 2		980		4		(34	)		950		0		950		0
Corporate notes and bonds	Level 2		9,874		40		(340	)		9,574		0		9,574		0
Corporate notes and bonds	Level 3		1,646		0		(1	)		1,645		0		145		1,500
Municipal securities	Level 2		263		1		(14	)		250		0		250		0
Municipal securities	Level 3		104		0		(16	)		88		0		88		0


Total debt investments		$	73,113	$	52	$	(3,491	)	$	69,674	$	7,795	$	60,379	$	1,500


Changes in Fair Value Recorded in Net Income

Equity investments	Level 1								$	3,340	$	258	$	0	$	3,082
Equity investments	Other									10,225		0		0		10,225


Total equity investments									$	13,565	$	258	$	0	$	13,307


Cash									$	11,581	$	11,581	$	0	$	0
Derivatives, net (a)										8		0		8		0


Total									$	94,828	$	19,634	$	60,387	$	14,807

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(In millions)	Fair Value Level	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity and Other Investments


June 30, 2023

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper	Level 2	$	16,589	$	0	$	0		$	16,589	$	12,231	$	4,358	$	0
Certificates of deposit	Level 2		2,701		0		0			2,701		2,657		44		0
U.S. government securities	Level 1		65,237		2		(3,870	)		61,369		2,991		58,378		0
U.S. agency securities	Level 2		2,703		0		0			2,703		894		1,809		0
Foreign government bonds	Level 2		498		1		(24	)		475		0		475		0
Mortgage- and asset-backed securities	Level 2		824		1		(39	)		786		0		786		0
Corporate notes and bonds	Level 2		10,809		8		(583	)		10,234		0		10,234		0
Corporate notes and bonds	Level 3		120		0		0			120		0		120		0
Municipal securities	Level 2		285		1		(18	)		268		7		261		0
Municipal securities	Level 3		103		0		(16	)		87		0		87		0


Total debt investments		$	99,869	$	13	$	(4,550	)	$	95,332	$	18,780	$	76,552	$	0


Changes in Fair Value Recorded in Net Income

Equity investments	Level 1								$	10,138	$	7,446	$	0	$	2,692
Equity investments	Other									7,187		0		0		7,187


Total equity investments									$	17,325	$	7,446	$	0	$	9,879


Cash									$	8,478	$	8,478	$	0	$	0
Derivatives, net (a)										6		0		6		0


Total									$	121,141	$	34,704	$	76,558	$	9,879

(a)

Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of March 31, 2024 and June 30, 2023, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $4.0 billion and $4.2 billion, respectively.

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Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:


	Less than 12 Months					12 Months or Greater								Total Unrealized Losses


(In millions)		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


March 31, 2024

U.S. government and agency securities	$	650	$	(17	)	$	48,044	$	(3,057	)	$	48,694	$	(3,074	)
Foreign government bonds		40		0			226		(12	)		266		(12	)
Mortgage- and asset-backed securities		264		(4	)		339		(30	)		603		(34	)
Corporate notes and bonds		1,000		(9	)		6,435		(332	)		7,435		(341	)
Municipal securities		44		(1	)		237		(29	)		281		(30	)


Total	$	1,998	$	(31	)	$	55,281	$	(3,460	)	$	57,279	$	(3,491	)


	Less than 12 Months					12 Months or Greater								Total Unrealized Losses


(In millions)		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2023

U.S. government and agency securities	$	7,950	$	(336	)	$	45,273	$	(3,534	)	$	53,223	$	(3,870	)
Foreign government bonds		77		(5	)		391		(19	)		468		(24	)
Mortgage- and asset-backed securities		257		(5	)		412		(34	)		669		(39	)
Corporate notes and bonds		2,326		(49	)		7,336		(534	)		9,662		(583	)
Municipal securities		111		(3	)		186		(31	)		297		(34	)


Total	$	10,721	$	(398	)	$	53,598	$	(4,152	)	$	64,319	$	(4,550	)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.

Debt Investment Maturities

The following table outlines maturities of our debt investments as of March 31, 2024:


(In millions)	Adjusted Cost Basis		Estimated Fair Value


March 31, 2024

Due in one year or less	$	19,613	$	19,428
Due after one year through five years		42,885		40,676
Due after five years through 10 years		9,230		8,304
Due after 10 years		1,385		1,266


Total	$	73,113	$	69,674

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Foreign Currencies

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.

PART I

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Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.

Interest Rate

Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using option, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Equity

Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit-Risk-Related Contingent Features

Certain counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of March 31, 2024, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:


(In millions)	March 31, 2024		June 30, 2023


Designated as Hedging Instruments

Foreign exchange contracts purchased	$	1,492	$	1,492
Interest rate contracts purchased		1,109		1,078

Not Designated as Hedging Instruments

Foreign exchange contracts purchased		9,245		7,874
Foreign exchange contracts sold		23,116		25,159
Equity contracts purchased		3,939		3,867
Equity contracts sold		2,152		2,154
Other contracts purchased		1,672		1,224
Other contracts sold		767		581

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Fair Values of Derivative Instruments

The following table presents our derivative instruments:


(In millions)	Derivative Assets				Derivative Liabilities		Derivative Assets			Derivative Liabilities


	March 31, 2024						June 30, 2023

Designated as Hedging Instruments

Foreign exchange contracts	$	38		$	(68	)	$	34		$	(67	)
Interest rate contracts		6			0			16			0

Not Designated as Hedging Instruments

Foreign exchange contracts		121			(192	)		249			(332	)
Equity contracts		72			(526	)		165			(400	)
Other contracts		5			(1	)		5			(6	)


Gross amounts of derivatives		242			(787	)		469			(805	)
Gross amounts of derivatives offset in the balance sheet		(125	)		126			(202	)		206
Cash collateral received		0			(17	)		0			(125	)


Net amounts of derivatives	$	117		$	(678	)	$	267		$	(724	)


Reported as

Short-term investments	$	8		$	0		$	6		$	0
Other current assets		103			0			245			0
Other long-term assets		6			0			16			0
Other current liabilities		0			(271	)		0			(341	)
Other long-term liabilities		0			(407	)		0			(383	)


Total	$	117		$	(678	)	$	267		$	(724	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $226 million and $786 million, respectively, as of March 31, 2024, and $442 million and $804 million, respectively, as of June 30, 2023.

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


(In millions)	Level 1			Level 2		Level 3		Total


March 31, 2024

Derivative assets	$	0	$	233		$	9	$	242
Derivative liabilities		0		(787	)		0		(787	)

June 30, 2023

Derivative assets		0		462			7		469
Derivative liabilities		0		(805	)		0		(805	)

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Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:


(In millions)		Three Months Ended March 31,						Nine Months Ended March 31,


		2024			2023			2024			2023

Designated as Fair Value Hedging Instruments

Interest rate contracts
Derivatives	$	(21	)	$	1		$	(15	)	$	(37	)
Hedged items		10			(15	)		(21	)		20

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Amount reclassified from accumulated other comprehensive loss		(37	)		18			(32	)		62

Not Designated as Hedging Instruments

Foreign exchange contracts		299			(10	)		171			(20	)
Equity contracts		(22	)		(61	)		(196	)		(230	)
Other contracts		(8	)		1			(5	)		(34	)

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:


(In millions)	Three Months Ended March 31,					Nine Months Ended March 31,


	2024			2023		2024		2023

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Included in effectiveness assessment	$	(19	)	$	5	$	3	$	14

NOTE 6 — INVENTORIES

The components of inventories were as follows:


(In millions)


	March 31, 2024		June 30, 2023

Raw materials	$	341	$	709
Work in process		12		23
Finished goods		951		1,768


Total	$	1,304	$	2,500

NOTE 7 — BUSINESS COMBINATIONS

Activision Blizzard, Inc.

On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) for a total purchase price of $75.4 billion, consisting primarily of cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The financial results of Activision Blizzard have been included in our consolidated financial statements since the date of the acquisition. Activision Blizzard is reported as part of our More Personal Computing segment.

PART I

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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, intangible assets, and income taxes.

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


(In millions)


Cash and cash equivalents	$	12,976
Goodwill		50,989
Intangible assets		21,969
Other assets		2,440
Long-term debt		(2,799	)
Long-term income taxes		(1,868	)
Deferred income taxes		(4,678	)
Other liabilities		(3,623	)


Total purchase price	$	75,406

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of Activision Blizzard. Substantially all of the goodwill is expected to be non-deductible for income tax purposes.

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


(In millions, except average life)	Amount		Weighted Average Life


Marketing-related	$	11,619		24 years
Technology-based		9,689		4 years
Customer-related		661		4 years


Fair value of intangible assets acquired	$	21,969		15 years

Following is the net impact of the Activision Blizzard acquisition on our consolidated income statements since the date of acquisition:


(In millions)	Three Months Ended March 31,			Nine Months Ended March 31,


	2024				2024

Revenue	$	1,969		$	4,053
Operating loss		(353	)		(790	)

The change of Activision Blizzard content from third-party to first-party is reflected in the net impact.

Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2022:


(In millions, except per share amounts)	Three Months Ended March 31,				Nine Months Ended March 31,


	2024		2023			2024		2023

Revenue	$	61,856	$	54,945	$	182,717	$	161,745
Net income		21,931		18,258		66,278		51,536
Diluted earnings per share		2.94		2.45		8.88		6.90

PART I

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These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.

NOTE 8 — GOODWILL

Changes in the carrying amount of goodwill were as follows:


(In millions)	June 30, 2023		Acquisitions			Other			March 31, 2024


Productivity and Business Processes	$	24,775	$	0		$	3		$	24,778
Intelligent Cloud		30,469		0			(17	)		30,452
More Personal Computing		12,642		51,235	(a)		56	(a)		63,933


Total	$	67,886	$	51,235		$	42		$	119,163

(a)

Includes goodwill of $51.0 billion related to Activision Blizzard. See Note 7 – Business Combinations for further information.

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

NOTE 9 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:


(In millions)	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount


	March 31, 2024								June 30, 2023

Marketing-related	$	16,549		$	(2,945	)	$	13,604	$	4,935	$	(2,473	)	$	2,462
Technology-based		21,735			(9,721	)		12,014		11,245		(7,589	)		3,656
Customer-related		6,049			(2,853	)		3,196		7,281		(4,047	)		3,234
Contract-based		36			(22	)		14		29		(15	)		14


Total	$	44,369	(a)	$	(15,541	)	$	28,828	$	23,490	$	(14,124	)	$	9,366

(a)

Includes intangible assets of $22.0 billion related to Activision Blizzard. See Note 7 – Business Combinations for further information.

Intangible assets amortization expense was $1.4 billion and $3.4 billion for the three and nine months ended March 31, 2024, respectively, and $612 million and $1.9 billion for the three and nine months ended March 31, 2023, respectively.

PART I

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The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2024:


(In millions)


Year Ending June 30,

2024 (excluding the nine months ended March 31, 2024)	$	1,454
2025		5,860
2026		4,436
2027		2,777
2028		1,869
Thereafter		12,432


Total	$	28,828

NOTE 10 — DEBT

Short-term Debt

As of March 31, 2024, we had $20.5 billion of commercial paper issued and outstanding, with a weighted average interest rate of 5.4% and maturities ranging from 6 days to 216 days. The estimated fair value of this commercial paper approximates its carrying value. As of June 30, 2023, we had no commercial paper issued or outstanding.

Long-term Debt

The components of long-term debt were as follows:


(In millions, issuance by calendar year)	Maturities (calendar year)				Stated Interest Rate				Effective Interest Rate			March 31, 2024			June 30, 2023


2009 issuance of $3.8 billion				2039				5.20%			5.24%	$	520		$	520
2010 issuance of $4.8 billion				2040				4.50%			4.57%		486			486
2011 issuance of $2.3 billion				2041				5.30%			5.36%		718			718
2012 issuance of $2.3 billion				2042				3.50%			3.57%		454			454
2013 issuance of $5.2 billion				2043		3.75%	–	4.88%	3.83%	–	4.92%		314			1,814
2013 issuance of €4.1 billion		2028	–	2033		2.63%	–	3.13%	2.69%	–	3.22%		2,484			2,509
2015 issuance of $23.8 billion		2025	–	2055		2.70%	–	4.75%	2.77%	–	4.78%		9,805			9,805
2016 issuance of $19.8 billion		2026	–	2056		2.40%	–	3.95%	2.46%	–	4.03%		7,930			9,430
2017 issuance of $17.1 billion (a)		2026	–	2057		3.30%	–	4.50%	3.38%	–	5.49%		6,833			8,945
2020 issuance of $10.1 billion (a)		2030	–	2060		1.35%	–	2.68%	2.53%	–	5.43%		10,111			10,000
2021 issuance of $8.2 billion		2052	–	2062		2.92%	–	3.04%	2.92%	–	3.04%		8,185			8,185
2023 issuance of $3.4 billion (a)		2026	–	2050		1.35%	–	4.50%	5.16%	–	5.49%		3,401			0


Total face value													51,241			52,866
Unamortized discount and issuance costs													(1,246	)		(438	)
Hedge fair value adjustments (b)													(85	)		(106	)
Premium on debt exchange													(5,003	)		(5,085	)


Total debt													44,907			47,237
Current portion of long-term debt													(2,249	)		(5,247	)


Long-term debt												$	42,658		$	41,990

(a)

Includes $3.6 billion of debt at face value related to the Activision Blizzard acquisition. See Note 7 – Business Combinations for further information.

(b)

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

PART I

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As of March 31, 2024 and June 30, 2023, the estimated fair value of long-term debt, including the current portion, was $43.2 billion and $46.2 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually.

The following table outlines maturities of our long-term debt, including the current portion, as of March 31, 2024:


(In millions)


Year Ending June 30,

2024 (excluding the nine months ended March 31, 2024)	$	0
2025		2,250
2026		3,000
2027		9,250
2028		0
Thereafter		36,741


Total	$	51,241

NOTE 11 — INCOME TAXES

Effective Tax Rate

Our effective tax rate was 18% and 19% for the three months ended March 31, 2024 and 2023, respectively, and 18% and 19% for the nine months ended March 31, 2024 and 2023, respectively. The decrease in our effective tax rate for the three and nine months ended March 31, 2024 compared to the prior year was primarily due to increased tax benefits from stock-based compensation and tax benefits from tax law changes, including the impact from the issuance of Notice 2023-55 and Notice 2023-80 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department. Notice 2023-55, issued in the first quarter of fiscal year 2024, delayed the effective date of final foreign tax credit regulations to fiscal year 2024 for Microsoft. Notice 2023-80, issued in the second quarter of fiscal year 2024, further delayed the effective date of final foreign tax credit regulations indefinitely.

Our effective tax rate was lower than the U.S. federal statutory rate for the three and nine months ended March 31, 2024, 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.

Uncertain Tax Positions

As of March 31, 2024 and June 30, 2023, unrecognized tax benefits and other income tax liabilities were $23.8 billion and $18.7 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets. The balance as of March 31, 2024 includes $1.9 billion of acquired unrecognized tax benefits and other income tax liabilities due to the acquisition of Activision Blizzard. See Note 7 – Business Combinations for further information.

We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest. As of March 31, 2024, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2023, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

PART I

Item 1

NOTE 12 — UNEARNED REVENUE

Unearned revenue by segment was as follows:


(In millions)


	March 31, 2024		June 30, 2023

Productivity and Business Processes	$	22,929	$	27,572
Intelligent Cloud		16,696		21,563
More Personal Computing		5,208		4,678


Total	$	44,833	$	53,813

Changes in unearned revenue were as follows:


(In millions)


Nine Months Ended March 31, 2024

Balance, beginning of period	$	53,813
Deferral of revenue		94,800
Recognition of unearned revenue		(103,780	)


Balance, end of period	$	44,833

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $242 billion as of March 31, 2024, of which $235 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.

NOTE 13 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 17 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:


(In millions)	Three Months Ended March 31,					Nine Months Ended March 31,


		2024		2023		2024		2023

Operating lease cost	$	882	$	766	$	2,473	$	2,112


Finance lease cost:
Amortization of right-of-use assets	$	453	$	348	$	1,241	$	994
Interest on lease liabilities		190		132		507		364


Total finance lease cost	$	643	$	480	$	1,748	$	1,358

PART I

Item 1

Supplemental cash flow information related to leases was as follows:


(In millions)	Three Months Ended March 31,					Nine Months Ended March 31,


		2024		2023		2024		2023

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	836	$	690	$	2,433	$	1,989
Operating cash flows from finance leases		190		132		507		364
Financing cash flows from finance leases		323		272		896		790

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		1,831		663		4,482		2,377
Finance leases		3,421		1,044		6,921		2,253

Supplemental balance sheet information related to leases was as follows:


(In millions, except lease term and discount rate)


	March 31, 2024			June 30, 2023

Operating Leases

Operating lease right-of-use assets	$	17,371		$	14,346


Other current liabilities	$	3,413		$	2,409
Operating lease liabilities		14,469			12,728


Total operating lease liabilities	$	17,882		$	15,137


Finance Leases

Property and equipment, at cost	$	27,328		$	20,538
Accumulated depreciation		(5,865	)		(4,647	)


Property and equipment, net	$	21,463		$	15,891


Other current liabilities	$	1,869		$	1,197
Other long-term liabilities		21,036			15,870


Total finance lease liabilities	$	22,905		$	17,067


Weighted Average Remaining Lease Term

Operating leases		8 years			8 years
Finance leases		12 years			11 years

Weighted Average Discount Rate

Operating leases		3.3%			2.9%
Finance leases		3.8%			3.4%

The following table outlines maturities of our lease liabilities as of March 31, 2024:


(In millions)


Year Ending June 30,	Operating Leases			Finance Leases

2024 (excluding the nine months ended March 31, 2024)	$	956		$	560
2025		3,566			2,694
2026		3,076			2,398
2027		2,608			2,409
2028		2,100			2,409
Thereafter		7,812			18,058


Total lease payments		20,118			28,528
Less imputed interest		(2,236	)		(5,623	)


Total	$	17,882		$	22,905

PART I

Item 1

As of March 31, 2024, we had additional operating and finance leases, primarily for datacenters, that had not yet commenced of $8.4 billion and $87.8 billion, respectively. These operating and finance leases will commence between fiscal year 2024 and fiscal year 2030 with lease terms of 1 year to 20 years.

NOTE 14 — CONTINGENCIES

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Twelve of these cases were consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying. The parties agreed to a stipulated dismissal of the consolidated cases to allow plaintiffs to appeal the expert testimony order. Plaintiffs appealed the court’s order in August of 2023, and the parties have filed their briefs on the appeal. A hearing on the status of the stayed cases occurred in December of 2023.

Irish Data Protection Commission Matter

In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In April 2023, the IDPC provided LinkedIn with a non-public preliminary draft decision alleging GDPR violations and proposing a fine. Microsoft intends to challenge the preliminary draft decision. There is no set timeline for the IDPC to issue a final decision.

Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of March 31, 2024, we accrued aggregate legal liabilities of $665 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

PART I

Item 1

NOTE 15 — STOCKHOLDERS’ EQUITY

Share Repurchases

On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021, has no expiration date, and may be terminated at any time. As of March 31, 2024, $13.1 billion remained of this $60.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase program:


(In millions)	Shares		Amount			Shares		Amount


Fiscal Year				2024					2023

First Quarter		11		$	3,560		17		$	4,600
Second Quarter		7			2,800		20			4,600
Third Quarter		7			2,800		18			4,600


Total		25		$	9,160		55		$	13,800

All repurchases were made using cash resources. All shares repurchased were under the share repurchase program approved on September 14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $1.4 billion and $3.9 billion for the three and nine months ended March 31, 2024, respectively, and $909 million and $2.7 billion for the three and nine months ended March 31, 2023, respectively.

Dividends

Our Board of Directors declared the following dividends:


Declaration Date	Record Date	Payment Date		Dividend Per Share		Amount


Fiscal Year 2024						(In millions)

September 19, 2023	November 16, 2023	December 14, 2023	$	0.75	$	5,574
November 28, 2023	February 15, 2024	March 14, 2024		0.75		5,573
March 12, 2024	May 16, 2024	June 13, 2024		0.75		5,574


Total			$	2.25	$	16,721


Fiscal Year 2023

September 20, 2022	November 17, 2022	December 8, 2022	$	0.68	$	5,066
November 29, 2022	February 16, 2023	March 9, 2023		0.68		5,059
March 14, 2023	May 18, 2023	June 8, 2023		0.68		5,054


Total			$	2.04	$	15,179

The dividend declared on March 12, 2024 was included in other current liabilities as of March 31, 2024.

PART I

Item 1

NOTE 16 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:


(In millions)	Three Months Ended March 31,							Nine Months Ended March 31,


		2024			2023			2024			2023

Derivatives

Balance, beginning of period	$	(9	)	$	(38	)	$	(27	)	$	(13	)
Unrealized gains (losses), net of tax of $(5), $1, $1, and $3		(19	)		5			3			14

Reclassification adjustments for (gains) losses included in other income (expense), net		37			(18	)		32			(62	)
Tax expense (benefit) included in provision for income taxes		(8	)		4			(7	)		14


Amounts reclassified from accumulated other comprehensive loss		29			(14	)		25			(48	)


Net change related to derivatives, net of tax of $3, $(3), $8, and $(11)		10			(9	)		28			(34	)


Balance, end of period	$	1		$	(47	)	$	1		$	(47	)


Investments

Balance, beginning of period	$	(2,511	)	$	(3,687	)	$	(3,582	)	$	(2,138	)
Unrealized gains (losses), net of tax of $(56), $194, $221, and $(225)		(212	)		732			830			(851	)

Reclassification adjustments for losses included in other income (expense), net		13			26			49			68
Tax benefit included in provision for income taxes		(3	)		(5	)		(10	)		(13	)


Amounts reclassified from accumulated other comprehensive loss		10			21			39			55


Net change related to investments, net of tax of $(53), $199, $231, and $(212)		(202	)		753			869			(796	)


Balance, end of period	$	(2,713	)	$	(2,934	)	$	(2,713	)	$	(2,934	)


Translation Adjustments and Other

Balance, beginning of period	$	(2,429	)	$	(2,732	)	$	(2,734	)	$	(2,527	)
Translation adjustments and other, net of tax of $0, $0, $0, and $0		(294	)		69			11			(136	)


Balance, end of period	$	(2,723	)	$	(2,663	)	$	(2,723	)	$	(2,663	)


Accumulated other comprehensive loss, end of period	$	(5,435	)	$	(5,644	)	$	(5,435	)	$	(5,644	)

PART I

Item 1

NOTE 17 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

•

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Copilot for Microsoft 365.

•

Office Consumer, including Microsoft 365 Consumer and Copilot Pro subscriptions, Office licensed on-premises, and other Office services.

•

LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.

•

Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

•

Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub.

•

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

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

•

Windows, including Windows original equipment manufacturer (“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; advertising; third-party disc royalties; and other cloud services.

•

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

PART I

Item 1

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.

In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.

Segment revenue and operating income were as follows during the periods presented:


(In millions)		Three Months Ended March 31,			Nine Months Ended March 31,


		2024		2023	2024		2023

Revenue

Productivity and Business Processes	$	19,570	$	17,516	$	57,411	$	50,983
Intelligent Cloud		26,708		22,081		76,847		63,914
More Personal Computing		15,580		13,260		46,137		40,829


Total	$	61,858	$	52,857	$	180,395	$	155,726


Operating Income

Productivity and Business Processes	$	10,143	$	8,639	$	30,397	$	25,137
Intelligent Cloud		12,513		9,476		36,725		27,358
More Personal Computing		4,925		4,237		14,386		11,774


Total	$	27,581	$	22,352	$	81,508	$	64,269

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three or nine months ended March 31, 2024 or 2023. Revenue, classified by the major geographic areas in which our customers were located, was as follows:


(In millions)		Three Months Ended March 31,			Nine Months Ended March 31,


		2024		2023	2024		2023

United States (a)	$	31,437	$	26,007	$	92,544	$	78,850
Other countries		30,421		26,850		87,851		76,876


Total	$	61,858	$	52,857	$	180,395	$	155,726

(a)

Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

PART I

Item 1

Revenue, classified by significant product and service offerings, was as follows:


(In millions)		Three Months Ended March 31,			Nine Months Ended March 31,


		2024		2023	2024		2023

Server products and cloud services	$	24,832	$	20,025	$	71,093	$	58,007
Office products and cloud services		13,911		12,468		40,528		35,912
Windows		5,929		5,328		16,758		15,449
Gaming		5,451		3,607		16,481		11,975
LinkedIn		4,013		3,659		12,121		11,120
Search and news advertising		3,134		3,036		9,407		9,158
Enterprise and partner services		1,861		2,047		5,722		5,883
Dynamics products and cloud services		1,646		1,389		4,762		3,951
Devices		1,067		1,282		3,490		4,160
Other		14		16		33		111


Total	$	61,858	$	52,857	$	180,395	$	155,726

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 $35.1 billion and $100.6 billion for the three and nine months ended March 31, 2024, respectively, and $28.5 billion and $81.3 billion for the three and nine months ended March 31, 2023, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and Dynamics products and cloud services in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

PART I

Item 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheet of Microsoft Corporation and subsidiaries (the “Company”) as of March 31, 2024, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month and nine-month periods ended March 31, 2024 and 2023, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of June 30, 2023, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the year then ended (not presented herein); and in our report dated July 27, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/S/ DELOITTE & TOUCHE LLP

Seattle, Washington

April 25, 2024

PART I

Item 2

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” (Part II, Item 1A of this Form 10-Q). These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q), and “Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2023, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

OVERVIEW

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. We are creating the platforms and tools, powered by artificial intelligence (“AI”), that deliver better, faster, and more effective solutions to support small and large business competitiveness, improve educational and health outcomes, grow public-sector efficiency, and empower human ingenuity.

We generate revenue by offering a wide range of cloud-based solutions, content, and other services to people and businesses; licensing and supporting an array of software products; delivering relevant online advertising to a global audience; and designing and selling devices. Our most significant expenses are related to compensating employees; supporting and investing in our cloud-based services, including datacenter operations; designing, manufacturing, marketing, and selling our other products and services; and income taxes.

Highlights from the third quarter of fiscal year 2024 compared with the third quarter of fiscal year 2023 included:

•

Microsoft Cloud revenue increased 23% to $35.1 billion.

•

Office Commercial products and cloud services revenue increased 13% driven by Office 365 Commercial growth of 15%.

•

Office Consumer products and cloud services revenue increased 4% and Microsoft 365 Consumer subscribers grew to 80.8 million.

•

LinkedIn revenue increased 10%.

•

Dynamics products and cloud services revenue increased 19% driven by Dynamics 365 growth of 23%.

•

Server products and cloud services revenue increased 24% driven by Azure and other cloud services growth of 31%.

•

Windows revenue increased 11% with Windows original equipment manufacturer licensing (“Windows OEM”) revenue growth of 11% and Windows Commercial products and cloud services revenue growth of 13%.

•

Devices revenue decreased 17%.

PART I

Item 2

•

Xbox content and services revenue increased 62% driven by 61 points of net impact from the Activision Blizzard Inc. (“Activision Blizzard”) acquisition. The net impact reflects the change of Activision Blizzard content from third-party to first-party.

•

Search and news advertising revenue excluding traffic acquisition costs increased 12%.

On October 13, 2023, we completed our acquisition of Activision Blizzard for a total purchase price of $75.4 billion, consisting primarily of cash. The financial results of Activision Blizzard have been included in our consolidated financial statements since the date of the acquisition. Activision Blizzard is reported as part of our More Personal Computing segment. Refer to Note 7 – Business Combinations of the Notes to the Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Industry Trends

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, influencing how users access services in the cloud and, in some cases, the user’s choice of which suite of cloud-based services to use. Aggregate demand for our software, services, and devices is also correlated to global macroeconomic and geopolitical factors, which remain dynamic. We must continue to evolve and adapt over an extended time in pace with this changing environment.

The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins. We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services. Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units (“GPUs”) and other components. Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. Extended disruptions at these suppliers could impact our ability to manufacture devices on time to meet consumer demand.

Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits.

Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Fluctuations in the U.S. dollar relative to certain foreign currencies did not have a material impact on reported revenue and expenses from our international operations for the three and nine months ended March 31, 2024.

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

Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by corporate year-end spending trends in our major markets and holiday season spending by consumers, and fourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the period.

PART I

Item 2

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting.

Additional information on our reportable segments is contained in Note 17 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Metrics

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q). Financial metrics are calculated based on financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and growth comparisons relate to the corresponding period of last fiscal year.

In the first quarter of fiscal year 2024, we made updates to the presentation and method of calculation for certain metrics, revising our Microsoft Cloud revenue metric to include revenue growth and expanding our Microsoft 365 Consumer subscribers metric to include Microsoft 365 Basic subscribers, aligning with how we manage our business.

Commercial

Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise and partner services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.


Commercial remaining performance obligation		Commercial portion of revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods

Microsoft Cloud revenue and revenue growth		Revenue from Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties

Microsoft Cloud gross margin percentage		Gross margin percentage for our Microsoft Cloud business

PART I

Item 2

Productivity and Business Processes and Intelligent Cloud

Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics reflect our cloud and on-premises product strategies and trends.


Office Commercial products and cloud services revenue growth		Revenue from Office Commercial products and cloud services (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Copilot for Microsoft 365

Office Consumer products and cloud services revenue growth		Revenue from Office Consumer products and cloud services, including Microsoft 365 Consumer and Copilot Pro subscriptions, Office licensed on-premises, and other Office services

Office 365 Commercial seat growth		The number of Office 365 Commercial seats at end of period where seats are paid users covered by an Office 365 Commercial subscription

Microsoft 365 Consumer subscribers		The number of Microsoft 365 Consumer and Copilot Pro subscribers at end of period

Dynamics products and cloud services revenue growth		Revenue from Dynamics products and cloud services, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications

LinkedIn revenue growth		Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions

Server products and cloud services revenue growth		Revenue from Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub

More Personal Computing

Metrics related to our More Personal Computing segment assess the performance of key lines of business within this segment. These metrics provide strategic product insights which allow us to assess the performance across our commercial and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we monitor metrics that are reflective of those varying motions.


Windows OEM revenue growth		Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel

Windows Commercial products and cloud services revenue growth		Revenue from Windows Commercial products and cloud services, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings

Devices revenue growth		Revenue from Devices, including Surface, HoloLens, and PC accessories

Xbox content and services revenue growth		Revenue from Xbox content and services, comprising first-party content (such as Activision Blizzard) and third-party content, including games and in-game content; Xbox Game Pass and other subscriptions; Xbox Cloud Gaming; advertising; third-party disc royalties; and other cloud services

Search and news advertising revenue (ex TAC) growth		Revenue from search and news advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers and news partners

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SUMMARY RESULTS OF OPERATIONS


(In millions, except percentages and per share amounts)	Three Months Ended March 31,				Percentage Change		Nine Months Ended March 31,				Percentage Change


		2024		2023			2024		2023

Revenue	$	61,858	$	52,857		17%	$	180,395	$	155,726		16%
Gross margin		43,353		36,729		18%		125,965		106,658		18%
Operating income		27,581		22,352		23%		81,508		64,269		27%
Net income		21,939		18,299		20%		66,100		52,280		26%
Diluted earnings per share		2.94		2.45		20%		8.85		6.99		27%

Adjusted gross margin (non-GAAP)		43,353		36,729		18%		125,965		106,810		18%
Adjusted operating income (non-GAAP)		27,581		22,352		23%		81,508		65,440		25%
Adjusted net income (non-GAAP)		21,939		18,299		20%		66,100		53,226		24%
Adjusted diluted earnings per share (non-GAAP)		2.94		2.45		20%		8.85		7.12		24%

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.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Revenue increased $9.0 billion or 17% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. More Personal Computing revenue increased driven by Gaming. Productivity and Business Processes revenue increased driven by Office 365 Commercial.

Cost of revenue increased $2.4 billion or 15% driven by growth in Microsoft Cloud and Gaming.

Gross margin increased $6.6 billion or 18% driven by growth across each of our segments.

•

Gross margin percentage increased slightly. Excluding the impact of the prior year change in accounting estimate for the useful lives of our server and network equipment, gross margin percentage increased 1 point driven by improvement in More Personal Computing.

•

Microsoft Cloud gross margin percentage decreased slightly to 72%. 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 $1.4 billion or 10% driven by Gaming, with 9 points of growth from the Activision Blizzard acquisition.

Operating income increased $5.2 billion or 23% driven by growth across each of our segments.

Nine Months Ended March 31, 2024 Compared with Nine Months Ended March 31, 2023

Revenue increased $24.7 billion or 16% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Office 365 Commercial. More Personal Computing revenue increased driven by Gaming.

Cost of revenue increased $5.4 billion or 11% driven by growth in Microsoft Cloud and Gaming, offset in part by a decline in Devices.

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Gross margin increased $19.3 billion or 18% driven by growth across each of our segments.

•

Gross margin percentage increased. Excluding the impact of the change in accounting estimate, gross margin percentage increased 2 points driven by improvement in More Personal Computing.

•

Microsoft Cloud gross margin percentage of 72% was relatively unchanged. Excluding the impact of the change in accounting estimate, Microsoft Cloud gross margin percentage increased 1 point 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 $2.1 billion or 5% driven by Gaming, with 7 points of growth from the Activision Blizzard acquisition, offset in part by 2 points of favorable impact from the prior year Q2 charge.

Operating income increased $17.2 billion or 27%, including a favorable foreign currency impact of 2%, 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.

SEGMENT RESULTS OF OPERATIONS


(In millions, except percentages)	Three Months Ended March 31,				Percentage Change		Nine Months Ended March 31,				Percentage Change


	2024		2023				2024		2023

Revenue

Productivity and Business Processes	$	19,570	$	17,516		12%	$	57,411	$	50,983		13%
Intelligent Cloud		26,708		22,081		21%		76,847		63,914		20%
More Personal Computing		15,580		13,260		17%		46,137		40,829		13%


Total	$	61,858	$	52,857		17%	$	180,395	$	155,726		16%


Operating Income

Productivity and Business Processes	$	10,143	$	8,639		17%	$	30,397	$	25,137		21%
Intelligent Cloud		12,513		9,476		32%		36,725		27,358		34%
More Personal Computing		4,925		4,237		16%		14,386		11,774		22%


Total	$	27,581	$	22,352		23%	$	81,508	$	64,269		27%

Reportable Segments

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Productivity and Business Processes

Revenue increased $2.1 billion or 12%.

•

Office Commercial products and cloud services revenue increased $1.4 billion or 13%. Office 365 Commercial revenue grew 15% with seat growth of 8%, driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Office Commercial products revenue declined 20% driven by continued customer shift to cloud offerings.

•

Office Consumer products and cloud services revenue increased $63 million or 4%. Microsoft 365 Consumer subscribers grew 14% to 80.8 million.

•

LinkedIn revenue increased $354 million or 10% driven by growth across all lines of business – Talent Solutions, Premium Subscriptions, Marketing Solutions, and Sales Solutions.

•

Dynamics products and cloud services revenue increased $257 million or 19% driven by Dynamics 365. Dynamics 365 revenue grew 23% driven by growth across all workloads.

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Operating income increased $1.5 billion or 17%.

•

Gross margin increased $1.6 billion or 11% 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 $57 million or 1%.

Intelligent Cloud

Revenue increased $4.6 billion or 21%.

•

Server products and cloud services revenue increased $4.8 billion or 24% driven by Azure and other cloud services. Azure and other cloud services revenue grew 31% driven by growth in our consumption-based services. Server products revenue increased 6% 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 $186 million or 9% on a strong prior year comparable for Enterprise Support Services.

Operating income increased $3.0 billion or 32%.

•

Gross margin increased $3.1 billion or 20% 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 increased $49 million or 1% driven by investments in Azure.

More Personal Computing

Revenue increased $2.3 billion or 17%.

•

Windows revenue increased $601 million or 11% driven by growth in Windows Commercial and Windows OEM. Windows Commercial products and cloud services revenue increased 13% driven by demand for Microsoft 365. Windows OEM revenue increased 11%.

•

Gaming revenue increased $1.8 billion or 51% driven by growth in Xbox content and services. Xbox content and services revenue increased 62% driven by 61 points of net impact from the Activision Blizzard acquisition. Xbox hardware revenue decreased 31% driven by lower volume of consoles sold.

•

Search and news advertising revenue increased $98 million or 3%. Search and news advertising revenue excluding traffic acquisition costs increased 12% driven by higher search volume.

•

Devices revenue decreased $215 million or 17%.

Operating income increased $688 million or 16%.

•

Gross margin increased $2.0 billion or 27% driven by growth in Gaming, with 13 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.

•

Operating expenses increased $1.3 billion or 41% driven by Gaming, with 43 points of growth from the Activision Blizzard acquisition.

Nine Months Ended March 31, 2024 Compared with Nine Months Ended March 31, 2023

Productivity and Business Processes

Revenue increased $6.4 billion or 13%.

•

Office Commercial products and cloud services revenue increased $4.4 billion or 14%. Office 365 Commercial revenue grew 17% with seat growth of 8%, driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Office Commercial products revenue declined 18% driven by continued customer shift to cloud offerings.

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•

Office Consumer products and cloud services revenue increased $181 million or 4% with continued growth in Microsoft 365 Consumer subscribers.

•

LinkedIn revenue increased $1.0 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 $811 million or 21% driven by Dynamics 365. Dynamics 365 revenue grew 26% driven by growth across all workloads.

Operating income increased $5.3 billion or 21%.

•

Gross margin increased $5.2 billion or 13% driven by growth in Office 365 Commercial. Gross margin percentage was relatively unchanged. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvement in Office 365 Commercial.

•

Operating expenses decreased $97 million or 1% primarily driven by 2 points of favorable impact from the prior year Q2 charge.

Intelligent Cloud

Revenue increased $12.9 billion or 20%.

•

Server products and cloud services revenue increased $13.1 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 4% 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 $161 million or 3% driven by declines in Industry Solutions and Enterprise Support Services.

Operating income increased $9.4 billion or 34%.

•

Gross margin increased $9.0 billion or 20% driven by growth in Azure. Gross margin percentage was relatively unchanged. Excluding the impact of the change in accounting estimate, gross margin percentage increased 1 point driven by improvement in Azure, inclusive of scaling our AI infrastructure, offset in part by sales mix shift to Azure.

•

Operating expenses decreased $369 million or 2% driven by 3 points of favorable impact from the prior year Q2 charge, offset in part by investments in Azure.

More Personal Computing

Revenue increased $5.3 billion or 13%.

•

Windows revenue increased $1.3 billion or 8% driven by growth in Windows Commercial and Windows OEM. Windows Commercial products and cloud services revenue increased 10% driven by demand for Microsoft 365. Windows OEM revenue increased 8%.

•

Gaming revenue increased $4.5 billion or 38% driven by growth in Xbox content and services. Xbox content and services revenue increased 47% driven by 40 points of net impact from the Activision Blizzard acquisition. Xbox hardware revenue decreased 7% driven by lower volume of consoles sold, offset in part by sales mix shift to higher-priced consoles.

•

Search and news advertising revenue increased $249 million or 3%. Search and news advertising revenue excluding traffic acquisition costs increased 10% driven by higher search volume.

•

Devices revenue decreased $670 million or 16%.

Operating income increased $2.6 billion or 22%.

•

Gross margin increased $5.1 billion or 24% 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 $2.5 billion or 27% driven by Gaming, with 31 points of growth from the Activision Blizzard acquisition.

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OPERATING EXPENSES

Research and Development


(In millions, except percentages)	Three Months Ended March 31,				Percentage Change		Nine Months Ended March 31,				Percentage Change


	2024		2023				2024		2023

Research and development	$	7,653	$	6,984		10%	$	21,454	$	20,456		5%
As a percent of revenue		12%		13%		(1)ppt		12%		13%		(1)ppt

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Research and development expenses increased $669 million or 10% driven by Gaming, with 9 points of growth from the Activision Blizzard acquisition.

Nine Months Ended March 31, 2024 Compared with Nine Months Ended March 31, 2023

Research and development expenses increased $998 million or 5% driven by Gaming, with 6 points of growth from the Activision Blizzard acquisition.

Sales and Marketing


(In millions, except percentages)	Three Months Ended March 31,				Percentage Change		Nine Months Ended March 31,				Percentage Change


	2024		2023				2024		2023

Sales and marketing	$	6,207	$	5,750		8%	$	17,640	$	16,555		7%
As a percent of revenue		10%		11%		(1)ppt		10%		11%		(1)ppt

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Sales and marketing expenses increased $457 million or 8% driven by Gaming, with 8 points of growth from the Activision Blizzard acquisition.

Nine Months Ended March 31, 2024 Compared with Nine Months Ended March 31, 2023

Sales and marketing expenses increased $1.1 billion or 7% driven by Gaming, with 6 points of growth from the Activision Blizzard acquisition.

General and Administrative


(In millions, except percentages)	Three Months Ended March 31,				Percentage Change		Nine Months Ended March 31,				Percentage Change


	2024		2023				2024		2023

General and administrative	$	1,912	$	1,643		16%	$	5,363	$	5,378		0%
As a percent of revenue		3%		3%		0ppt		3%		3%		0ppt

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General and administrative expenses include payroll, employee benefits, stock-based compensation expense, employee severance expense incurred as part of a corporate program, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

General and administrative expenses increased $269 million or 16% driven by Gaming, with 17 points of growth from the Activision Blizzard acquisition.

Nine Months Ended March 31, 2024 Compared with Nine Months Ended March 31, 2023

General and administrative expenses were relatively unchanged as prior year employee severance expenses were offset by growth from the Activision Blizzard acquisition.

OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:


(In millions)	Three Months Ended March 31,						Nine Months Ended March 31,


	2024			2023			2024			2023

Interest and dividends income	$	619		$	748		$	2,519		$	2,089
Interest expense		(800	)		(496	)		(2,234	)		(1,486	)
Net recognized gains (losses) on investments		(25	)		105			(63	)		103
Net losses on derivatives		(24	)		(65	)		(198	)		(255	)
Net gains (losses) on foreign currency remeasurements		(138	)		122			(203	)		26
Other, net		(486	)		(93	)		(792	)		(162	)


Total	$	(854	)	$	321		$	(971	)	$	315

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

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

Nine Months Ended March 31, 2024 Compared with Nine Months Ended March 31, 2023

Interest and dividends income increased due to higher yields and higher portfolio balances. Interest expense increased due to the issuance of commercial paper. Net recognized losses on investments increased primarily due to higher equity impairments. Net losses on derivatives decreased primarily due to lower losses on equity and interest rate derivatives. Other, net primarily reflects net recognized losses on equity method investments.

PART I

Item 2

INCOME TAXES

Effective Tax Rate

Uncertain Tax Positions

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.

PART I

Item 2

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)		Three Months Ended March 31,			Percentage Change		Nine Months Ended March 31,				Percentage Change


		2024		2023				2024	2023

Gross margin	$	43,353	$	36,729		18%	$	125,965	$	106,658		18%
Severance, hardware-related impairment, and lease consolidation costs		0		0		*		0		152		*


Adjusted gross margin (non-GAAP)	$	43,353	$	36,729		18%	$	125,965	$	106,810		18%


Operating income	$	27,581	$	22,352		23%	$	81,508	$	64,269		27%
Severance, hardware-related impairment, and lease consolidation costs		0		0		*		0		1,171		*


Adjusted operating income (non-GAAP)	$	27,581	$	22,352		23%	$	81,508	$	65,440		25%


Net income	$	21,939	$	18,299		20%	$	66,100	$	52,280		26%
Severance, hardware-related impairment, and lease consolidation costs		0		0		*		0		946		*