UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Transition Period From to |
Commission File Number
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(STATE OF INCORPORATION) |
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(I.R.S. ID) |
(
www.microsoft.com/investor
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol |
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Name of exchange on which registered |
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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.
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).
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.
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Accelerated Filer ☐ |
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Non-accelerated Filer ☐ |
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Smaller Reporting Company |
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Outstanding as of April 22, 2024 |
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Common Stock, $ |
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MICROSOFT CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 2024
INDEX
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PART I. |
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Item 1. |
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a) |
Income Statements for the Three and Nine Months Ended March 31, 2024 and 2023 |
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b) |
Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2024 and 2023 |
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c) |
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d) |
Cash Flows Statements for the Three and Nine Months Ended March 31, 2024 and 2023 |
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e) |
Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2024 and 2023 |
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f) |
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g) |
31 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
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67 |
2
PART I
Item 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCOME STATEMENTS
(In millions, except per share amounts) (Unaudited) |
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Three Months Ended |
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Nine Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenue: |
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Product |
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Service and other |
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Total revenue |
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Cost of revenue: |
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Product |
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Service and other |
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Total cost of revenue |
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Gross margin |
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Research and development |
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Sales and marketing |
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General and administrative |
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Operating income |
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Other income (expense), net |
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Income before income taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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Refer to accompanying notes.
3
PART I
Item 1
COMPREHENSIVE INCOME STATEMENTS
(In millions) (Unaudited) |
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Three Months Ended |
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Nine Months Ended March 31, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net income |
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$ |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Net change related to derivatives |
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Net change related to investments |
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Translation adjustments and other |
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Other comprehensive income (loss) |
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Comprehensive income |
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$ |
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$ |
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$ |
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Refer to accompanying notes.
4
PART I
Item 1
BALANCE SHEETS
(In millions) (Unaudited) |
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March 31, 2024 |
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June 30, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Total cash, cash equivalents, and short-term investments |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $ |
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Operating lease right-of-use assets |
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Equity and other investments |
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Goodwill |
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Intangible assets, net |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
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Short-term debt |
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Current portion of long-term debt |
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Accrued compensation |
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Short-term income taxes |
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Short-term unearned revenue |
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Other current liabilities |
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Total current liabilities |
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Long-term debt |
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Long-term income taxes |
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Long-term unearned revenue |
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Deferred income taxes |
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Operating lease liabilities |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Common stock and paid-in capital – shares authorized |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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Refer to accompanying notes.
5
PART I
Item 1
CASH FLOWS STATEMENTS
(In millions) (Unaudited) |
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Three Months Ended March 31, |
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Nine Months Ended March 31, |
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2024 |
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2023 |
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2024 |
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2023 |
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Operations |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Adjustments to reconcile net income to net cash from operations: |
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Depreciation, amortization, and other |
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Stock-based compensation expense |
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Net recognized losses (gains) on investments and derivatives |
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Deferred income taxes |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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Other current assets |
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Other long-term assets |
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Accounts payable |
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Unearned revenue |
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Income taxes |
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Other current liabilities |
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Other long-term liabilities |
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Net cash from operations |
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Financing |
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Proceeds from issuance (repayments) of debt, maturities of 90 days or less, net |
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( |
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Proceeds from issuance of debt |
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Repayments of debt |
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( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Common stock issued |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Common stock cash dividends paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Purchases of investments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Maturities of investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales of investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash and cash equivalents |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
6
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Common stock issued |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common stock cash dividends |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
7
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.
8
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:
9
PART I
Item 1
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 $
As of March 31, 2024 and June 30, 2023, other receivables related to activities to facilitate the purchase of server components were $
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 $
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
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
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) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock (B) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of stock-based awards |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents (C) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (A/B) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted (A/C) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
11
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net recognized gains (losses) on investments |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Net losses on derivatives |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net gains (losses) on foreign currency remeasurements |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Other, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Realized losses from sales of available-for-sale securities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Impairments and allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Net unrealized gains (losses) on investments still held |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Impairments of investments |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
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 |
|
$ |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
Certificates of deposit |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. government securities |
|
Level 1 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
U.S. agency securities |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Foreign government bonds |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Mortgage- and asset-backed securities |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
Level 3 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Municipal securities |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Municipal securities |
|
Level 3 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments |
|
|
|
$ |
|
$ |
|
$ |
( |
) |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
Equity investments |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
PART I
Item 1
(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 |
|
$ |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
Certificates of deposit |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. government securities |
|
Level 1 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
U.S. agency securities |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Foreign government bonds |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Mortgage- and asset-backed securities |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Municipal securities |
|
Level 2 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Municipal securities |
|
Level 3 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments |
|
|
|
$ |
|
$ |
|
$ |
( |
) |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
Equity investments |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $
14
PART I
Item 1
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 |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In millions) |
|
|
Fair Value |
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
|
Unrealized |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Mortgage- and asset-backed securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Corporate notes and bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Municipal securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
|
|
Total |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In millions) |
|
|
Fair Value |
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
|
Unrealized |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Foreign government bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Mortgage- and asset-backed securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Corporate notes and bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Municipal securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
$ |
|
||
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through 10 years |
|
|
|
|
|
|
||
Due after 10 years |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
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.
15
PART I
Item 1
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 $
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 |
|
$ |
|
|
$ |
|
||
Interest rate contracts purchased |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts purchased |
|
|
|
|
|
|
||
Foreign exchange contracts sold |
|
|
|
|
|
|
||
Equity contracts purchased |
|
|
|
|
|
|
||
Equity contracts sold |
|
|
|
|
|
|
||
Other contracts purchased |
|
|
|
|
|
|
||
Other contracts sold |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
16
PART I
Item 1
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 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Equity contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Other contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amounts of derivatives |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Gross amounts of derivatives offset in the balance sheet |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Cash collateral received |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
0 |
|
|
$ |
|
|
$ |
0 |
|
|||
|
|
|
|
|
0 |
|
|
|
|
|
|
0 |
|
|||
|
|
|
|
|
0 |
|
|
|
|
|
|
0 |
|
|||
|
|
0 |
|
|
|
( |
) |
|
|
0 |
|
|
|
( |
) |
|
|
|
0 |
|
|
|
( |
) |
|
|
0 |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivative liabilities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liabilities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
PART I
Item 1
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 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Hedged items |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from accumulated other comprehensive loss |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Equity contracts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other contracts |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 — INVENTORIES
The components of inventories were as follows:
(In millions) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
March 31, 2024 |
|
|
June 30, 2023 |
|
||
|
|
|
||||||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
NOTE 7 — BUSINESS COMBINATIONS
Activision Blizzard, Inc.
On
18
PART I
Item 1
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 |
|
$ |
|
|
Goodwill |
|
|
|
|
Intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Long-term debt |
|
|
( |
) |
Long-term income taxes |
|
|
( |
) |
Deferred income taxes |
|
|
( |
) |
Other liabilities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
|
||
Technology-based |
|
|
|
|
|
|
||
Customer-related |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of intangible assets acquired |
|
$ |
|
|
|
|
||
|
|
|
|
|
|
|
|
Following is the net impact of the Activision Blizzard acquisition on our consolidated income statements since the date of acquisition:
(In millions) |
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
$ |
|
||
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
The change of Activision Blizzard content from third-party to first-party is reflected in the net impact.
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2022:
(In millions, except per share amounts) |
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
||||||||||
|
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||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
2024 |
|
|
2023 |
|
|
|
2024 |
|
|
|
2023 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
19
PART I
Item 1
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intelligent Cloud |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
More Personal Computing |
|
|
|
|
|
(a) |
|
|
(a) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying Amount |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
March 31, 2024 |
|
|
June 30, 2023 |
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Marketing-related |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Technology-based |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Customer-related |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Contract-based |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(a) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $
20
PART I
Item 1
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) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
NOTE 10 — DEBT
Short-term Debt
As of March 31, 2024, we had $
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 |
|
||||||||||
|
|
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|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
– |
|
|
– |
|
|
|
|
|
|
|
||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total face value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Unamortized discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Hedge fair value adjustments (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Premium on debt exchange |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
PART I
Item 1
As of March 31, 2024 and June 30, 2023, the estimated fair value of long-term debt, including the current portion, was $
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) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
NOTE 11 — INCOME TAXES
Effective Tax Rate
Our effective tax rate was
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 $
We remain under audit by the IRS for tax years
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
22
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 |
|
$ |
|
|
$ |
|
||
Intelligent Cloud |
|
|
|
|
|
|
||
More Personal Computing |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
Changes in unearned revenue were as follows:
(In millions) |
|
|
|
|
|
|
|||
|
|
|||
Nine Months Ended March 31, 2024 |
|
|||
|
|
|||
Balance, beginning of period |
|
$ |
|
|
Deferral of revenue |
|
|
|
|
Recognition of unearned revenue |
|
|
( |
) |
|
|
|||
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
|
|
|
|
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $
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
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total finance lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
$ |
|
|
$ |
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost |
|
$ |
|
|
$ |
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
$ |
|
|
$ |
|
||
Other long-term liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
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) |
|
$ |
|
|
$ |
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 |
|
|
|
|
|
|
||
2028 |
|
|
|
|
|
|
||
Thereafter |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
||
Less imputed interest |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
24
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 $
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 $
25
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 $
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 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Second Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Third Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $
Dividends
Our Board of Directors declared the following dividends:
Declaration Date |
|
|
Record Date |
|
|
|
Payment Date |
|
|
|
Dividend Per Share |
|
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dividend declared on March 12, 2024 was included in other current liabilities as of March 31, 2024.
26
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 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Unrealized gains (losses), net of tax of $( |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for (gains) losses included in other income (expense), net |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Tax expense (benefit) included in provision for income taxes |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change related to derivatives, net of tax of $ |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Unrealized gains (losses), net of tax of $( |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for losses included in other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tax benefit included in provision for income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change related to investments, net of tax of $( |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Translation adjustments and other, net of tax of $ |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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:
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:
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:
28
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 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intelligent Cloud |
|
|
|
|
|
|
|
|
|
|
|
||||
More Personal Computing |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Operating Income |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Productivity and Business Processes |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intelligent Cloud |
|
|
|
|
|
|
|
|
|
|
|
||||
More Personal Computing |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
2024 |
|
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
United States (a) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other countries |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Office products and cloud services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Windows |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gaming |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Search and news advertising |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Enterprise and partner services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dynamics products and cloud services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Devices |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $
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.
30
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
31
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:
32
PART I
Item 2
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.
33
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 |
34
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 |
35
PART I
Item 2
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.
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.
36
PART I
Item 2
Gross margin increased $19.3 billion or 18% driven by growth across each of our segments.
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%.
37
PART I
Item 2
Operating income increased $1.5 billion or 17%.
Intelligent Cloud
Revenue increased $4.6 billion or 21%.
Operating income increased $3.0 billion or 32%.
More Personal Computing
Revenue increased $2.3 billion or 17%.
Operating income increased $688 million or 16%.
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%.
38
PART I
Item 2
Operating income increased $5.3 billion or 21%.
Intelligent Cloud
Revenue increased $12.9 billion or 20%.
Operating income increased $9.4 billion or 34%.
More Personal Computing
Revenue increased $5.3 billion or 13%.
Operating income increased $2.6 billion or 22%.
39
PART I
Item 2
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 |
|
|
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 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
PART I
Item 2
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 |
|
|
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.
41
PART I
Item 2
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
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.
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.
42
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 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|