~~(Former name, former address and former fiscal year, if changed since last report)~~

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes☒ No ☐

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

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

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

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

Refer to accompanying notes. ~~Refer to Note 18 – Accumulated Other Comprehensive Income (Loss) for further information.~~

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 ~~2017~~fiscal year 2023 Form 10-K filed with the U.S. Securities and Exchange Commission on ~~August 2, 2017.~~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. Equity investments for which we are able to exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments for which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

Estimates and Assumptions

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

Financial Instruments

Investments

~~Revenue~~

~~Product Revenue and Service and Other Revenue~~

Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

~~Revenue Recognition~~

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

~~PART I~~

~~Item 1~~

~~Nature of Products and Services~~

~~Licenses for on-premises software provide the customer~~consider all highly liquid interest-earning investments with a ~~right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses~~maturity of three months or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfrontless at the ~~point in time when the software is made available~~date of purchase to ~~the customer.~~be cash equivalents. The fair values of these investments approximate their carrying values. In ~~cases where we allocate revenue to software updates, primarily because the updates~~general, investments with original maturities of greater than three months and remaining maturities of less than one year are ~~provided at no additional charge, revenue is recognized~~classified as ~~the updates are provided, which is generally ratably over the estimated life of the related device or license.~~

~~Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined~~short-term investments. Investments with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract periodmaturities beyond one year may be classified as ~~customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.~~

Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognizedshort-term based on their highly liquid nature and because such marketable securities represent the ~~customer utilization~~investment of ~~such resources. When cloud services require a significant level of integration and interdependency with software and the individual components~~cash that is available for current operations.

Debt investments are ~~not considered distinct, all revenue is recognized over the period in which the cloud services are provided.~~

Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.

~~Our hardware is~~ generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.

~~Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.~~

~~Significant Judgments~~

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

~~PART I~~

~~Item 1~~

Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.

~~Contract Balances~~

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

~~The opening balance of current and long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 billion as of July 1, 2016.~~

As of December 31, 2017 and June 30, 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $1.6 billion and $1.7 billion, respectively, and are included in other long-term assets on our consolidated balance sheets.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

~~Activity in the allowance for doubtful accounts was as follows:~~

(In millions)

Six Months Ended December 31, 2017

Balance, beginning of period

$
361

Charged to costs and other

45

Write-offs

(53
)

Balance, end of period

$
353

Reported as of December 31, 2017

Accounts receivable, net of allowance for doubtful accounts

$
337

Other long-term assets

16

Total

$
353

Unearned revenue is comprised mainly of unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Dynamics business solutions; Windows 10 post-delivery support; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

~~Refer to Note 14 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.~~

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

~~PART I~~

~~Item 1~~

~~Assets Recognized from Costs to Obtain a Contract with a Customer~~

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets.

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

~~Leases~~

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

~~Recent Tax Legislation~~

As a result of the TCJA, we have recast certain prior period income tax liabilities on our consolidated balance sheets to conform to the current period presentation. Previously reported balances were impacted as follows:

(In millions)

As
Previously
Reported

As
Adjusted

As
Previously
Reported

As
Adjusted

Balance Sheets

June 30,
2017

September 30,
2017

Long-term income taxes

$
0

$
13,485

$
0

$
13,944

Other long-term liabilities

17,034

3,549

18,173

4,229

~~These adjustments had no impact on our consolidated income statements or net cash from or used in operating, financing, or investing on our consolidated cash flows statements.~~

~~Recent Accounting Guidance~~

~~Recently Adopted Accounting Guidance~~

~~Leases~~

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets

~~PART I~~

~~Item 1~~

~~and lease liabilities by lessees for those leases~~ classified as ~~operating leases. Under the standard, disclosures~~available-for-sale and realized gains and losses are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The standard had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Adoption of the standard required us to restate certain previously reported results, including the recognition of additional ROU assets and lease liabilities for operating leases. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.

~~Revenue from Contracts with Customers~~

In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

~~We elected to early adopt the standard effective July 1, 2017,~~recorded using the full retrospective method, which required us to restate each prior reporting period presented. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and SA, we recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard depends on contract-specific terms andspecific identification method. Changes in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional services remains substantially unchanged.

Adoption of the standard using the full retrospective method required us to restate certain previously reported results, including the recognition of additional revenue and an increase in the provision for income taxes, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard resulted in an increase in accounts receivable and other current and long-term assets, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and SA; a reduction of unearned revenue, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes, driven by the upfront recognition of revenue. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.

~~PART I~~

~~Item 1~~

~~Impacts to Previously Reported Results~~

~~Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:~~

(In millions, except per share amounts)

As
Previously
Reported

New
Revenue
Standard
Adjustment

As
Restated





Income Statements



Three Months Ended December 31, 2016



Revenue

$
24,090

$
1,736

$
25,826

Provision for income taxes

1,163

592

1,755

Net income

5,200

1,067

6,267

Diluted earnings per share

0.66

0.14

0.80

Six Months Ended December 31, 2016

Revenue

$
44,543

$
3,211

$
47,754

Provision for income taxes

1,798

1,117

2,915

Net income

9,890

2,044

11,934

Diluted earnings per share

1.26

0.26

1.52

(In millions)

As
Previously
Reported

New
Revenue
Standard
Adjustment

New Lease
Standard
Adjustment

As
Restated

Balance Sheets

June 30, 2017

Accounts receivable, net of allowance for doubtful accounts

$
19,792

$
2,639

$
0

$
22,431

Operating lease right-of-use assets

0

0

6,555

6,555

Other current and long-term assets

11,147

32

0

11,179

Unearned revenue

44,479

(17,823
)

0

26,656

Deferred income taxes

531

5,203

0

5,734

Operating lease liabilities

0

0

5,372

5,372

Other current and long-term liabilities

23,464

(26
)

1,183

24,621

Stockholders' equity

72,394

15,317

0

87,711

~~Adoption of the standards related to revenue recognition and leases had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statements.~~

~~Recent Accounting Guidance Not Yet Adopted~~

~~Financial Instruments – Targeted Improvements to Accounting for Hedging Activities~~

In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

~~Accounting for Income Taxes – Intra-Entity Asset Transfers~~

In October 2016, the FASB issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. This guidance is effective for us beginning July 1, 2018, with early adoption permitted beginning July 1, 2017. We plan to adopt the guidance effective July 1, 2018. Adoption of the guidance will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred

~~PART I~~

~~Item 1~~

~~from past intra-entity transfers involving~~assets other than inventory and new deferred tax assets for amounts not recognized under current GAAP. As a result of the TCJA, we are currently re-evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

~~Financial Instruments – Credit Losses~~

~~In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected~~fair value, excluding credit losses and ~~requires consideration~~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 ~~broader range~~systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, ~~reasonable~~ and ~~supportable information~~business outlook for, the investee. If we have plans to ~~inform credit loss estimates. We~~sell the security or it is more likely than not that we will be required to ~~use~~sell the security before recovery, then a ~~forward-looking expected credit loss model for accounts receivables, loans,~~decline in fair value below cost is recorded as an impairment charge in other income (expense), net and ~~other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as~~ a ~~reduction~~new cost basis in the ~~amortized cost basis of the securities. The standard will be effective for us beginning July~~investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

PART I

Item 1 2020, with early adoption permitted beginning July 1, 2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

~~Financial Instruments – Recognition, Measurement, Presentation, and Disclosure~~

In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equityEquity investments with ~~certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). Under the standard, equity investments that do not have a~~ readily determinable fair ~~value~~values are ~~eligible for the measurement alternative. Using the measurement alternative,~~measured at fair value. Equity investments without readily determinable fair values ~~will be valued~~are measured using the equity method or measured at cost with adjustments ~~to fair value~~ for observable changes in price or impairments ~~reflected through net income.~~

The standard will be effective for us beginning July 1, 2018. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment from accumulated other comprehensive income (“AOCI”)(referred to retained earnings as of the effective date. A cumulative-effect adjustment will capture any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the ~~impact of recording~~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 certain equity investments carried at cost. The remaining implementation matters include establishing processes and controls around equity securities without readily determinable fair values and evaluating the ~~impact of the standard to our accounting policies and disclosures. We expect to elect the measurement alternative for equity investments that do not have readily determinable fair values.~~

~~The impact on our consolidated balance sheets upon adoption will depend on the unrealized gains and losses held~~investment is less than carrying value. Changes in AOCI related to our equity investments on the date of adoption, and on any impact the new guidance may have on our equity investments carried at cost. See Note 4 – Investments for our current investment balances. The impact of the standard going forward on our consolidated income statement will be dependent on our equity investment holdings, with adjustments to fair value ~~reflected through net income. Adoption of the standard is expected to have no impact to cash from or used~~are recorded in ~~operating, financing or investing on our consolidated cash flows statements.~~

~~PART I~~

~~Item 1~~

~~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
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Net income (loss) available for common shareholders (A)

$
(6,302
)

$
6,267

$
274

$
11,934

Weighted average outstanding shares of common stock (B)

7,710

7,755

7,709

7,772

Dilutive effect of stock-based awards

0

75

90

81

Common stock and common stock equivalents (C)

7,710

7,830

7,799

7,853

Earnings (Loss) Per Share

Basic (A/B)

$
(0.82
)

$
0.81

$
0.04

$
1.54

Diluted (A/C)

$
(0.82
)

$
0.80

$
0.04

$
1.52

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented. In periods where we recognized a net loss, we excluded the impact of potentially dilutive outstanding stock-based awards from the calculation of diluted loss per share as their inclusion would have an antidilutive effect.

~~NOTE 3 — OTHER INCOME (EXPENSE), NET~~

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

Derivatives

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Dividends and interest income

$
530

$
311

$
1,003

$
604

Interest expense

(698
)

(521
)

(1,370
)

(958
)
Net recognized gains on investments

768

698

1,341

1,103

Net losses on derivatives

(84
)

(46
)

(134
)

(140
)
Net losses on foreign currency remeasurements

(60
)

(153
)

(69
)

(193
)
Other, net

34

(172
)

(5
)

(187
)

Total

$
490

$
117

$
766

$
229

~~Following are details of net recognized gains (losses) on investments during the periods reported:~~

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Other-than-temporary impairments of investments

$
(24
)

$
(21
)

$
(30
)

$
(39
)
Realized gains from sales of available-for-sale securities

1,066

851

1,737

1,334

Realized losses from sales of available-for-sale securities

(274
)

(132
)

(366
)

(192
)

Total

$
768

$
698

$
1,341

$
1,103

~~PART I~~

~~Item 1~~

~~NOTE 4~~ — ~~INVESTMENTS~~

~~Investment Components~~

~~The components of investments, including associated derivatives, were as follows:~~

(In millions)

Cost Basis

Unrealized
Gains

Unrealized
Losses

Recorded
Basis

Cash
and Cash
Equivalents

Short-term
Investments

Equity
and Other
Investments

December 31, 2017

Cash

$
3,877

$
0

$
0

$
3,877

$
3,877

$
0

$
0

Mutual funds

1,080

0

0

1,080

1,080

0

0

Commercial paper

1,533

0

0

1,533

904

629

0

Certificates of deposit

1,832

0

0

1,832

1,642

190

0

U.S. government and agency securities

119,085

34

(746
)

118,373

4,465

113,908

0

Foreign government bonds

6,605

2

(12
)

6,595

891

5,704

0

Mortgage- and asset-backed securities

3,952

7

(7
)

3,952

0

3,952

0

Corporate notes and bonds

5,172

48

(14
)

5,206

0

5,206

0

Municipal securities

284

47

0

331

0

331

0

Common and preferred stock

1,697

1,707

(6
)

3,398

0

0

3,398

Other investments

564

0

0

564

0

1

563

Total

$
145,681

$
  1,845

$
  (785
)

$
146,741

$
  12,859

$
129,921

$
  3,961

(In millions)

Cost Basis

Unrealized
Gains

Unrealized
Losses

Recorded
Basis

Cash
and Cash
Equivalents

Short-term
Investments

Equity
and Other
Investments

June 30, 2017

Cash

$
3,624

$
0

$
0

$
3,624

$
3,624

$
0

$
0

Mutual funds

1,478

0

0

1,478

1,478

0

0

Commercial paper

319

0

0

319

69

250

0

Certificates of deposit

1,358

0

0

1,358

972

386

0

U.S. government and agency securities

112,119

85

(360
)

111,844

16

111,828

0

Foreign government bonds

5,276

2

(13
)

5,265

1,504

3,761

0

Mortgage- and asset-backed securities

3,921

14

(4
)

3,931

0

3,931

0

Corporate notes and bonds

4,786

61

(12
)

4,835

0

4,835

0

Municipal securities

284

43

0

327

0

327

0

Common and preferred stock

2,472

3,062

(34
)

5,500

0

0

5,500

Other investments

523

0

0

523

0

0

523

Total

$
136,160

$
  3,267

$
  (423
)

$
139,004

$
  7,663

$
125,318

$
  6,023

~~PART I~~

~~Item 1~~

As of December 31, 2017 and June 30, 2017, the recorded bases of common and preferred stock that are restricted for more than one year or are not publicly traded were $1.0 billion and $1.1 billion, respectively. These investments are carried at cost and are reviewed quarterly for indicators of other-than-temporary impairment. It is not practicable for us to reliably estimate the fair value of these investments.

We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments on our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability. As of December 31, 2017 and June 30, 2017, collateral received under agreements for loaned securities was $4.3 billion and $3.7 billion, respectively, and was primarily comprised of U.S. government and agency securities.

~~Unrealized Losses on Investments~~

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

Less than 12 Months

12 Months or Greater

Total
Unrealized
Losses

(In millions)

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Total
Fair Value

December 31, 2017

U.S. government and agency securities

$
101,552

$
(672
)

$
2,855

$
(74
)

$
104,407

$
(746
)
Foreign government bonds

2,537

(1
)

34

(11
)

2,571

(12
)
Mortgage- and asset-backed securities

1,317

(3
)

338

(4
)

1,655

(7
)
Corporate notes and bonds

1,118

(6
)

439

(8
)

1,557

(14
)
Common and preferred stock

17

0

36

(6
)

53

(6
)

Total

$
106,541

$
  (682
)

$
  3,702

$
  (103
)

$
110,243

$
  (785
)

Less than 12 Months

12 Months or Greater

Total
Unrealized
Losses

(In millions)

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Total
Fair Value

June 30, 2017

U.S. government and agency securities

$
87,558

$
(348
)

$
371

$
(12
)

$
87,929

$
(360
)
Foreign government bonds

4,006

(2
)

23

(11
)

4,029

(13
)
Mortgage- and asset-backed securities

1,068

(3
)

198

(1
)

1,266

(4
)
Corporate notes and bonds

669

(8
)

177

(4
)

846

(12
)
Common and preferred stock

69

(6
)

148

(28
)

217

(34
)

Total

$
93,370

$
  (367
)

$
  917

$
  (56
)

$
  94,287

$
  (423
)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from domestic and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.

~~PART I~~

~~Item 1~~

~~Debt Investment Maturities~~

(In millions)

Cost Basis

Estimated
Fair Value

December 31, 2017

Due in one year or less

$
19,448

$
19,447

Due after one year through five years

103,950

103,341

Due after five years through 10 years

14,143

14,083

Due after 10 years

922

951

Total

$
138,463

$
137,822

~~NOTE 5 — DERIVATIVES~~

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, 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. All notional amounts presented below are measured in U.S. dollar equivalents.~~

~~Foreign Currency~~

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. Option and forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar. As of December 31, 2017 and June 30, 2017, the total notional amounts of these foreign exchange contracts sold were $7.5 billion and $8.9 billion, respectively.

Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. As of December 31, 2017 and June 30, 2017, the total notional amounts of these foreign exchange contracts sold were $5.6 billion and $5.1 billion, respectively.

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. As of December 31, 2017, the total notional amounts of these foreign exchange contracts purchased and sold were $8.9 billion and $10.4 billion, respectively. As of June 30, 2017, the total notional amounts of these foreign exchange contracts purchased and sold were $8.8 billion and $10.6 billion, respectively.

~~Equity~~

Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of December 31, 2017, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.5 billion and $1.9 billion, respectively, of which $1.4 billion and $1.6 billion, respectively, were designated as hedging instruments. As of June 30, 2017, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.9 billion and $2.4 billion, respectively, of which $1.6 billion and $1.8 billion, respectively, were designated as hedging instruments.

~~PART I~~

~~Item 1~~

~~Interest Rate~~

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts, and over-the-counter swap and option contracts, none of which are designated as hedging instruments. As of December 31, 2017, the total notional amounts of fixed-interest rate contracts purchased and sold were $584 million and $377 million, respectively. As of June 30, 2017, the total notional amounts of fixed-interest rate contracts purchased and sold were $233 million and $352 million, respectively.

In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date. As of December 31, 2017 and June 30, 2017, the total notional derivative amounts of mortgage contracts purchased were $542 million and $567 million, respectively.

~~Credit~~

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure to individual credit risks or groups of credit risks. As of December 31, 2017, the total notional amounts of credit contracts purchased and sold were $240 million and $48 million, respectively. As of June 30, 2017, the total notional amounts of credit contracts purchased and sold were $267 million and $63 million, respectively.

~~Credit-Risk-Related Contingent Features~~

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of December 31, 2017, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

~~Fair Values of Derivative Instruments~~

Derivative instruments are recognized as either assets or liabilities and ~~are~~ 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, ~~the~~ gains ~~(losses)~~and losses are recognized in ~~earnings in the periods of change together~~other income (expense), net with ~~the~~ offsetting ~~(losses)~~ gains and losses on the hedged ~~items attributed to the risk being hedged. For options designated as fair value hedges, changes in the time value are~~items. Gains and losses representing hedge components excluded from the assessment of ~~hedge~~ effectiveness ~~and~~ are recognized in ~~earnings.~~other income (expense), net.

For derivative instruments designated as cash flow hedges, ~~the effective portion of the~~ gains ~~(losses) on the derivatives is~~and losses are initially reported as a component of ~~OCI~~other comprehensive income and is subsequently recognized in ~~earnings when~~other income (expense), net with the corresponding hedged ~~exposure is recognized in earnings. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness~~item. Gains and ~~are recognized in earnings. Gains (losses) on derivatives~~losses representing ~~either~~ hedge components excluded from the assessment of effectiveness ~~or hedge ineffectiveness~~ are recognized in ~~earnings.~~other income (expense), net.

For derivative instruments that are not designated as hedges, gains ~~(losses)~~and losses from changes in fair values are primarily recognized in other income (expense), net. Other than those derivatives entered into for investment purposes, the gains (losses) are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities, which are recorded as a component of OCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are reclassified from AOCI into other income (expense), net.

~~PART I~~

~~Item 1~~

The following table presents the fair values of derivative instruments designated as hedging instruments (“designated hedge derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”). The fair values exclude the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk:

Assets

Liabilities

(In millions)

Short-term
Investments

Other
Current
Assets

Equity and
Other
Investments

Other
Long-term Assets

Other
Current
Liabilities

Other
Long-term Liabilities

December 31, 2017

Non-designated Hedge Derivatives



Foreign exchange contracts

$
5

$
145

$
0

$
32

$
(165
)

$
(5
)

Equity contracts

7

0

0

0

(1
)

0

Interest rate contracts

4

0

0

0

(5
)

0

Credit contracts

3

0

0

0

(1
)

0

Total

$
19

$
145

$
0

$
32

$
(172
)

$
(5
)

Designated Hedge Derivatives

Foreign exchange contracts

$
10

$
48

$
0

$
3

$
(27
)

$
(5
)

Equity contracts

0

0

7

0

(328
)

0

Total

$
10

$
48

$
7

$
3

$
(355
)

$
(5
)

Total gross amounts of derivatives

$
29

$
193

$
7

$
35

$
(527
)

$
(10
)

Gross derivatives either offset or subject to an enforceable master netting agreement

$
28

$
193

$
7

$
35

$
(526
)

$
  (10
)

Gross amounts of derivatives offset on the balance sheet

  (30
)

(115
)

  (7
)

(7
)

152

7

Net amounts presented on the balance sheet

  (2
)

78

0

28

(374
)

(3
)

Gross amounts of derivatives not offset on the balance sheet

0

0

0

0

0

0

Cash collateral received

0

0

0

0

(51
)

0

Net amount

$
  (2
)

$
78

$
0

$
28

$
  (425
)

$
(3
)

~~PART I~~

~~Item 1~~

Assets

Liabilities

(In millions)

Short-term
Investments

Other
Current
Assets

Equity and
Other
Investments

Other
Long-term Assets

Other
Current
Liabilities

Other
Long-term Liabilities

June 30, 2017

Non-designated Hedge Derivatives

Foreign exchange contracts

$
9

$
203

$
0

$
6

$
(134
)

$
(8
)
Equity contracts

3

0

0

0

(6
)

0

Interest rate contracts

3

0

0

0

(7
)

0

Credit contracts

5

0

0

0

(1
)

0

Total

$
20

$
203

$
0

$
6

$
(148
)

$
(8
)

Designated Hedge Derivatives

Foreign exchange contracts

$
80

$
133

$
0

$
0

$
(3
)

$
0

Equity contracts

0

0

67

0

(186
)

0

Total

$
80

$
133

$
67

$
0

$
(189
)

$
0

Total gross amounts of derivatives

$
100

$
336

$
67

$
6

$
(337
)

$
(8
)

Gross derivatives either offset or subject to an enforceable master netting agreement

$
100

$
336

$
67

$
6

$
(334
)

$
  (8
)
Gross amounts of derivatives offset on the balance sheet

  (20
)

  (132
)

  (67
)

  (8
)

221

7

Net amounts presented on the balance sheet

80

204

0

  (2
)

(113
)

(1
)
Gross amounts of derivatives not offset on the balance sheet

0

0

0

0

0

0

Cash collateral received

0

0

0

0

(228
)

0

Net amount

$
80

$
204

$
0

$
  (2
)

$
  (341
)

$
(1
)

~~Refer to Note 4 – Investments and Note 6 –~~ Fair Value Measurements ~~for further information.~~

~~PART I~~

~~Item 1~~

~~Fair Value Hedge Gains (Losses)~~

~~We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges and their related hedged items:~~

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Foreign Exchange Contracts

Derivatives

$
14

$
685

$
36

$
637

Hedged items

12

(674
)

10

(606
)

Total amount of ineffectiveness

$
26

$
11

$
46

$
31

Equity Contracts

Derivatives

$
(71
)

$
(7
)

$
(307
)

$
(17
)
Hedged items

71

7

307

17

Total amount of ineffectiveness

$
0

$
0

$
0

$
0

Amount of equity contracts excluded from effectiveness assessment

$
20

$
(1
)

$
60

$
(4
)

~~Cash Flow Hedge Gains (Losses)~~

~~We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:~~

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Effective Portion

Gains recognized in other comprehensive income (loss) (net of tax of $1, $3, $1, and $4)

$
  10

$
  449

$
15

$
484

Gains reclassified from accumulated other comprehensive income (loss) into revenue

19

172

130

247

Amount Excluded from Effectiveness Assessment and Ineffective Portion

Losses recognized in other income (expense), net

(73
)

(84
)

  (164
)

  (154
)

We estimate that $22 million of net derivative gains included in AOCI as of December 31, 2017 will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during the three and six months ended December 31, 2017.

~~PART I~~

~~Item 1~~

~~Non-Designated Derivative Gains (Losses)~~

Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense), net. These amounts are shown in the table below, with the exception of gains (losses) on derivatives presented in income statement line items other than other income (expense), net, which were immaterial for the periods presented. Other than those derivatives entered into for investment purposes, the gains (losses) below are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities and gains (losses) from foreign exchange rate changes on certain balance sheet amounts.

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Foreign exchange contracts

$
(115
)

$
26

$
(184
)

$
(5
)
Equity contracts

(49
)

(25
)

(78
)

(42
)
Interest-rate contracts

(2
)

(10
)

9

(6
)
Credit contracts

0

2

0

4

Other contracts

0

22

0

0

Total

$
(166
)

$
15

$
(253
)

$
(49
)

~~NOTE 6~~ — ~~FAIR VALUE MEASUREMENTS~~

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

•

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

•

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

•

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

We measure ~~certain assets, including our cost and~~ equity ~~method~~ investments atwithout readily determinable fair ~~value~~values on a nonrecurring ~~basis when they are deemed to be other-than-temporarily impaired.~~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. ~~An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.~~

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

239

PART I

Item 1

Contract Balances and Other Receivables

~~Financial Assets~~As of both September 30, 2023 and ~~Liabilities Measured at Fair Value~~June 30, 2023, long-term accounts receivable, net of allowance for doubtful accounts, was $4.5 billion and is included in other long-term assets in our consolidated balance sheets.

As of September 30, 2023 and June 30, 2023, other receivables related to activities to facilitate the purchase of server components were $10.2 billion and $9.2 billion, respectively, and are included in other current assets in our consolidated balance sheets.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of September 30, 2023 and June 30, 2023, our financing receivables, net were $4.8 billion and $5.3 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on ~~a Recurring Basis~~troubled accounts, historical experience, and other currently available evidence.

NOTE 2 — EARNINGS PER SHARE

The components of basic and diluted EPS were as follows:


(In millions, except earnings per share)


Three Months Ended September 30,	2023		2022

Net income available for common shareholders (A)	$	22,291	$	17,556


Weighted average outstanding shares of common stock (B)		7,429		7,457
Dilutive effect of stock-based awards		33		28


Common stock and common stock equivalents (C)		7,462		7,485


Earnings Per Share

Basic (A/B)	$	3.00	$	2.35
Diluted (A/C)	$	2.99	$	2.35

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

NOTE 3 — OTHER INCOME (EXPENSE), NET

The ~~following tables present~~components of other income (expense), net were as follows:


(In millions)


Three Months Ended September 30,	2023			2022

Interest and dividends income	$	1,166		$	641
Interest expense		(525	)		(500	)
Net recognized gains (losses) on investments		(107	)		13
Net gains on derivatives		93			9
Net losses on foreign currency remeasurements		(101	)		(78	)
Other, net		(137	)		(31	)


Total	$	389		$	54

Net Recognized Gains (Losses) on Investments

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


(In millions)


Three Months Ended September 30,	2023			2022

Realized gains from sales of available-for-sale securities	$	2		$	3
Realized losses from sales of available-for-sale securities		(25	)		(20	)
Impairments and allowance for credit losses		(6	)		(18	)


Total	$	(29	)	$	(35	)

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


(In millions)


Three Months Ended September 30,	2023			2022

Net realized gains on investments sold	$	45		$	83
Net unrealized losses on investments still held		(123	)		(28	)
Impairments of investments		0			(7	)


Total	$	(78	)	$	48

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 Investments


September 30, 2023

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper	Level 2	$	3,008	$	0	$	0		$	3,008	$	3,005	$	3	$	0
Certificates of deposit	Level 2		1,694		0		0			1,694		1,650		44		0
U.S. government securities	Level 1		56,210		2		(4,147	)		52,065		255		51,810		0
U.S. agency securities	Level 2		29		0		0			29		0		29		0
Foreign government bonds	Level 2		516		1		(24	)		493		5		488		0
Mortgage- and asset-backed securities	Level 2		863		1		(52	)		812		0		812		0
Corporate notes and bonds	Level 2		10,443		3		(612	)		9,834		0		9,834		0
Corporate notes and bonds	Level 3		122		0		0			122		0		122		0
Municipal securities	Level 2		283		1		(21	)		263		0		263		0
Municipal securities	Level 3		104		0		(16	)		88		0		88		0


Total debt investments		$	73,272	$	8	$	(4,872	)	$	68,408	$	4,915	$	63,493	$	0


Changes in Fair Value Recorded in Net Income

Equity investments	Level 1								$	70,729	$	68,159	$	0	$	2,570
Equity investments	Other									8,853		0		0		8,853


Total equity investments									$	79,582	$	68,159	$	0	$	11,423


Cash									$	7,378	$	7,378	$	0	$	0
Derivatives, net (a)										6		0		6		0


Total									$	155,374	$	80,452	$	63,499	$	11,423

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 Investments


June 30, 2023

Changes in Fair Value Recorded in Other Comprehensive Income

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


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


Changes in Fair Value Recorded in Net Income

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


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


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


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

(a)

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

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value onusing net asset value as a ~~recurring basis:~~

(In millions)

Level 1

Level 2

Level 3

Gross Fair
Value

Netting
^(a)

Net Fair
Value

December 31, 2017

Assets

Mutual funds

$
1,080

$
0

$
0

$
1,080

$
0

$
1,080

Commercial paper

0

1,533

0

1,533

0

1,533

Certificates of deposit

0

1,832

0

1,832

0

1,832

U.S. government and agency securities

116,194

2,180

0

118,374

0

118,374

Foreign government bonds

15

6,598

0

6,613

0

6,613

Mortgage- and asset-backed securities

0

3,953

0

3,953

0

3,953

Corporate notes and bonds

1

5,181

6

5,188

0

5,188

Municipal securities

0

331

0

331

0

331

Common and preferred stock

969

1,392

18

2,379

0

2,379

Derivatives

1

262

1

264

(159
)

105

Total

$
118,260

$
23,262

$
25

$
141,547

$
(159
)

$
141,388

Liabilities

Derivatives and other

$
3

$
534

$
37

$
574

$
(159
)

$
415

(In millions)

Level 1

Level 2

Level 3

Gross Fair
Value

Netting
^(a)

Net Fair
Value

June 30, 2017

Assets

Mutual funds

$
1,478

$
0

$
0

$
1,478

$
0

$
1,478

Commercial paper

0

319

0

319

0

319

Certificates of deposit

0

1,358

0

1,358

0

1,358

U.S. government and agency securities

109,228

2,616

0

111,844

0

111,844

Foreign government bonds

0

5,187

0

5,187

0

5,187

Mortgage- and asset-backed securities

0

3,934

0

3,934

0

3,934

Corporate notes and bonds

0

4,829

1

4,830

0

4,830

Municipal securities

0

327

0

327

0

327

Common and preferred stock

2,414

1,994

18

4,426

0

4,426

Derivatives

1

508

0

509

(227
)

282

Total

$
  113,121

$
  21,072

$
19

$
  134,212

$
  (227
)

$
  133,985

Liabilities

Derivatives and other

$
0

$
345

$
39

$
384

$
(228
)

$
156

~~(a)~~

These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

~~The~~practical expedient which are not categorized in the fair value hierarchy. As of both September 30, 2023 and June 30, 2023, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in ~~our Level 3 financial instruments that are measured at fair value on a recurring basis~~price or impairments were ~~immaterial during the periods presented.~~$4.2 billion.

2413

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 Unrealized Losses


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


September 30, 2023

U.S. government and agency securities	$	526	$	(23	)	$	51,241	$	(4,124	)	$	51,767	$	(4,147	)
Foreign government bonds		72		(4	)		411		(20	)		483		(24	)
Mortgage- and asset-backed securities		309		(12	)		417		(40	)		726		(52	)
Corporate notes and bonds		2,044		(49	)		7,568		(563	)		9,612		(612	)
Municipal securities		67		(1	)		235		(36	)		302		(37	)


Total	$	3,018	$	(89	)	$	59,872	$	(4,783	)	$	62,890	$	(4,872	)


	Less than 12 Months					12 Months or Greater								Total Unrealized Losses


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


June 30, 2023

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


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

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

Debt Investment Maturities

The following table ~~reconciles~~outlines maturities of our debt investments as of September 30, 2023:


(In millions)	Adjusted Cost Basis		Estimated Fair Value


September 30, 2023

Due in one year or less	$	13,575	$	13,451
Due after one year through five years		46,882		44,003
Due after five years through 10 years		11,489		9,801
Due after 10 years		1,326		1,153


Total	$	73,272	$	68,408

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 ~~total “Net Fair Value”~~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, ~~above~~and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.

PART I

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.

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.

Equity

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

Credit

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

Credit-Risk-Related Contingent Features

Certain counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the ~~balance sheet presentation~~standard convention related to over-the-counter derivatives. As of ~~these same assets~~September 30, 2023, our long-term unsecured debt rating was AAA, and cash investments were in ~~Note 4 – Investments.~~

(In millions)

December 31,
2017

June 30,
2017

Net fair value of assets measured at fair value on a recurring basis

$
141,388

$
133,985

Cash

3,877

3,624

Common and preferred stock measured at fair value on a nonrecurring basis

1,017

1,073

Other investments measured at fair value on a nonrecurring basis

564

523

Less derivative net assets classified as other current and long-term assets

(106
)

(202
)
Other

1

1

Recorded basis of investment components

$
146,741

$
139,004

~~Financial Assets and Liabilities Measured at Fair Value on~~excess of $1.0 billion. As a ~~Nonrecurring Basis~~

~~During the three and six months ended December 31, 2017 and 2016, we did not record any material other-than-temporary impairments on financial assets~~result, no collateral was required to be posted.

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


(In millions)	September 30, 2023		June 30, 2023


Designated as Hedging Instruments

Foreign exchange contracts purchased	$	1,492	$	1,492
Interest rate contracts purchased		1,084		1,078

Not Designated as Hedging Instruments

Foreign exchange contracts purchased		6,957		7,874
Foreign exchange contracts sold		17,026		25,159
Equity contracts purchased		3,548		3,867
Equity contracts sold		2,154		2,154
Other contracts purchased		1,698		1,224
Other contracts sold		678		581

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


	September 30, 2023						June 30, 2023

Designated as Hedging Instruments

Foreign exchange contracts	$	21		$	(75	)	$	34		$	(67	)
Interest rate contracts		9			0			16			0

Not Designated as Hedging Instruments

Foreign exchange contracts		503			(331	)		249			(332	)
Equity contracts		95			(342	)		165			(400	)
Other contracts		8			(24	)		5			(6	)


Gross amounts of derivatives		636			(772	)		469			(805	)
Gross amounts of derivatives offset in the balance sheet		(294	)		296			(202	)		206
Cash collateral received		0			(103	)		0			(125	)


Net amounts of derivatives	$	342		$	(579	)	$	267		$	(724	)


Reported as

Short-term investments	$	6		$	0		$	6		$	0
Other current assets		327			0			245			0
Other long-term assets		9			0			16			0
Other current liabilities		0			(259	)		0			(341	)
Other long-term liabilities		0			(320	)		0			(383	)


Total	$	342		$	(579	)	$	267		$	(724	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $627 million and $772 million, respectively, as of September 30, 2023, and $442 million and $804 million, respectively, as of June 30, 2023.

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


(In millions)	Level 1			Level 2		Level 3		Total


September 30, 2023

Derivative assets	$	2	$	629		$	5	$	636
Derivative liabilities		0		(772	)		0		(772	)

June 30, 2023

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

PART I

Item 1

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


(In millions)


Three Months Ended September 30,		2023			2022

Designated as Fair Value Hedging Instruments

Interest rate contracts
Derivatives	$	(16	)	$	(43	)
Hedged items		3			43

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Amount reclassified from accumulated other comprehensive loss		(46	)		(59	)

Not Designated as Hedging Instruments

Foreign exchange contracts		206			240
Equity contracts		113			12
Other contracts		(33	)		(10	)

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


(In millions)


Three Months Ended September 30,	2023			2022

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Included in effectiveness assessment	$	(15	)	$	(40	)

NOTE 7 6 — INVENTORIES

The components of inventories were as follows:


(In millions)


	September 30, 2023		June 30, 2023

Raw materials	$	520	$	709
Work in process		15		23
Finished goods		2,465		1,768


Total	$	3,000	$	2,500

(In millions)

December 31,
2017

June 30,
2017

Raw materials

$
491

$
797

Work in process

91

145

Finished goods

1,421

1,239

Total

$
2,003

$
2,181

On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation, the world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.

Changes in the carrying amount of goodwill were as follows:


(In millions)	June 30, 2017		Acquisitions		Other		December 31, 2017		June 30, 2023		Acquisitions		Other			September 30, 2023


Productivity and Business Processes	$	23,739	$	0	$	31	$	23,770	$	24,775	$	0	$	(16	)	$	24,759
Intelligent Cloud		5,555		68		6		5,629		30,469		0		(49	)		30,420
More Personal Computing		5,828		57		71		5,956		12,642		0		(31	)		12,611


Total	$	35,122	$	125	$	108	$	35,355	$	67,886	$	0	$	(96	)	$	67,790

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

NOTE 10 8 — INTANGIBLE ASSETS

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

(In millions)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

December 31,
2017

June 30,
2017

Technology-based ^(a)

$
7,126

$
(4,334
)

$
2,792

$
7,765

$
(4,318
)

$
3,447

Customer-related

4,022

(937
)

3,085

4,045

(692
)

3,353

Marketing-related

4,027

(958
)

3,069

4,016

(829
)

3,187

Contract-based

666

(578
)

88

841

(722
)

119

Total

$
  15,841

$
  (6,807
)

$
9,034

$
  16,667

$
  (6,561
)

$
  10,106

~~(a)~~

Technology-based intangible assets included $32 million and $59 million of net carrying amount of software to be sold, leased, or otherwise marketed as of December 31, 2017 and June 30, 2017, respectively.


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


	September 30, 2023							June 30, 2023

Technology-based	$	11,409	$	(7,904	)	$	3,505	$	11,245	$	(7,589	)	$	3,656
Customer-related		7,281		(4,284	)		2,997		7,281		(4,047	)		3,234
Marketing-related		4,935		(2,555	)		2,380		4,935		(2,473	)		2,462
Contract-based		30		(17	)		13		29		(15	)		14


Total	$	23,655	$	(14,760	)	$	8,895	$	23,490	$	(14,124	)	$	9,366

Intangible assets amortization expense was ~~$562~~$636 million and ~~$1.1 billion for the three and six months ended December 31, 2017, respectively, and $315 million and $529~~$633 million for the three ~~and six~~ months ended ~~December 31, 2016,~~September 30, 2023 and 2022, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of ~~December 31, 2017:~~September 30, 2023:

(In millions)

Year Ending June 30,

2018 (excluding the six months ended December 31, 2017)

$
1,105

2019

1,700

2020

1,194

2021

1,005

2022

931

Thereafter

3,099

Total

$
9,034


(In millions)


Year Ending June 30,

2024 (excluding the three months ended September 30, 2023)	$	1,748
2025		1,905
2026		1,407
2027		952
2028		675
Thereafter		2,208


Total	$	8,895

2618

PART I

Item 1

NOTE 9 — DEBT

~~NOTE 11~~ — ~~DEBT~~

Short-term Debt

As of ~~December 31, 2017,~~September 30, 2023, we had ~~$12.5~~$25.8 billion of commercial paper issued and outstanding, with a weighted average interest rate of ~~1.31%~~5.4% and maturities ranging from 227 days to ~~196 days. As of June 30, 2017, we had $9.1 billion of commercial paper issued and outstanding, with a weighted average interest rate of 1.01% and maturities ranging from 25 days to 264~~190 days. The estimated fair value of this commercial paper approximates its carrying value.

~~In October 2017,~~ As of June 30, 2023, we entered into two new $5.0 billion credit facilities that expire on October 30, 2018 and October 31, 2022, respectively, which replaced our previous credit facilities. These credit facilities serve as a back-up for ourhad no commercial paper ~~program.~~ issued or outstanding.

Long-term Debt

The components of long-term debt were as follows:


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


2009 issuance of $3.8 billion				2039				5.20%			5.24%	$	520		$	520
2010 issuance of $4.8 billion				2040				4.50%			4.57%		486			486
2011 issuance of $2.3 billion				2041				5.30%			5.36%		718			718
2012 issuance of $2.3 billion				2042				3.50%			3.57%		454			454
2013 issuance of $5.2 billion		2023	–	2043		3.63%	–	4.88%	3.73%	–	4.92%		1,814			1,814
2013 issuance of €4.1 billion		2028	–	2033		2.63%	–	3.13%	2.69%	–	3.22%		2,435			2,509
2015 issuance of $23.8 billion		2025	–	2055		2.70%	–	4.75%	2.77%	–	4.78%		9,805			9,805
2016 issuance of $19.8 billion		2026	–	2056		2.40%	–	3.95%	2.46%	–	4.03%		7,930			9,430
2017 issuance of $17.0 billion		2024	–	2057		2.88%	–	4.50%	3.04%	–	4.53%		8,945			8,945
2020 issuance of $10.0 billion		2050	–	2060		2.53%	–	2.68%	2.53%	–	2.68%		10,000			10,000
2021 issuance of $8.2 billion		2052	–	2062		2.92%	–	3.04%	2.92%	–	3.04%		8,185			8,185


Total face value													51,292			52,866
Unamortized discount and issuance costs													(431	)		(438	)
Hedge fair value adjustments (a)													(109	)		(106	)
Premium on debt exchange													(5,058	)		(5,085	)


Total debt													45,694			47,237
Current portion of long-term debt													(3,748	)		(5,247	)


Long-term debt												$	41,946		$	41,990

(a)

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

As of ~~December 31, 2017, we were in compliance with~~September 30, 2023 and June 30, 2023, the only financial covenant in both credit agreements, which requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreements. No amounts were drawn against these credit facilities during any of the periods presented.

~~Long-term Debt~~

~~As of December 31, 2017, the total carrying value and~~ estimated fair value of long-term debt, including the current portion, was $41.8 billion and $46.2 billion, respectively. The estimated fair values are based on Level 2 inputs.

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

The following table outlines maturities of our long-term debt, including the current portion, ~~were $76.8 billion and $81.7 billion, respectively. As~~as of ~~June~~September 30, 2017, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $77.1 billion and $80.3 billion, respectively. These estimated fair values are based on Level 2 inputs.2023:


(In millions)


Year Ending June 30,

2024 (excluding the three months ended September 30, 2023)	$	3,750
2025		2,250
2026		3,000
2027		8,000
2028		0
Thereafter		34,292


Total	$	51,292

2719

PART I

Item 1

~~The components of our long-term debt, including the current portion, and the associated interest rates were as follows:~~

(In millions, except interest rates)

Face Value
December 31,
2017

Face Value
June 30,
2017

Stated
Interest
Rate

Effective
Interest
Rate

Notes

November 15, 2017

$
0

$
600

0.875%

1.084%

May 1, 2018

450

450

1.000%

1.106%

November 3, 2018

1,750

1,750

1.300%

1.396%

December 6, 2018

1,250

1,250

1.625%

1.824%

June 1, 2019

1,000

1,000

4.200%

4.379%

August 8, 2019

2,500

2,500

1.100%

1.203%

November 1, 2019

18

18

0.500%

0.500%

February 6, 2020

1,500

1,500

1.850%

1.952%

February 12, 2020

1,500

1,500

1.850%

1.935%

October 1, 2020

1,000

1,000

3.000%

3.137%

November 3, 2020

2,250

2,250

2.000%

2.093%

February 8, 2021

500

500

4.000%

4.082%

August 8, 2021

2,750

2,750

1.550%

1.642%

December 6, 2021 ^(a)

2,102

1,996

2.125%

2.233%

February 6, 2022

1,750

1,750

2.400%

2.520%

February 12, 2022

1,500

1,500

2.375%

2.466%

November 3, 2022

1,000

1,000

2.650%

2.717%

November 15, 2022

750

750

2.125%

2.239%

May 1, 2023

1,000

1,000

2.375%

2.465%

August 8, 2023

1,500

1,500

2.000%

2.101%

December 15, 2023

1,500

1,500

3.625%

3.726%

February 6, 2024

2,250

2,250

2.875%

3.041%

February 12, 2025

2,250

2,250

2.700%

2.772%

November 3, 2025

3,000

3,000

3.125%

3.176%

August 8, 2026

4,000

4,000

2.400%

2.464%

February 6, 2027

4,000

4,000

3.300%

3.383%

December 6, 2028 ^(a)

2,102

1,996

3.125%

3.218%

May 2, 2033 ^(a)

660

627

2.625%

2.690%

February 12, 2035

1,500

1,500

3.500%
��

3.604%

November 3, 2035

1,000

1,000

4.200%

4.260%

August 8, 2036

2,250

2,250

3.450%

3.510%

February 6, 2037

2,500

2,500

4.100%

4.152%

June 1, 2039

750

750

5.200%

5.240%

October 1, 2040

1,000

1,000

4.500%

4.567%

February 8, 2041

1,000

1,000

5.300%

5.361%

November 15, 2042

900

900

3.500%

3.571%

May 1, 2043

500

500

3.750%

3.829%

December 15, 2043

500

500

4.875%

4.918%

February 12, 2045

1,750

1,750

3.750%

3.800%

November 3, 2045

3,000

3,000

4.450%

4.492%

August 8, 2046

4,500

4,500

3.700%

3.743%

February 6, 2047

3,000

3,000

4.250%

4.287%

February 12, 2055

2,250

2,250

4.000%

4.063%

November 3, 2055

1,000

1,000

4.750%

4.782%

August 8, 2056

2,250

2,250

3.950%

4.033%

February 6, 2057

2,000

2,000

4.500%

4.528%

Total

$
77,482

$
77,837

~~(a)~~

~~Euro-denominated debt securities.~~

~~PART I~~

~~Item 1~~

The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. As of December 31, 2017 and June 30, 2017, the aggregate debt issuance costs and unamortized discount associated with our long-term debt, including the current portion, were $688 million and $715 million, respectively.

NOTE 12 10 — INCOME TAXES

Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term on our consolidated balance sheets.

Effective Tax Rate

Our effective tax rate was ~~169%~~18% and ~~22%~~19% for the three months ended ~~December 31, 2017~~September 30, 2023 and ~~2016, respectively, and 98% and 20% for the six months ended December 31, 2017 and 2016,~~2022, respectively. The ~~increase~~decrease in our effective tax rate for the current quarter ~~and year-to-date~~ compared to the prior year was primarily due to tax benefits from tax law changes in the ~~net charge related~~first quarter of fiscal year 2024, including the impact from the issuance of Notice 2023-55 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department, which delayed the effective date of final foreign tax credit regulations to ~~the TCJA.~~fiscal year 2024 for Microsoft.

Our effective tax rate was ~~higher~~lower than the U.S. federal statutory rate for the three months ended September 30, 2023, primarily due to ~~the net charge related to the TCJA.~~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.

~~Recent~~Uncertain Tax ~~Legislation~~Positions

~~On December 22, 2017, the TCJA was enacted into law, which significantly changes existing U.S.~~As of September 30, 2023 and June 30, 2023, unrecognized tax ~~law~~benefits and includes numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. The TCJA requires us to incur a one-time transition tax on deferred foreign income not previously subject to U.S.other income tax ~~at a rate of 15.5% for foreign cash~~liabilities were $19.8 billion and ~~certain other net current assets,~~$18.7 billion, respectively, and 8% on the remaining income. The TCJA also reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For fiscal year 2018, our blended U.S. federal statutory tax rate is 28%. This is the result of using the tax rate of 35% for the first and second quarter of fiscal year 2018 and the reduced tax rate of 21% for the third and fourth quarter of fiscal year 2018. The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The GILTI and BEAT provisions of the TCJA will be effective for us beginning July 1, 2018.

~~The TCJA is effective~~are included in the second quarter of fiscal year 2018. As of December 31, 2017, we have not completed our accounting for the tax effects of the TCJA. During the quarter, we recorded a provisional net charge based on reasonable estimates for those tax effects. The provisional net charge is subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision forlong-term income taxes ~~and effective tax rate~~ in the period in which the adjustments are made. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date. The impacts of our estimates are described further below.

During the second quarter of fiscal year 2018, we recorded an estimated net charge of $13.8 billion related to the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.8 billion, offset in part by the impact of changes in the tax rate of $4.0 billion, primarily on deferred tax assets and liabilities.

~~We recorded an estimated $17.8 billion charge related to the transition tax, which was included in provision for income taxes on our consolidated income statements and income taxes on~~ our consolidated balance sheets. We have not yet completed our accounting for the transition tax as our analysis of deferred foreign income is not complete. To calculate the transition tax, we estimated our deferred foreign income for fiscal year 2017 and the first and second quarter of fiscal year 2018 because these tax returns are not complete or due. The fiscal year 2017 and fiscal year 2018 taxable income will be known once the respective tax returns are complete and filed. In addition,

~~PART I~~

~~Item 1~~

~~U.S. and foreign audit settlements may significantly impact the estimated transition tax. The impact of the U.S. and foreign audits on the transition tax will be known as the audits are concluded.~~

In addition, we recorded an estimated $4.0 billion benefit from the impact of changes in the tax rate, primarily on deferred tax assets and liabilities, which was included in provision for income taxes on our consolidated income statements and deferred income taxes on our consolidated balance sheets. We remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. We have not yet completed our accounting for the measurement of deferred taxes. To calculate the remeasurement of deferred taxes, we estimated when the existing deferred taxes will be settled or realized. The remeasurement of deferred taxes included in our financial statements will be subject to further revisions if our current estimates are different from our actual future operating results.

The TCJA subjects a U.S. corporation to tax on its GILTI. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA and the application of GAAP. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. We elected the deferred method and recorded an estimated $454 million benefit related to GILTI, which is included in the net charge related to the TCJA.

~~Uncertain Tax Positions~~

While we settled a portion of the IRS audit for tax years 2004 to 2006 during the third quarter of fiscal year 2011, and a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year 2016, we remain under audit ~~for those years. In the second quarter of fiscal year 2018, we settled a portion of the IRS audit for tax years 2010 to 2013. We continue to be subject to examination~~ by the IRS for tax years ~~2010~~2014 to ~~2016. In February 2012,~~2017. With respect to the ~~IRS withdrew its 2011 Revenue Agents Report~~audit for tax years 2004 to ~~2006~~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 ~~reopened the audit phase of the examination.~~interest. As of ~~December 31, 2017, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not resolved favorably. We~~September 30, 2023, we believe our allowances for income tax contingencies are adequate. We ~~have not received a~~disagree with the proposed ~~assessment for~~adjustments and will vigorously contest the ~~unresolved issues~~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 ~~2017,~~2023, some of which are currently under audit by local tax authorities. The ~~resolutions~~resolution of each of these audits ~~are~~is not expected to be material to our consolidated financial statements.

Tax contingencies and other income tax liabilities were $13.8 billion and $13.5 billion as of December 31, 2017 and June 30, 2017, respectively, and are included in long-term income taxes on our consolidated balance sheets. This increase relates primarily to current period intercompany transfer pricing.

NOTE 13 — ~~RESTRUCTURING CHARGES~~

In June 2017, management approved a sales and marketing restructuring plan. In fiscal year 2017, we recorded employee severance expenses of $306 million primarily related to this sales and marketing restructuring plan. We do not expect to incur additional charges for this restructuring plan in subsequent years. The actions associated with this restructuring plan are expected to be completed by the end of fiscal year 2018.

~~Changes in the restructuring liability were as follows:~~

(In millions)

Severance

Other
^(a)

Total

Balance, as of June 30, 2017

$
373

$
59

$
432

Restructuring charges

0

0

0

Cash paid

(292
)

(15
)

(307
)
Other

0

(7
)

(7
)

Balance, as of December 31, 2017

$
81

$
37

$
118

~~(a)~~

~~Primarily reflects activities associated with the consolidation of our phone facilities, manufacturing operations, and contract termination costs.~~

~~PART I~~

~~Item 1~~

~~NOTE 14~~11 — UNEARNED REVENUE

Unearned revenue by segment was as follows:


(In millions)


	September 30, 2023		June 30, 2023

Productivity and Business Processes	$	25,316	$	27,572
Intelligent Cloud		19,471		21,563
More Personal Computing		4,401		4,678


Total	$	49,188	$	53,813

(In millions)

December 31,
2017

June 30,
2017

Productivity and Business Processes

$
11,290

$
12,692

Intelligent Cloud

9,759

11,152

More Personal Computing

2,760

2,812

Total

$
23,809

$
26,656

~~The opening balance of unearned revenue was $22.2 billion as of July 1, 2016.~~

Changes in unearned revenue were as follows:


(In millions)


Six Months Ended December 31, 2017
Three Months Ended September 30, 2023				Three Months Ended September 30, 2023

Balance, beginning of period	$	26,656			$	53,813
Deferral of revenue		23,096				27,646
Recognition of unearned revenue		(25,943	)			(32,271	)


Balance, end of period	$	23,809			$	49,188

PART I

Item 1

Revenue allocated to remaining performance obligations, ~~represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”),~~ which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future ~~periods. Contracted not recognized revenue~~periods, was ~~$61~~$216 billion as of ~~December 31, 2017,~~September 30, 2023, of which we$212 billion is related to the commercial portion of revenue. We expect to recognize approximately ~~60%~~45% of ~~the~~this revenue over the next 12 months and the remainder thereafter.

NOTE 12 — LEASES

~~NOTE 15~~ — ~~LEASES~~

We have operating and finance leases for datacenters, corporate offices, research and development facilities, ~~retail stores,~~Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 2018 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:


(In millions)


Three Months Ended September 30,		2023		2022

Operating lease cost	$	775	$	662


Finance lease cost:
Amortization of right-of-use assets	$	380	$	189
Interest on lease liabilities		149		113


Total finance lease cost	$	529	$	302

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Operating lease cost

$
399

$
434

$
787

$
694

Finance lease cost:

Amortization of right-of-use assets

$
57

$
23

$
105

$
38

Interest on lease liabilities

44

15

74

27

Total finance lease cost

$
101

$
38

$
179

$
65

~~PART I~~

~~Item 1~~

Supplemental cash flow information related to leases was as follows:


(In millions)


Three Months Ended September 30,		2023		2022

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	795	$	654
Operating cash flows from finance leases		149		113
Financing cash flows from finance leases		285		256

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		1,804		1,189
Finance leases		1,704		611

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$
375

$
314

$
744

$
581

Operating cash flows from finance leases

45

15

75

27

Financing cash flows from finance leases

31

9

56

15

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

308

119

699

174

Finance leases

650

498

1,378

765

(In millions, except lease term and discount rate)

December 31,
2017

June 30,
2017

Operating Leases

Operating lease right-of-use assets

$
6,749

$
6,555

Other current liabilities

$
1,343

$
1,423

Operating lease liabilities

5,640

5,372

Total operating lease liabilities

$
6,983

$
6,795

Finance Leases

Property and equipment, gross

$
4,062

$
2,658

Accumulated depreciation

(266
)

(161
)

Property and equipment, net

$
3,796

$
2,497

Other current liabilities

$
156

$
113

Other long-term liabilities

3,746

2,425

Total finance lease liabilities

$
3,902

$
2,538

Weighted Average Remaining Lease Term

Operating leases

7 years

7 years

Finance leases

14 years

13 years

Weighted Average Discount Rate

Operating leases

2.5%

2.5%

Finance leases

5.0%

4.7%

~~Maturities~~The following table outlines maturities of our lease liabilities ~~were~~ as ~~follows:~~of September 30, 2023:

As of ~~December 31, 2017,~~September 30, 2023, we ~~have~~had additional operating and finance leases, primarily for datacenters, that ~~have~~had not yet commenced of ~~$237 million~~$7.5 billion and ~~$1.6~~$75.1 billion, respectively. These operating and finance leases will commence between fiscal year ~~2018~~2024 and fiscal year ~~2019~~2030 with lease terms of 1 year to 2018 years.

NOTE 1613 — CONTINGENCIES

~~Patent and Intellectual Property Claims~~

~~IPCom Patent Litigation~~

IPCom GmbH & Co. (“IPCom”) is a German company that holds a large portfolio of mobile technology-related patents spanning about 170 patent families and addressing a broad range of cellular technologies. IPCom has asserted 19 of these patents in litigation against Nokia Corporation (“Nokia”) and many of the leading cellular phone companies and operators. In November 2014, Microsoft and IPCom entered into a standstill agreement staying all of the pending litigation against Microsoft to permit the parties to pursue settlement discussions, which continue.

~~Other Patent and Intellectual Property Claims~~

~~In addition to the IPCom cases, there were 34 other patent infringement cases pending against Microsoft as of December 31, 2017.~~

~~Antitrust, Unfair Competition, and Overcharge Class Actions~~

Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.

The trial of the British Columbia action commenced in May 2016. The plaintiffs filed their case in chief in August 2016, setting out claims made, authorities, and evidence in support of their claims. A six-month oral hearing is expected to begin in summer 2018, consisting of cross examination on witness affidavits. The Ontario and Quebec cases are inactive.

~~Other Antitrust Litigation and Claims~~

~~China State Administration for Industry and Commerce Investigation~~

In 2014, Microsoft was informed that China’s State Administration for Industry and Commerce (“SAIC”) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAIC conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAIC has stated the investigation relates to compatibility, bundle sales, file verification issues related to Windows and Office software, and potentially other issues.

~~PART I~~

~~Item 1~~

~~Product-Related Litigation~~

U.S. Cell Phone Litigation

~~Nokia,~~Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 3546 lawsuits, including 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. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining 10 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, which the District of Columbia Court of Appeals heard~~ ~~en banc~~.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. ~~Plaintiffs~~The plaintiffs have filed supplemental expert evidence, portions of which ~~defendants have moved~~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.~~strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying. The plaintiffs appealed the court’s order in August of 2023.

~~Canadian Cell Phone Class Action~~Irish Data Protection Commission Matter

~~Nokia, along~~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 ~~other handset manufacturers~~a non-public preliminary draft decision alleging GDPR violations and ~~network operators,~~proposing a fine. Microsoft intends to challenge the preliminary draft decision. There is a defendant in a 2013 class action lawsuit filed in the Supreme Court of British Columbia by a purported class of Canadians who have used cellular phones for at least 1,600 hours, including a subclass of users with brain tumors, alleging adverse health effects from cellular phone use. Microsoft was served with the complaint in June 2014 and has been substitutedno set timeline for the ~~Nokia defendants. The litigation has been dormant for more than three years.~~IDPC to issue a final decision.

~~Employment-Related Litigation~~

~~Moussouris v. Microsoft~~

Current and former female Microsoft employees in certain engineering and information technology roles brought this class action in federal court in Seattle in 2015, alleging systemic gender discrimination in pay and promotions. The plaintiffs moved to certify the class in October 2017. Microsoft filed an opposition in January 2018, attaching an expert report showing no statistically significant disparity in pay and promotions between similarly situated men and women. The plaintiffs' reply is due in February 2018.

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 onin 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 ~~December 31, 2017,~~September 30, 2023, we accrued aggregate legal liabilities of ~~$370~~$597 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately ~~$1.3 billion~~$600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact onin our consolidated financial statements for the period in which the effects become reasonably estimable.

~~PART I~~

~~Item 1~~

NOTE 17 14 — STOCKHOLDERS’ EQUITY

Share Repurchases

On September ~~16, 2013,~~14, 2021, our Board of Directors approved a share repurchase program authorizing up to ~~$40.0 billion in share repurchases. This share repurchase program became effective on October 1, 2013, and was completed on December 22, 2016.~~

~~On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0~~$60.0 billion in share repurchases. This share repurchase program commenced ~~on December 22, 2016 following completion of the prior program approved on September 16, 2013,~~in November 2021, has no expiration date, and may be ~~suspended or discontinued~~terminated at any ~~time without notice.~~time. As of ~~December 31, 2017, $33.4~~September 30, 2023, $18.7 billion remained of this ~~$40.0~~$60.0 billion share repurchase program.

PART I

Item 1

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


(In millions)	Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount


Fiscal Year				2018					2017					2024					2023

First Quarter		22		$	1,600		63		$	3,550		11		$	3,560		17		$	4,600
Second Quarter		22			1,800		59			3,533


Total		44		$	3,400		122		$	7,083

~~Shares~~

All repurchases were made using cash resources. All shares repurchased ~~during fiscal year 2018~~ were under the share repurchase program approved on September ~~20, 2016. Shares repurchased during fiscal year 2017 were under the share repurchase program approved September 16, 2013.~~14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock ~~awards. All repurchases were made using cash resources.~~awards of $1.3 billion and $973 million for the first quarter of fiscal years 2024 and 2023, respectively.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date

Dividend
Per Share

Record Date

Total Amount

Payment Date

Fiscal Year 2018

(in millions)

September 19, 2017

$
0.42

November 16, 2017

$
3,238

December 14, 2017

November 29, 2017

$
0.42

February 15, 2018

$
3,236

March 8, 2018

Fiscal Year 2017

September 20, 2016

$
0.39

November 17, 2016

$
3,024

December 8, 2016

November 30, 2016

$
0.39

February 16, 2017

$
3,012

March 9, 2017

Declaration Date

Record Date

Payment Date

Dividend

Per Share

Amount

Fiscal Year 2024

(In millions)

September 19, 2023

November 16, 2023

December 14, 2023

0.75

5,573

Fiscal Year 2023

September 20, 2022

November 17, 2022

December 8, 2022

0.68

5,066

The dividend declared on ~~November 29, 2017~~September 19, 2023 was included in other current liabilities as of ~~December 31, 2017.~~September 30, 2023.

3524

PART I

Item 1

NOTE 1815 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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


(In millions)


Three Months Ended September 30,		2023			2022

Derivatives

Balance, beginning of period	$	(27	)	$	(13	)
Unrealized losses, net of tax of $(4) and $(11)		(15	)		(40	)

Reclassification adjustments for losses included in other income (expense), net		46			59
Tax benefit included in provision for income taxes		(10	)		(12	)


Amounts reclassified from accumulated other comprehensive loss		36			47


Net change related to derivatives, net of tax of $6 and $1		21			7


Balance, end of period	$	(6	)	$	(6	)


Investments

Balance, beginning of period	$	(3,582	)	$	(2,138	)
Unrealized losses, net of tax of $(75) and $(510)		(283	)		(1,925	)

Reclassification adjustments for losses included in other income (expense), net		29			35
Tax benefit included in provision for income taxes		(6	)		(7	)


Amounts reclassified from accumulated other comprehensive loss		23			28


Net change related to investments, net of tax of $(69) and $(503)		(260	)		(1,897	)


Balance, end of period	$	(3,842	)	$	(4,035	)


Translation Adjustments and Other

Balance, beginning of period	$	(2,734	)	$	(2,527	)
Translation adjustments and other, net of tax of $0 and $0		(355	)		(775	)


Balance, end of period	$	(3,089	)	$	(3,302	)


Accumulated other comprehensive loss, end of period	$	(6,937	)	$	(7,343	)

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Derivatives

Balance, beginning of period

$
28

$
315


$
134

$
352

Unrealized gains, net of tax of $1, $3, $1, and $4

11

449


15

484

Reclassification adjustments for gains included in revenue

(19
)

(172
)


(130
)


(247
)
Tax expense included in provision for income taxes

1

3

2

6

Amounts reclassified from accumulated other comprehensive income

(18
)

(169
)

(128
)


(241
)

Net change related to derivatives, net of tax of $0, $0, $(1), and $(2)

(7
)

280

(113
)

243

Balance, end of period

$
21

$
595

$
21

$
595

Investments

Balance, beginning of period

$
1,537

$
3,024

$
1,825

$
2,941

Unrealized gains (losses), net of tax of $(211), $(292), $(161), and $(110)

(390
)

(543
)

(317
)

(204
)

Reclassification adjustments for gains included in other income (expense), net

(751
)

(694
)


(1,306
)

(1,088
)
Tax expense included in provision for income taxes

263

243


457

381

Amounts reclassified from accumulated other comprehensive income

(488
)

(451
)

(849
)

(707
)

Net change related to investments, net of tax of $(474), $(535), $(618), and $(491)

(878
)

(994
)


(1,166
)


(911
)

Balance, end of period

$
659

$
2,030

$
659

$
2,030

Translation adjustments and other

Balance, beginning of period

$
(1,039
)

$
(1,381
)

$
(1,332
)

$
(1,499
)
Translation adjustments and other, net of tax of $0, $0, $(1), and $7

(40
)

(592
)

253

(474
)

Balance, end of period

$
(1,079
)

$
(1,973
)

$
(1,079
)

$
(1,973
)

Accumulated other comprehensive income (loss), end of period

$
(399
)

$
652

$
(399
)

$
652

NOTE 19 16 — 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.

~~PART I~~

~~Item 1~~

Our reportable segments are described below.

Productivity and Business Processes

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

•

Office Commercial ~~including~~(Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed ~~on-premises,~~on-premises), comprising Office, Exchange, SharePoint, ~~Skype for Business,~~Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft ~~Teams, and related Client Access Licenses (“CALs”).~~

365 Copilot.

•

Office Consumer, including ~~Office~~Microsoft 365 Consumer subscriptions, ~~and~~ Office licensed on-premises, and other Office ~~Consumer Services, including Skype, Outlook.com, and OneDrive.~~

services.

PART I

Item 1

•

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

Sales Solutions.

•

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

Power Automate; and on-premises ERP and CRM applications.

Intelligent Cloud

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

•

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

Nuance and GitHub.

•

Enterprise ~~Services,~~and partner services, including ~~Premier~~Enterprise Support Services, Industry Solutions, Nuance professional services, Microsoft Partner Network, and ~~Microsoft Consulting Services.~~

Learning Experience.

More Personal Computing

Our More Personal Computing segment consists of products and services ~~geared towards harmonizing~~that put customers at the ~~interests~~center of ~~end users, developers, and IT professionals across all devices.~~the experience with our technology. This segment primarily comprises:

•

Windows, including Windows original equipment manufacturer (“OEM”) licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of ~~Things (“IoT”); and MSN display advertising.~~

Things.

•

Devices, including ~~Microsoft~~ Surface, HoloLens, and PC ~~accessories, and other intelligent devices.~~

accessories.

•

Gaming, including Xbox hardware and Xbox ~~software~~content and services, comprising ~~Xbox Live transactions, subscriptions,~~first- and ~~advertising (“Xbox Live”), video~~third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party ~~video game royalties.~~

disc royalties, and other cloud services.

•

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

~~Search advertising.~~

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.

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


(In millions)		Three Months Ended December 31,				Six Months Ended December 31,


		2017		2016		2017		2016
Three Months Ended September 30,												2023		2022

Revenue	Revenue										Revenue

Productivity and Business Processes		$	8,953	$	7,179	$	17,191	$		13,615		$	18,592	$	16,465
Intelligent Cloud			7,795		6,758		14,717			12,855			24,259		20,325
More Personal Computing			12,170		11,889		21,548			21,284			13,666		13,332


Total		$	28,918	$	25,826	$	53,456	$		47,754		$	56,517	$	50,122


Operating Income	Operating Income										Operating Income

Productivity and Business Processes		$	3,337	$	3,053	$	6,343		$	5,958		$	9,970	$	8,323
Intelligent Cloud			2,832		2,291		4,969			4,068			11,751		8,978
More Personal Computing			2,510		2,561		5,075			4,594			5,174		4,217


Total		$	8,679	$	7,905	$	16,387		$	14,620		$	26,895	$	21,518

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three ~~and six~~ months ended ~~December 31, 2017~~September 30, 2023 or ~~2016.~~ 2022.Revenue, classified by the major geographic areas in which our customers ~~are~~were located, was as follows:

(In millions)

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

United States ^(a)

$
15,110

$
14,115

$
27,657

$
25,348

Other countries

13,808

11,711

25,799

22,406

Total

$
28,918

$
25,826

$
53,456

$
47,754

Revenue, ~~from external customers,~~ classified by significant product and service offerings, was as follows:


(In millions)	Three Months Ended December 31,				Six Months Ended December 31,


Three Months Ended September 30,									2023		2022
	2017		2016		2017		2016

Server products and cloud services									$	22,308	$	18,388
Office products and cloud services	$	7,075	$	6,439	$	13,651	$	12,421		13,140		11,577
Server products and cloud services		6,299		5,332		11,796		10,022
Windows		4,839		4,805		9,482		9,448		5,567		5,313
Gaming		3,920		3,617		5,816		5,503		3,919		3,610
Search advertising		1,820		1,605		3,459		3,034
Enterprise Services		1,435		1,371		2,806		2,726
LinkedIn										3,913		3,628
Search and news advertising										3,053		2,913
Enterprise and partner services										1,944		1,929
Dynamics										1,540		1,260
Devices		1,478		1,697		2,632		3,059		1,125		1,448
LinkedIn		1,312		228		2,460		228
Other		740		732		1,354		1,313		8		56


Total	$	28,918	$	25,826	$	53,456	$	47,754	$	56,517	$	50,122

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

Our ~~commercial cloud~~Microsoft Cloud revenue, which ~~primarily comprises~~includes Azure and other cloud services, Office 365 Commercial, the commercial ~~Azure,~~portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was ~~$5.3~~$31.8 billion and ~~$10.4~~$25.7 billion for the three ~~and six~~ months ended ~~December 31, 2017, respectively,~~September 30, 2023 and ~~$3.4 billion and $6.6 billion for the three and six months ended December 31, 2016,~~2022, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and ~~server products and cloud services~~Dynamics in the table above.

NOTE 17 — SUBSEQUENT EVENT

On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) for a cash payment of $61.8 billion, net of cash acquired. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming.

38Due to the limited amount of time since closing the transaction, the preliminary allocation of the purchase price is not yet complete. The initial purchase price allocation will be provided within our Form 10-Q for the second quarter of fiscal year 2024, and we expect most of the purchase price will be allocated to goodwill and other identifiable intangible assets. Activision Blizzard will be included in our consolidated financial statements beginning on the date of acquisition and reported as part of our More Personal Computing segment.

To the Stockholders and the Board of Directors ~~and Stockholders~~ of Microsoft Corporation

We have reviewed the accompanying consolidated balance sheet of Microsoft Corporation and subsidiaries (the ~~“Company”~~"Company") as of ~~December 31, 2017, and~~September 30, 2023, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month ~~and six-month~~ periods ended ~~December 31, 2017~~September 30, 2023 and ~~2016. These~~2022, 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 ~~statements are~~information for it to be in conformity with accounting principles generally accepted in the ~~responsibility~~United States of ~~the Company’s management.~~America.

We ~~conducted our reviews~~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.

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 ~~Public Company Accounting Oversight Board (United States),~~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.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them 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), the consolidated balance sheet of the Company as of June 30, 2017, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the year then ended prior to retrospective adjustment for the changes in the Company's method of accounting for revenue from contracts with customers and for leases, (not presented herein); and in our report dated August 2, 2017, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 1 that were applied to retrospectively adjust the June 30, 2017 consolidated balance sheet of Microsoft Corporation and subsidiaries. In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted consolidated balance sheet as of June 30, 2017.

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

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” ~~(Part II, Item 1A of this Form 10-Q)~~. 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, ~~2017,~~2023, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

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. ~~Our strategy is to build best-in-class~~We are creating the platforms and ~~productivity services for an intelligent cloud~~tools, powered by artificial intelligence (“AI”), that deliver better, faster, and ~~an intelligent edge infused with artificial intelligence.~~ more effective solutions to support small and large business competitiveness, improve educational and health outcomes, grow public-sector efficiency, and empower human ingenuity.

We ~~develop, license, and support~~generate revenue by offering a wide range of ~~software products,~~cloud-based solutions, content, and other services to people and devices that deliver new opportunities, greater convenience, and enhanced value to people’s lives. Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. They also support new startups, improve educational and health outcomes, and empower human ingenuity.

~~We generate revenue by~~businesses; licensing and supporting an array of software ~~products, by offering a wide range of cloud-based and other services to consumers and businesses, by designing, manufacturing, and selling devices that integrate with our cloud-based services, and by~~products; delivering relevant online advertising to a global ~~audience.~~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; datacenter costs in support of our cloud-based~~ services; and income taxes.

Highlights from the ~~second~~first quarter of fiscal year ~~2018~~2024 compared with the first quarter of fiscal year 2023 included:

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business. During the second quarter of fiscal year 2018, we recorded a net charge of $13.8 billion related to the TCJA. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part30

We adopted the new accounting standards for revenue recognition and leases effective July 1, 2017. These new standards had a material impact on our consolidated financial statements. Beginning in fiscal year 2018, our financial results reflect adoption of the standards with prior periods restated accordingly. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

On December 8, 2016, we completed our acquisition of LinkedIn Corporation for a total purchase price of $27.0 billion. LinkedIn has been included in our consolidated results of operations since the date of acquisition. Refer to Note 8 – Business Combinations of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

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.

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, ~~and influence~~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. ~~Microsoft competes~~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. ~~Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic.~~

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. ~~Strengthening of~~Fluctuations in the U.S. dollar relative to certain foreign currencies ~~throughout fiscal year 2017 negatively impacted~~did not have a material impact on reported revenue and ~~reduced reported~~ expenses from our international ~~operations. This trend has reversed~~operations in the first quarter of fiscal year ~~2018 and foreign currencies strengthening relative to the U.S. dollar have positively impacted our financial results.~~2024.

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

~~We expect our~~Our revenue ~~to fluctuate~~fluctuates quarterly and ~~to be~~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.

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. All differences between our internal management reporting basis and accounting principles generally accepted in the United States (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other. We have recast certain previously reported amounts to conform to the way we internally manage and monitor segment performance.

Additional information on our reportable segments is contained in Note 1916 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

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.

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.

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.

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.

Consolidated results of operations include LinkedIn results since the date of acquisition on December 8, 2016. The three and six months ended December 31, 2017 include a full period of LinkedIn results, whereas the three and six months ended December 31, 2016 only include 23 days of LinkedIn results.

Adjusted net income and adjusted diluted earnings per share exclude the net charge related to the TCJA. Refer to Non-GAAP Financial Measures below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.

Three Months Ended ~~December 31, 2017~~September 30, 2023 Compared with Three Months Ended ~~December 31, 2016~~September 30, 2022

Revenue increased ~~$3.1~~$6.4 billion or ~~12%,~~13% driven by growth in Intelligent Cloud and Productivity and Business Processes. Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial. More Personal Computing revenue increased driven by growth in Gaming and Windows, offset in part by a decline in Devices.

Cost of revenue increased $850 million or 6% driven by growth in Microsoft Cloud, offset in part by a decline in Devices.

Gross margin increased $5.5 billion or 16% driven by growth across each of our segments. Productivity and Business Processes revenue increased, driven by LinkedIn and higher revenue from Office. Intelligent Cloud revenue increased, primarily due to higher revenue from server products and cloud services. More Personal Computing revenue increased, driven by higher revenue from Gaming and Search advertising, offset in part by lower revenue from phones.

~~Gross margin increased $1.9 billion or 12%, primarily due to growth in Productivity and Business Processes, including LinkedIn, and Intelligent Cloud.~~

Operating ~~income~~expenses increased ~~$774~~$168 million or ~~10%, primarily due to higher gross margin, offset in part~~1% driven by ~~an increase in operating expenses.~~marketing, LinkedIn, ~~operating loss increased $69 million to $265 million, including $376 million of amortization of intangible assets. Key changes in expenses were:~~

Current year net loss and diluted loss per share were negatively impacted by the net charge related to TCJA, which resulted in a decrease to net income and diluted earnings per share of $13.8 billion and $1.78, respectively.

~~Six Months Ended December 31, 2017 Compared with Six Months Ended December 31, 2016~~

~~Revenue increased $5.7~~$5.4 billion or ~~12%,~~25% driven by growth across each of our segments. Productivity and Business Processes revenue increased, driven by LinkedIn and higher revenue from Office. Intelligent Cloud revenue increased, primarily due to higher revenue from server products and cloud services. More Personal Computing revenue increased, driven by higher revenue from Search advertising, Gaming, and Surface, offset by lower revenue from phones.

Gross margin increased $4.1 billion or 14%, primarily due to growth across each of our segments. Gross margin percentage increased, driven by margin percentage increase in More Personal Computing and favorable segment sales mix, offset in part by margin percentage decline in Intelligent Cloud. Gross margin percentage included an 8-point improvement in commercial cloud gross margin, primarily across Azure and Office 365.33

Operating income increased $1.8 billion or 12%, primarily due to higher gross margin, offset in part by an increase in operating expenses. LinkedIn operating loss increased $363 million to $559 million, including $748 million of amortization of intangible assets. Key changes in expenses were:

Current year net income and diluted earnings per share were negatively impacted by the net charge related to TCJA, which resulted in a decrease to net income and diluted earnings per share of $13.8 billion and $1.76, respectively.Item 2

Three Months Ended ~~December 31, 2017~~September 30, 2023 Compared with Three Months Ended ~~December 31, 2016~~September 30, 2022

~~Revenue increased $1.0 billion or 15%, primarily due to higher revenue from server products and cloud services.~~19%.

~~Operating income increased $541 million or 24%, primarily due to higher gross margin,~~SQL Server running in multi-cloud environments, offset in part by ~~higher operating expenses.~~

~~Revenue increased $281 million or 2%, primarily due to higher revenue from Gaming and Search advertising, offset in part by lower revenue from phones.~~

~~Operating income decreased $51 million or 2%, primarily due to an increase in operating expenses.~~

~~Six Months Ended December 31, 2017 Compared with Six Months Ended December 31, 2016~~

~~Revenue increased $3.6 billion or 26%, primarily due to LinkedIn and higher revenue from Office.~~

~~Operating income increased $385 million or 6%, primarily due to higher gross margin, offset in part by higher operating expenses.~~

~~Revenue increased $1.9 billion or 14%, primarily due to higher revenue from server products and cloud services.~~

~~Revenue increased $264 million or 1%, primarily due to higher revenue from Search advertising, Gaming, and Surface, offset in part by lower revenue from phones.~~

~~Operating income increased $481 million or 10%, primarily due to higher gross margin.~~

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 ~~localization costs incurred to translate software for international markets,~~ and the amortization of purchased software code and services content.

Three Months Ended ~~December 31, 2017~~September 30, 2023 Compared with Three Months Ended ~~December 31, 2016~~September 30, 2022

Research and development expenses increased ~~$442 million or 14%, primarily due to~~slightly driven by cloud engineering, LinkedIn, ~~expenses~~ and ~~investments~~Windows, offset in ~~cloud engineering. LinkedIn expenses increased $280 million to $362 million.~~part by a decline in Devices.

~~Six Months Ended December 31, 2017 Compared with Six Months Ended December 31, 2016~~

~~Research and development expenses increased $910 million or 15%, primarily due to LinkedIn expenses and investments in cloud engineering. LinkedIn expenses increased $625 million to $707 million.~~

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 ~~December 31, 2017~~September 30, 2023 Compared with Three Months Ended ~~December 31, 2016~~September 30, 2022

Sales and marketing expenses increased ~~$483~~$61 million or ~~12%, primarily due to LinkedIn expenses and~~1% driven by investments in commercial sales capacity, offset in part by a decrease in Windows marketing expenses. LinkedIn expenses increased $459 million to $649 million, including $154 million of amortization of acquired intangible assets.Gaming.

~~Six Months Ended December 31, 2017 Compared with Six Months Ended December 31, 2016~~

Sales and marketing expenses increased $1.1 billion or 15%, primarily due to LinkedIn expenses and investments in commercial sales capacity, offset in part by a decrease in Windows marketing expenses. LinkedIn expenses increased $1.0 billion to $1.2 billion, including $308 million of amortization of acquired intangible assets.

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 ~~December 31, 2017~~September 30, 2023 Compared with Three Months Ended ~~December 31, 2016~~September 30, 2022

General and administrative expenses increased ~~$230~~$76 million or ~~26%, primarily due to LinkedIn expenses and the benefit of a~~5% driven by legal ~~settlement in the prior year. LinkedIn expenses increased $101 million to $134 million.~~expenses.

~~Six Months Ended December 31, 2017 Compared with Six Months Ended December 31, 2016~~

General and administrative expenses increased $351 million or 18%, primarily due to LinkedIn expenses and the benefit of a legal settlement in the prior year. LinkedIn expenses increased $233 million to $266 million.

We use derivative instruments ~~to:~~to manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as ~~hedges~~hedging instruments are primarily recognized in other income (expense), net. Other than those derivatives entered into for investment purposes, the gains (losses) are generally economically offset by unrealized (losses) gains in the underlying available-for-sale securities and (losses) gains on certain balance sheet amounts from foreign exchange rate changes.

Three Months Ended ~~December 31, 2017~~September 30, 2023 Compared with Three Months Ended ~~December 31, 2016~~September 30, 2022

~~Dividends~~Interest and ~~interest~~dividends income increased ~~primarily~~ due to higher yields and higher portfolio ~~balances and yields on fixed-income securities.~~balances. Interest expense increased ~~primarily~~ due to ~~higher outstanding long-term debt.~~the issuance of commercial paper. Net recognized ~~gains~~losses on investments increased ~~primarily~~due to losses on equity securities in the current period as opposed to gains in the prior period. Net gains on derivatives increased due to higher gains on ~~sales of~~ equity ~~securities. Other, net reflects recognized gains from certain joint ventures in the current period and recognized losses from divestitures and certain joint ventures in the prior period.~~derivatives.

~~Six Months Ended December 31, 2017 Compared with Six Months Ended December 31, 2016~~36

Dividends and interest income increased primarily due to higher portfolio balances and yields on fixed-income securities. Interest expense increased primarily due to higher outstanding long-term debt. Net recognized gains on investments increased primarily due to higher gains on sales of equity securities. Other, net reflects recognized losses from divestitures and certain joint ventures in the prior period.Item 2

On December 22, 2017, the TCJA was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. The TCJA requires us to incur a one-time transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA also reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For fiscal year 2018, our blended U.S. federal statutory tax rate is 28%. This is the result of using the tax rate of 35% for the first and second quarter of fiscal year 2018 and the reduced tax rate of 21% for the third and fourth quarter of

fiscal year 2018. The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The GILTI and BEAT provisions of the TCJA will be effective for us beginning July 1, 2018.

The TCJA is effective in the second quarter of fiscal year 2018. As of December 31, 2017, we have not completed our accounting for the tax effects of the TCJA. During the quarter, we recorded a provisional net charge based on reasonable estimates for those tax effects. The provisional net charge is subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date.

~~While we settled a portion of~~We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to ~~2006 during~~2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the ~~third quarter of fiscal year 2011, and a portion of~~IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS ~~audit for~~is seeking an additional tax ~~years 2007 to 2009 during the first quarter~~payment of fiscal year 2016, we remain under audit for those years. In the second quarter of fiscal year 2018, we settled a portion of the IRS audit for tax years 2010 to 2013. We continue to be subject to examination by the IRS for tax years 2010 to 2016. In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006$28.9 billion plus penalties and ~~reopened the audit phase of the examination.~~interest. As of ~~December 31, 2017, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not resolved favorably. We~~September 30, 2023, we believe our allowances for income tax contingencies are adequate. We ~~have not received a~~disagree with the proposed ~~assessment for~~adjustments and will vigorously contest the ~~unresolved issues~~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 expect existing cash, cash equivalents, short-term investments, cash flows from operations, and ~~other income~~access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax liabilities were $13.8 billion and $13.5 billion as of December 31, 2017 and June 30, 2017, respectively, and are included in long-term income taxes on our consolidated balance sheets. This increase relates primarily to current period intercompany transfer pricing.

~~Adjusted net income and diluted earnings per share are non-GAAP financial measures which exclude the net charge~~ related to the ~~TCJA. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance~~Tax Cuts 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 substituteJobs Act (“TCJA”), for ~~or superior to,~~at least the ~~measures of financial performance prepared in accordance with GAAP.~~next 12 months and thereafter for the foreseeable future.

~~The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:~~

Cash, cash equivalents, and short-term investments totaled ~~$142.8~~$144.0 billion and ~~$133.0~~$111.3 billion as of ~~December 31, 2017~~September 30, 2023 and June 30, ~~2017,~~2023, respectively. Equity ~~and other~~ investments were ~~$4.0~~$11.4 billion and ~~$6.0~~$9.9 billion as of ~~December 31, 2017~~September 30, 2023 and June 30, ~~2017,~~2023, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

~~As a result of the TCJA, our cash, cash equivalents, and short-term investments held by foreign subsidiaries are no longer subject to U.S. tax on repatriation into the U.S.~~Item 2

We lend certain fixed-income and equity securities to increase investment returns. The loaned securities continue to be carried as investments on our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash collateral received is recorded as an asset with a corresponding liability. Our securities lending payable balance was $26 million as of December 31, 2017. Our average and maximum securities lending payable balances were $188 million and $600 million, respectively, for the three months ended December 31, 2017. Our average and maximum securities lending payable balances were $215 million and $600 million, respectively, for the six months ended December 31, 2017. Intra-year variances in the amount of securities loaned are mainly due to fluctuations in the demand for the securities.Valuation

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, ~~domestic~~common and ~~international equities,~~preferred stock, and ~~exchange-traded~~ mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government ~~bonds, corporate notes and~~ bonds, mortgage- and asset-backed securities, ~~U.S. government~~corporate notes and ~~agency securities, certificates of deposit,~~bonds, and ~~common and preferred stock.~~municipal securities. Level 3 investments are valued using ~~internally developed~~internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

Cash from operations increased ~~$2.5~~$7.4 billion to ~~$20.3~~$30.6 billion for the ~~six~~three months ended ~~December 31, 2017,~~September 30, 2023, mainly due to an increase in cash received from customers ~~offset in part by an increase~~and a decrease in cash paid to ~~employees, an income tax refund received in the prior year for overpayment of estimated taxes, and higher cash paid for interest on debt.~~suppliers. Cash ~~used in~~from financing ~~was $7.9~~increased $25.6 billion to $14.8 billion for the ~~six~~three months ended ~~December 31, 2017, compared to cash from financing of $17.3 billion for the six months ended December 31, 2016. The change was~~September 30, 2023, mainly due to a ~~$27.8~~$25.3 billion ~~decrease~~increase in proceeds from ~~issuances~~issuance of debt, net of ~~repayments,~~repayments. Cash from investing increased $3.6 billion to $503 million for the three months ended September 30, 2023, mainly due to an $8.2 billion increase in cash from net investment purchases, sales, and maturities, offset in part by a ~~$3.4~~$3.6 billion ~~decrease~~increase in cash used for ~~common stock repurchases. Cash used in investing decreased $26.0 billion~~additions to ~~$7.2 billion for the six months ended December 31, 2017, mainly due to a $24.6 billion decrease in cash used for acquisitions of companies, net of cash acquired,~~property and ~~purchases of intangibles and other assets, and a $3.0 billion decrease in cash used for net investment purchases, sales, and maturities.~~equipment.

We ~~issued~~issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit ~~rating and the low interest rate environment.~~rating. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. Refer to Note 119 – Debt of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Unearned revenue ~~is comprised~~comprises mainly of unearned revenue related to volume licensing programs, ~~and includes~~which may include Software Assurance (“SA”) and cloud services. Unearned revenue is generally ~~billed upfront~~invoiced annually at the beginning of each ~~annual coverage~~contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. ~~Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part~~

The following table outlines the expected future recognition of unearned revenue as of ~~December 31, 2017:~~September 30, 2023:

If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable. Refer to Note 11 – Unearned Revenue of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. As of September 30, 2023, we had a remaining transition tax liability of $7.7 billion, of which $3.7 billion is short-term and payable in the first quarter of fiscal year 2025.

For the ~~six~~three months ended ~~December 31, 2017,~~September 30, 2023 and 2022, we repurchased 4411 million shares and 17 million shares of our common stock for ~~$3.4~~$3.6 billion and $4.6 billion, respectively, through our share repurchase ~~programs.~~program. All repurchases were made using cash resources. As of September 30, 2023, $18.7 billion remained of our $60 billion share repurchase program. Refer to Note 1714 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

For the three months ended September 30, 2023 and 2022, our Board of Directors declared quarterly dividends of $0.75 per share and $0.68 per share, totaling $5.6 billion and $5.1 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 1714 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In evaluating estimated losses on these indemnifications, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact on our consolidated financial statements during the periods presented.

On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. for a cash payment of $61.8 billion, net of cash acquired.

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as ~~continue making~~ acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud ~~offerings.~~offerings and our investments in AI infrastructure. We have operating and finance leases for datacenters, corporate offices, research and development facilities, ~~retail stores,~~Microsoft Experience Centers, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

As a result of the TCJA, we are required to pay a one-time transition tax of $17.8 billion on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable beginning in fiscal year 2019 interest-free over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight.Item 2

~~We expect existing~~ cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, ~~share repurchases,~~ ~~debt maturities, material capital expenditures,~~ ~~and the transition tax related to the TCJA,~~ ~~for at least the next 12 months and thereafter for the foreseeable future.~~

~~Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.~~

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. ~~These estimates and assumptions are affected by management’s application of accounting policies.~~ Critical accounting ~~policies for us include~~estimates are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations. We have critical accounting estimates in the areas of revenue recognition, impairment of investment securities, goodwill, research and development costs, legal and other contingencies, income taxes, and inventories.

accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

Judgment is required to determine the ~~stand-alone~~standalone selling price (“SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

Our products are generally sold with a right of return, ~~and~~ we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when ~~estimating~~determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.

The new standard related to revenue recognition had a material impact on our consolidated financial statements. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

We review debt investments quarterly for ~~indicators of other-than-temporary~~credit losses and impairment. This determination requires significant judgment. In making this judgment, we employ a systematic methodology quarterly that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. 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 ~~duration and~~ extent to which the fair value is less than ~~cost,~~cost. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, ~~equity securities, our intent and ability to hold, or plans to sell,~~ the ~~investment. For fixed-income securities, we also evaluate whether~~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. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Oncerecovery, then a decline in fair value below cost is ~~determined to be other-than-temporary,~~recorded as an impairment charge ~~is recorded to~~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.

~~Goodwill~~Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a periodic basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net.

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May ~~1 for us)~~1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, ~~all~~ software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized onin our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

~~The TCJA significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part~~41

Inventories are stated at average cost, subject to the lower of cost or ~~market.~~net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include analysis of demand forecasts, product life cycle status, product development plans, current sales levels, pricing strategy, and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

ITEM 3. QUANTITATIVE AND ~~QUALITATIVE~~QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. ~~A portion of~~We use derivatives instruments to manage these risks, ~~is hedged, but~~however, they may still impact our consolidated financial statements.

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily ~~and use hedges where practicable~~ to ~~offset the risks and~~ maximize the economic effectiveness of our foreign currency ~~positions.~~positions, including hedges. Principal ~~currencies hedged~~currency exposures include the ~~euro,~~Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

~~Our~~Securities held in our fixed-income portfolio ~~is diversified across credit sectors and maturities, consisting primarily of investment-grade securities. The credit risk and~~are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio ~~is managed~~ to achieve economic returns that correlate to certain global ~~and domestic~~ fixed-income indices. ~~In addition, we use “To Be Announced” forward purchase commitments~~

Our fixed-income portfolio is diversified and consists primarily of ~~mortgage-backed assets~~investment-grade securities. We manage credit exposures relative to ~~gain exposure~~broad-based indices to ~~agency mortgage-backed securities.~~facilitate portfolio diversification.

~~Our~~Securities held in our equity investments portfolio ~~consists of global, developed, and emerging market securities that~~ are subject to ~~market~~ price risk. ~~We manage the securities relative to certain global and domestic indices and expect their economic risk and return to correlate with these indices.~~

We use a value-at-risk (“VaR”) model to estimate and quantify our market risks. VaR is the expected loss, for a given confidence level, in the fair value of our portfolio due to adverse market movements over a defined time horizon. The VaR model is not intended to represent actual losses in fair value, including determinations of other-than-temporary losses in fair value in accordance with accounting principles generally accepted in the United States of America (“GAAP”), but is used as a risk estimation and management tool. The distribution of the potential changes in total market value of all holdings is computed based on the historical volatilities and correlations among foreign exchange rates, interest rates, and equity prices, assuming normal market conditions.

The VaR is calculated as the total loss that will not be exceeded at the 97.5 percentile confidence level or, alternatively stated, the losses could exceed the VaR in 25 out of 1,000 cases. Several risk factors are not captured in the model, including liquidity risk, operational risk, and legal risk.

The following table sets forth the ~~one-day VaR for substantially all of our positions:~~potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices:

Total one-day VaR for the combined risk categories was $275 million and $207 million as of December 31, 2017 and June 30, 2017, respectively. The total VaR is 30% and 35% less as of December 31, 2017 and June 30, 2017, respectively, than the sum of the separate risk categories in the table above due to the diversification benefit of the combination of risks.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended ~~December 31, 2017~~September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standards related to revenue recognition and leases on our financial statements to facilitate their adoption on July 1, 2017. There were no significant changes to our internal control over financial reporting due to the adoption of the new standards.

Refer to Note 1613 – Contingencies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding legal proceedings in which we are involved.

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.

We face intense competition across all markets for our products and services, which may lead to lower revenue or operating margins.

Our competitors range in size from diversified global companies with significant research and development resources to small, specialized firms whose narrower product lines may let them be more effective in deploying technical, marketing, and financial resources. Barriers to entry in many of our businesses are low and many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. Our ability to remain competitive depends on our success in making innovative products, devices, and services that appeal to businesses and consumers.

An important element of our business model has been to create platform-based ecosystems on which many participants can build diverse solutions. A well-established ecosystem creates beneficial network effects among users, application developers, and the platform provider that can accelerate growth. Establishing significant scale in the marketplace is necessary to achieve and maintain attractive margins. We face significant competition from firms that provide competing ~~platforms, applications, and services.~~platforms.

The competitive pressures described above may cause decreased sales volumes, price reductions, and/or increased operating costs, such as for research and development, marketing, and sales incentives. This may lead to lower revenue, gross margins, and operating income.

Our increasing focus on cloud-based services presents execution and competitive risks. A growing part of our business involves cloud-based services available across the spectrum of computing devices. Our strategic vision is to compete and grow by building best-in-class platforms and productivity services ~~for an intelligent cloud~~that utilize ubiquitous computing and ~~an intelligent edge infused with artificial intelligence.~~ambient intelligence to drive insights and productivity gains. At the same time, our competitors are rapidly developing and deploying cloud-based services for consumers and business customers. Pricing and delivery models are evolving. Devices and form factors influence how users access services in the cloud and sometimes the user’s choice of which ~~suite of~~ cloud-based services to use. Certain industries and customers have specific requirements for cloud services and may present enhanced risks. We are devoting significant resources to develop and deploy our cloud-based strategies. The Windows ecosystem must continue to evolve with this changing environment. We ~~are undertaking~~embrace cultural and organizational changes to drive accountability and eliminate obstacles to innovation. ~~The Company’s investment in gaining insights from data is becoming central~~Our intelligent cloud and intelligent edge offerings are connected to the ~~value~~growth of the ~~services we deliver~~Internet of Things (“IoT”), a network of distributed and interconnected devices employing sensors, data, and computing capabilities, including AI. Our success in driving ubiquitous computing and ambient intelligence will depend on the level of adoption of our offerings such as Azure, Azure AI, and Azure IoT Edge. We may not establish market share sufficient to ~~customers,~~achieve scale necessary to meet our ~~operational efficiency and key opportunities in monetization, customer perceptions of quality, and operational efficiency.Our ability to use data in this way may be constrained by regulatory developments that impede realizing the expected return from this investment.~~business objectives.

Besides software development costs, we are incurring costs to build and maintain infrastructure to support cloud computing services. These costs will reduce the operating margins we have previously achieved. Whether we succeed in cloud-based services depends on our execution in several areas, including:

It is uncertain whether our strategies will attract the users or generate the revenue required to succeed. If we are not effective in executing organizational and technical changes to increase efficiency and accelerate innovation, or if we fail to generate sufficient usage of our new products and services, we may not grow revenue in line with the infrastructure and development investments described above. This may negatively impact gross margins and operating income.

~~PART II~~Some users may engage in fraudulent or abusive activities through our cloud-based services. These include unauthorized use of accounts through stolen credentials, use of stolen credit cards or other payment vehicles, failure to pay for services accessed, or other activities that violate our terms of service such as cryptocurrency mining or launching cyberattacks. If our efforts to detect such violations or our actions to control these types of fraud and abuse are not effective, we may experience adverse impacts to our revenue or incur reputational damage.

We make significant investments in ~~new~~ products and services that may not achieve expected returns. We will continue to make significant investments in research, development, and marketing for existing products, services, and technologies, including the Windows operating system, Microsoft ~~Office,~~365, Bing, SQL Server, Windows Server, ~~the Windows Store, Microsoft~~ Azure, Office 365, Xbox, LinkedIn, and other ~~cloud-based offerings, Xbox Live,~~products and ~~LinkedIn.~~services. In addition, we are focused on developing new AI platform services and incorporating AI into existing products and services. We also invest in the development and acquisition of a variety of hardware for productivity, communication, and entertainment, including PCs, tablets, gaming devices, and HoloLens. Investments in new technology are speculative. Commercial success depends on many factors, including innovativeness, developer support, and effective distribution and marketing. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of new software and hardware products or upgrades, unfavorably affecting revenue. We may not achieve significant revenue from new product, service, and distribution channel investments for several years, if at all. New products and services may not be profitable, and even if they are profitable, operating margins for some new products and businesses will not be as high as the margins we have experienced historically.

We ~~did extensive preparation~~may not get engagement in certain features, like Microsoft Edge, Bing, and ~~ongoing compatibility testing for applications~~Bing Chat, that drive post-sale monetization opportunities. Our data handling practices across our products and ~~devices~~services will continue to ~~help ensure a positive experience for our users installing Windows 10. However, negative upgrade experiences could adversely affect the reception~~be under scrutiny. Perceptions of ~~Windows 10 in the marketplace and could lead to litigation~~mismanagement, driven by regulatory activity or regulatory actions by customers and government agencies. In addition, we anticipate that Windows 10 will enable new post-license monetization opportunities beyond initial license revenues. Our inability to realize these opportunities to the extent we expect could have an adverse impact on our revenues. Finally, our practices for data collection, use, and management in Windows 10 are subject to regulatory review, and may result in decisions directing us to change these practices and imposing fines. If so, we could face negative public reaction ~~degraded user~~to our practices or product experiences, could negatively impact product and ~~reduced flexibility in~~feature adoption, product ~~design.~~design, and product quality.

Developing new technologies is complex. It can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue.

Acquisitions, joint ventures, and strategic alliances may have an adverse effect on our business. We expect to continue making acquisitions and entering into joint ventures and strategic alliances as part of our long-term business strategy. ~~In December 2016,~~For example, in March 2022 we completed our acquisition of ~~LinkedIn for $27.0 billion. The LinkedIn~~Nuance Communications, Inc., and in October 2023 we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”). In January 2023 we announced the third phase of our OpenAI strategic partnership. Acquisitions and other transactions and arrangements involve significant challenges and risks, including that they do not advance our business strategy, that we get an unsatisfactory return on our investment, that they raise new compliance-related obligations and challenges, that we have difficulty integrating and retaining new employees, business systems, and technology, or that they distract management from our other ~~businesses.~~businesses, or that announced transactions may not be completed. If an arrangement fails to adequately anticipate changing circumstances and interests of a party, it may result in early termination or renegotiation of the arrangement. The success of these transactions and arrangements will depend in part on our ability to leverage them to enhance our existing products and services or develop compelling new ~~ones.~~ones, as well as acquired companies’ ability to meet our policies and processes in areas such as data governance, privacy, and cybersecurity. It may take longer than expected to realize the full benefits from these transactions and arrangements such as increased revenue or enhanced efficiencies, ~~or increased market share,~~ or the benefits may ultimately be smaller than we expected. In addition, an acquisition may be subject to challenge even after it has been completed. For example, the Federal Trade Commission continues to challenge our Activision Blizzard acquisition and could, if successful, alter or unwind the transaction. These events could adversely affect our ~~operating results or~~consolidated financial ~~condition.~~statements.

If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings. We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at least annually. Factors that may be a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in industry segments in which we participate. We have in the past recorded, and may in the future be required to record, a significant charge onin our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations.

Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position.

Threats to IT security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities or intentionally designed processes in hardware, software, or other infrastructure in order to attack our products and services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Nation-state and state-sponsored actors can deploy significant resources to plan and carry out attacks. Nation-state attacks against us, our customers, or our partners may intensify during periods of intense diplomatic or armed conflict, such as the ongoing conflict in Ukraine. Inadequate account security or organizational security practices may also result in unauthorized access to confidential data. For example, system administrators may fail to timely remove employee account access when no longer appropriate. Employees or third parties may intentionally compromise our or our users’ security or systems or reveal confidential information. Malicious actors may employ the IT supply chain to introduce malware through software updates or compromised supplier accounts or hardware.

Cyberthreats are constantly evolving and becoming increasingly sophisticated and complex, increasing the difficulty of detecting and successfully defending against them. We may have no current capability to detect certain vulnerabilities or new attack methods, which may allow them to persist in the ~~fourth quarter~~environment over long periods of ~~fiscal year 2015, we recorded a $5.1 billion charge for~~time. Cyberthreats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers. Breaches of our facilities, network, or data security could disrupt the ~~impairment~~security of ~~goodwill~~our systems and a $2.2 billion charge for the impairment of intangible assets, and in the fourth quarter of fiscal year 2016 we recorded a $480 million charge for the impairment of intangible assets. The impairment charges for both periods relatedbusiness applications, impair our ability to provide services to our ~~phone business. Our acquisition~~customers and protect the privacy of ~~LinkedIn resulted~~their data, result in ~~a significant increase~~product development delays, compromise confidential or technical business information harming our reputation or competitive position, result in ~~our goodwill and intangible asset balances.~~

~~We may not earn the revenues we expect from~~theft or misuse of our intellectual property ~~rights.~~or other assets, subject us to ransomware attacks, require us to allocate more resources to improve technologies or remediate the impacts of attacks, or otherwise adversely affect our business. We are also subject to supply chain cyberattacks where malware can be introduced to a software provider’s customers, including us, through software updates.

In addition, our internal IT environment continues to evolve. Often, we are early adopters of new devices and technologies. We embrace new ways of sharing data and communicating internally and with partners and customers using methods such as social networking and other consumer-oriented technologies. Increasing use of generative AI models in our internal systems may create new attack methods for adversaries. Our business policies and internal security controls may not keep pace with these changes as new threats emerge, or emerging cybersecurity regulations in jurisdictions worldwide.

The security of our products and services is important in our customers’ decisions to purchase or use our products or services across cloud and on-premises environments. Security threats are a significant challenge to companies like us whose business is providing technology products and services to others. Threats to our own IT infrastructure can also affect our customers. Customers using our cloud-based services rely on the security of our infrastructure, including hardware and other elements provided by third parties, to ensure the reliability of our services and the protection of their data. Adversaries tend to focus their efforts on the most popular operating systems, programs, and services, including many of ours, and we expect that to continue. In addition, adversaries can attack our customers’ on-premises or cloud environments, sometimes exploiting previously unknown (“zero day”) vulnerabilities, such as occurred in early calendar year 2021 with several of our Exchange Server on-premises products. Vulnerabilities in these or any product can persist even after we have issued security patches if customers have not installed the most recent updates, or if the attackers exploited the vulnerabilities before patching to install additional malware to further compromise customers’ systems. Adversaries will continue to attack customers using our cloud services as customers embrace digital transformation. Adversaries that acquire user account information can use that information to compromise our users’ accounts, including where accounts share the same attributes such as passwords. Inadequate account security practices may also result in unauthorized access, and user activity may result in ransomware or other malicious software impacting a customer’s use of our products or services. We are increasingly incorporating open source software into our products. There may be vulnerabilities in open source software that may make our products susceptible to cyberattacks. Additionally, we are actively adding new generative AI features to our services. Because generative AI is a new field, understanding of security risks and protection methods continues to develop; features that rely on generative AI may be susceptible to unanticipated security threats from sophisticated adversaries.

Our customers operate complex IT systems with third-party hardware and software from multiple vendors that may include systems acquired over many years. They expect our products and services to support all these systems and products, including those that no longer incorporate the strongest current security advances or standards. As a result, we may not be able to discontinue support in our services for a product, service, standard, or feature solely because a more secure alternative is available. Failure to utilize the most current security advances and standards can increase our customers’ vulnerability to attack. Further, customers of widely varied size and technical sophistication use our technology, and consequently may still have limited capabilities and resources to help them adopt and implement state of the art cybersecurity practices and technologies. In addition, we must account for this wide variation of technical sophistication when defining default settings for our products and services, including security default settings, as these settings may limit or otherwise impact other aspects of IT operations and some customers may have limited capability to review and reset these defaults.

Cyberattacks may adversely impact our customers even if our production services are not directly compromised. We are committed to notifying our customers whose systems have been impacted as we become aware and have actionable information for customers to help protect themselves. We are also committed to providing guidance and support on detection, tracking, and remediation. We may not be able to ~~adequately protect our intellectual property rights~~

~~Protecting our intellectual property rights and combating unlicensed copying and use~~detect the existence or extent of these attacks for all of our customers or have information on how to detect or track an attack, especially where an attack involves on-premises software such as Exchange Server where we may have no or limited visibility into our customers’ computing environments.

To defend against security threats to our internal IT systems, our cloud-based services, and our customers’ systems, we must continuously engineer more secure products and services, enhance security, threat detection, and reliability features, improve the deployment of software updates to address security vulnerabilities in our own products as well as those provided by others, develop mitigation technologies that help to secure customers from attacks even when software updates are not deployed, maintain the digital security infrastructure that protects the integrity of our network, products, and services, and provide security tools such as firewalls, anti-virus software, and ~~other intellectual property on a global basis is difficult. While piracy adversely affects U.S. revenue,~~advanced security and information about the need to deploy security measures and the impact ~~on revenue from outside the U.S. is more significant, particularly~~of doing so. Customers in ~~countries where laws are less protective of intellectual property rights. Our revenue in these markets~~certain industries such as financial services, health care, and government may ~~grow slower than the underlying device market. Similarly, the absence of harmonized patent laws makes it more difficult~~have enhanced or specialized requirements to ~~ensure consistent respect for patent rights. Throughout the world,~~which we ~~educate users about the benefits of licensing genuine~~must engineer our products and ~~obtaining indemnification benefits for intellectual property risks,~~services.

The cost of measures to protect products and customer-facing services could reduce our operating margins. If we ~~educate lawmakers about the advantages~~fail to do these things well, actual or perceived security vulnerabilities in our products and services, data corruption issues, or reduced performance could harm our reputation and lead customers to reduce or delay future purchases of ~~a business climate where intellectual property rights are protected. Reductions in the legal protection for~~products or subscriptions to services, or to use competing products or services. Customers may also spend more on protecting their existing computer systems from attack, which could delay adoption of additional products or services. Customers, and third parties granted access to their systems, may fail to update their systems, continue to run software ~~intellectual property rights~~or operating systems we no longer support, or may fail timely to install or enable security patches, or may otherwise fail to adopt adequate security practices. Any of these could adversely affect our reputation and revenue. Actual or perceived vulnerabilities may lead to claims against us. Our license agreements typically contain provisions that eliminate or limit our exposure to liability, but there is no assurance these provisions will withstand legal challenges. At times, to achieve commercial objectives, we may enter into agreements with larger liability exposure to customers.

WeOur products operate in conjunction with and are dependent on products and components across a broad ecosystem of third parties. If there is a security vulnerability in one of these components, and if there is a security exploit targeting it, we could face increased costs, liability claims, reduced revenue, or harm to our reputation or competitive position.

Disclosure and misuse of personal data could result in liability and harm our reputation. As we continue to grow the number, breadth, and scale of our cloud-based offerings, we store and process increasingly large amounts of personal data of our customers and users. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. Despite our efforts to improve the security controls across our business groups and geographies, it is possible our security controls over personal data, our training of employees and third parties on data security, and other practices we follow may not ~~receive expected royalties from~~prevent the improper disclosure or misuse of customer or user data we or our ~~patent licenses~~

~~We expend significant resources~~vendors store and manage. In addition, third parties who have limited access to ~~patent~~our customer or user data may use this data in unauthorized ways. Improper disclosure or misuse could harm our reputation, lead to legal exposure to customers or users, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. Our software products and services also enable our customers and users to store and process personal data on-premises or, increasingly, in a cloud-based environment we host. Government authorities can sometimes require us to produce customer or user data in response to valid legal orders. In the ~~intellectual property~~U.S. and elsewhere, we ~~create with~~advocate for transparency concerning these requests and appropriate limitations on government authority to compel disclosure. Despite our efforts to protect customer and user data, perceptions that the ~~expectation that we will generate revenues by incorporating that intellectual property in~~collection, use, and retention of personal information is not satisfactorily protected could inhibit sales of our products or services or, in some instances, by licensing our patents to others in return for a royalty. Changes in the law may weaken our ability to prevent the use of patented technology or collect revenue for licensing our patents. These include legislative changes and ~~regulatory actions that make it more difficult to obtain injunctions, and the increasing use of legal process to challenge issued patents. Similarly, licensees~~could limit adoption of our ~~patents may fail to satisfy their obligations to pay us royalties, or may contest the scope~~cloud-based solutions by consumers, businesses, and extent of their obligations. Finally, the royalties we can obtain to monetize our intellectual property may decline because of the evolution of technology, selling price changes in products using licensed patents, or the difficulty of discovering infringements.

~~Third parties may claim we infringe their intellectual property rights.~~ From time to time, others claim we infringe their intellectual property rights. The number of these claims may grow because of constant technological change in the markets in which we compete, the extensive patent coverage of existing technologies, the rapid rate of issuance of new patents, and our offering of first-party devices, such as Surface. To resolve these claims,government entities. Additional security measures we may ~~enter into royalty~~take to address customer or user concerns, or constraints on our flexibility to determine where and ~~licensing agreements on terms that are less favorable than currently available, stop selling~~how to operate datacenters in response to customer or ~~redesign affected products~~user expectations or ~~services,~~governmental rules or ~~pay damages to satisfy indemnification commitments with our customers. These outcomes~~actions, may cause higher operating ~~margins to decline. Besides money damages, in some jurisdictions plaintiffs can seek injunctive relief that may limit~~expenses or ~~prevent importing, marketing, and selling~~hinder growth of our products or services that have infringing technologies. In some countries, such as Germany, an injunction can be issued before the parties have fully litigated the validity of the underlying patents. We have paid significant amounts to settle claims related to the use of technology and ~~intellectual property rights and to procure intellectual property rights as part of our strategy to manage this risk, and may continue to do so.~~services.

~~We may not be able to protect our source code from copying if there is an unauthorized disclosure of source code.~~ Source code, the detailed program commands for our operating systems and other software programs, is critical to our business. Although we license portions of our application and operating system source code to several licensees, we take significant measures to protect the secrecy of large portions of our source code. If a significant portion of our source code leaks, we might lose future trade secret protection for that source code. It may become easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code also could increase the security risks described in the next paragraph.49

We may not be able to protect information onin our products and services from use by others. LinkedIn and other Microsoft products and services contain valuable information and content protected by contractual restrictions or technical measures. In certain cases, we have made commitments to our members and users to limit access to or use of this information. Changes in the law or interpretations of the law may weaken our ability to prevent third parties from scraping or gathering information or content through use of bots or other measures and using it for their own benefit, thus diminishing the value of our products and services.

~~Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position.~~

Threats to IT security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our products and services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Cyber threats are constantly evolving, increasing the difficulty of detecting and successfully defending against them. Cyber threats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers. Breaches of our network or data security could disrupt the security of our systems and business applications, impair our ability to provide services to our customers and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our reputation or competitive position, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improved technologies, or otherwise adversely affect our business.

In addition, our internal IT environment continues to evolve. Often, we are early adopters of new devices and technologies. We embrace new ways of sharing data and communicating internally and with partners and customers using methods such as social networking and other consumer-oriented technologies. Our business policies and internal security controls may not keep pace with these changes as new threats emerge.

The security of our products and services is important in our customers’ decisions to purchase or use our products or services. Security threats are a challenge to companies like us whose business is technology products and services. Threats to our own IT infrastructure can also affect our customers. Customers using our cloud-based services rely on the security of our infrastructure, including hardware and other elements provided by third parties, to ensure the reliability of our services and the protection of their data. Hackers tend to focus their efforts on the most popular operating systems, programs, and services, including many of ours, and we expect that to continue. Hackers that acquire user account information at other companies can use that information to compromise our users’ accounts where accounts share the same attributes like passwords.

To defend against security threats, both to our internal IT systems, our cloud-based services, and our customers’ systems, we must continuously engineer more secure products and services, enhance security and reliability features, improve the deployment of software updates to address security vulnerabilities in our own products as well as those provided by others, develop mitigation technologies that help to secure customers from attacks even when software updates are not deployed, maintain the digital security infrastructure that protects the integrity of our network, products, and services, and provide customers security tools such as firewalls and anti-virus software and information about the need to deploy security measures and the impact of doing so.

The cost of these steps could reduce our operating margins. If we fail to do these things well, actual or perceived security vulnerabilities in our products and services, data corruption issues, or reduced performance could harm our reputation and lead customers to reduce or delay future purchases of products or subscriptions to services, or to use competing products or services. Customers may also spend more on protecting their existing computer systems from attack, which could delay adoption of additional products or services. Customers may fail to update their systems, continue to run software or operating systems we no longer support, or may fail timely to install or enable security patches. Any of these actions by customers could adversely affect our reputation and revenue. Actual or perceived vulnerabilities may lead to claims against us. Our license agreements typically contain provisions that eliminate or limit our exposure to liability, but there is no assurance these provisions will withstand legal challenges. At times, to achieve commercial objectives, we may enter into agreements with larger liability exposure to customers. Legislative or regulatory action in these areas may increase the costs to develop, implement, or secure our products and services.

As illustrated by the recent Spectre and Meltdown threats, our products operate in conjunction with and are dependent on products and components across a broad ecosystem. If there is a security vulnerability in one of these components, and if there is a security exploit targeting it, we could face increased costs, liability claims, reduced revenue, or harm to our reputation or competitive position.

~~Disclosure of personal data could result in liability and harm our reputation.~~ As we continue to grow the number and scale of our cloud-based offerings, we store and process increasingly large amounts of personally identifiable information of our customers. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. Despite our efforts to improve the security controls across our business groups and geographies, it is possible our security controls over personal data, our training of employees and vendors on data security, and other practices we follow may not prevent the improper disclosure of customer data we or our vendors store and manage. Improper disclosure could harm our reputation, lead to legal exposure to customers, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. Our software products and services also enable our customers to store and process personal data on-premises or, increasingly, in a cloud-based environment we host. Government authorities can sometimes require us to produce customer data in response to valid legal orders. In the U.S. and elsewhere, we advocate for transparency concerning these requests and appropriate limitations on government authority to compel disclosure. Despite our efforts to protect customer data, perceptions that the collection, use, and retention of personal information is not satisfactorily protected could inhibit sales of our products or services, and could limit adoption of our cloud-based solutions by consumers, businesses, and government entities. Additional security measures we may take to address customer concerns, or constraints on our flexibility to determine where and how to operate datacenters in response to customer expectations or governmental rules or actions, may cause higher operating expenses.

Abuse of our ~~advertising or social~~ platforms may harm our reputation or user engagement.

For ~~LinkedIn, Bing Ads, and other~~platform products and services that provide content or host ads that come from or can be influenced by third parties, including GitHub, LinkedIn, Microsoft Advertising, Microsoft News, Microsoft Store, Bing, and Xbox, our reputation or user engagement may be negatively affected by activity that is hostile or ~~inappropriate to other people, by~~inappropriate. This activity may come from users impersonating other people or organizations byincluding through the use of ~~our products or services to disseminate~~AI technologies, dissemination of information that may be viewed as misleading or intended to manipulate the opinions of our users, or by the use of our products or services that violates our terms of service or otherwise for objectionable or illegal ends. Preventing or responding to these actions may require us to make substantial investments in people and technology and these investments may not be successful, adversely affecting our business and consolidated financial ~~results.~~statements.

Our hosted consumer services as well as our enterprise services may be used to generate or disseminate harmful or illegal content in violation of our terms or applicable law. We may not proactively discover such content due to scale, the limitations of existing technologies, and conflicting legal frameworks. When discovered by users and others, such content may negatively affect our reputation, our brands, and user engagement. Regulations and other initiatives to make platforms responsible for preventing or eliminating harmful content online have been enacted, and we expect this to continue. We may be subject to enhanced regulatory oversight, civil or criminal liability, or reputational damage if we fail to comply with content moderation regulations, adversely affecting our business and consolidated financial statements.

The development of the IoT presents security, privacy, and execution risks. To support the growth of the intelligent cloud and the intelligent edge, we are developing products, services, and technologies to power the IoT. The IoT’s great potential also carries substantial risks. IoT products and services may contain defects in design, manufacture, or operation that make them insecure or ineffective for their intended purposes. An IoT solution has multiple layers of hardware, sensors, processors, software, and firmware, several of which we may not develop or control. Each layer, including the weakest layer, can impact the security of the whole system. Many IoT devices have limited interfaces and ability to be updated or patched. IoT solutions may collect large amounts of data, and our handling of IoT data may not satisfy customers or regulatory requirements. IoT scenarios may increasingly affect personal health and safety. If IoT solutions that include our technologies do not work as intended, violate the law, or harm individuals or businesses, we may be subject to legal claims or enforcement actions. These risks, if realized, may increase our costs, damage our reputation or brands, or negatively impact our revenues or margins.

Issues in the development and use of AI may result in reputational or competitive harm or liability. We are building AI into many of our offerings, including our productivity services, and we are also making AI available for our customers to use in solutions that they build. This AI may be developed by Microsoft or others, including our strategic partner, OpenAI. We expect these elements of our business to grow. We envision a future in which AI operating in our devices, applications, and the cloud helps our customers be more productive in their work and personal lives. As with many innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. AI algorithms or training methodologies may be flawed. Datasets may be overbroad, insufficient, or contain biased information. Content generated by AI systems may be offensive, illegal, or otherwise harmful. Ineffective or inadequate AI development or deployment practices by Microsoft or others could result in incidents that impair the acceptance of AI solutions or cause harm to individuals, customers, or society, or result in our products and services not working as intended. Human review of certain outputs may be required. As a result of these and other challenges associated with innovative technologies, our implementation of AI systems could subject us to competitive harm, regulatory action, legal liability, including under new proposed legislation regulating AI in jurisdictions such as the European Union (“EU”), new applications of existing data protection, privacy, intellectual property, and other laws, and brand or reputational harm. Some AI scenarios present ethical issues or may have broad impacts on society. If we enable or offer AI solutions that have unintended consequences, unintended usage or customization by our customers and partners, or are controversial because of their impact on human rights, privacy, employment, or other social, economic, or political issues, we may experience brand or reputational harm, adversely affecting our business and consolidated financial statements.

We may have excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure. Our increasing user traffic, growth in services, and the complexity of our products and services demand more computing power. We spend substantial amounts to build, purchase, or lease datacenters and equipment and to upgrade our technology and network infrastructure to handle more traffic on our websites and in our datacenters. 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. The cost or availability of these dependencies could be adversely affected by a variety of factors, including the transition to a clean energy economy, local and regional environmental regulations, and geopolitical disruptions. These demands continue to increase as we introduce new products and services and support the growth and the augmentation of existing services such as Bing, ~~Exchange Online, Microsoft~~ Azure, Microsoft Account services, ~~Office~~Microsoft 365, Microsoft Teams, Dynamics 365, OneDrive, SharePoint Online, Skype, Xbox, ~~Live,~~and Outlook.com ~~and Windows Stores.~~through the incorporation of AI features and/or functionality. We are rapidly growing our business of providing a platform and back-end hosting for services provided by third parties to their end users. Maintaining, securing, and expanding this infrastructure is expensive and ~~complex.~~complex, and requires development of principles for datacenter builds in geographies with higher safety and reliability risks. It requires that we maintain an Internet connectivity infrastructure and storage and compute capacity that is robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or permanent loss of customer data, or insufficient Internet connectivity, insufficient or unavailable power supply, or inadequate storage and compute capacity, could diminish the quality of our products, services, and user experience resulting in contractual liability, claims by customers and other third parties, regulatory actions, damage to our reputation, and loss of current and potential users, subscribers, and advertisers, each of which may adversely impact our consolidated financial statements.

We may experience quality or supply problems. Our hardware products such as Xbox consoles, Surface devices, and other devices we design and market are highly complex and can have defects in design, manufacture, or associated software. We could incur significant expenses, lost revenue, and reputational harm as a result of recalls, safety alerts, or product liability claims if we fail to prevent, detect, or address such issues through design, testing, or warranty repairs.

Our software products and services also may experience quality or reliability problems. The highly sophisticated software we develop may contain bugs and other defects that interfere with their intended operation. Our customers increasingly rely on us for critical business functions and multiple workloads. Many of our products and services are interdependent with one another. Each of these circumstances potentially magnifies the impact of quality or reliability issues. Any defects we do not detect and fix in pre-release testing could cause reduced sales and revenue, damage to our reputation, repair or remediation costs, delays in the release of new products or versions, or legal liability. Although our license agreements typically contain provisions that eliminate or limit our exposure to liability, there is no assurance these provisions will withstand legal challenge.

There are limited suppliers for certain device and datacenter components. Our competitors use some of the same suppliers and their demand for hardware components can affect the capacity available to us. If components are delayed or become unavailable, whether because of supplier capacity constraint, industry shortages, legal or regulatory changes that restrict supply sources, or other reasons, we may not obtain timely replacement supplies, resulting in reduced sales or inadequate datacenter capacity to support the delivery and continued development of our products and services. Component shortages, excess or obsolete inventory, or price reductions resulting in inventory adjustments may increase our cost of revenue. Xbox consoles, Surface devices, datacenter servers, and other hardware are assembled in Asia and other geographies that may be subject to disruptions in the supply chain, resulting in shortages that would affect our revenue and operating ~~results and financial condition~~.margins.

Government litigation and regulatory activity relating to competition rules may limit how we design and market our products. ~~As a leading global software and device maker, government~~Government agencies closely scrutinize us under U.S. and foreign competition laws. ~~An increasing number of governments~~Governments are ~~regulating~~actively enforcing competition ~~law activities~~laws and regulations, and this includes ~~increased~~ scrutiny in potentially large markets such as the ~~European Union (“EU”),~~EU, the U.S., and China. Some jurisdictions also allow competitors or consumers to assert claims of anti-competitive conduct. U.S. federal and state antitrust authorities have previously brought enforcement actions and continue to scrutinize our business.

~~The~~For example, the European Commission (“the Commission”) closely scrutinizes the design of high-volume Microsoft products and the terms on which we make certain technologies used in these products, such as file formats, programming interfaces, and protocols, available to other companies. Flagship product releases such as Windows 10 can receive significant scrutiny under competition laws. For example, in 2004, the Commission ordered us to create new versions of our Windows operating system that do not include certain multimedia technologies and to provide our competitors with specifications for how to implement certain proprietary Windows communications protocols in their own products. In 2009, the Commission accepted a set of commitments offered by Microsoft to address the Commission’s concerns relating to competition in web browsing software, including an undertaking to address Commission

~~concerns relating to interoperability. The web browsing commitments expired in 2014. The remaining obligations may limit our ability to innovate in Windows~~EU or other products in the future, diminish the developer appeal of the Windows platform, and increase our product development costs. The availability of licenses related to protocols and file formats may enable competitors to develop software products that better mimic the functionality of our products, which could hamper sales of our products.competition laws.

Our portfolio of first-party devices continues to grow; at the same time our OEM partners offer a large variety of devices onfor our platforms. As a result, increasingly we both cooperate and compete with our OEM partners, creating a risk that we fail to do so in compliance with competition rules. Regulatory scrutiny in this area may increase. Certain foreign governments, particularly in China and other countries in Asia, have advanced arguments under their competition laws that exert downward pressure on royalties for our intellectual property. ~~Because these jurisdictions only recently implemented competition laws, their enforcement activities are unpredictable.~~

~~Government~~Competition law regulatory actions and court decisions ~~such as these~~ may result in fines or hinder our ability to provide the benefits of our software to consumers and businesses, reducing the attractiveness of our products and the revenue that ~~come~~comes from them. New competition law actions could be ~~initiated.~~initiated, potentially using previous actions as precedent. The outcome of such actions, or steps taken to avoid them, could adversely affect us in a variety of ways, ~~including:~~

~~Our global operations subject us~~Laws and regulations relating to ~~potential liability under~~ anti-corruption and trade ~~protection, and other laws and regulations.~~could result in increased costs, fines, criminal penalties, or reputational damage. The Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors, or ~~agents.~~agents, and the accounting provisions of the FCPA require us to maintain accurate books and records and adequate internal controls. From time to time, we receive inquiries from authorities in the U.S. and elsewhere ~~and~~which may be based on reports from employees and others about our business activities outside the U.S. and our compliance with Anti-Corruption Laws. ~~Specifically,~~Periodically, we receive such reports directly and investigate them, and also cooperate with investigations by U.S. and foreign law enforcement authorities. An example of increasing international regulatory complexity is the EU Whistleblower Directive, initiated in 2021, which presents compliance challenges as it is implemented in different forms by EU member states. Most countries in which we operate also have ~~been cooperating with authorities in the U.S. in connection with reports concerning our compliance with the Foreign Corrupt Practices Act in various countries.~~competition laws that prohibit competitors from colluding or otherwise attempting to reduce competition between themselves. While we devote substantial resources to our ~~global~~U.S. and international compliance programs and have implemented policies, training, and internal controls designed to reduce the risk of corrupt payments and collusive activity, our employees, partners, vendors, or agents may violate our policies. Our failure to comply with Anti-Corruption Laws or competition laws could result in significant fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation. ~~Operations outside the U.S. may be affected by changes in~~

Increasing trade ~~protection~~ laws, policies, ~~and measures,~~ sanctions, and other regulatory requirements ~~affecting~~also affect our operations in and outside the U.S. relating to trade and investment. ~~We may be subject to legal liability~~Economic sanctions in the U.S., the EU, and ~~reputational damage if we sell goods~~other countries prohibit most business with restricted entities or ~~services in violation~~countries. U.S. export controls restrict Microsoft from offering many of ~~U.S. trade sanctions on countries such as Iran, North Korea, Cuba, Sudan, and Syria.~~

Other regulatory areas that may apply to our products and online services offerings include user privacy, telecommunications, data storage and protection, and online content. For example, regulators may take the position that our offerings such as Skype are covered by laws regulating telecommunications services. Data protection authorities may assert that our collection, use, and management of customer data is inconsistent with their laws and regulations. Applying these laws and regulations to our business is often unclear, subject to change over time, and sometimes may conflict from jurisdiction to jurisdiction. Additionally, these laws and governments’ approach to their enforcement, and ourits products and services ~~are continuing~~ to, ~~evolve. Compliance with these types~~or making investments in, certain entities in specified countries. U.S. import controls restrict us from integrating certain information and communication technologies into our supply chain and allow for government review of ~~regulation~~transactions involving information and communications technology from countries determined to be foreign adversaries. Supply chain regulations may ~~involve significant costs~~impact the availability of goods or ~~require changes in products or business practices that~~ result in ~~reduced revenue. Noncompliance~~additional regulatory scrutiny. Periods of intense diplomatic or armed conflict, such as the ongoing conflict in Ukraine, may result in (1) new and rapidly evolving sanctions and trade restrictions, which may impair trade with sanctioned individuals and countries, and (2) negative impacts to regional trade ecosystems among our customers, partners, and us. Non-compliance with sanctions as well as general ecosystem disruptions could result in ~~the imposition~~reputational harm, operational delays, monetary fines, loss of ~~penalties~~revenues, increased costs, loss of export privileges, or ~~orders we stop the alleged noncompliant activity.~~criminal sanctions.

Laws and regulations relating to the handling of personal data may impede the adoption of our services or result in increased costs, legal claims, or fines against ~~us.~~us, or reputational damage. The growth of our Internet- and cloud-based services internationally relies increasingly on the movement of data across national boundaries. Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. For example, while the EU-U.S. Data Privacy Framework (“DPF”) has been recognized as adequate under EU law to allow transfers of personal data from the EU to certified companies in the U.S., the DPF is subject to further legal challenge which could cause the legal requirements for data transfers from the EU to be uncertain. EU data protection authorities have and may again block the use of certain U.S.-based services that involve the transfer of data to the U.S. In the EU and other markets, potential new rules and restrictions on the ~~U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer~~flow of data ~~from EU member states to~~across borders could increase the ~~U.S. This framework, called the Privacy Shield, is intended to address shortcomings~~cost and complexity of delivering our products and services.

identified by the European Court of Justice in a predecessor mechanism. The Privacy Shield and other mechanisms are currently subject to challenges in European courts, which may lead to uncertainty about the legal basis for data transfers across the Atlantic. In ~~2016,~~addition, the EU ~~adopted a new law governing data practices and privacy called the~~ General Data Protection Regulation (“GDPR”), which ~~becomes effective~~applies to all of our activities conducted from an establishment in ~~May 2018. The law requires firms~~the EU or related to ~~meet new requirements~~products and services offered in the EU, imposes a range of compliance obligations regarding the handling of personal data. More recently, the EU has been developing new requirements related to the use of data, including in the Digital Markets Act, the Digital Services Act, and the Data Act, that add additional rules and restriction on the use of data in our products and services. Engineering efforts to build ~~new~~and maintain capabilities to facilitate compliance with ~~the law may entail~~these laws involve substantial expense and the diversion of engineering resources from other projects. IfWe might experience reduced demand for our offerings if we are unable to engineer products that meet ~~Microsoft’s~~our legal duties or help our customers meet their obligations under ~~the GDPR or~~these and other data regulations, ~~we might experience reduced demand for~~or if our ~~offerings.~~implementation to comply makes our offerings less attractive. Compliance with ~~data regulations might limit our ability~~these obligations depends in part on how particular regulators interpret and apply them. If we fail to ~~innovate~~comply, or ~~offer certain features and functionality~~if regulators assert we have failed to comply (including in ~~some jurisdictions where we operate. Non-compliance with the GDPR~~response to complaints made by customers), it may lead to regulatory enforcement actions, which can result in significant monetary penalties, private lawsuits, reputational damage, blockage of upproduct offerings or of international data transfers, and loss of customers. The highest fines assessed under GDPR have recently been increasing, especially against large technology companies, and European data protection authorities have taken action to 4%block or remove services from their markets. Jurisdictions around the world, such as China, India, and states in the U.S. have adopted, or are considering adopting or expanding, laws and regulations imposing obligations regarding the collection, handling, and transfer of ~~worldwide revenue, or private lawsuits.~~personal data.

Our investment in gaining insights from data is becoming central to the value of the services, including AI services, we deliver to customers, to operational efficiency and key opportunities in monetization, and to customer perceptions of quality. Our ability to use data in this way may be constrained by regulatory developments that impede realizing the expected return from this investment. Ongoing legal analyses, reviews, and inquiries by regulators of Microsoft practices, or relevant practices of other organizations, may result in burdensome or inconsistent requirements, including data sovereignty and localization requirements, affecting the location, movement, collection, and ~~movement~~use of our customer and internal employee data as well as the management of that data. Compliance with applicable laws and regulations regarding personal data may require changes in services, business practices, or internal systems that result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms. Compliance with data regulations might limit our ability to innovate or offer certain features and functionality in some jurisdictions where we operate. Failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant ~~activity.~~activity, as well as negative publicity and diversion of management time and effort.

Existing and increasing legal and regulatory requirements could adversely affect our ~~ability~~results of operations. We are subject to ~~attract~~a wide range of laws, regulations, and ~~retain talented employees.~~ ~~Our~~legal requirements in the U.S. and globally, including those that may apply to our products and online services offerings, and those that impose requirements related to user privacy, telecommunications, data storage and protection, advertising, and online content. Laws in several jurisdictions, including EU Member State laws under the European Electronic Communications Code, increasingly define certain of our services as regulated telecommunications services. This trend may continue and will result in these offerings being subjected to additional data protection, security, law enforcement surveillance, and other obligations. Regulators and private litigants may assert that our collection, use, and management of customer data and other information is inconsistent with their laws and regulations, including laws that apply to the tracking of users via technology such as cookies. New environmental, social, and governance laws and regulations are expanding mandatory disclosure, reporting, and diligence requirements. Legislative or regulatory action relating to cybersecurity requirements may increase the costs to develop, implement, or secure our products and services. Compliance with evolving digital accessibility laws and standards will require engineering and is important to our efforts to empower all people and organizations to achieve more. Legislative and regulatory action is emerging in the areas of AI and content moderation, which could increase costs or restrict opportunity. For example, in the EU, an AI Act is being considered, and may entail increased costs or decreased opportunities for the operation of our AI services in the European market.

How these laws and regulations apply to our business is ~~based on successfully attracting~~often unclear, subject to change over time, and ~~retaining talented employees. The market for highly skilled workers~~sometimes may be inconsistent from jurisdiction to jurisdiction. In addition, governments’ approach to enforcement, and ~~leaders in~~ our industry is extremely competitive. We are limited in our ability to recruit internationally by restrictive domestic immigration laws. Changes to U.S. immigration policies that restrain the flow of technical and professional talent may inhibit our ability to adequately staff our research and development efforts. If we are less successful in our recruiting efforts, or if we cannot retain key employees, our ability to develop and deliver successful products and services, are continuing to evolve. Compliance with existing, expanding, or new laws and regulations may beinvolve significant costs or require changes in products or business practices that could adversely ~~affected. Effective succession planning is also important to~~affect our ~~long-term success. Failure to ensure effective transfer~~results of ~~knowledge and smooth transitions involving key employees~~operations. Noncompliance could ~~hinder our strategic planning and execution. How employment-related laws are interpreted and applied to our workforce practices may~~ result in ~~increased operating costs~~the imposition of penalties or orders we cease the alleged noncompliant activity. In addition, there is increasing pressure from advocacy groups, regulators, competitors, customers, and ~~less flexibility in how~~other stakeholders across many of these areas. If our products do not meet customer expectations or legal requirements, we ~~meet our workforce needs.~~could lose sales opportunities or face regulatory or legal actions.

We have claims and lawsuits against us that may result in adverse outcomes. We are subject to a variety of claims and lawsuits. These claims may arise from a wide variety of business practices and initiatives, including major new product releases such as Windows, ~~10,~~AI services, significant business transactions, warranty or product claims, employment practices, and ~~employment practices.~~regulation. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business. The litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact onin our consolidated financial statements could occur for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

Our business with government customers may present additional uncertainties. We derive substantial revenue from government contracts. Government contracts generally can present risks and challenges not present in private commercial agreements. For instance, we may be subject to government audits and investigations relating to these contracts, we could be suspended or debarred as a governmental contractor, we could incur civil and criminal fines and penalties, and under certain circumstances contracts may be rescinded. Some agreements may allow a government to terminate without cause and provide for higher liability limits for certain losses. Some contracts may be subject to periodic funding approval, reductions, cancellations, or delays which could adversely impact public-sector demand for our products and services. These events could negatively impact our results of operations, financial condition, and reputation.

We may have additional tax liabilities. We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, compliance with the 2017 United States Tax ~~Cut~~Cuts and Jobs Act (“TCJA”) and possible future legislative changes may require the collection of information not regularly produced within the ~~Company,~~company, the use of estimates in our consolidated financial statements, and the exercise of significant judgment in accounting for its provisions. As regulations and guidance evolve with respect to the TCJA or possible future legislative changes, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affect our consolidated financial ~~position.~~statements.

We are regularly ~~are~~ under audit by tax authorities in different jurisdictions. ~~Economic~~Although we believe that our provision for income taxes and our tax estimates are reasonable, tax authorities may disagree with certain positions we have taken. In addition, economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably more difficult. ~~Although we believe our~~We are currently under Internal Revenue Service audit for prior tax ~~estimates are reasonable,~~years and have received Notices of Proposed Adjustment (“NOPAs”) from the ~~final determination of~~IRS for the tax ~~audits and any related litigation~~years 2004 to 2013. The primary issues in the ~~jurisdictions where we are subject~~NOPAs relate to ~~taxation could be materially different from our historical income~~intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax ~~provisions~~payment of $28.9 billion plus penalties and ~~accruals.~~interest. The ~~results~~final resolution of ~~an audit~~the proposed adjustments, and other audits or litigation, ~~could have a material effect on~~may differ from the amounts recorded in our consolidated financial statements and may materially affect our consolidated financial statements in the period or periods in which that determination is made.

We earn a significant amount of our operating income outside the U.S.~~; a~~ A change in the mix of earnings and losses in countries with differing statutory tax rates, changes in our business or structure, or the expiration of or disputes about certain tax agreements in a particular country may result in higher effective tax rates for the ~~Company.~~company. In addition, changes in U.S. federal and state or international tax laws applicable to corporate multinationals, other fundamental law changes currently being considered by many countries, including in the U.S., and changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions may materially adversely impact our ~~tax expense~~consolidated financial statements.

Weutilization of our intellectual property that may ~~experience quality or supply problems.~~ ~~Our vertically-integrated hardware products such as Xbox consoles, Surface devices,~~result in our business and operating results may be harmed. Protecting our intellectual property rights and combating unlicensed copying and use of our software and other ~~devices we design, manufacture, and market are highly complex and can have defects~~intellectual property on a global basis is difficult. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights.

Changes in ~~design, manufacture,~~the law may continue to weaken our ability to prevent the use of patented technology or ~~associated software. We could incur significant expenses, lost~~collect revenue ~~and reputational harm as a result~~for licensing our patents. Additionally, licensees of ~~recalls, safety alerts, or product liability claims if we~~our patents may fail to ~~prevent, detect,~~satisfy their obligations to pay us royalties or ~~address such issues through design, testing, or warranty repairs.~~may contest the scope and extent of their obligations. Finally, our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain situations. If we are unable to protect our intellectual property, our revenue may be adversely affected.

~~Our software products also may experience quality or reliability problems. The highly-sophisticated software products we develop may contain bugs~~Source code, the detailed program commands for our operating systems and other ~~defects that interfere with their intended operation. Any defects we do not detect and fix in pre-release testing could cause reduced sales and revenue, damage~~software programs, is critical to our ~~reputation, repair or remediation costs, delays in the release of new~~business. If our source code leaks, we might lose future trade secret protection for that code. It may then become easier for third parties to compete with our products or versions, or legal liability. Although our license agreements typically contain provisions that eliminate or limit our exposure to liability, there is no assurance these provisions will withstand legal challenge.

We acquire some device and datacenter components from sole suppliers. Our competitors use some of the same suppliers and their demand for hardware components can affect the capacity available to us. If a component from a sole-source supplier is delayed or becomes unavailable, whether because of supplier capacity constraint or industry shortages, we may not obtain timely replacement supplies, resulting in reduced sales or inadequate datacenter capacity. Component shortages, excess or obsolete inventory, or price reductions resulting in inventory adjustments may increase our cost of revenue. Xbox consoles, Surface devices, datacenter servers, and other hardware are assembled in Asia and other geographies that may be subject to disruptions in the supply chain, resulting in shortages that wouldby copying functionality, which could adversely affect our revenue and operating ~~margins. These same~~results. Unauthorized disclosure of source code also could increase the security risks ~~would apply~~described elsewhere in these risk factors.

Third parties may claim that we infringe their intellectual property. From time to ~~any other vertically-integrated hardware and software products~~time, others claim we infringe their intellectual property rights. To resolve these claims, we may ~~offer.~~

enter into royalty and licensing agreements on terms that are less favorable than currently available, stop selling or redesign affected products or services, or pay damages to satisfy indemnification commitments with our customers. Adverse outcomes could also include monetary damages or injunctive relief that may limit or prevent importing, marketing, and selling our products or services that have infringing technologies. We ~~strive~~have paid significant amounts to ~~empower all people~~settle claims related to the use of technology and ~~organizations~~intellectual property rights and to ~~achieve more, and accessibility~~procure intellectual property rights as part of our ~~products is an~~strategy to manage this risk, and may continue to do so.

If our reputation or our brands are damaged, our business and operating results may be harmed. Our reputation and brands are globally recognized and are important ~~aspect of this goal.~~to our business. Our reputation and brands affect our ability to attract and retain consumer, business, and public-sector customers. There ~~is increasing pressure~~are numerous ways our reputation or brands could be damaged. These include product safety or quality issues, our environmental impact and sustainability, supply chain practices, or human rights record. We may experience backlash from customers, government entities, advocacy groups, ~~regulators, competitors,~~employees, and other stakeholders that disagree with our product offering decisions or public policy positions. Damage to our reputation or our brands may occur from, among other things:

The proliferation of social media may increase the likelihood, speed, and magnitude of negative brand events. If our brands or reputation are damaged, it could negatively impact our revenues or margins, or ability to attract the most highly qualified employees.

Adverse economic or market conditions may harm our business. Worsening economic conditions, including inflation, recession, pandemic, or other changes in economic conditions, may cause lower IT spending and adversely affect our revenue. If demand for PCs, servers, and other computing devices declines, or consumer or business spending for those products declines, our revenue will be adversely affected.

Our product distribution system relies on an extensive partner and retail network. OEMs building devices that run our software have also been a significant means of distribution. The impact of economic conditions on our partners, such as the bankruptcy of a major distributor, OEM, or retailer, could cause sales channel disruption.

Challenging economic conditions also may impair the ability of our customers to ~~make technology more accessible. If our~~pay for products ~~do not meet customer expectations~~and services they have purchased. As a result, allowances for doubtful accounts and write-offs of accounts receivable may increase.

We maintain an investment portfolio of various holdings, types, and maturities. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by market downturns or ~~emerging~~events that affect global ~~accessibility requirements, we could lose sales opportunities or face regulatory actions.~~

~~Our global business exposes us to operational and economic risks.~~ ~~Our customers are located in over 200 countries and a~~financial markets. A significant part of our ~~revenue comes from international sales. The~~investment portfolio comprises U.S. government securities. If global ~~nature~~financial markets decline for long periods, or if there is a downgrade of the U.S. government credit rating due to an actual or threatened default on government debt, our investment portfolio may be adversely affected and we could determine that more of our ~~business creates operational and economic risks. Emerging markets are~~investments have experienced a ~~significant focus of our international growth strategy. The developing nature of these markets presents several risks, including deterioration of social, political, labor, or economic conditions~~decline in a country or region, and difficulties in staffing and managing foreign operations. Although we hedge a portion of our international currency exposure, significant fluctuations in foreign exchange rates between the U.S. dollar and foreign currencies mayfair value, requiring impairment charges that could adversely affect our ~~revenue. Competitive or regulatory pressure to make our pricing structure uniform might require that we reduce the sales price of our software in the U.S. and other countries.~~consolidated financial statements.

Catastrophic events or geopolitical conditions may disrupt our business. A disruption or failure of our systems or operations because of a major earthquake, weather event, ~~cyber-attack,~~cyberattack, terrorist attack, pandemic, or other catastrophic event could cause delays in completing sales, providing services, or performing other critical functions. Our corporate headquarters, a significant portion of our research and development activities, and certain other essential business operations are in the Seattle, Washington area, and we have other business operations in the Silicon Valley area of California, both of which are seismically active regions. A catastrophic event that results in the destruction or disruption of any of our critical business or IT systems, or the infrastructure or systems they rely on, such as power grids, could harm our ability to conduct normal business operations. Providing our customers with more services and solutions in the cloud puts a premium on the resilience of our systems and strength of our business continuity management plans and magnifies the potential impact of prolonged service outages onin our ~~operating results.~~consolidated financial statements.

Abrupt political change, terrorist activity, and armed conflict, such as the ongoing conflict in Ukraine, pose ~~a risk of general~~ economic ~~disruption in affected countries,~~and other risks, which may negatively impact our ability to sell to and collect from customers, increase our operating ~~costs.~~costs, or otherwise disrupt our operations in markets both directly and indirectly impacted by such events. These conditions also may add uncertainty to the timing and budget for technology investment decisions by our customers and may cause supply chain disruptions for hardware manufacturers. Geopolitical change may result in changing regulatory systems and requirements and market interventions that could impact our operating strategies, access to national, regional, and global markets, hiring, and profitability. Geopolitical instability may lead to sanctions and impact our ability to do business in some markets or with some public-sector customers. Emerging nationalist trends in specific countries may significantly alter the trade environment. Changes to trade policy or agreements may result in higher tariffs, local sourcing initiatives, or other developments that make it more difficult to sell our products in foreign countries. Any of these changes may negatively impact our revenues.

~~PART II~~The occurrence of regional epidemics or a global pandemic, such as COVID-19, may adversely affect our operations, financial condition, and results of operations. The extent to which global pandemics impact our business going forward will depend on factors such as the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. Measures to contain a global pandemic may intensify other risks described in these Risk Factors.

~~Item 1A~~We may incur increased costs to effectively manage these aspects of our business. If we are unsuccessful, it may adversely impact our revenues, cash flows, market share growth, and reputation.

The long-term effects of climate change on the global economy orand the IT industry in particular are unclear. Environmental regulations or changes in the supply, demand, or available sources of energy or other ~~natural~~ resources may affect the availability or cost of goods and services, including natural resources, necessary to run our business. Changes in ~~weather~~climate where we operate may increase the costs of powering and cooling computer hardware we use to develop software and provide cloud-based services.

~~Adverse~~Our global business exposes us to operational and economic ~~or market conditions may harm~~risks. Our customers are located throughout the world and a significant part of our ~~business.~~ Worsening economic conditions, including inflation, recession, or other changes in economic conditions, may cause lower IT spending and adversely affect our revenue. If demand for PCs, servers, and other computing devices declines, or consumer or business spending for those products declines, our revenue will be adversely affected. Substantial revenue comes from international sales. The global nature of our ~~U.S. government contracts. An extended federal government shutdown resulting from failing~~business creates operational, economic, and geopolitical risks. Our results of operations may be affected by global, regional, and local economic developments, monetary policy, inflation, and recession, as well as political and military disputes. In addition, our international growth strategy includes certain markets, the developing nature of which presents several risks, including deterioration of social, political, labor, or economic conditions in a country or region, and difficulties in staffing and managing foreign operations. Emerging nationalist and protectionist trends and concerns about human rights, the environment, and political expression in specific countries may significantly alter the trade and commercial environments. Changes to ~~pass budget appropriations, adopt continuing funding resolutions~~trade policy or ~~raise the debt ceiling,~~agreements as a result of populism, protectionism, or economic nationalism may result in higher tariffs, local sourcing initiatives, and non-local sourcing restrictions, export controls, investment restrictions, or other ~~budgetary decisions limiting~~developments that make it more difficult to sell our products in foreign countries. Disruptions of these kinds in developed or ~~delaying federal government spending,~~emerging markets could ~~reduce government IT spending on~~negatively impact demand for our products and services, impair our ability to operate in certain regions, or increase operating costs. Although we hedge a portion of our international currency exposure, significant fluctuations in foreign exchange rates between the U.S. dollar and foreign currencies may adversely affect our ~~revenue.~~results of operations.

Our product distribution system relies on an extensive partner and retail network. OEMs building devices that run our software have also been a significant means of distribution. The impact of economic conditionsbusiness depends on our ~~partners, such~~ability to attract and retain talented employees. Our business is based on successfully attracting and retaining talented employees representing diverse backgrounds, experiences, and skill sets. The market for highly skilled workers and leaders in our industry is extremely competitive. Maintaining our brand and reputation, as well as a diverse and inclusive work environment that enables all our employees to thrive, are important to our ability to recruit and retain employees. We are also limited in our ability to recruit internationally by restrictive domestic immigration laws. Changes to U.S. immigration policies that restrain the ~~bankruptcy~~flow of ~~a major distributor, OEM,~~technical and professional talent may inhibit our ability to adequately staff our research and development efforts. If we are less successful in our recruiting efforts, or ~~retailer, could cause sales channel disruption.~~

~~Challenging economic conditions also may impair the~~if we cannot retain highly skilled workers and key leaders, our ability ~~of our customers~~ to ~~pay for~~develop and deliver successful products and services ~~they have purchased. As a result, allowances for doubtful accounts and write-offs of accounts receivable may increase.~~

We maintain an investment portfolio of various holdings, types, and maturities. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by unusual events that affect global financial markets. A significant part of our investment portfolio comprises U.S. government securities. If global credit and equity markets decline for long periods, or if there is a downgrade of the U.S. government credit rating due to an actual or threatened default on government debt, our investment portfolio may be adversely affected and we could determine that more of our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial results.

~~Changes in our sales organization may impact revenues.~~ ~~In July 2017, we announced plans to reorganize our global sales organization to help enable customers’ digital transformation, add greater technical ability~~affected. Effective succession planning is also important to our ~~sales force,~~long-term success. Failure to ensure effective transfer of knowledge and ~~create pooled resources that can be used across countries~~smooth transitions involving key employees could hinder our strategic planning and ~~industries.~~execution. How employment-related laws are interpreted and applied to our workforce practices may result in increased operating costs and less flexibility in how we meet our workforce needs. Our global workforce is predominantly non-unionized, although we do have some employees in the U.S. and internationally who are represented by unions or works councils. In the U.S., there has been a general increase in workers exercising their right to form or join a union. The ~~reorganization is the most~~unionization of significant ~~change~~employee populations could result in ~~our global sales organization in Microsoft’s history, involving employees~~higher costs and other operational changes necessary to respond to changing ~~roles, adding additional talent, realigning teams,~~conditions and ~~onboarding~~to establish new partners. Successfully executing these changes will be a significant factor in enabling future revenue growth. As we navigate through this transition, sales, profitability, and cash flow could be adversely impacted.relationships with worker representatives.

~~Refer to Note 17 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion regarding dividends and share repurchases.~~ Following are our monthly ~~stock~~share repurchases for the ~~second~~first quarter of fiscal year ~~2018:~~2024:

All share repurchases were made using cash resources. Our ~~stock~~share repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards.

Our Board of Directors declared the following dividends during the first quarter of fiscal year 2024:

We returned $9.1 billion to shareholders in the form of share repurchases and dividends in the first quarter of fiscal year 2024. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion regarding share repurchases and dividends.

Insider Trading Arrangements

Our Section 16 officers and directors, as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934 (the “Exchange Act”), may from time to time enter into plans for the purchase or sale of our common stock that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act. During the quarter ended ~~December 31, 2017, Microsoft provided software services~~September 30, 2023, the following Section 16 officers and directors adopted, modified, or terminated “Rule 10b5-1 trading arrangements” (as defined in Item 408 of Regulation S-K of the Exchange Act):

•

Satya Nadella, our Chief Executive Officer and Chairman of the Board of Directors, adopted a new written trading plan on September 7, 2023. The plan’s maximum duration is until September 6, 2024. The first trade will not occur until February 28, 2024, at the earliest. The trading plan is intended to permit Mr. Nadella to sell (i) 49% of net vested shares of our common stock pursuant to a ~~person~~Restricted Stock Award that will vest on February 28, 2024, and (ii) 49% of net vested shares of our common stock pursuant to Restricted StockAwards that will vest on August 31, 2024.

No other officers or ~~entity identified under section 560.304~~directors, as defined in Rule 16a-1(f), adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of ~~title 31, Code of Federal Regulations. The services constituted a cloud-based spam and malware filtering service and~~Regulation S-K, during the cloud-based provision of Office 365 software services provided to two entities associated with the Iranian bank, Bank Sepah – Bank Sepah International PLC and Banque Sepah, respectively. For the former, an annual service fee equivalent to $600 was charged for a one-year period beginning in February 2017, and for the latter, use rights were charged at a price equivalent to approximately $55 per month fromthree months ended September 2016 through November 2017, totaling $770. It is not possible to determine the precise profits, if any, attributable to these activities, though they are less than the associated revenues. Microsoft has ceased providing these software services to these entities and has no intention of doing so in the future.30, 2023.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the ~~undersigned~~undersigned; thereunto duly authorized.


Washington		91-1144442
~~One Microsoft Way, Redmond, Washington~~(STATE OF INCORPORATION)		(I.R.S. ID)



~~(Address~~Securities registered pursuant to Section 12(b) of ~~principal executive offices)~~the Act:

Title of each class	~~(Zip Code)~~Trading Symbol	Name of exchange on which registered

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


Large ~~accelerated filer~~ Accelerated Filer☒		Accelerated ~~filer~~ Filer ☐
Non-accelerated ~~filer~~ Filer ☐~~(Do not check if a smaller reporting company)~~		Smaller ~~reporting company~~ Reporting Company ☐
~~Emerging growth company~~ ☐		Emerging Growth Company ☐


Class	Outstanding as of ~~January 26, 2018~~October 19, 2023


Common Stock, ~~$0.00000625~~$0.00000625 par value per share	7,432,262,329 shares	~~7,699,792,852 shares~~


				Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements		3

		a)	Income Statements for the Three ~~and Six~~ Months Ended ~~December 31, 2017~~September 30, 2023 and ~~2016~~2022	3

		b)	Comprehensive Income Statements for the Three ~~and Six~~ Months Ended ~~December 31, 2017~~September 30, 2023 and ~~2016~~2022	4

		c)	Balance Sheets as of ~~December 31, 2017~~September 30, 2023 and June 30, ~~2017~~2023	5

		d)	Cash Flows Statements for the Three ~~and Six~~ Months Ended ~~December 31, 2017~~September 30, 2023 and ~~2016~~2022	6

		e)	Stockholders’ Equity Statements for the Three ~~and Six~~ Months Ended ~~December 31, 2017~~September 30, 2023 and ~~2016~~2022	7

		f)	Notes to Financial Statements	8

		g)	Report of Independent Registered Public Accounting Firm	3929

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		4030

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		5543

	Item 4.	Controls and Procedures		5643

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings		5744

	Item 1A.	Risk Factors		5744

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		6758

	Item 5.	Other Information		6759

	Item 6.	Exhibits		6860

SIGNATURE				6961


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

☐
	For the Quarterly Period Ended September 30, 2023

	OR

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


(In millions, except per share amounts) (Unaudited)	Three Months Ended December 31,					Six Months Ended December 31,


	2017			2016			2017		2016
Three Months Ended September 30,										2023		2022

Revenue:
Product	$	17,926		$	18,273	$	32,224	$	33,241	$	15,535	$	15,741
Service and other		10,992			7,553		21,232		14,513		40,982		34,381


Total revenue		28,918			25,826		53,456		47,754		56,517		50,122


Cost of revenue:
Product		5,498			5,378		8,478		8,959		3,531		4,302
Service and other		5,566			4,523		10,864		8,786		12,771		11,150


Total cost of revenue		11,064			9,901		19,342		17,745		16,302		15,452


Gross margin		17,854			15,925		34,114		30,009		40,215		34,670
Research and development		3,504			3,062		7,078		6,168		6,659		6,628
Sales and marketing		4,562			4,079		8,374		7,297		5,187		5,126
General and administrative		1,109			879		2,275		1,924		1,474		1,398


Operating income		8,679			7,905		16,387		14,620		26,895		21,518
Other income, net		490			117		766		229		389		54


Income before income taxes		9,169			8,022		17,153		14,849		27,284		21,572
Provision for income taxes		15,471			1,755		16,879		2,915		4,993		4,016


Net income (loss)	$	(6,302	)	$	6,267	$	274	$	11,934
Net income										$	22,291	$	17,556


Earnings (loss) per share:
Earnings per share:
Basic	$	(0.82	)	$	0.81	$	0.04	$	1.54	$	3.00	$	2.35
Diluted	$	(0.82	)	$	0.80	$	0.04	$	1.52	$	2.99	$	2.35

Weighted average shares outstanding:
Basic		7,710			7,755		7,709		7,772		7,429		7,457
Diluted		7,710			7,830		7,799		7,853		7,462		7,485


Cash dividends declared per common share	$	0.42		$	0.39	$	0.84	$	0.78


(In millions) (Unaudited)	Three Months Ended December 31,						Six Months Ended December 31,


Three Months Ended September 30,													2023			2022
	2017			2016			2017			2016

Net income (loss)	$	(6,302	)	$	6,267		$	274		$	11,934
Net income													$	22,291		$	17,556


Other comprehensive income (loss), net of tax:
Net change related to derivatives		(7	)		280			(113	)		243			21			7
Net change related to investments		(878	)		(994	)		(1,166	)		(911	)		(260	)		(1,897	)
Translation adjustments and other		(40	)		(592	)		253			(474	)		(355	)		(775	)


Other comprehensive loss		(925	)		(1,306	)		(1,026	)		(1,142	)		(594	)		(2,665	)


Comprehensive income (loss)	$	(7,227	)	$	4,961		$	(752	)	$	10,792
Comprehensive income													$	21,697		$	14,891

(In millions)	As Previously Reported		As Adjusted		As Previously Reported		As Adjusted


Balance Sheets				June 30, 2017			September 30, 2017

Long-term income taxes	$	0	$	13,485	$	0	$	13,944
Other long-term liabilities		17,034		3,549		18,173		4,229

(In millions, except per share amounts)	As Previously Reported		New Revenue Standard Adjustment		As Restated


Income Statements

Three Months Ended December 31, 2016

Revenue	$	24,090	$	1,736	$	25,826
Provision for income taxes		1,163		592		1,755
Net income		5,200		1,067		6,267
Diluted earnings per share		0.66		0.14		0.80

Six Months Ended December 31, 2016

Revenue	$	44,543	$	3,211	$	47,754
Provision for income taxes		1,798		1,117		2,915
Net income		9,890		2,044		11,934
Diluted earnings per share		1.26		0.26		1.52


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


December 31, 2017

Cash	$	3,877	$	0	$	0		$	3,877	$	3,877	$	0	$	0
Mutual funds		1,080		0		0			1,080		1,080		0		0
Commercial paper		1,533		0		0			1,533		904		629		0
Certificates of deposit		1,832		0		0			1,832		1,642		190		0
U.S. government and agency securities		119,085		34		(746	)		118,373		4,465		113,908		0
Foreign government bonds		6,605		2		(12	)		6,595		891		5,704		0
Mortgage- and asset-backed securities		3,952		7		(7	)		3,952		0		3,952		0
Corporate notes and bonds		5,172		48		(14	)		5,206		0		5,206		0
Municipal securities		284		47		0			331		0		331		0
Common and preferred stock		1,697		1,707		(6	)		3,398		0		0		3,398
Other investments		564		0		0			564		0		1		563


Total	$	145,681	$	1,845	$	(785	)	$	146,741	$	12,859	$	129,921	$	3,961

	Assets												Liabilities


(In millions)	Short-term Investments			Other Current Assets			Equity and Other Investments			Other Long-term Assets			Other Current Liabilities			Other Long-term Liabilities


December 31, 2017

Non-designated Hedge Derivatives

Foreign exchange contracts	$	5		$	145		$	0		$	32		$	(165	)	$	(5	)
Equity contracts		7			0			0			0			(1	)		0
Interest rate contracts		4			0			0			0			(5	)		0
Credit contracts		3			0			0			0			(1	)		0


Total	$	19		$	145		$	0		$	32		$	(172	)	$	(5	)


Designated Hedge Derivatives

Foreign exchange contracts	$	10		$	48		$	0		$	3		$	(27	)	$	(5	)
Equity contracts		0			0			7			0			(328	)		0


Total	$	10		$	48		$	7		$	3		$	(355	)	$	(5	)


Total gross amounts of derivatives	$	29		$	193		$	7		$	35		$	(527	)	$	(10	)


Gross derivatives either offset or subject to an enforceable master netting agreement	$	28		$	193		$	7		$	35		$	(526	)	$	(10	)
Gross amounts of derivatives offset on the balance sheet		(30	)		(115	)		(7	)		(7	)		152			7


Net amounts presented on the balance sheet		(2	)		78			0			28			(374	)		(3	)
Gross amounts of derivatives not offset on the balance sheet		0			0			0			0			0			0
Cash collateral received		0			0			0			0			(51	)		0


Net amount	$	(2	)	$	78		$	0		$	28		$	(425	)	$	(3	)

(In millions)


Year Ending June 30,

2018 (excluding the six months ended December 31, 2017)	$	1,105
2019		1,700
2020		1,194
2021		1,005
2022		931
Thereafter		3,099


Total	$	9,034

(In millions, except interest rates)	Face Value December 31, 2017		Face Value June 30, 2017		Stated Interest Rate			Effective Interest Rate


Notes

November 15, 2017	$	0	$	600		0.875%			1.084%
May 1, 2018		450		450		1.000%			1.106%
November 3, 2018		1,750		1,750		1.300%			1.396%
December 6, 2018		1,250		1,250		1.625%			1.824%
June 1, 2019		1,000		1,000		4.200%			4.379%
August 8, 2019		2,500		2,500		1.100%			1.203%
November 1, 2019		18		18		0.500%			0.500%
February 6, 2020		1,500		1,500		1.850%			1.952%
February 12, 2020		1,500		1,500		1.850%			1.935%
October 1, 2020		1,000		1,000		3.000%			3.137%
November 3, 2020		2,250		2,250		2.000%			2.093%
February 8, 2021		500		500		4.000%			4.082%
August 8, 2021		2,750		2,750		1.550%			1.642%
December 6, 2021 ^(a)		2,102		1,996		2.125%			2.233%
February 6, 2022		1,750		1,750		2.400%			2.520%
February 12, 2022		1,500		1,500		2.375%			2.466%
November 3, 2022		1,000		1,000		2.650%			2.717%
November 15, 2022		750		750		2.125%			2.239%
May 1, 2023		1,000		1,000		2.375%			2.465%
August 8, 2023		1,500		1,500		2.000%			2.101%
December 15, 2023		1,500		1,500		3.625%			3.726%
February 6, 2024		2,250		2,250		2.875%			3.041%
February 12, 2025		2,250		2,250		2.700%			2.772%
November 3, 2025		3,000		3,000		3.125%			3.176%
August 8, 2026		4,000		4,000		2.400%			2.464%
February 6, 2027		4,000		4,000		3.300%			3.383%
December 6, 2028 ^(a)		2,102		1,996		3.125%			3.218%
May 2, 2033 ^(a)		660		627		2.625%			2.690%
February 12, 2035		1,500		1,500		3.500%	��		3.604%
November 3, 2035		1,000		1,000		4.200%			4.260%
August 8, 2036		2,250		2,250		3.450%			3.510%
February 6, 2037		2,500		2,500		4.100%			4.152%
June 1, 2039		750		750		5.200%			5.240%
October 1, 2040		1,000		1,000		4.500%			4.567%
February 8, 2041		1,000		1,000		5.300%			5.361%
November 15, 2042		900		900		3.500%			3.571%
May 1, 2043		500		500		3.750%			3.829%
December 15, 2043		500		500		4.875%			4.918%
February 12, 2045		1,750		1,750		3.750%			3.800%
November 3, 2045		3,000		3,000		4.450%			4.492%
August 8, 2046		4,500		4,500		3.700%			3.743%
February 6, 2047		3,000		3,000		4.250%			4.287%
February 12, 2055		2,250		2,250		4.000%			4.063%
November 3, 2055		1,000		1,000		4.750%			4.782%
August 8, 2056		2,250		2,250		3.950%			4.033%
February 6, 2057		2,000		2,000		4.500%			4.528%


Total	$	77,482	$	77,837

(In millions)		Severance			Other	^(a)		Total


Balance, as of June 30, 2017	$	373		$	59		$	432
Restructuring charges		0			0			0
Cash paid		(292	)		(15	)		(307	)
Other		0			(7	)		(7	)


Balance, as of December 31, 2017	$	81		$	37		$	118

Declaration Date	Dividend Per Share		Record Date		Total Amount		Payment Date


Fiscal Year 2018					(in millions)

September 19, 2017	$	0.42		November 16, 2017	$	3,238		December 14, 2017
November 29, 2017	$	0.42		February 15, 2018	$	3,236		March 8, 2018


Fiscal Year 2017

September 20, 2016	$	0.39		November 17, 2016	$	3,024		December 8, 2016
November 30, 2016	$	0.39		February 16, 2017	$	3,012		March 9, 2017


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


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 Microsoft 365 Copilot

Office Consumer products and cloud services revenue growth		Revenue from Office Consumer products and cloud services, including Microsoft 365 Consumer 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 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


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- 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


(In millions, except percentages and per share amounts)		Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change			Three Months Ended September 30,			Percentage Change


		2017			2016				2017		2016				2023		2022

Revenue	$	28,918		$	25,826		12%	$	53,456	$	47,754		12%	$	56,517	$	50,122		13%
Gross margin		17,854			15,925		12%		34,114		30,009		14%		40,215		34,670		16%
Operating income		8,679			7,905		10%		16,387		14,620		12%		26,895		21,518		25%
Net income (loss)		(6,302	)		6,267		(201)%		274		11,934		(98)%
Diluted earnings (loss) per share		(0.82	)		0.80		(203)%		0.04		1.52		(97)%
Net income															22,291		17,556		27%
Diluted earnings per share															2.99		2.35		27%

Adjusted net income		7,498			6,267		20%		14,074		11,934		18%
Adjusted diluted earnings per share		0.96			0.80		20%		1.80		1.52		18%


(In millions, except percentages)	Three Months Ended December 31,				Percentage Change		Six Months Ended December 31,				Percentage Change		Three Months Ended September 30,				Percentage Change


	2017		2016					2017		2016			2023		2022

Revenue

Productivity and Business Processes	$	8,953	$	7,179		25%	$	17,191	$	13,615		26%	$	18,592	$	16,465		13%
Intelligent Cloud		7,795		6,758		15%		14,717		12,855		14%		24,259		20,325		19%
More Personal Computing		12,170		11,889		2%		21,548		21,284		1%		13,666		13,332		3%


Total revenue	$	28,918	$	25,826		12%	$	53,456	$	47,754		12%
Total													$	56,517	$	50,122		13%


Operating Income

Productivity and Business Processes	$	3,337	$	3,053		9%	$	6,343	$	5,958		6%	$	9,970	$	8,323		20%
Intelligent Cloud		2,832		2,291		24%		4,969		4,068		22%		11,751		8,978		31%
More Personal Computing		2,510		2,561		(2)%		5,075		4,594		10%		5,174		4,217		23%


Total operating income	$	8,679	$	7,905		10%	$	16,387	$	14,620		12%
Total													$	26,895	$	21,518		25%

(In millions)


Three Months Ending,

March 31, 2018	$	10,121
June 30, 2018		6,488
September 30, 2018		3,000
December 31, 2018		1,700
Thereafter		2,500


Total	$	23,809


(In millions)


Three Months Ending

December 31, 2023	$	21,006
March 31, 2024		14,860
June 30, 2024		8,551
September 30, 2024		2,012
Thereafter		2,759


Total	$	49,188

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs


							(in millions)

October 1, 2017 – October 31, 2017		9,042,700	$	77.84		9,042,700	$	34,496
November 1, 2017 – November 30, 2017		7,699,775	$	83.68		7,699,775	$	33,852
December 1, 2017 – December 31, 2017		5,329,011	$	84.78		5,329,011	$	33,400


		22,071,486				22,071,486


10.14*15.1		~~Microsoft Corporation Deferred Compensation Plan for Non-Employee Directors (Amended and Restated Effective as of December 1, 2017)~~

10.26*		~~Microsoft Corporation 2017 Stock Plan (incorporated by reference to Annex C to the Microsoft Corporation Proxy Statement filed on October 16, 2017)~~

~~15.1~~		Letter regarding unaudited interim financial information

31.1		~~Certifications~~Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		~~Certifications~~Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance ~~Document~~Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document

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101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase

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104		Cover page formatted as Inline XBRL and contained in Exhibit 101