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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended March 31, 2020

OR

 

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

For the Transition Period From                  to                 

Commission File Number 001-37845

 

MICROSOFT CORPORATION

 

 

Washington

 

91-1144442

(State of incorporation)

 

(I.R.S. ID)

 

ONE MICROSOFT WAY, REDMOND, washington 98052-6399

(425) 882-8080

www.microsoft.com/investor

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

 

 

 

 

 

Common stock, $0.00000625 par value per share

 

MSFT

 

NASDAQ

2.125% Notes due 2021

 

MSFT

 

NASDAQ

3.125% Notes due 2028

 

MSFT

 

NASDAQ

2.625% Notes due 2033

 

MSFT

 

NASDAQ

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

NONE

 

 

 

 

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

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

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

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

 

 

Emerging growth company 

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

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

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

 

Class

 

Outstanding as of April 24, 2020

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,583,440,247 shares

 

 

 

 

 


 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2020

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

a)

Income Statements for the Three and Nine Months Ended March 31, 2020 and 2019

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2020 and 2019

4

 

 

 

 

 

 

 

c)

Balance Sheets as of March 31, 2020 and June 30, 2019

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three and Nine Months Ended March 31, 2020 and 2019

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2020 and 2019

7

 

 

 

 

 

 

 

f)

Notes to Financial Statements

8

 

 

 

 

 

 

 

g)

Report of Independent Registered Public Accounting Firm

30

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

 

 

 

Item 4.

Controls and Procedures

47

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

��

Item 1.

Legal Proceedings

48

 

 

 

 

 

 

Item 1A.

Risk Factors

48

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

 

 

 

Item 6.

Exhibits

62

 

 

 

 

 

SIGNATURE

63

 

 

 

2


PART I

Item 1

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

 

(In millions, except per share amounts) (Unaudited)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

15,871

 

 

$

15,448

 

 

$

49,894

 

 

$

48,966

 

Service and other

 

 

19,150

 

 

 

15,123

 

 

 

55,088

 

 

 

43,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

35,021

 

 

 

30,571

 

 

 

104,982

 

 

 

92,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

3,376

 

 

 

3,441

 

 

 

11,647

 

 

 

12,975

 

Service and other

 

 

7,599

 

 

 

6,729

 

 

 

22,092

 

 

 

19,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

10,975

 

 

 

10,170

 

 

 

33,739

 

 

 

32,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

24,046

 

 

 

20,401

 

 

 

71,243

 

 

 

59,628

 

Research and development

 

 

4,887

 

 

 

4,316

 

 

 

14,055

 

 

 

12,363

 

Sales and marketing

 

 

4,911

 

 

 

4,565

 

 

 

14,181

 

 

 

13,251

 

General and administrative

 

 

1,273

 

 

 

1,179

 

 

 

3,455

 

 

 

3,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

12,975

 

 

 

10,341

 

 

 

39,552

 

 

 

30,554

 

Other income (expense), net

 

 

(132

)

 

 

145

 

 

 

62

 

 

 

538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

12,843

 

 

 

10,486

 

 

 

39,614

 

 

 

31,092

 

Provision for income taxes

 

 

2,091

 

 

 

1,677

 

 

 

6,535

 

 

 

5,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,752

 

 

$

8,809

 

 

$

33,079

 

 

$

26,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.41

 

 

$

1.15

 

 

$

4.34

 

 

$

3.39

 

Diluted

 

$

1.40

 

 

$

1.14

 

 

$

4.30

 

 

$

3.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,602

 

 

 

7,672

 

 

 

7,619

 

 

 

7,679

 

Diluted

 

 

7,675

 

 

 

7,744

 

 

 

7,693

 

 

 

7,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,752

 

 

$

8,809

 

 

$

33,079

 

 

$

26,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

(36

)

 

 

(33

)

 

 

(42

)

 

 

(93

)

Net change related to investments

 

 

3,508

 

 

 

714

 

 

 

3,665

 

 

 

1,334

 

Translation adjustments and other

 

 

(541

)

 

 

67

 

 

 

(607

)

 

 

(252

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

2,931

 

 

 

748

 

 

 

3,016

 

 

 

989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

13,683

 

 

$

9,557

 

 

$

36,095

 

 

$

27,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,
2020

 

 

June 30,
2019

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,710

 

 

$

11,356

 

Short-term investments

 

 

125,916

 

 

 

122,463

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

137,626

 

 

 

133,819

 

Accounts receivable, net of allowance for doubtful accounts of $446 and $411

 

 

22,699

 

 

 

29,524

 

Inventories

 

 

1,644

 

 

 

2,063

 

Other current assets

 

 

8,536

 

 

 

10,146

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

170,505

 

 

 

175,552

 

Property and equipment, net of accumulated depreciation of $41,512 and $35,330

 

 

41,221

 

 

 

36,477

 

Operating lease right-of-use assets

 

 

8,448

 

 

 

7,379

 

Equity investments

 

 

2,660

 

 

 

2,649

 

Goodwill

 

 

42,064

 

 

 

42,026

 

Intangible assets, net

 

 

6,855

 

 

 

7,750

 

Other long-term assets

 

 

13,696

 

 

 

14,723

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

285,449

 

 

$

286,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,246

 

 

$

9,382

 

Current portion of long-term debt

 

 

3,748

 

 

 

5,516

 

Accrued compensation

 

 

6,254

 

 

 

6,830

 

Short-term income taxes

 

 

3,296

 

 

 

5,665

 

Short-term unearned revenue

 

 

27,012

 

 

 

32,676

 

Other current liabilities

 

 

9,151

 

 

 

9,351

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

58,707

 

 

 

69,420

 

Long-term debt

 

 

62,862

 

 

 

66,662

 

Long-term income taxes

 

 

28,888

 

 

 

29,612

 

Long-term unearned revenue

 

 

3,385

 

 

 

4,530

 

Deferred income taxes

 

 

185

 

 

 

233

 

Operating lease liabilities

 

 

7,248

 

 

 

6,188

 

Other long-term liabilities

 

 

9,673

 

 

 

7,581

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

170,948

 

 

 

184,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,590 and 7,643

 

 

79,813

 

 

 

78,520

 

Retained earnings

 

 

32,012

 

 

 

24,150

 

Accumulated other comprehensive income (loss)

 

 

2,676

 

 

 

(340

)

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

114,501

 

 

 

102,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

285,449

 

 

$

286,556

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,752

 

 

$

8,809

 

 

$

33,079

 

 

$

26,053

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

3,118

 

 

 

2,926

 

 

 

9,292

 

 

 

8,758

 

Stock-based compensation expense

 

 

1,338

 

 

 

1,172

 

 

 

3,940

 

 

 

3,462

 

Net recognized losses (gains) on investments and derivatives

 

 

52

 

 

 

(95

)

 

 

(140

)

 

 

(470

)

Deferred income taxes

 

 

(206

)

 

 

(320

)

 

 

(436

)

 

 

(740

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

891

 

 

 

460

 

 

 

6,778

 

 

 

7,258

 

Inventories

 

 

181

 

 

 

12

 

 

 

419

 

 

 

710

 

Other current assets

 

 

94

 

 

 

(14

)

 

 

(179

)

 

 

(864

)

Other long-term assets

 

 

124

 

 

 

(517

)

 

 

(726

)

 

 

(969

)

Accounts payable

 

 

546

 

 

 

(197

)

 

 

(8

)

 

 

(1,032

)

Unearned revenue

 

 

(736

)

 

 

20

 

 

 

(6,564

)

 

 

(4,543

)

Income taxes

 

 

765

 

 

 

276

 

 

 

(3,042

)

 

 

(879

)

Other current liabilities

 

 

695

 

 

 

649

 

 

 

(1,136

)

 

 

(1,017

)

Other long-term liabilities

 

 

(110

)

 

 

339

 

 

 

725

 

 

 

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

17,504

 

 

 

13,520

 

 

 

42,002

 

 

 

36,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of debt

 

 

(3,000

)

 

 

0

 

 

 

(5,518

)

 

 

(3,000

)

Common stock issued

 

 

342

 

 

 

274

 

 

 

1,003

 

 

 

834

 

Common stock repurchased

 

 

(7,059

)

 

 

(4,753

)

 

 

(17,177

)

 

 

(14,910

)

Common stock cash dividends paid

 

 

(3,876

)

 

 

(3,526

)

 

 

(11,272

)

 

 

(10,290

)

Other, net

 

 

(1,052

)

 

 

404

 

 

 

(805

) 

 

 

(835

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(14,645

)

 

 

(7,601

)

 

 

(33,769

)

 

 

(28,201

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(3,767

)

 

 

(2,565

)

 

 

(10,697

)

 

 

(9,874

)

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

 

 

(329

)

 

 

(269

)

 

 

(871

)

 

 

(2,107

)

Purchases of investments

 

 

(15,910

)

 

 

(5,846

)

 

 

(58,311

)

 

 

(42,255

)

Maturities of investments

 

 

17,247

 

 

 

5,893

 

 

 

47,559

 

 

 

14,889

 

Sales of investments

 

 

2,810

 

 

 

1,424

 

 

 

14,559

 

 

 

30,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used in) investing

 

 

51

 

 

 

(1,363

)

 

 

(7,761

)

 

 

(8,516

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

(64

)

 

 

18

 

 

 

(118

)

 

 

(94

)

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

2,846

 

 

 

4,574

 

 

 

354

 

 

 

(734

)

Cash and cash equivalents, beginning of period

 

 

8,864

 

 

 

6,638

 

 

 

11,356

 

 

 

11,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

11,710

 

 

$

11,212

 

 

$

11,710

 

 

$

11,212

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

6


PART I

Item 1

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

79,625

 

 

$

77,556

 

 

$

78,520

 

 

$

71,223

 

 

Common stock issued

 

 

342

 

 

 

274

 

 

 

1,003

 

 

 

6,521

 

 

Common stock repurchased

 

 

(1,492

)

 

 

(1,218

)

 

 

(3,649

)

 

 

(3,433

)

 

Stock-based compensation expense

 

 

1,338

 

 

 

1,172

 

 

 

3,940

 

 

 

3,462

 

 

Other, net

 

 

0

 

 

 

7

 

 

 

(1

)

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

79,813

 

 

 

77,791

 

 

 

79,813

 

 

 

77,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

30,739

 

 

 

16,585

 

 

 

24,150

 

 

 

13,682

 

 

Net income

 

 

10,752

 

 

 

8,809

 

 

 

33,079

 

 

 

26,053

 

 

Common stock cash dividends

 

 

(3,865

)

 

 

(3,518

)

 

 

(11,627

)

 

 

(10,592

)

 

Common stock repurchased

 

 

(5,614

)

 

 

(3,538

)

 

 

(13,590

)

 

 

(11,482

)

 

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

0

 

 

 

677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

32,012

 

 

 

18,338

 

 

 

32,012

 

 

 

18,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

(255

)

 

 

(2,013

)

 

 

(340

)

 

 

(2,187

)

 

Other comprehensive income

 

 

2,931

 

 

 

748

 

 

 

3,016

 

 

 

989

 

 

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

2,676

 

 

 

(1,265

)

 

 

2,676

 

 

 

(1,265

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

114,501

 

 

$

94,864

 

 

$

114,501

 

 

$

94,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.51

 

 

$

0.46

 

 

$

1.53

 

 

$

1.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

7


PART I

Item 1

 

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation fiscal year 2019 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on August 1, 2019.

 

Principles of Consolidation

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

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to the recent outbreak of a novel strain of the coronavirus (“COVID-19”).

Financial Instruments

Investments

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

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in other comprehensive income. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis 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. We also evaluate whether 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. In addition, we 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. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.

8


PART I

Item 1

 

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

Derivatives

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

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

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

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

Fair Value Measurements

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

 

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

 

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

 

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

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

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

9


PART I

Item 1

 

Contract Balances

As of March 31, 2020 and June 30, 2019, long-term accounts receivable, net of allowance for doubtful accounts, was $2.5 billion and $2.2 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Financial Instruments – Targeted Improvements to Accounting for Hedging Activities

In August 2017, the Financial Accounting Standards Board (“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. We adopted the standard effective July 1, 2019. As we did not hold derivative instruments requiring an adjustment upon adoption, there was no impact in our consolidated financial statements. Adoption of the standard enhanced the presentation of the effects of our hedging instruments and the hedged items in our consolidated financial statements to increase the understandability of the results of our hedging strategies.

Recent Accounting Guidance Not Yet Adopted

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 credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, 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 in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. 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 have evaluated the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems. We continue to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, we do not expect the impact to be material upon adoption.

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021, with early adoption permitted. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

 

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.

10


PART I

Item 1

 

The components of basic and diluted EPS were as follows:

 

(In millions, except earnings per share)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

10,752

 

 

$

8,809

 

 

$

33,079

 

 

$

26,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,602

 

 

 

7,672

 

 

 

7,619

 

 

 

7,679

 

Dilutive effect of stock-based awards

 

 

73

 

 

 

72

 

 

 

74

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

7,675

 

 

 

7,744

 

 

 

7,693

 

 

 

7,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

1.41

 

 

$

1.15

 

 

$

4.34

 

 

$

3.39

 

Diluted (A/C)

 

$

1.40

 

 

$

1.14

 

 

$

4.30

 

 

$

3.36

 

 

 

 

 

 

 

 

 

 

 

 

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

 

NOTE 3 — OTHER INCOME (EXPENSE), NET

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

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividends income

 

$

673

 

 

$

668

 

 

$

2,085

 

 

$

2,053

 

Interest expense

 

 

(614

)

 

 

(671

)

 

 

(1,905

)

 

 

(2,017

)

Net recognized gains (losses) on investments

 

 

(101

)

 

 

44

 

 

 

4

 

 

 

381

 

Net gains on derivatives

 

 

49

 

 

 

51

 

 

 

136

 

 

 

89

 

Net gains (losses) on foreign currency remeasurements

 

 

(136

)

 

 

37

 

 

 

(218

)

 

 

(32

)

Other, net

 

 

(3

)

 

 

16

 

 

 

(40

)

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(132

)

 

$

145

 

 

$

62

 

 

$

538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Recognized Gains (Losses) on Investments

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

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

9

 

 

$

6

 

 

$

30

 

 

$

19

 

Realized losses from sales of available-for-sale securities

 

 

(7

)

 

 

(10

)

 

 

(17

)

 

 

(100

)

Other-than-temporary impairments of investments

 

 

(7

)

 

 

0

 

 

 

(12

)

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(5

)

 

$

(4

)

 

$

1

 

 

$

(88

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(In millions)

 

Three Months Ended

March 31,

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) on investments sold

 

$

(5

)

 

$

5

 

 

$

70

 

 

$

238

 

Net unrealized gains (losses) on investments still held

 

 

(22

)

 

 

50

 

 

 

33

 

 

 

241

 

Impairments of investments

 

 

(69

)

 

 

(7

)

 

 

(100

)

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(96

)

 

$

48

 

 

$

3

 

 

$

469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


PART I

Item 1

 

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

 

(In millions)

 

Fair Value
Level

 

 

 

Cost Basis

 

 

 

Unrealized

Gains

 

 

 

Unrealized

Losses

 

 

 

Recorded

Basis

 

 

 

Cash

 and Cash

Equivalents

 

 

 

Short-term

Investments

 

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

5,164

 

 

$

0

 

 

$

0

 

 

$

5,164

 

 

$

1,442

 

 

$

3,722

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

2,446

 

 

 

0

 

 

 

0

 

 

 

2,446

 

 

 

1,984

 

 

 

462

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

96,481

 

 

 

6,543

 

 

 

(13

)

 

 

103,011

 

 

 

496

 

 

 

102,515

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

2,124

 

 

 

0

 

 

 

0

 

 

 

2,124

 

 

 

458

 

 

 

1,666

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

7,255

 

 

 

3

 

 

 

(13

)

 

 

7,245

 

 

 

1,476

 

 

 

5,769

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

3,952

 

 

 

16

 

 

 

(37

)

 

 

3,931

 

 

 

0

 

 

 

3,931

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

7,444

 

 

 

107

 

 

 

(138

)

 

 

7,413

 

 

 

32

 

 

 

7,381

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

49

 

 

 

0

 

 

 

0

 

 

 

49

 

 

 

0

 

 

 

49

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

312

 

 

 

46

 

 

 

(5

)

 

 

353

 

 

 

0

 

 

 

353

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

84

 

 

 

0

 

 

 

0

 

 

 

84

 

 

 

0

 

 

 

84

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

125,311

 

 

$

6,715

 

 

$

(206

)

 

$

131,820

 

 

$

5,888

 

 

$

125,932

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,426

 

 

$

1,239

 

 

$

0

 

 

$

187

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,473

 

 

 

0

 

 

 

0

 

 

 

2,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,899

 

 

$

1,239

 

 

$

0

 

 

$

2,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,583

 

 

$

4,583

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

0

 

 

 

(16

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

140,286

 

 

$

11,710

 

 

$

125,916

 

 

$

2,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


PART I

Item 1

 

 

(In millions)

 

Fair Value
Level

 

 

 

Cost Basis

 

 

 

Unrealized

Gains

 

 

 

Unrealized

Losses

 

 

 

Recorded

Basis

 

 

 

Cash

and Cash

Equivalents

 

 

 

Short-term

Investments

 

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

2,211

 

 

$

0

 

 

$

0

 

 

$

2,211

 

 

$

1,773

 

 

$

438

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

2,018

 

 

 

0

 

 

��

0

 

 

 

2,018

 

 

 

1,430

 

 

 

588

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

104,925

 

 

 

1,854

 

 

 

(104

)

 

 

106,675

 

 

 

769

 

 

 

105,906

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

988

 

 

 

0

 

 

 

0

 

 

 

988

 

 

 

698

 

 

 

290

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

6,350

 

 

 

4

 

 

 

(8

)

 

 

6,346

 

 

 

2,506

 

 

 

3,840

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

3,554

 

 

 

10

 

 

 

(3

)

 

 

3,561

 

 

 

0

 

 

 

3,561

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

7,437

 

 

 

111

 

 

 

(7

)

 

 

7,541

 

 

 

0

 

 

 

7,541

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

15

 

 

 

0

 

 

 

0

 

 

 

15

 

 

 

0

 

 

 

15

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

242

 

 

 

48

 

 

 

0

 

 

 

290

 

 

 

0

 

 

 

290

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

7

 

 

 

0

 

 

 

0

 

 

 

7

 

 

 

0

 

 

 

7

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

127,747

 

 

$

2,027

 

 

$

(122

)

 

$

129,652

 

 

$

7,176

 

 

$

122,476

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

973

 

 

$

409

 

 

$

0

 

 

$

564

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,085

 

 

 

0

 

 

 

0

 

 

 

2,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,058

 

 

$

409

 

 

$

0

 

 

$

2,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,771

 

 

$

3,771

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

0

 

 

 

(13

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

136,468

 

 

$

11,356

 

 

$

122,463

 

 

$

2,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

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

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of March 31, 2020 and June 30, 2019, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.3 billion and $1.2 billion, respectively.

Unrealized Losses on Debt Investments

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

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

1,703

 

 

$

(4

)

 

$

372

 

 

$

(9

)

 

$

2,075

 

 

$

(13

)

Foreign government bonds

 

 

481

 

 

 

(6

)

 

 

8

 

 

 

(7

)

 

 

489

 

 

 

(13

)

Mortgage- and asset-backed securities

 

 

2,180

 

 

 

(32

)

 

 

134

 

 

 

(5

)

 

 

2,314

 

 

 

(37

)

Corporate notes and bonds

 

 

3,469

 

 

 

(126

)

 

 

41

 

 

 

(12

)

 

 

3,510

 

 

 

(138

)

Municipal securities

 

 

75

 

 

 

(5

)

 

 

1

 

 

 

0

 

 

 

76

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,908

 

 

$

(173

)

 

$

556

 

 

$

(33

)

 

$

8,464

 

 

$

(206

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13


PART I

Item 1

 

 

 

 

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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

1,491

 

 

$

(1

)

 

$

39,158

 

 

$

(103

)

 

$

40,649

 

 

$

(104

)

Foreign government bonds

 

 

25

 

 

 

0

 

 

 

77

 

 

 

(8

)

 

 

102

 

 

 

(8

)

Mortgage- and asset-backed securities

 

 

664

 

 

 

(1

)

 

 

378

 

 

 

(2

)

 

 

1,042

 

 

 

(3

)

Corporate notes and bonds

 

 

498

 

 

 

(3

)

 

 

376

 

 

 

(4

)

 

 

874

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,678

 

 

$

(5

)

 

$

39,989

 

 

$

(117

)

 

$

42,667

 

 

$

(122

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Debt Investment Maturities

 

(In millions)

 

Cost Basis

 

 

Estimated

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

39,008

 

 

$

39,109

 

Due after one year through five years

 

 

48,552

 

 

 

51,106

 

Due after five years through 10 years

 

 

35,789

 

 

 

39,458

 

Due after 10 years

 

 

1,962

 

 

 

2,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

125,311

 

 

$

131,820

 

 

 

 

 

 

 

 

 

 

 

NOTE 5 — DERIVATIVES

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

Foreign 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.

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.

In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

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

Interest Rate

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

14


PART I

Item 1

 

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. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Equity

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

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 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 March 31, 2020, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

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

 

(In millions)

 

March 31,

2020

 

 

June 30,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

$

635

 

 

$

0

 

Foreign exchange contracts sold

 

 

7,049

 

 

 

6,034

 

Interest rate contracts purchased

 

 

1,280

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

 

11,044

 

 

 

14,889

 

Foreign exchange contracts sold

 

 

10,970

 

 

 

15,614

 

Other contracts purchased

 

 

1,694

 

 

 

2,007

 

Other contracts sold

 

 

567

 

 

 

456

 

 

 

 

 

 

 

 

 

 

 

15


PART I

Item 1

 

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

 

 

 

Derivative

 

 

 

Derivative

 

 

Derivative

 

 

Derivative

 

(In millions)

 

Assets

 

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2020

 

 

June 30,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

9

 

 

$

(141

)

 

$

0

 

 

$

(93

)

Interest rate contracts

 

 

80

 

 

 

0

��

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

301

 

 

 

(356

)

 

 

204

 

 

 

(172

)

Other contracts

 

 

22

 

 

 

(156

)

 

 

46

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amounts of derivatives

 

 

412

 

 

 

(653

)

 

 

250

 

 

 

(272

)

Gross amounts of derivatives offset in the balance sheet

 

 

(128

)

 

 

134

 

 

 

(113

)

 

 

114

 

Cash collateral received

 

 

 0

 

 

 

(46

)

 

 

 0

 

 

 

(78

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amounts of derivatives

 

$

284

 

 

$

(565

)

 

$

137

 

 

$

(236

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

(16

)

 

$

0

 

 

$

(13

)

 

$

0

 

Other current assets

 

 

222

 

 

 

0

 

 

 

146

 

 

 

0

 

Other long-term assets

 

 

78

 

 

 

0

 

 

 

4

 

 

 

0

 

Other current liabilities

 

 

0

 

 

 

(393

)

 

 

0

 

 

 

(221

)

Other long-term liabilities

 

 

0

 

 

 

(172

)

 

 

0

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

284

 

 

$

(565

)

 

$

137

 

 

$

(236

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $406 million and $653 million, respectively, as of March 31, 2020, and $247 million and $272 million, respectively, as of June 30, 2019.  

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

 

(In millions)

 

Level 1

 

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

8

 

 

$

403

 

 

$

1

 

 

$

412

 

Derivative liabilities

 

 

(3

)

 

 

(650

)

 

 

0

 

 

 

(653

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

0

 

 

 

247

 

 

 

3

 

 

 

250

 

Derivative liabilities

 

 

0

 

 

 

(272

)

 

 

0

 

 

 

(272

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


PART I

Item 1

 

Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:

 

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Revenue

 

 

Other
Income

(Expense),
Net

 

 

Revenue

 

 

Other
Income

(Expense),
Net

 

 

Revenue

 

 

Other

Income

(Expense),

Net

 

 

Revenue

 

 

Other

Income

(Expense),

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Fair Value Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

0

 

 

$

(23

)

 

$

0

 

 

$

81

 

 

$

0

 

 

$

30

 

 

$

0

 

 

$

19

 

Hedged items

 

 

0

 

 

 

32

 

 

 

0

 

 

 

(81

)

 

 

0

 

 

 

(27

)

 

 

0

 

 

 

(19

)

Excluded from effectiveness assessment

 

 

0

 

 

 

35

 

 

 

0

 

 

 

48

 

 

 

0

 

 

 

118

 

 

 

0

 

 

 

121

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

0

 

 

 

91

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

78

 

 

 

0

 

 

 

0

 

Hedged items

 

 

0

 

 

 

(92

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(80

)

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount reclassified from accumulated other comprehensive income

 

 

0

 

 

 

(12

)

 

 

66

 

 

 

0

 

 

 

0

 

 

 

(9

)

 

 

246

 

 

 

0

 

Excluded from effectiveness assessment

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(21

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(62

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

0

 

 

 

(98

)

 

 

0

 

 

 

(87

)

 

 

0

 

 

 

(217

)

 

 

0

 

 

 

(196

)

Other contracts

 

 

0

 

 

 

16

 

 

 

0

 

 

 

22

 

 

 

0

 

 

 

18

 

 

 

0

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(In millions)

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in effectiveness assessment

 

$

(46

)

 

$

31

 

 

$

(50

)

 

$

145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 6 — INVENTORIES

The components of inventories were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2020

 

 

June 30,

2019

 

 

 

 

Raw materials

 

$

655

 

 

$

399

 

Work in process

 

 

86

 

 

 

53

 

Finished goods

 

 

903

 

 

 

1,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,644

 

 

$

2,063

 

 

 

 

 

 

 

 

 

 

 

17


PART I

Item 1

 

NOTE 7 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

 

(In millions)

 

June 30,

2019

 

 

Acquisitions

 

 

Other

 

 

March 31,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

24,277

 

 

$

7

 

 

$

(130

)

 

$

24,154

 

Intelligent Cloud

 

 

11,351

 

 

 

197

 

 

 

(14

)

 

 

11,534

 

More Personal Computing

 

 

6,398

 

 

 

96

 

 

 

(118

)

 

 

6,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

42,026

 

 

$

300

 

 

$

(262

)

 

$

42,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

NOTE 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2020

 

 

June 30,

2019

 

 

 

 

 

 

 

 

Technology-based

 

$

7,899

 

 

$

(6,235

)

 

$

1,664

 

 

$

7,691

 

 

$

(5,771

)

 

$

1,920

 

Customer-related

 

 

4,675

 

 

 

(2,169

)

 

 

2,506

 

 

 

4,709

 

 

 

(1,785

)

 

 

2,924

 

Marketing-related

 

 

4,157

 

 

 

(1,520

)

 

 

2,637

 

 

 

4,165

 

 

 

(1,327

)

 

 

2,838

 

Contract-based

 

 

474

 

 

 

(426

)

 

 

48

 

 

 

574

 

 

 

(506

)

 

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  17,205

 

 

$

  (10,350

)

 

$

6,855

 

 

$

  17,139

 

 

$

  (9,389

)

 

$

7,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets amortization expense was $356 million and $1.2 billion for the three and nine months ended March 31, 2020, respectively, and $431 million and $1.5 billion for the three and nine months ended March 31, 2019, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2020:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2020 (excluding the nine months ended March 31, 2020)

 

$

354

 

2021

 

 

1,369

 

2022

 

 

1,278

 

2023

 

 

1,099

 

2024

 

 

758

 

Thereafter

 

 

1,997

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,855

 

 

 

 

 

 

 

18


PART I

Item 1

 

NOTE 9  DEBT

The components of debt were as follows:

 

(In millions, issuance by calendar year)

 

Maturities

(calendar year)

 

Stated Interest

Rate

 

 

Effective Interest

Rate

 

 

March 31,

2020

 

 

June 30,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 issuance of $3.8 billion

 

 

 

 

2039

 

 

 

 

5.20%

 

 

 

 

5.24%

 

 

$

750

 

 

$

750

 

2010 issuance of $4.8 billion

 

 

2020

2040

 

 

3.00%

4.50%

 

 

3.14%

4.57%

 

 

 

2,000

 

 

 

2,000

 

2011 issuance of $2.3 billion

 

 

2021

2041

 

 

4.00%

5.30%

 

 

4.08%

5.36%

 

 

 

1,500

 

 

 

1,500

 

2012 issuance of $2.3 billion

 

 

2022

2042

 

 

2.13%

3.50%

 

 

2.24%

3.57%

 

 

 

1,650

 

 

 

1,650

 

2013 issuance of $5.2 billion

 

 

2023

2043

 

 

2.38%

4.88%

 

 

2.47%

4.92%

 

 

 

3,500

 

 

 

3,500

 

2013 issuance of €4.1 billion

 

 

2021

2033

 

 

2.13%

3.13%

 

 

2.23%

3.22%

 

 

 

4,443

 

 

 

4,613

 

2014 issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

18

 

2015 issuance of $23.8 billion

 

 

2020

2055

 

 

2.00%

4.75%

 

 

2.09%

4.78%

 

 

 

20,500

 

 

 

22,000

 

2016 issuance of $19.8 billion

 

 

2021

2056

 

 

1.55%

3.95%

 

 

1.64%

4.03%

 

 

 

17,250

 

 

 

19,750

 

2017 issuance of $17.0 billion

 

 

2022

2057

 

 

2.40%

4.50%

 

 

2.52%

4.53%

 

 

 

15,500

 

 

 

17,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total face value

 

 

 

 

 

 

 

 

 

 

 

 

67,093

 

 

 

72,781

 

Unamortized discount and issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

(563

)

 

 

(603

)

Hedge fair value adjustments (a)

 

 

 

 

 

 

 

 

 

 

 

 

80

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

66,610

 

 

 

72,178

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

(3,748

)

 

 

(5,516

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

$

62,862

 

 

$

66,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (a)

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

As of March 31, 2020 and June 30, 2019, the estimated fair value of long-term debt, including the current portion, was $77.3 billion and $78.9 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 as of March 31, 2020:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

 

 

 

2021

 

$

3,750

 

2022

 

 

7,920

 

2023

 

 

2,750

 

2024

 

 

5,250

 

Thereafter

 

 

47,423

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

67,093

 

 

 

 

 

 

 

19


PART I

Item 1

 

NOTE 10 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge related to the enactment of the TCJA in fiscal year 2018 and adjusted the provisional net charge by recording additional tax expense of $157 million in the second quarter of fiscal year 2019 pursuant to SEC Staff Accounting Bulletin No. 118.

Effective Tax Rate

Our effective tax rate was 16% for the three months ended March 31, 2020 and 2019, and 16% for the nine months ended March 31, 2020 and 2019. The effective tax rate was relatively unchanged for the three months ended March 31, 2020 compared to the prior year, primarily due to changes in the mix of our income before income taxes between the U.S. and foreign countries, offset in part by tax benefits relating to stock-based compensation. The effective tax rate was relatively unchanged for the nine months ended March 31, 2020 compared to the prior year, primarily due to changes in the mix of our income before income taxes between the U.S. and foreign countries, offset in part by the adjustment of the provisional net charge related to the TCJA in the second quarter of fiscal year 2019.

Our effective tax rate was lower than the U.S. federal statutory rate for the three and nine months ended March 31, 2020, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation.

Uncertain Tax Positions

As of March 31, 2020 and June 30, 2019, unrecognized tax benefits and other income tax liabilities were $16.1 billion and $15.3 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets.

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. We remain under audit for tax years 2004 to 2013. We expect the IRS to begin an examination of tax years 2014 to 2017 within the next 12 months.

As of March 31, 2020, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and 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 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 2019, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

 

20


PART I

Item 1

 

NOTE 11 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,
2020

 

 

June 30,
2019

 

 

 

 

Productivity and Business Processes

 

$

14,077

 

 

$

16,831

 

Intelligent Cloud

 

 

12,984

 

 

 

16,988

 

More Personal Computing

 

 

3,336

 

 

 

3,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

30,397

 

 

$

37,206

 

 

 

 

 

 

 

 

 

 

 

Changes in unearned revenue were as follows:

 

(In millions)

 

 

 

 

 

 

 

Nine Months Ended March 31, 2020

 

 

 

Balance, beginning of period

 

$

37,206

 

Deferral of revenue

 

 

49,749

 

Recognition of unearned revenue

 

 

(56,558

)

 

 

 

 

 

 

 

Balance, end of period

 

$

30,397

 

 

 

 

 

 

 

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $93 billion as of March 31, 2020, of which $89 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

 

 

NOTE 12  LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

522

 

 

$

431

 

 

$

1,465

 

 

$

1,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

135

 

 

$

100

 

 

$

423

 

 

$

262

 

Interest on lease liabilities

 

 

87

 

 

 

65

 

 

 

249

 

 

 

179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease cost

 

$

222

 

 

$

165

 

 

$

672

 

 

$

441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


PART I

Item 1

 

Supplemental cash flow information related to leases was as follows:

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

505

 

 

$

425

 

 

$

1,437

 

 

$

1,229

 

Operating cash flows from finance leases

 

 

87

 

 

 

65

 

 

 

249

 

 

 

179

 

Financing cash flows from finance leases

 

 

110

 

 

 

66

 

 

 

293

 

 

 

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

680

 

 

 

730

 

 

 

2,611

 

 

 

1,698

 

Finance leases

 

 

259

 

 

 

658

 

 

 

2,611

 

 

 

1,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental balance sheet information related to leases was as follows:

 

(In millions, except lease term and discount rate)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,
2020

 

 

June 30,
2019

 

 

 

 

Operating Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

8,448

 

 

$

7,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

1,557

 

 

$

1,515

 

Operating lease liabilities

 

 

7,248

 

 

 

6,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

8,805

 

 

$

7,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost

 

$

9,366

 

 

$

7,041

 

Accumulated depreciation

 

 

(1,198

)

 

 

(774

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

8,168

 

 

$

6,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

470

 

 

$

317

 

Other long-term liabilities

 

 

8,140

 

 

 

6,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease liabilities

 

$

8,610

 

 

$

6,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

7 years

 

 

 

7 years

 

Finance leases

 

 

13 years

 

 

 

13 years

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

2.9%

 

 

 

3.0%

 

Finance leases

 

 

4.1%

 

 

 

4.6%

 

 

 

 

 

 

 

 

 

 

 

22


PART I

Item 1

 

Maturities of lease liabilities were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

Operating Leases

 

 

Finance Leases

 

 

 

 

2020 (excluding the nine months ended March 31, 2020)

 

$

483

 

 

$

196

 

2021

 

 

1,810

 

 

 

796

 

2022

 

 

1,627

 

 

 

811

 

2023

 

 

1,445

 

 

 

818

 

2024

 

 

1,226

 

 

 

830

 

Thereafter

 

 

3,764

 

 

 

7,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease payments

 

 

10,355

 

 

 

11,052

 

Less imputed interest

 

 

(1,550

)

 

 

(2,442

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,805

 

 

$

8,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $2.7 billion and $3.5 billion, respectively. These operating and finance leases will commence between fiscal year 2020 and fiscal year 2023 with lease terms of 1 year to 16 years.

 

 

NOTE 13 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 49 patent infringement cases pending against Microsoft as of March 31, 2020, none of which are material individually or in aggregate.

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. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement has been approved by the courts in British Columbia, Ontario, and Quebec, and the claims administration process will commence once each court approves the form of notice to the class.

Other Antitrust Litigation and Claims

China State Administration for Industry and Commerce Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented its preliminary views as to certain possible violations of China's Anti-Monopoly Law, and discussions are expected to continue.

23


PART I

Item 1

 

Product-Related Litigation

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 40 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 cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing is scheduled for June 2020.

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. In June 2018, the court denied the plaintiffs’ motion for class certification. In December 2019, the U.S. Court of Appeals for the Ninth Circuit affirmed the denial of class certification.

Other Contingencies

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

As of March 31, 2020, we accrued aggregate legal liabilities of $304 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $800 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

 

24


PART I

Item 1

 

NOTE 14  STOCKHOLDERS’ EQUITY

Share Repurchases

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020, following completion of the program approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of March 31, 2020, $36.8 billion remained of this $40.0 billion share repurchase program.

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

 

(In millions)

 

Shares

 

Amount

 

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

 

2020

 

 

 

 

 

2019

 

 

 

 

 

 

First Quarter

 

 

29

 

 

$

4,000

 

 

 

24

 

 

$

2,600

 

Second Quarter

 

 

32

 

 

 

4,600

 

 

 

57

 

 

 

6,100

 

Third Quarter

 

 

37

 

 

 

6,000

 

 

 

36

 

 

 

3,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

98

 

 

$

14,600

 

 

 

117

 

 

$

12,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $1.1 billion and $2.6 billion for the three and nine months ended March 31, 2020, respectively, and $854 million and $2.3 billion for the three and nine months ended March 31, 2019, respectively. All repurchases were made using cash resources.

Dividends

Our Board of Directors declared the following dividends:

 

Declaration Date

 

Record Date

 

Payment Date

 

 

Dividend

Per Share

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2020

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

September 18, 2019

 

November 21, 2019

 

December 12, 2019

 

 

$

0.51

 

 

$

3,886

 

December 4, 2019

 

February 20, 2020

 

March 12, 2020

 

 

 

0.51

 

 

 

3,876

 

March 9, 2020

 

May 21, 2020

 

June 11, 2020

 

 

 

0.51

 

 

 

3,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

$

1.53

 

 

$

11,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 18, 2018

 

November 15, 2018

 

December 13, 2018

 

 

$

0.46

 

 

$

3,544

 

November 28, 2018

 

February 21, 2019

 

March 14, 2019

 

 

 

0.46

 

 

 

3,526

 

March 11, 2019

 

May 16, 2019

 

June 13, 2019

 

 

 

0.46

 

 

 

3,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

$

1.38

 

 

$

10,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The dividend declared on March 9, 2020 was included in other current liabilities as of March 31, 2020.

 

25


PART I

Item 1

 

NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

(In millions)

 

Three Months Ended
March 31,

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(6

)

 

$

113

 

 

$

0

 

 

$

173

 

Unrealized gains (losses), net of tax of $(12), $0, $(13), and $2

 

 

(46

)

 

 

31

 

 

 

(50

)

 

 

146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments for (gains) losses included in earnings

 

 

12

 

 

 

(66

)

 

 

9

 

 

 

(246

)

Tax expense (benefit) included in provision for income taxes

 

 

(2

)

 

 

2

 

 

 

(1

)

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

10

 

 

 

(64

)

 

 

8

 

 

 

(239

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives, net of tax of $(10), $(2), $(12), and $(5)

 

 

(36

)

 

 

(33

)

 

 

(42

)

 

 

(93

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(42

)

 

$

80

 

 

$

(42

)

 

$

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,645

 

 

$

(297

)

 

$

1,488

 

 

$

(850

)

Unrealized gains, net of tax of $932, $189, $977, and $337

 

 

3,504

 

 

 

711

 

 

 

3,666

 

 

 

1,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5

 

 

 

4

 

 

 

(1

)

 

 

84

 

Tax benefit included in provision for income taxes

 

 

(1

)

 

 

(1

)

 

 

0

 

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

4

 

 

 

3

 

 

 

(1

)

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to investments, net of tax of $933, $190, $977, and $354

 

 

3,508

 

 

 

714

 

 

 

3,665

 

 

 

1,334

 

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

5,153

 

 

$

417

 

 

$

5,153

 

 

$

417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation Adjustments and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,894

)

 

$

(1,829

)

 

$

(1,828

)

 

$

(1,510

)

Translation adjustments and other, net of tax of $(51), $1, $(59), and $0

 

 

(541

)

 

 

67

 

 

 

(607

)

 

 

(252

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(2,435

)

 

$

(1,762

)

 

$

(2,435

)

 

$

(1,762

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), end of period

 

$

2,676

 

 

$

(1,265

)

 

$

2,676

 

 

$

(1,265

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


PART I

Item 1

 

NOTE 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.

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 and Office licensed on-premises, comprising Office, Exchange, SharePoint, Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).

 

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

 

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

 

Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.

Intelligent Cloud

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

 

Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related CALs; and GitHub.

 

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

More Personal Computing

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

 

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

 

Devices, including Surface and PC accessories.

 

Gaming, including Xbox hardware and Xbox content and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties.

 

Search.

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.

27


PART I

Item 1

 

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.

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

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

11,743

 

 

$

10,242

 

 

$

34,646

 

 

$

30,113

 

Intelligent Cloud

 

 

12,281

 

 

 

9,649

 

 

 

34,995

 

 

 

27,594

 

More Personal Computing

 

 

10,997

 

 

 

10,680

 

 

 

35,341

 

 

 

34,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,021

 

 

$

30,571

 

 

$

104,982

 

 

$

92,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

4,788

 

 

$

3,979

 

 

$

14,752

 

 

$

11,875

 

Intelligent Cloud

 

 

     4,560

 

 

 

3,208

 

 

 

12,980

 

 

 

9,418

 

More Personal Computing

 

 

3,627

 

 

 

3,154

 

 

 

11,820

 

 

 

9,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

12,975

 

 

$

10,341

 

 

$

39,552

 

 

$

30,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three or nine months ended March 31, 2020 or 2019. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

United States (a)

 

$

17,428

 

 

$

15,372

 

 

$

53,847

 

 

$

46,899

 

Other countries

 

 

17,593

 

 

 

15,199

 

 

 

51,135

 

 

 

45,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,021

 

 

$

30,571

 

 

$

104,982

 

 

$

92,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

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

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

 

(In millions)

 

Three Months Ended
March 31,

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Server products and cloud services

 

$

10,490

 

 

$

8,053

 

 

$

29,801

 

 

$

22,902

 

Office products and cloud services

 

 

8,920

 

 

 

7,889

 

 

 

26,369

 

 

 

23,258

 

Windows

 

 

5,220

 

 

 

4,944

 

 

 

16,166

 

 

 

14,603

 

Gaming

 

 

2,349

 

 

 

2,363

 

 

 

8,218

 

 

 

9,333

 

Search advertising

 

 

1,986

 

 

 

1,911

 

 

 

6,140

 

 

 

5,675

 

LinkedIn

 

 

2,050

 

 

 

1,696

 

 

 

6,061

 

 

 

4,919

 

Enterprise Services

 

 

1,633

 

 

 

1,542

 

 

 

4,790

 

 

 

4,513

 

Devices

 

 

1,412

 

 

 

1,423

 

 

 

4,662

 

 

 

4,632

 

Other

 

 

961

 

 

 

750

 

 

 

2,775

 

 

 

2,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,021

 

 

$

30,571

 

 

$

104,982

 

 

$

92,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28


PART I

Item 1

 

Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $13.3 billion and $37.4 billion for the three and nine months ended March 31, 2020, respectively, and $9.6 billion and $27.1 billion for the three and nine months ended March 31, 2019, respectively. These amounts are primarily included in Office products and cloud services, Server products and cloud services, and LinkedIn in the table above.

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

 

29


PART I

Item 1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheet of Microsoft Corporation and subsidiaries (the "Company") as of March 31, 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month and nine-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of June 30, 2019, 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 August 1, 2019, 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, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

/S/ DELOITTE & TOUCHE LLP

Seattle, Washington

April 29, 2020

 

 

 

30


PART I

Item 2

 

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

Note About Forward-Looking Statements

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2019, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

OVERVIEW

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. 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 offering a wide range of cloud-based and other services to people and businesses; licensing and supporting an array of software products; designing, manufacturing, and selling devices; and delivering relevant online advertising to a global audience. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; datacenter costs in support of our cloud-based services; and income taxes.

Highlights from the third quarter of fiscal year 2020 compared with the third quarter of fiscal year 2019 included:

 

Commercial cloud revenue increased 39% to $13.3 billion.

 

Office Commercial revenue increased 13%, driven by Office 365 Commercial growth of 25%.

 

Office Consumer revenue increased 15%, with continued growth in Office 365 Consumer subscribers to 39.6 million.

 

LinkedIn revenue increased 21%.

 

Dynamics revenue increased 17%, driven by Dynamics 365 growth of 47%.

 

Server products and cloud services revenue increased 30%, driven by Azure growth of 59%.

 

Enterprise Services revenue increased 6%.

 

Windows original equipment manufacturer licensing (“Windows OEM”) revenue was relatively unchanged.

 

Windows Commercial revenue increased 17%.

 

Search advertising revenue, excluding traffic acquisition costs, increased 1%.

 

Xbox content and services revenue increased 2%.

 

Surface revenue increased 1%.

31


PART I

Item 2

 

Industry Trends

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

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, and influence how users access services in the cloud, and in some cases, the user’s choice of which suite of cloud-based services to use. We must continue to evolve and adapt over an extended time in pace with this changing environment. The investments we are making in infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.

Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits. 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 the U.S. dollar relative to certain foreign currencies reduced reported revenue and expenses from our international operations in the first, second, and third quarter of fiscal year 2020.

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

COVID-19

In March 2020, the World Health Organization declared the outbreak of a novel strain of the coronavirus (“COVID-19”) to be a pandemic. The COVID-19 pandemic is having widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes, and closure of non-essential businesses. To protect the health and well-being of our employees, suppliers, and customers, we have made substantial modifications to employee travel policies, implemented retail store and office closures as employees are advised to work from home, and cancelled or shifted our conferences and other marketing events to virtual-only through fiscal year 2021. The COVID-19 pandemic has impacted and may continue to impact our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.

In the third quarter of fiscal year 2020, COVID-19 had minimal net impact on our revenue. In the Productivity and Business Processes and Intelligent Cloud segments, cloud usage increased, particularly in Microsoft 365 including Teams, Azure, Windows Virtual Desktop, advanced security solutions, and Power Platform, as customers shifted to work and learn from home. In the final weeks of the quarter, there was a slowdown in transactional licensing, particularly in small and medium businesses, and a reduction in advertising spend in LinkedIn. In the More Personal Computing segment, Windows OEM and Surface benefited from increased demand to support remote work and learn scenarios, offset in part by supply chain constraints in China that improved late in the quarter. Gaming benefited from increased engagement following stay-at-home guidelines. Search was negatively impacted by reductions in advertising spend, particularly in the industries most impacted by COVID-19. The effects of COVID-19 may not be fully reflected in our financial results until future periods.

32


PART I

Item 2

 

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including 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. These factors may adversely impact consumer, business, and government spending on technology as well as customers' ability to pay for our products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including investments, receivables, and forward-looking guidance. Refer to Risk Factors (Part II, Item 1A of this Form 10-Q) for a discussion of these factors and other risks.

Seasonality

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

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other.

Additional information on our reportable segments is contained in Note 16 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Metrics

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

Commercial

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

 

Commercial remaining performance obligation

 

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

 

 

 

Commercial cloud revenue

 

Revenue from our commercial cloud business, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties

 

 

 

Commercial cloud gross margin percentage

 

Gross margin percentage for our commercial cloud business

 

33


PART I

Item 2

 

Productivity and Business Processes and Intelligent Cloud

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

 

Office Commercial products and cloud services revenue growth

 

Revenue from Office Commercial products and cloud services, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”)

 

 

 

Office Consumer products and cloud services revenue growth

 

Revenue from Office Consumer, including Office 365 subscriptions and Office licensed on-premises

 

 

 

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

 

 

 

Office 365 Consumer subscribers

 

The number of Office 365 Consumer subscribers at end of period

 

 

 

Dynamics products and cloud services revenue growth

 

Revenue from Dynamics products and cloud services, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises

 

 

 

LinkedIn revenue growth

 

Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions

 

 

 

Server products and cloud services revenue growth

 

Revenue from Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related CALs; and GitHub

 

 

 

Enterprise Services revenue growth

 

Revenue from Enterprise Services, including Premier Support Services and Microsoft Consulting Services

 

More Personal Computing

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

 

Windows OEM Pro revenue growth

 

Revenue from sales of Windows Pro licenses sold through the OEM channel, which primarily addresses demand in the commercial market

 

 

 

Windows OEM non-Pro revenue growth

 

Revenue from sales of Windows non-Pro licenses sold through the OEM channel, which primarily addresses demand in the consumer market

 

 

 

Windows Commercial products and cloud services revenue growth

 

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

 

 

 

Surface revenue

 

Revenue from Surface devices and accessories

 

 

 

Xbox content and services revenue growth

 

Revenue from Xbox content and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties

 

 

 

Search advertising revenue, excluding TAC, growth

 

Revenue from search advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers

 

34


PART I

Item 2

 

SUMMARY RESULTS OF OPERATIONS

 

(In millions, except percentages and per share amounts)

 

 

Three Months Ended

March 31,

 

 

Percentage

Change

 

 

Nine Months Ended
March 31,

 

 

Percentage
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

35,021

 

 

$

30,571

 

 

 

15%

 

 

$

104,982

 

 

$

92,126

 

 

 

14%

 

Gross margin

 

 

     24,046

 

 

 

20,401

 

 

 

18%

 

 

 

71,243

 

 

 

59,628

 

 

 

19%

 

Operating income

 

 

12,975

 

 

 

10,341

 

 

 

25%

 

 

 

39,552

 

 

 

30,554

 

 

 

29%

 

Net income

 

 

10,752

 

 

 

     8,809

 

 

 

22%

 

 

 

33,079

 

 

 

26,053

 

 

 

27%

 

Diluted earnings per share

 

 

1.40

 

 

 

1.14

 

 

 

23%

 

 

 

4.30

 

 

 

3.36

 

 

 

28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income

 

 

10,752

 

 

 

8,809

 

 

 

22%

 

 

 

33,079

 

 

 

26,210

 

 

 

26%

 

Non-GAAP diluted earnings per share

 

 

1.40

 

 

 

1.14

 

 

 

23%

 

 

 

4.30

 

 

 

3.38

 

 

 

27%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income and diluted earnings per share (“EPS”) for the nine months ended March 31, 2019 exclude the net charge related to the Tax Cuts and Jobs Act (“TCJA”) of $157 million. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.

Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

Revenue increased $4.5 billion or 15%, driven by growth across each of our segments. Intelligent Cloud revenue increased, driven by server products and cloud services. Productivity and Business Processes revenue increased, driven by Office and LinkedIn. More Personal Computing revenue increased, driven by Windows.

Gross margin increased $3.6 billion or 18%, driven by growth across each of our segments. Gross margin percentage increased, driven by sales mix shift to higher margin businesses. Commercial cloud gross margin percentage increased 4 points to 67%, primarily driven by improvement in Azure.

Operating income increased $2.6 billion or 25%, driven by growth across each of our segments.

Key changes in expenses were:

 

Cost of revenue increased $805 million or 8%, driven by growth in commercial cloud.

 

Research and development expenses increased $571 million or 13%, driven by investments in cloud engineering and LinkedIn.

 

Sales and marketing expenses increased $346 million or 8%, driven by investments in LinkedIn and commercial sales, as well as an increase in bad debt expense.

 

General and administrative expenses increased $94 million or 8%.

Gross margin and operating income included an unfavorable foreign currency impact of 2% and 3%, respectively.

Nine Months Ended March 31, 2020 Compared with Nine Months Ended March 31, 2019

Revenue increased $12.9 billion or 14%, driven by growth across each of our segments. Intelligent Cloud revenue increased, driven by server products and cloud services. Productivity and Business Processes revenue increased, driven by Office and LinkedIn. More Personal Computing revenue increased, driven by Windows and Search advertising, offset in part by a decrease in Gaming.

Gross margin increased $11.6 billion or 19%, driven by growth across each of our segments. Gross margin percentage increased, driven by sales mix shift to higher margin businesses. Commercial cloud gross margin percentage increased 5 points to 67%, primarily driven by improvement in Azure.

Operating income increased $9.0 billion or 29%, driven by growth across each of our segments.

Key changes in expenses were:

 

Cost of revenue increased $1.2 billion or 4%, driven by growth in commercial cloud, offset in part by a decline in Gaming.

35


PART I

Item 2

 

 

Research and development expenses increased $1.7 billion or 14%, driven by investments in cloud engineering, LinkedIn, and Gaming.

 

Sales and marketing expenses increased $930 million or 7%, driven by investments in LinkedIn and commercial sales.

 

General and administrative expenses were relatively unchanged.

Gross margin and operating income included an unfavorable foreign currency impact of 3% and 4%, respectively.

Prior year net income and diluted EPS were negatively impacted by the net charge related to the TCJA, which resulted in a decrease to net income and diluted EPS of $157 million and $0.02, respectively.

SEGMENT RESULTS OF OPERATIONS

 

(In millions, except percentages)

 

Three Months Ended

March 31,

 

 

Percentage

Change

 

 

Nine Months Ended
March 31,

 

 

Percentage
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

11,743

 

 

$

10,242

 

 

 

15%

 

 

$

34,646

 

 

$

30,113

 

 

 

15%

 

Intelligent Cloud

 

 

12,281

 

 

 

9,649

 

 

 

27%

 

 

 

34,995

 

 

 

27,594

 

 

 

27%

 

More Personal Computing

 

 

10,997

 

 

 

10,680

 

 

 

3%

 

 

 

35,341

 

 

 

34,419

 

 

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

��

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,021

 

 

$

30,571

 

 

 

15%

 

 

$

104,982

 

 

$

92,126

 

 

 

14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

4,788

 

 

$

3,979

 

 

 

20%

 

 

$

14,752

 

 

$

11,875

 

 

 

24%

 

Intelligent Cloud

 

 

4,560

 

 

 

3,208

 

 

 

42%

 

 

 

12,980

 

 

 

9,418

 

 

 

38%

 

More Personal Computing

 

 

3,627

 

 

 

3,154

 

 

 

15%

 

 

 

11,820

 

 

 

9,261

 

 

 

28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

12,975

 

 

$

10,341

 

 

 

25%

 

 

$

39,552

 

 

$

30,554

 

 

 

29%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments

Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

Productivity and Business Processes

Revenue increased $1.5 billion or 15%.

 

Office Commercial revenue increased $878 million or 13%, driven by Office 365 Commercial, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to cloud offerings and a slowdown in transactional licensing, primarily in small and medium businesses. Office 365 Commercial revenue grew 25%, due to seat growth of 20% and higher revenue per user.

 

Office Consumer revenue increased $160 million or 15%, driven by Office 365 subscription revenue and strength in Office 2019, primarily in Japan.

 

LinkedIn revenue increased $354 million or 21%, driven by growth across all businesses.

 

Dynamics revenue increased 17%, driven by Dynamics 365 growth of 47%.

Operating income increased $809 million or 20%.

 

Gross margin increased $1.3 billion or 16%, driven by growth in Office Commercial and LinkedIn. Gross margin percentage increased, due to gross margin percentage improvement in Office 365 Commercial and LinkedIn, offset in part by an increased mix of cloud offerings.

 

Operating expenses increased $473 million or 12%, driven by investments in LinkedIn and cloud engineering.

Gross margin and operating income included an unfavorable foreign currency impact of 2% and 3%, respectively.

36


PART I

Item 2

 

Intelligent Cloud

Revenue increased $2.6 billion or 27%.

 

Server products and cloud services revenue increased $2.4 billion or 30%, driven by Azure. Azure revenue grew 59%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based services and per user-based services. Server products revenue increased 11%, due to hybrid and premium solutions, as well as demand related to Windows Server 2008 end of support.

 

Enterprise Services revenue increased $91 million or 6%, driven by growth in Premier Support Services.

Operating income increased $1.4 billion or 42%.

 

Gross margin increased $2.0 billion or 30%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage increased, due to gross margin percentage improvement in Azure, offset in part by an increased mix of cloud offerings.

 

Operating expenses increased $625 million or 19%, driven by investments in Azure.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 2%, 2%, and 4%, respectively.

More Personal Computing

Revenue increased $317 million or 3%.

 

Windows revenue increased $276 million or 6%, driven by growth in Windows Commercial. Windows Commercial revenue increased 17%, primarily driven by increased demand for Microsoft 365. Windows OEM revenue was relatively unchanged. Windows OEM Pro revenue grew 5%, driven by continued Windows 10 momentum, with demand from remote work and learn scenarios, offset in part by supply chain constraints in China. Windows OEM non-Pro revenue decreased 10%, driven by continued pressure in the entry-level category and supply chain constraints in China.

 

Search advertising revenue increased $75 million or 4%. Search advertising revenue, excluding traffic acquisition costs, increased 1%, with reduced advertising spend, particularly in the industries most impacted by COVID-19.

 

Surface revenue increased $11 million or 1%, driven by increased demand from remote work and learn scenarios, offset in part by supply chain constraints in China.

 

Gaming revenue decreased $14 million or 1%. Xbox hardware revenue decreased 20%, primarily due to a decrease in price of consoles sold. Xbox content and services revenue increased $33 million or 2%, primarily due to increased engagement following stay-at-home guidelines, offset in part by a high prior year comparable primarily from a third-party title.

Operating income increased $473 million or 15%.

 

Gross margin increased $386 million or 6%, driven by growth in Windows. Gross margin percentage increased, due to sales mix shift to higher margin businesses.

 

Operating expenses decreased $87 million or 3%, driven by the redeployment of engineering resources.

Gross margin and operating income each included an unfavorable foreign currency impact of 2%.

Nine Months Ended March 31, 2020 Compared with Nine Months Ended March 31, 2019

Productivity and Business Processes

Revenue increased $4.5 billion or 15%.

 

Office Commercial revenue increased $2.7 billion or 14%, driven by Office 365 Commercial, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to cloud offerings. Office 365 Commercial revenue grew 26%, due to seat growth and higher revenue per user.

 

Office Consumer revenue increased $401 million or 13%, driven by Office 365 subscription revenue and strength in Office 2019, primarily in Japan.

37


PART I

Item 2

 

 

LinkedIn revenue increased $1.1 billion or 23%, driven by growth across all businesses.

 

Dynamics revenue increased 14%, driven by Dynamics 365 growth of 43%.

Operating income increased $2.9 billion or 24%.

 

Gross margin increased $4.1 billion or 18%, driven by growth in Office Commercial and LinkedIn. Gross margin percentage increased, due to gross margin percentage improvement in Office 365 Commercial and LinkedIn, offset in part by an increased mix of cloud offerings.

 

Operating expenses increased $1.2 billion or 11%, driven by investments in LinkedIn and cloud engineering.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 2%, 2%, and 4%, respectively.

Intelligent Cloud

Revenue increased $7.4 billion or 27%.

 

Server products and cloud services revenue increased $6.9 billion or 30%, driven by Azure. Azure revenue grew 60%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based services and per user-based services. Server products revenue increased 11%, due to hybrid and premium solutions, as well as demand related to  Windows Server 2008 and SQL Server 2008 end of support.

 

Enterprise Services revenue increased $277 million or 6%, driven by growth in Premier Support Services.

Operating income increased $3.6 billion or 38%.

 

Gross margin increased $5.4 billion or 29%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage increased, due to gross margin percentage improvement in Azure, offset in part by an increased mix of cloud offerings.

 

Operating expenses increased $1.8 billion or 19%, driven by investments in Azure.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 2%, 2%, and 4%, respectively.

More Personal Computing

Revenue increased $922 million or 3%.

 

Windows revenue increased $1.6 billion or 11%, driven by growth in Windows Commercial and Windows OEM. Windows Commercial revenue increased 22%, driven by increased demand for Microsoft 365. Windows OEM revenue increased 9%, ahead of PC market growth. Windows OEM Pro revenue grew 16%, driven by continued momentum in advance of Windows 7 end of support and healthy Windows 10 demand. Windows OEM non-Pro revenue declined 4%, driven by continued pressure in the entry-level category.

 

Search advertising revenue increased $465 million or 8%. Search advertising revenue, excluding traffic acquisition costs, increased 6%, driven by higher revenue per search.

 

Surface revenue increased $83 million or 2%, driven by commercial growth, offset in part by a decline in consumer.

 

Gaming revenue decreased $1.1 billion or 12%, driven by a decrease in Xbox hardware of 38%, primarily due to a decrease in volume and price of consoles sold. Xbox content and services revenue decreased $269 million or 4%, against a high prior year comparable primarily from a third-party title, offset in part by strength in Minecraft and growth in subscriptions.

Operating income increased $2.6 billion or 28%, including an unfavorable foreign currency impact of 2%.

 

Gross margin increased $2.1 billion or 12%, driven by growth in Windows. Gross margin percentage increased, due to sales mix shift to higher margin businesses.

 

Operating expenses decreased $421 million or 5%, driven by the redeployment of engineering resources, offset in part by investments in Gaming.

38


PART I

Item 2

 

OPERATING EXPENSES

Research and Development

 

(In millions, except percentages)

 

Three Months Ended

March 31,

 

 

Percentage

Change

 

 

Nine Months Ended
March 31,

 

 

Percentage
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,887

 

 

$

4,316

 

 

 

13%

 

 

$

14,055

 

 

$

12,363

 

 

 

14%

 

As a percent of revenue

 

 

14%

 

 

 

14%

 

 

 

0ppt

 

 

 

13%

 

 

 

13%

 

 

 

0ppt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2020 Compared with Three Months Ended March 31, 2019

Research and development expenses increased $571 million or 13%, driven by investments in cloud engineering and LinkedIn.

Nine Months Ended March 31, 2020 Compared with Nine Months Ended March 31, 2019

Research and development expenses increased $1.7 billion or 14%, driven by investments in cloud engineering, LinkedIn, and Gaming.

Sales and Marketing

 

(In millions, except percentages)

 

Three Months Ended

March 31,

 

 

Percentage

Change

 

 

Nine Months Ended
March 31,

 

 

Percentage
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

4,911

 

 

$

4,565

 

 

 

8%

 

 

$

14,181

 

 

$

13,251

 

 

 

7%

 

As a percent of revenue

 

 

14%

 

 

 

15%

 

 

 

(1)ppt

 

 

 

14%

 

 

 

14%

 

 

 

0ppt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

Sales and marketing expenses increased $346 million or 8%, driven by investments in LinkedIn and commercial sales, as well as an increase in bad debt expense.

Nine Months Ended March 31, 2020 Compared with Nine Months Ended March 31, 2019

Sales and marketing expenses increased $930 million or 7%, driven by investments in LinkedIn and commercial sales.

General and Administrative

 

(In millions, except percentages)

 

Three Months Ended

March 31,

 

 

Percentage

Change

 

 

Nine Months Ended

March 31,

 

 

Percentage

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

1,273

 

 

$

1,179

 

 

 

8%

 

 

$

3,455

 

 

$

3,460

 

 

 

0%

 

As a percent of revenue

 

 

4%

 

 

 

4%

 

 

 

0ppt

 

 

 

3%

 

 

 

4%

 

 

 

(1)ppt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39


PART I

Item 2

 

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

Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

General and administrative expenses increased $94 million or 8%.

Nine Months Ended March 31, 2020 Compared with Nine Months Ended March 31, 2019

General and administrative expenses were relatively unchanged.

OTHER INCOME (EXPENSE), NET

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

 

(In millions)

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020