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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 December 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 January 21, 2021

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,542,215,767 shares

 

 

 

 

 

 


 

 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended December 31, 2020

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

a)

Income Statements for the Three and Six Months Ended December 31, 2020 and 2019

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three and Six Months Ended December 31, 2020 and 2019

4

 

 

 

 

 

 

 

c)

Balance Sheets as of December 31, 2020 and June 30, 2020

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three and Six Months Ended December 31, 2020 and 2019

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three and Six Months Ended December 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

December 31,

 

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

19,460

 

 

$

18,255

 

 

$

35,263

 

 

$

34,023

 

Service and other

 

 

23,616

 

 

 

18,651

 

 

 

44,967

 

 

 

35,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

43,076

 

 

 

36,906

 

 

 

80,230

 

 

 

69,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

6,058

 

 

 

4,966

 

 

 

9,655

 

 

 

8,271

 

Service and other

 

 

8,136

 

 

 

7,392

 

 

 

15,541

 

 

 

14,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

14,194

 

 

 

12,358

 

 

 

25,196

 

 

 

22,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

28,882

 

 

 

24,548

 

 

 

55,034

 

 

 

47,197

 

Research and development

 

 

4,899

 

 

 

4,603

 

 

 

9,825

 

 

 

9,168

 

Sales and marketing

 

 

4,947

 

 

 

4,933

 

 

 

9,178

 

 

 

9,270

 

General and administrative

 

 

1,139

 

 

 

1,121

 

 

 

2,258

 

 

 

2,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

17,897

 

 

 

13,891

 

 

 

33,773

 

 

 

26,577

 

Other income, net

 

 

440

 

 

 

194

 

 

 

688

 

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

18,337

 

 

 

14,085

 

 

 

34,461

 

 

 

26,771

 

Provision for income taxes

 

 

2,874

 

 

 

2,436

 

 

 

5,105

 

 

 

4,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,463

 

 

$

11,649

 

 

$

29,356

 

 

$

22,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.05

 

 

$

1.53

 

 

$

3.88

 

 

$

2.93

 

Diluted

 

$

2.03

 

 

$

1.51

 

 

$

3.85

 

 

$

2.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,555

 

 

 

7,621

 

 

 

7,561

 

 

 

7,628

 

Diluted

 

 

7,616

 

 

 

7,691

 

 

 

7,627

 

 

 

7,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

Net income

 

$

15,463

 

 

$

11,649

 

 

$

29,356

 

 

$

22,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

8

 

 

 

(4

)

 

 

12

 

 

 

(6

)

Net change related to investments

 

 

(492

)

 

 

(420

)

 

 

(693

)

 

 

157

 

Translation adjustments and other

 

 

741

 

 

 

230

 

 

 

852

 

 

 

(66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

257

 

 

 

(194

)

 

 

171

 

 

 

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

15,720

 

 

$

11,455

 

 

$

29,527

 

 

$

22,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

December 31,
2020

 

 

June 30,
2020

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,432

 

 

$

13,576

 

Short-term investments

 

 

117,536

 

 

 

122,951

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

131,968

 

 

 

136,527

 

Accounts receivable, net of allowance for doubtful accounts of $642 and $788

 

 

27,312

 

 

 

32,011

 

Inventories

 

 

1,924

 

 

 

1,895

 

Other current assets

 

 

12,769

 

 

 

11,482

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

173,973

 

 

 

181,915

 

Property and equipment, net of accumulated depreciation of $47,715 and $43,197

 

 

51,737

 

 

 

44,151

 

Operating lease right-of-use assets

 

 

10,298

 

 

 

8,753

 

Equity investments

 

 

3,794

 

 

 

2,965

 

Goodwill

 

 

44,219

 

 

 

43,351

 

Intangible assets, net

 

 

6,555

 

 

 

7,038

 

Other long-term assets

 

 

13,561

 

 

 

13,138

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

304,137

 

 

$

301,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,770

 

 

$

12,530

 

Current portion of long-term debt

 

 

5,387

 

 

 

3,749

 

Accrued compensation

 

 

6,838

 

 

 

7,874

 

Short-term income taxes

 

 

1,562

 

 

 

2,130

 

Short-term unearned revenue

 

 

30,402

 

 

 

36,000

 

Other current liabilities

 

 

10,527

 

 

 

10,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

67,486

 

 

 

72,310

 

Long-term debt

 

 

55,136

 

 

 

59,578

 

Long-term income taxes

 

 

26,701

 

 

 

29,432

 

Long-term unearned revenue

 

 

2,985

 

 

 

3,180

 

Deferred income taxes

 

 

174

 

 

 

204

 

Operating lease liabilities

 

 

8,875

 

 

 

7,671

 

Other long-term liabilities

 

 

12,544

 

 

 

10,632

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

173,901

 

 

 

183,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,546 and 7,571

 

 

81,896

 

 

 

80,552

 

Retained earnings

 

 

44,973

 

 

 

34,566

 

Accumulated other comprehensive income

 

 

3,367

 

 

 

3,186

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

130,236

 

 

 

118,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

304,137

 

 

$

301,311

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

December 31,

 

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,463

 

 

$

11,649

 

 

$

29,356

 

 

$

22,327

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

2,761

 

 

 

3,203

 

 

 

5,406

 

 

 

6,174

 

Stock-based compensation expense

 

 

1,566

 

 

 

1,340

 

 

 

3,022

 

 

 

2,602

 

Net recognized gains on investments and derivatives

 

 

(354

)

 

 

(203

)

 

 

(482

)

 

 

(192

)

Deferred income taxes

 

 

(17

)

 

 

(53

)

 

 

(28

)

 

 

(230

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,008

)

 

 

(4,203

)

 

 

4,835

 

 

 

5,887

 

Inventories

 

 

788

 

 

 

799

 

 

 

(20

)

 

 

238

 

Other current assets

 

 

730

 

 

 

165

 

 

 

676

 

 

 

(273

)

Other long-term assets

 

 

(1,499

)

 

 

(517

)

 

 

(1,561

)

 

 

(850

)

Accounts payable

 

 

33

 

 

 

(7

)

 

 

348

 

 

 

(554

)

Unearned revenue

 

 

(3,227

)

 

 

(2,936

)

 

 

(6,291

)

 

 

(5,828

)

Income taxes

 

 

(2,368

)

 

 

(471

)

 

 

(3,351

)

 

 

(3,807

)

Other current liabilities

 

 

1,755

 

 

 

1,489

 

 

 

(1,196

)

 

 

(1,831

)

Other long-term liabilities

 

 

893

 

 

 

425

 

 

 

1,137

 

 

 

835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

12,516

 

 

 

10,680

 

 

 

31,851

 

 

 

24,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of debt

 

 

(3,250

)

 

 

(18

)

 

 

(3,250

)

 

 

(2,518

)

Common stock issued

 

 

302

 

 

 

234

 

 

 

847

 

 

 

661

 

Common stock repurchased

 

 

(6,535

)

 

 

(5,206

)

 

 

(13,278

)

 

 

(10,118

)

Common stock cash dividends paid

 

 

(4,230

)

 

 

(3,886

)

 

 

(8,086

)

 

 

(7,396

)

Other, net

 

 

79

 

 

 

(39

)

 

 

(156

)

 

 

247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(13,634

)

 

 

(8,915

)

 

 

(23,923

)

 

 

(19,124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(4,174

)

 

 

(3,545

)

 

 

(9,081

)

 

 

(6,930

)

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

 

 

(415

)

 

 

(80

)

 

 

(896

)

 

 

(542

)

Purchases of investments

 

 

(15,092

)

 

 

(19,011

)

 

 

(29,672

)

 

 

(42,401

)

Maturities of investments

 

 

15,264

 

 

 

11,230

 

 

 

29,530

 

 

 

30,312

 

Sales of investments

 

 

2,421

 

 

 

5,370

 

 

 

4,835

 

 

 

11,749

 

Other, net

 

 

327

 

 

 

0

 

 

 

(1,756

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(1,669

)

 

 

(6,036

)

 

 

(7,040

)

 

 

(7,812

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

14

 

 

 

18

 

 

 

(32

)

 

 

(54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(2,773

)

 

 

(4,253

)

 

 

856

 

 

 

(2,492

)

Cash and cash equivalents, beginning of period

 

 

17,205

 

 

 

13,117

 

 

 

13,576

 

 

 

11,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

14,432

 

 

$

8,864

 

 

$

14,432

 

 

$

8,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

6


PART I

Item 1

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

81,089

 

 

$

78,882

 

 

$

80,552

 

 

$

78,520

 

Common stock issued

 

 

302

 

 

 

234

 

 

 

1,117

 

 

 

661

 

Common stock repurchased

 

 

(1,062

)

 

 

(831

)

 

 

(2,794

)

 

 

(2,157

)

Stock-based compensation expense

 

 

1,566

 

 

 

1,340

 

 

 

3,022

 

 

 

2,602

 

Other, net

 

 

1

 

 

 

0

 

 

 

(1

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

81,896

 

 

 

79,625

 

 

 

81,896

 

 

 

79,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

39,193

 

 

 

27,240

 

 

 

34,566

 

 

 

24,150

 

Net income

 

 

15,463

 

 

 

11,649

 

 

 

29,356

 

 

 

22,327

 

Common stock cash dividends

 

 

(4,220

)

 

 

(3,875

)

 

 

(8,451

)

 

 

(7,762

)

Common stock repurchased

 

 

(5,463

)

 

 

(4,275

)

 

 

(10,466

)

 

 

(7,976

)

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

(32

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

44,973

 

 

 

30,739

 

 

 

44,973

 

 

 

30,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

3,110

 

 

 

(61

)

 

 

3,186

 

 

 

(340

)

Other comprehensive income (loss)

 

 

257

 

 

 

(194

)

 

 

171

 

 

 

85

 

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

10

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

3,367

 

 

 

(255

)

 

 

3,367

 

 

 

(255

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

  130,236

 

 

$

110,109

 

 

$

130,236

 

 

$

  110,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.56

 

 

$

0.51

 

 

$

1.12

 

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on July 30, 2020.

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 (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of 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 coronavirus (“COVID-19”).

In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from three years to four years and increase the estimated useful life of network equipment from two years to four years. This change in accounting estimate was effective beginning fiscal year 2021. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2020, the effect of this change in estimate for the three months ended December 31, 2020, was an increase in operating income of $787 million and net income of $649 million, or $0.09 per both basic and diluted share. The effect of this change for the six months ended December 31, 2020, was an increase in operating income of $1.7 billion and net income of $1.4 billion, or $0.19 per both basic and diluted share.

Financial Instruments

Investments

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

8


PART I

Item 1

 

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

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

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.

9


PART I

Item 1

 

 

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

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

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

Contract Balances and Other Receivables

As of December 31, 2020 and June 30, 2020, other receivables due from suppliers were $708 million and $442 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of December 31, 2020 and June 30, 2020, long-term accounts receivable, net of allowance for doubtful accounts was $2.9 billion and $2.7 billion, respectively, and are included in other long-term assets in our consolidated balance sheets.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of December 31, 2020 and June 30, 2020, financing receivables, net were $4.0 billion and $5.2 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

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 adopted the standard effective July 1, 2020. We use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We applied 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. The adoption of the standard did not have a material impact on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

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.

 

10


PART I

Item 1

 

 

NOTE 2 — EARNINGS PER SHARE

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

The components of basic and diluted EPS were as follows:

 

(In millions, except earnings per share)

 

 

Three Months Ended

December 31,

 

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

15,463

 

 

$

11,649

 

 

$

29,356

 

 

$

22,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,555

 

 

 

7,621

 

 

 

7,561

 

 

 

7,628

 

Dilutive effect of stock-based awards

 

 

61

 

 

 

70

 

 

 

66

 

 

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

7,616

 

 

 

7,691

 

 

 

7,627

 

 

 

7,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

2.05

 

 

$

1.53

 

 

$

3.88

 

 

$

2.93

 

Diluted (A/C)

 

$

2.03

 

 

$

1.51

 

 

$

3.85

 

 

$

2.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividends income

 

$

545

 

 

$

688

 

 

$

1,115

 

 

$

1,412

 

Interest expense

 

 

(571

)

 

 

(654

)

 

 

(1,160

)

 

 

(1,291

)

Net recognized gains on investments

 

 

359

 

 

 

162

 

 

 

484

 

 

 

105

 

Net gains (losses) on derivatives

 

 

(5

)

 

 

41

 

 

 

(2

)

 

 

87

 

Net gains (losses) on foreign currency remeasurements

 

 

42

 

 

 

(24

)

 

 

181

 

 

 

(82

)

Other, net

 

 

70

 

 

 

(19

)

 

 

70

 

 

 

(37

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

440

 

 

$

194

 

 

$

688

 

 

$

194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Recognized Gains (Losses) on Investments

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

 

(In millions)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

32

 

 

$

14

 

 

$

51

 

 

$

21

 

Realized losses from sales of available-for-sale securities

 

 

(13

)

 

 

(6

)

 

 

(18

)

 

 

(10

)

Impairments and allowance for credit losses

 

 

0

 

 

 

(1

)

 

 

3

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

19

 

 

$

7

 

 

$

36

 

 

$

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


PART I

Item 1

 

 

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

 

(In millions)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains on investments sold

 

$

16

 

 

$

53

 

 

$

33

 

 

$

75

 

Net unrealized gains on investments still held

 

 

326

 

 

 

111

 

 

 

426

 

 

 

55

 

Impairments of investments

 

 

(2

)

 

 

(9

)

 

 

(11

)

 

 

(31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

340

 

 

$

155

 

 

$

448

 

 

$

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

 

(In millions)

 

Fair Value
Level

 

 

Adjusted

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

6,618

 

 

$

0

 

 

$

0

 

 

$

6,618

 

 

$

4,638

 

 

$

1,980

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

2,770

 

 

 

0

 

 

 

0

 

 

 

2,770

 

 

 

1,763

 

 

 

1,007

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

88,151

 

 

 

5,580

 

 

 

(12

)

 

 

93,719

 

 

 

1,151

 

 

 

92,568

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

1,772

 

 

 

3

 

 

 

0

 

 

 

1,775

 

 

 

418

 

 

 

1,357

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

7,196

 

 

 

15

 

 

 

(1

)

 

 

7,210

 

 

 

0

 

 

 

7,210

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

4,537

 

 

 

38

 

 

 

(4

)

 

 

4,571

 

 

 

0

 

 

 

4,571

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

8,010

 

 

 

353

 

 

 

(1

)

 

 

8,362

 

 

 

0

 

 

 

8,362

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

62

 

 

 

0

 

 

 

0

 

 

 

62

 

 

 

0

 

 

 

62

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

291

 

 

 

62

 

 

 

(1

)

 

 

352

 

 

 

0

 

 

 

352

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

95

 

 

 

0

 

 

 

(7

)

 

 

88

 

 

 

0

 

 

 

88

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

119,502

 

 

$

6,051

 

 

$

(26

)

 

$

125,527

 

 

$

7,970

 

 

$

117,557

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,655

 

 

$

897

 

 

$

0

 

 

$

758

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,036

 

 

 

0

 

 

 

0

 

 

 

3,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,691

 

 

$

897

 

 

$

0

 

 

$

3,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,565

 

 

$

5,565

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

 

 

0

 

 

 

(21

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

135,762

 

 

$

14,432

 

 

$

117,536

 

 

$

3,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


PART I

Item 1

 

 

 

(In millions)

 

Fair Value

Level

 

 

Adjusted

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

4,687

 

 

$

1

 

 

$

0

 

 

$

4,688

 

 

$

1,618

 

 

$

3,070

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

2,898

 

 

 

0

 

 

 

0

 

 

 

2,898

 

 

 

1,646

 

 

 

1,252

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

92,067

 

 

 

6,495

 

 

 

(1

)

 

 

98,561

 

 

 

3,168

 

 

 

95,393

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

2,439

 

 

 

2

 

 

 

0

 

 

 

2,441

 

 

 

449

 

 

 

1,992

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

6,982

 

 

 

6

 

 

 

(3

)

 

 

6,985

 

 

 

1

 

 

 

6,984

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

4,865

 

 

 

41

 

 

 

(6

)

 

 

4,900

 

 

 

0

 

 

 

4,900

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

8,500

 

 

 

327

 

 

 

(17

)

 

 

8,810

 

 

 

0

 

 

 

8,810

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

58

 

 

 

0

 

 

 

0

 

 

 

58

 

 

 

0

 

 

 

58

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

313

 

 

 

57

 

 

 

(4

)

 

 

366

 

 

 

0

 

 

 

366

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

91

 

 

 

0

 

 

 

0

 

 

 

91

 

 

 

0

 

 

 

91

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

122,900

 

 

$

6,929

 

 

$

(31

)

 

$

129,798

 

 

$

6,882

 

 

$

122,916

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,198

 

 

$

784

 

 

$

0

 

 

$

414

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,551

 

 

 

0

 

 

 

0

 

 

 

2,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,749

 

 

$

784

 

 

$

0

 

 

$

2,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,910

 

 

$

5,910

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

0

 

 

 

35

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

139,492

 

 

$

13,576

 

 

$

122,951

 

 

$

2,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 December 31, 2020 and June 30, 2020, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.5 billion and $1.4 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

2,777

 

 

$

(12

)

 

$

0

 

 

$

0

 

 

$

2,777

 

 

$

(12

)

Foreign government bonds

 

 

1,708

 

 

 

(1

)

 

 

0

 

 

 

0

 

 

 

1,708

 

 

 

(1

)

Mortgage- and asset-backed securities

 

 

1,148

 

 

 

(4

)

 

 

0

 

 

 

0

 

 

 

1,148

 

 

 

(4

)

Corporate notes and bonds

 

 

160

 

 

 

(1

)

 

 

0

 

 

 

0

 

 

 

160

 

 

 

(1

)

Municipal securities

 

 

121

 

 

 

(8

)

 

 

0

 

 

 

0

 

 

 

121

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,914

 

 

$

    (26

)

 

$

    0

 

 

$

0

 

 

$

  5,914

 

 

$

    (26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

2,323

 

 

$

(1

)

 

$

0

 

 

$

0

 

 

$

2,323

 

 

$

(1

)

Foreign government bonds

 

 

500

 

 

 

(3

)

 

 

0

 

 

 

0

 

 

 

500

 

 

 

(3

)

Mortgage- and asset-backed securities

 

 

1,014

 

 

 

(6

)

 

 

0

 

 

 

0

 

 

 

1,014

 

 

 

(6

)

Corporate notes and bonds

 

 

649

 

 

 

(17

)

 

 

0

 

 

 

0

 

 

 

649

 

 

 

(17

)

Municipal securities

 

 

66

 

 

 

(4

)

 

 

0

 

 

 

0

 

 

 

66

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,552

 

 

$

  (31

)

 

$

  0

 

 

$

  0

 

 

$

 4,552

 

 

$

  (31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Debt Investment Maturities

 

(In millions)

 

Adjusted

Cost Basis

 

 

Estimated

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

29,516

 

 

$

29,559

 

Due after one year through five years

 

 

58,954

 

 

 

62,275

 

Due after five years through 10 years

 

 

28,343

 

 

 

30,824

 

Due after 10 years

 

 

2,689

 

 

 

2,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  119,502

 

 

$

  125,527

 

 

 

 

 

 

 

 

 

 

 

NOTE 5 — DERIVATIVES

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

Foreign Currencies

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

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 December 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

$

635

 

 

$

635

 

Foreign exchange contracts sold

 

 

6,953

 

 

 

6,754

 

Interest rate contracts purchased

 

 

1,283

 

 

 

1,295

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

 

11,247

 

 

 

11,896

 

Foreign exchange contracts sold

 

 

14,598

 

 

 

15,595

 

Other contracts purchased

 

 

2,350

 

 

 

1,844

 

Other contracts sold

 

 

745

 

 

 

757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

14

 

 

$

(72

)

 

$

44

 

 

$

(54

)

Interest rate contracts

 

 

77

 

 

 

0

 

 

 

93

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

409

 

 

 

(463

)

 

 

245

 

 

 

(334

)

Other contracts

 

 

44

 

 

 

(9

)

 

 

18

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amounts of derivatives

 

 

544

 

 

 

(544

)

 

 

400

 

 

 

(399

)

Gross amounts of derivatives offset in the balance sheet

 

 

(157

)

 

 

158

 

 

 

(154

)

 

 

158

 

Cash collateral received

 

 

0

 

 

 

(288

)

 

 

0

 

 

 

(154

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amounts of derivatives

 

$

387

 

 

$

(674

)

 

$

246

 

 

$

(395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

(21

)

 

$

0

 

 

$

35

 

 

$

0

 

Other current assets

 

 

320

 

 

 

0

 

 

 

199

 

 

 

0

 

Other long-term assets

 

 

88

 

 

 

0

 

 

 

12

 

 

 

0

 

Other current liabilities

 

 

0

 

 

 

(648

)

 

 

0

 

 

 

(334

)

Other long-term liabilities

 

 

0

 

 

 

(26

)

 

 

0

 

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

387

 

 

$

(674

)

 

$

246

 

 

$

(395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $540 million and $544 million, respectively, as of December 31, 2020, and $399 million and $399 million, respectively, as of June 30, 2020.

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

 

(In millions)

 

Level 1

 

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

1

 

 

$

542

 

 

$

1

 

 

$

544

 

Derivative liabilities

 

 

0

 

 

 

(544

)

 

 

0

 

 

 

(544

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

1

 

 

 

398

 

 

 

1

 

 

 

400

 

Derivative liabilities

 

 

0

 

 

 

(399

)

 

 

0

 

 

 

(399

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


PART I

Item 1

 

 

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

 

 

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 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

 

 

$

(124

)

 

$

0

 

 

$

23

 

 

$

0

 

 

$

(293

)

 

$

0

 

 

$

53

 

Hedged items

 

 

0

 

 

 

125

 

 

 

0

 

 

 

(26

)

 

 

0

 

 

 

293

 

 

 

0

 

 

 

(59

)

Excluded from effectiveness assessment

 

 

0

 

 

 

10

 

 

 

0

 

 

 

42

 

 

 

0

 

 

 

18

 

 

 

0

 

 

 

83

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

0

 

 

 

(9

)

 

 

0

 

 

 

(14

)

 

 

0

 

 

 

(9

)

 

 

0

 

 

 

(13

)

Hedged items

 

 

0

 

 

 

12

 

 

 

0

 

 

 

13

 

 

 

0

 

 

 

16

 

 

 

0

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount reclassified from accumulated other comprehensive income

 

 

0

 

 

 

21

 

 

 

0

 

 

 

8

 

 

 

0

 

 

 

41

 

 

 

0

 

 

 

3

 

Excluded from effectiveness assessment

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

0

 

 

 

139

 

 

 

0

 

 

 

52

 

 

 

0

 

 

 

197

 

 

 

0

 

 

 

(119

)

Other contracts

 

 

0

 

 

 

3

 

 

 

0

 

 

 

1

 

 

 

0

 

 

 

7

 

 

 

0

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(In millions)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in effectiveness assessment

 

$

25

 

 

$

2

 

 

$

45

 

 

$

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 6 — INVENTORIES

The components of inventories were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2020

 

 

June 30,

2020

 

 

 

 

Raw materials

 

$

560

 

 

$

700

 

Work in process

 

 

83

 

 

 

83

 

Finished goods

 

 

1,281

 

 

 

1,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,924

 

 

$

1,895

 

 

 

 

 

 

 

 

 

 

 

 

17


PART I

Item 1

 

NOTE 7 — BUSINESS COMBINATIONS

On September 19, 2020, we entered into a definitive agreement to acquire ZeniMax Media Inc., the parent company of Bethesda Softworks LLC (“Bethesda”), for $7.5 billion in cash. Bethesda is one of the largest, privately held game developers and publishers in the world, and will bring a broad portfolio of games, technology, and talent to Xbox. We expect this acquisition to close in the second half of fiscal year 2021, subject to customary closing conditions and completion of regulatory review.

 

NOTE 8 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

 

(In millions)

 

June 30,

2020

 

 

Acquisitions

 

 

Other

 

 

December 31,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

24,190

 

 

$

0

 

 

$

112

 

 

$

24,302

 

Intelligent Cloud

 

 

12,697

 

 

 

443

 

 

 

58

 

 

 

13,198

 

More Personal Computing

 

 

6,464

 

 

 

2

 

 

 

253

 

 

 

6,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

43,351

 

 

$

445

 

 

$

423

 

 

$

44,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

NOTE 9  INTANGIBLE ASSETS

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

 

(In millions)

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

Technology-based

 

$

8,355

 

 

$

(6,672

)

 

$

1,683

 

 

$

8,160

 

 

$

(6,381

)

 

$

1,779

 

Customer-related

 

 

4,955

 

 

 

(2,532

)

 

 

2,423

 

 

 

4,967

 

 

 

(2,320

)

 

 

2,647

 

Marketing-related

 

 

4,162

 

 

 

(1,723

)

 

 

2,439

 

 

 

4,158

 

 

 

(1,588

)

 

 

2,570

 

Contract-based

 

 

435

 

 

 

(425

)

 

 

10

 

 

 

474

 

 

 

(432

)

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  17,907

 

 

$

  (11,352

)

 

$

6,555

 

 

$

  17,759

 

 

$

  (10,721

)

 

$

7,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18


PART I

Item 1

 

 

Intangible assets amortization expense was $378 million and $761 million for the three and six months ended December 31, 2020, respectively, and $411 million and $845 million for the three and six months ended December 31, 2019, respectively.

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2021 (excluding the six months ended December 31, 2020)

 

$

763

 

2022

 

 

1,459

 

2023

 

 

1,267

 

2024

 

 

905

 

2025

 

 

490

 

Thereafter

 

 

1,671

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,555

 

 

 

 

 

 

 

NOTE 10  DEBT

The components of debt were as follows:

 

(In millions, issuance by calendar year)

 

Maturities

(calendar year)

 

Stated Interest

Rate

 

 

Effective Interest

Rate

 

 

December 31,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 issuance of $3.8 billion (a)

 

 

 

 

2039

 

 

 

 

5.20%

 

 

 

 

5.24%

 

 

$

559

 

 

$

559

 

2010 issuance of $4.8 billion (a)

 

 

 

 

2040

 

 

 

 

4.50%

 

 

 

 

4.57%

 

 

 

571

 

 

 

1,571

 

2011 issuance of $2.3 billion (a)

 

 

2021

2041

 

 

4.00%

5.30%

 

 

4.08%

5.36%

 

 

 

1,270

 

 

 

1,270

 

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 (a)

 

 

2023

2043

 

 

2.38%

4.88%

 

 

2.47%

4.92%

 

 

 

2,919

 

 

 

2,919

 

2013 issuance of €4.1 billion

 

 

2021

2033

 

 

2.13%

3.13%

 

 

2.23%

3.22%

 

 

 

4,955

 

 

 

4,549

 

2015 issuance of $23.8 billion (a)

 

 

2022

2055

 

 

2.38%

4.75%

 

 

2.47%

4.78%

 

 

 

13,299

 

 

 

15,549

 

2016 issuance of $19.8 billion (a)

 

 

2021

2056

 

 

1.55%

3.95%

 

 

1.64%

4.03%

 

 

 

16,955

 

 

 

16,955

 

2017 issuance of $17.0 billion (a)

 

 

2022

2057

 

 

2.40%

4.50%

 

 

2.52%

4.53%

 

 

 

12,385

 

 

 

12,385

 

2020 issuance of $10.0 billion (a)

 

 

2050

2060

 

 

2.53%

2.68%

 

 

2.53%

2.68%

 

 

 

10,000

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total face value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64,563

 

 

 

67,407

 

Unamortized discount and issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(533

)

 

 

(554

)

Hedge fair value adjustments (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77

 

 

 

93

 

Premium on debt exchange (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,584

)

 

 

(3,619

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,523

 

 

 

63,327

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,387

)

 

 

(3,749

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

55,136

 

 

$

59,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

In June 2020, we exchanged a portion of our existing debt at premium for cash and new debt with longer maturities. The premium is amortized over the term of the new debt.

(b)

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

As of December 31, 2020 and June 30, 2020, the estimated fair value of long-term debt, including the current portion, was $75.1 billion and $77.1 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.

19


PART I

Item 1

 

The following table outlines maturities of our long-term debt, including the current portion, as of December 31, 2020:

 

(In millions)

 

 

  

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

 

 

 

2021 (excluding the six months ended December 31, 2020)

 

$

500

 

2022

 

 

8,141

 

2023

 

 

2,750

 

2024

 

 

5,250

 

2025

 

 

2,250

 

Thereafter

 

 

45,672

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

64,563

 

 

 

 

 

 

 

NOTE 11 — INCOME TAXES

Effective Tax Rate

Our effective tax rate was 16% and 17% for the three months ended December 31, 2020 and 2019, respectively, and 15% and 17% for the six months ended December 31, 2020 and 2019, respectively. The decrease in our effective tax rate for the three and six months ended December 31, 2020 compared to the prior year was primarily due to tax benefits from final Tax Cuts and Jobs Act regulations and an increase in tax benefits relating to stock-based compensation.

Our effective tax rate was lower than the U.S. federal statutory rate for the three and six months ended December 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 December 31, 2020 and June 30, 2020, unrecognized tax benefits and other income tax liabilities were $15.4 billion and $16.6 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets. The decrease is primarily driven by a partial settlement of the Internal Revenue Service (“IRS”) audits for tax years 2004 to 2013.

We settled a portion of the 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. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of December 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 key transfer pricing 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 2020, 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 12 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2020

 

 

June 30,
2020

 

 

 

 

Productivity and Business Processes

 

$

16,225

 

 

$

18,643

 

Intelligent Cloud

 

 

13,786

 

 

 

16,620

 

More Personal Computing

 

 

3,376

 

 

 

3,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

33,387

 

 

$

39,180

 

 

 

 

 

 

 

 

 

 

 

Changes in unearned revenue were as follows:

 

(In millions)

 

 

 

 

 

 

 

Six Months Ended December 31, 2020

 

 

 

Balance, beginning of period

 

$

39,180

 

Deferral of revenue

 

 

37,044

 

Recognition of unearned revenue

 

 

(42,837

)

 

 

 

 

 

 

 

Balance, end of period

 

$

33,387

 

 

 

 

 

 

 

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $117 billion as of December 31, 2020, of which $112 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 13  LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 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

December 31,

 

 

 

Six Months Ended 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

503

 

 

$

478

 

 

$

1,001

 

 

$

943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

249

 

 

$

163

 

 

$

455

 

 

$

288

 

Interest on lease liabilities

 

 

94

 

 

 

84

 

 

 

186

 

 

 

162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease cost

 

$

343

 

 

$

247

 

 

$

641

 

 

$

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


PART I

Item 1

 

 

Supplemental cash flow information related to leases was as follows:

 

(In millions)

 

Three Months Ended

December 31,

 

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

482

 

 

$

479

 

 

$

973

 

 

$

932

 

Operating cash flows from finance leases

 

 

94

 

 

 

84

 

 

 

186

 

 

 

162

 

Financing cash flows from finance leases

 

 

153

 

 

 

104

 

 

 

289

 

 

 

183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

1,578

 

 

 

948

 

 

 

2,256

 

 

 

1,931

 

Finance leases

 

 

1,193

 

 

 

863

 

 

 

1,828

 

 

 

2,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental balance sheet information related to leases was as follows:

 

(In millions, except lease term and discount rate)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2020

 

 

June 30,
2020

 

 

 

 

Operating Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

10,298

 

 

$

8,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

1,866

 

 

$

1,616

 

Operating lease liabilities

 

 

8,875

 

 

 

7,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

10,741

 

 

$

9,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost

 

$

12,694

 

 

$

10,371

 

Accumulated depreciation

 

 

(1,840

)

 

 

(1,385

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

10,854

 

 

$

8,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

699

 

 

$

540

 

Other long-term liabilities

 

 

10,819

 

 

 

8,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease liabilities

 

$

11,518

 

 

$

9,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

8 years

 

 

 

8 years

 

Finance leases

 

 

12 years

 

 

 

13 years

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

2.3%

 

 

 

2.7%

 

Finance leases

 

 

3.6%

 

 

 

3.9%

 

 

 

 

 

 

 

 

 

 

 

22


PART I

Item 1

 

 

The following table outlines maturities of our lease liabilities as of December 31, 2020:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

Operating Leases

 

 

Finance Leases

 

 

 

 

2021 (excluding the six months ended December 31, 2020)

 

$

1,099

 

 

$

533

 

2022

 

 

1,997

 

 

 

1,080

 

2023

 

 

1,811

 

 

 

1,092

 

2024

 

 

1,579

 

 

 

1,107

 

2025

 

 

1,280

 

 

 

1,431

 

Thereafter

 

 

4,309

 

 

 

8,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease payments

 

 

12,075

 

 

 

14,186

 

Less imputed interest

 

 

(1,334

)

 

 

(2,668

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,741

 

 

$

11,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $4.0 billion and $6.9 billion, respectively. These operating and finance leases will commence between fiscal year 2021 and fiscal year 2026 with lease terms of 1 year to 15 years.

 

NOTE 14 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 73 patent infringement cases pending against Microsoft as of December 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 and form of notice have been approved by the courts in British Columbia, Ontario, and Quebec. The ten-month claims period commenced on November 23, 2020 and will close on September 23, 2021.

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 on general causation is scheduled for July 2021.

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 December 31, 2020, we accrued aggregate legal liabilities of $322 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $500 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.

 

NOTE 15  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 December 31, 2020, $20.7 billion remained of this $40.0 billion share repurchase program.

24


PART I

Item 1

 

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

 

(In millions)

 

Shares

 

Amount

 

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

 

 

 

2021

 

 

 

 

 

2020

 

 

 

 

 

 

First Quarter

 

 

25

 

 

$

5,270

 

 

 

29

 

 

$

4,000

 

Second Quarter

 

 

27

 

 

 

5,750

 

 

 

32

 

 

 

4,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

52

 

 

$

11,020

 

 

 

61

 

 

$

8,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased during the first and second quarters of fiscal year 2021 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the first and second quarters of fiscal year 2020 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 $785 million and $2.3 billion for the three and six months ended December 31, 2020, respectively, and $551 million and $1.5 billion for the three and six months ended December 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 2021

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 15, 2020

 

 

November 19, 2020

 

 

December 10, 2020

 

 

$

0.56

 

 

$

4,230

 

December 2, 2020

 

 

February 18, 2021

 

 

March 11, 2021

 

 

 

0.56

 

 

 

4,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

1.12

 

 

$

8,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

$

1.02

 

 

$

7,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The dividend declared on December 2, 2020 was included in other current liabilities as of December 31, 2020.

 

25


PART I

Item 1

 

 

NOTE 16 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

(In millions)

 

Three Months Ended

December 31,

 

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(34

 

$

(2

)

 

$

(38

)

 

$

0

 

Unrealized gains (losses), net of tax of $7, $1, $12, and $(1)

 

 

25

 

 

 

2

 

 

 

45

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments for gains included in earnings

 

 

(21

)

 

 

(8

)

 

 

(41

)

 

 

(3

)

Tax expense included in provision for income taxes

 

 

4

 

 

 

2

 

 

 

8

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(17

)

 

 

(6

)

 

 

(33

)

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives, net of tax of $3, $(1), $4, and $(2)

 

 

8

 

 

 

(4

)

 

 

12

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(26

)

 

$

(6

)

 

$

(26

)

 

$

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

5,287

 

 

$

2,065

 

 

$

5,478

 

 

$

1,488

 

Unrealized gains (losses), net of tax of $(128), $(111), $(178), and $45

 

 

(477

)

 

 

(414

)

 

 

(665

)

 

 

162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(19

)

 

 

(7

)

 

 

(36

)

 

 

(6

)

Tax expense included in provision for income taxes

 

 

4

 

 

 

1

 

 

 

8

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(15

)

 

 

(6

)

 

 

(28

)

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to investments, net of tax of $(132), $(112), $(186), and $44

 

 

(492

)

 

 

(420

)

  

 

(693

)

 

 

157

 

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

10

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

4,795

 

 

$

1,645

 

 

$

4,795

 

 

$

1,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation Adjustments and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(2,143

)

 

$

(2,124

)

 

$

(2,254

)

 

$

(1,828

)

Translation adjustments and other, net of tax of $0, $0, $(9), and $(8)

 

 

741

 

 

 

230

 

 

 

852

 

 

 

(66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(1,402

)

 

$

(1,894

)

 

$

(1,402

)

 

$

(1,894

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), end of period

 

$

3,367

 

 

$

(255

)

 

$

3,367

 

 

$

(255

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


PART I

Item 1

 

 

NOTE 17  SEGMENT INFORMATION AND GEOGRAPHIC DATA

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

Our reportable segments are described below.

Productivity and Business Processes

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

 

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

 

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

 

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

 

Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, and Customer Data Platform; low-code application platform and automation solutions; and on-premises ERP and CRM applications.

Intelligent Cloud

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

 

Server products and cloud services, including Azure; 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 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; and MSN advertising.

 

Devices, including Surface and PC accessories.

 

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

 

Search.

27


PART I

Item 1

 

 

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

In addition, certain costs 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

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

13,353

 

 

$

11,826

 

 

$

25,672

 

 

$

22,903

 

Intelligent Cloud

 

 

14,601

 

 

 

11,869

 

 

 

27,587

 

 

 

22,714

 

More Personal Computing

 

 

15,122

 

 

 

13,211

 

 

 

26,971

 

 

 

24,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

43,076

 

 

$

36,906

 

 

$

80,230

 

 

$

69,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

6,181

 

 

$

5,182

 

 

$

11,887

 

 

$

9,964

 

Intelligent Cloud

 

 

6,492

 

 

 

4,531

 

 

 

11,914

 

 

 

8,420

 

More Personal Computing

 

 

5,224

 

 

 

4,178

 

 

 

9,972

 

 

 

8,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

17,897

 

 

$

13,891

 

 

$

33,773

 

 

$

26,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three or six months ended December 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

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

United States (a)

 

$

21,836

 

 

$

19,149

 

 

$

40,861

 

 

$

36,419

 

Other countries

 

 

21,240

 

 

 

17,757

 

 

 

39,369

 

 

 

33,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

43,076

 

 

$

36,906

 

 

$

80,230

 

 

$

69,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

28


PART I

Item 1

 

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

 

(In millions)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Server products and cloud services

 

$

12,729

 

 

$

10,119

 

 

$

23,924

 

 

$

19,311

 

Office products and cloud services

 

 

9,881

 

 

 

8,983

 

 

 

19,159

 

 

 

17,449

 

Windows

 

 

5,716

 

 

 

5,593

 

 

 

11,021

 

 

 

10,946

 

Gaming

 

 

5,031

 

 

 

3,327

 

 

 

8,123

 

 

 

5,869

 

LinkedIn

 

 

2,577

 

 

 

2,102

 

 

 

4,783

 

 

 

4,011

 

Search advertising

 

 

2,184

 

 

 

2,163

 

 

 

3,973

 

 

 

4,154

 

Devices

 

 

2,120

 

 

 

2,048

 

 

 

3,740

 

 

 

3,250

 

Enterprise Services

 

 

1,695

 

 

 

1,612

 

 

 

3,332

 

 

 

3,157

 

Other

 

 

1,143

 

 

 

959

 

 

 

2,175

 

 

 

1,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

43,076

 

 

$

36,906

 

 

$

80,230

 

 

$

69,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $16.7 billion and $31.9 billion for the three and six months ended December 31, 2020, respectively, and $12.5 billion and $24.1 billion for the three and six months ended December 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 December 31, 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month and six-month periods ended December 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, 2020, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the year then ended (not presented herein); and in our report dated July 30, 2020, 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, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

 

/S/ DELOITTE & TOUCHE LLP

 

Seattle, Washington

January 26, 2021

 

 

 

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, 2020, 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.

As the world continues to respond to the coronavirus (“COVID-19”), we are working to do our part by ensuring the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology and resources to our customers to help them do their best work while remote.

Highlights from the second quarter of fiscal year 2021 compared with the second quarter of fiscal year 2020 included:

 

Commercial cloud revenue increased 34% to $16.7 billion.

 

Office Commercial products and cloud services revenue increased 11%, driven by Office 365 Commercial growth of 21%.

 

Office Consumer products and cloud services revenue increased 7%, and Microsoft 365 Consumer subscribers increased to 47.5 million.

 

LinkedIn revenue increased 23%.

 

Dynamics products and cloud services revenue increased 21%, driven by Dynamics 365 growth of 39%.

 

Server products and cloud services revenue increased 26%, driven by Azure growth of 50%.

 

Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 1%.

 

Windows Commercial products and cloud services revenue increased 10%.

 

Xbox content and services revenue increased 40%.

 

Surface revenue increased 3%.

31


PART I

Item 2

 

 

 

Search advertising revenue, excluding traffic acquisition costs, increased 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. Weakening of the U.S. dollar relative to certain foreign currencies increased reported revenue but did not have a material impact on reported expenses from our international operations for the three months ended December 31, 2020, and did not have a material impact on reported revenue or expenses from our international operations for the six months ended December 31, 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 fiscal year 2021, the COVID-19 pandemic continued to impact our business operations and financial results. Cloud usage and demand benefited as customers accelerate their digital transformation priorities. Our consumer businesses also benefited from the remote environment, with continued demand for PCs and productivity tools, as well as strong engagement across our Gaming platform. We saw improvement in customer advertising spend, but continued to experience weakness in transactional licensing and savings in operating expenses related to COVID-19. The COVID-19 pandemic may continue to impact our business operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects over time. Refer to Risk Factors (Part II, Item 1A of this Form 10-Q) for further discussion.

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.

32


PART I

Item 2

 

Change in Accounting Estimate

In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from three years to four years and increase the estimated useful life of network equipment from two years to four years. This change in accounting estimate was effective beginning fiscal year 2021. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2020, the effect of this change in estimate for the three months ended December 31, 2020, was an increase in operating income of $787 million and net income of $649 million, or $0.09 per both basic and diluted share. The effect of this change for the six months ended December 31, 2020, was an increase in operating income of $1.7 billion and net income of $1.4 billion, or $0.19 per both basic and diluted share. It is estimated this change will increase our fiscal year 2021 annual operating income by $2.7 billion.

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 17 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Metrics

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q). Financial metrics are calculated based on 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, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”)

 

 

 

Office Consumer products and cloud services revenue growth

 

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

 

 

 

Microsoft 365 Consumer subscribers

 

The number of Microsoft 365 Consumer (formerly 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, comprising a set of intelligent, cloud-based applications across ERP, CRM, and Customer Data Platform; low-code application platform and automation solutions; and on-premises ERP and CRM applications

 

 

 

LinkedIn revenue growth

 

Revenue from LinkedIn, including Talent Solutions, Learning Solutions, Marketing Solutions, Sales 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

 

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 products and cloud services, 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, Xbox Game Pass and other subscriptions, cloud services, and advertising), 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

December 31,

 

 

Percentage

Change

 

 

Six Months Ended

December 31,

 

 

Percentage

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

43,076

 

 

$

36,906

 

 

 

17%

 

 

$

80,230

 

 

$

69,961

 

 

 

15%

 

Gross margin

 

 

28,882

 

 

 

24,548

 

 

 

18%

 

 

 

55,034

 

 

 

47,197

 

 

 

17%

 

Operating income

 

 

17,897

 

 

 

13,891

 

 

 

29%

 

 

 

33,773

 

 

 

26,577

 

 

 

27%

 

Net income

 

 

15,463

 

 

 

11,649

 

 

 

33%

 

 

 

29,356

 

 

 

22,327

 

 

 

31%

 

Diluted earnings per share

 

 

2.03

 

 

 

1.51

 

 

 

34%

 

 

 

3.85

 

 

 

2.90

 

 

 

33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Revenue increased $6.2 billion or 17%, driven by growth across each of our segments. Intelligent Cloud revenue increased, driven by server products and cloud services. More Personal Computing revenue increased, driven by Gaming. Productivity and Business Processes revenue increased, driven by Office Commercial and LinkedIn.

Cost of revenue increased $1.8 billion or 15%, driven by growth in Gaming and commercial cloud, offset in part by a reduction in depreciation expense due to the change in estimated useful lives of our server and network equipment.

Gross margin increased $4.3 billion or 18%, driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased slightly, driven by the change in estimated useful lives of our server and network equipment. Commercial cloud gross margin percentage increased 4 points to 71%, driven by the change in estimated useful lives of our server and network equipment. Excluding this impact, commercial cloud gross margin percentage was relatively unchanged, driven by gross margin percentage improvement in Azure, offset in part by sales mix shift to Azure.

Operating expenses increased $328 million or 3%, driven by investments in cloud engineering and commercial sales, offset in part by savings related to COVID-19 across each of our segments.

Key changes in operating expenses were:

 

Research and development expenses increased $296 million or 6%, driven by investments in cloud engineering.

 

Sales and marketing expenses were relatively unchanged, driven by investments in commercial sales, offset in part by reductions in advertising.

 

General and administrative expenses increased $18 million or 2%.

Operating income increased $4.0 billion or 29%, driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 2%, and 3%, respectively.

Six Months Ended December 31, 2020 Compared with Six Months Ended December 31, 2019

Revenue increased $10.3 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 Commercial and LinkedIn. More Personal Computing revenue increased, driven by Gaming.

Cost of revenue increased $2.4 billion or 11%, driven by growth in commercial cloud and Gaming, offset in part by the change in estimated useful lives of our server and network equipment.

Gross margin increased $7.8 billion or 17%, driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased, driven by the change in estimated useful lives of our server and network equipment. Commercial cloud gross margin percentage increased 4 points to 71%, driven by the change in estimated useful lives of our server and network equipment. Excluding this impact, commercial cloud gross margin percentage increased slightly, driven by gross margin percentage improvement in Azure, offset in part by sales mix shift to Azure.

35


PART I

Item 2

 

Operating expenses increased $641 million or 3%, driven by investments in cloud engineering and commercial sales, offset in part by savings related to COVID-19 across each of our segments.

Key changes in operating expenses were:

 

Research and development expenses increased $657 million or 7%, driven by investments in cloud engineering.

 

Sales and marketing expenses decreased $92 million or 1%, driven by reductions in advertising, offset in part by investments in commercial sales.

 

General and administrative expenses increased $76 million or 3%, driven by an increase in business taxes.

Operating income increased $7.2 billion or 27%, driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment.

Gross margin and operating income both included a favorable foreign currency impact of 2%.

SEGMENT RESULTS OF OPERATIONS

 

(In millions, except percentages)

 

Three Months Ended

December 31,

 

 

Percentage

Change

 

 

Six Months Ended

December 31,

 

 

Percentage

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

13,353

 

 

$

11,826

 

 

 

13%

 

 

$

25,672

 

 

$

22,903

 

 

 

12%

 

Intelligent Cloud

 

 

14,601

 

 

 

11,869

 

 

 

23%

 

 

 

27,587

 

 

 

22,714

 

 

 

21%

 

More Personal Computing

 

 

15,122

 

 

 

13,211

 

 

 

14%

 

 

 

26,971

 

 

 

24,344

 

 

 

11%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

43,076

 

 

$

36,906

 

 

 

17%

 

 

$

80,230

 

 

$

69,961

 

 

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

6,181

 

 

$

5,182

 

 

 

19%

 

 

$

11,887

 

 

$

9,964

 

 

 

19%

 

Intelligent Cloud

 

 

6,492

 

 

 

4,531

 

 

 

43%

 

 

 

11,914

 

 

 

8,420

 

 

 

41%

 

More Personal Computing

 

 

5,224

 

 

 

4,178

 

 

 

25%

 

 

 

9,972

 

 

 

8,193

 

 

 

22%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

17,897

 

 

$

13,891

 

 

 

29%

 

 

$

33,773

 

 

$

26,577

 

 

 

27%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments

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

Productivity and Business Processes

Revenue increased $1.5 billion or 13%.

 

Office Commercial products and cloud services revenue increased $807 million or 11%, on a strong prior year comparable. Office 365 Commercial revenue grew 21%, due to seat growth of 15% and higher revenue per user. Office Commercial products revenue declined 26%, driven by continued customer shift to cloud offerings from multi-year on-premises agreements and continued transactional weakness, on a strong prior year comparable that benefited from transactional strength, primarily in Japan.

 

Office Consumer products and cloud services revenue increased $79 million or 7%, driven by Microsoft 365 Consumer subscription revenue, on a strong prior year comparable that benefited from transactional strength in Japan. Microsoft 365 Consumer subscribers increased 28% to 47.5 million.

 

LinkedIn revenue increased $475 million or 23%, driven by advertising demand in our Marketing Solutions business.

 

Dynamics products and cloud services revenue increased 21%, driven by Dynamics 365 growth of 39%.

36


PART I

Item 2

 

 

Operating income increased $999 million or 19%.

 

Gross margin increased $1.2 billion or 13%, driven by growth in LinkedIn and Office Commercial, and the change in estimated useful lives of our server and network equipment. Gross margin percentage was relatively unchanged with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage decreased, driven by increased usage of Office 365 Commercial and a sales mix shift to cloud offerings.

 

Operating expenses increased $167 million or 4%, driven by investments in commercial sales, Teams marketing, and cloud engineering.

Revenue, gross margin, and operating income each included a favorable foreign currency impact of 2%.

Intelligent Cloud

Revenue increased $2.7 billion or 23%.

 

Server products and cloud services revenue increased $2.6 billion or 26%, driven by Azure. Azure revenue grew 50%, due to growth in our consumption-based services. Server products revenue increased 4%, driven by hybrid and premium solutions, offset in part by continued transactional weakness, on a strong prior year comparable that benefited from demand related to Windows Server 2008 end of support.

 

Enterprise Services revenue increased $83 million or 5%, driven by growth in Premier Support Services.

Operating income increased $2.0 billion or 43%.

 

Gross margin increased $2.4 billion or 29%, driven by growth in server products and cloud services and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage increased slightly, driven by gross margin percentage improvement in Azure, offset in part by sales mix shift to Azure.

 

Operating expenses increased $436 million or 12%, driven by investments in Azure.

Gross margin and operating income both included a favorable foreign currency impact of 2%.

More Personal Computing

Revenue increased $1.9 billion or 14%.

 

Windows revenue increased $123 million or 2%, driven by growth in Windows Commercial. Windows Commercial products and cloud services revenue increased 10%, primarily driven by demand for Microsoft 365. Windows OEM revenue increased 1%, driven by consumer PC demand, on a strong prior year OEM Pro comparable that benefited from Windows 7 end of support. Windows OEM Pro revenue decreased 9% and Windows OEM non-Pro revenue grew 24%.

 

Gaming revenue increased $1.7 billion or 51%, driven by growth in Xbox content and services and Xbox hardware. Xbox content and services revenue increased $998 million or 40%, driven by growth in third-party titles, Xbox Game Pass subscriptions, and first-party titles. Xbox hardware revenue increased 86%, driven by higher price of consoles sold due to the Xbox Series X|S launches.

 

Surface revenue increased $69 million or 3%.

 

Search advertising revenue increased slightly. Search advertising revenue, excluding traffic acquisition costs, increased 2%, primarily driven by higher search volume, offset in part by lower revenue per search.

Operating income increased $1.0 billion or 25%.

 

Gross margin increased $771 million or 11%, driven by growth in Gaming and Windows. Gross margin percentage decreased, driven by sales mix shift to Gaming.

 

Operating expenses decreased $275 million or 10%, driven by reductions in marketing and retail store expenses.

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

37


PART I

Item 2

 

Six Months Ended December 31, 2020 Compared with Six Months Ended December 31, 2019

Productivity and Business Processes

Revenue increased $2.8 billion or 12%.

 

Office Commercial products and cloud services revenue increased $1.5 billion or 10%, on a strong prior year comparable. Office 365 Commercial revenue grew 21%, due to seat growth and higher revenue per user. Office Commercial products revenue declined 28%, driven by continued customer shift to cloud offerings from multi-year on-premises agreements and continued transactional weakness, on a strong prior year comparable that benefited from transactional strength in Japan.

 

Office Consumer products and cloud services revenue increased $219 million or 10%, driven by Microsoft 365 Consumer subscription revenue, on a strong prior year comparable that benefited from transactional strength in Japan.

 

LinkedIn revenue increased $772 million or 19%, driven by advertising demand in our Marketing Solutions business.

 

Dynamics products and cloud services revenue increased 20%, driven by Dynamics 365 growth of 38%.

Operating income increased $1.9 billion or 19%.

 

Gross margin increased $2.2 billion or 13%, including a favorable foreign currency impact of 2%, driven by growth in LinkedIn and Office Commercial, and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased slightly with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage decreased, driven by increased usage of Office 365 Commercial and a sales mix shift to cloud offerings.

 

Operating expenses increased $322 million or 4%, driven by investments in commercial sales, Teams marketing, and cloud engineering.

Intelligent Cloud

Revenue increased $4.9 billion or 21%.

 

Server products and cloud services revenue increased $4.6 billion or 24%, driven by Azure. Azure revenue grew 49%, due to growth in our consumption-based services. Server products revenue increased 1%, driven by hybrid and premium solutions, offset in part by continued transactional weakness, on a strong prior year comparable that benefited from demand related to SQL Server 2008 and Windows Server 2008 end of support.

 

Enterprise Services revenue increased $175 million or 6%, driven by growth in Premier Support Services.

Operating income increased $3.5 billion or 41%, including a favorable foreign currency impact of 2%.

 

Gross margin increased $4.3 billion or 27%, driven by growth in server products and cloud services and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage was relatively unchanged, driven by gross margin percentage improvement in Azure, offset in part by sales mix shift to Azure.

 

Operating expenses increased $805 million or 11%, driven by investments in Azure.

More Personal Computing

Revenue increased $2.6 billion or 11%.

 

Windows revenue increased $75 million or 1%, primarily driven by growth in Windows Commercial, offset in part by a decrease in Windows OEM. Windows Commercial products and cloud services revenue increased 11%, driven by demand for Microsoft 365. Windows OEM revenue decreased 2% on a strong prior year OEM Pro comparable that benefited from Windows 7 end of support, offset in part by consumer PC demand. Windows OEM Pro revenue decreased 15% and Windows OEM non-Pro revenue grew 27%.

38


PART I

Item 2

 

 

Gaming revenue increased $2.3 billion or 38%, driven by growth in Xbox content and services and Xbox hardware. Xbox content and services revenue increased $1.6 billion or 35%, driven by growth in third-party titles, Xbox Game Pass subscriptions, and first-party titles. Xbox hardware revenue increased 51%, driven by higher price of consoles sold due to the Xbox Series X|S launches.

 

Surface revenue increased $486 million or 16%, driven by PC market demand.

 

Search advertising revenue decreased $181 million or 4%. Search advertising revenue, excluding traffic acquisition costs, decreased 4%, driven by lower revenue per search, offset in part by higher search volume.

Operating income increased $1.8 billion or 22%.

 

Gross margin increased $1.3 billion or 9%, driven by growth in Gaming, Surface, and Windows. Gross margin percentage decreased slightly, driven by sales mix shift to lower margin businesses.

 

Operating expenses decreased $486 million or 9%, driven by reductions in marketing and retail store expenses.

OPERATING EXPENSES

Research and Development

 

(In millions, except percentages)

 

Three Months Ended

December 31,

 

 

Percentage

Change

 

 

Six Months Ended

December 31,

 

 

Percentage

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,899

 

 

$

4,603

 

 

 

6%

 

 

$

9,825

 

 

$

9,168

 

 

 

7%

 

As a percent of revenue

 

 

11%

 

 

 

12%

 

 

 

(1)ppt

 

 

 

12%

 

 

 

13%

 

 

 

(1)ppt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

Research and development expenses increased $296 million or 6%, driven by investments in cloud engineering.

Six Months Ended December 31, 2020 Compared with Six Months Ended December 31, 2019

Research and development expenses increased $657 million or 7%, driven by investments in cloud engineering.

Sales and Marketing

 

(In millions, except percentages)

 

Three Months Ended

December 31,

 

 

Percentage

Change

 

 

Six Months Ended

December 31,

 

 

Percentage

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

4,947

 

 

$

4,933

 

 

 

0%

 

 

$

9,178

 

 

$

9,270

 

 

 

(1)%

 

As a percent of revenue

 

 

11%

 

 

 

13%

 

 

 

(2)ppt

 

 

 

11%

 

 

 

13%

 

 

 

(2)ppt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

Sales and marketing expenses were relatively unchanged, driven by investments in commercial sales, offset in part by reductions in advertising.

39


PART I

Item 2

 

Six Months Ended December 31, 2020 Compared with Six Months Ended December 31, 2019

Sales and marketing expenses decreased $92 million or 1%, driven by reductions in advertising, offset in part by investments in commercial sales.

General and Administrative

 

(In millions, except percentages)

 

Three Months Ended

December 31,

 

 

Percentage

Change

 

 

Six Months Ended

December 31,

 

 

Percentage

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

1,139

 

 

$

1,121

 

 

 

2%

 

 

$

2,258

 

 

$

2,182