UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended March 31, 2023
	OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Transition Period From to

Commission File Number 001-37845

MICROSOFT CORPORATION

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

ONE MICROSOFT WAY, REDMOND, Washington 98052-6399

(425) 882-8080

www.microsoft.com/investor

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol	Name of exchange on which registered
Common stock, $0.00000625 par value per share	MSFT	Nasdaq
3.125% Notes due 2028	MSFT	Nasdaq
2.625% Notes due 2033	MSFT	Nasdaq

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

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

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

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

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

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

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

Class	Outstanding as of April 20, 2023
Common Stock, $0.00000625 par value per share	7,435,487,575 shares

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2023

INDEX

				Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		a)	Income Statements for the Three and Nine Months Ended March 31, 2023 and 2022	3
		b)	Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2023 and 2022	4
		c)	Balance Sheets as of March 31, 2023 and June 30, 2022	5
		d)	Cash Flows Statements for the Three and Nine Months Ended March 31, 2023 and 2022	6
		e)	Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2023 and 2022	7
		f)	Notes to Financial Statements	8
		g)	Report of Independent Registered Public Accounting Firm	31
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
	Item 4.	Controls and Procedures		50
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		51
	Item 1A.	Risk Factors		51
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		66
	Item 6.	Exhibits		67
SIGNATURE				68

2

PART I

Item 1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

(In millions, except per share amounts) (Unaudited)	Three Months Ended March 31,						Nine Months Ended March 31,
	2023		2022				2023		2022
Revenue:
Product	$	15,588	$	17,366		$	47,846	$	54,776
Service and other		37,269		31,994			107,880		91,629
Total revenue		52,857		49,360			155,726		146,405
Cost of revenue:
Product		3,941		4,584			13,933		14,707
Service and other		12,187		11,031			35,135		31,514
Total cost of revenue		16,128		15,615			49,068		46,221
Gross margin		36,729		33,745			106,658		100,184
Research and development		6,984		6,306			20,456		17,663
Sales and marketing		5,750		5,595			16,555		15,521
General and administrative		1,643		1,480			5,378		4,151
Operating income		22,352		20,364			64,269		62,849
Other income (expense), net		321		(174	)		315		380
Income before income taxes		22,673		20,190			64,584		63,229
Provision for income taxes		4,374		3,462			12,304		7,231
Net income	$	18,299	$	16,728		$	52,280	$	55,998
Earnings per share:
Basic	$	2.46	$	2.23		$	7.02	$	7.46
Diluted	$	2.45	$	2.22		$	6.99	$	7.41
Weighted average shares outstanding:
Basic		7,441		7,493			7,450		7,504
Diluted		7,464		7,534			7,474		7,552

Refer to accompanying notes.

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Item 1

COMPREHENSIVE INCOME STATEMENTS

(In millions) (Unaudited)	Three Months Ended March 31,							Nine Months Ended March 31,
	2023			2022				2023			2022
Net income	$	18,299		$	16,728		$	52,280		$	55,998
Other comprehensive income (loss), net of tax:
Net change related to derivatives		(9	)		6			(34	)		8
Net change related to investments		753			(2,882	)		(796	)		(4,047	)
Translation adjustments and other		69			(37	)		(136	)		(259	)
Other comprehensive income (loss)		813			(2,913	)		(966	)		(4,298	)
Comprehensive income	$	19,112		$	13,815		$	51,314		$	51,700

Refer to accompanying notes.

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Item 1

BALANCE SHEETS

(In millions) (Unaudited)
	March 31, 2023			June 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	26,562		$	13,931
Short-term investments		77,865			90,826
Total cash, cash equivalents, and short-term investments		104,427			104,757
Accounts receivable, net of allowance for doubtful accounts of $495 and $633		37,420			44,261
Inventories		2,877			3,742
Other current assets		19,165			16,924
Total current assets		163,889			169,684
Property and equipment, net of accumulated depreciation of $65,998 and $59,660		88,132			74,398
Operating lease right-of-use assets		13,879			13,148
Equity investments		9,415			6,891
Goodwill		67,940			67,524
Intangible assets, net		9,879			11,298
Other long-term assets		26,954			21,897
Total assets	$	380,088		$	364,840
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,305		$	19,000
Current portion of long-term debt		6,245			2,749
Accrued compensation		10,411			10,661
Short-term income taxes		4,163			4,067
Short-term unearned revenue		36,903			45,538
Other current liabilities		12,664			13,067
Total current liabilities		85,691			95,082
Long-term debt		41,965			47,032
Long-term income taxes		25,000			26,069
Long-term unearned revenue		2,698			2,870
Deferred income taxes		302			230
Operating lease liabilities		12,312			11,489
Other long-term liabilities		17,437			15,526
Total liabilities		185,405			198,298
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,437 and 7,464		92,093			86,939
Retained earnings		108,234			84,281
Accumulated other comprehensive loss		(5,644	)		(4,678	)
Total stockholders’ equity		194,683			166,542
Total liabilities and stockholders’ equity	$	380,088		$	364,840

Refer to accompanying notes.

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Item 1

CASH FLOWS STATEMENTS

(In millions) (Unaudited)	Three Months Ended March 31,							Nine Months Ended March 31,
	2023			2022				2023		2022
Operations
Net income	$	18,299		$	16,728		$	52,280		$	55,998
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		3,549			3,773			9,987			10,481
Stock-based compensation expense		2,465			1,906			7,195			5,505
Net recognized losses (gains) on investments and derivatives		(40	)		105			152			(566	)
Deferred income taxes		(1,675	)		(198	)		(4,171	)		(5,985	)
Changes in operating assets and liabilities:
Accounts receivable		(1,408	)		857			7,157			5,800
Inventories		106			(279	)		868			(662	)
Other current assets		1,152			91			428			1,861
Other long-term assets		(554	)		(724	)		(1,285	)		(2,230	)
Accounts payable		(407	)		520			(4,032	)		284
Unearned revenue		(181	)		(209	)		(8,689	)		(7,437	)
Income taxes		1,414			1,091			(1,039	)		1,687
Other current liabilities		1,715			1,287			(490	)		(1,111	)
Other long-term liabilities		6			438			451			781
Net cash from operations		24,441			25,386			58,812			64,406
Financing
Repayments of debt		0			(4,197	)		(1,750	)		(9,023	)
Common stock issued		536			477			1,354			1,380
Common stock repurchased		(5,509	)		(8,822	)		(16,541	)		(23,939	)
Common stock cash dividends paid		(5,059	)		(4,645	)		(14,746	)		(13,503	)
Other, net		(258	)		(158	)		(839	)		(522	)
Net cash used in financing		(10,290	)		(17,345	)		(32,522	)		(45,607	)
Investing
Additions to property and equipment		(6,607	)		(5,340	)		(19,164	)		(17,015	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(301	)		(18,719	)		(1,329	)		(20,775	)
Purchases of investments		(9,063	)		(8,723	)		(25,675	)		(21,537	)
Maturities of investments		13,154			1,099			26,744			15,214
Sales of investments		1,239			16,693			8,725			25,218
Other, net		(1,686	)		(1,181	)		(2,847	)		(1,687	)
Net cash used in investing		(3,264	)		(16,171	)		(13,546	)		(20,582	)
Effect of foreign exchange rates on cash and cash equivalents		29			24			(113	)		57
Net change in cash and cash equivalents		10,916			(8,106	)		12,631			(1,726	)
Cash and cash equivalents, beginning of period		15,646			20,604			13,931			14,224
Cash and cash equivalents, end of period	$	26,562		$	12,498		$	26,562		$	12,498

Refer to accompanying notes.

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Item 1

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions, except per share amounts) (Unaudited)	Three Months Ended March 31,							Nine Months Ended March 31,
	2023			2022				2023			2022
Common stock and paid-in capital
Balance, beginning of period	$	90,225		$	84,528		$	86,939		$	83,111
Common stock issued		536			477			1,354			1,380
Common stock repurchased		(1,133	)		(1,313	)		(3,394	)		(4,401	)
Stock-based compensation expense		2,465			1,906			7,195			5,505
Other, net		0			169			(1	)		172
Balance, end of period		92,093			85,767			92,093			85,767
Retained earnings
Balance, beginning of period		99,368			75,045			84,281			57,055
Net income		18,299			16,728			52,280			55,998
Common stock cash dividends		(5,053	)		(4,634	)		(15,176	)		(13,931	)
Common stock repurchased		(4,380	)		(7,506	)		(13,151	)		(19,489	)
Balance, end of period		108,234			79,633			108,234			79,633
Accumulated other comprehensive loss
Balance, beginning of period		(6,457	)		437			(4,678	)		1,822
Other comprehensive income (loss)		813			(2,913	)		(966	)		(4,298	)
Balance, end of period		(5,644	)		(2,476	)		(5,644	)		(2,476	)
Total stockholders’ equity	$	194,683		$	162,924		$	194,683		$	162,924
Cash dividends declared per common share	$	0.68		$	0.62		$	2.04		$	1.86

Refer to accompanying notes.

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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 2022 Form 10-K filed with the U.S. Securities and Exchange Commission on July 28, 2022.

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.

In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate was effective beginning fiscal year 2023. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2022, the effect of this change in estimate for the three months ended March 31, 2023 was an increase in operating income of $885 million and net income of $720 million, or $0.10 per both basic and diluted share. The effect of this change for the nine months ended March 31, 2023 was an increase in operating income of $2.9 billion and net income of $2.3 billion, or $0.32 and $0.31 per basic and diluted share, respectively.

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.

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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 other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

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

Fair Value Measurements

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

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

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Item 1

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

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

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

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

Contract Balances and Other Receivables

As of March 31, 2023 and June 30, 2022, other receivables due from suppliers were $717 million and $1.0 billion, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of March 31, 2023 and June 30, 2022, long-term accounts receivable, net of allowance for doubtful accounts, was $4.3 billion and $3.8 billion, respectively, and is 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 March 31, 2023 and June 30, 2022, our financing receivables, net were $2.7 billion and $4.1 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.

Employee Severance

On January 18, 2023, we announced a decision to reduce our overall workforce by approximately 10,000 jobs through the third quarter of fiscal year 2023. During the three months ended December 31, 2022, we recorded $800 million of employee severance expenses related to these job eliminations as part of an ongoing employee benefit plan. These employee severance expenses were included in general and administrative expenses in our consolidated income statements and allocated to our segments based on relative gross margin. Refer to Note 17 – Segment Information and Geographic Data for further information.

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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 March 31,					Nine Months Ended March 31,
	2023		2022			2023		2022
Net income available for common shareholders (A)	$	18,299	$	16,728	$	52,280	$	55,998
Weighted average outstanding shares of common stock (B)		7,441		7,493		7,450		7,504
Dilutive effect of stock-based awards		23		41		24		48
Common stock and common stock equivalents (C)		7,464		7,534		7,474		7,552
Earnings Per Share
Basic (A/B)	$	2.46	$	2.23	$	7.02	$	7.46
Diluted (A/C)	$	2.45	$	2.22	$	6.99	$	7.41

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

NOTE 3 — OTHER INCOME (EXPENSE), NET

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

(In millions)	Three Months Ended March 31,						Nine Months Ended March 31,
	2023			2022			2023			2022
Interest and dividends income	$	748		$	519		$	2,089		$	1,542
Interest expense		(496	)		(503	)		(1,486	)		(1,567	)
Net recognized gains (losses) on investments		105			(76	)		103			595
Net losses on derivatives		(65	)		(29	)		(255	)		(29	)
Net gains (losses) on foreign currency remeasurements		122			(74	)		26			(152	)
Other, net		(93	)		(11	)		(162	)		(9	)
Total	$	321		$	(174	)	$	315		$	380

Net Recognized Gains (Losses) on Investments

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

(In millions)		Three Months Ended March 31,						Nine Months Ended March 31,
	2023			2022			2023			2022
Realized gains from sales of available-for-sale securities	$	4		$	119		$	19		$	150
Realized losses from sales of available-for-sale securities		(30	)		(89	)		(73	)		(102	)
Impairments and allowance for credit losses		0			(45	)		(13	)		(53	)
Total	$	(26	)	$	(15	)	$	(67	)	$	(5	)

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Item 1

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

(In millions)	Three Months Ended March 31,						Nine Months Ended March 31,
	2023			2022			2023			2022
Net realized gains (losses) on investments sold	$	(13	)	$	(22	)	$	77		$	46
Net unrealized gains (losses) on investments still held		144			(34	)		109			559
Impairments of investments		0			(5	)		(16	)		(5	)
Total	$	131		$	(61	)	$	170		$	600

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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
March 31, 2023
Changes in Fair Value Recorded in Other Comprehensive Income
Commercial paper	Level 2	$	9,853	$	0	$	0		$	9,853	$	9,207	$	646	$	0
Certificates of deposit	Level 2		2,229		0		0			2,229		2,185		44		0
U.S. government securities	Level 1		66,318		1		(3,169	)		63,150		1,550		61,600		0
U.S. agency securities	Level 2		7,469		1		(2	)		7,468		4,127		3,341		0
Foreign government bonds	Level 2		512		1		(23	)		490		5		485		0
Mortgage- and asset-backed securities	Level 2		767		1		(36	)		732		0		732		0
Corporate notes and bonds	Level 2		10,963		18		(552	)		10,429		0		10,429		0
Corporate notes and bonds	Level 3		118		0		0			118		0		118		0
Municipal securities	Level 2		367		13		(15	)		365		0		365		0
Municipal securities	Level 3		104		0		(7	)		97		0		97		0
Total debt investments		$	98,700	$	35	$	(3,804	)	$	94,931	$	17,074	$	77,857	$	0
Changes in Fair Value Recorded in Net Income
Equity investments	Level 1								$	3,475	$	979	$	0	$	2,496
Equity investments	Other									6,919		0		0		6,919
Total equity investments									$	10,394	$	979	$	0	$	9,415
Cash									$	8,509	$	8,509	$	0	$	0
Derivatives, net (a)										8		0		8		0
Total									$	113,842	$	26,562	$	77,865	$	9,415

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(In millions)	Fair Value Level	Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments
June 30, 2022
Changes in Fair Value Recorded in Other Comprehensive Income
Commercial paper	Level 2	$	2,500	$	0	$	0		$	2,500	$	2,498	$	2	$	0
Certificates of deposit	Level 2		2,071		0		0			2,071		2,032		39		0
U.S. government securities	Level 1		79,696		29		(2,178	)		77,547		9		77,538		0
U.S. agency securities	Level 2		419		0		(9	)		410		0		410		0
Foreign government bonds	Level 2		506		0		(24	)		482		0		482		0
Mortgage- and asset-backed securities	Level 2		727		1		(30	)		698		0		698		0
Corporate notes and bonds	Level 2		11,661		4		(554	)		11,111		0		11,111		0
Corporate notes and bonds	Level 3		67		0		0			67		0		67		0
Municipal securities	Level 2		368		19		(13	)		374		0		374		0
Municipal securities	Level 3		103		0		(6	)		97		0		97		0
Total debt investments		$	98,118	$	53	$	(2,814	)	$	95,357	$	4,539	$	90,818	$	0
Changes in Fair Value Recorded in Net Income
Equity investments	Level 1								$	1,590	$	1,134	$	0	$	456
Equity investments	Other									6,435		0		0		6,435
Total equity investments									$	8,025	$	1,134	$	0	$	6,891
Cash									$	8,258	$	8,258	$	0	$	0
Derivatives, net (a)										8		0		8		0
Total									$	111,648	$	13,931	$	90,826	$	6,891

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

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Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of March 31, 2023 and June 30, 2022, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $4.1 billion and $3.8 billion, respectively.

Unrealized Losses on Debt Investments

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

	Less than 12 Months					12 Months or Greater								Total Unrealized Losses
(In millions)		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value
March 31, 2023
U.S. government and agency securities	$	12,922	$	(354	)	$	41,520	$	(2,817	)	$	54,442	$	(3,171	)
Foreign government bonds		74		(5	)		390		(18	)		464		(23	)
Mortgage- and asset-backed securities		160		(5	)		387		(31	)		547		(36	)
Corporate notes and bonds		2,015		(41	)		7,486		(511	)		9,501		(552	)
Municipal securities		87		(2	)		177		(20	)		264		(22	)
Total	$	15,258	$	(407	)	$	49,960	$	(3,397	)	$	65,218	$	(3,804	)

	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, 2022
U.S. government and agency securities	$	59,092	$	(1,835	)	$	2,210	$	(352	)	$	61,302	$	(2,187	)
Foreign government bonds		418		(18	)		27		(6	)		445		(24	)
Mortgage- and asset-backed securities		510		(26	)		41		(4	)		551		(30	)
Corporate notes and bonds		9,443		(477	)		786		(77	)		10,229		(554	)
Municipal securities		178		(12	)		74		(7	)		252		(19	)
Total	$	69,641	$	(2,368	)	$	3,138	$	(446	)	$	72,779	$	(2,814	)

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
March 31, 2023
Due in one year or less	$	34,947	$	34,805
Due after one year through five years		48,237		46,168
Due after five years through 10 years		14,143		12,698
Due after 10 years		1,373		1,260
Total	$	98,700	$	94,931

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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.

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

Interest Rate

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

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

Equity

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

Credit

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

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of March 31, 2023, 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.

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

(In millions)	March 31, 2023		June 30, 2022
Designated as Hedging Instruments
Foreign exchange contracts purchased	$	1,492	$	635
Interest rate contracts purchased		1,108		1,139
Not Designated as Hedging Instruments
Foreign exchange contracts purchased		10,232		10,322
Foreign exchange contracts sold		20,460		21,606
Other contracts purchased		4,787		2,773
Other contracts sold		2,952		544

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

(In millions)	Derivative Assets				Derivative Liabilities		Derivative Assets			Derivative Liabilities
	March 31, 2023						June 30, 2022
Designated as Hedging Instruments
Foreign exchange contracts	$	19		$	(77	)	$	0		$	(77	)
Interest rate contracts		6			0			3			0
Not Designated as Hedging Instruments
Foreign exchange contracts		278			(333	)		333			(362	)
Other contracts		217			(311	)		20			(112	)
Gross amounts of derivatives		520			(721	)		356			(551	)
Gross amounts of derivatives offset in the balance sheet		(265	)		263			(130	)		133
Cash collateral received		0			(26	)		0			(75	)
Net amounts of derivatives	$	255		$	(484	)	$	226		$	(493	)
Reported as
Short-term investments	$	8		$	0		$	8		$	0
Other current assets		243			0			218			0
Other long-term assets		4			0			0			0
Other current liabilities		0			(188	)		0			(298	)
Other long-term liabilities		0			(296	)		0			(195	)
Total	$	255		$	(484	)	$	226		$	(493	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $496 million and $720 million, respectively, as of March 31, 2023, and $343 million and $550 million, respectively, as of June 30, 2022.

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

(In millions)	Level 1			Level 2		Level 3		Total
March 31, 2023
Derivative assets	$	4	$	507		$	9	$	520
Derivative liabilities		0		(721	)		0		(721	)
June 30, 2022
Derivative assets		1		349			6		356
Derivative liabilities		0		(551	)		0		(551	)

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

(In millions)		Three Months Ended March 31,						Nine Months Ended March 31,
		2023			2022			2023			2022
Designated as Fair Value Hedging Instruments
Foreign exchange contracts
Derivatives	$	0		$	0		$	0		$	49
Hedged items		0			0			0			(50	)
Excluded from effectiveness assessment		0			0			0			4
Interest rate contracts
Derivatives		1			(57	)		(37	)		(71	)
Hedged items		(15	)		61			20			83
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Amount reclassified from accumulated other comprehensive loss		18			(15	)		62			(44	)
Not Designated as Hedging Instruments
Foreign exchange contracts		(10	)		35			(20	)		308
Other contracts		(60	)		(29	)		(264	)		(41	)

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

(In millions)	Three Months Ended March 31,						Nine Months Ended March 31,
	2023		2022				2023		2022
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Included in effectiveness assessment	$	5	$	(6	)	$	14	$	(27	)

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)
	March 31, 2023		June 30, 2022
Raw materials	$	1,055	$	1,144
Work in process		35		82
Finished goods		1,787		2,516
Total	$	2,877	$	3,742

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NOTE 7 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2022. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

(In millions)
Goodwill (a)	$	16,326
Intangible assets		4,365
Other assets		42
Other liabilities (b)		(1,972	)
Total	$	18,761

(a)Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.

(b)Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, substantially all of which have been redeemed.

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

(In millions, except average life)	Amount			Weighted Average Life
Customer-related	$	2,610	9 years
Technology-based		1,540	5 years
Marketing-related		215	4 years
Total	$	4,365	7 years

Activision Blizzard, Inc.

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”) for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The acquisition has been approved by Activision Blizzard’s shareholders. We are continuing to engage with regulators reviewing the transaction and are working toward closing it in fiscal year 2023, subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions.

NOTE 8 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)	June 30, 2022		Acquisitions		Other			March 31, 2023
Productivity and Business Processes	$	24,811	$	11	$	(27	)	$	24,795
Intelligent Cloud		30,182		223		87			30,492
More Personal Computing		12,531		0		122			12,653
Total	$	67,524	$	234	$	182		$	67,940

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

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

NOTE 9 — INTANGIBLE ASSETS

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

(In millions)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	March 31, 2023							June 30, 2022
Technology-based	$	11,228	$	(7,366	)	$	3,862	$	11,277	$	(6,958	)	$	4,319
Customer-related		7,308		(3,837	)		3,471		7,342		(3,171	)		4,171
Marketing-related		4,929		(2,393	)		2,536		4,942		(2,143	)		2,799
Contract-based		23		(13	)		10		16		(7	)		9
Total	$	23,488	$	(13,609	)	$	9,879	$	23,577	$	(12,279	)	$	11,298

Intangible assets amortization expense was $612 million and $1.9 billion for the three and nine months ended March 31, 2023, respectively, and $502 million and $1.4 billion for the three and nine months ended March 31, 2022, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2023:

(In millions)
Year Ending June 30,
2023 (excluding the nine months ended March 31, 2023)	$	628
2024		2,403
2025		1,869
2026		1,341
2027		900
Thereafter		2,738
Total	$	9,879

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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			March 31, 2023			June 30, 2022
2009 issuance of $3.8 billion				2039				5.20%			5.24%	$	520		$	520
2010 issuance of $4.8 billion				2040				4.50%			4.57%		486			486
2011 issuance of $2.3 billion				2041				5.30%			5.36%		718			718
2012 issuance of $2.3 billion		2022	–	2042		2.13%	–	3.50%	2.24%	–	3.57%		454			1,204
2013 issuance of $5.2 billion		2023	–	2043		2.38%	–	4.88%	2.47%	–	4.92%		2,814			2,814
2013 issuance of €4.1 billion		2028	–	2033		2.63%	–	3.13%	2.69%	–	3.22%		2,499			2,404
2015 issuance of $23.8 billion		2025	–	2055		2.70%	–	4.75%	2.77%	–	4.78%		9,805			10,805
2016 issuance of $19.8 billion		2023	–	2056		2.00%	–	3.95%	2.10%	–	4.03%		9,430			9,430
2017 issuance of $17.0 billion		2024	–	2057		2.88%	–	4.50%	3.04%	–	4.53%		8,945			8,945
2020 issuance of $10.0 billion		2050	–	2060		2.53%	–	2.68%	2.53%	–	2.68%		10,000			10,000
2021 issuance of $8.2 billion		2052	–	2062		2.92%	–	3.04%	2.92%	–	3.04%		8,185			8,185
Total face value													53,856			55,511
Unamortized discount and issuance costs													(446	)		(471	)
Hedge fair value adjustments (a)													(88	)		(68	)
Premium on debt exchange													(5,112	)		(5,191	)
Total debt													48,210			49,781
Current portion of long-term debt													(6,245	)		(2,749	)
Long-term debt												$	41,965		$	47,032

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

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As of March 31, 2023 and June 30, 2022, the estimated fair value of long-term debt, including the current portion, was $47.8 billion and $50.9 billion, respectively. The estimated fair values are based on Level 2 inputs.

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

The following table outlines maturities of our long-term debt, including the current portion, as of March 31, 2023:

(In millions)
Year Ending June 30,
2023 (excluding the nine months ended March 31, 2023)	$	1,000
2024		5,250
2025		2,250
2026		3,000
2027		8,000
Thereafter		34,356
Total	$	53,856

NOTE 11 — INCOME TAXES

Effective Tax Rate

Our effective tax rate was 19% and 17% for the three months ended March 31, 2023 and 2022, respectively, and 19% and 11% for the nine months ended March 31, 2023 and 2022, respectively. The increase in our effective tax rate for the three months ended March 31, 2023 compared to the prior year was primarily due to a decrease in tax benefits relating to stock-based compensation. The increase in our effective tax rate for the nine months ended March 31, 2023 compared to the prior year was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties and a decrease in tax benefits relating to stock-based compensation.

In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeded the current tax liability from the U.S. global intangible low-taxed income tax.

Our effective tax rate was lower than the U.S. federal statutory rate for the three and nine months ended March 31, 2023, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland.

Uncertain Tax Positions

As of March 31, 2023 and June 30, 2022, unrecognized tax benefits and other income tax liabilities were $18.1 billion and $16.3 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets.

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. 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 March 31, 2023, 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. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

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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 2022, 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.

NOTE 12 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)
	March 31, 2023		June 30, 2022
Productivity and Business Processes	$	20,504	$	24,558
Intelligent Cloud		15,552		19,371
More Personal Computing		3,545		4,479
Total	$	39,601	$	48,408

Changes in unearned revenue were as follows:

(In millions)
Nine Months Ended March 31, 2023
Balance, beginning of period	$	48,408
Deferral of revenue		78,046
Recognition of unearned revenue		(86,853	)
Balance, end of period	$	39,601

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $201 billion as of March 31, 2023, of which $196 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.

NOTE 13 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 18 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

(In millions)	Three Months Ended March 31,				Nine Months Ended March 31,
		2023		2022		2023		2022
Operating lease cost	$	766	$	744	$	2,112	$	1,801
Finance lease cost:
Amortization of right-of-use assets	$	348	$	289	$	994	$	779
Interest on lease liabilities		132		109		364		320
Total finance lease cost	$	480	$	398	$	1,358	$	1,099

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Supplemental cash flow information related to leases was as follows:

(In millions)	Three Months Ended March 31,				Nine Months Ended March 31,
		2023		2022		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	690	$	726	$	1,989	$	1,733
Operating cash flows from finance leases		132		109		364		320
Financing cash flows from finance leases		272		233		790		655
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		663		1,421		2,377		4,151
Finance leases		1,044		720		2,253		3,094

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)
	March 31, 2023	June 30, 2022
Operating Leases