Microsoft (MSFT) 10-K risk factor changes: FY2022 vs FY2021

Non-compliance [added: with sanctions as well as general ecosystem disruptions] could result in reputational harm, operational delays, monetary fines, loss of [added: revenues, increased costs, loss of] export privileges, or criminal sanctions.

Regulators may assert that our collection, use, and management of customer [added: data] and other [removed: data] [added: information] is inconsistent with their laws and [removed: regulations.][added: regulations, including laws that apply to the tracking of users via technology such as cookies.]

[removed: Laws] [added: Laws] and regulations relating to the handling of personal data may impede the adoption of our services or result in increased costs, legal claims, fines against [removed: us, or] [added: us, or] reputational [removed: damage. The growth of our Internet- and cloud-based services internationally relies increasingly on the movement of data across national boundaries.][added: damage.]

[removed: The law, which] [added: For example, the EU General Data Protection Regulation (“GDPR”)] applies to all of our activities conducted from an establishment in the EU or related to products and services offered in the EU, imposes a range of compliance obligations regarding the handling of personal data.

Engineering efforts to build and maintain capabilities to facilitate compliance with [removed: the law have entailed] [added: these laws involve] substantial expense and the diversion of engineering resources from other [removed: projects and may continue to do so.][added: projects.]

We might experience reduced demand for our offerings if we are unable to engineer products that meet our legal duties or help our customers meet their obligations under the GDPR [removed: or] [added: and] other data regulations, or if our implementation to comply with the GDPR makes our offerings less attractive.

[removed: The GDPR imposes significant new obligations and compliance] [added: Compliance] with these obligations depends in part on how particular regulators interpret and apply them.

If we fail to [removed: comply with the GDPR,] [added: comply,] or if regulators assert we have failed to comply [removed: with the GDPR,] [added: (including in response to complaints made by customers),] it may lead to regulatory enforcement actions, which can result in monetary penalties [removed: of] [added: (of] up to 4% of worldwide [removed: revenue,] [added: revenue in the case of GDPR),] private lawsuits, reputational damage, [added: blockage of international data transfers,] and loss of customers.

[removed: Countries] [added: Jurisdictions] around the world, [added: such as China, India,] and states in the U.S. [removed: such as California, Colorado, and Virginia,] have adopted, or are considering adopting or expanding, laws and regulations imposing obligations regarding the handling [added: or transfer] of personal data.

[removed: We may have additional tax liabilities.] We are subject to income taxes in the U.S. and many foreign jurisdictions.

[removed: Third] [added: Third] parties may claim we infringe their intellectual property [removed: rights. From time to time, others claim we infringe their intellectual property] rights.

These include product safety or quality issues, [removed: or] our environmental impact and sustainability, supply chain practices, or human rights record.

[removed: Catastrophic events or geopolitical conditions may disrupt our business.] A disruption or failure of our systems or operations because of a major earthquake, weather event, cyberattack, terrorist attack, pandemic, or other catastrophic event could cause delays in completing sales, providing services, or performing other critical functions.

Abrupt political change, terrorist activity, and armed [added: conflict, such as the ongoing] conflict [added: in Ukraine,] pose a risk of general economic disruption in affected countries, which may increase our operating [removed: costs.][added: costs and negatively impact our ability to sell to and collect from customers in affected markets.]

The occurrence of regional epidemics or a global pandemic [added: such as COVID-19] may adversely affect our operations, financial condition, and results of operations.

The COVID-19 pandemic [removed: continues to have] [added: has had] widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices.

The extent to which [removed: the COVID-19 pandemic impacts] [added: global pandemics impact] our business going forward will depend on [removed: numerous evolving] factors [removed: we cannot reliably predict, including] [added: such as] the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability.

Measures to contain [removed: the virus that impact us, our partners, distributors, and suppliers] [added: a global pandemic] may [removed: further] intensify [removed: these impacts and] other risks described in these Risk Factors.

Any of these [added: measures] may adversely impact our ability to:

Other digital safety abuses

Our hosted consumer services as well as our enterprise services may be used to disseminate harmful or illegal content in violation of our terms or applicable law.

We may not proactively discover such content due to scale, the limitations of existing technologies, and conflicting legal frameworks.

When discovered by users, such content may negatively affect our reputation, our brands, and user engagement.

Regulations and other initiatives to make platforms responsible for preventing or eliminating harmful content online have been enacted, and we expect this to continue.

We may be subject to enhanced regulatory oversight, civil or criminal liability, or reputational damage if we fail to comply with content moderation regulations, adversely affecting our business and consolidated financial statements.

The development of the IoT presents security, privacy, and execution risks.

To support the growth of the intelligent cloud and the intelligent edge, we are developing products, services, and technologies to power the IoT, a network of distributed and interconnected devices employing sensors, data, and computing capabilities including AI.

The IoT’s great potential also carries substantial risks.

IoT products and services may contain defects in design, manufacture, or operation that make them insecure or ineffective for their intended purposes.

An IoT solution has multiple layers of hardware, sensors, processors, software, and firmware, several of which we may not develop or control.

Each layer, including the weakest layer, can impact the security of the whole system.

Many IoT devices have limited interfaces and ability to be updated or patched.

IoT solutions may collect large amounts of data, and our handling of IoT data may not satisfy customers or regulatory requirements.

IoT scenarios may increasingly affect personal health and safety.

If IoT solutions that include our technologies do not work as intended, violate the law, or harm individuals or businesses, we may be subject to legal claims or enforcement actions.

These risks, if realized, may increase our costs, damage our reputation or brands, or negatively impact our revenues or margins.

Issues in the development and use of AI may result in reputational harm or liability.

We are building AI into many of our offerings, including our productivity services, and we are also making first- and third-party AI available for our customers to use in solutions that they build.

We expect these elements of our business to grow.

We envision a future in which AI operating in our devices, applications, and the cloud helps our customers be more productive in their work and personal lives.

As with many innovations, AI presents risks and challenges that could affect its adoption, and therefore our business.

AI algorithms may be flawed.

Datasets may be insufficient or contain biased information.

Ineffective or inadequate AI development or deployment practices by Microsoft or others could result in incidents that impair the acceptance of AI solutions or cause harm to individuals or society.

These deficiencies and other failures of AI systems could subject us to competitive harm, regulatory action, legal liability, including under new proposed legislation regulating AI in jurisdictions such as the European Union (“EU”), and brand or reputational harm.

Some AI scenarios present ethical issues.

If we enable or offer AI solutions that are controversial because of their impact on human rights, privacy, employment, or other social, economic, or political issues, we may experience brand or reputational harm.

OPERATIONAL RISKS

We may have excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure.

Our increasing user traffic, growth in services, and the complexity of our products and services demand more computing power.

We spend substantial amounts to build, purchase, or lease datacenters and equipment and to upgrade our technology and network infrastructure to handle more traffic on our websites and in our datacenters.

Our datacenters depend on predictable energy and networking supplies, the cost or availability of which could be adversely affected by a variety of factors, including the transition to a clean energy economy and geopolitical disruptions.

These demands continue to increase as we introduce new products and services and support the growth of existing services such as Bing, Azure, Microsoft Account services, Microsoft 365, Microsoft Teams, Dynamics 365, OneDrive, SharePoint Online, Skype, Xbox, and Outlook.com.

We are rapidly growing our business of providing a platform and back-end hosting for services provided by third parties to their end users.

Maintaining, securing, and expanding this infrastructure is expensive and complex, and requires development of principles for datacenter builds in geographies with higher safety risks.

It requires that we maintain an Internet connectivity infrastructure and storage and compute capacity that is robust and reliable within competitive and regulatory constraints that continue to evolve.

Inefficiencies or operational failures, including temporary or permanent loss of customer data, insufficient Internet connectivity, or inadequate storage and compute capacity, could diminish the quality of our products, services, and user experience resulting in contractual liability, claims by customers and other third parties, regulatory actions, damage to our reputation, and loss of current and potential users, subscribers, and advertisers, each of which may adversely impact our consolidated financial statements.

We may experience quality or supply problems. Our hardware products such as Xbox consoles, Surface devices, and other devices we design and market are highly complex and can have defects in design, manufacture, or associated software.

We could incur significant expenses, lost revenue, and reputational harm as a result of recalls, safety alerts, or product liability claims if we fail to prevent, detect, or address such issues through design, testing, or warranty repairs.

Periodically, we receive such reports directly and investigate them.

On July 22, 2019, our Hungarian subsidiary entered into a non-prosecution agreement (“NPA”) with the U.S. Department of Justice (“DOJ”) and we agreed to the terms of a cease and desist order with the Securities and Exchange Commission.

These agreements required us to pay $25.3 million in monetary penalties, disgorgement, and interest pertaining to activities at Microsoft’s subsidiary in Hungary.

The NPA, which has a three-year term, also contains certain ongoing compliance requirements, including the obligations to disclose to the DOJ issues that may implicate the FCPA and to cooperate in any inquiries.

This ruling has led to uncertainty about the legal requirements for data transfers from the EU under other legal mechanisms.

In May 2018, the EU General Data Protection Regulation (“GDPR”), became effective.

Federal and state governments have implemented measures to contain the virus, including social distancing, travel restrictions, and vaccination programs.

Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus are causing additional outbreaks.

The COVID-19 pandemic has impacted and may continue to impact our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.

These factors may adversely impact consumer, business, and government spending on technology as well as customers' ability to pay for our products and services on an ongoing basis.

This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including investments, receivables, and forward-looking guidance.

[removed: Legal] [added: Legal] and Other [removed: Contingencies][added: Contingencies]

CHANGE IN ACCOUNTING ESTIMATE

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 will be 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, it is estimated this change will increase our fiscal year 2023 operating income by $3.7 billion.

We had previously increased the estimated useful lives of both server and network equipment in July 2020.

Contractual Obligations

The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30, 2021:

| (In millions) | | 2022 | | | | 2023-2024 | | | | 2025-2026 | | | | Thereafter | | | | Total | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | |

| Long-term debt: (a) | | | | | | | | | | | | | | | | | | | | |

| Principal payments | | $ | 8,075 | | | $ | 8,000 | | | $ | 5,250 | | | $ | 42,585 | | | $ | 63,910 | |

| Interest payments | | | 1,628 | | | | 2,847 | | | | 2,438 | | | | 17,320 | | | | 24,233 | |

| Construction commitments (b) | | | 8,927 | | | | 529 | | | | 0 | | | | 0 | | | | 9,456 | |

| Operating leases, including imputed interest (c) | | | 2,801 | | | | 4,956 | | | | 3,469 | | | | 6,747 | | | | 17,973 | |

| Finance leases, including imputed interest (c) | | | 1,341 | | | | 3,256 | | | | 3,774 | | | | 14,096 | | | | 22,467 | |

| Transition tax (d) | | | 1,427 | | | | 4,105 | | | | 8,030 | | | | 0 | | | | 13,562 | |

| Purchase commitments (e) | | | 29,129 | | | | 1,708 | | | | 446 | | | | 270 | | | | 31,553 | |

| Other long-term liabilities (f) | | | 0 | | | | 365 | | | | 68 | | | | 263 | | | | 696 | |

| Total | | $ | 53,328 | | | $ | 25,766 | | | $ | 23,475 | | | $ | 81,281 | | | $ | 183,850 | |

| (a) | *Refer to Note 11 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).* |

| --- | --- |

| (b) | *Refer to Note 7 – Property and Equipment of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).* |

| (c) | *Refer to Note 14 – Leases of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).* |

| (d) | *Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).* |

| (e) | *Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not presented as construction commitments above.* |

| (f) | *We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $14.6 billion from the amounts presented as the timing of these obligations is uncertain. We have also excluded unearned revenue and non-cash items.* |

Other Planned Uses of Capital

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt.

The acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as continue making acquisitions that align with our business strategy.

Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff.

We expect capital expenditures to increase in coming years to support growth in our cloud offerings.

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

We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

Liquidity

As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax.

Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight.

We have paid transition tax of $4.7 billion, which included $1.5 billion for fiscal year 2021.

The remaining transition tax of $13.6 billion is payable over the next five years with a final payment in fiscal year 2026.

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

PART II

Item 7

RECENT ACCOUNTING GUIDANCE

Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

| Risk Categories | | Hypothetical Change | | June 30, [removed: 2021] [added: 2022] | | | | | | Impact | |

| Foreign [removed: currency–Revenue] [added: currency – Revenue] | | 10% decrease in foreign exchange rates | | $ | [removed: (6,756] [added: (6,822] | ) | | | | Earnings | |

| Foreign [removed: currency–Investments] [added: currency – Investments] | | 10% decrease in foreign exchange rates | | | [removed: (136] [added: (94] | ) | | | | Fair Value | |

| Interest rate | | 100 basis point increase in U.S. treasury interest rates | | | [removed: (3,511] [added: (2,536] | ) | | | | Fair Value | |

| Credit | | 100 basis point increase in credit spreads | | | [removed: (309] [added: (350] | ) | | | | Fair Value | |

| Equity | | 10% decrease in equity market prices | | | [removed: (602] [added: (637] | ) | | | | Earnings | |

| Year Ended June 30, | | [removed: 2021] [added: 2022] | | | | [removed: 2020] [added: 2021] | | | | [removed: 2019] [added: 2020] | | |

| Product | | $ | [removed: 71,074] [added: 72,732] | | | $ | [removed: 68,041] [added: 71,074] | | | $ | [removed: 66,069] [added: 68,041] | |

| Service and other | | | [removed: 97,014] [added: 125,538] | | | | [removed: 74,974] [added: 97,014] | | | | [removed: 59,774] [added: 74,974] | |

| Total revenue | | | [removed: 168,088] [added: 198,270] | | | | [removed: 143,015] [added: 168,088] | | | | [removed: 125,843] [added: 143,015] | |

| Product | | | [removed: 18,219] [added: 19,064] | | | | [removed: 16,017] [added: 18,219] | | | | [removed: 16,273] [added: 16,017] | |

| Service and other | | | [removed: 34,013] [added: 43,586] | | | | [removed: 30,061] [added: 34,013] | | | | [removed: 26,637] [added: 30,061] | |

| Total cost of revenue | | | [removed: 52,232] [added: 62,650] | | | | [removed: 46,078] [added: 52,232] | | | | [removed: 42,910] [added: 46,078] | |

| Gross margin | | | [removed: 115,856] [added: 135,620] | | | | [removed: 96,937] [added: 115,856] | | | | [removed: 82,933] [added: 96,937] | |

| Research and development | | | [removed: 20,716] [added: 24,512] | | | | [removed: 19,269] [added: 20,716] | | | | [removed: 16,876] [added: 19,269] | |

| Sales and marketing | | | [removed: 20,117] [added: 21,825] | | | | [removed: 19,598] [added: 20,117] | | | | [removed: 18,213] [added: 19,598] | |

| General and administrative | | | [removed: 5,107] [added: 5,900] | | | | [removed: 5,111] [added: 5,107] | | | | [removed: 4,885] [added: 5,111] | |

| Operating income | | | [removed: 69,916] [added: 83,383] | | | | [removed: 52,959] [added: 69,916] | | | | [removed: 42,959] [added: 52,959] | |

| Other income, net | | | [removed: 1,186] [added: 333] | | | | [removed: 77] [added: 1,186] | | | | [removed: 729] [added: 77] | |

| Income before income taxes | | | [removed: 71,102] [added: 83,716] | | | | [removed: 53,036] [added: 71,102] | | | | [removed: 43,688] [added: 53,036] | |

| Provision for income taxes | | | [removed: 9,831] [added: 10,978] | | | | [removed: 8,755] [added: 9,831] | | | | [removed: 4,448] [added: 8,755] | |

| Net income | | $ | [removed: 61,271] [added: 72,738] | | | $ | [removed: 44,281] [added: 61,271] | | | $ | [removed: 39,240] [added: 44,281] | |

| Basic | | $ | [removed: 8.12] [added: 9.70] | | | $ | [removed: 5.82] [added: 8.12] | | | $ | [removed: 5.11] [added: 5.82] | |

| Diluted | | $ | [removed: 8.05] [added: 9.65] | | | $ | [removed: 5.76] [added: 8.05] | | | $ | [removed: 5.06] [added: 5.76] | |

| Basic | | | [removed: 7,547] [added: 7,496] | | | | [removed: 7,610] [added: 7,547] | | | | [removed: 7,673] [added: 7,610] | |

| Diluted | | | [removed: 7,608] [added: 7,540] | | | | [removed: 7,683] [added: 7,608] | | | | [removed: 7,753] [added: 7,683] | |

| [removed: (In millions)] [added: (In millions)] | | | | | | | | | | | | |

| Net change related to derivatives | | | [removed: 19] [added: 6] | | | | [removed: (38] [added: 19] | [removed: )] | | | [removed: (173] [added: (38] | ) |

| Net change related to investments | | | [removed: (2,266] [added: (5,360] | ) | | | [removed: 3,990] [added: (2,266] | [added: )] | | | [removed: 2,405] [added: 3,990] | |

| Translation adjustments and other | | | [removed: 873] [added: (1,146] | [added: )] | | | [removed: (426] [added: 873] | [removed: )] | | | [removed: (318] [added: (426] | ) |

| Other comprehensive income (loss) | | | [removed: (1,374] [added: (6,500] | ) | | | [removed: 3,526] [added: (1,374] | [added: )] | | | [removed: 1,914] [added: 3,526] | |

| Comprehensive income | | $ | [removed: 59,897] [added: 66,238] | | | $ | [removed: 47,807] [added: 59,897] | | | $ | [removed: 41,154] [added: 47,807] | |

| June 30, | | [added: | 2022 | | | |] 2021 | | | | 2020 | | [removed: |]

| Cash and cash equivalents | | $ | [removed: 14,224] [added: 13,931] | | | $ | [removed: 13,576] [added: 14,224] | |

| Short-term investments | | | [removed: 116,110] [added: 90,826] | | | | [removed: 122,951] [added: 116,110] | |

| Total cash, cash equivalents, and short-term investments | | | [removed: 130,334] [added: 104,757] | | | | [removed: 136,527] [added: 130,334] | |

| Accounts receivable, net of allowance for doubtful accounts of [removed: $751] [added: $633] and [removed: $788] [added: $751] | | | [removed: 38,043] [added: 44,261] | | | | [removed: 32,011] [added: 38,043] | |

| Inventories | | | [removed: 2,636] [added: 3,742] | | | | [removed: 1,895] [added: 2,636] | |

| Other current assets | | | [removed: 13,393] [added: 16,924] | | | | [removed: 11,482] [added: 13,393] | |

| Total current assets | | | [removed: 184,406] [added: 169,684] | | | | [removed: 181,915] [added: 184,406] | |

| Net income | | $ | 72,738 | | | $ | 61,271 | | | $ | 44,281 | |

| Year Ended June 30, | | 2022 | | | | 2021 | | | | 2020 | | |

| Stock-based compensation expense | | | 7,502 | | | | 6,118 | | | | 5,289 | |

| Net income | | | 72,738 | | | | 61,271 | | | | 44,281 | |

| Other comprehensive income (loss) | | | (6,500 | ) | | | (1,374 | ) | | | 3,526 | |

In July 2022, we completed an assessment of the useful lives of our server and network equipment.

We had previously increased the estimated useful lives of both server and network equipment in July 2020.

| Year Ended June 30, | | | 2022 | | | | 2021 | | | | 2020 | |

| Year Ended June 30, | | 2022 | | | | 2021 | | | | 2020 | | |

| Year Ended June 30, | | 2022 | | | | 2021 | | | | 2020 | | |

| Year Ended June 30, | | 2022 | | | | 2021 | | | | 2020 | | |

| Year Ended June 30, | | 2022 | | | | 2021 | | | | 2020 | | |

| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 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 | |

| Total debt investments | | | | | | $ | 98,118 | | | $ | 53 | | | $ | (2,814 | ) | | $ | 95,357 | | | $ | 4,539 | | | $ | 90,818 | | | $ | 0 | |

| Equity investments | | | Level 1 | | | | | | | | | | | | | | | $ | 1,590 | | | $ | 1,134 | | | $ | 0 | | | $ | 456 | |

| Total equity investments | | | | | | | | | | | | | | | | | | $ | 8,025 | | | $ | 1,134 | | | $ | 0 | | | $ | 6,891 | |

| Cash | | | | | | | | | | | | | | | | | | $ | 8,258 | | | $ | 8,258 | | | $ | 0 | | | $ | 0 | |

| Total | | | | | | | | | | | | | | | | | | $ | 111,648 | | | $ | 13,931 | | | $ | 90,826 | | | $ | 6,891 | |

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 fiscal year 2021 was an increase in operating income of $2.7 billion and net income of $2.3 billion, or $0.30 per both basic and diluted share.

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 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.

Recent Accounting Guidance Not Yet Adopted

The standard will be effective for us beginning July 1, 2021.

We have completed our assessment and concluded that adoption of the new standard will not have a material impact on our consolidated financial statements.

| Commercial paper | | | Level 2 | | | $ | 4,316 | | | $ | 0 | | | $ | 0 | | | $ | 4,316 | | | $ | 1,331 | | | $ | 2,985 | | | $ | 0 | |

| Certificates of deposit | | | Level 2 | | | | 3,615 | | | | 0 | | | | 0 | | | | 3,615 | | | | 2,920 | | | | 695 | | | | 0 | |

| U.S. government securities | | | Level 1 | | | | 90,664 | | | | 3,832 | | | | (111 | ) | | | 94,385 | | | | 1,500 | | | | 92,885 | | | | 0 | |

| Total debt investments | | | | | | $ | 117,966 | | | $ | 4,177 | | | $ | (135 | ) | | $ | 122,008 | | | $ | 5,976 | | | $ | 116,032 | | | $ | 0 | |

| Equity investments | | | Level 1 | | | | | | | | | | | | | | | $ | 1,582 | | | $ | 976 | | | $ | 0 | | | $ | 606 | |

| Total equity investments | | | | | | | | | | | | | | | | | | $ | 6,960 | | | $ | 976 | | | $ | 0 | | | $ | 5,984 | |

| Cash | | | | | | | | | | | | | | | | | | $ | 7,272 | | | $ | 7,272 | | | $ | 0 | | | $ | 0 | |

| Total | | | | | | | | | | | | | | | | | | $ | 136,318 | | | $ | 14,224 | | | $ | 116,110 | | | $ | 5,984 | |

We are a leader among technology companies in pursuing patents and currently have a portfolio of over [removed: 65,000] [added: 69,000] U.S. and international patents issued and over [removed: 21,000] [added: 19,000] pending worldwide.

We plan to continue to make significant investments in a broad range of [added: product] research and development [removed: efforts.][added: activities, and as appropriate we will coordinate our research and development across operating segments and leverage the results across the Company.]

[removed: OEMs][added: OEMs]

We have a network of field sales representatives and field support personnel that solicit orders from distributors and [removed: resellers,] [added: resellers] and provide product training and sales support.

[removed: Volume] [added: Volume] Licensing [removed: Programs][added: Programs]

Microsoft [removed: Product] [added: Products] and Services Agreement

Microsoft [removed: Product] [added: Products] and Services Agreements are designed for medium and large organizations that want to license cloud services and on-premises software as needed, with no organization-wide commitment, under a single, non-expiring agreement.

Open [added: Value]

Open [added: Value] agreements are a simple, cost-effective way to acquire the latest Microsoft technology.

[removed: Open] [added: These] agreements are designed for small and medium organizations that want to license cloud services and on-premises software over a [removed: one- to] three-year period.

[removed: Select Plus][added: Select Plus]

[added: A] Select Plus [removed: agreements are] [added: agreement is] designed for government and academic organizations to acquire on-premises licenses at any affiliate or department level, while realizing advantages as one organization.

[added: A] Microsoft Online Subscription [removed: Agreements are] [added: Agreement is] designed for small and medium organizations that want to subscribe to, activate, provision, and maintain cloud services seamlessly and directly via the web.

Our executive officers as of July [removed: 29, 2021] [added: 28, 2022] were as follows:

| Satya Nadella | | | [removed: 53] [added: 54] | | | Chairman of the Board and Chief Executive Officer |

| Judson Althoff | | | [removed: 48] [added: 49] | | | Executive Vice President and Chief Commercial Officer |

| Christopher C. Capossela | | | [removed: 51] [added: 52] | | | Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer |

| Kathleen T. Hogan | | | [removed: 55] [added: 56] | | | Executive Vice President, Human Resources |

| Amy E. Hood | | | [removed: 49] [added: 50] | | | Executive Vice President, Chief Financial Officer |

| Bradford L. Smith | | | [removed: 62] [added: 63] | | | President and [removed: Chief Legal Officer] [added: Vice Chair] |

| Christopher D. Young | | | [removed: 49] [added: 50] | | | Executive Vice President, Business Development, Strategy, and Ventures |

In his more than [removed: 28] [added: 25] years at Microsoft, Mr. Capossela has held a variety of marketing leadership roles in the Microsoft Office Division.

Mr. Smith was appointed President and [removed: Chief Legal Officer] [added: Vice Chair] in September [removed: 2015.][added: 2021.]

Mr. Young [removed: joined Microsoft in November 2020] [added: has served] as Executive Vice President, Business Development, Strategy, and [removed: Ventures.][added: Ventures since joining Microsoft in November 2020.]

We may not establish market share sufficient to achieve scale necessary to [removed: achieve] [added: meet] our business objectives.

Our data handling practices across our products and services will continue to be under scrutiny and perceptions of mismanagement, driven by regulatory activity or negative public reaction to our practices or product experiences, [removed: which] could negatively impact product and feature adoption, product design, and product quality.

For example, in [removed: October 2018 we completed our acquisition of GitHub, Inc. (“GitHub”) for $7.5 billion, in] March 2021 we completed our acquisition of ZeniMax Media Inc. for $8.1 billion, and in [removed: April 2021] [added: March 2022] we [removed: announced a definitive agreement to acquire] [added: completed our acquisition of] Nuance Communications, Inc. for [removed: $19.7] [added: $18.8] billion.

These acquisitions and other transactions and arrangements involve significant challenges and risks, including that they do not advance our business strategy, that we get an unsatisfactory return on our investment, that [added: they raise new compliance-related obligations and challenges, that] we have difficulty integrating and retaining new employees, business systems, and technology, that they distract management from our other businesses, or that announced transactions may not be completed.

The success of these transactions and arrangements will depend in part on our ability to leverage them to enhance our existing products and services or develop compelling new [removed: ones.][added: ones, as well as acquired companies’ ability to meet our policies and processes in areas such as data governance, privacy, and cybersecurity.]

[removed: Nation state] [added: Nation-state] and [removed: state sponsored] [added: state-sponsored] actors can deploy significant resources to plan and carry out exploits.

Breaches of our facilities, network, or data security could disrupt the security of our systems and business applications, impair our ability to provide services to our customers and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our reputation or competitive position, result in theft or misuse of our intellectual property or other assets, [added: subject us to ransomware attacks,] require us to allocate more resources to improve technologies or remediate the impacts of attacks, or otherwise adversely affect our business.

Our business policies and internal security controls may not keep pace with these changes as new threats [removed: emerge.][added: emerge, or emerging cybersecurity regulations in jurisdictions worldwide.]

Adversaries that acquire user account information can use that information to compromise our users’ accounts, including where accounts share the same attributes [added: such] as passwords.

[removed: The] [added: Cyberattacks such as] Solorigate/Nobelium [removed: or similar cyberattacks] may adversely impact our customers even if our production services are not directly compromised.

Customers in certain industries such as financial services, health care, and government may have enhanced or specialized requirements to which we must engineer our [removed: product] [added: products] and services.

As we continue to grow the [removed: number] [added: number, breadth,] and scale of our cloud-based offerings, we store and process increasingly large amounts of [removed: personally identifiable information] [added: personal data] of our customers and users.

Advertising, professional, [added: marketplace,] and [removed: social] [added: gaming] platform abuses

For platform products and services that provide content or host ads that come from or can be influenced by third parties, including GitHub, LinkedIn, Microsoft Advertising, [removed: MSN,] [added: Microsoft News, Microsoft Store, Bing,] and Xbox, our reputation or user engagement may be negatively affected by activity that is hostile or inappropriate.

This activity may come from users impersonating other people or organizations, [removed: use] [added: dissemination] of [removed: our products or services to spread terrorist or violent extremist content or to disseminate] information that may be viewed as misleading or intended to manipulate the opinions of our users, or the use of our products or services that violates our terms of service or otherwise for objectionable or illegal ends.

Microsoft Customer Agreement

A Microsoft Customer Agreement is a simplified purchase agreement presented, accepted, and stored through a digital experience.

A Microsoft Customer Agreement is a non-expiring agreement that is designed to support all customers over time, whether purchasing through a partner or directly from Microsoft.

Prior to that, he served as President and Chief Legal Officer since September 2015.

In January 2022 we announced a definitive agreement to acquire Activision Blizzard, Inc. for $68.7 billion.

Nation-state attacks against us or our customers may intensify during periods of intense diplomatic or armed conflict, such as the ongoing conflict in Ukraine.

RESEARCH AND DEVELOPMENT

Product and Service Development, and Intellectual Property

We develop most of our products and services internally through the following engineering groups.

| | • | *Cloud and AI*, focuses on making IT professionals, developers, and their systems more productive and efficient through development of cloud infrastructure, server, database, CRM, ERP, management and development tools, AI cognitive services, and other business process applications and services for enterprises. |

| --- | --- | --- |

| | • | *Experiences and Devices*, focuses on instilling a unifying product ethos across our end-user experiences and devices, including Office, Windows, Enterprise Mobility + Security, and Surface. |

| | • | *AI and Research*, focuses on our AI innovations and other forward-looking research and development efforts spanning infrastructure, services, applications, and search. |

| | • | *LinkedIn*, focuses on our services that transform the way customers hire, market, sell, and learn. |

| | • | *Gaming*, focuses on developing hardware, content, and services across a large range of platforms to help grow our user base through game experiences and social interaction. |

PART I

We generally fund research at the corporate level to ensure that we are looking beyond immediate product considerations to opportunities further in the future.

We also fund research and development activities at the operating segment level.

Much of our segment level research and development is coordinated with other segments and leveraged across the Company.

Under the Open agreements, organizations purchase perpetual licenses and SA is optional.

Item 1A

Digital safety and service misuse

Our hosted consumer services as well as our enterprise services may be used by third parties to disseminate harmful or illegal content in violation of our terms or applicable law.

We may not proactively discover such content due to scale and the limitations of existing technologies, and when discovered by users, such content may negatively affect our reputation, our brands, and user engagement.

Regulations and other initiatives to make platforms responsible for preventing or eliminating harmful content online are gaining momentum and we expect this to continue.

We may be subject to enhanced regulatory oversight, civil or criminal liability, or reputational damage if we fail to comply with content moderation regulations, adversely affecting our business and consolidated financial statements.

The development of the IoT presents security, privacy, and execution risks.

To support the growth of the intelligent cloud and the intelligent edge, we are developing products, services, and technologies to power the IoT, a network of distributed and interconnected devices employing sensors, data, and computing capabilities including AI.

The IoT’s great potential also carries substantial risks.

IoT products and services may contain defects in design, manufacture, or operation that make them insecure or ineffective for their intended purposes.

An IoT solution has multiple layers of hardware, sensors, processors, software, and firmware, several of which we may not develop or control.

Each layer, including the weakest layer, can impact the security of the whole system.

Many IoT devices have limited interfaces and ability to be updated or patched.

IoT solutions may collect large amounts of data, and our handling of IoT data may not satisfy customers or regulatory requirements.

IoT scenarios may increasingly affect personal health and safety.

If IoT solutions that include our technologies do not work as intended, violate the law, or harm individuals or businesses, we may be subject to legal claims or enforcement actions.

These risks, if realized, may increase our costs, damage our reputation or brands, or negatively impact our revenues or margins.

Issues in the use of AI in our offerings may result in reputational harm or liability.

We are building AI into many of our offerings and we expect this element of our business to grow.

We envision a future in which AI operating in our devices, applications, and the cloud helps our customers be more productive in their work and personal lives.

As with many disruptive innovations, AI presents risks and challenges that could affect its adoption, and therefore our business.

AI algorithms may be flawed.

Datasets may be insufficient or contain biased information.

Inappropriate or controversial data practices by Microsoft or others could impair the acceptance of AI solutions.

These deficiencies could undermine the decisions, predictions, or analysis AI applications produce, subjecting us to competitive harm, legal liability, and brand or reputational harm.

Some AI scenarios present ethical issues.

While not material to the Company, the Company was required to make annual reports of the general activities of the Company’s Antitrust Compliance Office as required by the Final Order and Judgment in *Barovic v.

Ballmer et al,* United States District Court for the Western District of Washington (“Final Order”).

For more information see http://aka.ms/MSLegalNotice2015.

The Final Order expired in April of 2021.

During fiscal year 2021, the Antitrust Compliance Office (a) monitored the Company’s compliance with the European Commission Decision of March 24, 2004, (“2004 Decision”) and with the Company’s Public Undertaking to the European Commission dated December 16, 2009 (“2009 Undertaking”); (b) monitored, in the manner required by the Final Order, employee, customer, competitor, regulator, or other third-party complaints regarding compliance with the 2004 Decision, the 2009 Undertaking, or other EU or U.S. laws or regulations governing tying, bundling, and exclusive dealing contracts; and, (c) monitored, in the manner required by the Final Order, the training of the Company’s employees regarding the Company’s antitrust compliance polices.

In addition, prior to expiration of the Final Order, the Antitrust Compliance Officer reported to the Regulatory and Public Policy Committee of the Board at each of its regularly scheduled meetings.

| | For the Fiscal Year Ended June 30, [removed: 2021] [added: 2022] |

As of December 31, [removed: 2020,] [added: 2021,] the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was [removed: $1.7] [added: $2.5] trillion based on the closing sale price as reported on the NASDAQ National Market System.

As of July [removed: 26, 2021,] [added: 25, 2022,] there were [removed: 7,514,891,248] [added: 7,457,891,872] shares of common stock outstanding.

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on [removed: November 30, 2021] [added: December 13, 2022] are incorporated by reference into Part III.

[removed: MICROSOFT CORPORATION][added: MICROSOFT CORPORATION]

For the Fiscal Year Ended June 30, [removed: 2021][added: 2022]

| | | | | [Information about our Executive Officers](#INFORMATION_ABOUT_OUR_EXECUTIVE_FICERS) | | [removed: 20] [added: 21] | |

| | | Item 1A. | | [Risk Factors](#ITEM_1A_RISK_FACTORS) | | [removed: 22] [added: 23] | |

| | | Item 1B. | | [Unresolved Staff Comments](#ITEM_1B_UNRESOLVED_STAFF_COMMENTS) | | [removed: 36] [added: 37] | |

| | | Item 2. | | [Properties](#ITEM_2_PROPERTIES) | | [removed: 36] [added: 37] | |

| | | Item 3. | | [Legal Proceedings](#ITEM_3_LEGAL_PROCEEDINGS) | | [removed: 36] [added: 37] | |

| | | Item 4. | | [Mine Safety Disclosures](#ITEM_4_MINE_SAFETY_DISCLOSURES) | | [removed: 36] [added: 37] | |

| | | Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](#ITEM5_MARKET_FOR_REGISTRANTS) | | [removed: 37] [added: 38] | |

| | | Item 6. | | [\[Reserved\]](#ITEM_6_RESERVED) | | [removed: 38] [added: 39] | |

| | | Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#ITEM_7_MANAGEMENTS_DISCUSSION_ANALYSIS_F) | | [removed: 39] [added: 40] | |

| | | Item 14. | | [Principal [removed: Accounting] [added: Accountant] Fees and Services](#ITEM_14_PRINCIPAL_ACCOUNTING_FEES_SERVIC) | | 101 | |

| | | Item 15. | | [removed: [Exhibits,] [added: [Exhibit and] Financial Statement Schedules](#ITEM_15_EXHIBITS_FINANCIAL_STATEMENT_SCH) | | 102 | |

[removed: They also] [added: We are creating the tools and platforms that deliver better, faster, and more effective solutions to] support new startups, improve educational and health outcomes, and empower human ingenuity.

[removed: Artificial] [added: In the next phase of innovation, artificial] intelligence (“AI”) capabilities are rapidly advancing, fueled by data and knowledge of the world.

Our products include operating systems, cross-device productivity [added: and collaboration] applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games.

[removed: The] [added: The] Ambitions That Drive [removed: Us][added: Us]

At Microsoft, [removed: we’re providing] [added: we provide] technology and resources to help our customers [removed: navigate] [added: create] a [removed: remote] [added: secure hybrid work] environment.

[removed: We’re seeing our] [added: Our] family of products [removed: play] [added: plays a] key [removed: roles] [added: role] in the ways the world [removed: is continuing to work, learn,] [added: works, learns,] and [removed: connect.][added: connects.]

Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including [removed: Office, Dynamics,] [added: Office 365, Dynamics 365,] and LinkedIn.

Microsoft 365 brings together Office 365, Windows, and Enterprise Mobility + Security to help organizations empower their employees with AI-backed tools that unlock creativity, increase [removed: teamwork,] [added: collaboration,] and fuel innovation, all the while enabling compliance coverage and data protection.

We see more emerging use cases and needs for compute and security at the edge and are accelerating our innovation across the spectrum of intelligent edge devices, from [removed: IoT] [added: Internet of Things (“IoT”)] sensors to gateway devices and edge hardware to build, manage, and secure edge workloads.

The opportunity to merge the physical and digital worlds, when combined with the power of Azure cloud services, unlocks [removed: the potential for entirely] new workloads and experiences [removed: which we believe will shape the next era of computing.][added: to create common understanding and drive more informed decisions.]

Azure Synapse [removed: Analytics, a limitless analytics service,] brings together data integration, enterprise data warehousing, and big data analytics [removed: for immediate business intelligence and machine learning needs.][added: in a comprehensive solution.]

Microsoft 365 is empowering people and organizations to be productive and secure as they adapt to more fluid ways of [removed: working] [added: working, learning,] and [removed: learning.][added: playing.]

[removed: Windows 11 builds on the strengths of productivity, versatility, and security on Windows 10 today and] [added: It] adds [removed: in] new experiences that include powerful task switching tools like new snap layouts, snap groups, and desktops; new ways to stay connected through [added: Microsoft Teams] chat; the information you want at your fingertips; and more.

Organizational tools such as Collections, Vertical Tabs, and Immersive Reader help [removed: you] make the most of your time while browsing, streaming, searching, [removed: sharing,] and [removed: more.][added: sharing.]

The Surface family includes Surface [removed: Book 3,] [added: Laptop Studio,] Surface Laptop [removed: Go,] [added: 4,] Surface [added: Laptop] Go 2, Surface [removed: Pro 7, Surface] Laptop [removed: 4,] [added: Pro 8,] Surface Pro X, Surface [added: Go 3, Surface] Studio 2, and Surface [removed: Duo.][added: Duo 2.]

We have a strong position with our large and growing highly engaged community of gamers, including the [removed: March 2021] acquisition of ZeniMax Media Inc., the parent company of Bethesda Softworks [removed: LLC, one of the largest, privately held game developers and publishers in the world.][added: LLC.]

[removed: Our] [added: Our] Future [removed: Opportunity][added: Opportunity]

Our goal is to lead the industry in several distinct areas of technology over the [removed: long-term,] [added: long term,] which we expect will translate to sustained growth.

| | • | Transforming the workplace to deliver new modern, modular business [removed: applications to] [added: applications, drive deeper insights, and] improve how people communicate, collaborate, learn, work, play, and interact with one another. |

Over the last year, we [removed: have] collaborated with partners and worked within neighborhoods and communities to launch and scale a number of projects and [removed: programs] [added: programs,] including: [removed: expanding our existing justice reform work] [added: working] with [removed: a five-year, $50 million sustained effort,] [added: 70 organizations in 145 communities on the Justice Reform Initiative,] expanding access to affordable broadband and devices for Black and African American communities and key institutions that support them in major urban centers, expanding access to skills and education to support Black and African American students and adults to succeed in the digital economy, and increasing technology support for nonprofits that provide critical services to Black and African American communities.

We [removed: have more than doubled] [added: exceeded] our [added: goal on increasing the] percentage [removed: share] of transaction [removed: volume] [added: volumes] with Black- and African American-owned financial institutions and increased our deposits with Black- and African American-owned minority depository institutions, enabling increased funds into local communities.

[removed: Investing] [added: Investing] in Digital [removed: Skills][added: Skills]

We [removed: also] [added: previously] invested $20 million in key non-profit partnerships through Microsoft Philanthropies to help people from underserved communities that are often excluded by the digital economy.

| | | Item 9C. | | [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](#ITEM_9C_DISCLOSURE_REGARDING_FOREIGN_JUR) | | 101 | |

| | | | | | | | |

Microsoft is innovating and expanding our entire portfolio to help people and organizations overcome today’s challenges and emerge stronger.

In a dynamic environment, digital technology is the key input that powers the world’s economic output.

Our ecosystem of customers and partners have learned that while hybrid work is complex, embracing flexibility, different work styles, and a culture of trust can help navigate the challenges the world faces today.

Customers are looking to unlock value while simplifying security and management.

From infrastructure and data, to business applications and collaboration, we provide unique, differentiated value to customers.

We are building a distributed computing fabric – across cloud and the edge – to help every organization build, run, and manage mission-critical workloads anywhere.

We are enabling metaverse experiences at all layers of our stack, so customers can more effectively model, automate, simulate, and predict changes within their industrial environments, feel a greater sense of presence in the new world of hybrid work, and create custom immersive worlds to enable new opportunities for connection and experimentation.

Microsoft Teams is a comprehensive platform for work, with meetings, calls, chat, collaboration, and business process automation.

Together with the Microsoft Cloud, Dynamics 365, Microsoft Teams, and Azure Synapse bring a new era of collaborative applications that transform every business function and process.

Microsoft Power Platform is helping domain experts drive productivity gains with low-code/no-code tools, robotic process automation, virtual agents, and business intelligence.

In a dynamic labor market, LinkedIn is helping professionals use the platform to connect, learn, grow, and get hired.

As digital transformation accelerates, organizations in every sector across the globe can address challenges that will have a fundamental impact on their success.

For enterprises, digital technology empowers employees, optimizes operations, engages customers, and in some cases, changes the very core of products and services.

Microsoft has a proven track record of delivering high value to our customers across many diverse and durable growth markets.

We continue to invest in high performance and sustainable computing to meet the growing demand for fast access to Microsoft services provided by our network of cloud computing infrastructure and datacenters.

Our industry clouds bring together capabilities across the entire Microsoft Cloud, along with industry-specific customizations, to improve time to value, increase agility, and lower costs.

In March 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”).

Together, Microsoft and Nuance will enable organizations across industries to accelerate their business goals with security-focused, cloud-based solutions infused with powerful, vertically optimized AI.

Additionally, we are extending our infrastructure beyond the planet, bringing cloud computing to space.

Azure Orbital is a fully managed ground station as a service for fast downlinking of data.

Windows also plays a critical role in fueling our cloud business with Windows 365, a desktop operating system that’s also a cloud service.

From another internet-connected device, including Android or macOS devices, you can run Windows 365, just like a virtual machine.

With Windows 11, we have simplified the design and experience to empower productivity and inspire creativity.

Windows 11 offers innovations focused on enhancing productivity and is designed to support hybrid work.

Windows 11 security and privacy features include operating system security, application security, and user and identity security.

Tools like search, news, and maps have given us immediate access to the world’s information.

Today, through our Search, News, Mapping, and Browse services, Microsoft delivers unique trust, privacy, and safety features.

With three billion people actively playing games today, and a new generation steeped in interactive entertainment, Microsoft continues to invest in content, community, and cloud services.

In January 2022, we announced plans to acquire Activision Blizzard, Inc., a leader in game development and an interactive entertainment content publisher.

The case for digital transformation has never been more urgent.

Customers are looking to us to help improve productivity and the affordability of their products and services.

Fiscal year 2021 was a year of both successes and challenges.

While we continued to make progress on several of our goals, with an overall reduction in our combined Scope 1 and Scope 2 emissions, our Scope 3 emissions increased, due in substantial part to significant global datacenter expansions and growth in Xbox sales and usage as a result of the COVID-19 pandemic.

Despite these Scope 3 increases, we will continue to build the foundations and do the work to deliver on our commitments, and help our customers and partners achieve theirs.

We have learned the impact of our work will not all be felt immediately, and our experience highlights how progress won’t always be linear.

While fiscal year 2021 presented us with some new learnings, we also made some great progress.

A few examples that illuminate the diversity of our work include:

| | • | We purchased the removal of 1.4 million metrics tons of carbon. |

| 2.125% Notes due 2021 | | MSFT | | Nasdaq |

Our ecosystem of customers and partners has stepped up to help people and organizations in every country use technology to be resilient and transform during the most trying of circumstances.

Amid rapid change we’ve witnessed technology empower telehealth, remote manufacturing, and new ways of working from home and serving customers.

These capabilities have relied on the public cloud, which is built on the investments we have made over time.

We are living in the new era of the intelligent cloud and intelligent edge, which is being sharpened by rapid advances in distributed computing, ambient intelligence, and multidevice experiences.

This means the places we go and the things we interact with will increasingly become digitized, creating new opportunities and new breakthroughs.

In the next phase of innovation, computing is more powerful and ubiquitous from the cloud to the edge.

Physical and virtual worlds are coming together with the Internet of Things (“IoT”) and mixed reality to create richer experiences that understand the context surrounding people, the things they use, the places they go, and their activities and relationships.

A person’s experience with technology spans a multitude of devices and has become increasingly more natural and multi-sensory with voice, ink, and gaze interactions.

Microsoft Teams is enabling rapid digital transformation by giving people a single tool to chat, call, meet, and collaborate.

Microsoft Relationship Sales solution brings together LinkedIn Sales Navigator and Dynamics to transform business to business sales through social selling.

Dynamics 365 for Talent with LinkedIn Recruiter and Learning gives human resource professionals a complete solution to compete for talent.

Microsoft Power Platform empowers employees to build custom applications, automate workflow, and analyze data no matter their technical expertise.

These scenarios represent a move to unlock creativity and discover new habits, while simplifying security and management.

This creates an opportunity to reach new customers and increase usage and engagement with existing customers.

In the new remote world, companies have accelerated their own digital transformation to empower their employees, optimize their operations, engage customers, and in some cases, change the very core of their products and services.

Partnering with organizations on their digital transformation during this period is one of our largest opportunities and we are uniquely positioned to become the strategic digital transformation platform and partner of choice; their success is our success.

Our strategy requires continued investment in datacenters and other hybrid and edge infrastructure to support our services.

In April 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc., a cloud and AI software provider with healthcare and enterprise AI experience.

The acquisition will build on our industry-specific cloud offerings.

The PC has been mission-critical across work, school, and life to sustain productivity in a remote everything world.

Windows 10 serves the enterprise as the most secure and productive operating system.

It empowers people with AI-first interfaces ranging from voice-activated commands through Cortana, inking, immersive 3D content storytelling, and mixed reality experiences.

Our ambition for Windows 10 monetization opportunities includes gaming, services, subscriptions, and search advertising.

In June 2021, Microsoft announced the next generation of Windows – Windows 11.

Windows also plays a critical role in fueling our cloud business and Microsoft 365 strategy, and it powers the growing range of devices on the “intelligent edge.”

To expand usage and deepen engagement, we continue to invest in content, community, and cloud services as we pursue the expansive opportunity in the gaming industry.

In a time of great disruption and uncertainty, customers are looking to us to accelerate their own digital transformations as software and cloud computing play a huge role across every industry and around the world.

COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic.

The COVID-19 pandemic continues to have widespread and unpredictable impacts on global society, economies, financial markets, and business practices, and continues to impact our business operations, including our employees, customers, partners, and communities.

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II, Item 7 of this Form 10-K) for further discussion regarding the impact of COVID-19 on our fiscal year 2021 financial results.

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict.

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

In January 2021, we announced that in fiscal year 2020 we reduced Microsoft’s carbon emissions by 586,683 metric tons.

We purchased the removal of 1.3 million metric tons of carbon from 26 projects around the world.

Furthermore, we shared a commitment to transparency by subjecting the data in our annual sustainability report to third-party review and to accountability by including progress on sustainability goals as a factor in determining executive pay.

We also pledged a $50 million investment in AI for Earth to accelerate innovation by putting AI in the hands of those working to directly address sustainability challenges.

We are committed to playing our part to help accelerate the world’s transition to a more economically and environmentally sustainable future for us all.

Our future opportunity depends on reaching and empowering all communities, and we are committed to taking action to help address racial injustice and inequity.

We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our fiscal year [removed: 2021] [added: 2022] that remain unresolved.

The largest owned properties include space in the following locations: China, India, Ireland, the Netherlands, [removed: Singapore,] and [removed: South Korea.][added: Singapore.]

The largest leased properties include space in the following locations: Australia, Canada, China, France, Germany, India, [added: Ireland,] Israel, Japan, [added: the] Netherlands, and the United Kingdom.

The table below shows a summary of the square footage of our office, datacenter, and other facilities owned and leased domestically and internationally as of June 30, [removed: 2021:][added: 2022:]

| U.S. | | | [removed: 22] [added: 25] | | | | [removed: 17] [added: 19] | | | | [removed: 39] [added: 44] | |

| International | | | [removed: 9] [added: 8] | | | | [removed: 19] [added: 21] | | | | [removed: 28] [added: 29] | |

| Total | | | [removed: 31] [added: 33] | | | | [removed: 36] [added: 40] | | | | [removed: 67] [added: 73] | |

On July [removed: 26, 2021,] [added: 25, 2022,] there were [removed: 89,291] [added: 86,465] registered holders of record of our common stock.

Following are our monthly share repurchases for the fourth quarter of fiscal year [removed: 2021:][added: 2022:]

Our Board of Directors declared the following dividends during the fourth quarter of fiscal year [removed: 2021:][added: 2022:]

We returned [removed: $10.4] [added: $12.4] billion to shareholders in the form of share repurchases and dividends in the fourth quarter of fiscal year [removed: 2021.][added: 2022.]

| April 1, 2022 – April 30, 2022 | | | 9,124,963 | | | | $ | 289.34 | | | | 9,124,963 | | | $ | 45,869 | |

| May 1, 2022 – May 31, 2022 | | | 9,809,727 | | | | | 265.95 | | | | 9,809,727 | | | | 43,260 | |

| June 1, 2022 – June 30, 2022 | | | 9,832,841 | | | | | 259.42 | | | | 9,832,841 | | | | 40,709 | |

| | | | 28,767,531 | | | | | | | | | 28,767,531 | | | | | |

| June 14, 2022 | | | August 18, 2022 | | | | September 8, 2022 | | | $ | 0.62 | | | $ | 4,627 | |

| April 1, 2021 – April 30, 2021 | | | 7,493,732 | | | | $ | 255.23 | | | | 7,493,732 | | | $ | 13,030 | |

| May 1, 2021 – May 31, 2021 | | | 8,823,524 | | | | | 247.36 | | | | 8,823,524 | | | | 10,847 | |

| June 1, 2021 – June 30, 2021 | | | 8,155,857 | | | | | 258.07 | | | | 8,155,857 | | | | 8,742 | |

| | | | 24,473,113 | | | | | | | | | 24,473,113 | | | | | |

| June 16, 2021 | | | August 19, 2021 | | | | September 9, 2021 | | | $ | 0.56 | | | $ | 4,211 | |

This section generally discusses the results of our operations for the year ended June 30, [removed: 2021] [added: 2022] compared to the year ended June 30, [removed: 2020.][added: 2021.]

For a discussion of the year ended June 30, [removed: 2020] [added: 2021] compared to the year ended June 30, [removed: 2019,] [added: 2020,] please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, [removed: 2020.][added: 2021.]

Highlights from fiscal year [removed: 2021] [added: 2022] compared with fiscal year [removed: 2020] [added: 2021] included:

| | • | [removed: Commercial cloud] [added: Microsoft Cloud (formerly commercial cloud)] revenue increased [removed: 34%] [added: 32%] to [removed: $69.1] [added: $91.2] billion. |

| | • | Office Commercial products and cloud services revenue increased 13% driven by Office 365 Commercial growth of [removed: 22%.] [added: 18%.] |

| | • | Office Consumer products and cloud services revenue increased [removed: 10%] [added: 11%] and Microsoft 365 Consumer subscribers [removed: increased] [added: grew] to [removed: 51.9] [added: 59.7] million. |

| | • | LinkedIn revenue increased [removed: 27%.] [added: 34%.] |

| | • | Dynamics products and cloud services revenue increased 25% driven by Dynamics 365 growth of [removed: 43%.] [added: 39%.] |

| | • | Server products and cloud services revenue increased [removed: 27%] [added: 28%] driven by Azure [added: and other cloud services] growth of [removed: 50%.] [added: 45%.] |

| | • | Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased [removed: slightly.] [added: 11%.] |

| | • | Windows Commercial products and cloud services revenue increased [removed: 14%.] [added: 11%.] |

| | • | Xbox content and services revenue increased [removed: 23%.] [added: 3%.] |

| | • | Search [added: and news] advertising [removed: revenue,] [added: revenue] excluding traffic acquisition [removed: costs,] [added: costs] increased [removed: 13%.] [added: 27%.] |

| | • | Surface revenue increased [removed: 5%.] [added: 3%.] |

On March [removed: 9, 2021,] [added: 4, 2022,] we completed our acquisition of [removed: ZeniMax Media] [added: Nuance Communications,] Inc. [removed: (“ZeniMax”), the parent company of Bethesda Softworks LLC,] [added: (“Nuance”)] for a total purchase price of [removed: $8.1] [added: $18.8] billion, consisting primarily of cash.

The financial results of [removed: ZeniMax] [added: Nuance] have been included in our consolidated financial statements since the date of the acquisition.

[removed: Industry Trends][added: Industry Trends]

[removed: Economic] [added: Economic] Conditions, Challenges, and [removed: Risks][added: Risks]

Extended disruptions at these suppliers [added: and/or manufacturers] could lead to a similar disruption in our ability to manufacture devices on time to meet consumer demand.

[removed: Weakening of] [added: Fluctuations in] the U.S. dollar relative to certain foreign currencies [removed: increased reported revenue and] did not have a material impact on reported [added: revenue or] expenses from our international operations in fiscal year [removed: 2021.][added: 2022.]

Financial metrics are calculated based on [removed: GAAP] [added: financial] results [added: prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”),] and growth comparisons relate to the corresponding period of last fiscal year.

| [removed: Commercial cloud] [added: Microsoft Cloud] revenue | | Revenue from [removed: our commercial] [added: Azure and other] cloud [removed: business, which includes Azure,] [added: services,] Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties |

| [removed: Commercial cloud] [added: Microsoft Cloud] gross margin percentage | | Gross margin percentage for our [removed: commercial cloud] [added: Microsoft Cloud] business |

[removed: Productivity] [added: Productivity] and Business Processes and Intelligent [removed: Cloud][added: Cloud]

| Office Commercial products and cloud services revenue growth | | Revenue from Office Commercial products and cloud services (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and [removed: Skype for Business] [added: Microsoft Viva] |

| Office Consumer products and cloud services revenue growth | | Revenue from Office Consumer products and cloud services, including Microsoft 365 Consumer [removed: subscriptions and] [added: subscriptions,] Office licensed [removed: on-premises] [added: on-premises, and other Office services] |

| Microsoft 365 Consumer subscribers | | The number of Microsoft 365 Consumer [removed: (formerly Office 365 Consumer)] subscribers at end of period |

| LinkedIn revenue growth | | Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, [removed: Sales Solutions,] and [removed: Learning] [added: Sales] Solutions |

| Server products and cloud services revenue growth | | Revenue from Server products and cloud services, including [removed: Azure;] [added: Azure and other cloud services;] SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and [added: Nuance and] GitHub |

| Windows OEM [removed: Pro] revenue growth | | Revenue from sales of Windows Pro [added: and non-Pro] licenses sold through the OEM [removed: channel, which primarily addresses demand in the commercial market] [added: channel] |

| Surface revenue [added: growth] | | Revenue from Surface devices and accessories |

| Xbox content and services revenue growth | | Revenue from Xbox content and services, comprising [removed: digital transactions,] [added: first- and third-party content (including games and in-game content),] Xbox Game Pass and other subscriptions, [removed: video games,] [added: Xbox Cloud Gaming,] third-party [removed: video game] [added: disc] royalties, [removed: cloud services,] [added: advertising,] and [removed: advertising] [added: other cloud services] |

| Search [added: and news] advertising revenue, excluding TAC, growth | | Revenue from search [added: and news] advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers [added: and news partners] |

| (In millions, except percentages and per share amounts) | | [removed: 2021] [added: 2022] | | | | [removed: 2020] [added: 2021] | | | | Percentage Change | | |

| Revenue | | $ | [removed: 168,088] [added: 198,270] | | | $ | [removed: 143,015] [added: 168,088] | | | | 18% | |

| Gross margin | | | [removed: 115,856] [added: 135,620] | | | | [removed: 96,937] [added: 115,856] | | | | [removed: 20%] [added: 17%] | |

| Operating income | | | [removed: 69,916] [added: 83,383] | | | | [removed: 52,959] [added: 69,916] | | | | [removed: 32%] [added: 19%] | |

| Net income | | | [removed: 61,271] [added: 72,738] | | | | [removed: 44,281] [added: 61,271] | | | | [removed: 38%] [added: 19%] | |

| Diluted earnings per share | | | [removed: 8.05] [added: 9.65] | | | | [removed: 5.76] [added: 8.05] | | | | [removed: 40%] [added: 20%] | |

| Adjusted net income (non-GAAP) | | | [removed: 60,651] [added: 69,447] | | | | [removed: 44,281] [added: 60,651] | | | | [removed: 37%] [added: 15%] | |

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.

Nuance is reported as part of our Intelligent Cloud segment.

In the first quarter of fiscal year 2022, we made updates to the presentation and method of calculation for certain metrics, most notably changes to incorporate all current and anticipated revenue streams within our Office Consumer and Server products and cloud services metrics and changes to align with how we manage our Windows OEM and Search and news advertising businesses.

None of these changes had a material impact on previously reported amounts in our MD&A.

In the third quarter of fiscal year 2022, we completed our acquisition of Nuance.

Nuance is included in all commercial metrics and our Server products and cloud services revenue growth metric.

Azure and other cloud services revenue includes Nuance cloud services, and Server products revenue includes Nuance on-premises offerings.

Fiscal Year 2022 Compared with Fiscal Year 2021

Cost of revenue increased $10.4 billion or 20% driven by growth in Microsoft Cloud.

Gross margin increased $19.8 billion or 17% driven by growth across each of our segments.

| | • | Gross margin percentage decreased slightly. Excluding the impact of the fiscal year 2021 change in accounting estimate for the useful lives of our server and network equipment, gross margin percentage increased 1 point driven by improvement in Productivity and Business Processes. |

Operating expenses increased $6.3 billion or 14% driven by investments in cloud engineering, LinkedIn, Gaming, and commercial sales.

| | • | General and administrative expenses increased $793 million or 16% driven by investments in corporate functions. |

Operating income increased $13.5 billion or 19% driven by growth across each of our segments.

Current year net income and diluted EPS were positively impacted by the net tax benefit related to the transfer of intangible properties, which resulted in an increase to net income and diluted EPS of $3.3 billion and $0.44, respectively.

| Total | | $ | 83,383 | | | $ | 69,916 | | | | 19% | |

Fiscal Year 2022 Compared with Fiscal Year 2021

| | • | Dynamics products and cloud services revenue increased 25% driven by Dynamics 365 growth of 39%. |

| | • | Gross margin increased $7.3 billion or 17% driven by growth in Office 365 Commercial and LinkedIn. Gross margin percentage was relatively unchanged. Excluding the impact of the change in accounting estimate, gross margin percentage increased 2 points driven by improvement across all cloud services. |

| | • | Operating expenses increased $2.8 billion or 16% driven by investments in Azure and other cloud services. |

| | • | Windows revenue increased $2.3 billion or 10% driven by growth in Windows OEM and Windows Commercial. Windows OEM revenue increased 11% driven by continued strength in the commercial PC market, which has higher revenue per license. Windows Commercial products and cloud services revenue increased 11% driven by demand for Microsoft 365. |

| | • | Gaming revenue increased $860 million or 6% on a strong prior year comparable that benefited from Xbox Series X\|S launches and stay-at-home scenarios, driven by growth in Xbox hardware and Xbox content and services. Xbox hardware revenue increased 16% due to continued demand for Xbox Series X\|S. Xbox content and services revenue increased 3% driven by growth in Xbox Game Pass subscriptions and first-party content, offset in part by a decline in third-party content. |

| | • | Operating expenses increased $1.5 billion or 14% driven by investments in Gaming, Search and news advertising, and Windows marketing. |

| --- | --- | --- |

| (In millions, except percentages) | | 2022 | | | | 2021 | | | | Percentage Change | | |

| (In millions, except percentages) | | 2022 | | | | 2021 | | | | Percentage Change | | |

| (In millions, except percentages) | | 2022 | | | | 2021 | | | | Percentage Change | | |

General and administrative expenses increased $793 million or 16% driven by investments in corporate functions.

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 exceeds the current tax liability from the U.S. global intangible low-taxed income tax.

| (In millions, except percentages and per share amounts) | | 2022 | | | | 2021 | | | | Percentage Change | | |

| Net income tax benefit related to transfer of intangible properties | | | (3,291 | ) | | | 0 | | | | * | |

| Net income tax benefit related to transfer of intangible properties | | | (0.44 | ) | | | 0 | | | | * | |

LIQUIDITY AND CAPITAL RESOURCES

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

| --- | --- | --- | --- | --- |

| September 30, 2022 | | $ | 17,691 | |

| December 31, 2022 | | | 13,923 | |

| March 31, 2023 | | | 9,491 | |

| June 30, 2023 | | | 4,433 | |

| Thereafter | | | 2,870 | |

As the world continues to respond to 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.

The purchase price included $768 million of cash and cash equivalents acquired.

ZeniMax is reported as part of our More Personal Computing segment.

Refer to Risk Factors (Part I, Item 1A of this Form 10-K) 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 and savings in operating expenses related to COVID-19, but experienced weakness in transactional licensing.

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.

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 fiscal year 2021 was an increase in operating income of $2.7 billion and net income of $2.3 billion, or $0.30 per both basic and diluted share.

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.

| | | |

| 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 |

Cost of revenue increased $6.2 billion or 13% driven by growth in commercial cloud and Gaming, 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 $18.9 billion or 20% 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 with the change in estimated useful lives of our server and network equipment.

Excluding this impact, gross margin percentage decreased slightly driven by gross margin percentage reduction in More Personal Computing.

Operating expenses increased $2.0 billion or 4% driven by investments in cloud engineering and commercial sales, offset in part by savings related to COVID-19 across each of our segments, prior year charges associated with the closing of our Microsoft Store physical locations, and a reduction in bad debt expense.

| | • | General and administrative expenses were relatively unchanged, driven by prior year charges associated with the closing of our Microsoft Store physical locations, offset in part by an increase in certain employee-related expenses and business taxes. |

Operating income increased $17.0 billion or 32% driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment.

| Total | | $ | 69,916 | | | $ | 52,959 | | | | 32% | |

| | • | Gross margin increased $6.5 billion or 18% driven by growth in Office 365 Commercial and LinkedIn, 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 decreased slightly driven by a sales mix shift to cloud offerings, on a low prior year comparable impacted by increased usage. |

| | • | Windows revenue increased $933 million or 4% driven by growth in Windows Commercial. Windows Commercial products and cloud services revenue increased 14% driven by demand for Microsoft 365. Windows OEM revenue increased slightly 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 21%. |

| | • | Gaming revenue increased $3.8 billion or 33% driven by growth in Xbox content and services and Xbox hardware. Xbox content and services revenue increased $2.3 billion or 23% driven by growth in third-party titles, Xbox Game Pass subscriptions, and first-party titles. Xbox hardware revenue increased 92% driven by higher price of consoles sold due to the Xbox Series X\|S launches. |

| --- | --- | --- | --- |

| | • | Operating expenses decreased $752 million or 6% driven by prior year charges associated with the closing of our Microsoft Store physical locations and reductions in retail store expenses and marketing, offset in part by investments in Gaming. |

Sales and marketing expenses increased $519 million or 3% driven by investments in commercial sales, offset in part by a reduction in bad debt expense.

General and administrative expenses were relatively unchanged, driven by prior year charges associated with the closing of our Microsoft Store physical locations, offset in part by an increase in certain employee-related expenses and business taxes.

Net gains on derivatives decreased due to lower gains on foreign currency contracts.

FINANCIAL CONDITION

| September 30, 2021 | | $ | 15,922 | |

| December 31, 2021 | | | 12,646 | |

| March 31, 2022 | | | 8,786 | |

| June 30, 2022 | | | 4,171 | |

| Thereafter | | | 2,616 | |

| Total | | $ | 44,141 | |

| June 30, [removed: 2020] | | [removed: | | | | | | | | | | | | | | | | | | | |] [added: 2022] | | | | [added: 2021] | | | | [added: 2020] | | |

| U.S. agency securities | | | Level 2 | | | | [removed: 2,439] [added: 807] | | | | 2 | | | | 0 | | | | [removed: 2,441] [added: 809] | | | | [removed: 449] [added: 0] | | | | [removed: 1,992] [added: 809] | | | | 0 | |

| Mortgage- and asset-backed securities | | | Level 2 | | | | [removed: 4,865] [added: 3,442] | | | | [removed: 41] [added: 22] | | | | (6 | ) | | | [removed: 4,900] [added: 3,458] | | | | 0 | | | | [removed: 4,900] [added: 3,458] | | | | 0 | |

| Corporate notes and bonds | | | Level [removed: 2] [added: 3] | | | | [removed: 8,500] [added: 63] | | | | [removed: 327] [added: 0] | | | | [removed: (17] [added: 0] | [removed: )] | | | [removed: 8,810] [added: 63] | | | | 0 | | | | [removed: 8,810] [added: 63] | | | | 0 | |

| Corporate notes and bonds | | | Level [removed: 3] [added: 2] | | | | [removed: 58] [added: 8,443] | | | | [removed: 0] [added: 249] | | | | [removed: 0] [added: (9] | [added: )] | | | [removed: 58] [added: 8,683] | | | | 0 | | | | [removed: 58] [added: 8,683] | | | | 0 | |

| Municipal securities | | | Level [removed: 2] [added: 3] | | | | [removed: 313] [added: 95] | | | | [removed: 57] [added: 0] | | | | [removed: (4] [added: (7] | ) | | | [removed: 366] [added: 88] | | | | 0 | | | | [removed: 366] [added: 88] | | | | 0 | |

| Municipal securities | | | Level [removed: 3] [added: 2] | | | | [removed: 91] [added: 308] | | | | [removed: 0] [added: 63] | | | | 0 | | | | [removed: 91] [added: 371] | | | | 0 | | | | [removed: 91] [added: 371] | | | | 0 | |

| Equity investments | | | Other | | | | | | | | | | | | | | | | [removed: 2,551] [added: 5,378] | | | | 0 | | | | 0 | | | | [removed: 2,551] [added: 5,378] | |

| Derivatives, net (a) | | | | | | | | | | | | | | | | | | | [removed: 35] [added: 78] | | | | 0 | | | | [removed: 35] [added: 78] | | | | 0 | |

As of June 30, [removed: 2021] [added: 2022] and [removed: 2020,] [added: 2021,] equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were [removed: $3.3] [added: $3.8] billion and [removed: $1.4] [added: $3.3] billion, respectively.

| | | Less than 12 Months | | | | | | | | 12 Months or Greater | | | | | | | | | | | | [added: |] Total Unrealized Losses | | [removed: |]

| (In millions) | | Fair Value | | | | [added: |] Unrealized Losses | | | [removed: |] Fair Value | | | | Unrealized Losses | | | | Total Fair Value | | | | | | |

| U.S. government and agency securities | | $ | [removed: 2,323] [added: 59,092] | | | $ | [removed: (1] [added: (1,835] | ) | | $ | [removed: 0] [added: 2,210] | | | $ | [removed: 0] [added: (352] | [added: )] | | $ | [removed: 2,323] [added: 61,302] | | | $ | [removed: (1] [added: (2,187] | ) |

| Foreign government bonds | | | [removed: 500] [added: 418] | | | | [removed: (3] [added: (18] | ) | | | [removed: 0] [added: 27] | | | | [removed: 0] [added: (6] | [added: )] | | | [removed: 500] [added: 445] | | | | [removed: (3] [added: (24] | ) |

| Mortgage- and asset-backed securities | | | [removed: 1,014] [added: 510] | | | | [removed: (6] [added: (26] | ) | | | [removed: 0] [added: 41] | | | | [removed: 0] [added: (4] | [added: )] | | | [removed: 1,014] [added: 551] | | | | [removed: (6] [added: (30] | ) |

| Corporate notes and bonds | | | [removed: 649] [added: 9,443] | | | | [removed: (17] [added: (477] | ) | | | [removed: 0] [added: 786] | | | | [removed: 0] [added: (77] | [added: )] | | | [removed: 649] [added: 10,229] | | | | [removed: (17] [added: (554] | ) |

| Municipal securities | | | [removed: 66] [added: 178] | | | | [removed: (4] [added: (12] | ) | | | [removed: 0] [added: 74] | | | | [removed: 0] [added: (7] | [added: )] | | | [removed: 66] [added: 252] | | | | [removed: (4] [added: (19] | ) |

| June 30, 2021 | | | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | |]

| Due in one year or less | | $ | [removed: 22,612] [added: 26,480] | | | $ | [removed: 22,676] [added: 26,470] | |

| Due after one year through five years | | | [removed: 67,541] [added: 52,006] | | | | [removed: 70,315] [added: 50,748] | |

| Due after five years through 10 years | | | [removed: 25,212] [added: 18,274] | | | | [removed: 26,327] [added: 16,880] | |

| Due after 10 years | | | [removed: 2,601] [added: 1,358] | | | | [removed: 2,690] [added: 1,259] | |

| Total [added: debt investments] | | [added: | | | |] $ | 117,966 | | | $ | [added: 4,177 | | | $ | (135 | ) | | $ |] 122,008 | | [added: | $ | 5,976 | | | $ | 116,032 | | | $ | 0 | |]

As of June 30, [removed: 2021,] [added: 2022,] our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion.

| (In millions) | | June 30, [removed: 2021] [added: 2022] | | | | June 30, [removed: 2020] [added: 2021] | | |

| Foreign exchange contracts sold | | | [removed: 6,081] [added: 0] | | | | [removed: 6,754] [added: 6,081] | |

| Interest rate contracts purchased | | | [removed: 1,247] [added: 1,139] | | | | [removed: 1,295] [added: 1,247] | |

| Foreign exchange contracts purchased | | | [removed: 14,223] [added: 10,322] | | | | [removed: 11,896] [added: 14,223] | |

| Foreign exchange contracts sold | | | [removed: 23,391] [added: 21,606] | | | | [removed: 15,595] [added: 23,391] | |

| Other contracts purchased | | | [removed: 2,456] [added: 2,773] | | | | [removed: 1,844] [added: 2,456] | |

| Other contracts sold | | | [removed: 763] [added: 544] | | | | [removed: 757] [added: 763] | |

[removed: Fair] [added: Fair] Values of Derivative [removed: Instruments][added: Instruments]

| | | June 30, [removed: 2021] [added: 2022] | | | | | | | June 30, [removed: 2020] [added: 2021] | | | | | | | |

| Foreign exchange contracts | | $ | [removed: 76] [added: 0] | | | $ | [removed: (8] [added: (77] | ) | | $ | [removed: 44] [added: 76] | | | $ | [removed: (54] [added: (8] | ) |

| Interest rate contracts | | | [removed: 40] [added: 3] | | | | 0 | | | | [removed: 93] [added: 40] | | | | 0 | |

| Foreign exchange contracts | | | [removed: 227] [added: 333] | | | | [removed: (291] [added: (362] | ) | | | [removed: 245] [added: 227] | | | | [removed: (334] [added: (291] | ) |

| Other contracts | | | [removed: 56 | | | | (36] [added: (72] | ) | | | [removed: 18] [added: 9] | | | | [removed: (11] [added: 50] | [removed: )] |

| Gross amounts of derivatives | | | [removed: 399] [added: 356] | | | | [removed: (335] [added: (551] | ) | | | [removed: 400] [added: 399] | | | | [removed: (399] [added: (335] | ) |

| Gross amounts of derivatives offset in the balance sheet | | | [removed: (141] [added: (130] | ) | | | [removed: 142] [added: 133] | | | | [removed: (154] [added: (141] | ) | | | [removed: 158] [added: 142] | |

| Cash collateral received | | | 0 | | | | [removed: (42] [added: (75] | ) | | | 0 | | | | [removed: (154] [added: (42] | ) |

| Commercial paper | | | Level 2 | | | $ | 4,316 | | | $ | 0 | | | $ | 0 | | | $ | 4,316 | | | $ | 1,331 | | | $ | 2,985 | | | $ | 0 | |

| Certificates of deposit | | | Level 2 | | | | 3,615 | | | | 0 | | | | 0 | | | | 3,615 | | | | 2,920 | | | | 695 | | | | 0 | |

| U.S. government securities | | | Level 1 | | | | 90,664 | | | | 3,832 | | | | (111 | ) | | | 94,385 | | | | 1,500 | | | | 92,885 | | | | 0 | |

| Foreign government bonds | | | Level 2 | | | | 6,213 | | | | 9 | | | | (2 | ) | | | 6,220 | | | | 225 | | | | 5,995 | | | | 0 | |

| Equity investments | | | Level 1 | | | | | | | | | | | | | | | $ | 1,582 | | | $ | 976 | | | $ | 0 | | | $ | 606 | |

| Total equity investments | | | | | | | | | | | | | | | | | | $ | 6,960 | | | $ | 976 | | | $ | 0 | | | $ | 5,984 | |

| Cash | | | | | | | | | | | | | | | | | | $ | 7,272 | | | $ | 7,272 | | | $ | 0 | | | $ | 0 | |

| Total | | | | | | | | | | | | | | | | | | $ | 136,318 | | | $ | 14,224 | | | $ | 116,110 | | | $ | 5,984 | |

| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |

| Total | | $ | 69,641 | | | $ | (2,368 | ) | | $ | 3,138 | | | $ | (446 | ) | | $ | 72,779 | | | $ | (2,814 | ) |

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

| June 30, 2022 | | | | | | | | |

| Total | | $ | 98,118 | | | $ | 95,357 | |

| June 30, 2022 | | | | | | | | | | | | | | | | |

| Derivative assets | | $ | 1 | | | $ | 349 | | | $ | 6 | | | $ | 356 | |

| Foreign exchange contracts | | | | | | | | | | | | |

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.

| Goodwill (a) | | | | | | $ | 16,308 | |

| 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, of which $985 million was redeemed prior to June 30, 2022. The remaining $1 million of notes are redeemable through their respective maturity dates and are included in other current liabilities on our consolidated balance sheets as of June 30, 2022.* |

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| Goodwill | | | | | | | 5,510 | |

| (In millions, except average life) | | Amount | | | | | Weighted Average Life | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

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Activision Blizzard, Inc.

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 and will provide building blocks for the metaverse.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 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 | |

| Foreign government bonds | | | Level 2 | | | | 6,982 | | | | 6 | | | | (3 | ) | | | 6,985 | | | | 1 | | | | 6,984 | | | | 0 | |

| Total debt investments | | | | | | $ | 122,900 | | | $ | 6,929 | | | $ | (31 | ) | | $ | 129,798 | | | $ | 6,882 | | | $ | 122,916 | | | $ | 0 | |

| Equity investments | | | Level 1 | | | | | | | | | | | | | | | $ | 1,198 | | | $ | 784 | | | $ | 0 | | | $ | 414 | |

| Total equity investments | | | | | | | | | | | | | | | | | | $ | 3,749 | | | $ | 784 | | | $ | 0 | | | $ | 2,965 | |

| Cash | | | | | | | | | | | | | | | | | | $ | 5,910 | | | $ | 5,910 | | | $ | 0 | | | $ | 0 | |

| Total | | | | | | | | | | | | | | | | | | $ | 139,492 | | | $ | 13,576 | | | $ | 122,951 | | | $ | 2,965 | |

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| | | | | | | | | | | | | | | | | | | | | | | | | |

| June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | |

| Total | | $ | 4,552 | | | $ | (31 | ) | | $ | 0 | | | $ | 0 | | | $ | 4,552 | | | $ | (31 | ) |

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.

| June 30, 2020 | | | | | | | | | | | | | | | | |

| Derivative assets | | | 1 | | | | 398 | | | | 1 | | | | 400 | |

| | | Revenue | | | | Other Income (Expense), Net | | | | Revenue | | | | Other Income (Expense), Net | | | | Revenue | | | | Other Income (Expense), Net | | |

| Included in effectiveness assessment | | $ | 34 | | | $ | (38 | ) | | $ | 159 | |

Depreciation expense declined in fiscal year 2021 due to the change in estimated useful lives of our server and network equipment.

During fiscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold improvements, due to the closing of our Microsoft Store physical locations.

| --- | --- | --- | --- | --- |

| | | | | |

| Goodwill | | | 5,469 | |

GitHub, Inc.

On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow).

The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences.

| Cash, cash equivalents, and short-term investments | | $ | 234 | |

| Goodwill | | | 5,497 | |

| Total | | $ | 6,924 | |

The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes.

We assigned the goodwill to our Intelligent Cloud segment.

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

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| Contract-based | | | 10 | | | | 3 years | | | | 0 | | | | 0 years | |

| 2022 | | $ | 1,683 | |

| 2023 | | | 1,722 | |

| 2024 | | | 1,415 | |

| 2025 | | | 755 | |

Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, [removed: 2021.][added: 2022.]

There were no changes in our internal control over financial reporting during the quarter ended June 30, [removed: 2021] [added: 2022] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Deloitte & Touche LLP has audited our internal control over financial reporting as of June 30, [removed: 2021;] [added: 2022;] their report is included in Item 9A.

We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, [removed: 2021,] [added: 2022,] based on criteria established in *Internal Control — Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, [removed: 2021,] [added: 2022,] based on [removed: the] criteria established in *Internal Control — Integrated Framework (2013)* issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements [removed: and the related notes (collectively referred to] as [removed: the "financial statements") as] of and for the year ended June 30, [removed: 2021,] [added: 2022,] of the Company and our report dated July [removed: 29, 2021,] [added: 28, 2022,] expressed an unqualified opinion on those financial statements.

Item 9B, [added: 9C,] 10, 11, 12, 13, 14

July 28, 2022

July 29, 2021

PART III

Not applicable.

PART III

Information about our directors may be found under the caption “Our [removed: director nominees”] [added: Director Nominees”] in our Proxy Statement for the Annual Meeting of Shareholders to be held [removed: November 30, 2021] [added: December 13, 2022] (the “Proxy Statement”).

The information set forth in the Proxy Statement under the captions “Director [removed: independence”] [added: Independence Guidelines”] and “Certain [removed: relationships] [added: Relationships] and [removed: related transactions”] [added: Related Transactions”] is incorporated herein by reference.

Information concerning [removed: principal accountant] fees and services [added: provided by our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34),] appears in the Proxy Statement under the headings “Fees [removed: billed] [added: Billed] by Deloitte & Touche” and “Policy on Audit Committee [removed: pre-approval] [added: Pre-Approval] of [removed: audit] [added: Audit] and [removed: permissible non-audit services] [added: Permissible Non-Audit Services] of [removed: independent auditor”] [added: Independent Auditor”] and is incorporated herein by reference.

[removed: PART IV][added: PART IV]

[removed: EXHIBITS,] [added: EXHIBIT AND] FINANCIAL STATEMENT SCHEDULES

The financial statements are set forth under [added: Part II,] Item 8 of this Form 10-K, as indexed below.

| [removed: 10.12] [added: 10.9] | | [Amended and Restated Officers’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312516742796/d245252dex1012.htm) | | | | | 10-Q | | | | 9/30/16 | | | | 10.12 | | | | 10/20/16 | |

| [removed: 10.13] [added: 10.11] | | [Form of Indemnification Agreement and Amended and Restated Directors’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee](http://www.sec.gov/Archives/edgar/data/789019/000156459019027952/msft-ex1013_465.htm) | | | | | 10-K | | | | 6/30/19 | | | | 10.13 | | | | 8/1/19 | |

| [removed: 10.25] [added: 10.10] | | [Assumption of Beneficiaries’ Representative Obligations Under Amended and Restated Officers’ Indemnification Trust Agreement](http://www.sec.gov/Archives/edgar/data/789019/000156459020034944/msft-ex1025_365.htm) | | | | | 10-K | | | | 6/30/2020 | | | | 10.25 | | | | 7/30/2020 | |

| [removed: 10.26] [added: 10.12] | | [Assumption of Beneficiaries’ Representative Obligations Under Amended and Restated Directors’ Indemnification Trust Agreement](http://www.sec.gov/Archives/edgar/data/789019/000156459020034944/msft-ex1026_364.htm) | | | | | 10-K | | | | 6/30/2020 | | | | 10.26 | | | | 7/30/2020 | |

| 21 | | [Subsidiaries of [removed: Registrant](https://www.sec.gov/Archives/edgar/data/789019/000156459021039151/msft-ex21_10.htm)] [added: Registrant](https://www.sec.gov/Archives/edgar/data/789019/000156459022026876/msft-ex21_8.htm)] | | X | | | | | | | | | | | | | | | | |

| 23.1 | | [Consent of Independent Registered Public Accounting [removed: Firm](https://www.sec.gov/Archives/edgar/data/789019/000156459021039151/msft-ex231_9.htm)] [added: Firm](https://www.sec.gov/Archives/edgar/data/789019/000156459022026876/msft-ex231_7.htm)] | | X | | | | | | | | | | | | | | | | |

| 31.1 | | [removed: [Certifications] [added: [Certification] of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of [removed: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459021039151/msft-ex311_8.htm)] [added: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459022026876/msft-ex311_11.htm)] | | X | | | | | | | | | | | | | | | | |

| 31.2 | | [removed: [Certifications] [added: [Certification] of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of [removed: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459021039151/msft-ex312_7.htm)] [added: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459022026876/msft-ex312_10.htm)] | | X | | | | | | | | | | | | | | | | |

| 32.1 | | [removed: [Certifications] [added: [Certification] of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of [removed: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459021039151/msft-ex321_13.htm)] [added: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459022026876/msft-ex321_9.htm)] | | X | | | | | | | | | | | | | | | | |

| 32.2 | | [removed: [Certifications] [added: [Certification] of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of [removed: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459021039151/msft-ex322_12.htm)] [added: 2002](https://www.sec.gov/Archives/edgar/data/789019/000156459022026876/msft-ex322_6.htm)] | | X | | | | | | | | | | | | | | | | |

Item 16

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Redmond, State of Washington, on July [removed: 29, 2021.][added: 28, 2022.]

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on July [removed: 29, 2021.][added: 28, 2022.]

SIGNATURES

| /s/ CARLOS A. RODRIGUEZ | | Director |

| Carlos A. Rodriguez | | |

| | | |

ITEM 16.

FORM 10-K SUMMARY

SIGNATURES