Microsoft (MSFT) 10-K risk factor changes: FY2023 vs FY2022

[removed: Other] [added: Existing and increasing legal and] regulatory [removed: areas] [added: requirements could adversely affect our results of operations. We are subject to a wide range of laws, regulations, and legal requirements in the U.S. and globally, including those] that may apply to our products and online services [removed: offerings include] [added: offerings, and those that impose] requirements related to user privacy, telecommunications, data storage and protection, advertising, and online content.

This trend may continue and will result in these offerings being subjected to additional data protection, security, [removed: and] law enforcement [removed: surveillance] [added: surveillance, and other] obligations.

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

[removed: Applying] [added: How] these laws and regulations [added: apply] to our business is often unclear, subject to change over time, and sometimes may [removed: conflict] [added: be inconsistent] from jurisdiction to jurisdiction.

[removed: Additionally, these laws and] [added: In addition,] governments’ approach to [removed: their] enforcement, and our products and services, are continuing to evolve.

Compliance with [removed: these types of regulation] [added: existing, expanding, or new laws and regulations] may involve significant costs or require changes in products or business practices that [removed: result in reduced revenue.][added: could adversely affect our results of operations.]

Noncompliance could result in the imposition of penalties or orders we [removed: stop] [added: cease] the alleged noncompliant activity.

[removed: There] [added: In addition, there] is increasing pressure from advocacy groups, regulators, competitors, customers, and other stakeholders [removed: to make technology more accessible.][added: across many of these areas.]

If our products do not meet customer expectations or [removed: global accessibility] [added: legal] requirements, we could lose sales opportunities or face regulatory or legal actions.

[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 us, or reputational [removed: damage.][added: damage. The growth of our Internet- and cloud-based services internationally relies increasingly on the movement of data across national boundaries.]

[removed: Potential] [added: EU data protection authorities have and may again block the use of certain U.S.-based services that involve the transfer of data to the U.S. In the EU and other markets, potential] new rules and restrictions on the flow of data across borders could increase the cost and complexity of delivering our products and [removed: services in some markets.][added: services.]

[removed: For example,] [added: In addition,] the EU General Data Protection Regulation [removed: (“GDPR”)] [added: (“GDPR”), which] 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.

More recently, the EU has been developing new requirements related to the use of data, including in the Digital Markets Act, the Digital Services Act, and the Data Act, that [removed: will] add additional rules and restriction on the use of data in our products and services.

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 [removed: the GDPR] [added: these] and other data regulations, or if our implementation to comply [removed: with the GDPR] makes our offerings less attractive.

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

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

[removed: The Company’s] [added: Our] investment in gaining insights from data is becoming central to the value of the [removed: services] [added: services, including AI services,] we deliver to customers, to [removed: our] operational efficiency and key opportunities in monetization, [added: and to] customer perceptions of [removed: quality, and operational efficiency.][added: quality.]

[removed: We] [added: We] have claims and lawsuits against us that may result in adverse [removed: outcomes.][added: outcomes. We are subject to a variety of claims and lawsuits.]

These claims may arise from a wide variety of business practices and initiatives, including major new product releases such as Windows, [added: AI services,] significant business transactions, warranty or product claims, [removed: and] employment [removed: practices.][added: practices, and regulation.]

[removed: Our] [added: Our] business with government customers may present additional [removed: uncertainties.][added: uncertainties. We derive substantial revenue from government contracts.]

Some contracts may be subject to periodic funding approval, reductions, [added: cancellations,] or delays which could adversely impact public-sector demand for our products and services.

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

We [removed: regularly] are [added: regularly] under audit by tax authorities in different jurisdictions.

It may then become easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating [removed: margins.][added: results.]

[added: We face risks related to the protection and utilization of our intellectual property that may result in our business and operating results may be harmed.] Protecting our intellectual property rights and combating unlicensed copying and use of our software and other intellectual property on a global basis is difficult.

[removed: Similarly,] [added: Additionally,] licensees of our patents may fail to satisfy their obligations to pay us royalties or may contest the scope and extent of their obligations.

Finally, our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain [removed: situations and may negatively impact revenue.][added: situations.]

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

[removed: Besides money damages, in some jurisdictions plaintiffs can seek] [added: Adverse outcomes could also include monetary damages or] injunctive relief that may limit or prevent importing, marketing, and selling our products or services that have infringing technologies.

[removed: If] [added: If] our reputation or our brands are damaged, our business and operating results may be [removed: harmed.][added: harmed.]

[removed: | | • |] The introduction of new features, products, services, or terms of service that customers, users, or partners do not like. [removed: |]

[removed: | | • |] Public scrutiny of our decisions regarding user privacy, data practices, or content. [removed: |]

[removed: | | • |] Data security breaches, compliance failures, or actions of partners or individual employees. [removed: |]

[added: Adverse economic or market conditions may harm our business.] Worsening economic conditions, including inflation, recession, pandemic, or other changes in economic conditions, may cause lower IT spending and adversely affect our revenue.

[added: 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.

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

The extent to which global pandemics impact our business going forward will depend on factors such as the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; and the impact on economic [removed: activity] [added: activity,] including the possibility of recession or financial market instability.

If we are [removed: unsuccessful] [added: unsuccessful,] it may adversely impact our revenues, cash flows, market share growth, and reputation.

Environmental regulations or changes in the supply, [removed: demand] [added: demand,] or available sources of energy or other resources may affect the availability or cost of goods and services, including natural resources, necessary to run our business.

[added: Our global business exposes us to operational and economic risks.] Our customers are located throughout the world and a significant part of our revenue comes from international sales.

For example, while the EU-U.S. Data Privacy Framework (“DPF”) has been recognized as adequate under EU law to allow transfers of personal data from the EU to certified companies in the U.S., the DPF is subject to further legal challenge which could cause the legal requirements for data transfers from the EU to be uncertain.

Laws in several jurisdictions, including EU Member State laws under the European Electronic Communications Code, increasingly define certain of our services as regulated telecommunications services.

New environmental, social, and governance laws and regulations are expanding mandatory disclosure, reporting, and diligence requirements.

Compliance with evolving digital accessibility laws and standards will require engineering and is important to our efforts to empower all people and organizations to achieve more.

For example, in the EU, an AI Act is being considered, and may entail increased costs or decreased opportunities for the operation of our AI services in the European market.

If we are unable to protect our intellectual property, our revenue may be adversely affected.

Our global workforce is predominantly non-unionized, although we do have some employees in the U.S. and internationally who are represented by unions or works councils.

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.

PART I

Item 1A

[removed: Impairment] [added: Impairment] of Investment [removed: Securities][added: Securities]

[removed: Goodwill][added: Goodwill]

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May [removed: 1 for us)] [added: 1)] and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

[removed: Research] [added: Research] and Development [removed: Costs][added: Costs]

[removed: Inventories][added: Inventories]

[removed: CHANGE IN ACCOUNTING ESTIMATE][added: Change in Accounting Estimate]

This change in accounting estimate [removed: will be] [added: was] effective beginning fiscal year 2023.

Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2022, [removed: it is estimated] [added: the effect of] this change [removed: will increase our] [added: in estimate for] fiscal year 2023 [added: was an increase in] operating income [removed: by] [added: of] $3.7 [removed: billion.][added: billion and net income of $3.0 billion, or $0.40 per both basic and diluted share.]

[removed: STATEMENT] [added: STATEMENT] OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL [removed: STATEMENTS][added: STATEMENTS]

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive.

Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses.

The devices and form factors customers prefer evolve rapidly, influencing how users access services in the cloud and, in some cases, the user’s choice of which suite of cloud-based services to use.

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

We must continue to evolve and adapt over an extended time in pace with this changing environment.

The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.

We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services.

Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units (“GPUs”) and other components.

Our devices are primarily manufactured by third-party contract manufacturers.

For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements.

However, some of our products contain certain components for which there are very few qualified suppliers.

Extended disruptions at these suppliers could impact our ability to manufacture devices on time to meet consumer demand.

Our success is highly dependent on our ability to attract and retain qualified employees.

We hire a mix of university and industry talent worldwide.

We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits.

Our international operations provide a significant portion of our total revenue and expenses.

Many of these revenue and expenses are denominated in currencies other than the U.S. dollar.

As a result, changes in foreign exchange rates may significantly affect revenue and expenses.

Fluctuations in the U.S. dollar relative to certain foreign currencies reduced reported revenue and expenses from our international operations in fiscal year 2023.

On January 18, 2023, we announced decisions we made to align our cost structure with our revenue and customer demand, prioritize our investments in strategic areas, and consolidate office space.

As a result, we recorded a $1.2 billion charge in the second quarter of fiscal year 2023 (“Q2 charge”), which included employee severance expenses of $800 million, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities.

First, we reduced our overall workforce by approximately 10,000 jobs through the third quarter of fiscal year 2023 related to the Q2 charge, which represents less than 5% of our total employee base.

While we eliminated roles in some areas, we will continue to hire in key strategic areas.

Second, we are allocating both our capital and talent to areas of secular growth and long-term competitiveness, while divesting in other areas.

Third, we are consolidating our leases to create higher density across our workspaces, which impacted our financial results through the remainder of fiscal year 2023, and we may make similar decisions in future periods as we continue to evaluate our real estate needs.

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

Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year.

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

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting.

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

Additional information on our reportable segments is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

Metrics

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources.

We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services.

Our commercial and other business metrics are fundamentally connected based on how customers use our products and services.

The metrics are disclosed in the MD&A or the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

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

[removed: Foreign Currencies][added: Foreign Currencies]

[removed: Interest Rate][added: Interest Rate]

[removed: Credit][added: Credit]

We manage credit exposures relative to broad-based indices [removed: and] to facilitate portfolio diversification.

[removed: Equity][added: Equity]

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

| [removed: Risk Categories |] [added: Risk Categories] | [removed: Hypothetical Change] | [added: Hypothetical Change] | [removed: June 30, 2022] | [added: June 30, 2023] | | | | | [removed: Impact] [added: Impact] | |

| Foreign currency – Revenue | | 10% decrease in foreign exchange rates | | [removed: $ | (6,822] [added: $] | [removed: )] [added: (8,122] | [added: )] | | | Earnings | |

| Foreign currency – Investments | | 10% decrease in foreign exchange rates | | | [removed: (94 | )] [added: (29] | [added: )] | | | Fair Value | |

| Interest rate | | 100 basis point increase in U.S. treasury interest rates | | | [removed: (2,536 | )] [added: (1,832] | [added: )] | | | Fair Value | |

| Credit | | 100 basis point increase in credit spreads | | | [removed: (350 | )] [added: (354] | [added: )] | | | Fair Value | |

| Equity | | 10% decrease in equity market prices | | | [removed: (637 | )] [added: (705] | [added: )] | | | Earnings | |

[removed: ITEM] [added: ITEM] 8.

FINANCIAL [removed: STATEMENTS] [added: STATEMENTS] AND SUPPLEMENTARY [removed: DATA][added: DATA]

| [removed: (In] [added: (In] millions, except per share [removed: amounts)] [added: amounts)] | | | | | | | | | | | | |

| [removed: Year] [added: Year] Ended June [removed: 30,] [added: 30,] | | [removed: 2022] [added: 2023] | | | | [removed: 2021] [added: 2022] | | | | [removed: 2020] [added: 2021] | | |

| Product | | [removed: $] [added: $] | [removed: 72,732] [added: 64,699] | | | $ | [removed: 71,074] [added: 72,732] | | | $ | [removed: 68,041] [added: 71,074] | |

| Service and other | | | [removed: 125,538] [added: 147,216] | | | | [removed: 97,014] [added: 125,538] | | | | [removed: 74,974] [added: 97,014] | |

| Total revenue | | | [removed: 198,270] [added: 211,915] | | | | [removed: 168,088] [added: 198,270] | | | | [removed: 143,015] [added: 168,088] | |

| Product | | | [removed: 19,064] [added: 17,804] | | | | [removed: 18,219] [added: 19,064] | | | | [removed: 16,017] [added: 18,219] | |

| Service and other | | | [removed: 43,586] [added: 48,059] | | | | [removed: 34,013] [added: 43,586] | | | | [removed: 30,061] [added: 34,013] | |

| Total cost of revenue | | | [removed: 62,650] [added: 65,863] | | | | [removed: 52,232] [added: 62,650] | | | | [removed: 46,078] [added: 52,232] | |

| Gross margin | | | [removed: 135,620] [added: 146,052] | | | | [removed: 115,856] [added: 135,620] | | | | [removed: 96,937] [added: 115,856] | |

| Research and development | | | [removed: 24,512] [added: 27,195] | | | | [removed: 20,716] [added: 24,512] | | | | [removed: 19,269] [added: 20,716] | |

| Sales and marketing | | | [removed: 21,825] [added: 22,759] | | | | [removed: 20,117] [added: 21,825] | | | | [removed: 19,598] [added: 20,117] | |

| General and administrative | | | [removed: 5,900] [added: 7,575] | | | | [removed: 5,107] [added: 5,900] | | | | [removed: 5,111] [added: 5,107] | |

| Operating income | | | [removed: 83,383] [added: 88,523] | | | | [removed: 69,916] [added: 83,383] | | | | [removed: 52,959] [added: 69,916] | |

| Other income, net | | | [removed: 333] [added: 788] | | | | [removed: 1,186] [added: 333] | | | | [removed: 77] [added: 1,186] | |

| Income before income taxes | | | [removed: 83,716] [added: 89,311] | | | | [removed: 71,102] [added: 83,716] | | | | [removed: 53,036] [added: 71,102] | |

| Provision for income taxes | | | [removed: 10,978] [added: 16,950] | | | | [removed: 9,831] [added: 10,978] | | | | [removed: 8,755] [added: 9,831] | |

| Net income | | [removed: $] [added: $] | [removed: 72,738] [added: 72,361] | | | $ | [removed: 61,271] [added: 72,738] | | | $ | [removed: 44,281] [added: 61,271] | |

| Basic | | [removed: $] [added: $] | [removed: 9.70] [added: 9.72] | | | $ | [removed: 8.12] [added: 9.70] | | | $ | [removed: 5.82] [added: 8.12] | |

| Diluted | | [removed: $] [added: $] | [removed: 9.65] [added: 9.68] | | | $ | [removed: 8.05] [added: 9.65] | | | $ | [removed: 5.76] [added: 8.05] | |

| Basic | | | [removed: 7,496] [added: 7,446] | | | | [removed: 7,547] [added: 7,496] | | | | [removed: 7,610] [added: 7,547] | |

| Diluted | | | [removed: 7,540] [added: 7,472] | | | | [removed: 7,608] [added: 7,540] | | | | [removed: 7,683] [added: 7,608] | |

[removed: COMPREHENSIVE INCOME STATEMENTS][added: COMPREHENSIVE INCOME STATEMENTS]

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

| Net change related to derivatives | | | [removed: 6] [added: (14] | [added: )] | | | [removed: 19] [added: 6] | | | | [removed: (38] [added: 19] | [removed: )] |

| Net change related to investments | | | [removed: (5,360] [added: (1,444] | [removed: )] [added: )] | | | [removed: (2,266] [added: (5,360] | ) | | | [removed: 3,990] [added: (2,266] | [added: )] |

| Translation adjustments and other | | | [removed: (1,146] [added: (207] | [removed: )] [added: )] | | | [removed: 873] [added: (1,146] | [added: )] | | | [removed: (426] [added: 873] | [removed: )] |

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INCOME STATEMENTS

| June 30, | | 2023 | | | | 2022 | | |

| | | | | | | | | |

| Year Ended June 30, | | 2023 | | | | 2022 | | | | 2021 | | |

| Net income | | $ | 72,361 | | | $ | 72,738 | | | $ | 61,271 | |

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

| Year Ended June 30, | | 2023 | | | | 2022 | | | | 2021 | | |

| Stock-based compensation expense | | | 9,611 | | | | 7,502 | | | | 6,118 | |

| Net income | | | 72,361 | | | | 72,738 | | | | 61,271 | |

| Other comprehensive loss | | | (1,665 | ) | | | (6,500 | ) | | | (1,374 | ) |

Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2022, the effect of this change in estimate for fiscal year 2023 was an increase in operating income of $3.7 billion and net income of $3.0 billion, or $0.40 per both basic and diluted share.

Foreign Currencies

| (In millions) | | | | | | | | | | | | |

| Year Ended June 30, | | | 2023 | | | | 2022 | | | | 2021 | |

| (In millions) | | | | | | | | | | | | |

Employee Severance

On January 18, 2023, we announced a decision to reduce our overall workforce by approximately 10,000 jobs through the third quarter of fiscal year 2023.

During the three months ended December 31, 2022, we recorded $800 million of employee severance expenses related to these job eliminations as part of an ongoing employee benefit plan.

These employee severance expenses were incurred as part of a corporate program, and were included in general and administrative expenses in our consolidated income statements and allocated to our segments based on relative gross margin.

Refer to Note 19 – Segment Information and Geographic Data for further information.

Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds.

Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies.

Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities.

Our Level 2 derivative assets and liabilities include certain cleared swap contracts and over-the-counter forward, option, and swap contracts.

*Level 3* – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.

Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

| Year Ended June 30, | | 2023 | | | | 2022 | | | | 2021 | | |

| (In millions) | | | | | | | | | | | | |

| Year Ended June 30, | | 2023 | | | | 2022 | | | | 2021 | | |

| (In millions) | | | | | | | | | | | | |

| Year Ended June 30, | | 2023 | | | | 2022 | | | | 2021 | | |

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

INCOME STATEMENTS

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

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

Recent Accounting Guidance

Accounting for Income Taxes

In December 2019, the Financial Accounting Standards Board issued a new standard to simplify the accounting for income taxes.

The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries.

The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

We adopted the standard effective July 1, 2021.

Adoption of the standard did not have a material impact on our consolidated financial statements.

We are a leader among technology companies in pursuing patents and currently have a portfolio of over [removed: 69,000] [added: 70,000] U.S. and international patents issued and over 19,000 pending worldwide.

While we employ much of our internally-developed intellectual property [removed: exclusively] in our products and services, we also engage in outbound licensing of specific patented technologies that are incorporated into licensees’ products.

While it may be necessary in the future to seek or renew licenses relating to various aspects of our [removed: products, services,] [added: products] and [removed: business methods,] [added: services,] we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms.

[removed: Investing] [added: Investing] in the [removed: Future][added: Future]

Microsoft Research is one of the world’s largest corporate research [removed: organizations and works] [added: organizations, often working] in close collaboration with top universities around the [removed: world to advance] [added: world, and is focused on advancing] the state-of-the-art in computer science and a broad range of other [removed: disciplines, providing us a unique perspective on future trends and contributing to our innovation.][added: disciplines.]

Our sales [removed: force] [added: organization] performs a variety of functions, including working directly with commercial enterprises and public-sector organizations worldwide to identify and meet their technology and digital transformation requirements; managing OEM relationships; and supporting system integrators, independent software vendors, and other partners who engage directly with our customers to perform sales, consulting, and fulfillment functions for our products and services.

[removed: Direct][added: Direct]

[added: Additionally, our] Microsoft Experience Centers are designed to facilitate deeper engagement with our partners and customers across industries.

[removed: Distributors] [added: Distributors] and [removed: Resellers][added: Resellers]

[removed: Enterprise Agreement][added: Enterprise Agreement]

[removed: Microsoft] [added: Microsoft] Customer [removed: Agreement][added: Agreement]

[removed: Microsoft] [added: Microsoft] Online Subscription [removed: Agreement][added: Agreement]

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

[removed: Open Value][added: Open Value]

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

[removed: Partner Programs][added: Partner Programs]

Our executive officers as of July [removed: 28, 2022] [added: 27, 2023] were as follows:

| [removed: Name] [added: Name] | | [removed: Age] [added: Age] | | | | [removed: Position] [added: Position] with the [removed: Company] [added: Company] |

| Satya Nadella | | | [removed: 54] [added: 55] | | | Chairman [removed: of the Board] and Chief Executive Officer |

| Judson [added: B.] Althoff | | | [removed: 49] [added: 50] | | | Executive Vice President and Chief Commercial Officer |

| Christopher C. Capossela | | | [removed: 52] [added: 53] | | | Executive Vice [removed: President, Marketing and Consumer Business,] [added: President] and Chief Marketing Officer |

| Kathleen T. Hogan | | | [removed: 56] [added: 57] | | | Executive Vice [removed: President,] [added: President and Chief] Human Resources [added: Officer] |

| Amy E. Hood | | | [removed: 50] [added: 51] | | | Executive Vice [removed: President,] [added: President and] Chief Financial Officer |

| Bradford L. Smith | | | [removed: 63] [added: 64] | | | [removed: President and] Vice Chair [added: and President] |

| Christopher D. Young | | | [removed: 50] [added: 51] | | | Executive Vice President, Business Development, Strategy, and Ventures |

He [added: had served as Executive Vice President, Chief Marketing Officer since March 2014.Since joining Microsoft in 1991, Mr. Capossela has held a variety of marketing leadership roles in the Consumer Channels Group, and in the Microsoft Office Division where he] was responsible for marketing productivity solutions including Microsoft Office, Office 365, SharePoint, Exchange, Skype for Business, Project, and Visio.

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

[removed: | | • |] Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov. [removed: |]

[removed: | | • |] Information on our business strategies, financial results, and metrics for investors. [removed: |]

[removed: | | • |] Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. [removed: Archives of these events are also available. |]

[removed: | | • |] Press releases on quarterly earnings, product and service announcements, legal developments, and international news. [removed: |]

[removed: | | • |] Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies. [removed: |]

[removed: | | • |] Other news and announcements that we may post from time to time that investors might find useful or interesting. [removed: |]

[removed: | | • |] Opportunities to sign up for email alerts to have information pushed in real time. [removed: |]

[removed: ITEM] [added: ITEM] 1A.

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

[removed: Competition] [added: Competition] in the technology [removed: sector][added: sector]

[removed: Competition] [added: Competition] among platform-based [removed: ecosystems][added: ecosystems]

[removed: | | • |] A competing vertically-integrated model, in which a single firm controls the software and hardware elements of a product and related services, has succeeded with some consumer products such as personal computers, tablets, phones, gaming consoles, wearables, and other endpoint devices. [removed: Competitors pursuing this model also earn revenue from services integrated with the hardware and software platform, including applications and content sold through their integrated marketplaces. They may also be able to claim security and performance benefits from their vertically integrated offer. We also offer some vertically-integrated hardware and software products and services. To the extent we shift a portion of our business to a vertically integrated model we increase our cost of revenue and reduce our operating margins. |]

[removed: | | • | Even as we transition more of our business to infrastructure-, platform-, and software-as-a-service business model, the license-based proprietary software model generates a substantial portion of our software revenue.] We bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from licensing our products. [removed: Many of our competitors also develop and sell software to businesses and consumers under this model. |]

Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including 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 collaboration, and fuel innovation, all the while enabling compliance coverage and data protection.

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

Microsoft Viva is an employee experience platform that brings together communications, knowledge, learning, resources, and insights.

Microsoft 365 Copilot combines next-generation AI with business data in the Microsoft Graph and Microsoft 365 applications.

Together with the Microsoft Cloud, Dynamics 365, Microsoft Teams, and our AI offerings bring a new era of collaborative applications that optimize business functions, processes, and applications to better serve customers and employees while creating more business value.

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.

Build the Intelligent Cloud and Intelligent Edge Platform

As digital transformation and adoption of AI accelerates and revolutionizes more business workstreams, 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.

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 cloud business benefits from three economies of scale: datacenters that deploy computational resources at significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs.

The Microsoft Cloud provides the best integration across the technology stack while offering openness, improving time to value, reducing costs, and increasing agility.

Being a global-scale cloud, Azure uniquely offers hybrid consistency, developer productivity, AI capabilities, and trusted security and compliance.

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 Internet of Things (“IoT”) sensors to gateway devices and edge hardware to build, manage, and secure edge workloads.

Our AI platform, Azure AI, is helping organizations transform, bringing intelligence and insights to the hands of their employees and customers to solve their most pressing challenges.

Organizations large and small are deploying Azure AI solutions to achieve more at scale, more easily, with the proper enterprise-level and responsible AI protections.

We have a long-term partnership with OpenAI, a leading AI research and deployment company.

We deploy OpenAI’s models across our consumer and enterprise products.

As OpenAI’s exclusive cloud provider, Azure powers all of OpenAI's workloads.

We have also increased our investments in the development and deployment of specialized supercomputing systems to accelerate OpenAI’s research.

Our hybrid infrastructure offers integrated, end-to-end security, compliance, identity, and management capabilities to support the real-world needs and evolving regulatory requirements of commercial customers and enterprises.

Our industry clouds bring together capabilities across the entire Microsoft Cloud, along with industry-specific customizations.

Azure Arc simplifies governance and management by delivering a consistent multi-cloud and on-premises management platform.

Nuance, a leader in conversational AI and ambient intelligence across industries including healthcare, financial services, retail, and telecommunications, joined Microsoft in 2022.

Microsoft and Nuance enable organizations to accelerate their business goals with security-focused, cloud-based solutions infused with AI.

We are accelerating our development of mixed reality solutions with new Azure services and devices.

Microsoft Mesh enables organizations to create custom, immersive experiences for the workplace to help bring remote and hybrid workers and teams together.

The ability to convert data into AI drives our competitive advantage.

The Microsoft Intelligent Data Platform is a leading cloud data platform that fully integrates databases, analytics, and governance.

The platform empowers organizations to invest more time creating value rather than integrating and managing their data.

Microsoft Fabric is an end-to-end, unified analytics platform that brings together all the data and analytics tools that organizations need.

GitHub Copilot is at the forefront of AI-powered software development, giving developers a new tool to write code easier and faster so they can focus on more creative problem-solving.

From GitHub to Visual Studio, we provide a developer tool chain for everyone, no matter the technical experience, across all platforms, whether Azure, Windows, or any other cloud or client platform.

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, users can run Windows 365, just like a virtual machine.

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.

Create More Personal Computing

In fiscal year 2021, we closed our Microsoft Store physical locations and opened our Microsoft Experience Centers.

He had served as Executive Vice President, Chief Marketing Officer since March 2014.

Previously, he served as the worldwide leader of the Consumer Channels Group, responsible for sales and marketing activities with OEMs, operators, and retail partners.

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

From 2006 through 2009, Ms. Hood was General Manager, Microsoft Business Division Strategy.

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

RISK FACTORS

| | • | We derive substantial revenue from licenses of Windows operating systems on PCs. We face significant competition from competing platforms developed for new devices and form factors such as smartphones and tablet computers. These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users are increasingly turning to these devices to perform functions that in the past were performed by personal computers. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract application developers to our PC operating system platforms. Competing with operating systems licensed at low or no cost may decrease our PC operating system margins. Popular products or services offered on competing platforms could increase their competitive strength. In addition, some of our devices compete with products made by our original equipment manufacturer (“OEM”) partners, which may affect their commitment to our platform. |

| | • | Competing platforms have content and application marketplaces with scale and significant installed bases. The variety and utility of content and applications available on a platform are important to device purchasing decisions. Users may incur costs to move data and buy new content and applications when switching platforms. To compete, we must successfully enlist developers to write applications for our platform and ensure that these applications have high quality, security, customer appeal, and value. Efforts to compete with competitors’ content and application marketplaces may increase our cost of revenue and lower our operating margins. Competitors’ rules governing their content and applications marketplaces may restrict our ability to distribute products and services through them in accordance with our technical and business model objectives. |

A growing part of our business involves cloud-based services available across the spectrum of computing devices.

We make significant investments in products and services that may not achieve expected returns.

We expect to continue making acquisitions and entering into joint ventures and strategic alliances as part of our long-term business strategy.

We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles.

The attackers were later able to create false credentials that appeared legitimate to certain customers’ systems.

We may be targets of further attacks similar to Solorigate/Nobelium as both a supplier and consumer of IT.

As we continue to grow the number, breadth, and scale of our cloud-based offerings, we store and process increasingly large amounts of personal data of our customers and users.

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: FORM 10-K][added: FORM 10-K]

| [removed: ☒] [added: ☒] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

| | [removed: For] [added: For] the Fiscal Year [removed: Ended June 30, 2022] [added: Ended June 30, 2023] |

| [removed: ☐] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

| | [removed: For] [added: For] the Transition Period From [removed: to] [added: to] |

[removed: Commission] [added: Commission] File [removed: Number 001-37845][added: Number 001-37845]

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

| [removed: Washington] [added: Washington] | | [removed: 91-1144442] [added: 91-1144442] |

| [removed: (STATE] [added: (STATE] OF [removed: INCORPORATION)] [added: INCORPORATION)] | | [removed: (I.R.S. ID)] [added: (I.R.S. ID)] |

[removed: ONE] [added: ONE] MICROSOFT [removed: WAY, REDMOND, Washington 98052-6399][added: WAY, REDMOND, Washington 98052-6399]

[removed: (425) 882-8080][added: (425) 882-8080]

[removed: www.microsoft.com/investor][added: www.microsoft.com/investor]

| [removed: Common] [added: Common] stock, [removed: $0.00000625 par] [added: $0.00000625 par] value per [removed: share] [added: share] | | [removed: MSFT] [added: MSFT] | | [removed: Nasdaq] [added: Nasdaq] |

| [removed: 3.125%] [added: 3.125%] Notes due [removed: 2028] [added: 2028] | | [removed: MSFT] [added: MSFT] | | [removed: Nasdaq] [added: Nasdaq] |

| [removed: 2.625%] [added: 2.625%] Notes due [removed: 2033] [added: 2033] | | [removed: MSFT] [added: MSFT] | | [removed: Nasdaq] [added: Nasdaq] |

As of December 31, [removed: 2021,] [added: 2022,] the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was [removed: $2.5] [added: $1.8] trillion based on the closing sale price as reported on the NASDAQ National Market System.

As of July [removed: 25, 2022,] [added: 24, 2023,] there were [removed: 7,457,891,872] [added: 7,429,763,722] shares of common stock outstanding.

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on December [removed: 13, 2022] [added: 7, 2023] are incorporated by reference into Part III.

[removed: For] [added: For] the Fiscal Year Ended June 30, [removed: 2022][added: 2023]

[removed: INDEX][added: INDEX]

| | | | | | [removed: Page] [added: Page] | | |

| [removed: PART I] [added: PART I] | | | | | | | |

| | | Item 1. | | [removed: [Business](#ITEM_1_BUSINESS)] [added: [Business](#item_1_business)] | | [removed: 3] [added: 4] | |

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

| [removed: PART II] [added: PART II] | | | | | | | |

| | | Item 7A. | | [Quantitative and Qualitative Disclosures about Market [removed: Risk](#ITEM_7A_QUANTITATIVE_QUALITATIVE_DISCLOS)] [added: Risk](#item_7a_quantitative_qualitative_disclos)] | | [removed: 56] [added: 57] | |

| | | Item 8. | | [Financial Statements and Supplementary [removed: Data](#ITEM_8_FINANCIAL_STATEMENTS_AND_SUPPLEM)] [added: Data](#item_8_financial_statements_and_supplem)] | | [removed: 57] [added: 58] | |

| [removed: PART III] [added: PART III] | | | | | | | |

| | | Item 10. | | [Directors, Executive [removed: Officers] [added: Officers,] and Corporate [removed: Governance](#ITEM_10_DIRECTORS_EXECUTIVE_FICERS_CORPO)] [added: Governance](#item_10_directors_executive_ficers_corpo)] | | 101 | |

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

[removed: PART I][added: PART I]

[removed: Item 1][added: ITEM 1.]

[removed: Note] [added: Note] About Forward-Looking [removed: Statements][added: Statements]

[removed: Embracing] [added: Embracing] Our [removed: Future][added: Future]

We are creating the [removed: tools and] platforms [added: and tools, powered by artificial intelligence (“AI”),] that deliver better, faster, and more effective solutions to support [removed: new startups,] [added: small and large business competitiveness,] improve educational and health outcomes, [added: grow public-sector efficiency,] and empower human ingenuity.

Microsoft is [added: now] innovating and expanding our [removed: entire] portfolio [added: with AI capabilities] to help people and organizations overcome today’s challenges and emerge stronger.

| | OR |

| | | |

| | | | | |

| None | | | | |

| | | |

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

MICROSOFT CORPORATION

FORM 10-K

| | | | | | | | |

BUSINESS

In a world of increasing economic complexity, AI has the power to revolutionize many types of work.

Those leveraging the Microsoft Cloud are best positioned to take advantage of technological advancements and drive innovation.

Our investment in AI spans the entire company, from Microsoft Teams and Outlook, to Bing and Xbox, and we are infusing generative AI capability into our consumer and commercial offerings to deliver copilot capability for all services across the Microsoft Cloud.

We’re committed to making the promise of AI real – and doing it responsibly.

Our work is guided by a core set of principles: fairness, reliability and safety, privacy and security, inclusiveness, transparency, and accountability.

| | OR |

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

| None | | | | |

ITEM 1.

BUSINESS

Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency.

We bring technology and products together into experiences and solutions that unlock value for our customers.

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.

Organizations of all sizes have digitized business-critical functions, redefining what they can expect from their business applications.

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

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

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.

Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including 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 collaboration, and fuel innovation, all the while enabling compliance coverage and data protection.

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

Microsoft Viva is an employee experience platform that brings together communications, knowledge, learning, resources, and insights powered by Microsoft 365.

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.

Build the Intelligent Cloud and Intelligent Edge Platform

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.

Azure is a trusted cloud with comprehensive compliance coverage and AI-based security built in.

Our cloud business benefits from three economies of scale: datacenters that deploy computational resources at significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs.

The Microsoft Cloud is the most comprehensive and trusted cloud, providing the best integration across the technology stack while offering openness, improving time to value, reducing costs, and increasing agility.

Being a global-scale cloud, Azure uniquely offers hybrid consistency, developer productivity, AI capabilities, and trusted security and compliance.

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 Internet of Things (“IoT”) sensors to gateway devices and edge hardware to build, manage, and secure edge workloads.

With Azure Stack, organizations can extend Azure into their own datacenters to create a consistent stack across the public cloud and the intelligent edge.

Our hybrid infrastructure consistency spans security, compliance, identity, and management, helping to support the real-world needs and evolving regulatory requirements of commercial customers and enterprises.

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.

Azure Arc simplifies governance and management by delivering a consistent multi-cloud and on-premises management platform.

Security, compliance, identity, and management underlie our entire tech stack.

We offer integrated, end-to-end capabilities to protect people and organizations.

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.

We are accelerating our development of mixed reality solutions with new Azure services and devices.

Microsoft Mesh enables presence and shared experiences from anywhere through mixed reality applications.

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: 2022] [added: 2023] that remain unresolved.

We have approximately [removed: 15] [added: 16] million square feet of space located in King County, Washington that is used for engineering, sales, marketing, and operations, among other general and administrative purposes.

These facilities include approximately [removed: 10] [added: 11] million square feet of owned space situated on approximately [removed: 520] [added: 530] acres of land we own at our corporate headquarters, and approximately 5 million square feet of space we lease.

We [removed: also] own and lease [added: other] facilities [removed: internationally] [added: domestically and internationally, primarily] for [added: offices,] datacenters, [removed: research] and [removed: development,] [added: research] and [removed: other operations.][added: development.]

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

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

The table below shows a summary of the square footage of our [removed: office, datacenter, and other facilities] [added: properties] owned and leased domestically and internationally as of June 30, [removed: 2022:][added: 2023:]

| [removed: (Square] [added: (Square] feet in [removed: millions)] [added: millions)] | | | | | | | | | | | | |

| [removed: Location] [added: Location] | | [removed: Owned] [added: Owned] | | | | [removed: Leased] [added: Leased] | | | | [removed: Total] [added: Total] | | |

| U.S. | | | [removed: 25] [added: 27] | | | | [removed: 19] [added: 20] | | | | [removed: 44] [added: 47] | |

| International | | | [removed: 8] [added: 9] | | | | [removed: 21] [added: 22] | | | | [removed: 29] [added: 31] | |

| Total | | | [removed: 33] [added: 36] | | | | [removed: 40] [added: 42] | | | | [removed: 73] [added: 78] | |

Refer to Research and Development (Part I, Item 1 of this Form 10-K) for further discussion of our research and development facilities.

In fiscal year 2023, we made decisions to consolidate our office leases to create higher density across our workspaces, and we may make similar decisions in future periods as we continue to evaluate our real estate needs.

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

In addition, we own and lease space domestically that includes office and datacenter space.

In addition to the above locations, we have various product development facilities, both domestically and internationally, as described under Research and Development (Part I, Item 1 of this Form 10-K).

PART II

PART II

On July [removed: 25, 2022,] [added: 24, 2023,] there were [removed: 86,465] [added: 83,883] registered holders of record of our common stock.

Following are our monthly share repurchases for the fourth quarter of fiscal year [removed: 2022:][added: 2023:]

| [removed: Period] [added: Period] | | [removed: Total Number of Shares Purchased] [added: Total Number of Shares Purchased] | | | | [removed: Average Price Paid] [added: Average Price Paid] Per [removed: Share] [added: Share] | | | | | [removed: Total] [added: Total] Number [removed: of Shares Purchased as] [added: of Shares Purchased as] Part of [removed: Publicly Announced Plans or Programs] [added: Publicly Announced Plans or Programs] | | | | [removed: Approximate Dollar Value] [added: Approximate Dollar Value] of Shares [removed: That May] [added: That May] Yet [removed: Be Purchased] [added: Be Purchased] Under [removed: the Plans] [added: the Plans] or [removed: Programs] [added: Programs] | | |

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

Our Board of Directors declared the following dividends during the fourth quarter of fiscal year [removed: 2022:][added: 2023:]

| [removed: Declaration Date] [added: Declaration Date] | | | [removed: Record Date] [added: Record Date] | | | | [removed: Payment Date] [added: Payment Date] | | | | [removed: Dividend Per Share] [added: Dividend Per Share] | | | | [removed: Amount] [added: Amount] | |

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

We returned [removed: $12.4] [added: $9.7] billion to shareholders in the form of share repurchases and dividends in the fourth quarter of fiscal year [removed: 2022.][added: 2023.]

| April 1, 2023 – April 30, 2023 | | | 5,007,656 | | | | $ | 287.97 | | | | 5,007,656 | | | $ | 25,467 | |

| May 1, 2023 – May 31, 2023 | | | 5,355,638 | | | | | 314.26 | | | | 5,355,638 | | | | 23,784 | |

| June 1, 2023 – June 30, 2023 | | | 4,413,960 | | | | | 334.15 | | | | 4,413,960 | | | | 22,309 | |

| | | | 14,777,254 | | | | | | | | | 14,777,254 | | | | | |

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

| June 13, 2023 | | | August 17, 2023 | | | | September 14, 2023 | | | $ | 0.68 | | | $ | 5,054 | |

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

| 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 | |

[removed: Item 7][added: ITEM 7.]

MANAGEMENT’S DISCUSSION AND ANALYSIS [removed: OF FINANCIAL] [added: OF FINANCIAL] CONDITION AND RESULTS OF [removed: OPERATIONS][added: OPERATIONS]

This section generally discusses the results of our operations for the year ended June 30, [removed: 2022] [added: 2023] compared to the year ended June 30, [removed: 2021.][added: 2022.]

For a discussion of the year ended June 30, [removed: 2021] [added: 2022] compared to the year ended June 30, [removed: 2020,] [added: 2021,] 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: 2021.][added: 2022.]

We generate revenue by offering a wide range of cloud-based [added: solutions, content,] and other services to people and businesses; licensing and supporting an array of software products; [removed: designing, manufacturing, and selling devices; and] delivering relevant online advertising to a global [removed: audience.][added: audience; and designing and selling devices.]

Our most significant expenses are related to compensating employees; [added: supporting and investing in our cloud-based services, including datacenter operations;] designing, manufacturing, marketing, and selling our [added: other] products and services; [removed: datacenter costs in support of our cloud-based services;] and income taxes.

Highlights from fiscal year [removed: 2022] [added: 2023] compared with fiscal year [removed: 2021] [added: 2022] included:

[removed: | | • |] Microsoft Cloud [removed: (formerly commercial cloud)] revenue increased [removed: 32%] [added: 22%] to [removed: $91.2] [added: $111.6] billion. [removed: |]

[removed: | | • |] Office Commercial products and cloud services revenue increased [removed: 13%] [added: 10%] driven by Office 365 Commercial growth of [removed: 18%. |][added: 13%.]

[removed: | | • |] Office Consumer products and cloud services revenue increased [removed: 11%] [added: 2%] and Microsoft 365 Consumer subscribers [removed: grew] [added: increased] to [removed: 59.7] [added: 67.0] million. [removed: |]

[removed: | | • |] LinkedIn revenue increased [removed: 34%. |][added: 10%.]

[removed: | | • |] Dynamics products and cloud services revenue increased [removed: 25%] [added: 16%] driven by Dynamics 365 growth of [removed: 39%. |][added: 24%.]

[removed: | | • |] Server products and cloud services revenue increased [removed: 28%] [added: 19%] driven by Azure and other cloud services growth of [removed: 45%. |][added: 29%.]

[removed: | | • |] Windows original equipment manufacturer licensing (“Windows OEM”) revenue [removed: increased 11%. |][added: decreased 25%.]

[removed: | | • |] Windows Commercial products and cloud services revenue increased [removed: 11%. |][added: 5%.]

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

[removed: | | • |] Search and news advertising revenue excluding traffic acquisition costs increased [removed: 27%. |][added: 11%.]

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

We are creating the platforms and tools, powered by artificial intelligence (“AI”), that deliver better, faster, and more effective solutions to support small and large business competitiveness, improve educational and health outcomes, grow public-sector efficiency, and empower human ingenuity.

Devices revenue decreased 24%.

PART II

ITEM 7.

Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency.

They also support new startups, improve educational and health outcomes, and empower human ingenuity.

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

| | • | Surface revenue increased 3%. |

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash.

Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings.

The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition.

Nuance is reported as part of our Intelligent Cloud segment.

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

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive.

Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses.

The devices and form factors customers prefer evolve rapidly, and influence how users access services in the cloud, and in some cases, the user’s choice of which suite of cloud-based services to use.

We must continue to evolve and adapt over an extended time in pace with this changing environment.

The investments we are making in infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.

Our success is highly dependent on our ability to attract and retain qualified employees.

We hire a mix of university and industry talent worldwide.

We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits.

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

Our devices are primarily manufactured by third-party contract manufacturers, some of which contain certain components for which there are very few qualified suppliers.

For these components, we have limited near-term flexibility to use other manufacturers if a current vendor becomes unavailable or is unable to meet our requirements.

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

Our international operations provide a significant portion of our total revenue and expenses.

Many of these revenue and expenses are denominated in currencies other than the U.S. dollar.

As a result, changes in foreign exchange rates may significantly affect revenue and expenses.

Fluctuations in the U.S. dollar relative to certain foreign currencies did not have a material impact on reported revenue or expenses from our international operations in fiscal year 2022.

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

Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year.

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

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting.

Additional information on our reportable segments is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

Metrics

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources.

We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services.

Our commercial and other business metrics are fundamentally connected based on how customers use our products and services.

| [removed: June 30, 2021 | | | | | | | | | | | | | | | | | | | |] [added: June 30,] | | [added: 2023] | | | | [added: 2022] | | | | [added: 2021] | | |

| [removed: Derivatives, net (a) | | | | | | | | | | | | | | | | | | | 78 |] [added: Derivatives] | | | [removed: 0] [added: (65] | [added: )] | | | [removed: 78] [added: (92] | [added: )] | | | [removed: 0] [added: (37] | [added: )] |

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

| [removed: June 30, 2022] | | [added: June 30, 2023] | | | | | | | [added: June 30, 2022 | | | | | | | |]

[removed: NOTE 5 — DERIVATIVES][added: | Derivatives | | | | | | | | | | | | |]

[added: |] Interest [removed: Rate][added: rate contracts | | | 16 | | | | 0 | | | | 3 | | | | 0 | |]

| [removed: (In millions)] [added: (In millions)] | | [removed: June 30, 2022] [added: June 30, 2023] | | | | [removed: June 30, 2021] [added: June 30, 2022] | | |

| [removed: Designated] [added: Designated] as Hedging [removed: Instruments] [added: Instruments] | | | | | | | | |

| Foreign exchange contracts purchased | | [removed: $] [added: $] | [removed: 635] [added: 1,492] | | | $ | 635 | |

| Foreign exchange contracts [removed: sold] | | [added: $] | [added: 34 | | | $ | (67 | ) | | $ |] 0 | | | [added: $] | [removed: 6,081] [added: (77] | [added: )] |

| Interest rate contracts purchased | | | [removed: 1,139] [added: 1,078] | | | | [removed: 1,247] [added: 1,139] | |

| [removed: Not] [added: Not] Designated as Hedging [removed: Instruments] [added: Instruments] | | | | | | | | |

| Foreign exchange contracts purchased | | | [removed: 10,322] [added: 7,874] | | | | [removed: 14,223] [added: 10,322] | |

| Foreign exchange contracts sold | | | [removed: 21,606] [added: 25,159] | | | | [removed: 23,391] [added: 21,606] | |

| Other contracts purchased | | | [removed: 2,773] [added: 1,224] | | | | [removed: 2,456] [added: 1,642] | |

| Other contracts sold | | | [removed: 544] [added: 581] | | | | [removed: 763] [added: 544] | |

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

| [removed: (In millions)] [added: (In millions)] | | [removed: Assets] [added: Derivative Assets] | | | [removed: Liabilities] [added: Derivative Liabilities] | | | | [removed: Assets] [added: Derivative Assets] | | | | [removed: Liabilities] [added: Derivative Liabilities] | | | |

| [removed: | |] [added: Year Ended] June [removed: 30, 2022 | |] [added: 30,] | | [added: 2023] | | | [removed: June 30, 2021] | [added: 2022] | | | | [added: 2021] | | |

| [removed: Designated] [added: Designated] as Hedging [removed: Instruments] [added: Instruments] | | | | | | | | | | | | | | | | |

| Foreign exchange contracts | | [removed: $] | [removed: 0 | | | $ | (77] [added: (73] | [removed: )] [added: )] | | [removed: $] | [removed: 76] [added: 383] | | | [removed: $] | [removed: (8] [added: 27] | [removed: )] |

| [removed: Not] [added: Not] Designated as Hedging [removed: Instruments] [added: Instruments] | | | | | | | | | | | | | | | | |

| Foreign exchange contracts | | | [removed: 333] [added: 249] | | | | [removed: (362] [added: (332] | [removed: )] [added: )] | | | [removed: 227] [added: 333] | | | | [removed: (291] [added: (362] | ) |

| Other contracts | | | [removed: 20] [added: 5] | | | | [removed: (112] [added: (6] | [removed: )] [added: )] | | | [removed: 56] [added: 15] | | | | [removed: (36] [added: (17] | ) |

| Gross amounts of derivatives | | | [removed: 356] [added: 469] | | | | [removed: (551] [added: (805] | [removed: )] [added: )] | | | [removed: 399] [added: 356] | | | | [removed: (335] [added: (551] | ) |

| Gross amounts of derivatives offset in the balance sheet | | | [removed: (130] [added: (202] | [removed: )] [added: )] | | | [removed: 133] [added: 206] | | | | [removed: (141] [added: (130] | ) | | | [removed: 142] [added: 133] | |

| Cash collateral received | | | [removed: 0] [added: 0] | | | | [removed: (75] [added: (125] | [removed: )] [added: )] | | | 0 | | | | [removed: (42] [added: (75] | ) |

| Net amounts of derivatives | | [removed: $] [added: $] | [removed: 226] [added: 267] | | | [removed: $] [added: $] | [removed: (493] [added: (724] | [removed: )] [added: )] | | $ | [removed: 258] [added: 226] | | | $ | [removed: (235] [added: (493] | ) |

| [removed: Reported as] [added: Reported as] | | | | | | | | | | | | | | | | |

| Short-term investments | | [removed: $] [added: $] | [removed: 8] [added: 6] | | | [removed: $] [added: $] | [removed: 0] [added: 0] | | | $ | [removed: 78] [added: 8] | | | $ | 0 | |

| Other current assets | | | [removed: 218] [added: 245] | | | | [removed: 0] [added: 0] | | | | [removed: 137] [added: 218] | | | | 0 | |

| Other long-term assets | | | [removed: 0] [added: 16] | | | | [removed: 0] [added: 0] | | | | [removed: 43] [added: 0] | | | | 0 | |

| Other current liabilities | | | [removed: 0] [added: 0] | | | | [removed: (298] [added: (341] | [removed: )] [added: )] | | | 0 | | | | [removed: (182] [added: (298] | ) |

| Other long-term liabilities | | | [removed: 0] [added: 0] | | | | [removed: (195] [added: (383] | [removed: )] [added: )] | | | 0 | | | | [removed: (53] [added: (195] | ) |

| Total | | [removed: $] [added: $] | [removed: 226] [added: 267] | | | [removed: $] [added: $] | [removed: (493] [added: (724] | [removed: )] [added: )] | | $ | [removed: 258] [added: 226] | | | $ | [removed: (235] [added: (493] | ) |

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were [removed: $343] [added: $442] million and [removed: $550] [added: $804] million, respectively, as of June 30, [removed: 2022,] [added: 2023,] and [removed: $395] [added: $343] million and [removed: $335] [added: $550] million, respectively, as of June 30, [removed: 2021.][added: 2022.]

| [removed: (In millions)] [added: (In millions)] | | [removed: Level 1] [added: Level 1] | | | | | [removed: Level 2] [added: Level 2] | | | [removed: Level 3] [added: Level 3] | | | | [removed: Total] [added: Total] | | |

| [removed: June 30, 2022 | | | | | | | |] [added: June 30,] | | [added: 2023] | | | | [added: 2022] | | |

| Derivative assets | | [removed: $] | 1 | | | [removed: $] | 349 | | | [removed: $] | 6 | | | [removed: $] | 356 | |

| Derivative liabilities | | | [removed: 0] [added: 0] | | | | [removed: (335] [added: (805] | [removed: )] [added: )] | | | [removed: 0] [added: 0] | | | | [removed: (335] [added: (805] | [removed: )] [added: )] |

| Equity contracts purchased | | | 3,867 | | | | 1,131 | |

| Equity contracts sold | | | 2,154 | | | | 0 | |

| Equity contracts | | | 165 | | | | (400 | ) | | | 5 | | | | (95 | ) |

| June 30, 2023 | | | | | | | | | | | | | | | | |

| Derivative assets | | $ | 0 | | | $ | 462 | | | $ | 7 | | | $ | 469 | |

| Equity contracts | | | (420 | ) | | | 13 | | | | (6 | ) |

| Designated as Cash Flow Hedging Instruments | | | | | | | | | | | | |

Depreciation expense declined in fiscal year 2023 due to the change in estimated useful lives of our server and network equipment.

The allocation of the purchase price to goodwill was completed as of December 31, 2022.

| (In millions) | | | | | | | | |

| Goodwill (a) | | | | | | $ | 16,326 | |

(a)

None of the goodwill is expected to be deductible for income tax purposes.*

(b)

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

| (In millions) | | | | | | | | |

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

| | | | | | | | | | |

| | | | | | | | | | |

The acquisition has been approved by Activision Blizzard’s shareholders.

We continue to work toward closing the transaction subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions.

Microsoft and Activision Blizzard have jointly agreed to extend the merger agreement through October 18, 2023 to allow for additional time to resolve remaining regulatory concerns.

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

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

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

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

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

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

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

| (In millions) | | | | |

| 2024 | | $ | 2,363 | |

| 2025 | | | 1,881 | |

| 2026 | | | 1,381 | |

| 2027 | | | 929 | |

| 2028 | | | 652 | |

| Thereafter | | | 2,160 | |

| Total | | $ | 9,366 | |

| 2015 issuance of $23.8 billion | | | 2025 | – | 2055 | | | 2.70% | – | 4.75% | | | 2.77% | – | 4.78% | | | | 9,805 | | | | 10,805 | |

(a)

| (In millions) | | | | |

| (In millions) | | Fair Value Level | | | | Adjusted Cost Basis | | | | Unrealized Gains | | | | Unrealized Losses | | | | Recorded Basis | | | | Cash and Cash Equivalents | | | | Short-term Investments | | | | Equity Investments | | |

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

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

| Changes in Fair Value Recorded in Other Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 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 | |

| U.S. agency securities | | | Level 2 | | | | 807 | | | | 2 | | | | 0 | | | | 809 | | | | 0 | | | | 809 | | | | 0 | |

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

| Mortgage- and asset-backed securities | | | Level 2 | | | | 3,442 | | | | 22 | | | | (6 | ) | | | 3,458 | | | | 0 | | | | 3,458 | | | | 0 | |

| Corporate notes and bonds | | | Level 2 | | | | 8,443 | | | | 249 | | | | (9 | ) | | | 8,683 | | | | 0 | | | | 8,683 | | | | 0 | |

| Corporate notes and bonds | | | Level 3 | | | | 63 | | | | 0 | | | | 0 | | | | 63 | | | | 0 | | | | 63 | | | | 0 | |

| Municipal securities | | | Level 2 | | | | 308 | | | | 63 | | | | 0 | | | | 371 | | | | 0 | | | | 371 | | | | 0 | |

| Municipal securities | | | Level 3 | | | | 95 | | | | 0 | | | | (7 | ) | | | 88 | | | | 0 | | | | 88 | | | | 0 | |

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

| Changes in Fair Value Recorded in Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

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

| Equity investments | | | Other | | | | | | | | | | | | | | | | 5,378 | | | | 0 | | | | 0 | | | | 5,378 | |

| 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 | |

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

| --- | --- |

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy.

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

Unrealized Losses on Debt Investments

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

| | | Less than 12 Months | | | | | | | | 12 Months or Greater | | | | | | | | | | | | Total Unrealized Losses | | |

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

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

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

| U.S. government and agency securities | | $ | 59,092 | | | $ | (1,835 | ) | | $ | 2,210 | | | $ | (352 | ) | | $ | 61,302 | | | $ | (2,187 | ) |

| Foreign government bonds | | | 418 | | | | (18 | ) | | | 27 | | | | (6 | ) | | | 445 | | | | (24 | ) |

| Mortgage- and asset-backed securities | | | 510 | | | | (26 | ) | | | 41 | | | | (4 | ) | | | 551 | | | | (30 | ) |

| Corporate notes and bonds | | | 9,443 | | | | (477 | ) | | | 786 | | | | (77 | ) | | | 10,229 | | | | (554 | ) |

| Municipal securities | | | 178 | | | | (12 | ) | | | 74 | | | | (7 | ) | | | 252 | | | | (19 | ) |

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

PART II

Item 8

| | | Less than 12 Months | | | | | | | | 12 Months or Greater | | | | | | | | | | | | | Total Unrealized Losses | |

[removed: ITEM] [added: ITEM] 9A.

[removed: CONTROLS AND PROCEDURES][added: CONTROLS AND PROCEDURES]

[removed: REPORT] [added: REPORT] OF MANAGEMENT ON INTERNAL [removed: CONTROL] [added: CONTROL] OVER FINANCIAL [removed: REPORTING][added: REPORTING]

Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, [removed: 2022.][added: 2023.]

There were no changes in our internal control over financial reporting during the quarter ended June 30, [removed: 2022] [added: 2023] 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: 2022;] [added: 2023;] their report is included in Item 9A.

[removed: REPORT] [added: REPORT] OF INDEPENDENT [removed: REGISTERED] [added: REGISTERED] PUBLIC ACCOUNTING [removed: FIRM][added: FIRM]

[removed: Opinion] [added: Opinion] on Internal Control over Financial [removed: Reporting][added: Reporting]

We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, [removed: 2022,] [added: 2023,] 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: 2022,] [added: 2023,] based on 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 as of and for the year ended June 30, [removed: 2022,] [added: 2023,] of the Company and our report dated July [removed: 28, 2022,] [added: 27, 2023,] expressed an unqualified opinion on those financial statements.

[removed: Basis] [added: Basis] for [removed: Opinion][added: Opinion]

[removed: Definition] [added: Definition] and Limitations of Internal Control over Financial [removed: Reporting][added: Reporting]

July 27, 2023

July 28, 2022

During the three months ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K.

Not applicable.

[removed: PART III][added: PART III]

Information about our directors may be found under the caption “Our Director Nominees” in our Proxy Statement for the Annual Meeting of Shareholders to be held December [removed: 13, 2022] [added: 7, 2023] (the “Proxy Statement”).

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

[removed: ITEM] [added: ITEM] 15.

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

[removed: | (a) | Financial] [added: Financial] Statements and [removed: Schedules |][added: Schedules]

| [removed: Index] [added: Index] to Financial [removed: Statements] [added: Statements] | | [removed: Page] [added: Page] | |

| [Income [removed: Statements](#INCOME_STATEMENTS)] [added: Statements](#income_statements)] | | [removed: 57] [added: 58] | |

| [Comprehensive Income [removed: Statements](#COMPREHENSIVE_INCOME_STATEMENTS)] [added: Statements](#comprehensive_income_statements)] | | [removed: 58] [added: 59] | |

| [Balance [removed: Sheets](#BALANCE_SHEETS)] [added: Sheets](#balance_sheets)] | | [removed: 59] [added: 60] | |

| [Cash Flows [removed: Statements](#CASH_FLOWS_STATEMENTS)] [added: Statements](#cash_flows_statements)] | | [removed: 60] [added: 61] | |

| [Stockholders’ Equity [removed: Statements](#STOCKHOLDERS_EQUITY_STATEMENTS)] [added: Statements](#stockholders_equity_statements)] | | [removed: 61] [added: 62] | |

| [Notes to Financial [removed: Statements](#NOTES_TO_FINANCIAL_STATEMENTS)] [added: Statements](#notes_to_financial_statements)] | | [removed: 62] [added: 63] | |

[removed: | (b) | Exhibit Listing |][added: Exhibit Listing]

| | | | | | [removed: Incorporated] [added: Incorporated] by [removed: Reference] [added: Reference] | | | | | | | | | | | | | | | |

| [removed: Exhibit Number] [added: Exhibit Number] | | [removed: Exhibit Description] [added: Exhibit Description] | | [removed: Filed Herewith] [added: Filed Herewith] | | [removed: Form] [added: Form] | | | | [removed: Period Ending] [added: Period Ending] | | | | [removed: Exhibit] [added: Exhibit] | | | | [removed: Filing Date] [added: Filing Date] | | |

| 3.1 | | [Amended and Restated Articles of Incorporation of Microsoft [removed: Corporation](http://www.sec.gov/Archives/edgar/data/789019/000119312516782569/d305147dex31.htm)] [added: Corporation](https://www.sec.gov/Archives/edgar/data/789019/000119312516782569/d305147dex31.htm)] | | | | | 8-K | | | | | | | | 3.1 | | | | [removed: 12/1/16] [added: 12/1/2016] | |

| 3.2 | | [Bylaws of Microsoft [removed: Corporation](http://www.sec.gov/Archives/edgar/data/789019/000119312517203579/d347274dex32.htm)] [added: Corporation](https://www.sec.gov/Archives/edgar/data/789019/000119312517203579/d347274dex32.htm)] | | | | | 8-K | | | | | | | | 3.2 | | | | [removed: 6/14/17] [added: 7/3/2023] | |

| 4.1 | | [Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee (“Base [removed: Indenture”)](http://www.sec.gov/Archives/edgar/data/789019/000119312515357088/d97665dex41.htm)] [added: Indenture”)](https://www.sec.gov/Archives/edgar/data/789019/000119312515357088/d97665dex41.htm)] | | | | | S-3ASR | | | | | | | | 4.1 | | | | [removed: 10/29/15] [added: 10/29/2015] | |

| 4.2 | | [Form of First Supplemental Indenture for 2.95% Notes due 2014, 4.20% Notes due 2019, and 5.20% Notes due 2039, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Base [removed: Indenture](http://www.sec.gov/Archives/edgar/data/789019/000119312509113054/dex42.htm)] [added: Indenture](https://www.sec.gov/Archives/edgar/data/789019/000119312509113054/dex42.htm)] | | | | | 8-K | | | | | | | | 4.2 | | | | [removed: 5/15/09] [added: 5/15/2009] | |

| 4.5 | | [Form of Second Supplemental Indenture for 0.875% Notes due 2013, 1.625% Notes due 2015, 3.00% Notes due 2020, and 4.50% Notes due 2040, dated as of September 27, 2010, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as [removed: Trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312510216531/dex42.htm)] [added: Trustee](https://www.sec.gov/Archives/edgar/data/789019/000119312510216531/dex42.htm)] | | | | | 8-K | | | | | | | | 4.2 | | | | [removed: 9/27/10] [added: 9/27/2010] | |

| 4.6 | | [Third Supplemental Indenture for 2.500% Notes due 2016, 4.000% Notes due 2021, and 5.300% Notes due 2041, dated as of February 8, 2011, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as [removed: Trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312511026916/dex42.htm)] [added: Trustee](https://www.sec.gov/Archives/edgar/data/789019/000119312511026916/dex42.htm)] | | | | | 8-K | | | | | | | | 4.2 | | | | [removed: 2/8/11] [added: 2/8/2011] | |

| 4.7 | | [Fourth Supplemental Indenture for 0.875% Notes due 2017, 2.125% Notes due 2022, and 3.500% Notes due 2042, dated as of November 7, 2012, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as [removed: Trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312512456267/d433368dex41.htm)] [added: Trustee](https://www.sec.gov/Archives/edgar/data/789019/000119312512456267/d433368dex41.htm)] | | | | | 8-K | | | | | | | | 4.1 | | | | [removed: 11/7/12] [added: 11/7/2012] | |

| 4.8 | | [Fifth Supplemental Indenture for 2.625% Notes due 2033, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as [removed: Trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312513192843/d531397dex41.htm)] [added: Trustee](https://www.sec.gov/Archives/edgar/data/789019/000119312513192843/d531397dex41.htm)] | | | | | 8-K | | | | | | | | 4.1 | | | | [removed: 5/1/13] [added: 5/1/2013] | |

| 4.9 | | [Sixth Supplemental Indenture for 1.000% Notes due 2018, 2.375% Notes due 2023, and 3.750% Notes due 2043, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as [removed: Trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312513192843/d531397dex42.htm)] [added: Trustee](https://www.sec.gov/Archives/edgar/data/789019/000119312513192843/d531397dex42.htm)] | | | | | 8-K | | | | | | | | 4.2 | | | | [removed: 5/1/13] [added: 5/1/2013] | |

| 4.10 | | [Seventh Supplemental Indenture for 2.125% Notes due 2021 and 3.125% Notes due 2028, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as [removed: Trustee](http://www.sec.gov/Archives/edgar/data/789019/000119312513464138/d638276dex41.htm)] [added: Trustee](https://www.sec.gov/Archives/edgar/data/789019/000119312513464138/d638276dex41.htm)] | | | | | 8-K | | | | | | | | 4.1 | | | | [removed: 12/6/13] [added: 12/6/2013] | |