Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the Quarterly Period Ended December 31, 2022
	OR

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

	For the Transition Period From to

Commission File Number 001-37845

MICROSOFT CORPORATION

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

ONE MICROSOFT WAY, REDMOND, Washington 98052-6399

(425) 882-8080

www.microsoft.com/investor

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

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

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

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

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

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

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

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

Class		Outstanding as of January 19, 2023
Common Stock, $0.00000625 par value per share			7,443,803,533 shares

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended December 31, 2022

INDEX

				Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		a)	Income Statements for the Three and Six Months Ended December 31, 2022 and 2021	3
		b)	Comprehensive Income Statements for the Three and Six Months Ended December 31, 2022 and 2021	4
		c)	Balance Sheets as of December 31, 2022 and June 30, 2022	5
		d)	Cash Flows Statements for the Three and Six Months Ended December 31, 2022 and 2021	6
		e)	Stockholders’ Equity Statements for the Three and Six Months Ended December 31, 2022 and 2021	7
		f)	Notes to Financial Statements	8
		g)	Report of Independent Registered Public Accounting Firm	30
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49
	Item 4.	Controls and Procedures		49
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		50
	Item 1A.	Risk Factors		50
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		65
	Item 6.	Exhibits		66
SIGNATURE				67

PART I

Item 1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

(In millions, except per share amounts) (Unaudited)		Three Months Ended December 31,							Six Months Ended December 31,
		2022			2021				2022			2021
Revenue:
Product		$	16,517		$	20,779		$	32,258		$	37,410
Service and other			36,230			30,949			70,611			59,635
Total revenue			52,747			51,728			102,869			97,045
Cost of revenue:
Product			5,690			6,331			9,992			10,123
Service and other			11,798			10,629			22,948			20,483
Total cost of revenue			17,488			16,960			32,940			30,606
Gross margin			35,259			34,768			69,929			66,439
Research and development			6,844			5,758			13,472			11,357
Sales and marketing			5,679			5,379			10,805			9,926
General and administrative			2,337			1,384			3,735			2,671
Operating income			20,399			22,247			41,917			42,485
Other income (expense), net			(60	)		268			(6	)		554
Income before income taxes			20,339			22,515			41,911			43,039
Provision for income taxes			3,914			3,750			7,930			3,769
Net income		$	16,425		$	18,765		$	33,981		$	39,270
Earnings per share:
Basic		$	2.20		$	2.50		$	4.56		$	5.23
Diluted		$	2.20		$	2.48		$	4.54		$	5.19
Weighted average shares outstanding:
Basic			7,451			7,505			7,454			7,509
Diluted			7,473			7,555			7,479			7,561

Refer to accompanying notes.

PART I

Item 1

COMPREHENSIVE INCOME STATEMENTS

(In millions) (Unaudited)		Three Months Ended December 31,									Six Months Ended December 31,
		2022				2021					2022				2021
Net income		$	16,425			$	18,765			$	33,981			$	39,270
Other comprehensive income (loss), net of tax:
Net change related to derivatives			(32	)			0				(25	)			2
Net change related to investments			348				(743	)			(1,549	)			(1,165	)
Translation adjustments and other			570				(103	)			(205	)			(222	)
Other comprehensive income (loss)			886				(846	)			(1,779	)			(1,385	)
Comprehensive income		$	17,311			$	17,919			$	32,202			$	37,885

Refer to accompanying notes.

PART I

Item 1

BALANCE SHEETS

(In millions) (Unaudited)
		December 31, 2022				June 30, 2022
Assets
Current assets:
Cash and cash equivalents		$	15,646			$	13,931
Short-term investments			83,862				90,826
Total cash, cash equivalents, and short-term investments			99,508				104,757
Accounts receivable, net of allowance for doubtful accounts of $485 and $633			35,833				44,261
Inventories			2,980				3,742
Other current assets			19,502				16,924
Total current assets			157,823				169,684
Property and equipment, net of accumulated depreciation of $63,459 and $59,660			82,755				74,398
Operating lease right-of-use assets			13,624				13,148
Equity investments			7,097				6,891
Goodwill			67,905				67,524
Intangible assets, net			10,354				11,298
Other long-term assets			24,994				21,897
Total assets		$	364,552			$	364,840
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	15,354			$	19,000
Current portion of long-term debt			3,997				2,749
Accrued compensation			9,030				10,661
Short-term income taxes			3,553				4,067
Short-term unearned revenue			36,982				45,538
Other current liabilities			12,802				13,067
Total current liabilities			81,718				95,082
Long-term debt			44,119				47,032
Long-term income taxes			24,169				26,069
Long-term unearned revenue			2,644				2,870
Deferred income taxes			289				230
Operating lease liabilities			11,998				11,489
Other long-term liabilities			16,479				15,526
Total liabilities			181,416				198,298
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,447 and 7,464			90,225				86,939
Retained earnings			99,368				84,281
Accumulated other comprehensive loss			(6,457	)			(4,678	)
Total stockholders’ equity			183,136				166,542
Total liabilities and stockholders’ equity		$	364,552			$	364,840

Refer to accompanying notes.

PART I

Item 1

CASH FLOWS STATEMENTS

(In millions) (Unaudited)		Three Months Ended December 31,									Six Months Ended December 31,
		2022				2021					2022			2021
Operations
Net income		$	16,425			$	18,765			$	33,981			$	39,270
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other			3,648				3,496				6,438				6,708
Stock-based compensation expense			2,538				1,897				4,730				3,599
Net recognized losses (gains) on investments and derivatives			214				(307	)			192				(671	)
Deferred income taxes			(1,305	)			183				(2,496	)			(5,787	)
Changes in operating assets and liabilities:
Accounts receivable			(3,164	)			(5,543	)			8,565				4,943
Inventories			1,305				394				762				(383	)
Other current assets			(392	)			830				(724	)			1,770
Other long-term assets			(65	)			(908	)			(731	)			(1,506	)
Accounts payable			(2,058	)			235				(3,625	)			(236	)
Unearned revenue			(5,186	)			(4,343	)			(8,508	)			(7,228	)
Income taxes			(2,863	)			(2,057	)			(2,453	)			596
Other current liabilities			1,819				1,745				(2,205	)			(2,398	)
Other long-term liabilities			257				93				445				343
Net cash from operations			11,173				14,480				34,371				39,020
Financing
Repayments of debt			(750	)			0				(1,750	)			(4,826	)
Common stock issued			243				291				818				903
Common stock repurchased			(5,459	)			(7,433	)			(11,032	)			(15,117	)
Common stock cash dividends paid			(5,066	)			(4,652	)			(9,687	)			(8,858	)
Other, net			(317	)			(192	)			(581	)			(364	)
Net cash used in financing			(11,349	)			(11,986	)			(22,232	)			(28,262	)
Investing
Additions to property and equipment			(6,274	)			(5,865	)			(12,557	)			(11,675	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets			(679	)			(850	)			(1,028	)			(2,056	)
Purchases of investments			(11,599	)			(2,505	)			(16,612	)			(12,814	)
Maturities of investments			6,928				5,253				13,590				14,115
Sales of investments			4,775				2,895				7,486				8,525
Other, net			(301	)			(89	)			(1,161	)			(506	)
Net cash used in investing			(7,150	)			(1,161	)			(10,282	)			(4,411	)
Effect of foreign exchange rates on cash and cash equivalents			88				106				(142	)			33
Net change in cash and cash equivalents			(7,238	)			1,439				1,715				6,380
Cash and cash equivalents, beginning of period			22,884				19,165				13,931				14,224
Cash and cash equivalents, end of period		$	15,646			$	20,604			$	15,646			$	20,604

Refer to accompanying notes.

PART I

Item 1

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions, except per share amounts) (Unaudited)		Three Months Ended December 31,									Six Months Ended December 31,
		2022				2021					2022				2021
Common stock and paid-in capital
Balance, beginning of period		$	88,535			$	83,751			$	86,939			$	83,111
Common stock issued			243				291				818				903
Common stock repurchased			(1,090	)			(1,411	)			(2,261	)			(3,088	)
Stock-based compensation expense			2,538				1,897				4,730				3,599
Other, net			(1	)			0				(1	)			3
Balance, end of period			90,225				84,528				90,225				84,528
Retained earnings
Balance, beginning of period			92,374				66,944				84,281				57,055
Net income			16,425				18,765				33,981				39,270
Common stock cash dividends			(5,059	)			(4,646	)			(10,123	)			(9,297	)
Common stock repurchased			(4,372	)			(6,018	)			(8,771	)			(11,983	)
Balance, end of period			99,368				75,045				99,368				75,045
Accumulated other comprehensive income (loss)
Balance, beginning of period			(7,343	)			1,283				(4,678	)			1,822
Other comprehensive income (loss)			886				(846	)			(1,779	)			(1,385	)
Balance, end of period			(6,457	)			437				(6,457	)			437
Total stockholders’ equity		$	183,136			$	160,010			$	183,136			$	160,010
Cash dividends declared per common share		$	0.68			$	0.62			$	1.36			$	1.24

Refer to accompanying notes.

PART I

Item 1

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation fiscal year 2022 Form 10-K filed with the U.S. Securities and Exchange Commission on July 28, 2022.

Principles of Consolidation

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

Estimates and Assumptions

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

In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate was effective beginning fiscal year 2023. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2022, the effect of this change in estimate for the three months ended December 31, 2022 was an increase in operating income of $945 million and net income of $768 million, or $0.10 per both basic and diluted share. The effect of this change for the six months ended December 31, 2022 was an increase in operating income of $2.0 billion and net income of $1.6 billion, or $0.22 per both basic and diluted share.

Financial Instruments

Investments

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

PART I

Item 1

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

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

Derivatives

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

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

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

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

Fair Value Measurements

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

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

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

PART I

Item 1

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

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

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

Contract Balances and Other Receivables

As of December 31, 2022 and June 30, 2022, other receivables due from suppliers were $545 million and $1.0 billion, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of both December 31, 2022 and June 30, 2022, long-term accounts receivable, net of allowance for doubtful accounts, was $4.2 billion and $3.8 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of December 31, 2022 and June 30, 2022, our financing receivables, net were $3.1 billion and $4.1 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Employee Severance

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

NOTE 2 — EARNINGS PER SHARE

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

PART I

Item 1

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)		Three Months Ended December 31,									Six Months Ended December 31,
		2022				2021					2022				2021
Net income available for common shareholders (A)		$	16,425			$	18,765			$	33,981			$	39,270
Weighted average outstanding shares of common stock (B)			7,451				7,505				7,454				7,509
Dilutive effect of stock-based awards			22				50				25				52
Common stock and common stock equivalents (C)			7,473				7,555				7,479				7,561
Earnings Per Share
Basic (A/B)		$	2.20			$	2.50			$	4.56			$	5.23
Diluted (A/C)		$	2.20			$	2.48			$	4.54			$	5.19

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

NOTE 3 — OTHER INCOME (EXPENSE), NET

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

(In millions)		Three Months Ended December 31,								Six Months Ended December 31,
		2022				2021				2022				2021
Interest and dividends income		$	700			$	503			$	1,341			$	1,023
Interest expense			(490	)			(525	)			(990	)			(1,064	)
Net recognized gains (losses) on investments			(15	)			300				(2	)			671
Net gains (losses) on derivatives			(199	)			7				(190	)			0
Net losses on foreign currency remeasurements			(18	)			(13	)			(96	)			(78	)
Other, net			(38	)			(4	)			(69	)			2
Total		$	(60	)		$	268			$	(6	)		$	554

Net Recognized Gains (Losses) on Investments

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

(In millions)			Three Months Ended December 31,								Six Months Ended December 31,
		2022				2021				2022				2021
Realized gains from sales of available-for-sale securities		$	27			$	12			$	30			$	31
Realized losses from sales of available-for-sale securities			(23	)			(6	)			(43	)			(13	)
Impairments and allowance for credit losses			5				(5	)			(13	)			(8	)
Total		$	9			$	1			$	(26	)		$	10

PART I

Item 1

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

(In millions)		Three Months Ended December 31,								Six Months Ended December 31,
		2022				2021				2022				2021
Net realized gains (losses) on investments sold		$	(8	)		$	31			$	75			$	68
Net unrealized gains (losses) on investments still held			(7	)			268				(35	)			593
Impairments of investments			(9	)			0				(16	)			0
Total		$	(24	)		$	299			$	24			$	661

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

(In millions)		Fair Value Level			Adjusted Cost Basis				Unrealized Gains				Unrealized Losses				Recorded Basis				Cash and Cash Equivalents				Short-term Investments				Equity Investments
December 31, 2022
Changes in Fair Value Recorded in Other Comprehensive Income
Commercial paper		Level 2			$	6,423			$	0			$	0			$	6,423			$	3,307			$	3,116			$	0
Certificates of deposit		Level 2				2,694				0				0				2,694				2,250				444				0
U.S. government securities		Level 1				67,941				0				(3,963	)			63,978				1,029				62,949				0
U.S. agency securities		Level 2				5,525				0				(6	)			5,519				674				4,845				0
Foreign government bonds		Level 2				491				1				(27	)			465				0				465				0
Mortgage- and asset-backed securities		Level 2				883				1				(43	)			841				0				841				0
Corporate notes and bonds		Level 2				11,310				8				(676	)			10,642				0				10,642				0
Corporate notes and bonds		Level 3				88				1				0				89				0				89				0
Municipal securities		Level 2				370				8				(17	)			361				0				361				0
Municipal securities		Level 3				104				0				(7	)			97				0				97				0
Total debt investments					$	95,829			$	19			$	(4,739	)		$	91,109			$	7,260			$	83,849			$	0
Changes in Fair Value Recorded in Net Income
Equity investments		Level 1															$	1,521			$	1,082			$	0			$	439
Equity investments		Other																6,658				0				0				6,658
Total equity investments																	$	8,179			$	1,082			$	0			$	7,097
Cash																	$	7,304			$	7,304			$	0			$	0
Derivatives, net (a)																		13				0				13				0
Total																	$	106,605			$	15,646			$	83,862			$	7,097

PART I