Item 1. Unrealized Losses on Debt Investments

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
September 30, 2023
U.S. government and agency securities		$	526			$	**(**23	)		$	51,241			$	**(**4,124	)		$	51,767			$	**(**4,147	)
Foreign government bonds			72				**(**4	)			411				**(**20	)			483				**(**24	)
Mortgage- and asset-backed securities			309				**(**12	)			417				**(**40	)			726				**(**52	)
Corporate notes and bonds			2,044				**(**49	)			7,568				**(**563	)			9,612				**(**612	)
Municipal securities			67				**(**1	)			235				**(**36	)			302				**(**37	)
Total		$	3,018			$	**(**89	)		$	59,872			$	**(**4,783	)		$	62,890			$	**(**4,872	)

		Less than 12 Months								12 Months or Greater													Total Unrealized Losses
(In millions)			Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Total Fair Value
June 30, 2023
U.S. government and agency securities		$	7,950			$	(336	)		$	45,273			$	(3,534	)		$	53,223			$	(3,870	)
Foreign government bonds			77				(5	)			391				(19	)			468				(24	)
Mortgage- and asset-backed securities			257				(5	)			412				(34	)			669				(39	)
Corporate notes and bonds			2,326				(49	)			7,336				(534	)			9,662				(583	)
Municipal securities			111				(3	)			186				(31	)			297				(34	)
Total		$	10,721			$	(398	)		$	53,598			$	(4,152	)		$	64,319			$	(4,550	)

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

Debt Investment Maturities

The following table outlines maturities of our debt investments as of September 30, 2023:

(In millions)		Adjusted Cost Basis				Estimated Fair Value
September 30, 2023
Due in one year or less		$	13,575			$	13,451
Due after one year through five years			46,882				44,003
Due after five years through 10 years			11,489				9,801
Due after 10 years			1,326				1,153
Total		$	73,272			$	68,408

NOTE 5 — DERIVATIVES

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

Foreign Currencies

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

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Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

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

Interest Rate

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

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

Equity

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

Credit

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

Credit-Risk-Related Contingent Features

Certain counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of September 30, 2023, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

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

(In millions)		September 30, 2023				June 30, 2023
Designated as Hedging Instruments
Foreign exchange contracts purchased		$	1,492			$	1,492
Interest rate contracts purchased			1,084				1,078
Not Designated as Hedging Instruments
Foreign exchange contracts purchased			6,957				7,874
Foreign exchange contracts sold			17,026				25,159
Equity contracts purchased			3,548				3,867
Equity contracts sold			2,154				2,154
Other contracts purchased			1,698				1,224
Other contracts sold			678				581

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Fair Values of Derivative Instruments

The following table presents our derivative instruments:

(In millions)		Derivative Assets					Derivative Liabilities			Derivative Assets				Derivative Liabilities
		September 30, 2023								June 30, 2023
Designated as Hedging Instruments
Foreign exchange contracts		$	21			$	**(**75	)		$	34			$	(67	)
Interest rate contracts			9				0				16				0
Not Designated as Hedging Instruments
Foreign exchange contracts			503				**(**331	)			249				(332	)
Equity contracts			95				**(**342	)			165				(400	)
Other contracts			8				**(**24	)			5				(6	)
Gross amounts of derivatives			636				**(**772	)			469				(805	)
Gross amounts of derivatives offset in the balance sheet			**(**294	)			296				(202	)			206
Cash collateral received			0				**(**103	)			0				(125	)
Net amounts of derivatives		$	342			$	**(**579	)		$	267			$	(724	)
Reported as
Short-term investments		$	6			$	0			$	6			$	0
Other current assets			327				0				245				0
Other long-term assets			9				0				16				0
Other current liabilities			0				**(**259	)			0				(341	)
Other long-term liabilities			0				**(**320	)			0				(383	)
Total		$	342			$	**(**579	)		$	267			$	(724	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $627 million and $772 million, respectively, as of September 30, 2023, and $442 million and $804 million, respectively, as of June 30, 2023.

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

(In millions)		Level 1					Level 2			Level 3				Total
September 30, 2023
Derivative assets		$	2			$	629			$	5			$	636
Derivative liabilities			0				**(**772	)			0				**(**772	)
June 30, 2023
Derivative assets			0				462				7				469
Derivative liabilities			0				(805	)			0				(805	)

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

(In millions)
Three Months Ended September 30,			2023				2022
Designated as Fair Value Hedging Instruments
Interest rate contracts
Derivatives		$	**(**16	)		$	(43	)
Hedged items			3				43
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Amount reclassified from accumulated other comprehensive loss			**(**46	)			(59	)
Not Designated as Hedging Instruments
Foreign exchange contracts			206				240
Equity contracts			113				12
Other contracts			**(**33	)			(10	)

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

(In millions)
Three Months Ended September 30,		2023				2022
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Included in effectiveness assessment		$	**(**15	)		$	(40	)

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)
		September 30, 2023				June 30, 2023
Raw materials		$	520			$	709
Work in process			15				23
Finished goods			2,465				1,768
Total		$	3,000			$	2,500

NOTE 7 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)		June 30, 2023				Acquisitions				Other				September 30, 2023
Productivity and Business Processes		$	24,775			$	0			$	**(**16	)		$	24,759
Intelligent Cloud			30,469				0				**(**49	)			30,420
More Personal Computing			12,642				0				**(**31	)			12,611
Total		$	67,886			$	0			$	**(**96	)		$	67,790

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

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

NOTE 8 — INTANGIBLE ASSETS

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

(In millions)		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
		September 30, 2023												June 30, 2023
Technology-based		$	11,409			$	**(**7,904	)		$	3,505			$	11,245			$	(7,589	)		$	3,656
Customer-related			7,281				**(**4,284	)			2,997				7,281				(4,047	)			3,234
Marketing-related			4,935				**(**2,555	)			2,380				4,935				(2,473	)			2,462
Contract-based			30				**(**17	)			13				29				(15	)			14
Total		$	23,655			$	**(**14,760	)		$	8,895			$	23,490			$	(14,124	)		$	9,366

Intangible assets amortization expense was $636 million and $633 million for the three months ended September 30, 2023 and 2022, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2023:

(In millions)
Year Ending June 30,
2024 (excluding the three months ended September 30, 2023)		$	1,748
2025			1,905
2026			1,407
2027			952
2028			675
Thereafter			2,208
Total		$	8,895

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NOTE 9 — DEBT

Short-term Debt

As of September 30, 2023, we had $25.8 billion of commercial paper issued and outstanding, with a weighted average interest rate of 5.4% and maturities ranging from 7 days to 190 days. The estimated fair value of this commercial paper approximates its carrying value. As of June 30, 2023, we had no commercial paper issued or outstanding.

Long-term Debt

The components of long-term debt were as follows:

(In millions, issuance by calendar year)		Maturities (calendar year)					Stated Interest Rate						Effective Interest Rate					September 30, 2023				June 30, 2023
2009 issuance of $3.8 billion					2039					5.20**%**					5.24**%**			$	520			$	520
2010 issuance of $4.8 billion					2040					4.50**%**					4.57**%**				486				486
2011 issuance of $2.3 billion					2041					5.30**%**					5.36**%**				718				718
2012 issuance of $2.3 billion					2042					3.50**%**					3.57**%**				454				454
2013 issuance of $5.2 billion			2023	–	2043			3.63**%**	–	4.88**%**			3.73**%**	–	4.92**%**				1,814				1,814
2013 issuance of €4.1 billion			2028	–	2033			2.63**%**	–	3.13**%**			2.69**%**	–	3.22**%**				2,435				2,509
2015 issuance of $23.8 billion			2025	–	2055			2.70**%**	–	4.75**%**			2.77**%**	–	4.78**%**				9,805				9,805
2016 issuance of $19.8 billion			2026	–	2056			2.40**%**	–	3.95**%**			2.46**%**	–	4.03**%**				7,930				9,430
2017 issuance of $17.0 billion			2024	–	2057			2.88**%**	–	4.50**%**			3.04**%**	–	4.53**%**				8,945				8,945
2020 issuance of $10.0 billion			2050	–	2060			2.53**%**	–	2.68**%**			2.53**%**	–	2.68**%**				10,000				10,000
2021 issuance of $8.2 billion			2052	–	2062			2.92**%**	–	3.04**%**			2.92**%**	–	3.04**%**				8,185				8,185
Total face value																			51,292				52,866
Unamortized discount and issuance costs																			**(**431	)			(438	)
Hedge fair value adjustments (a)																			**(**109	)			(106	)
Premium on debt exchange																			**(**5,058	)			(5,085	)
Total debt																			45,694				47,237
Current portion of long-term debt																			**(**3,748	)			(5,247	)
Long-term debt																		$	41,946			$	41,990

(a)

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

As of September 30, 2023 and June 30, 2023, the estimated fair value of long-term debt, including the current portion, was $41.8 billion and $46.2 billion, respectively. The estimated fair values are based on Level 2 inputs.

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

The following table outlines maturities of our long-term debt, including the current portion, as of September 30, 2023:

(In millions)
Year Ending June 30,
2024 (excluding the three months ended September 30, 2023)		$	3,750
2025			2,250
2026			3,000
2027			8,000
2028			0
Thereafter			34,292
Total		$	51,292

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NOTE 10 — INCOME TAXES

Effective Tax Rate

Our effective tax rate was 18% and 19% for the three months ended September 30, 2023 and 2022, respectively. The decrease in our effective tax rate for the current quarter compared to the prior year was primarily due to tax benefits from tax law changes in the first quarter of fiscal year 2024, including the impact from the issuance of Notice 2023-55 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department, which delayed the effective date of final foreign tax credit regulations to fiscal year 2024 for Microsoft.

Our effective tax rate was lower than the U.S. federal statutory rate for the three months ended September 30, 2023, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland.

Uncertain Tax Positions

As of September 30, 2023 and June 30, 2023, unrecognized tax benefits and other income tax liabilities were $19.8 billion and $18.7 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets.

We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest. As of September 30, 2023, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2023, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NOTE 11 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)
		September 30, 2023				June 30, 2023
Productivity and Business Processes		$	25,316			$	27,572
Intelligent Cloud			19,471				21,563
More Personal Computing			4,401				4,678
Total		$	49,188			$	53,813

Changes in unearned revenue were as follows:

(In millions)
Three Months Ended September 30, 2023
Balance, beginning of period		$	53,813
Deferral of revenue			27,646
Recognition of unearned revenue			**(**32,271	)
Balance, end of period		$	49,188

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Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $216 billion as of September 30, 2023, of which $212 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.

NOTE 12 — LEASES

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

The components of lease expense were as follows:

(In millions)
Three Months Ended September 30,			2023				2022
Operating lease cost		$	775			$	662
Finance lease cost:
Amortization of right-of-use assets		$	380			$	189
Interest on lease liabilities			149				113
Total finance lease cost		$	529			$	302

Supplemental cash flow information related to leases was as follows:

(In millions)
Three Months Ended September 30,			2023				2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	795			$	654
Operating cash flows from finance leases			149				113
Financing cash flows from finance leases			285				256
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			1,804				1,189
Finance leases			1,704				611

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Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)
		September 30, 2023				June 30, 2023
Operating Leases
Operating lease right-of-use assets		$	15,435			$	14,346
Other current liabilities		$	2,538			$	2,409
Operating lease liabilities			13,487				12,728
Total operating lease liabilities		$	16,025			$	15,137
Finance Leases
Property and equipment, at cost		$	21,892			$	20,538
Accumulated depreciation			**(**4,949	)			(4,647	)
Property and equipment, net		$	16,943			$	15,891
Other current liabilities		$	1,577			$	1,197
Other long-term liabilities			16,577				15,870
Total finance lease liabilities		$	18,154			$	17,067
Weighted Average Remaining Lease Term
Operating leases			8 years				8 years
Finance leases			11 years				11 years
Weighted Average Discount Rate
Operating leases			3.1**%**				2.9%
Finance leases			3.6**%**				3.4%

The following table outlines maturities of our lease liabilities as of September 30, 2023:

(In millions)
Year Ending June 30,		Operating Leases				Finance Leases
2024 (excluding the three months ended September 30, 2023)		$	2,287			$	1,378
2025			2,834				2,196
2026			2,365				1,883
2027			1,961				1,890
2028			1,767				1,900
Thereafter			6,803				12,934
Total lease payments			18,017				22,181
Less imputed interest			**(**1,992	)			**(**4,027	)
Total		$	16,025			$	18,154

As of September 30, 2023, we had additional operating and finance leases, primarily for datacenters, that had not yet commenced of $7.5 billion and $75.1 billion, respectively. These operating and finance leases will commence between fiscal year 2024 and fiscal year 2030 with lease terms of 1 year to 18 years.

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NOTE 13 — CONTINGENCIES

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying. The plaintiffs appealed the court’s order in August of 2023.

Irish Data Protection Commission Matter

In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In April 2023, the IDPC provided LinkedIn with a non-public preliminary draft decision alleging GDPR violations and proposing a fine. Microsoft intends to challenge the preliminary draft decision. There is no set timeline for the IDPC to issue a final decision.

Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of September 30, 2023, we accrued aggregate legal liabilities of $597 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 14 — STOCKHOLDERS’ EQUITY

Share Repurchases

On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021, has no expiration date, and may be terminated at any time. As of September 30, 2023, $18.7 billion remained of this $60.0 billion share repurchase program.

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

(In millions)		Shares			Amount					Shares			Amount
Fiscal Year						2024								2023
First Quarter			11			$	3,560				17			$	4,600

All repurchases were made using cash resources. All shares repurchased were under the share repurchase program approved on September 14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $1.3 billion and $973 million for the first quarter of fiscal years 2024 and 2023, respectively.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date			Record Date				Payment Date				Dividend Per Share				Amount
Fiscal Year 2024															(In millions)
September 19, 2023			November 16, 2023				December 14, 2023			$	0.75			$	5,573
Fiscal Year 2023
September 20, 2022			November 17, 2022				December 8, 2022			$	0.68			$	5,066

The dividend declared on September 19, 2023 was included in other current liabilities as of September 30, 2023.

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NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(In millions)
Three Months Ended September 30,			2023				2022
Derivatives
Balance, beginning of period		$	**(**27	)		$	(13	)
Unrealized losses, net of tax of $(4) and $(11)			**(**15	)			(40	)
Reclassification adjustments for losses included in other income (expense), net			46				59
Tax benefit included in provision for income taxes			**(**10	)			(12	)
Amounts reclassified from accumulated other comprehensive loss			36				47
Net change related to derivatives, net of tax of **$**6 and $1			21				7
Balance, end of period		$	**(**6	)		$	(6	)
Investments
Balance, beginning of period		$	**(**3,582	)		$	(2,138	)
Unrealized losses, net of tax of $(75) and $(510)			**(**283	)			(1,925	)
Reclassification adjustments for losses included in other income (expense), net			29				35
Tax benefit included in provision for income taxes			**(**6	)			(7	)
Amounts reclassified from accumulated other comprehensive loss			23				28
Net change related to investments, net of tax of $(69) and $(503)			**(**260	)			(1,897	)
Balance, end of period		$	**(**3,842	)		$	(4,035	)
Translation Adjustments and Other
Balance, beginning of period		$	**(**2,734	)		$	(2,527	)
Translation adjustments and other, net of tax of **$**0 and $0			**(**355	)			(775	)
Balance, end of period		$	**(**3,089	)		$	(3,302	)
Accumulated other comprehensive loss, end of period		$	**(**6,937	)		$	(7,343	)

NOTE 16 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

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

Our reportable segments are described below.

Productivity and Business Processes

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

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot.

Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services.

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

Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Intelligent Cloud

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

Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub.

Enterprise and partner services, including Enterprise Support Services, Industry Solutions, Nuance professional services, Microsoft Partner Network, and Learning Experience.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

Windows, including Windows original equipment manufacturer (“OEM”) licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things.

Devices, including Surface, HoloLens, and PC accessories.

Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party disc royalties, and other cloud services.

Search and news advertising, comprising Bing (including Bing Chat), Microsoft News, Microsoft Edge, and third-party affiliates.

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

In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.

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Segment revenue and operating income were as follows during the periods presented:

(In millions)
Three Months Ended September 30,		2023				2022
Revenue
Productivity and Business Processes		$	18,592			$	16,465
Intelligent Cloud			24,259				20,325
More Personal Computing			13,666				13,332
Total		$	56,517			$	50,122
Operating Income
Productivity and Business Processes		$	9,970			$	8,323
Intelligent Cloud			11,751				8,978
More Personal Computing			5,174				4,217
Total		$	26,895			$	21,518

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three months ended September 30, 2023 or 2022. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)
Three Months Ended September 30,		2023				2022
United States (a)		$	28,812			$	25,867
Other countries			27,705				24,255
Total		$	56,517			$	50,122

(a)

Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

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

(In millions)
Three Months Ended September 30,		2023				2022
Server products and cloud services		$	22,308			$	18,388
Office products and cloud services			13,140				11,577
Windows			5,567				5,313
Gaming			3,919				3,610
LinkedIn			3,913				3,628
Search and news advertising			3,053				2,913
Enterprise and partner services			1,944				1,929
Dynamics			1,540				1,260
Devices			1,125				1,448
Other			8				56
Total		$	56,517			$	50,122

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

Our Microsoft Cloud revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $31.8 billion and $25.7 billion for the three months ended September 30, 2023 and 2022, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and Dynamics in the table above.

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Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

NOTE 17 — SUBSEQUENT EVENT

On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) for a cash payment of $61.8 billion, net of cash acquired. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming.

Due to the limited amount of time since closing the transaction, the preliminary allocation of the purchase price is not yet complete. The initial purchase price allocation will be provided within our Form 10-Q for the second quarter of fiscal year 2024, and we expect most of the purchase price will be allocated to goodwill and other identifiable intangible assets. Activision Blizzard will be included in our consolidated financial statements beginning on the date of acquisition and reported as part of our More Personal Computing segment.

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REPORT OF INDEPENDENT REGIST****ERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheet of Microsoft Corporation and subsidiaries (the "Company") as of September 30, 2023, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month periods ended September 30, 2023 and 2022, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of June 30, 2023, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for the year then ended (not presented herein); and in our report dated July 27, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

/S/ DELOITTE & TOUCHE LLP

Seattle, Washington

October 24, 2023

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” (Part II, Item 1A of this Form 10-Q). These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q), and “Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2023, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

OVERVIEW

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. 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.

We generate revenue by offering a wide range of cloud-based solutions, content, and other services to people and businesses; licensing and supporting an array of software products; delivering relevant online advertising to a global audience; and designing and selling devices. Our most significant expenses are related to compensating employees; supporting and investing in our cloud-based services, including datacenter operations; designing, manufacturing, marketing, and selling our other products and services; and income taxes.

Highlights from the first quarter of fiscal year 2024 compared with the first quarter of fiscal year 2023 included:

Microsoft Cloud revenue increased 24% to $31.8 billion.

Office Commercial products and cloud services revenue increased 15% driven by Office 365 Commercial growth of 18%.

Office Consumer products and cloud services revenue increased 3% and Microsoft 365 Consumer subscribers grew to 76.7 million.

LinkedIn revenue increased 8%.

Dynamics products and cloud services revenue increased 22% driven by Dynamics 365 growth of 28%.

Server products and cloud services revenue increased 21% driven by Azure and other cloud services growth of 29%.

Windows revenue increased 5% with Windows original equipment manufacturer licensing (“Windows OEM”) revenue growth of 4% and Windows Commercial products and cloud services revenue growth of 8%.

Devices revenue decreased 22%.

Xbox content and services revenue increased 13%.

Search and news advertising revenue excluding traffic acquisition costs increased 10%.

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Industry Trends

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, 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 did not have a material impact on reported revenue and expenses from our international operations in the first quarter of fiscal year 2024.

Refer to Risk Factors (Part II, Item 1A of this Form 10-Q) 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 16 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

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Metrics

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q). Financial metrics are calculated based on financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and growth comparisons relate to the corresponding period of last fiscal year.

In the first quarter of fiscal year 2024, we made updates to the presentation and method of calculation for certain metrics, revising our Microsoft Cloud revenue metric to include revenue growth and expanding our Microsoft 365 Consumer subscribers metric to include Microsoft 365 Basic subscribers, aligning with how we manage our business.

Commercial

Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise and partner services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.

Commercial remaining performance obligation		Commercial portion of revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods
Microsoft Cloud revenue and revenue growth		Revenue from Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties
Microsoft Cloud gross margin percentage		Gross margin percentage for our Microsoft Cloud business

Productivity and Business Processes and Intelligent Cloud

Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics reflect our cloud and on-premises product strategies and trends.

Office Commercial products and cloud services revenue growth		Revenue from Office Commercial products and cloud services (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot
Office Consumer products and cloud services revenue growth		Revenue from Office Consumer products and cloud services, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services
Office 365 Commercial seat growth		The number of Office 365 Commercial seats at end of period where seats are paid users covered by an Office 365 Commercial subscription
Microsoft 365 Consumer subscribers		The number of Microsoft 365 Consumer subscribers at end of period
Dynamics products and cloud services revenue growth		Revenue from Dynamics products and cloud services, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications
LinkedIn revenue growth		Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions
Server products and cloud services revenue growth		Revenue from Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub

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More Personal Computing

Metrics related to our More Personal Computing segment assess the performance of key lines of business within this segment. These metrics provide strategic product insights which allow us to assess the performance across our commercial and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we monitor metrics that are reflective of those varying motions.

Windows OEM revenue growth		Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel
Windows Commercial products and cloud services revenue growth		Revenue from Windows Commercial products and cloud services, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings
Devices revenue growth		Revenue from Devices, including Surface, HoloLens, and PC accessories
Xbox content and services revenue growth		Revenue from Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party disc royalties, and other cloud services
Search and news advertising revenue (ex TAC) growth		Revenue from search and news advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers and news partners

SUMMARY RESULTS OF OPERATIONS

(In millions, except percentages and per share amounts)			Three Months Ended September 30,							Percentage Change
			2023				2022
Revenue		$	56,517			$	50,122				13%
Gross margin			40,215				34,670				16%
Operating income			26,895				21,518				25%
Net income			22,291				17,556				27%
Diluted earnings per share			2.99				2.35				27%

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Revenue increased $6.4 billion or 13% driven by growth in Intelligent Cloud and Productivity and Business Processes. Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial. More Personal Computing revenue increased driven by growth in Gaming and Windows, offset in part by a decline in Devices.

Cost of revenue increased $850 million or 6% driven by growth in Microsoft Cloud, offset in part by a decline in Devices.

Gross margin increased $5.5 billion or 16% driven by growth across each of our segments.

Gross margin percentage increased. Excluding the impact of the prior year change in accounting estimate for the useful lives of our server and network equipment, gross margin percentage increased 3 points driven by improvements across each of our segments.

Microsoft Cloud gross margin percentage increased slightly to 73%. Excluding the impact of the change in accounting estimate, Microsoft Cloud gross margin percentage increased 2 points driven by improvement in Azure and other cloud services and Office 365 Commercial.

Operating expenses increased $168 million or 1% driven by marketing, LinkedIn, and cloud engineering, offset in part by a decline in Devices.

Operating income increased $5.4 billion or 25% driven by growth across each of our segments.

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SEGMENT RESULTS OF OPERATIONS

(In millions, except percentages)		Three Months Ended September 30,								Percentage Change
		2023				2022
Revenue
Productivity and Business Processes		$	18,592			$	16,465				13%
Intelligent Cloud			24,259				20,325				19%
More Personal Computing			13,666				13,332				3%
Total		$	56,517			$	50,122				13%
Operating Income
Productivity and Business Processes		$	9,970			$	8,323				20%
Intelligent Cloud			11,751				8,978				31%
More Personal Computing			5,174				4,217				23%
Total		$	26,895			$	21,518				25%

Reportable Segments

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Productivity and Business Processes

Revenue increased $2.1 billion or 13%.

Office Commercial products and cloud services revenue increased $1.5 billion or 15%. Office 365 Commercial revenue grew 18% with seat growth of 10%, driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Office Commercial products revenue declined 17% driven by continued customer shift to cloud offerings.

Office Consumer products and cloud services revenue increased $44 million or 3%. Microsoft 365 Consumer subscribers grew 18% to 76.7 million.

LinkedIn revenue increased $285 million or 8% primarily driven by Talent Solutions.

Dynamics products and cloud services revenue increased $280 million or 22% driven by Dynamics 365 growth of 28%.

Operating income increased $1.6 billion or 20%.

Gross margin increased $1.8 billion or 13% driven by growth in Office 365 Commercial. Gross margin percentage increased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage increased 1 point driven by improvement in Office 365 Commercial.

Operating expenses increased $119 million or 2% primarily driven by LinkedIn.

Intelligent Cloud

Revenue increased $3.9 billion or 19%.

Server products and cloud services revenue increased $3.9 billion or 21% driven by Azure and other cloud services. Azure and other cloud services revenue grew 29% driven by growth in our consumption-based services. Server products revenue increased 2% driven by demand for Windows Server and SQL Server running in multi-cloud environments, offset in part by continued customer shift to cloud offerings.

Enterprise and partner services revenue increased $15 million or 1% driven by growth in Enterprise Support Services, offset in part by a decline in Industry Solutions.

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Operating income increased $2.8 billion or 31%.

Gross margin increased $2.9 billion or 20% driven by growth in Azure and other cloud services. Gross margin percentage increased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage increased 2 points driven by improvement in Azure and other cloud services.

Operating expenses increased $86 million or 2% driven by investments in Azure and other cloud services.

More Personal Computing

Revenue increased $334 million or 3%.

Windows revenue increased $254 million or 5% driven by growth in Windows Commercial and Windows OEM. Windows Commercial products and cloud services revenue increased 8% driven by demand for Microsoft 365. Windows OEM revenue increased 4%.

Gaming revenue increased $309 million or 9% driven by growth in Xbox content and services. Xbox content and services revenue increased 13% driven by growth in first-party content and Xbox Game Pass. Xbox hardware revenue decreased 7% driven by lower volume of consoles sold, offset in part by higher price of consoles sold.

Search and news advertising revenue increased $140 million or 5%. Search and news advertising revenue excluding traffic acquisition costs increased 10% driven by higher search volume.

Devices revenue decreased $323 million or 22%.

Operating income increased $957 million or 23%.

Gross margin increased $920 million or 13% driven by growth in Gaming and Windows. Gross margin percentage increased primarily driven by sales mix shift.

Operating expenses decreased $37 million or 1% driven by a decline in Devices, offset in part by investments in Gaming.

OPERATING EXPENSES

Research and Development

(In millions, except percentages)		Three Months Ended September 30,								Percentage Change
		2023				2022
Research and development		$	6,659			$	6,628				0%
As a percent of revenue			12%				13%				(1)ppt

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

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Research and development expenses increased slightly driven by cloud engineering, LinkedIn, and Windows, offset in part by a decline in Devices.

Sales and Marketing

(In millions, except percentages)		Three Months Ended September 30,								Percentage Change
		2023				2022
Sales and marketing		$	5,187			$	5,126				1%
As a percent of revenue			9%				10%				(1)ppt

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

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Sales and marketing expenses increased $61 million or 1% driven by investments in Gaming.

General and Administrative

(In millions, except percentages)		Three Months Ended September 30,								Percentage Change
		2023				2022
General and administrative		$	1,474			$	1,398				5%
As a percent of revenue			3%				3%				0ppt

General and administrative expenses include payroll, employee benefits, stock-based compensation expense, employee severance expense incurred as part of a corporate program, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

General and administrative expenses increased $76 million or 5% driven by legal expenses.

OTHER INCOME (EXPENSE), NET

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

(In millions)
Three Months Ended September 30,		2023				2022
Interest and dividends income		$	1,166			$	641
Interest expense			(525	)			(500	)
Net recognized gains (losses) on investments			(107	)			13
Net gains on derivatives			93				9
Net losses on foreign currency remeasurements			(101	)			(78	)
Other, net			(137	)			(31	)
Total		$	389			$	54

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Interest and dividends income increased due to higher yields and higher portfolio balances. Interest expense increased due to the issuance of commercial paper. Net recognized losses on investments increased due to losses on equity securities in the current period as opposed to gains in the prior period. Net gains on derivatives increased due to higher gains on equity derivatives.

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INCOME TAXES

Effective Tax Rate

Our effective tax rate was 18% and 19% for the three months ended September 30, 2023 and 2022, respectively. The decrease in our effective tax rate for the current quarter compared to the prior year was primarily due to tax benefits from tax law changes in the first quarter of fiscal year 2024, including the impact from the issuance of Notice 2023-55 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department, which delayed the effective date of final foreign tax credit regulations to fiscal year 2024 for Microsoft.

Our effective tax rate was lower than the U.S. federal statutory rate for the three months ended September 30, 2023, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland.

Uncertain Tax Positions

We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest. As of September 30, 2023, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2023, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and short-term investments totaled $144.0 billion and $111.3 billion as of September 30, 2023 and June 30, 2023, respectively. Equity investments were $11.4 billion and $9.9 billion as of September 30, 2023 and June 30, 2023, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

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Item 2

Valuation

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

Cash Flows

Cash from operations increased $7.4 billion to $30.6 billion for the three months ended September 30, 2023, mainly due to an increase in cash received from customers and a decrease in cash paid to suppliers. Cash from financing increased $25.6 billion to $14.8 billion for the three months ended September 30, 2023, mainly due to a $25.3 billion increase in proceeds from issuance of debt, net of repayments. Cash from investing increased $3.6 billion to $503 million for the three months ended September 30, 2023, mainly due to an $8.2 billion increase in cash from net investment purchases, sales, and maturities, offset in part by a $3.6 billion increase in cash used for additions to property and equipment.

Debt Proceeds

We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. Refer to Note 9 – Debt of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Unearned Revenue

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“SA”) and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

PART I

Item 2

The following table outlines the expected future recognition of unearned revenue as of September 30, 2023:

(In millions)
Three Months Ending
December 31, 2023		$	21,006
March 31, 2024			14,860
June 30, 2024			8,551
September 30, 2024			2,012
Thereafter			2,759
Total		$	49,188

If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable. Refer to Note 11 – Unearned Revenue of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Material Cash Requirements and Other Obligations

Income Taxes

As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. As of September 30, 2023, we had a remaining transition tax liability of $7.7 billion, of which $3.7 billion is short-term and payable in the first quarter of fiscal year 2025.

Share Repurchases

For the three months ended September 30, 2023 and 2022, we repurchased 11 million shares and 17 million shares of our common stock for $3.6 billion and $4.6 billion, respectively, through our share repurchase program. All repurchases were made using cash resources. As of September 30, 2023, $18.7 billion remained of our $60 billion share repurchase program. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Dividends

For the three months ended September 30, 2023 and 2022, our Board of Directors declared quarterly dividends of $0.75 per share and $0.68 per share, totaling $5.6 billion and $5.1 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Other Planned Uses of Capital

On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. for a cash payment of $61.8 billion, net of cash acquired.

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings and our investments in AI infrastructure. We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

PART I