Dear shareholders, customers, partners and employees:
Thank you for your support and investment in Microsoft. We’re proud of our progress this year, and we are eager to make
even more progress in the year ahead.
We continue to be guided by our mission to empower every person and every organization on the planet to achieve
more. The breadth and depth of our mission unlocks unprecedented opportunity as technology transforms every industry
and has the power to make a difference in the lives of everyone. We strive to create local opportunity, growth and impact in
every community and country around the world. Our platforms and tools enable creativity in all of us, and help drive small-
business productivity, large business competitiveness and public-sector efficiency. They also support new startups, improve
educational and health outcomes, and empower human ingenuity. Our sense of purpose lies in our customers’ success.
Now let me share more about what we delivered in fiscal 2017 for our shareholders, our customers and partners, and for
the communities in which we operate throughout the world.
PROGRESS AND OUR RESULTS
We delivered $90.0 billion in revenue and $22.3 billion in operating income this past fiscal year. Adjusting for Windows 10
revenue deferrals and restructuring expenses, revenue was $96.7 billion with $29.3 billion in operating income.
We continued to invest in innovation and expand our market opportunities, while maintaining our commitment to shareholder
return, which included total cash return of $22.3 billion this year.
Our commercial cloud annualized revenue run rate ended the year exceeding $18.9 billion, up more than 56 percent year-
over-year. Our cloud growth puts us squarely on track to reach the goal we set a little over two years ago of $20 billion in
commercial cloud annualized revenue run rate in fiscal 2018.
The strength of our results across our reporting segments reflects our accelerating innovation as well as increased customer
usage and engagement across our businesses.
• More than 100 million people use Office 365 commercial.
• More than 27 million consumers use Office 365 Home & Personal across devices.
• More than 53 million members are active on Xbox Live.
• More than 500 million LinkedIn members use the LinkedIn network.
• Windows 10 is active on more than 500 million devices around the world.
• Dynamics 365 customers grew more than 40 percent year-over-year.
• Azure compute usage more than doubled year-over-year.
We prioritized our investments to capture our expanding market opportunities. We are investing for the future with product
innovation complemented by new acquisitions and partnerships. We have completed our acquisition of LinkedIn to connect
the world’s largest professional network with the world’s leading professional cloud. We are investing to create broader
economic benefit and opportunity with our datacenter expansion, bringing Azure to 42 regions globally – more than any
other cloud provider – and with the most comprehensive compliance coverage in the industry.
We broadened our offerings to reach new audiences, such as bringing Office 365 to firstline workers from retail and
hospitality to manufacturing. We took collaboration to a new level with Microsoft Teams, which brings people, conversations
and content together in a digital hub. We are in the forefront of innovating in mixed reality and how this new medium can
radically change gaming, firstline and knowledge work through immersive experiences. We are innovating in gaming with
new services such as Mixer and Xbox Game Pass. We introduced hundreds of new Azure
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services, including new cognitive services APIs for vision, speech, text, translation, emotion and more. We have galvanized
the company’s efforts around AI both to power each of our product categories with breakthrough capabilities and make the
same capabilities available to our customers through Azure. We inspired new ways for students and teachers to create and
learn with Windows 10 S. And we continued to create new device categories with Windows 10 and Surface, including the
new Surface Studio and Laptop.
And we’re continually transforming to better serve customers, evolving our sales and marketing approach to galvanize
around five core customer solution areas.
Across every industry in every corner of the world, our customers are using Microsoft technologies to radically transform
everything from agriculture to manufacturing, and we are only at the beginning. Here are some examples.
BOEING
Boeing is using Microsoft HoloLens for 3-D visualization to transform employee training, and it is using Cortana Intelligence,
Azure and Azure IoT to harness a wealth of aircraft data. This “digital twin” aircraft increases crew and maintenance
efficiency, improves customer experience, and creates a new business model and services that Boeing can offer its airline
customers.
THYSSENKRUPP
thyssenkrupp Elevator is using HoloLens to transform the way it measures, visualizes and installs its products, streamlining
the initial surveying process of a stair lift installation. Using spatial mapping, 3-D visualization and the natural inputs offered
by mixed reality, the company has digitized its sales and manufacturing processes to reduce delivery times as much as 4x,
transforming its customer experience and growing its business opportunity.
TETRA PAK
Tetra Pak, the world’s largest food packaging company and inventor of the 20th century’s most important innovation in that
industry, aseptic packaging technology, employs Azure to enable its cloud-connected machines to predict exactly when
equipment needs maintenance. Service engineers use HoloLens to access experts who remotely guide them through a
repair, reducing time and cost. With the cloud and mixed reality, Tetra Pak is delivering new and existing value in a much
more efficient way – in the most remote locations, on the most mobile devices.
LAND O’ LAKES
Land O’ Lakes is working to feed the world sustainably by embracing the Microsoft Cloud, predictive data analytics and
mobile technologies in tandem with family farmers. Using Azure, Office 365 and Surface, farmers in different parts of the
world can access agronomic research, weather information and satellite data to make the right planting decisions and react
to real-time changes in the field, every day.
SCHNEIDER ELECTRIC
Responsible and sustainable management of fresh water is one of the world’s biggest challenges. With 70 percent of fresh
water reserves being used for agricultural purposes, every drop counts. Schneider Electric has built a smart farming platform
using Azure IoT to enable farmers to more efficiently manage water use. Advanced analytics, live local data from sensors
on the farm and access to pricing information from the local water utility allow farmers to maximize crop and livestock yields
and lower energy consumption by pumping water at optimal times.
CASE WESTERN RESERVE UNIVERSITY AND CLEVELAND CLINIC
Case Western Reserve University and Cleveland Clinic are using mixed reality to transform medical education. Using
HoloLens, they built an entirely new and immersive way to teach and learn human anatomy. Doctors who have
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looked at data sets like this for years say they have never fully understood the 3-D structure until seeing it as a hologram
with HoloLens, giving them the ability to see a brain tumor in mixed reality and predict the impact of the tumor with 3-D
modeling, or seeing the aortic valve in true relation to the critical structures around it.
LOOKING FORWARD: OUR EXPANSIVE OPPORTUNITY
A new technology paradigm
As you can begin to see in the examples above, a new technology paradigm is emerging, one with an intelligent cloud and
an intelligent edge. Microsoft will lead this new era. There are three characteristics that define this shift. The first is that the
experience layer is becoming multidevice and multisense, where a person’s experience with technology will span a multitude
of devices and become increasingly more natural and multisensory with voice, ink, gestures and gaze interactions. Second,
artificial intelligence (AI) will be pervasive across devices, apps and infrastructure to drive insights and act on your behalf.
Third, computing will be more distributed than ever before with compute power at the edge, whether it’s the connected car,
the connected factory floor or any connected device. As developers write new applications for this paradigm, they need new
mechanisms to manage the complexity of distributed, event-driven computing.
With this new paradigm comes new opportunity. Every customer is looking for both innovative technology to drive new
growth and a strategic partner that can help them build their own digital capability. Customers are looking to change how
they use digital technology and to reimagine how they empower their employees, engage customers, optimize their
operations, and change the very core of their products and services. They are building their own digital systems of
intelligence to drive growth. Microsoft is uniquely positioned to capitalize on this opportunity with the combination of our
technology, partner ecosystem and culture of growth mindset.
As we look ahead to fiscal 2018 and beyond, we will focus on bringing our technology and products together into experiences
and solutions that deliver new value for our customers. Going forward, we will focus our innovation and investments in areas
where we see the greatest opportunity for growth.
The modern workplace
The workplace itself is transforming – from changing employee expectations, a widening skills gap, more diverse and
globally distributed teams, to an increasingly complex threat environment. The productivity experiences and tools we deliver
will unlock the creator in all of us and enable seamless teamwork not just in the workplace, but also at school and at home
across all the devices people use – from the phone to the laptop to mixed-reality headsets to the whiteboard. Microsoft 365
– which brings together Windows 10, Office 365 and Enterprise Mobility & Security – will be a key driver of value for our
business customers of all sizes and for our business growth. The Microsoft Graph, which provides the underlying data model
of the user’s experience, and the LinkedIn network, will make it possible for every professional in any business or functional
role to be much more productive in getting things done.
Business applications
Every process inside a business is being digitized. This rapid shift means customers are looking to move away from
monolithic suites that perpetuate disconnected data siloes and expensive custom extensibility frameworks. Our approach
with Dynamics 365 and LinkedIn is to build modular business applications that are part of a connected data graph, enabling
AI and extensibility that span a customer’s business process needs. We will enable organizations of all sizes to digitize
business-critical functions across relationship sales, talent and people processes, operations, customer service, field
service, and more.
Applications and infrastructure
Cloud computing is foundational to enabling digital transformation for any organization. Beyond being a trusted, global,
hyper-scale cloud, what makes Azure unique is our hybrid consistency, developer productivity and SaaS
3
application integration. Our hybrid infrastructure consistency spans identity, data, compute, management and security,
helping to support the real-world needs and evolving regulatory requirements of commercial customers and enterprise-
focused SaaS ISVs. Azure Stack is an extension of Azure that enables developers to build and deploy applications the
same way whether they run on the intelligent cloud or the intelligent edge. With Visual Studio and Azure Services, we
provide the toolchain and application platform for modern DevOps that helps organizations with their agility and productivity
– and enable them to use the best of the Windows ecosystem and the best of the Linux ecosystem together. Azure enables
SaaS ISV developers to reach 100 million plus enterprise users through the integration of Azure Active Directory and Office
365, and by embedding Power BI, Power Apps and Flow as part of their applications, enables customers to have consistent
identity, developer extensibility and security across their application portfolio spanning their own custom applications and
SaaS applications.
Data and AI
The core currency of any business going forward will be the ability to reason over its data using AI to drive competitive
advantage. Microsoft Research continues to make significant advances in AI technologies, infusing them into product
experiences like Bing, Cortana, LinkedIn Newsfeed, Skype Translator, Editor and PowerPoint Designer in Office,
Relationship Health in Dynamics, HoloLens, and many more. We are uniquely positioned to take this AI capability and
democratize it, so that every developer can be an AI developer, and every company can become an AI company. It all starts
with having support for the comprehensive data estate spanning Azure Database, Cosmos DB, Data Warehouse and Data
Lake, combined with SQL Server. Azure is the cloud with the richest set of ML tools, bot framework and cognitive services,
enabling developers to add AI capabilities into their applications. With state-of-the-art GPU and FPGA support, our Azure
infrastructure is best in class for AI workloads. I am excited about our road map here and what’s to come.
Gaming
The $100 billion plus gaming industry is experiencing massive growth and transformation, and we have an expansive
opportunity as we think about gaming end-to-end – from the way games are created and distributed to how they are played
and viewed. We will build on our strong foundation of connected gaming assets across PC, console, mobile and work to
grow and engage the 53 million strong Xbox Live member network more deeply and frequently – from great game
experiences to streaming to social to mixed reality. We will be the company for gamers to play the games they want, with
the people they want, on the devices they want. I’m excited about our opportunity to accelerate our growth opportunity,
innovate boldly and earn new fans.
While these solution areas capture our near-term opportunity, we’re also investing in cutting-edge research to lead well into
the future. Artificial intelligence, mixed reality and quantum computing will come together and shape the future of our industry
and others for generations to come. We’re deeply committed to leading in these areas and bringing them together in ways
that enable humanity to solve our most pressing issues, from climate change to curing cancer to creating economic
opportunity for all. We will do so by adhering to the highest ethical principles and standing for our timeless values.
OUR RESPONSIBILITY IN THE WORLD
Our mission to empower every person and every organization on the planet extends to our corporate social responsibility
efforts. We strive to use our technology, grants, employees and voice to improve people’s lives by enabling access to the
benefits and opportunities that technology offers. This past year we increased our investments across a range of strategic
initiatives.
• Microsoft Philanthropies donated more than $1.2 billion in software and services in fiscal 2017, helping nonprofits
around the world get the technology and skills they need for today’s digital economy.
• Since 2016 we have donated more than $1 billion in cloud services to more than 90,000 nonprofits and university
researchers – achieving our $1 billion milestone a year early – and announced a new plan to more than triple the
number of nonprofits we’ll reach to 300,000 over the next three years.
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• Our employees raised a record-breaking $142 million through our employee giving program in 2016. I am proud
and humbled by their commitment to not only make a difference with our customers and partners, but in their local
communities and the broader world.
• We’re ensuring that our products and services are accessible to meet the needs of all our customers, including
the more than 1 billion people around the world with disabilities. Examples include our new Eye Control feature in
Windows 10 for people with ALS, and Seeing AI, a free app on iOS for blind and low vision users that narrates the
world around you.
• We’re partnering with telecommunications companies through our Rural Airband Initiative to bring broadband
connectivity to 2 million people in rural America by 2022, helping to close the rural broadband gap for the more
than 20 million Americans living in rural communities who lack access to the economic, educational and health
opportunities the internet provides.
• We’re advancing our sustainability efforts, completing our largest wind energy purchase to date and aiming to
address some of the world’s toughest environment challenges through our new AI for Earth initiative.
• Finally, as part of our broader responsibility to engage thoughtfully in the public dialogue on the important
challenges facing our world, we published “A Cloud for Global Good” to help companies and governments ensure
technology is trusted, responsible and inclusive.
When I reflect on the past year, I’m proud of our progress – both in our own continued transformation and in how we are
empowering customers to digitally transform.
As a multinational corporation, we have both a substantial opportunity and a high responsibility to ensure that technology’s
benefits reach people more broadly across our global society and economy. Everywhere we operate, we focus on
contributing to local communities in positive ways – helping to spark growth, competitiveness and economic opportunity for
all.
To serve the needs of our customers well into the future, we must continually transform while remaining steadfast to our
timeless values. Microsoft has both the capability and the culture to help customers digitally transform today, while creating
new technologies that are among the most innovative and impactful humankind has ever experienced with mixed reality,
artificial intelligence and quantum computing.
We will continue to invest in the highest growth opportunities, innovate boldly, and empower people and organizations by
creating the platforms and tools that enable others to grow and thrive, now and well into the future.
Satya Nadella
Chief Executive Officer
October 16, 2017
5
The following table reconciles our financial results reported in accordance with generally accepted accounting principles
(“GAAP”) to non-GAAP financial results. The shareholder letter contains non-GAAP financial information to aid investors in
better understanding the company’s revenue and operating income results for fiscal year 2017. Non-GAAP results exclude
the net impact from Windows 10 revenue deferrals and the impact of restructuring expenses.
($ in millions, except per share amounts)
2017 As Reported (GAAP)
Net Impact from Windows 10 Revenue Deferrals
Restructuring Expenses
2017 As Adjusted (non-GAAP)
Twelve Months Ended June 30,
Operating
Income
Revenue
$ 89,950
6,707
—
$ 96,657
$ 22,326
6,707
306
$ 29,339
6
(c)
(e)
(In millions, except per share data)
FINANCIAL HIGHLIGHTS
2016
2017 (a)
Year Ended June 30,
Revenue
55,689 (b)
Gross margin
22,326 (b)(c)
Operating income
21,204 (b)(c)
Net income
2.71 (b)(c)
Diluted earnings per share
Cash dividends declared per share
1.56
Cash, cash equivalents, and short-term investments 132,981
241,086
Total assets
104,165
Long-term obligations
72,394
Stockholders’ equity
2013
$ 89,950 (b) $ 85,320 (d) $ 93,580 $ 86,833 $ 77,849
57,464
26,764 (i)
21,863 (i)
2.58 (i)
0.92
77,022
174,303 (f) 170,569 (f) 140,890 (f)
24,531 (f)
78,944
52,540 (d)
20,182 (d)(e)
16,798 (d)(e)
2.10 (d)(e)
1.44
113,240
193,468 (f)
62,114 (f)
71,997
60,542
18,161 (g)
12,193 (g)
1.48 (g)
1.24
96,526
59,755
27,759
22,074
2.63
1.12
85,709
44,574 (f)
80,083
35,285 (f)
89,784
2014 (h)
2015
(a) On December 8, 2016, we acquired LinkedIn Corporation. LinkedIn has been included in our consolidated results of
operations starting on the acquisition date.
(b) Reflects the impact of the net revenue deferral from Windows 10 of $6.7 billion, which decreased operating income,
net income, and diluted earnings per share (“EPS”) by $6.7 billion, $4.4 billion, and $0.57, respectively.
Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring
plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.03,
respectively.
(d) Reflects the impact of the net revenue deferral from Windows 10 of $6.6 billion, which decreased operating income,
net income, and diluted EPS by $6.6 billion, $4.6 billion, and $0.58, respectively.
Includes $630 million of asset impairment charges related to our phone business, and $480 million of restructuring
charges associated with our phone business restructuring plans, which together decreased operating income, net
income, and diluted EPS by $1.1 billion, $895 million, and $0.11, respectively.
(g)
(f) Reflects the impact of the adoption of the new accounting standard in fiscal year 2017 related to balance sheet
classification of debt issuance costs. See Note 12 – Debt of the Notes to Financial Statements for further discussion.
Includes $7.5 billion of goodwill and asset impairment charges related to our phone business, and $2.5 billion of
integration and restructuring expenses, primarily associated with our phone business restructuring plans, which
together decreased operating income, net income, and diluted EPS by $10.0 billion, $9.5 billion, and $1.15,
respectively.
(h) On April 25, 2014, we acquired substantially all of Nokia Corporation’s Devices and Services business (“NDS”). NDS
(i)
has been included in our consolidated results of operations starting on the acquisition date.
Includes a charge related to a fine imposed by the European Commission in March 2013 which decreased operating
income and net income by $733 million (€561 million) and diluted EPS by $0.09. Also includes a charge for Surface
RT inventory adjustments recorded in the fourth quarter of fiscal year 2013, which decreased operating income, net
income, and diluted EPS by $900 million, $596 million, and $0.07, respectively.
QUARTERLY STOCK PRICE INFORMATION, ISSUER PURCHASES OF EQUITY SECURITIES,
DIVIDENDS, AND STOCK PERFORMANCE
QUARTERLY STOCK PRICE INFORMATION
Our common stock is traded on the NASDAQ Stock Market under the symbol MSFT. On July 31, 2017, there were 101,825
registered holders of record of our common stock. The high and low common stock sales prices per share were as follows:
Quarter Ended
Fiscal Year 2017
High
Low
Fiscal Year 2016
High
Low
September 30
December 31
March 31
June 30
Fiscal Year
$ 58.70
$ 64.10
$ 66.19
$ 72.89
$ 72.89
50.39
56.32
61.95
64.85
50.39
$ 48.41
39.72
$ 56.85 $ 55.64 $ 56.77
48.04
48.19
43.75
$ 56.85
39.72
7
Share Repurchases
SHARE REPURCHASES AND DIVIDENDS
On September 16, 2013, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in
share repurchases. This share repurchase program became effective on October 1, 2013, and was completed on
December 22, 2016.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional
$40.0 billion in share repurchases. This share repurchase program commenced on December 22, 2016 following
completion of the prior program approved on September 16, 2013, has no expiration date, and may be suspended or
discontinued at any time without notice. As of June 30, 2017, $36.8 billion remained of this $40.0 billion share repurchase
program.
We repurchased the following shares of common stock under the share repurchase programs:
(In millions)
Year Ended June 30,
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Shares
Shares
Amount
2017
Amount
2016
Shares
63 $ 3,550
3,533
59
1,600
25
1,600
23
89 $ 4,000
3,600
66
3,600
69
3,600
70
43
43
116
93
170 $ 10,283
294 $ 14,800
295
Amount
2015
$ 2,000
2,000
5,000
4,209
$
13,209
Shares repurchased during the third and fourth quarter of fiscal year 2017 were under the share repurchase program
approved September 20, 2016. All other shares repurchased were under the share repurchase program approved
September 16, 2013. The above table excludes shares repurchased to settle statutory employee tax withholding related to
the vesting of stock awards. All repurchases were made using cash resources.
Dividends
In fiscal year 2017, our Board of Directors declared the following dividends:
Declaration Date
September 20, 2016
November 30, 2016
March 14, 2017
June 13, 2017
Dividend
Per Share
Record Date
$ 0.39
November 17, 2016
Total Amount
(In millions)
$ 3,024
6
Payment Date
December 8, 201
0.39
February 16, 2017
3,012
7
0.39
0.39
May 18, 2017
August 17, 2017
3,009
3,006
7
September 14, 201
7
March 9, 201
June 8, 201
The dividend declared on June 13, 2017 will be paid after the filing date of the 2017 Form 10-K and was included in other
current liabilities as of June 30, 2017.
In fiscal year 2016, our Board of Directors declared the following dividends:
Declaration Date
September 15, 2015
December 2, 2015
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Dividend
Per Share
Record Date
$ 0.36
November 19, 2015
Total Amount
(In millions)
$ 2,868
Payment Date
December 10, 201
5
0.36
February 18, 2016
2,842
2016
March 10,
Declaration Date
March 15, 2016
June 14, 2016
Dividend
Per Share
Record Date
Total Amount
0.36
May 19, 2016
2,821
2016
0.36
August 18, 2016
2,800
2016
Payment Date
June 9,
September 8,
The dividend declared on June 14, 2016 was included in other current liabilities as of June 30, 2016.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Microsoft Corporation, the S&P 500 Index,
and the NASDAQ Computer Index
Microsoft Corporation
S&P 500
NASDAQ Computer
6/12
$ 100.00
100.00
100.00
6/13
$ 116.38
120.60
98.40
6/14
$ 144.62
150.27
140.53
6/15
$ 157.17
161.43
157.83
6/16
6/17
$ 187.22 $ 258.45
197.92
167.87
223.98
162.37
* $100 invested on 6/30/12 in stock or index, including reinvestment of dividends.
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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: “Business,” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” 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 “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and
Qualitative Disclosures about Market Risk” in our fiscal year 2017 Form 10-K. We undertake no obligation to update or
revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
BUSINESS
GENERAL
Our vision
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. Our strategy is
to build best-in-class platforms and productivity services for an intelligent cloud and an intelligent edge infused with artificial
intelligence (“AI”).
The way individuals and organizations use and interact with technology continues to evolve. A person’s experience with
technology increasingly spans a multitude of devices and becomes more natural and multi-sensory with voice, ink, and gaze
interactions. We believe a new technology paradigm is emerging that manifests itself through an intelligent cloud and an
intelligent edge where computing is more distributed, AI drives insights and acts on the user’s behalf, and user experiences
span devices with a user’s available data and information. We continue to transform our business to lead this new era of
digital transformation and enable our customers and partners to thrive in this evolving world.
What we offer
Founded in 1975, we operate worldwide in over 190 countries. We develop, license, and support a wide range of software
products, services, and devices that deliver new opportunities, greater convenience, and enhanced value to people’s lives.
Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency.
They also support new startups, improve educational and health outcomes, and empower human ingenuity.
Our products include operating systems; cross-device productivity applications; server applications; business solution
applications; desktop and server management tools; software development tools; video games; and training and certification
of computer system integrators and developers. We also design, manufacture, and sell devices, including PCs, tablets,
gaming and entertainment consoles, other intelligent devices, and related accessories, that integrate with our cloud-based
offerings. We offer an array of services, including cloud-based solutions that provide customers with software, services,
platforms, and content, and we provide solution support and consulting services. We also deliver relevant online advertising
to a global audience.
The ambitions that drive us
To achieve our vision, our research and development efforts focus on three interconnected ambitions:
• Reinvent productivity and business processes.
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• Build the intelligent cloud platform.
• Create more personal computing.
Reinvent productivity and business processes
We believe we can significantly enhance the lives of our customers using our broad portfolio of productivity, communication,
and information products and services that span platforms and devices. Productivity is our first and foremost objective, to
enable people to meet and collaborate more easily, and to effectively express ideas in new ways. We invent new scenarios
that in turn create opportunity for our partners and help businesses accelerate their digital transformation while respecting
each person’s privacy choices.
The foundation for these efforts rests on advancing our leading productivity, collaboration, communication, and business
process tools including Microsoft Office, Microsoft Dynamics, and LinkedIn. With Office 365, we provide familiar industry-
leading productivity and business process tools as cloud services, enabling access from anywhere and any device. New
scenarios – like those enabled by Microsoft Teams – will redefine how work gets done and help foster employee
engagement and culture. This work creates an opportunity to reach new customers and expand the usage of our services
by our existing customers. We see opportunity in combining our offerings in new ways that are mobile, secure, collaborative,
intelligent, and trustworthy. We offer our services across platforms and devices outside our own. As people move from
device to device, so does their content and the richness of their services. We engineer our applications so users can find,
try, and buy them in friction-free ways.
On December 8, 2016, we completed our acquisition of LinkedIn Corporation, the world’s largest professional network on
the Internet. The acquisition is expected to accelerate the growth of Office 365, Dynamics 365, and LinkedIn.
Build the intelligent cloud platform
Cloud computing is foundational to enabling any organization’s digital transformation. In deploying technology that advances
business strategy, enterprises decide what solutions will make employees more productive, collaborative, and satisfied, and
connect with customers in new and compelling ways. Enterprises work to unlock business insights from a world of data. To
achieve these objectives, they increasingly look to leverage the benefits of the cloud. Helping businesses digitally transform
and move to the cloud is one of our largest opportunities. As one of the two largest providers of cloud computing at scale,
we believe we work from a position of strength. The Microsoft Cloud is a secure solution that can listen, learn, and
predict; turning data into actionable insight that enhances business opportunities. It provides a scalable and complete
collaboration suite that transforms the way teams work. With the cloud, high-performance computing and agility can help
businesses expand their growth.
Our cloud business benefits from three economies of scale: larger datacenters that deploy computational resources at
significantly lower cost per unit than smaller ones; larger datacenters that coordinate and aggregate diverse customer,
geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and
multi-tenancy locations that lower application maintenance labor costs.
We believe our server products and cloud services, which include Microsoft SQL Server, Windows Server, Visual Studio,
System Center, and Microsoft Azure, make us the only company with a public, private, and hybrid cloud platform that can
power modern business. What differentiates Azure is our hybrid consistency, developer productivity, and software-as-a-
service (“SaaS”) application integration. In addition, our hybrid infrastructure spans identity, data, compute, management,
and security, helping to support the real-world needs and evolving regulatory requirements of commercial customers and
enterprise-focused SaaS partners. We are working to enhance the customer’s return on investment by enabling enterprises
to combine their existing datacenters and our public cloud into a single cohesive infrastructure. Businesses can deploy
applications in their own datacenter, a partner’s datacenter, or in our datacenters with common security, management, and
administration across all environments, providing the flexibility and scale they want. AI will be pervasive across devices,
applications, and infrastructure to
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drive insights and act on the user’s behalf. Azure is also unique in its support for emerging applications so that Internet of
Things (“IoT”) devices can act locally at the edge while taking advantage of the cloud for global coordination and machine
learning at scale.
We enable organizations to securely adopt SaaS applications, both our own and third-party, and integrate them with their
existing security and management infrastructure. We continue to innovate with higher-level services including identity and
directory services that manage employee corporate identity and manage and secure corporate information accessed and
stored across a growing number of devices, rich data storage and analytics services, machine learning services, media
services, web and mobile backend services, and developer productivity services. To foster a rich developer ecosystem, our
platform is extensible, enabling customers and partners to further customize and enhance our solutions, achieving even
more value. This strategy requires continuing investment in datacenters and other infrastructure to support our services.
Create more personal computing
We strive to make computing more personal by putting users at the core of the experience, enabling them to interact with
technology in more intuitive, engaging, and dynamic ways. Windows 10 is the cornerstone of our ambition to create more
personal computing, allowing us to move from an operating system that runs on a PC to a service that can power the full
spectrum of devices. Windows 10 is more personal and productive with functionality such as Cortana, Windows Hello,
Windows Ink, Microsoft Edge, and universal applications. Windows 10 offers a foundation for the secure, modern workplace.
Windows 10 is designed to foster innovation – from us, our partners, and developers – through rich and consistent
experiences across the range of existing devices and entirely new device categories.
Our ambition for Windows 10 is to broaden our economic opportunity through three key levers: an original equipment
manufacturer (“OEM”) ecosystem that creates exciting new hardware designs for Windows 10; our own commitment to the
health and profitability of our first-party premium device portfolio; and monetization opportunities such as services,
subscriptions, gaming, and search advertising. Our OEM partners are investing in an extensive portfolio of hardware designs
and configurations for Windows 10. We now have the widest range of Windows hardware ever available.
With the unified Windows operating system, developers and OEMs can contribute to a thriving Windows ecosystem. We
invest heavily to make Windows the most secure, manageable, and capable operating system for the needs of a modern
workforce. We are working to create a broad developer opportunity by unifying the Windows installed base on Windows 10,
and by enabling universal Windows applications to run across all device targets.
As part of our strategic objectives, we are committed to designing and marketing first-party devices to help drive innovation,
create new categories, and stimulate demand in the Windows ecosystem. We are developing new input and output methods
within Windows 10, including speech, pen, gesture, and mixed reality capabilities to power more personal computing
experiences. The experiences and tools we build will unlock the creator in everyone and enable seamless teamwork not
just in the workplace, but also at school and at home across all the devices people use.
Our future opportunity
Customers are looking to Microsoft and our thriving partner ecosystem to accelerate their own digital transformations and
to unlock new opportunity in this era of intelligent cloud and intelligent edge. We continue to develop complete, intelligent
solutions for our customers, including offerings like the recently introduced Microsoft 365 which brings together Office 365,
Windows 10, and Enterprise Mobility and Security, that empower users to be creative and work together while safeguarding
businesses and simplifying IT management. Our goal is to lead the industry in several distinct areas of technology over the
long-term, which we expect will translate to sustained growth. We are investing significant resources in:
• Transforming the workplace to deliver new modular business applications to improve how people communicate,
collaborate, learn, work, play, and interact with one another.
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• Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses
and individuals, including converting data into AI.
• Using Windows to develop new categories of devices – both our own and third-party – as a person’s experience
with technology becomes more natural, personal, and predictive with multi-sensory breakthroughs in voice, ink,
gaze interactions, and augmented reality holograms.
Inventing new gaming experiences that bring people together around their shared love for games, using an
approach that enables people to play the games they want, with the people they want, on the devices they want.
• Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using
•
natural methods of communication.
Our future growth depends on our ability to transcend current product category definitions, business models, and sales
motions. We have the opportunity to redefine what customers and partners can expect and are working to deliver new
solutions that reflect the best of Microsoft.
OPERATING SEGMENTS
We operate our business and report our financial performance using three segments: Productivity and Business Processes,
Intelligent Cloud, and More Personal Computing. Our segments provide management with a comprehensive financial view
of our key businesses. The segments enable the alignment of strategies and objectives across the development, sales,
marketing, and services organizations, and they provide a framework for timely and rational allocation of resources within
businesses.
Additional information on our operating segments and geographic and product information is contained in Note 21 –
Segment Information and Geographic Data of the Notes to Financial Statements.
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, including Office 365 subscriptions and Office licensed on-premises, comprising Office,
Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access Licenses (“CALs”).
• Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer
Services, including Skype, Outlook.com, and OneDrive.
LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.
•
• Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics
365, a set of cloud-based applications across ERP and CRM.
Office Commercial
Office Commercial is designed to increase personal, team, and organizational productivity through a range of products and
services. Growth depends on our ability to reach new users, add value to our core product set, and continue to expand our
product and service offerings into new markets such as security, analytics, collaboration, unified communications, and
business intelligence. Office Commercial revenue is mainly affected by a combination of the demand from commercial
customers for volume licensing, including Software Assurance, and the number of information workers in an enterprise, as
well as the continued shift to Office 365. CALs provide certain Office
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Commercial products and services with access rights to our server products and CAL revenue is reported with the
associated Office products and services.
Office Consumer
Office Consumer is designed to increase personal productivity through a range of products and services. Growth depends
on our ability to reach new users, add value to our core product set, and continue to expand our product and service offerings
into new markets. Office Consumer revenue is mainly affected by the percentage of customers that buy Office with their
new devices and the continued shift to Office 365. Office Consumer Services revenue is mainly affected by the demand for
communication and storage through Skype, Outlook.com, and OneDrive, which is largely driven by subscriptions,
advertising, and the sale of minutes.
LinkedIn
LinkedIn connects the world’s professionals to make them more productive and successful, and is the world’s largest
professional network on the Internet. LinkedIn offers services that can be used by customers to transform the way they hire,
market, sell, and learn. In addition to LinkedIn’s free services, LinkedIn offers three categories of monetized solutions: Talent
Solutions, Marketing Solutions, and Premium Subscriptions, which includes Sales Solutions. Talent Solutions is comprised
of two elements: Hiring, and Learning and Development. Hiring provides services to recruiters that enable them to attract,
recruit, and hire talent. Learning and Development provides subscriptions to enterprises and individuals to access online
learning content. Marketing Solutions enables companies to advertise to LinkedIn’s member base. Premium Subscriptions
enables professionals to manage their professional identity, grow their network, and connect with talent through additional
services like premium search. Premium Subscriptions also includes Sales Solutions, which helps sales professionals find,
qualify, and create sales opportunities and accelerate social selling capabilities. Growth will depend on our ability to increase
the number of LinkedIn members and our ability to continue offering services that provide value for our members and
increase their engagement. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations
for subscriptions to Talent Solutions and Premium Subscriptions offerings, as well as member engagement and the quality
of the sponsored content delivered to those members to drive Marketing Solutions.
Dynamics
Dynamics provides on-premises and cloud-based business solutions for financial management, enterprise resource
planning (“ERP”), customer relationship management (“CRM”), supply chain management, and analytics applications for
small and medium businesses, large organizations, and divisions of global enterprises. Dynamics revenue is largely driven
by the number of information workers licensed and the continued shift to Dynamics 365, a unified set of cloud-based
intelligent business applications for enterprises.
Competition
Competitors to Office include software and global application vendors such as Adobe Systems, Apple, Cisco Systems,
Facebook, Google, IBM, Oracle, SAP, and numerous web-based and mobile application competitors as well as local
application developers in Asia and Europe. Cisco Systems is using its position in enterprise communications equipment to
grow its unified communications business. Google provides a hosted messaging and productivity suite. Apple distributes
versions of its pre-installed application software, such as email and calendar products, through its PCs, tablets, and phones.
Skype for Business and Skype also compete with a variety of instant messaging, voice, and video communication providers,
ranging from start-ups to established enterprises. Web-based offerings competing with individual applications have also
positioned themselves as alternatives to our products. We believe our products compete effectively based on our strategy
of providing powerful, flexible, secure, and easy-to-use solutions that work well with technologies our customers already
have and are available on a device or via the cloud.
LinkedIn faces competition from online recruiting companies, talent management companies, and larger companies that
are focusing on talent management and human resource services; job boards; traditional recruiting firms; and
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companies that provide learning and development products and services. Marketing Solutions competes with online and
offline outlets that generate revenue from advertisers and marketers.
Dynamics competes with vendors such as Oracle and SAP in the market that provides solutions for large organizations and
divisions of global enterprises. In the market that provides solutions for small and mid-sized businesses, our Dynamics
products compete with vendors such as Infor, The Sage Group, and NetSuite. Salesforce.com’s cloud CRM offerings
compete with our Dynamics CRM on-premises and Dynamics 365 offerings.
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power
modern business. This segment primarily comprises:
• Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System
Center, and related CALs, and Azure.
• Enterprise Services, including Premier Support Services and Microsoft Consulting Services.
Server Products and Cloud Services
Our server products are designed to make IT professionals, developers, and their systems more productive and efficient.
Server software is integrated server infrastructure and middleware designed to support software applications built on the
Windows Server operating system. This includes the server platform, database, business intelligence, storage,
management and operations, virtualization, service-oriented architecture platform, security, and identity software. We also
license standalone and software development lifecycle tools for software architects, developers, testers, and project
managers. Server products and cloud services revenue is mainly affected by purchases through volume licensing programs,
licenses sold to OEMs, and retail packaged products. CALs provide access rights to certain server products, including SQL
Server and Windows Server, and revenue is reported along with the associated server product.
Azure is a scalable cloud platform with computing, networking, storage, database, and management, along with advanced
services such as analytics, and comprehensive solutions such as Enterprise Mobility Suite. Azure includes a flexible platform
that helps developers build, deploy, and manage enterprise, mobile, web, and IoT applications, for any platform or device
without having to worry about the underlying infrastructure. Azure enables customers to devote more resources to
development and use of applications that benefit their organizations, rather than managing on-premises hardware and
software.
Enterprise Services
Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing,
deploying, and managing Microsoft server and desktop solutions and provide training and certification to developers and IT
professionals on various Microsoft products.
Competition
Our server products face competition from a wide variety of server operating systems and applications offered by companies
with a range of market approaches. Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Oracle
offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers
offer server hardware for the Linux operating system and many contribute to Linux operating system development. The
competitive position of Linux has also benefited from the large number of compatible applications now produced by many
commercial and non-commercial software developers. A number of companies, such as Red Hat, supply versions of Linux.
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We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial software
vendors that offer solutions and middleware technology platforms, software applications for connectivity (both Internet and
intranet), security, hosting, database, and e-business servers. IBM and Oracle lead a group of companies focused on the
Java Platform Enterprise Edition that competes with our enterprise-wide computing solutions. Commercial competitors for
our server applications for PC-based distributed client-server environments include CA Technologies, IBM, and Oracle. Our
web application platform software competes with open source software such as Apache, Linux, MySQL, and PHP. In
middleware, we compete against Java vendors.
Our database, business intelligence, and data warehousing solutions offerings compete with products from IBM, Oracle,
SAP, and other companies. Our system management solutions compete with server management and server virtualization
platform providers, such as BMC, CA Technologies, Hewlett-Packard, IBM, and VMware. Our products for software
developers compete against offerings from Adobe, IBM, Oracle, and other companies, and also against open-source
projects, including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP, and Ruby on Rails.
We believe our server products provide customers with advantages in performance, total costs of ownership, and
productivity by delivering superior applications, development tools, compatibility with a broad base of hardware and software
applications, security, and manageability.
Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, Salesforce.com, VMware, and
open source offerings. Azure’s competitive advantage includes enabling a hybrid cloud, allowing deployment of existing
datacenters with our public cloud into a single, cohesive infrastructure, and the ability to run at a scale that meets the needs
of businesses of all sizes and complexities.
Our Enterprise Services business competes with a wide range of companies that provide strategy and business planning,
application development, and infrastructure services, including multinational consulting firms and small niche businesses
focused on specific technologies.
More Personal Computing
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end
users, developers, and IT professionals across all devices. This segment primarily comprises:
• Windows, including Windows OEM licensing (“Windows OEM”) 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; Windows IoT; and MSN
display advertising.
• Devices, including Microsoft Surface, PC accessories, and other intelligent devices.
• Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions,
subscriptions, and advertising (“Xbox Live”), video games, and third-party video game royalties.
• Search advertising.
Windows
The Windows operating system is designed to deliver a more personal computing experience for users by enabling
consistency of experience, applications, and information across their devices. Windows OEM revenue is impacted
significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices
they sell. In addition to computing device market volume, Windows OEM revenue is impacted by:
• The mix of computing devices based on form factor and screen size.
• Differences in device market demand between developed markets and emerging markets.
• Attachment of Windows to devices shipped.
• Customer mix between consumer, small and medium businesses, and large enterprises.
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• Changes in inventory levels in the OEM channel.
• Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from
local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.
• Piracy.
Windows Commercial revenue, which includes volume licensing of the Windows operating system, is affected mainly by the
demand from commercial customers for volume licensing and Software Assurance, often reflecting the number of
information workers in a licensed enterprise, and is therefore relatively independent of the number of PCs sold in a given
year. Revenue from Windows cloud services, such as Windows Defender Advanced Threat Protection, and other Windows
commercial offerings, is mainly impacted by attachment of Windows to devices shipped, pricing changes and promotions,
mix of computing devices, and the customer mix among large enterprises, small and medium businesses, and educational
institutions.
Patent licensing includes our programs to license patents we own for use across a broad array of technology areas, including
mobile devices and cloud offerings.
Windows IoT extends the power of Windows and the cloud to intelligent systems by delivering specialized operating
systems, tools, and services for use in embedded devices.
Display advertising primarily includes MSN ads. In June 2015, we entered into agreements with AOL and AppNexus to
outsource our display sales responsibility.
Devices
We design, manufacture, and sell devices, including Surface, PC accessories, and other intelligent devices, such as Surface
Hub and HoloLens. Our devices are designed to enable people and organizations to connect to the people and content that
matter most using Windows and integrated Microsoft products and services. Surface is designed to help organizations,
students, and consumers be more productive. We released the Surface Studio in December 2016 and our latest Surface
devices, the Surface Laptop and Surface Pro, in June 2017.
In July 2015, we announced a plan to restructure our phone business to better focus and align resources. In May 2016, we
announced plans to further streamline our smartphone hardware business. In November 2016, we completed the sale of
our feature phone business.
Gaming
Our gaming platform is designed to provide a unique variety of entertainment using our devices, peripherals, applications,
online services, and content. We released Xbox One and Xbox One S in November 2013 and August 2016, respectively,
and announced Xbox One X in June 2017. With the launch of the Windows 10 Xbox app in July 2015, and the launch of the
Mixer service in May 2017, we continue to open new opportunities for customers to engage both on- and off-console. Xbox
Live enables people to connect and share online gaming experiences and is accessible on Xbox consoles, Windows-
enabled devices, and other devices. Xbox Live is designed to benefit users by providing access to a network of certified
applications and services and to benefit our developer and partner ecosystems by providing access to a large customer
base. Xbox Live revenue is mainly affected by subscriptions and sales of Xbox Live enabled content, as well as advertising.
We also design and sell gaming content to showcase our unique platform capabilities for Xbox consoles, Windows-enabled
devices, and other devices. Growth of our gaming business is determined by the overall active user base through Xbox Live
enabled content, availability of games, providing exclusive game content that gamers seek, the computational power and
reliability of the devices used to access our content and services, and the ability to create new experiences via online
services, downloadable content, and peripherals.
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Search Advertising
Search advertising, including Bing and Bing Ads, is designed to deliver relevant online advertising to a global audience. We
have several partnerships with other companies, including Oath (formerly Yahoo! and AOL) which is owned by Verizon,
through which we provide and monetize search queries. Growth depends on our ability to attract new users, understand
intent, and match intent with relevant content and advertiser offerings.
Competition
Windows faces competition from various software products and from alternative platforms and devices, mainly from Apple
and Google. We believe Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-
use interface, and compatibility with a broad range of hardware and software applications, including those that enable
productivity.
Devices face competition from various computer, tablet, hardware, and phone manufacturers who offer a unique
combination of high-quality industrial design and innovative technologies across various price points. These manufacturers,
many of which are also current or potential partners and customers, include Apple and our Windows OEMs.
Our gaming platform competes with console platforms from Sony and Nintendo, both of which have a large, established
base of customers. The lifecycle for gaming and entertainment consoles averages five to ten years. Nintendo released its
latest generation console in March 2017 and Sony released its latest generation console in November 2013. We also
compete with other providers of entertainment services through online marketplaces. We believe our gaming platform is
effectively positioned against competitive products and services based on significant innovation in hardware architecture,
user interface, developer tools, online gaming and entertainment services, and continued strong exclusive content from our
own game franchises as well as other digital content offerings. Our video games competitors include Electronic Arts and
Activision Blizzard. Xbox Live faces competition from various online marketplaces, including those operated by Amazon,
Apple, and Google.
Our search advertising business competes with Google and a wide array of websites, social platforms like Facebook, and
portals that provide content and online offerings to end users.
OPERATIONS
We have operations centers that support operations in their regions, including customer contract and order processing,
credit and collections, information processing, and vendor management and logistics. The regional center in Ireland
supports the European, Middle Eastern, and African region; the center in Singapore supports the Japan, India, Greater
China, and Asia-Pacific region; and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico, Redmond,
Washington, and Reno, Nevada support Latin America and North America. In addition to the operations centers, we also
operate datacenters throughout the Americas, Australia, Europe, and Asia.
To serve the needs of customers around the world and to improve the quality and usability of products in international
markets, we localize many of our products to reflect local languages and conventions. Localizing a product may require
modifying the user interface, altering dialog boxes, and translating text.
Our devices are primarily manufactured by third-party contract manufacturers. We generally have the ability to use other
manufacturers if a current vendor becomes unavailable or unable to meet our requirements.
We sold our feature phone business in November 2016, which included the sale of our phone manufacturing facility in
Vietnam.
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RESEARCH AND DEVELOPMENT
During fiscal years 2017, 2016, and 2015, research and development expense was $13.0 billion, $12.0 billion, and
$12.0 billion, respectively. These amounts represented 14%, 14%, and 13% of revenue in fiscal years 2017, 2016, and
2015, respectively. We plan to continue to make significant investments in a broad range of research and development
efforts.
Product and Service Development, and Intellectual Property
We develop most of our products and services internally through the following engineering groups.
• Office Product Group, focuses on our business across productivity, communications, education, and other
information applications and services.
• Artificial Intelligence and Research, focuses on our AI development and other forward-looking research and
development efforts spanning infrastructure, services, applications, and search.
• Cloud and Enterprise, focuses on our cloud infrastructure, server, database, CRM, ERP, management and
development tools, and other business process applications and services for enterprises.
• Windows and Devices Group, focuses on our Windows platform, applications, games, store, and devices that
power the Windows ecosystem.
LinkedIn, focuses on our services that transform the way customers hire, market, sell, and learn.
•
Internal development allows us to maintain competitive advantages that come from product differentiation and closer
technical control over our products and services. It also gives us the freedom to decide which modifications and
enhancements are most important and when they should be implemented. We strive to obtain information as early as
possible about changing usage patterns and hardware advances that may affect software design. Before releasing new
software platforms, we provide application vendors with a range of resources and guidelines for development, training, and
testing. Generally, we also create product documentation internally.
We protect our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to
ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to our software and hardware
products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and
currently have a portfolio of over 66,000 U.S. and international patents issued and over 35,000 pending. While we employ
much of our internally developed intellectual property exclusively in our products and services, we also engage in outbound
and inbound licensing of specific patented technologies that are incorporated into licensees’ or Microsoft’s products. From
time to time, we enter into broader cross-license agreements with other technology companies covering entire groups of
patents. We also purchase or license technology that we incorporate into our products and services. At times, we make
select intellectual property broadly available at no or low cost to achieve a strategic objective, such as promoting industry
standards, advancing interoperability, or attracting and enabling our external development community.
While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, services, and
business methods, we believe, based upon past experience and industry practice, such licenses generally can be obtained
on commercially reasonable terms. We believe our continuing research and product development are not materially
dependent on any single license or other agreement with a third party relating to the development of our products.
Investing in the Future
Our success is based on our ability to create new and compelling products, services, and experiences for our users, to
initiate and embrace disruptive technology trends, to enter new geographic and product markets, and to drive broad adoption
of our products and services. We invest in a range of emerging technology trends and breakthroughs that we believe offer
significant opportunities to deliver value to our customers and growth for the company. Based on our assessment of key
technology trends, we maintain our long-term commitment to research and development across a wide spectrum of
technologies, tools, and platforms spanning digital work and life experiences, cloud computing, AI, and hardware operating
systems.
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While our main research and development facilities are located in Redmond, Washington, we also operate research and
development facilities in other parts of the U.S. and around the world, including Canada, China, India, Ireland, Israel, and
the United Kingdom. This global approach helps us remain competitive in local markets and enables us to continue to attract
top talent from across the world. We generally fund research at the corporate level to ensure that we are looking beyond
immediate product considerations to opportunities further in the future. We also fund research and development activities
at the operating segment level. Much of our segment level research and development is coordinated with other segments
and leveraged across the company.
In addition to our main research and development operations, we also operate Microsoft Research. Microsoft Research is
one of the world’s largest computer science research organizations, and works in close collaboration with top universities
around the world to advance the state-of-the-art in computer science, providing us a unique perspective on future technology
trends and contributing to our innovation.
DISTRIBUTION, SALES, AND MARKETING
We market and distribute our products and services through the following channels: OEMs, direct, and distributors and
resellers. Our sales force performs a variety of functions, including working directly with enterprises and public-sector
organizations worldwide to identify and meet their technology requirements; managing OEM relationships; and supporting
system integrators, independent software vendors, and other partners who engage directly with our customers to perform
sales, consulting, and fulfillment functions for our products and services.
OEMs
We distribute our software through OEMs that pre-install our software on new devices and servers they sell. The largest
component of the OEM business is the Windows operating system pre-installed on devices. OEMs also sell devices pre-
installed with other Microsoft products and services, including applications such as Office and the capability to subscribe to
Office 365.
There are two broad categories of OEMs. The largest category of OEMs are direct OEMs as our relationship with them is
managed through a direct agreement between Microsoft and the OEM. We have distribution agreements covering one or
more of our products with virtually all the multinational OEMs, including Acer, ASUS, Dell, Fujitsu, Hewlett-Packard, Lenovo,
Samsung, Toshiba, and with many regional and local OEMs. The second broad category of OEMs are system builders
consisting of lower-volume PC manufacturers, which source Microsoft software for pre-installation and local redistribution
primarily through the Microsoft distributor channel rather than through a direct agreement or relationship with Microsoft.
Direct
Many organizations that license our products and services transact directly with us through Enterprise Agreements and
Enterprise Services contracts, with sales support from system integrators, independent software vendors, web agencies,
and partners that advise organizations on licensing our products and services (“Enterprise Agreement Software Advisors”,
or “ESA”). Microsoft offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to
those offered through the reseller channel. A large network of partner advisors support many of these sales.
We also provide commercial and consumer products and services directly to customers, such as cloud services, search,
and gaming, through our online portals, marketplaces, and retail stores.
Distributors and Resellers
Organizations also license our products and services indirectly, primarily through licensing solution partners (“LSP”),
distributors, value-added resellers (“VAR”), OEMs, and retailers. Although each type of reselling partner may reach
organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs,
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and VARs typically reach small and medium organizations. ESAs are also typically authorized as LSPs and operate as
resellers for our other volume licensing programs. Microsoft Cloud Solution Provider is our main partner program for reselling
cloud services.
Our Dynamics software offerings are also licensed to enterprises through a global network of channel partners providing
vertical solutions and specialized services. We distribute our retail packaged products primarily through independent non-
exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain these products
primarily through retail outlets. We distribute our devices through third-party retailers. We have a network of field sales
representatives and field support personnel that solicit orders from distributors and resellers, and provide product training
and sales support.
LICENSING OPTIONS
We offer options for organizations that want to purchase our cloud services, on-premises software, and Software Assurance.
We license software to organizations under volume licensing agreements to allow the customer to acquire multiple licenses
of products and services instead of having to acquire separate licenses through retail channels. We use different programs
designed to provide flexibility for organizations of various sizes. While these programs may differ in various parts of the
world, generally they include those discussed below.
Software Assurance conveys rights to new software and upgrades for perpetual licenses released over the contract period.
It also provides support, tools, and training to help customers deploy and use software efficiently. Software Assurance is
included with certain volume licensing agreements and is an optional purchase with others.
Volume Licensing Programs
Enterprise Agreement
Enterprise Agreements offer large organizations a manageable volume licensing program that gives them the flexibility to
buy cloud services and software licenses under one agreement. Enterprise Agreements are designed for medium or large
organizations that want to license cloud services and on-premises software organization-wide over a three-year period.
Organizations can elect to purchase perpetual licenses or subscribe to licenses. Software Assurance is included.
Microsoft Product and Services Agreement
MPSAs are designed for medium and large organizations that want to license cloud services and on-premises software as
needed, with no organization-wide commitment, under a single, non-expiring agreement. Organizations purchase perpetual
licenses or subscribe to licenses. Software Assurance is optional for customers that purchase perpetual licenses.
Open
Open Licensing agreements are a simple, cost-effective way to acquire the latest Microsoft technology. Open Licensing
agreements are designed for small and medium organizations that want to license cloud services and on-premises software
over a one- to three-year period. Under the Open License program, organizations purchase perpetual licenses and Software
Assurance is optional. Under Open Value programs, organizations can elect to purchase perpetual licenses or subscribe to
licenses and Software Assurance is included.
Select Plus
Select Plus agreements are designed for government and academic organizations to acquire on-premises licenses at any
affiliate or department level, while realizing advantages as one organization. Organizations purchase perpetual licenses
and Software Assurance is optional.
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In July 2014, we announced the retirement over a two-year period of Select Plus agreements for commercial organizations.
Beginning July 2015, no new Select Plus agreements were signed with commercial organizations. Starting in July 2016, we
no longer accept orders from commercial organizations for Select Plus after their next agreement anniversary.
Microsoft Online Subscription Agreement
Microsoft Online Subscription Agreement is designed for small and medium organizations that want to subscribe to, activate,
provision, and maintain cloud services seamlessly and directly via the web, through the Microsoft Online Subscription
Program. The program allows customers to acquire monthly or annual subscriptions for cloud-based services.
Partner Programs
The Microsoft Cloud Solution Provider program offers customers an easy way to license the cloud services they need in
combination with the value-added services offered by their systems integrator, hosting partner, or cloud reseller partner.
Partners in this program can easily package their own products and services to directly provision, manage, and support
their customer subscriptions.
The Microsoft Services Provider License Agreement allows service providers and independent software vendors who want
to license eligible Microsoft software products to provide software services and hosted applications to their end customers.
Partners license software over a three-year period and are billed monthly based on consumption.
The Independent Software Vendor Royalty program enables partners to integrate Microsoft products into other applications
and then license the unified business solution to their end users.
Our customers include individual consumers, small and medium organizations, large global enterprises, public-sector
institutions, Internet service providers, application developers, and OEMs. No sales to an individual customer accounted for
more than 10% of revenue in fiscal years 2017, 2016, or 2015. Our practice is to ship our products promptly upon receipt
of purchase orders from customers; consequently, backlog is not significant.
CUSTOMERS
EMPLOYEES
As of June 30, 2017, we employed approximately 124,000 people on a full-time basis, 73,000 in the U.S. and 51,000
internationally. Of the total employed people, 39,000 were in operations, including manufacturing, distribution, product
support, and consulting services; 40,000 were in product research and development; 34,000 were in sales and marketing;
and 11,000 were in general and administration. The acquisition of LinkedIn Corporation resulted in the addition of
approximately 11,000 people in fiscal year 2017. Certain of our employees are subject to collective bargaining agreements.
AVAILABLE INFORMATION
Our Internet address is www.microsoft.com. At our Investor Relations website, www.microsoft.com/investor, we make
available free of charge a variety of information for investors. Our goal is to maintain the Investor Relations website as a
portal through which investors can easily find or navigate to pertinent information about us, including:
• Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, as soon as reasonably practicable after we electronically file that material with or
furnish it to the Securities and Exchange Commission (“SEC”).
Information on our business strategies, financial results, and metrics for investors.
•
• Announcements of investor conferences, speeches, and events at which our executives talk about our product,
service, and competitive strategies. Archives of these events are also available.
23
• Press releases on quarterly earnings, product and service announcements, legal developments, and international
news.
• Corporate governance information including our articles of incorporation, bylaws, governance guidelines,
committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other
governance-related policies.
• Other news and announcements that we may post from time to time that investors might find useful or interesting.
• Opportunities to sign up for email alerts and RSS feeds to have information pushed in real time.
The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. In addition to
these channels, we use social media to communicate to the public. It is possible that the information we post on social
media could be deemed to be material to investors. We encourage investors, the media, and others interested in Microsoft
to review the information we post on the social media channels listed on our Investor Relations website.
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 financial statements and the accompanying Notes
to Financial Statements.
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. Our strategy is
to build best-in-class platforms and productivity services for an intelligent cloud and an intelligent edge infused with artificial
intelligence (“AI”). We develop, license, and support a wide range of software products, services, and devices that deliver
new opportunities, greater convenience, and enhanced value to people’s lives. Our platforms and tools help drive small
business productivity, large business competitiveness, and public-sector efficiency. They also support new startups,
improve educational and health outcomes, and empower human ingenuity.
We generate revenue by licensing and supporting an array of software products, by offering a wide range of cloud-based
and other services to consumers and businesses, by designing, manufacturing, and selling devices that integrate with our
cloud-based services, and by delivering relevant online advertising to a global audience. Our most significant expenses are
related to compensating employees; designing, manufacturing, marketing, and selling our products and services; datacenter
costs in support of our cloud-based services; and income taxes.
Highlights* from fiscal year 2017 included:
• Commercial cloud annualized revenue run rate** exceeded $18.9 billion.
• Office Commercial revenue grew 6%, driven by Office 365 commercial revenue growth of 46%.
• Office Consumer revenue grew 14%, and Office 365 consumer subscribers increased to 27.0 million.
• Microsoft Dynamics revenue grew 9%, driven by Dynamics 365 revenue growth of 78%.
•
• Server products and cloud services revenue grew 13%, driven by Microsoft Azure revenue growth of 99%.
• Enterprise Services revenue decreased 2%, driven by a decline in revenue from custom support agreements,
LinkedIn contributed revenue of $2.3 billion.
offset in part by higher revenue from Premier Support Services and Microsoft Consulting Services.
• Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 3%.
• Windows Commercial revenue grew 5%, driven by multi-year agreement revenue.
• Microsoft Surface revenue decreased 2%, driven by a reduction in volumes sold, offset in part by a higher mix of
premium devices.
• Search advertising revenue, excluding traffic acquisition costs, grew 9%.
• Gaming revenue decreased slightly, driven by lower Xbox hardware revenue, offset in part by growth in Xbox
software and services.
Highlights are presented based on segment results.
*
** Commercial cloud annualized revenue run rate is calculated by multiplying revenue for the last month of the quarter
by twelve for Office 365 commercial, Azure, Dynamics 365, and other cloud properties.
On December 8, 2016, we completed our acquisition of LinkedIn Corporation for a total purchase price of $27.0 billion.
LinkedIn has been included in our consolidated results of operations since the date of acquisition. See Note 9 – Business
Combinations in the Notes to Financial Statements for further discussion.
25
In November 2016, we completed the sale of our feature phone business for $350 million.
In July 2015, we announced a plan to restructure our phone business to better focus and align resources. In May 2016, we
announced plans to further streamline our smartphone hardware business. Our change in phone strategy resulted in a
reduction in units sold and associated expenses in fiscal year 2016 and 2017.
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, and influence how users access services in the cloud, and
in some cases, the user’s choice of which suite of cloud-based services to use. We must continue to evolve and adapt over
an extended time in pace with this changing environment. The investments we are making in infrastructure and devices will
continue to increase our operating costs and may decrease our operating margins.
Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and
industry talent worldwide. Microsoft competes for talented individuals globally by offering an exceptional working
environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and
businesses, and competitive compensation and benefits. Aggregate demand for our software, services, and devices is
correlated to global macroeconomic and geopolitical factors, which remain dynamic.
Our 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. The strengthening of the U.S. dollar relative to certain foreign currencies
throughout fiscal year 2015, 2016, and 2017, negatively impacted reported revenue and reduced reported expenses from
our international operations.
See a discussion of these factors and other risks under Risk Factors in our fiscal year 2017 Form 10-K.
Seasonality
Our revenue historically has fluctuated quarterly and has generally been highest in the second quarter of our fiscal year due
to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers.
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. All differences between our internal management reporting basis and accounting
principles generally accepted in the United States (“U.S. GAAP”), along with certain corporate-level and other activity, are
included in Corporate and Other. We have recast certain previously reported amounts to conform to the way we internally
manage and monitor segment performance.
Additional information on our reportable segments is contained in Note 21 – Segment Information and Geographic Data of
the Notes to Financial Statements.
26
SUMMARY RESULTS OF OPERATIONS
(In millions, except percentages and per share amounts)
2017
2016
2015
Revenue
Gross margin
Operating income
Diluted earnings per share
$ 89,950
$ 85,320
$ 93,580
55,689
52,540
60,542
22,326
20,182
18,161
2.71
2.10
1.48
Percentage
Change 2017
Versus 2016
Percentage
Change 2016
Versus 2015
5%
%
6%
%
11%
%
29%
%
(9)
(13)
11
42
Fiscal year 2017 compared with fiscal year 2016
Revenue increased $4.6 billion or 5%, driven by growth in Productivity and Business Processes and Intelligent Cloud, offset
in part by lower revenue from More Personal Computing. Productivity and Business Processes revenue increased, driven
by the acquisition of LinkedIn and higher revenue from Microsoft Office. Intelligent Cloud revenue increased, primarily due
to higher revenue from server products and cloud services. More Personal Computing revenue decreased, mainly due to
lower revenue from Devices, offset in part by higher revenue from Windows and Search advertising. Revenue included an
unfavorable foreign currency impact of 2%.
Gross margin increased $3.1 billion or 6%, due to growth across each of our segments, including the acquisition of LinkedIn,
driven by higher revenue. Gross margin included an unfavorable foreign currency impact of 2%. Gross margin percentage
increased slightly due to a margin percent increase in More Personal Computing and segment sales mix, offset in part by
margin percent declines in Productivity and Business Processes and Intelligent Cloud. Gross margin percentage includes
a 5-point improvement in commercial cloud gross margin primarily across Azure and Office 365.
Operating income increased $2.1 billion or 11%, primarily due to higher gross margin and lower impairment, integration,
and restructuring expenses, offset in part by an increase in research and development and sales and marketing expenses.
Operating income included an operating loss of $948 million related to the acquisition of LinkedIn, including $866 million of
amortization of intangible assets. Operating income also included an unfavorable foreign currency impact of 4%. Key
changes in expenses were:
• Cost of revenue increased $1.5 billion or 5%, mainly due to growth in our commercial cloud, the acquisition of
LinkedIn, and higher Search advertising traffic acquisition costs, offset in part by a reduction in phone sales and
Gaming cost of revenue.
• Research and development expenses increased $1.0 billion or 9%, primarily due to LinkedIn expenses and
increased investments in cloud engineering, offset in part by a reduction in phone expenses.
• Sales and marketing expenses increased $842 million or 6%, primarily due to LinkedIn expenses and increased
investments in sales capacity for our commercial cloud, offset in part by a reduction in phone and marketing
expenses.
Impairment, integration, and restructuring expenses decreased $804 million, driven by prior year asset impairment
charges and restructuring charges related to our phone business, offset in part by current year employee
severance expenses primarily related to our sales and marketing restructuring plan.
•
Diluted earnings per share (“EPS”) was $2.71 for fiscal year 2017. Current year diluted EPS was negatively impacted by
the net revenue deferral from Windows 10 and restructuring expenses, which resulted in a decrease in diluted EPS of $0.60.
Diluted EPS was $2.10 for fiscal year 2016. Prior year diluted EPS was negatively impacted by the net revenue deferral
from Windows 10 and impairment and restructuring expenses, which resulted in a decrease in diluted EPS of $0.69.
Fiscal year 2016 compared with fiscal year 2015
Revenue decreased $8.3 billion or 9%, primarily due to the impact of the net revenue deferral from Windows 10 of
$6.6 billion and an unfavorable foreign currency impact of approximately $3.8 billion or 4%. Windows 10 revenue is
27
primarily recognized at the time of billing in the More Personal Computing segment, and the deferral and subsequent
recognition of revenue is reflected in Corporate and Other. More Personal Computing revenue decreased, mainly due to
lower revenue from Devices and Windows, offset in part by higher revenue from Search advertising and Gaming. Intelligent
Cloud revenue increased, primarily due to higher revenue from server products and cloud services and Enterprise Services.
Productivity and Business Processes revenue increased slightly, driven by an increase in Office and Dynamics revenue.
Operating income increased $2.0 billion or 11%, primarily due to a decrease in impairment, integration, and restructuring
expenses and sales and marketing expenses, offset in part by lower gross margin. Gross margin decreased $8.0 billion or
13%, driven by the decline in revenue as discussed above, and included an unfavorable foreign currency impact of
approximately $3.3 billion or 5%. Productivity and Business Processes and More Personal Computing gross margin
decreased, offset in part by higher gross margin from Intelligent Cloud.
Key changes in expenses were:
• Cost of revenue decreased $258 million or 1%, mainly due to a reduction in phone sales, driven by the change in
•
strategy for the phone business, offset in part by growth in commercial cloud and Search advertising.
Impairment, integration, and restructuring expenses decreased $8.9 billion, primarily driven by prior year goodwill
and asset impairment charges related to our phone business and restructuring charges associated with our phone
business restructuring plans.
• Sales and marketing expenses decreased $1.0 billion or 6%, driven by a reduction in phone expenses and a
favorable foreign currency impact of approximately 2%.
Diluted EPS was $2.10 for fiscal year 2016. Diluted EPS was negatively impacted by the net revenue deferral from Windows
10 and impairment, integration, and restructuring expenses, which resulted in a decrease to diluted EPS of $0.69. Diluted
EPS was $1.48 for fiscal year 2015. Diluted EPS was negatively impacted by impairment, integration, and restructuring
expenses, which resulted in a decrease to diluted EPS of $1.15.
SEGMENT RESULTS OF OPERATIONS
2017
2016
2015
Percentage
Change 2017
Versus 2016
Percentage
Change 2016
Versus 2015
$ 30,444 $ 26,487 $ 26,430
%
27,440
25,042
23,715
%
38,773
40,434
43,435
%
(6,707)
(6,643)
0
%
$ 89,950 $ 85,320 $ 93,580
%
$ 11,913 $ 12,418 $ 13,274
%
9,138
9,315
9,803
%
8,288
6,202
5,095
%
(7,013)
(7,753)
(10,011)
*
$ 22,326 $ 20,182 $ 18,161
%
15
10
(4)
(1)
5
(4)
(2)
34
11
%
%
%
*
%
%
%
%
*
%
0
6
(7)
(9)
(6)
(5)
22
11
(In millions, except percentages)
Revenue
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Corporate and Other
Total
Operating income (loss)
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Corporate and Other
Total
*
Not meaningful
28
Reportable Segments
Fiscal year 2017 compared with fiscal year 2016
Productivity and Business Processes
Revenue increased $4.0 billion or 15%, driven by the acquisition of LinkedIn and higher revenue from Office.
LinkedIn revenue was $2.3 billion, primarily comprised of revenue from Talent Solutions.
•
• Office Commercial revenue increased $1.2 billion or 6%, driven by higher revenue from Office 365 commercial,
mainly due to growth in subscribers, offset in part by lower revenue from products licensed on-premises, reflecting
a continued shift to Office 365 commercial.
• Office Consumer revenue increased $425 million or 14%, driven by higher revenue from Office 365 consumer,
mainly due to growth in subscribers.
• Dynamics revenue increased 9%, primarily due to higher revenue from Dynamics 365.
Operating income decreased $505 million or 4%, primarily due to higher operating expenses, offset in part by higher gross
margin. Operating income included an unfavorable foreign currency impact of 3%.
• Operating expenses increased $2.4 billion or 26%, mainly due to LinkedIn and cloud engineering expenses.
Operating expenses included $2.3 billion related to our acquisition of LinkedIn, including $359 million of
amortization of acquired intangible assets. Sales and marketing expenses increased $1.2 billion or 24%, research
and development expenses increased $955 million or 35%, and general and administrative expenses increased
$212 million or 14%.
• Gross margin increased $1.8 billion or 9%, primarily due to our acquisition of LinkedIn. Gross margin percentage
decreased due to an increased mix of cloud offerings and amortization of acquired intangible assets related to
LinkedIn. Cost of revenue included $918 million related to our acquisition of LinkedIn, including $507 million of
amortization of acquired intangible assets.
Intelligent Cloud
Revenue increased $2.4 billion or 10%, primarily due to higher revenue from server products and cloud services.
• Server products and cloud services revenue grew $2.5 billion or 13%, driven by Azure revenue growth of 99%
and server products licensed on-premises revenue growth of 4%.
• Enterprise Services revenue decreased 2%, driven by a decline in revenue from custom support agreements,
offset in part by higher revenue from Premier Support Services and Microsoft Consulting Services.
Operating income decreased $177 million or 2%, primarily due to higher operating expenses, offset in part by higher gross
margin. Operating income included an unfavorable foreign currency impact of 3%.
• Operating expenses increased $973 million or 11%, driven by investments in sales capacity, cloud engineering,
and developer engagement. Sales and marketing expenses increased $547 million or 13%, research and
development expenses increased $468 million or 14%, and general and administrative expenses decreased
$42 million or 3%.
• Gross margin increased $796 million or 4%, driven by growth in server products and cloud services revenue and
cloud services scale and efficiencies, offset in part by a decline in Enterprise Services gross margin. Gross margin
included an unfavorable foreign currency impact of 2%. Gross margin percentage decreased due to an increased
mix of cloud offerings and lower Enterprise Services gross margin percent, offset by improvement in Azure gross
margin percent.
29
More Personal Computing
Revenue decreased $1.7 billion or 4%, mainly due to lower revenue from Devices, offset in part by higher revenue from
Windows and Search advertising.
• Windows revenue increased $442 million or 3%, mainly due to higher revenue from Windows OEM and Windows
Commercial. Windows OEM revenue increased 3%. Windows OEM Pro revenue grew 5%, outperforming the
commercial PC market, primarily due to a higher mix of premium licenses sold. Windows OEM non-Pro revenue
grew 1%, outperforming the consumer PC market, primarily due to a higher mix of premium devices sold. Windows
Commercial revenue grew 5%, driven by multi-year agreement revenue.
• Search advertising revenue increased $791 million or 15%. Search advertising revenue, excluding traffic
acquisition costs, increased 9%, primarily driven by growth in Bing, due to higher revenue per search and search
volume.
• Gaming revenue decreased slightly, primarily due to lower Xbox hardware revenue, offset in part by higher
revenue from Xbox software and services. Xbox hardware revenue decreased 21%, mainly due to lower prices of
consoles sold and a decline in volume of consoles sold. Xbox software and services revenue increased 11%,
driven by a higher volume of Xbox Live transactions and revenue per transaction.
• Surface revenue decreased $82 million or 2%, primarily due to a reduction in volumes sold, offset in part by a
higher mix of premium devices.
• Phone revenue decreased $2.8 billion.
Operating income increased $2.1 billion or 34%, due to lower operating expenses and higher gross margin. Operating
income included an unfavorable foreign currency impact of 4%.
• Operating expenses decreased $1.5 billion or 12%, driven by a reduction in phone expenses and Surface launch-
related expenses in the prior year. Sales and marketing expenses decreased $892 million or 16%, research and
development expenses decreased $374 million or 6%, and general and administrative expenses decreased
$252 million or 16%.
• Gross margin increased $568 million or 3%, driven by growth in Windows, Search advertising, and Gaming, offset
in part by a decline in Phone and Surface. Gross margin percentage increased due to favorable sales mix and
gross margin percent improvements across Gaming, Windows, and Search advertising, offset by a gross margin
percent decline in Devices. Gross margin included an unfavorable foreign currency impact of 2%.
Fiscal year 2016 compared with fiscal year 2015
Productivity and Business Processes
Productivity and Business Processes revenue increased slightly, primarily due to an increase in Office and Dynamics
revenue. Revenue included an unfavorable foreign currency impact of approximately 6%.
• Office Commercial revenue increased $135 million or 1%, driven by higher revenue from Office 365 commercial,
mainly due to growth in subscribers, offset by lower transactional license volume, reflecting a continued shift to
Office 365 commercial and a decline in the business PC market. Revenue included an unfavorable foreign
currency impact of approximately 6%.
• Office Consumer revenue decreased $69 million or 2%, driven by a decline in the consumer PC market, offset in
part by higher revenue from Office 365 consumer, mainly due to growth in subscribers. Revenue included an
unfavorable foreign currency impact of approximately 4%.
• Dynamics revenue increased 4%, mainly due to higher revenue from Dynamics CRM Online, driven by seat
growth. Revenue included an unfavorable foreign currency impact of approximately 6%.
Productivity and Business Processes operating income decreased $856 million or 6%, driven by lower gross margin. Gross
margin decreased $928 million or 4%, primarily due to higher cost of revenue. Gross margin included an unfavorable foreign
currency impact of approximately 6%. Cost of revenue increased $985 million or 25%, primarily
30
due to an increased mix of cloud offerings. Operating expenses decreased $72 million or 1%, driven by lower sales and
marketing expenses. Sales and marketing expenses decreased $82 million or 2%, mainly due to a reduction in headcount-
related expenses and lower fees paid to third-party enterprise software advisors.
Intelligent Cloud
Intelligent Cloud revenue increased $1.3 billion or 6%, primarily due to higher server products and cloud services revenue
and Enterprise Services revenue. Revenue included an unfavorable foreign currency impact of approximately 5%.
• Server products and cloud services revenue grew $686 million or 4%, driven by revenue growth from Azure of
113%, offset in part by a decline in transactional revenue from our on-premises server products. Revenue included
an unfavorable foreign currency impact of approximately 5%.
• Enterprise Services revenue grew $536 million or 11%, mainly due to growth in Premier Support Services.
Revenue included an unfavorable foreign currency impact of approximately 5%.
Intelligent Cloud operating income decreased $488 million or 5%, primarily due to higher operating expenses, offset in part
by higher gross margin. Operating expenses increased $989 million or 12%, mainly due to higher research and development
expenses and sales and marketing expenses. Research and development expenses increased $567 million or 21% and
sales and marketing expenses increased $347 million or 9%, driven by increased strategic investments and acquisitions to
drive cloud sales capacity and innovation. Gross margin increased $501 million or 3%, driven by revenue growth, offset in
part by higher cost of revenue. Gross margin included an unfavorable foreign currency impact of approximately 5%. Cost
of revenue increased $826 million or 14%, primarily driven by an increased mix of cloud services.
More Personal Computing
More Personal Computing revenue decreased $3.0 billion or 7%, mainly due to lower revenue from Devices and Windows,
offset in part by higher revenue from Search advertising and Gaming. Revenue included an unfavorable foreign currency
impact of approximately 2%.
• Devices revenue decreased $4.0 billion or 33%, mainly due to lower revenue from phones, driven by the change
in strategy for the phone business, offset in part by higher Surface revenue. Phone revenue decreased $4.2 billion
or 56%, as we sold 13.8 million Microsoft Lumia phones and 75.5 million other phones in fiscal year 2016,
compared with 36.8 million and 126.8 million sold, respectively, in fiscal year 2015. Surface revenue increased
$207 million or 5%, primarily driven by the release of Surface Pro 4 and Surface Book in the second quarter of
fiscal year 2016, as well as the release of Surface 3 in the fourth quarter of fiscal year 2015, offset in part by a
decline in revenue from Surface Pro 3. Devices revenue included an unfavorable foreign currency impact of
approximately 3%.
• Windows revenue decreased $958 million or 5%, mainly due to lower revenue from patent licensing, Windows
OEM, and Windows Phone licensing. Patent licensing revenue decreased 27%, due to a decline in license
revenue per unit and licensed units. Windows OEM revenue decreased 1%. Windows OEM Pro revenue declined
6%, driven by a decline in the business PC market. Windows OEM non-Pro revenue increased 7%, outperforming
the consumer PC market, driven by a higher mix of premium licenses sold. Windows Phone licensing revenue
decreased 64%, driven by the recognition of deferred revenue in fiscal year 2015 from Windows Phone 8.
Windows revenue included an unfavorable foreign currency impact of approximately 2%.
• Search advertising revenue increased $1.7 billion or 46%. Search advertising revenue, excluding traffic acquisition
costs, increased 17%, primarily driven by growth in Bing, due to higher revenue per search and search volume.
Search advertising revenue included an unfavorable foreign currency impact of approximately 2%.
• Gaming revenue increased $75 million or 1%, primarily due to higher revenue from Xbox Live and video games,
offset in part by lower Xbox hardware revenue. Xbox Live revenue increased 17%, driven by higher
31
revenue per transaction and volume of transactions. Video games revenue grew 28%, driven by the launch of
Halo 5 and sales of Minecraft. We acquired Mojang AB, the Swedish video game developer of the Minecraft
gaming franchise, in November 2014. Xbox hardware revenue decreased 16%, mainly due to lower prices of
Xbox One consoles sold and a decline in Xbox 360 console volume, offset in part by higher Xbox One console
volume. Gaming revenue included an unfavorable foreign currency impact of approximately 4%.
More Personal Computing operating income increased $1.1 billion or 22%, primarily due to lower operating expenses, offset
in part by lower gross margin. Operating expenses decreased $2.0 billion or 13%, mainly due to lower sales and marketing
expenses and research and development expenses. Sales and marketing expenses decreased $1.3 billion or 19% and
research and development expenses decreased $676 million or 10%, driven by a reduction in phone expenses. Gross
margin decreased $932 million or 5%, reflecting lower revenue, offset in part by a reduction in cost of revenue. Gross margin
included an unfavorable foreign currency impact of approximately 5%. Cost of revenue decreased $2.1 billion or 9%,
primarily driven by a reduction in phone sales, offset in part by higher search advertising cost of revenue.
Corporate and Other
Corporate and Other revenue is comprised of revenue deferrals related to Windows 10. Corporate and Other operating
income (loss) is comprised of revenue deferrals related to Windows 10 and corporate-level activity not specifically allocated
to a segment, including impairment, integration, and restructuring expenses.
Fiscal year 2017 compared with fiscal year 2016
Revenue decreased $64 million, due to an increase in the net revenue deferral from Windows 10. During fiscal year 2017
and 2016, we deferred net revenue from Windows 10 of $6.7 billion and $6.6 billion, respectively.
Corporate and Other operating loss decreased $740 million, primarily due to an $804 million reduction in impairment,
integration, and restructuring expenses, driven by prior year goodwill and asset impairment charges and restructuring
charges related to our phone business, offset in part by current year employee severance expenses primarily related to our
sales and marketing restructuring plan.
Fiscal year 2016 compared with fiscal year 2015
Corporate and Other revenue decreased $6.6 billion, due to the net revenue deferral from Windows 10.
Corporate and Other operating loss decreased $2.3 billion, primarily due to an $8.9 billion reduction in impairment,
integration, and restructuring expenses, driven by prior year goodwill and asset impairment charges related to our phone
business, offset in part by lower revenue.
OPERATING EXPENSES
Research and Development
(In millions, except percentages)
Research and development
As a percent of revenue
2017
2016
2015
$ 13,037
$ 11,988
$ 12,046
Percentage
Change 2017
Versus 2016
Percentage
Change 2016
Versus 2015
9%
%
0
1pp
14%
14%
13%
0ppt
t
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, localization costs incurred to translate software for international markets, and
the amortization of purchased software code and services content.
32
Fiscal year 2017 compared with fiscal year 2016
Research and development expenses increased $1.0 billion or 9%, primarily due to LinkedIn expenses and increased
investments in cloud engineering, offset in part by a reduction in phone expenses. Expenses included $745 million related
to our acquisition of LinkedIn.
Fiscal year 2016 compared with fiscal year 2015
Research and development expenses decreased $58 million, primarily due to a reduction in phone expenses, driven by the
change in strategy for the phone business, offset in part by increased strategic investments and acquisitions to drive cloud
innovation.
Sales and Marketing
(In millions, except percentages)
Sales and marketing
As a percent of revenue
2017
2016
2015
$ 15,539
$ 14,697
$ 15,713
Percentage
Change 2017
Versus 2016
Percentage
Change 2016
Versus 2015
6%
%
(6)
0pp
17%
17%
17%
0ppt
t
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.
Fiscal year 2017 compared with fiscal year 2016
Sales and marketing expenses increased $842 million or 6%, primarily due to LinkedIn expenses and increased investments
in sales capacity for our commercial cloud, offset in part by a reduction in phone expenses and prior year marketing
expenses primarily related to Surface, commercial, and Windows 10. Expenses included $1.3 billion related to our
acquisition of LinkedIn, including $359 million of amortization of acquired intangible assets.
Fiscal year 2016 compared with fiscal year 2015
Sales and marketing expenses decreased $1.0 billion or 6%, primarily due to a reduction in phone expenses, driven by the
change in strategy for the phone business. Expenses included a favorable foreign currency impact of approximately 2%.
General and Administrative
(In millions, except percentages)
General and administrative
As a percent of revenue
2017
2016
2015
Percentage
Change 2017
Versus 2016
Percentage
Change 2016
Versus 2015
$ 4,481
$ 4,563
$ 4,611
(2)%
%
(1)
0pp
5%
5%
5%
0ppt
t
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, severance
expense, 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.
Fiscal year 2017 compared with fiscal year 2016
General and administrative expenses decreased $82 million or 2%, primarily due to prior year investments in infrastructure
supporting our business transformation, a reduction in phone expenses, and lower employee-related expenses, offset in
part by LinkedIn expenses. Expenses included $294 million related to our acquisition of LinkedIn.
33
Fiscal year 2016 compared with fiscal year 2015
General and administrative expenses decreased $48 million or 1%, primarily due to a reduction in employee-related
expenses, offset in part by increased investments in infrastructure supporting our business transformation. Expenses
included a favorable foreign currency impact of approximately 2%.
IMPAIRMENT, INTEGRATION, AND RESTRUCTURING EXPENSES
Impairment, integration, and restructuring expenses include costs associated with the impairment of goodwill and intangible
assets related to our phone business, employee severance expenses and costs associated with the consolidation of facilities
and manufacturing operations related to restructuring activities, and systems consolidation and other business integration
expenses associated with our acquisition of Nokia Corporation’s Devices and Services business (“NDS”).
Fiscal year 2017 compared with fiscal year 2016
Impairment, integration, and restructuring expenses were $306 million for fiscal year 2017, compared to $1.1 billion for fiscal
year 2016.
During fiscal year 2017, we recorded $306 million of employee severance expenses primarily related to our sales and
marketing restructuring plan. During fiscal year 2016, we recorded $630 million of asset impairment charges related to our
phone business. We also recorded $480 million of restructuring charges, including employee severance expenses and
contract termination costs, primarily related to our previously announced phone business restructuring plans.
Fiscal year 2016 compared with fiscal year 2015
Impairment, integration, and restructuring expenses were $1.1 billion for fiscal year 2016, compared to $10.0 billion for fiscal
year 2015.
During fiscal year 2015, we recognized impairment charges of $7.5 billion related to our phone business. Our annual
goodwill impairment test as of May 1, 2015 indicated that the carrying value of our previous Phone Hardware reporting unit
goodwill exceeded its estimated fair value. Accordingly, we recorded a goodwill impairment charge of $5.1 billion, reducing
our Phone Hardware reporting unit goodwill from $5.4 billion to $116 million, net of foreign currency remeasurements, as
well as an impairment charge of $2.2 billion related to the write-down of our Phone Hardware reporting unit intangible assets.
All remaining goodwill and intangible assets are included in our Devices reporting unit, within More Personal Computing
under our current segment structure. Restructuring charges were $2.1 billion, including employee severance expenses and
the write-down of certain assets in connection with our restructuring activities. Integration expenses associated with the
acquisition of NDS were $435 million in fiscal year 2015.
The components of other income (expense), net were as follows:
OTHER INCOME (EXPENSE), NET
(In millions)
Year Ended June 30,
Dividends and interest income
Interest expense
Net recognized gains on investments
Net losses on derivatives
Net gains (losses) on foreign currency remeasurements
Other
Total
34
2016
2017
2015
$ 1,387 $ 903 $ 766
(781)
(1,243)
716
668
(423)
(443)
335
(121)
(195)
(267)
(431) $ 346
(2,222)
2,583
(510)
(164)
(251)
823 $
$
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 hedges are primarily recognized in other income (expense), net. Other than those
derivatives entered into for investment purposes, such as commodity contracts, the gains (losses) are generally
economically offset by unrealized gains (losses) in the underlying available-for-sale securities and gains (losses) on certain
balance sheet amounts from foreign exchange rate changes.
Fiscal year 2017 compared with fiscal year 2016
Dividends and interest income increased primarily due to higher portfolio balances and yields on fixed-income securities.
Interest expense increased primarily due to higher outstanding long-term debt. Net recognized gains on investments
increased primarily due to higher gains on sales of equity securities. Net losses on derivatives increased due to higher
losses on equity derivatives, offset in part by lower losses on commodity and foreign currency derivatives. Other, net reflects
recognized losses from certain joint ventures and divestitures.
Fiscal year 2016 compared with fiscal year 2015
Dividends and interest income increased due to higher portfolio balances and slightly higher yields on fixed-income
securities. Interest expense increased due to higher outstanding long-term debt. Net recognized gains on investments
decreased primarily due to higher other-than-temporary impairments and lower gains on sales of fixed-income securities,
offset in part by higher gains on sales of equity securities. Net losses on derivatives increased due to higher losses on
currency and equity contracts and lower gains on interest rate contracts in the current period as compared to the prior
period, offset in part by lower losses on commodity contracts. For fiscal year 2016, other reflects recognized losses from
divestitures and certain joint ventures.
Fiscal year 2017 compared with fiscal year 2016
INCOME TAXES
Our effective tax rate for fiscal years 2017 and 2016 was 8% and 15%, respectively. The decrease in our effective tax rate
for fiscal year 2017 compared to fiscal year 2016 was primarily due to the realization of tax benefits attributable to previous
phone business losses, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign
countries. The fiscal year 2016 effective tax rate included the impact of nondeductible phone charges and valuation
allowances. Our effective tax rate was lower than the U.S. federal statutory rate 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 centers in Ireland, Singapore, and Puerto Rico. Additionally, our effective tax rate in fiscal year 2017 reflects the
realization of tax benefits attributable to previous phone business losses.
The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result
of the geographic distribution of, and customer demand for, our products and services. We supply our Windows PC
operating system to customers through our U.S. regional operating center, while we supply the Microsoft Office system and
our server products and tools to customers through our foreign regional operations centers. In fiscal year 2017, our U.S.
income before income taxes was $453 million and our foreign income before income taxes was $22.7 billion. Net revenue
deferrals related to sales of Windows 10 negatively impacted our fiscal year 2017 U.S. income before income taxes by
$6.4 billion and foreign income before income taxes by $317 million. In fiscal year 2016, our U.S. loss before income taxes
was $325 million and our foreign income before income taxes was $20.1 billion. Net revenue deferrals related to sales of
Windows 10 negatively impacted our fiscal year 2016 U.S. loss by $6.0 billion and foreign income before income taxes by
$588 million.
Tax contingencies and other income tax liabilities were $13.5 billion and $11.8 billion as of June 30, 2017 and 2016,
respectively, and are included in other long-term liabilities. This increase relates primarily to current period intercompany
transfer pricing and tax credits.
35
While we settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 during the third quarter
of fiscal year 2011, and settled a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year
2016, we remain under audit for those years. We also continue to be subject to examination by the IRS for tax years 2010
to 2016. In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006 and reopened the
audit phase of the examination. As of June 30, 2017, the primary unresolved issue relates to transfer pricing, which could
have a significant impact on our consolidated financial statements if not resolved favorably. We believe our allowances for
income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do
not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not
anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
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 2017, some of which are currently under audit by local tax authorities. The resolutions of
these audits are not expected to be material to our consolidated financial statements.
Fiscal year 2016 compared with fiscal year 2015
Our effective tax rate for fiscal years 2016 and 2015 was 15% and 34%, respectively. Our effective tax rate was lower than
the U.S. federal statutory rate 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 centers in Ireland, Singapore, and Puerto
Rico.
The decrease in our effective tax rate for fiscal year 2016 compared to fiscal year 2015 was primarily due to changes in the
mix of our income before income taxes between the U.S. and foreign countries including the impact of net revenue deferrals
related to sales of Windows 10, tax benefits from the adoption of the new accounting guidance relating to stock-based
compensation, and distributions from foreign affiliates. The fiscal year 2015 effective tax rate included the tax impact of
losses in foreign jurisdictions for which we may not realize a tax benefit, primarily as a result of impairment and restructuring
charges.
The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result
of the geographic distribution of, and customer demand for, our products and services. We supply our Windows PC
operating system to customers through our U.S. regional operating center, while we supply the Microsoft Office system and
our server products and tools to customers through our foreign regional operations centers. In fiscal year 2016, our U.S.
loss before income taxes was $325 million and our foreign income before income taxes was $20.1 billion. Net revenue
deferrals related to sales of Windows 10 negatively impacted our fiscal year 2016 U.S. loss before income taxes by
$6.0 billion and foreign income before income taxes by $588 million. In fiscal year 2015, our U.S. income before income
taxes was $7.4 billion and our foreign income before income taxes was $11.1 billion. Impairment, integration, and
restructuring expense relating to our phone business decreased our fiscal year 2015 U.S income before income taxes by
$1.1 billion and foreign income before income taxes by $8.9 billion.
Cash, Cash Equivalents, and Investments
FINANCIAL CONDITION
Cash, cash equivalents, and short-term investments totaled $133.0 billion as of June 30, 2017, compared with $113.2 billion
as of June 30, 2016. Equity and other investments were $6.0 billion as of June 30, 2017, compared with $10.4 billion as of
June 30, 2016. Our short-term investments are primarily intended to facilitate liquidity and for 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.
36
Of the cash, cash equivalents, and short-term investments as of June 30, 2017, $127.9 billion was held by our foreign
subsidiaries and would be subject to material repatriation tax effects. The amount of cash, cash equivalents, and short-term
investments held by foreign subsidiaries subject to other restrictions on the free flow of funds (primarily currency and other
local regulatory) was $2.4 billion. As of June 30, 2017, approximately 87% of the cash equivalents and short-term
investments held by our foreign subsidiaries were invested in U.S. government and agency securities, approximately 3%
were invested in U.S. mortgage- and asset-backed securities, and approximately 2% were invested in corporate notes and
bonds of U.S. companies, all of which are denominated in U.S. dollars. The remaining cash equivalents and short-term
investments held by our foreign subsidiaries were primarily invested in foreign securities.
Securities lending
We lend certain fixed-income and equity securities to increase investment returns. The loaned securities continue to be
carried as investments on our consolidated balance sheets. Cash and/or security interests are received as collateral for the
loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the
borrower. Cash collateral received is recorded as an asset with a corresponding liability. Our securities lending payable
balance was $97 million as of June 30, 2017. Our average and maximum securities lending payable balances for fiscal year
2017 were $484 million and $1.5 billion, respectively. Intra-year variances in the amount of securities loaned are mainly due
to fluctuations in the demand for the securities.
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, domestic and international equities, and exchange-traded 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 foreign government bonds, corporate notes and bonds, mortgage- and asset-
backed securities, U.S. government and agency securities, common and preferred stock, and certificates of deposit. 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
Fiscal year 2017 compared with fiscal year 2016
Cash from operations increased $6.2 billion to $39.5 billion during the fiscal year, mainly due to an increase in cash received
from customers and an income tax refund for overpayment of estimated taxes, offset in part by an increase in cash paid to
employees. Cash from financing increased $16.8 billion to $8.4 billion, mainly due to a $13.2 billion increase in proceeds
from issuances of debt, net of repayments, and a $4.2 billion decrease in cash used for common stock repurchases, offset
in part by an $839 million increase in dividends paid. Cash used in investing increased $22.8 billion to $46.8 billion, mainly
due to a $24.6 billion increase in cash used for acquisitions of companies, net of cash acquired, and purchases of intangibles
and other assets, offset in part by a $1.9 billion decrease in cash used for net investment purchases, sales, and maturities.
37
Fiscal year 2016 compared with fiscal year 2015
Cash from operations increased $3.7 billion to $33.3 billion during the fiscal year, mainly due to lower operating expenditures
and a reduction in materials and production costs, offset in part by a decrease in cash received from customers. Cash used
in financing decreased $1.3 billion to $8.4 billion, mainly due to a $4.6 billion increase in proceeds from issuances of debt,
net of repayments, offset in part by a $1.5 billion increase in cash used for common stock repurchases and a $1.1 billion
increase in dividends paid. Cash used in investing increased $949 million to $24.0 billion, mainly due to a $2.4 billion
increase in cash used for additions to property and equipment and a $1.5 billion increase in cash used for net investment
purchases, sales, and maturities, offset in part by a $2.3 billion decrease in cash used for acquisitions of companies, net of
cash acquired, and purchases of intangibles and other assets.
Debt
We issued debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating and the
low interest rate environment. 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. See Note 12 – Debt of the Notes to Financial Statements for further discussion.
Unearned Revenue
Unearned revenue as of June 30, 2017 was comprised mainly of unearned revenue from volume licensing programs.
Unearned revenue from volume licensing programs represents customer billings for multi-year licensing arrangements paid
for either at inception of the agreement or annually at the beginning of each coverage period and accounted for as
subscriptions with revenue recognized ratably over the coverage period. Unearned revenue as of June 30, 2017 also
included payments for: Windows 10 licenses; post-delivery support and consulting services to be performed in the future;
Office 365 subscriptions; LinkedIn; Xbox Live subscriptions; Dynamics business solutions products; Skype prepaid credits
and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we provide the
service or software, or otherwise meet the revenue recognition criteria.
The following table outlines the expected future recognition of unearned revenue as of June 30, 2017:
(In millions)
Three Months Ending,
September 30, 2017
December 31, 2017
March 31, 2018
June 30, 2018
Thereafter
Total
$ 12,544
9,993
7,307
4,258
10,377
$ 44,479
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.
Share Repurchases
During fiscal year 2017, 2016, and 2015, we repurchased 170 million shares, 294 million shares, and 295 million shares of
our common stock for $10.3 billion, $14.8 billion, and $13.2 billion, respectively, through our share repurchase programs.
All repurchases were made using cash resources. See Note 18 – Stockholders’ Equity of the Notes to Financial Statements
for further discussion.
38
Dividends
See Note 18 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.
Off-Balance Sheet Arrangements
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property
infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have
agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In
evaluating estimated losses on these indemnifications, we consider factors such as the degree of probability of an
unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have
a material impact on our consolidated financial statements during the periods presented.
Contractual Obligations
The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30,
2017:
(In millions)
Long-term debt: (a)
Principal payments
Interest payments
Construction commitments (b)
Operating leases (b)
Capital leases, including imputed interest (b)
Purchase commitments (c)
Other long-term liabilities (d)
Total contractual obligations
2018
2019-2020
2021-2022
Thereafter
Total
$ 1,050
$ 9,518
$ 11,746
$ 55,523
$
7
2,402
4,672
4,301
33,179
4
1,067
0
0
0
7
1,292
2,335
1,657
2,588
2
334
16,002
0
835
628
120
866
176
26
4,612
7
397
3
319
77,83
44,55
1,06
7,87
6,64
17,20
46
$ 22,147 $ 18,108
$ 18,772 $ 96,618
5
$
5
155,64
(a) See Note 12 – Debt of the Notes to Financial Statements.
(b) See Note 16 – Commitments of the Notes to Financial Statements.
(c) Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not
presented as construction commitments above.
(d) We have excluded long-term tax contingencies, other tax liabilities, deferred income taxes, and long-term pension
liabilities of $14.4 billion from the amounts presented as the timing of these obligations is uncertain. We have also
excluded unearned revenue and non-cash items.
Other Planned Uses of Capital
We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of
technology, as well as continue making acquisitions that align with our business strategy. Additions to property and
equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales
and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support
growth in our cloud offerings. We have operating leases for most U.S. and international sales and support offices 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.
39
Liquidity
We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in
foreign jurisdictions. As a result, as discussed above under Cash, Cash Equivalents, and Investments, the majority of our
cash, cash equivalents, and short-term investments are held by foreign subsidiaries. We currently do
40
not intend nor foresee a need to repatriate these funds. We expect existing domestic cash, cash equivalents, short-term
investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our domestic
operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt
maturities, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. In
addition, we expect existing foreign cash, cash equivalents, short-term investments, and cash flows from operations to
continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as
material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
Should we require more capital in the U.S. than is generated by our operations domestically, for example to fund significant
discretionary activities, such as business acquisitions and share repurchases, we could elect to repatriate future earnings
from foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in
higher effective tax rates, increased interest expense, or dilution of our earnings. We have borrowed funds domestically and
continue to believe we have the ability to do so at reasonable interest rates.
See Note 1 – Accounting Policies of the Notes to Financial Statements for further discussion.
RECENT ACCOUNTING GUIDANCE
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing
consolidated financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s
application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of investment
securities, goodwill, research and development costs, contingencies, income taxes, and inventories.
Revenue Recognition
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether
elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
Judgment is also required to assess whether future releases of certain software represent new products or upgrades and
enhancements to existing products. Certain volume licensing arrangements include a perpetual license for current products
combined with rights to receive unspecified future versions of software products and are accounted for as subscriptions,
with billings recorded as unearned revenue and recognized as revenue ratably over the coverage period.
Software updates are evaluated on a case-by-case basis to determine whether they meet the definition of an upgrade,
which may require revenue to be deferred and recognized when the upgrade is delivered. If it is determined that implied
post-contract customer support (“PCS”) is being provided, revenue from the arrangement is deferred and recognized over
the implied PCS term. If updates are determined to not meet the definition of an upgrade, revenue is generally recognized
as products are shipped or made available.
Microsoft enters into arrangements that can include various combinations of software, services, and hardware. Where
elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the
respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized
as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements:
(i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence,
41
and (iii) best estimate of selling price (“ESP”). For software elements, we follow the industry-specific software guidance
which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable
is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will
not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices
would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment
and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each
deliverable.
Customers purchasing a Windows 10 license will receive unspecified updates and upgrades over the life of their Windows
10 device at no additional cost. As these updates and upgrades will not be sold on a stand-alone basis, we are unable to
establish VSOE. Accordingly, revenue from licenses of Windows 10 is recognized ratably over the estimated life of the
related device, which ranges between two to four years.
The new standard related to revenue recognition will have a material impact on our consolidated financial statements. See
Note 1 – Accounting Policies in the Notes to Financial Statements for further discussion.
Impairment of Investment Securities
We review investments quarterly for indicators of other-than-temporary impairment. This determination requires significant
judgment. In making this judgment, we employ a systematic methodology quarterly that considers available quantitative and
qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value,
we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and
extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or plans to sell, the
investment. For fixed-income securities, we also evaluate whether 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. We also consider specific adverse conditions related to the
financial health of and business outlook for the investee, including industry and sector performance, changes in technology,
and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an
impairment charge is recorded to 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.
Goodwill
We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We
evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation
approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating
segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances
could include a significant change in the business climate, legal factors, operating performance indicators, competition, or
sale or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of
assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each
reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow
methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash
flows will occur, and determination of our weighted average cost of capital.
The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results,
market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination
of fair value and goodwill impairment for each reporting unit.
42
Research and Development Costs
Costs incurred internally in researching and developing a computer software product are charged to expense until
technological feasibility has been established for the product. Once technological feasibility is established, all software costs
are capitalized until the product is available for general release to customers. Judgment is required in determining when
technological feasibility of a product is established. We have determined that technological feasibility for our software
products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this
occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue
over the estimated life of the products.
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss
from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset
has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining
whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our
consolidated financial statements.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides
guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in
assessing the future tax consequences of events that have been recognized on our consolidated financial statements or
tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated
financial statements.
Inventories
Inventories are stated at average cost, subject to the lower of cost or market. Cost includes materials, labor, and
manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include
analysis of demand forecasts, product life cycle status, product development plans, current sales levels, pricing strategy,
and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a
new cost basis through a charge to cost of revenue.
43
STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated financial statements and related information that are
presented in this report. The consolidated financial statements, which include amounts based on management’s estimates
and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of
America.
The Company designs and maintains accounting and internal control systems to provide reasonable assurance at
reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records
are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are
augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training
of qualified personnel, and a program of internal audits.
The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an
opinion on the consolidated financial statements and internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
The Board of Directors, through its Audit Committee, consisting solely of independent directors of the Company, meets
periodically with management, internal auditors, and our independent registered public accounting firm to ensure that each
is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Deloitte & Touche
LLP and the internal auditors each have full and free access to the Audit Committee.
Satya Nadella
Chief Executive Officer
Amy E. Hood
Executive Vice President and Chief Financial Officer
Frank H. Brod
Corporate Vice President, Finance and Administration;
Chief Accounting Officer
44
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS
We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, equity prices, and commodity
prices. A portion of these risks is hedged, but they may impact our consolidated financial statements.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency
exposures daily and use hedges where practicable to offset the risks and maximize the economic effectiveness of our
foreign currency positions. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and
Australian dollar.
Interest Rate
Our fixed-income portfolio is diversified across credit sectors and maturities, consisting primarily of investment-grade
securities. The credit risk and average maturity of the fixed-income portfolio is managed to achieve economic returns that
correlate to certain global and domestic fixed-income indices. In addition, we use “To Be Announced” forward purchase
commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities.
Equity
Our equity portfolio consists of global, developed, and emerging market securities that are subject to market price risk. We
manage the securities relative to certain global and domestic indices and expect their economic risk and return to correlate
with these indices.
Commodity
We use broad-based commodity exposures to enhance portfolio returns and facilitate portfolio diversification. Our
investment portfolio has exposure to a variety of commodities, including precious metals, energy, and grain. We manage
these exposures relative to global commodity indices and expect their economic risk and return to correlate with these
indices.
VALUE-AT-RISK
We use a value-at-risk (“VaR”) model to estimate and quantify our market risks. VaR is the expected loss, for a given
confidence level, in the fair value of our portfolio due to adverse market movements over a defined time horizon. The VaR
model is not intended to represent actual losses in fair value, including determinations of other-than-temporary losses in fair
value in accordance with U.S. GAAP, but is used as a risk estimation and management tool. The distribution of the potential
changes in total market value of all holdings is computed based on the historical volatilities and correlations among foreign
exchange rates, interest rates, equity prices, and commodity prices, assuming normal market conditions.
The VaR is calculated as the total loss that will not be exceeded at the 97.5 percentile confidence level or, alternatively
stated, the losses could exceed the VaR in 25 out of 1,000 cases. Several risk factors are not captured in the model,
including liquidity risk, operational risk, and legal risk.
45
The following table sets forth the one-day VaR for substantially all of our positions as of June 30, 2017 and 2016 and for
the year ended June 30, 2017:
(In millions)
Risk Categories
Foreign currency
Interest rate
Equity
Commodity
June 30,
2017
June 30,
2016
$ 114
152
$ 92
58
157
Year Ended June 30,
2017
Low
$ 88
High
$ 303
Average
$ 169
113
155
57
54
0
121
8
165
12
54
0
12
Total one-day VaR for the combined risk categories was $207 million and $225 million as of June 30, 2017 and 2016. The
total VaR is 35% and 29% less as of June 30, 2017 and 2016, respectively, than the sum of the separate risk categories in
the table above due to the diversification benefit of the combination of risks.
46
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
(In millions, except per share amounts)
Year Ended June 30,
Revenue:
Product
Service and other
Total revenue
Cost of revenue:
Product
Service and other
Total cost of revenue
Gross margin
Research and development
Sales and marketing
General and administrative
Impairment, integration, and restructuring
Operating income
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Cash dividends declared per common share
See accompanying notes.
2017
2016
2015
$ 57,190 $ 61,502
23,818
85,320
32,760
89,950
$ 75,956
17,624
93,580
15,175
19,086
34,261
55,689
13,037
15,539
4,481
306
22,326
823
23,149
1,945
21,410
11,628
33,038
60,542
12,046
15,713
4,611
10,011
18,161
346
18,507
6,314
$ 21,204 $ 16,798 $ 12,193
17,880
14,900
32,780
52,540
11,988
14,697
4,563
1,110
20,182
(431)
19,751
2,953
$
$
2.74 $
2.71 $
2.12 $
2.10 $
1.49
1.48
7,746
7,832
1.56 $
7,925
8,013
1.44 $
8,177
8,254
1.24
$
47
COMPREHENSIVE INCOME STATEMENTS
(In millions)
Year Ended June 30,
Net income
Other comprehensive income (loss):
Net unrealized gains (losses) on derivatives (net of tax effects of $(5), $(12), and
$20)
Net unrealized losses on investments (net of tax effects of $(613), $(121), and
Translation adjustments and other (net of tax effects of $9, $(33), and $16)
$(197))
Other comprehensive loss
Comprehensive income
2017
2015
$ 21,204 $ 16,798 $ 12,193
2016
(218)
(238)
559
(1,116)
228
(1,106)
(362)
(1,383)
(1,186)
$ 20,098 $ 15,813 $ 11,007
(228)
(519)
(985)
See accompanying notes. Refer to Note 19 – Accumulated Other Comprehensive Income for further information.
48
BALANCE SHEETS
(In millions)
June 30,
Assets
Current assets:
Cash and cash equivalents
Short-term investments (including securities loaned of $3,694 and $204)
Total cash, cash equivalents, and short-term investments
Accounts receivable, net of allowance for doubtful accounts of $405 and $426
Inventories
Other
Total current assets
Property and equipment, net of accumulated depreciation of $24,179 and $19,800
Equity and other investments
Goodwill
Intangible assets, net
Other long-term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Short-term debt
Current portion of long-term debt
Accrued compensation
Income taxes
Short-term unearned revenue
Securities lending payable
Other
Total current liabilities
Long-term debt
2017
2016
$
$
7,663
0
125,318
0
132,981
0
19,792
7
2,181
1
4,897
2
159,851
0
23,734
6
6,023
1
35,122
2
10,106
3
6,250
$ 241,086
6
$
8
$
$
7,390
8
9,072
4
1,049
0
5,819
4
718
0
34,102
8
97
4
6,280
9
64,527
7
76,073
7
6,51
106,73
113,24
18,27
2,25
5,89
139,66
18,35
10,43
17,87
3,73
3,41
193,46
6,89
12,90
5,26
58
27,46
29
5,94
59,35
40,55
49
(In millions)
Long-term unearned revenue
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,708 and 7,808
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
10,377
1
531
6
17,184
0
168,692
1
69,315
8
2,648
2
431
7
72,394
$ 241,086
7
$
8
6,44
1,47
13,64
121,47
68,17
2,28
1,53
71,99
193,46
50
CASH FLOWS STATEMENTS
(In millions)
Year Ended June 30,
Operations
Net income
Adjustments to reconcile net income to net cash from operations:
Goodwill and asset impairments
Depreciation, amortization, and other
Stock-based compensation expense
Net recognized gains on investments and derivatives
Deferred income taxes
Deferral of unearned revenue
Recognition of unearned revenue
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other long-term assets
Accounts payable
Other current liabilities
Other long-term liabilities
Net cash from operations
Financing
Proceeds from issuance (repayments) of short-term debt, maturities of 90 days
or less, net
Proceeds from issuance of debt
Repayments of debt
Common stock issued
Common stock repurchased
Common stock cash dividends paid
Other, net
Net cash from (used in) financing
Investing
Additions to property and equipment
Acquisition of companies, net of cash acquired, and purchases of intangible and
other assets
Purchases of investments
Maturities of investments
Sales of investments
Securities lending payable
Net cash used in investing
Effect of foreign exchange rates on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See accompanying notes.
2017
2016
2015
$ 21,204 $ 16,798 $ 12,193
0
8,778
3,266
(2,073)
(3,296)
67,711
(57,735)
(925)
50
1,066
(539)
81
386
1,533
39,507
(4,963)
44,344
(7,922)
772
(11,788)
(11,845)
(190)
8,408
630
6,622
2,668
(223)
332
57,072
(48,498)
(530)
600
(1,167)
(41)
88
(260)
(766)
33,325
7,195
13,884
(2,796)
668
(15,969)
(11,006)
(369)
(8,393)
7,498
5,957
2,574
(443)
224
45,072
(44,920)
1,456
(272)
62
346
(1,054)
(624)
1,599
29,668
4,481
10,680
(1,500)
634
(14,443)
(9,882)
362
(9,668)
(8,129)
(8,343)
(5,944)
(25,944)
(176,905)
28,044
136,350
(197)
(46,781)
19
1,153
6,510
7,663 $
(1,393)
(129,758)
22,054
93,287
203
(23,950)
(67)
915
5,595
6,510 $
(3,723)
(98,729)
15,013
70,848
(466)
(23,001)
(73)
(3,074)
8,669
5,595
$
51
2017
2016
2015
$ 68,178 $ 68,465 $ 68,366
634
(3,700)
2,574
588
3
68,465
668
(3,689)
2,668
0
66
68,178
772
(2,987)
3,266
0
86
69,315
2,282
21,204
(12,040)
(8,798)
2,648
9,096
16,798
(11,329)
(12,283)
2,282
17,710
12,193
(10,063)
(10,744)
9,096
1,537
(1,106)
431
3,708
(1,186)
2,522
$ 72,394 $ 71,997 $ 80,083
2,522
(985)
1,537
STOCKHOLDERS’ EQUITY STATEMENTS
(In millions)
Year Ended June 30,
Common stock and paid-in capital
Balance, beginning of period
Common stock issued
Common stock repurchased
Stock-based compensation expense
Stock-based compensation income tax benefits
Other, net
Balance, end of period
Retained earnings
Balance, beginning of period
Net income
Common stock cash dividends
Common stock repurchased
Balance, end of period
Accumulated other comprehensive income
Balance, beginning of period
Other comprehensive loss
Balance, end of period
Total stockholders’ equity
See accompanying notes.
52
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
We have recast certain prior period amounts to conform to the current period presentation, with no impact on consolidated
net income or cash flows.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany
transactions and balances have been eliminated. Equity investments through which we are able to exercise significant
influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted
for using the equity method. Investments through which we are not able to exercise significant influence over the investee
and which do not have readily determinable fair values are accounted for under the cost method.
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 include: 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; allowances for product returns; the market value of,
and demand for, our inventory; and stock-based compensation forfeiture rates. Examples of assumptions include: the
elements comprising a software arrangement, including the distinction between upgrades or enhancements and new
products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of
events that have been recognized on our consolidated financial statements or tax returns; and determining when investment
impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and
assumptions.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue
and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting
from this process are recorded to other comprehensive income (“OCI”).
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems; cross-device productivity applications; server applications;
business solution applications; desktop and server management tools; software development tools; video games; hardware
such as PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories; and
training and certification of computer system integrators and developers.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services,
platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution
support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
53
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes
collected from customers and subsequently remitted to governmental authorities.
Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether
elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
Microsoft enters into arrangements that can include various combinations of software, services, and hardware. Where
elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the
respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized
as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements:
(i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price
(“ESP”). For software elements, we follow the industry specific software guidance which only allows for the use of VSOE in
establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established
by management for a product that is not yet sold if it is probable that the price will not change before introduction into the
marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold
regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that
may vary over time depending upon the unique facts and circumstances related to each deliverable.
Revenue for retail packaged products, products licensed to original equipment manufacturers (“OEMs”), and perpetual
licenses under certain volume licensing programs generally is recognized as products are shipped or made available.
Technology guarantee programs are accounted for as multiple-element arrangements as customers receive free or
significantly discounted rights to use upcoming new versions of a software product if they license existing versions of the
product during the eligibility period. Revenue is allocated between the existing product and the new product, and revenue
allocated to the new product is deferred until that version is delivered. The revenue allocation is based on the VSOE of fair
value of the products. The VSOE of fair value for upcoming new products are based on the price determined by management
having the relevant authority when the element is not yet sold separately, but is expected to be sold in the near future at the
price set by management.
Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they
meet the definition of an upgrade and create a multiple-element arrangement, which may require revenue to be deferred
and recognized when the upgrade is delivered, or if it is determined that implied post-contract customer support (“PCS”) is
being provided, the arrangement is accounted for as a multiple-element arrangement and all revenue from the arrangement
is deferred and recognized over the implied PCS term when the VSOE of fair value does not exist. If updates are determined
to not meet the definition of an upgrade, revenue is generally recognized as products are shipped or made available.
Customers purchasing a Windows 10 license will receive unspecified updates and upgrades over the life of their Windows
10 device at no additional cost. As these updates and upgrades will not be sold on a stand-alone basis, we are unable to
establish VSOE of fair value. Accordingly, revenue from licenses of Windows 10 is recognized ratably over the estimated
life of the related device, which ranges between two to four years.
Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive
unspecified future versions of software products, which we have determined are additional software products and are
therefore accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably
over the coverage period. Arrangements that include term-based licenses for current products with the right to use
unspecified future versions of the software during the coverage period, are also accounted for as subscriptions, with revenue
recognized ratably over the coverage period. Revenue from cloud-based services
54
arrangements that allow for the use of a hosted software product or service over a contractually determined period of time
without taking possession of software are accounted for as subscriptions with billings recorded as unearned revenue and
recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers.
Revenue from cloud-based services arrangements that are provided on a consumption basis (for example, the amount of
storage used in a particular period) is recognized commensurate with the customer utilization of such resources.
Some volume licensing arrangements include time-based subscriptions for cloud-based services and software offerings
that are accounted for as subscriptions. These arrangements are considered multiple-element arrangements. However,
because all elements are accounted for as subscriptions and have the same coverage period and delivery pattern, they
have the same revenue recognition timing.
Revenue related to Surface devices, Xbox consoles, games published by us, phones, and other hardware components is
generally recognized when ownership is transferred to the resellers or to end customers when selling directly through
Microsoft retail stores and online marketplaces. A portion of revenue may be deferred when these products are combined
with software elements, and/or services. Revenue related to licensing for games published by third parties for use on the
Xbox consoles is recognized when games are manufactured by the game publishers.
Display advertising revenue is recognized as advertisements are displayed. Search advertising revenue is recognized when
the ad appears in the search results or when the action necessary to earn the revenue has been completed. Consulting
services revenue is recognized as services are rendered, generally based on the negotiated hourly rate in the consulting
arrangement and the number of hours worked during the period. Consulting revenue for fixed-price services arrangements
is recognized as services are provided.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs
related to product support service centers and product distribution centers; costs incurred to include software on PCs sold
by OEMs, to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain
Internet-based products and services, including datacenter costs and royalties; warranty costs; inventory valuation
adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software
development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related
revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure
rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware
warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally
include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate
the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our
estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Research and Development
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, localization costs incurred to translate software for international markets, and
the amortization of purchased software code and services content. Such costs related to software development are included
in research and development expense until the point that technological feasibility is reached, which for our software
products, is generally shortly before the products are released to production. Once technological feasibility is reached, such
costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
55
Sales and Marketing
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. Advertising costs are expensed as incurred. Advertising expense was $1.5 billion,
$1.6 billion, and $1.9 billion in fiscal years 2017, 2016, and 2015, respectively.
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”),
is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related
service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the
grant date less the present value of expected dividends not received during the vesting period. We measure the fair value
of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method
and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is
entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, the provision for U.S. taxes on undistributed earnings of
international subsidiaries not deemed to be permanently reinvested, and interest and penalties on uncertain tax positions.
Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of
such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation
allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as
long-term on our consolidated balance sheets.
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
non-derivative investments primarily include U.S. government securities, domestic and international equities, and
actively traded 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 and
commodities. Our Level 2 non-derivative investments consist primarily of foreign government bonds, corporate
notes and bonds, mortgage- and asset-backed securities, U.S. government and agency securities, common and
preferred stock, and certificates of deposit. Our Level 2 derivative assets and liabilities primarily include certain
over-the-counter option and swap contracts.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that
market participants would use in pricing the asset or liability. The fair values are therefore determined using model-
based techniques, including option pricing models and discounted cash flow models. Our
56
Level 3 non-derivative assets and liabilities primarily comprise investments in common and preferred stock, 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 certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when
they are deemed to be other-than-temporarily impaired. 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. An impairment charge is recorded when the cost of the investment exceeds its fair value
and this condition is determined to be other-than-temporary.
Our other current financial assets and our current financial liabilities have fair values that approximate their carrying values.
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. All cash
equivalents and short-term investments are classified as available-for-sale and realized gains and losses are recorded using
the specific identification method. Changes in market value, excluding other-than-temporary impairments, are reflected in
OCI.
Equity and other investments classified as long-term include both debt and equity instruments. Debt and publicly-traded
equity securities are classified as available-for-sale and realized gains and losses are recorded using the specific
identification method. Changes in the market value of available-for-sale securities, excluding other-than-temporary
impairments, are reflected in OCI. Common and preferred stock and other investments that are restricted for more than one
year or are not publicly traded are recorded at cost or using the equity method.
We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as
secured borrowings and the loaned securities continue to be carried as investments on our consolidated balance sheets.
Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon
the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a
corresponding liability.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Fair value is
calculated based on publicly available market information or other estimates determined by management. We employ a
systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating
potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors,
general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less
than cost, and for equity securities, our intent and ability to hold, or plans to sell, the investment. For fixed-income securities,
we also evaluate whether 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. We also consider specific adverse conditions related to the financial health of and business outlook
for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow
factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other
income (expense), net and a new cost basis in the investment is established.
Derivatives
Derivative instruments are recognized as either assets or liabilities and are 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.
57
For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of
change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged. For options
designated as fair value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and
are recognized in earnings.
For derivative instruments designated as cash flow hedges, the effective portion of the gains (losses) on the derivatives is
initially reported as a component of OCI and is subsequently recognized in earnings when the hedged exposure is
recognized in earnings. For options designated as cash flow hedges, changes in the time value are excluded from the
assessment of hedge effectiveness and are recognized in earnings. Gains (losses) on derivatives representing either hedge
components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily
recognized in other income (expense), net. Other than those derivatives entered into for investment purposes, such as
commodity contracts, the gains (losses) are generally economically offset by unrealized gains (losses) in the underlying
available-for-sale securities, which are recorded as a component of OCI until the securities are sold or other-than-
temporarily impaired, at which time the amounts are reclassified from accumulated other comprehensive income (“AOCI”)
into other income (expense), net.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable
balance. We determine the allowance based on known troubled accounts, historical experience, and other currently
available evidence. Activity in the allowance for doubtful accounts was as follows:
(In millions)
Year Ended June 30,
Balance, beginning of period
Charged to costs and other
Write-offs
Balance, end of period
Inventories
2017
$ 426
85
(106)
$ 405
2016
$ 335
146
(55)
$ 426
2015
$ 301
77
(43)
$ 335
Inventories are stated at average cost, subject to the lower of cost or market. Cost includes materials, labor, and
manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a
reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and
equipment are generally as follows: computer software developed or acquired for internal use, three to seven years;
computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to
20 years; and furniture and equipment, one to 10 years. Land is not depreciated.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment)
on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying value.
58
Intangible Assets
All of our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated
period of benefit, ranging from one to 15 years. We evaluate the recoverability of intangible assets periodically by taking
into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be
impaired.
Recent Accounting Guidance
Accounting for Income Taxes – Intra-Entity Asset Transfers
In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize
the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather
than when the asset has been sold to an outside party. This guidance is effective for us beginning July 1, 2018, with early
adoption permitted beginning July 1, 2017. We plan to adopt the guidance effective July 1, 2018. Adoption of the guidance
will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of
the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past
intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under
current U.S. GAAP. We anticipate this guidance will have a material impact on our consolidated balance sheets upon
adoption, and continue to evaluate any impacts to our accounting policies, processes, and systems.
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current U.S.
GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable
and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit
loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt
securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis
of the securities. The standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1,
2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect
adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our
consolidated financial statements, including accounting policies, processes, and systems.
Leases
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among
organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most
prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those
leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the
objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from
leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest
comparative period presented using a modified retrospective approach, with certain practical expedients available.
The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We elected to early adopt the
standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected
the available practical expedients on adoption. In preparation for adoption of the standard, we have implemented internal
controls and key system functionality to enable the preparation of financial information.
The standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our
consolidated income statements. The most significant impact will be the recognition of ROU assets and lease liabilities for
operating leases, while our accounting for capital leases remains substantially unchanged.
59
Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of
$6.6 billion and $5.2 billion as of June 30, 2017 and 2016, respectively. See Expected Impacts to Reported Results below
for the impact of adoption of the standard on our consolidated financial statements.
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation,
and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes
in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than OCI.
The standard will be effective for us beginning July 1, 2018. Adoption of the standard will be applied using a modified
retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently
evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes,
and systems.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized
when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity
expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective
method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (modified retrospective method). We will adopt the standard using the full retrospective method to restate each
prior reporting period presented.
The standard will be effective for us beginning July 1, 2018, with early adoption permitted. We elected to early adopt the
standard effective July 1, 2017. In preparation for adoption of the standard, we have implemented internal controls and key
system functionality to enable the preparation of financial information and have reached conclusions on key accounting
assessments related to the standard, including our assessment that the impact of accounting for costs incurred to obtain a
contract is immaterial.
The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows
10, we will recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related
device. For certain multi-year commercial software subscriptions that include both distinct software licenses and Software
Assurance, we will recognize license revenue at the time of contract execution rather than over the subscription period. Due
to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment
required under the standard will depend on contract-specific terms and in some instances may vary from recognition at the
time of billing. Revenue recognition related to our hardware, cloud offerings such as Office 365, LinkedIn, and professional
services will remain substantially unchanged.
Adoption of the standard will result in the recognition of additional revenue of $6.6 billion and $5.8 billion for fiscal year 2017
and 2016, respectively, and an increase in the provision for income taxes of $2.5 billion and $2.1 billion, respectively,
primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard will result in an
increase in accounts receivable and other current and long-term assets of $2.7 billion and $4.2 billion, as of June 30, 2017
and 2016, respectively, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial
software subscriptions that include both distinct software licenses and Software Assurance; a reduction of unearned revenue
of $17.8 billion and $11.7 billion as of June 30, 2017 and 2016, respectively, driven by the upfront recognition of license
revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income
taxes of $5.2 billion and $4.8 billion as of June 30, 2017 and 2016, respectively, driven by the upfront recognition of revenue.
See Expected Impacts to Reported Results below for the impact of adoption of the standard on our consolidated financial
statements.
60
Expected Impacts to Reported Results
Adoption of the standards related to revenue recognition and leases is expected to impact our reported results as follows:
Year Ended
June 30, 2017
(In millions, except earnings per share)
Income statements:
Revenue
Provision for income taxes
Net income
Diluted earnings per share
(In millions, except earnings per share)
Income statements:
Revenue
Provision for income taxes
Net income
Diluted earnings per share
(In millions)
Balance sheets:
Accounts receivable, net
Operating lease right-of-use assets
Other current and long-term assets
Unearned revenue
Deferred income taxes
Operating lease liabilities
Other current and long-term liabilities
Stockholders’ equity
(In millions)
Balance sheets:
Accounts receivable, net
Operating lease right-of-use assets
Other current and long-term assets
Unearned revenue
Deferred income taxes
Operating lease liabilities
Other current and long-term liabilities
As
Reported
$ 89,950
1,945
21,204
2.71
As
Reported
$ 85,320
2,953
16,798
2.10
As
Reported
$ 19,792
0
11,147
44,479
531
0
23,464
72,394
New
Revenue
Standard
Adjustment
New
Lease
Standard
Adjustment
As
Adjusted
$ 6,621
2,467
4,285
0.54
$ 0
$ 96,571
0
0
0
4,412
25,489
3.25
New
Revenue
Standard
Adjustment
New
Lease
Standard
Adjustment
Year Ended
June 30, 2016
As
Adjusted
$ 0
$ 91,154
$ 5,834
2,147
3,741
0.46
0
0
0
$ 0
$ 22,431
New
Revenue
Standard
Adjustment
New
Lease
Standard
Adjustment
$ 2,639
0
32
(17,823)
5,203
0
(26)
15,317
6,555
0
0
0
5,372
1,183
0
5,100
20,539
2.56
June 30,
2017
As
Adjusted
6,555
11,179
26,656
5,734
5,372
24,621
87,711
June 30,
2016
As
Adjusted
As
Reported
New
Revenue
Standard
Adjustment
New
Lease
Standard
Adjustment
$ 18,277
0
9,308
33,909
1,476
0
19,589
$ 2,359
0
1,872
(11,716)
4,837
0
17
$ 0
$ 20,636
5,198
0
0
0
4,257
941
5,198
11,180
22,193
6,313
4,257
20,547
61
(In millions)
Stockholders’ equity
71,997
11,093
0
June 30,
2016
83,090
62
Adoption of the standards related to revenue recognition and leases had no impact to cash from or used in operating,
financing, or investing on our consolidated cash flows statements.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock
plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive
potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
(In millions, except earnings per share)
Year Ended June 30,
Net income available for common shareholders (A)
Weighted average outstanding shares of common stock (B)
Dilutive effect of stock-based awards
Common stock and common stock equivalents (C)
Earnings Per Share
Basic (A/B)
Diluted (A/C)
2017
2016
2015
$ 21,204
7,746
86
7,832
$
2.74
$
2.71
$
8
5
8
3
$
2
$
0
16,79
$ 12,193
7,92
8
8,01
2.1
2.1
8,177
77
8,254
$
1.49
$
1.48
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods
presented.
The components of other income (expense), net were as follows:
NOTE 3 — OTHER INCOME (EXPENSE), NET
(In millions)
Year Ended June 30,
Dividends and interest income
Interest expense
Net recognized gains on investments
Net losses on derivatives
Net gains (losses) on foreign currency remeasurements
Other, net
Total
2017
$ 1,387
(2,222)
2,583
(510)
(164)
(251)
823
$
2016
$ 903
(1,243)
668
(443)
(121)
(195)
(431)
$
2015
$ 766
(781)
716
(423)
335
(267)
$ 346
Following are details of net recognized gains (losses) on investments during the periods reported:
(In millions)
Year Ended June 30,
Other-than-temporary impairments of investments
Realized gains from sales of available-for-sale securities
Realized losses from sales of available-for-sale securities
Total
2017
(55)
$
3,064
(426)
$ 2,583
2016
$ (322)
1,376
(386)
$ 668
2015
(183)
$
1,176
(277)
716
$
63
Investment Components
The components of investments, including associated derivatives, were as follows:
NOTE 4 — INVESTMENTS
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
Cash
and Cash
Equivalents
Short-term
Investments
Equity
and Other
Investments
$
3,624
$
1,478
319
1,358
112,119
5,276
3,921
4,786
284
0
0
0
0
85
2
14
61
43
$
0
0
0
0
$
3,624
$ 3,624
$
0
$
1,478
319
1,358
1,478
69
972
0
250
386
(360)
111,844
16
111,828
(13)
(4)
(12)
0
5,265
1,504
3,931
4,835
327
0
0
0
3,761
3,931
4,835
327
0
0
0
0
0
0
0
0
0
2,472
523
$ 136,160
3,062
0
$ 3,267
(34)
0
$ (423)
5,500
523
$ 139,004
0
0
$ 7,663
0
0
$ 125,318
5,500
523
$ 6,023
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
Cash
and Cash
Equivalents
Short-term
Investments
Equity
and Other
Investments
$
3,501
$
1,012
298
1,000
$
0
0
0
0
89,970
245
5,502
4,789
6,509
285
10
21
110
57
0
0
0
0
(11)
(18)
(2)
(35)
0
5,597
4,452
(236)
615
0
0
$
1
2
8
0
4
4
8
4
2
3
5
3,50
1,01
29
1,00
90,20
5,49
4,80
6,58
34
9,81
61
$ 3,501
$
1,012
298
868
100
731
0
0
0
0
0
$
0
0
0
0
0
0
0
0
0
3
8
0
0
0
132
90,104
4,763
4,808
6,584
342
0
(3)
9,81
61
(In millions)
June 30, 2017
Cash
Mutual funds
Commercial paper
Certificates of deposit
U.S. government and
agency securities
Foreign government
bonds
Mortgage- and asset-
backed securities
Corporate notes and
bonds
Municipal securities
Common and
preferred stock
Other investments
Total
(In millions)
June 30, 2016
Cash
Mutual funds
Commercial paper
Certificates of deposit
U.S. government and
agency securities
Foreign government
bonds
Mortgage- and asset-
backed securities
Corporate notes and
bonds
Municipal securities
Common and
preferred stock
Other investments
64
(In millions)
Total
Cost Basis
Unrealized
Gains
Unrealized
Losses
$ 119,078
$ 4,895
$ (302)
Recorded
Basis
123,67
$
1
Cash
and Cash
Equivalents
Short-term
Investments
Equity
and Other
Investments
$
$ 6,510 $ 106,730
1
10,43
As of June 30, 2017 and 2016, the recorded bases of common and preferred stock that are restricted for more than one
year or are not publicly traded were $1.1 billion and $767 million, respectively. These investments are carried at cost and
are reviewed quarterly for indicators of other-than-temporary impairment. It is not practicable for us to reliably estimate the
fair value of these investments.
65
As of June 30, 2017, collateral received under agreements for loaned securities was $3.7 billion, which was primarily
comprised of U.S. government and agency securities. As of June 30, 2016, collateral received under agreements for loaned
securities was $294 million, which was primarily comprised of cash.
Unrealized Losses on Investments
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values
were as follows:
(In millions)
June 30, 2017
U.S. government and agency
securities
Foreign government bonds
Mortgage- and asset-backed
securities
Corporate notes and bonds
Common and preferred stock
Total
(In millions)
June 30, 2016
U.S. government and agency
securities
Foreign government bonds
Mortgage- and asset-backed
securities
Corporate notes and bonds
Common and preferred stock
Total
Less than 12 Months
Unrealized
Losses
Fair Value
12 Months or Greater
Unrealized
Losses
Fair Value
Total
Fair Value
Total
Unrealized
Losses
$ 87,558
4,006
1,068
669
69
$ 93,370
$ (348)
(2)
(3)
(8)
(6)
$ (367)
$ 371
23
198
177
148
$ 917
$
(12)
(11)
$ 87,929
4,029
(1)
(4)
(28)
$ (56)
1,266
846
217
$ 94,287
$ (360)
(13)
(4)
(12)
(34)
$ (423)
Less than 12 Months
Unrealized
Losses
Fair Value
12 Months or Greater
Unrealized
Losses
Fair Value
Total
Fair Value
Total
Unrealized
Losses
$ 5,816
3,452
844
1,180
896
$ 12,188
$
(3)
(3)
$
432
35
(1)
(11)
(147)
$ (165)
322
788
390
$ 1,967
$
(8)
(15)
(1)
(24)
(89)
$ (137)
$ 6,248
3,487
1,166
1,968
1,286
$ 14,155
$
(11)
(18)
(2)
(35)
(236)
$ (302)
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from
domestic and international equities are due to market price movements. Management does not believe any remaining
unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.
Debt Investment Maturities
(In millions)
June 30, 2017
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Total
66
Cost Basis
Estimated
Fair Value
$ 18,212
102,374
6,478
999
$ 128,063
$
8
8
4
9
$
9
18,18
102,16
6,50
1,01
127,87
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, 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.
NOTE 5 — DERIVATIVES
67
Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional
amounts presented below are measured in U.S. dollar equivalents.
Foreign Currency
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. Option and forward
contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are
designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound,
Canadian dollar, and Australian dollar. As of June 30, 2017 and 2016, the total notional amounts of these foreign exchange
contracts sold were $8.9 billion and $8.4 billion, respectively.
Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward
contracts that are designated as fair value hedging instruments. As of June 30, 2017 and 2016, the total notional amounts
of these foreign exchange contracts sold were $5.1 billion and $5.3 billion, respectively.
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. As of June 30, 2017,
the total notional amounts of these foreign exchange contracts purchased and sold were $8.8 billion and $10.6 billion,
respectively. As of June 30, 2016, the total notional amounts of these foreign exchange contracts purchased and sold were
$12.0 billion and $11.7 billion, respectively.
Equity
Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed
relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures,
and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and
designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of June 30, 2017, the
total notional amounts of equity contracts purchased and sold for managing market price risk were $1.9 billion and
$2.4 billion, respectively, of which $1.6 billion and $1.8 billion, respectively, were designated as hedging instruments. As of
June 30, 2016, the total notional amounts of equity contracts purchased and sold for managing market price risk were
$1.3 billion and $2.2 billion, respectively, of which $737 million and $986 million, respectively, were designated as hedging
instruments.
Interest Rate
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 exchange-traded option and futures contracts, and over-the-counter swap and option contracts, none
of which are designated as hedging instruments. As of June 30, 2017, the total notional amounts of fixed-interest rate
contracts purchased and sold were $233 million and $352 million, respectively. As of June 30, 2016, the total notional
amounts of fixed-interest rate contracts purchased and sold were $328 million and $2.4 billion, respectively.
In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to
agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery
of the assets is not taken at the earliest available delivery date. As of June 30, 2017 and 2016, the total notional derivative
amounts of mortgage contracts purchased were $567 million and $548 million, respectively.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap
contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices
68
and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure
to individual credit risks or groups of credit risks. As of June 30, 2017, the total notional amounts of credit contracts
purchased and sold were $267 million and $63 million, respectively. As of June 30, 2016, the total notional amounts of credit
contracts purchased and sold were $440 million and $273 million, respectively.
Commodity
We use broad-based commodity exposures to enhance portfolio returns and to facilitate portfolio diversification. We use
swaps, futures, and option contracts, not designated as hedging instruments, to generate and manage exposures to broad-
based commodity indices. We use derivatives on commodities as they can be low-cost alternatives to the purchase and
storage of a variety of commodities, including, but not limited to, precious metals, energy, and grain. As of June 30, 2017,
the total notional amounts of commodity contracts purchased were $19 million. As of June 30, 2016, the total notional
amounts of commodity contracts purchased and sold were $631 million and $162 million, respectively.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding
long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of
$1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard
convention related to over-the-counter derivatives. As of June 30, 2017, 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.
69
Fair Values of Derivative Instruments
The following table presents the fair values of derivative instruments designated as hedging instruments (“designated hedge
derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”). The fair values exclude the
impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value
adjustments related to our own credit risk and counterparty credit risk:
Short-term
Investments
Other
Current
Assets
Equity and
Other
Investments
June 30, 2017
Assets
Other
Long-
term
Assets
Liabilities
Other
Long-
term
Liabilities
Other
Current
Liabilities
June 30, 2016
Assets
Liabilities
Short-term
Investments
Other
Current
Assets
Equity and
Other
Investments
Other
Current
Liabilities
$
9 $ 203
0
3
0
3
0
5
$ 20 $ 203
$
$
0 $
0
0
0
0 $
6 $ (134)
(6)
0
(7)
0
0
(1)
6 $ (148)
$
$
(8)
0
0
0
(8)
$ 33 $ 156
0
0
0
$ 72 $ 156
23
10
6
$
$
0
0
0
0
0
$ (296)
(16)
(25)
(5)
$ (342)
$ 80 $ 133
0
$ 80 $ 133
0
$
0 $
67
$ 67 $
0 $
(3)
(186)
0
0 $ (189)
$ 0
0
$ 0
$
$
1 $ 392
0
0
1 $ 392
$
0
18
$ 18
$ (263)
(25)
$ (288)
$ 100 $ 336
$ 67 $ 6 $ (337)
$
(8)
$ 73 $ 548
$ 18
$ (630)
$ 100 $ 336
$ 67 $
6 $ (334)
$
(8)
$ 69 $ 548
$ 18
$ (630)
(20 )
(132 )
(67 )
(8)
221
7
(74)
(302 )
(25)
398
80
204
0
(2)
(113)
(1)
(5) 246
(7)
(232)
0
0
0
0
0
0
0
$ 80 $ 204
0
0 $
0
(228)
(2) $ (341)
$
$
0
0
(1)
0
0
0
0
(5) $ 246
$
0
0
(7)
0
(250)
$ (482)
$
(In millions)
Non-designated
Hedge Derivatives
Foreign exchange
contracts
Equity contracts
Interest rate contracts
Credit contracts
Total
Designated Hedge
Derivatives
Foreign exchange
contracts
Equity contracts
Total
Total gross amounts
of derivatives
Gross derivatives either
offset or subject to an
enforceable master
netting agreement
Gross amounts of
derivatives offset on
the balance sheet
Net amounts presented
on the balance
sheet
Gross amounts of
derivatives not offset
on the balance
sheet
Cash collateral
received
Net amount
See also Note 4 – Investments and Note 6 – Fair Value Measurements.
70
Fair Value Hedge Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges
and their related hedged items:
(In millions)
Year Ended June 30,
Foreign Exchange Contracts
Derivatives
Hedged items
Total amount of ineffectiveness
Equity Contracts
Derivatives
Hedged items
Total amount of ineffectiveness
Amount of equity contracts excluded from effectiveness assessment
Cash Flow Hedge Gains (Losses)
2017
2016
2015
$ 441
(386)
55
$
$ (797)
838
41
$
$ 741
(725)
16
$
$
$
$
(74)
74
0
(80)
$
$
$
(76)
76
0
(10)
$ (107)
107
0
0
$
$
We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:
(In millions)
Year Ended June 30,
Effective Portion
Gains recognized in other comprehensive income (net of tax effects of $4, $24 and
$35)
Gains reclassified from accumulated other comprehensive income into revenue
Amount Excluded from Effectiveness Assessment and Ineffective Portion
Losses recognized in other income (expense), net
2017
2016
2015
$ 328
$ 351
555
625
$ 1,152
608
(389)
(354)
(346)
We estimate that $130 million of net derivative gains included in AOCI as of June 30, 2017 will be reclassified into earnings
within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a
result of forecasted transactions that failed to occur during fiscal year 2017.
Non-Designated Derivative Gains (Losses)
Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other
income (expense), net. These amounts are shown in the table below, with the exception of gains (losses) on derivatives
presented in income statement line items other than other income (expense), net, which were immaterial for the periods
presented. Other than those derivatives entered into for investment purposes, such as commodity contracts, the gains
(losses) below are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities
and gains (losses) from foreign exchange rate changes on certain balance sheet amounts.
(In millions)
Year Ended June 30,
Foreign exchange contracts
Equity contracts
Interest-rate contracts
Credit contracts
Commodity contracts
Total
2017
$ (117)
(114)
14
5
(22)
$ (234)
2016
$ (55
)
(21)
10
(1)
(87)
$ (154)
2015
$ (483
)
(19)
23
(1)
(223)
$ (703)
71
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
NOTE 6 — FAIR VALUE MEASUREMENTS
The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Gross
Fair
Value
Netting (a)
Net Fair
Value
(In millions)
June 30, 2017
Assets
Mutual funds
Commercial paper
Certificates of deposit
U.S. government and agency securities
Foreign government bonds
Mortgage- and asset-backed securities
Corporate notes and bonds
Municipal securities
Common and preferred stock
Derivatives
Total
Liabilities
Derivatives and other
(In millions)
June 30, 2016
Assets
Mutual funds
Commercial paper
Certificates of deposit
U.S. government and agency securities
Foreign government bonds
72
$
0
$
0
$
1,478
$
$
1,478
0
0
109,228
0
0
0
0
319
1,358
2,616
5,187
3,934
4,829
327
319
1,358
111,844
5,187
3,934
4,830
327
4,426
0
0
0
0
0
1
0
18
0
2,414
1,994
1
508
509
(227)
$ 113,121
$ 21,072
$
19
$ 134,212
$ (227)
$
0
$
345
$
39 $
384
$ (228)
Level 1
Level 2
Level 3
Gross
Fair
Value
Netting (a)
$
1,012
$
0
$
0
0
86,492
10
298
1,000
3,707
5,705
0
0
0
0
0
$
1,012
$
298
1,000
90,199
5,715
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$
8
9
8
4
7
4
0
7
6
2
$
5
$
6
$
2
8
0
9
5
1,47
31
1,35
111,84
5,18
3,93
4,83
32
4,42
28
133,98
15
Net Fair
Value
1,01
29
1,00
90,19
5,71
(In millions)
Mortgage- and asset-backed securities
Corporate notes and bonds
Municipal securities
Common and preferred stock
Derivatives
Total
Liabilities
Derivatives and other
Level 1
Level 2
Level 3
0
0
0
4,803
6,361
342
6,918
2,114
6
633
0
1
0
18
0
Gross
Fair
Value
4,803
6,362
342
9,050
Netting (a)
0
0
0
0
639
(401)
$ 94,438
$ 24,963
$
19
$ 119,420
$ (401)
$
17
$
613
$
0
$
630
$ (398)
Net Fair
Value
4,80
6,36
34
9,05
23
119,01
23
3
2
2
0
8
$
9
$
2
(a) These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable
master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.
The changes in our Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during
the periods presented.
73
The following table reconciles the total “Net Fair Value” of assets above to the balance sheet presentation of these same
assets in Note 4 – Investments.
(In millions)
June 30,
Net fair value of assets measured at fair value on a recurring basis
Cash
Common and preferred stock measured at fair value on a nonrecurring basis
Other investments measured at fair value on a nonrecurring basis
Less derivative net assets classified as other current and long-term assets
Other
Recorded basis of investment components
2017
$ 133,985
3,624
1,073
523
(202)
1
$ 139,004
2016
$ 119,019
3,501
767
618
(246)
12
$ 123,671
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During fiscal year 2017 and 2016, we did not record any material other-than-temporary impairments on financial assets
required to be measured at fair value on a nonrecurring basis.
The components of inventories were as follows:
NOTE 7 — INVENTORIES
(In millions)
June 30,
Raw materials
Work in process
Finished goods
Total
The components of property and equipment were as follows:
NOTE 8 — PROPERTY AND EQUIPMENT
(In millions)
June 30,
Land
Buildings and improvements
Leasehold improvements
Computer equipment and software
Furniture and equipment
Total, at cost
Accumulated depreciation
Total, net
2017
2016
$
7
5
9
$
1
79
14
1,23
2,18
$
2
8
1
$
1
61
15
1,48
2,25
$
2017
1,107
16,284
5,064
21,414
4,044
47,913
(24,179)
$ 23,734
2016
824
$
12,393
3,659
17,391
3,889
38,156
(19,800)
$ 18,356
As of June 30, 2017 and 2016, assets recorded under capital leases were $2.7 billion and $865 million, respectively, and
accumulated depreciation associated with capital leases was $161 million and $57 million, respectively. During fiscal years
2017 and 2016, property and equipment acquired under capital leases was $1.8 billion and $413 million, respectively.
During fiscal years 2017, 2016, and 2015, depreciation expense was $6.1 billion, $4.9 billion, and $4.1 billion, respectively.
74
NOTE 9 — BUSINESS COMBINATIONS
On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation, the
world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted
primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics
365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the
acquisition.
The allocation of the purchase price to goodwill was completed as of June 30, 2017. The major classes of assets and
liabilities to which we allocated the purchase price were as follows:
(In millions)
Cash and cash equivalents
Short-term investments
Other current assets
Property and equipment
Intangible assets
Goodwill (a)
Short-term debt (b)
Other current liabilities
Deferred income taxes
Other
Total purchase price
$ 1,328
2,110
697
1,529
7,887
16,803
(1,323)
(1,117)
(774)
(131)
$ 27,009
(a) Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to
increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected
to be deductible for income tax purposes.
(b) Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after
our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt
on our consolidated balance sheets. See Note 12 – Debt for further information.
Following are the details of the purchase price allocated to the intangible assets acquired:
(In millions)
Customer-related
Marketing-related (trade names)
Technology-based
Contract-based
Fair value of intangible assets acquired
Amount
Weighted
Average Life
$
7
8
9
3
$
7
3,60
2,14
2,10
2
7,88
7 years
20 years
3 years
5 years
9 years
Our consolidated income statement includes the following revenue and operating loss attributable to LinkedIn since the date
of acquisition:
(In millions)
Year Ended June 30,
Revenue
Operating loss
2017
$ 2,268
(948)
$
75
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as
if the acquisition had been consummated on July 1, 2015:
(In millions, except earnings per share)
Year Ended June 30,
Revenue
Net income
Diluted earnings per share
2017
$ 91,668
2016
$ 88,652
20,894
2.67
15,383
1.92
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the
results that would have been realized had we been a combined company during the periods presented and are not
necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments
related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges
were immaterial and are included in the earliest period presented.
Changes in the carrying amount of goodwill were as follows:
NOTE 10 — GOODWILL
(In millions)
Productivity and Business
Processes
Intelligent Cloud
More Personal Computing
Total
June 30,
2015
$ 6,309
4,917
5,713
$ 16,939
Acquisitions
443
$
549
100
$ 1,092
Other
$
(74)
1
(86)
$ (159)
June 30,
2016
$ 6,678
5,467
5,727
$ 17,872
Acquisitions
Other
$ 17,072 (a)
49
115
$ 17,236
$ (11)
39
(14)
$ 14
June 30,
2017
$ 23,739
5,555
5,828
$ 35,122
(a)
Includes goodwill related to LinkedIn and other acquisitions. See Note 9 – Business Combinations for further
information.
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the
facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months.
Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in
which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are
presented as “Other” in the above table. Also included in “Other” are business dispositions and transfers between business
segments due to reorganizations, as applicable.
Our accumulated goodwill impairment as of both June 30, 2017 and 2016 was $11.3 billion.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow
methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow
approach is the most reliable indicator of the fair values of the businesses. Effective May 1, 2017, we prospectively adopted
accounting guidance that simplifies our goodwill impairment testing by eliminating the requirement to calculate the implied
fair value of goodwill (formerly “Step 2”) in the event that an impairment is identified. Instead, an impairment charge is
recorded based on the excess of the reporting unit’s carrying amount over its fair value.
No instances of impairment were identified in our May 1, 2017 or May 1, 2016 test. During fiscal year 2015, we recorded
impairment charges of $5.1 billion related to goodwill in our previous Phone Hardware reporting unit. Phone Hardware
goodwill is included in the Devices reporting unit within More Personal Computing under our current segment structure.
76
Upon completion of the annual testing as of May 1, 2015, our previous Phone Hardware reporting unit goodwill was
determined to be impaired. In the second half of fiscal year 2015, Phone Hardware did not meet its sales volume and
revenue goals, and the mix of units sold had lower margins than planned. These results, along with changes in the
competitive marketplace and an evaluation of business priorities, led to a shift in strategic direction and reduced future
revenue and profitability expectations for the business. As a result of these changes in strategy and expectations, we
forecasted reductions in unit volume growth rates and lower future cash flows used to estimate the fair value of the Phone
Hardware reporting unit, which resulted in the determination that an impairment adjustment was required.
Because our annual test indicated that Phone Hardware’s carrying value exceeded its estimated fair value, Step 2 of the
goodwill impairment test was performed specific to Phone Hardware. Under Step 2, the fair value of all Phone Hardware
assets and liabilities were estimated, including tangible assets, existing technology, patent agreements, and contractual
arrangements, for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of the
goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Assumptions used in
measuring the value of these assets and liabilities included the discount rates and royalty rates used in valuing the intangible
assets, and consideration of the market environment in valuing the tangible assets.
The components of intangible assets, all of which are finite-lived, were as follows:
NOTE 11 — INTANGIBLE ASSETS
(In millions)
June 30,
Technology-based (a)
Marketing-related
Contract-based
Customer-related
Total
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
2017
$ 7,765
4,016
841
4,045
$ 16,667 (b)
$ (4,318)
(829)
(722)
(692)
$ (6,561)
$ 3,447
3,187
119
3,353
$ 10,106
$ 5,970
1,869
796
465
$ 9,100
$ (3,648)
(616)
(718)
(385)
$ (5,367)
Net Carrying
Amount
2016
$ 2,322
1,253
78
80
$ 3,733
(a) Technology-based intangible assets included $59 million and $115 million of net carrying amount of software to be
(b)
sold, leased, or otherwise marketed as of June 30, 2017 and 2016, respectively.
Includes intangible assets related to LinkedIn and other additions. See Note 9 – Business Combinations for further
information.
No material impairments of intangible assets were identified during fiscal year 2017.
During fiscal year 2016, we recorded impairment charges of $480 million related to intangible assets in the Devices reporting
unit within our More Personal Computing segment. In the fourth quarter of fiscal year 2016, we tested these intangible
assets for recoverability due to changes in facts and circumstances associated with the shift in strategic direction and
reduced profitability expectations for our phone business. Based on the results of our testing, we determined that the
carrying value of the intangible assets was not recoverable, and an impairment charge was recorded to the extent that
estimated fair value exceeded carrying value. We primarily used the income approach to determine the fair value of the
intangible assets and determine the amount of impairment.
During fiscal year 2015, we recorded impairment charges of $2.2 billion related to intangible assets in our previous Phone
Hardware reporting unit. Phone Hardware intangible assets are included in the Devices reporting unit under our current
segment structure. In the fourth quarter of fiscal year 2015, we tested these intangible assets for recoverability due to
changes in facts and circumstances associated with the shift in strategic direction and reduced profitability expectations for
Phone Hardware. Based on the results of our testing, we determined that the carrying value of the intangible assets was
not recoverable, and an impairment charge was recorded to the extent that estimated fair value exceeded carrying value.
We primarily used a relief from royalty income approach to determine the fair value of the intangible assets and determine
the amount of impairment.
77
These intangible assets impairment charges were included in impairment, integration, and restructuring expenses on our
consolidated income statement, and reflected in Corporate and Other in our table of operating income (loss) by segment in
Note 21 – Segment Information and Geographic Data.
We estimate that we have no significant residual value related to our intangible assets.
The components of intangible assets acquired during the periods presented were as follows:
(In millions)
Year Ended June 30,
Customer-related
Technology-based
Marketing-related
Contract-based
Total
Weighted
Average Life
Amount
2017
Amount
2016
Weighted
Average Life
$
7
5
8
3
$
3
3,60
2,26
2,14
6
8,08
7 years
2 years
19 years
6 years
9 years
$
0
1
2
0
$
3
3
36
39
3 years
4 years
1 year
n/a
4 years
Intangible assets amortization expense was $1.7 billion, $978 million, and $1.3 billion for fiscal years 2017, 2016, and 2015,
respectively. Amortization of capitalized software was $55 million, $69 million, and $79 million for fiscal years 2017, 2016,
and 2015, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2017:
(In millions)
Year Ending June 30,
2018
2019
2020
2021
2022
Thereafter
Total
Short-term Debt
$ 2,190
1,698
1,180
1,006
932
3,100
$ 10,106
NOTE 12 — DEBT
As of June 30, 2017, we had $9.1 billion of commercial paper issued and outstanding, with a weighted-average interest rate
of 1.01% and maturities ranging from 25 days to 264 days. As of June 30, 2016, we had $12.9 billion of commercial paper
issued and outstanding, with a weighted-average interest rate of 0.43% and maturities ranging from 1 day to 99 days. The
estimated fair value of this commercial paper approximates its carrying value.
We have two $5.0 billion credit facilities that expire on October 31, 2017 and November 14, 2018, respectively. These credit
facilities serve as a back-up for our commercial paper program. As of June 30, 2017, we were in compliance with the only
financial covenant in both credit agreements, which requires us to maintain a coverage ratio of at least three times earnings
before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreements. No amounts
were drawn against these credit facilities during any of the periods presented.
78
Long-term Debt
As of June 30, 2017, the total carrying value and estimated fair value of our long-term debt, including the current portion,
were $77.1 billion and $80.3 billion, respectively. As of June 30, 2016, the total carrying value and estimated fair value of
our long-term debt were $40.6 billion and $44.0 billion, respectively. These estimated fair values are based on Level 2
inputs.
79
The components of our long-term debt, including the current portion, and the associated interest rates were as follows:
(In millions, except interest rates)
June 30,
Notes
November 15, 2017
May 1, 2018
November 3, 2018
December 6, 2018
June 1, 2019
August 8, 2019 (a)
November 1, 2019 (b)
February 6, 2020 (c)
February 12, 2020
October 1, 2020
November 3, 2020
February 8, 2021
August 8, 2021 (a)
December 6, 2021 (d)
February 6, 2022 (c)
February 12, 2022
November 3, 2022
November 15, 2022
May 1, 2023
August 8, 2023 (a)
December 15, 2023
February 6, 2024 (c)
February 12, 2025
November 3, 2025
August 8, 2026 (a)
80
Face Value
2017
Face Value
2016
Stated
Interest
Rate
Effective
Interest
Rate
$
600
$
600
0.875
1.084
%
450
450
%
1,750
1,750
%
1,250
1,000
2,500
18
1,500
1,500
1,000
2,250
500
2,750
1,996
1,750
1,500
1,000
750
1,000
1,500
1,500
2,250
2,250
3,000
4,000
1,250
%
1,000
%
*
%
*
%
*
%
1,500
%
1,000
%
2,250
%
500
%
*
%
1,944
%
*
%
1,500
%
1,000
%
750
%
1,000
%
*
%
1,500
%
*
%
2,250
%
3,000
%
*
%
1.000
1.300
1.625
4.200
1.100
0.500
1.850
1.850
3.000
2.000
4.000
1.550
2.125
2.400
2.375
2.650
2.125
2.375
2.000
3.625
2.875
2.700
3.125
2.400
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
1.106
1.396
1.824
4.379
1.203
0.500
1.952
1.935
3.137
2.093
4.082
1.642
2.233
2.520
2.466
2.717
2.239
2.465
2.101
3.726
3.041
2.772
3.176
2.464
(In millions, except interest rates)
February 6, 2027 (c)
December 6, 2028 (d)
May 2, 2033 (d)
February 12, 2035
November 3, 2035
August 8, 2036 (a)
February 6, 2037 (c)
June 1, 2039
October 1, 2040
February 8, 2041
November 15, 2042
May 1, 2043
December 15, 2043
February 12, 2045
November 3, 2045
August 8, 2046 (a)
February 6, 2047 (c)
February 12, 2055
November 3, 2055
August 8, 2056 (a)
February 6, 2057 (c)
Total
Face Value
Face Value
4,000
1,996
627
1,500
1,000
2,250
2,500
750
1,000
1,000
900
500
500
1,750
3,000
4,500
3,000
2,250
1,000
2,250
*
%
1,944
%
611
%
1,500
%
1,000
%
*
%
*
%
750
%
1,000
%
1,000
%
900
%
500
%
500
%
1,750
%
3,000
%
*
%
*
%
2,250
%
1,000
%
*
%
2,000
$ 77,837
*
$ 40,949
%
Stated
Interest
Rate
3.300
Effective
Interest
Rate
3.383
3.125
2.625
3.500
4.200
3.450
4.100
5.200
4.500
5.300
3.500
3.750
4.875
3.750
4.450
3.700
4.250
4.000
4.750
3.950
4.500
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
3.218
2.690
3.604
4.260
3.510
4.152
5.240
4.567
5.361
3.571
3.829
4.918
3.800
4.492
3.743
4.287
4.063
4.782
4.033
4.528
81
In August 2016, we issued $19.8 billion of debt securities.
(a)
(b) Remaining notes that were acquired as part of the LinkedIn acquisition. See Note 9 – Business Combinations for
further information.
In February 2017, we issued $17.0 billion of debt securities.
(c)
(d) Euro-denominated debt securities.
*
Not applicable.
The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt
outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest
is paid annually. Cash paid for interest on our debt for fiscal years 2017, 2016, and 2015 was $1.6 billion, $1.1 billion, and
$620 million, respectively. Effective July 1, 2016, we retrospectively adopted accounting guidance that requires debt
issuance costs to be recorded as a deduction from the carrying amount of the debt liability, consistent with debt discounts.
As of June 30, 2017 and 2016, the aggregate unamortized discount and debt issuance costs associated with our long-term
debt, including the current portion, were $715 million and $392 million, respectively.
Maturities of our long-term debt for each of the next five years and thereafter are as follows:
(In millions)
Year Ending June 30,
2018
2019
2020
2021
2022
Thereafter
Total
The components of the provision for income taxes were as follows:
NOTE 13 — INCOME TAXES
(In millions)
Year Ended June 30,
Current Taxes
U.S. federal
U.S. state and local
Foreign
Current taxes
Deferred Taxes
Deferred taxes
Provision for income taxes
$ 1,050
4,000
5,518
3,750
7,996
55,523
$ 77,837
2017
2016
2015
$ 545
$ 2,739
30
136
2,472
1,940
5,241
2,621
$
3,66
1
36
4
2,06
5
6,09
0
(3,296
)
22
332
4
$ 1,945
$ 2,95
3
$
6,31
4
In fiscal year 2017, deferred taxes included U.S. and foreign deferred tax benefit of $2.7 billion and $617 million,
respectively.
82
U.S. and foreign components of income (loss) before income taxes were as follows:
(In millions)
Year Ended June 30,
U.S.
Foreign
Income before income taxes
2017
453
$
$
22,696
$ 23,149 $
2016
(325)
20,076
19,751
2015
$ 7,363
11,144
$ 18,507
In fiscal year 2017, income before income taxes included the net impact of U.S. and foreign revenue deferrals related to the
sales of Windows 10 of $6.4 billion and $317 million, respectively. In fiscal year 2016, income before income taxes included
the net impact of U.S. and foreign revenue deferrals related to the sales of Windows 10 of $6.0 billion and $588 million,
respectively. In fiscal year 2015, income before income taxes included the net impact of U.S. and foreign impairment,
integration, and restructuring expenses relating to our phone business of $1.1 billion and $8.9 billion, respectively.
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective
rate were as follows:
Year Ended June 30,
Federal statutory rate
Effect of:
Foreign earnings taxed at lower rates
Phone business losses
Excess tax benefits relating to stock-based compensation
Domestic production activities deduction
Interest, net
Other reconciling items, net
Effective rate
2017
35.0%
2016
35.0%
2015
35.0%
(15.7)% (19.4)% (20.9)%
19.1%
(7.3)%
(2.7)%
0%
(2.4)%
(1.4)%
1.5%
1.8%
1.8%
(1.3)%
34.1%
8.4%
1.3%
(2.0)%
(0.6)%
1.2%
(0.5)%
15.0%
The reduction from the federal statutory rate is 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 centers in Ireland,
Singapore, and Puerto Rico. Our foreign regional operating centers, which are taxed at rates lower than the U.S. rate,
generated 64%, 69%, and 73% of our foreign income before tax in fiscal years 2017, 2016, and 2015, respectively.
Additionally, our effective tax rate in fiscal year 2017 reflects the realization of tax benefits attributable to previous phone
business losses. In general, other reconciling items consist primarily of U.S. state income taxes, permanent items, and
credits. In fiscal years 2017, 2016, and 2015, there were no individually significant other reconciling items.
The decrease in our effective tax rate for fiscal year 2017 compared to fiscal year 2016 was primarily due to the realization
of tax benefits attributable to previous phone business losses, offset in part by changes in the mix of our income before
income taxes between the U.S. and foreign countries. The fiscal year 2016 effective tax rate included the impact of
nondeductible phone charges and valuation allowances.
83
The components of the deferred income tax assets and liabilities were as follows:
(In millions)
June 30,
Deferred Income Tax Assets
Stock-based compensation expense
Other expense items
Restructuring charges
Unearned revenue
Impaired investments
Loss carryforwards
Depreciation and amortization
Other revenue items
Deferred income tax assets
Less valuation allowance
Deferred income tax assets, net of valuation allowance
Deferred Income Tax Liabilities
Foreign earnings
Unrealized gain on investments and debt
Depreciation and amortization
Other
Deferred income tax liabilities
Net deferred income tax assets (liabilities)
Reported As
Other long-term assets
Long-term deferred income tax liabilities
Net deferred income tax assets (liabilities)
2017
2016
$
777
1,550
66
1,889
59
4,809
53
130
9,333
(3,310)
$ 6,023
$ (1,107)
(1,384)
(1,630)
(21)
(4,142)
$ 1,881
$
809
1,609
284
494
226
4,252
115
89
7,878
(4,729)
$ 3,149
$ (1,242)
(2,102)
(1,008)
(54)
(4,406)
$ (1,257)
$ 2,412
(531)
$ 1,881
$
219
(1,476)
$ (1,257)
In fiscal year 2017, we corrected the table above to include a $2.5 billion loss carryforward and valuation allowance as of
June 30, 2016. We do not consider this correction to be material, and there was no impact to our consolidated financial
statements.
As of June 30, 2017, we had net operating loss carryforwards of $13.7 billion, including $11.1 billion of foreign net operating
loss carryforwards. The valuation allowance disclosed in the table above relates to the foreign net operating loss
carryforwards and other net deferred tax assets that may not be realized.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or
recovered.
As of June 30, 2017, we have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences
of approximately $142 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested
outside the U.S. The unrecognized deferred tax liability associated with these temporary differences was approximately
$45 billion as of June 30, 2017.
Income taxes paid, net of refunds, were $2.4 billion, $3.9 billion, and $4.4 billion in fiscal years 2017, 2016, and 2015,
respectively.
Tax contingencies and other income tax liabilities were $13.5 billion and $11.8 billion as of June 30, 2017 and 2016,
respectively, and are included in other long-term liabilities. This increase relates primarily to current period intercompany
transfer pricing and tax credits.
84
Uncertain Tax Positions
Unrecognized tax benefits as of June 30, 2017, 2016, and 2015, were $11.7 billion, $10.2 billion, and $9.6 billion,
respectively. If recognized, these tax benefits would affect our effective tax rates for fiscal years 2017, 2016, and 2015, by
$10.2 billion, $8.8 billion, and $7.9 billion, respectively.
As of June 30, 2017, 2016, and 2015, we had accrued interest expense related to uncertain tax positions of $2.3 billion,
$1.9 billion, and $1.7 billion, respectively, net of federal income tax benefits. Interest expense on unrecognized tax benefits
was $399 million, $163 million, and $237 million in fiscal years 2017, 2016, and 2015, respectively, and was included in
provision for income taxes.
The aggregate changes in the balance of unrecognized tax benefits were as follows:
(In millions)
Year Ended June 30,
Balance, beginning of year
Decreases related to settlements
Increases for tax positions related to the current year
Increases for tax positions related to prior years
Decreases for tax positions related to prior years
Decreases due to lapsed statutes of limitations
Balance, end of year
2017
$ 10,164
(4)
1,277
397
(49)
(48)
$ 11,737
2016
$ 9,599
(201)
1,086
115
(317)
(118)
$ 10,164
2015
$ 8,714
(50)
1,091
94
(144)
(106)
$ 9,599
While we settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 during the third quarter
of fiscal year 2011, and settled a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year
2016, we remain under audit for those years. We also continue to be subject to examination by the IRS for tax years 2010
to 2016. In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006 and reopened the
audit phase of the examination. As of June 30, 2017, the primary unresolved issue relates to transfer pricing, which could
have a significant impact on our consolidated financial statements if not resolved favorably. We believe our allowances for
income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do
not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not
anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
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 2017, some of which are currently under audit by local tax authorities. The resolutions of
these audits are not expected to be material to our consolidated financial statements.
Phone Hardware Restructuring
NOTE 14 — RESTRUCTURING CHARGES
In June 2015, management approved a plan to restructure our phone business to better focus and align resources (the
“Phone Hardware Restructuring Plan”), under which we eliminated approximately 7,400 positions in fiscal year 2016. In
fiscal year 2015, we incurred restructuring charges of $780 million under the Phone Hardware Restructuring Plan, including
severance expenses and other reorganization costs. In fiscal year 2016, we reversed $21 million of previously estimated
restructuring charges related to contract termination costs. The actions associated with the Phone Hardware Restructuring
Plan were completed as of June 30, 2017.
2016 Restructuring
In the fourth quarter of fiscal year 2016, management approved restructuring plans that resulted in approximately 4,700 job
eliminations in fiscal year 2017, primarily across our smartphone hardware business and global sales.
85
In fiscal year 2016, we incurred restructuring charges of $501 million in connection with the 2016 restructuring plans,
including severance expenses and other reorganization costs. The actions associated with these restructuring plans were
completed as of June 30, 2017.
2017 Restructuring
In June 2017, management approved a sales and marketing restructuring plan. In fiscal year 2017, we recorded employee
severance expenses of $306 million primarily related to this sales and marketing restructuring plan. We do not expect to
incur additional charges for this restructuring plan in subsequent years. The actions associated with this restructuring plan
are expected to be completed by the end of fiscal year 2018.
Restructuring Summary
Restructuring charges associated with each of these plans were included in impairment, integration, and restructuring
expenses on our consolidated income statements, and were reflected in Corporate and Other in our table of operating
income (loss) by segment.
Changes in the restructuring liability were as follows:
(In millions)
Balance, as of June 30, 2016
Restructuring charges
Cash paid
Other
Balance, as of June 30, 2017
Severance
Other (a)
Total
$ 470
306
(367)
(36)
$ 373
$ 239
0
(101)
(79)
59
$
$ 709
306
(468)
(115)
$ 432
(a) Primarily reflects activities associated with the consolidation of our facilities and manufacturing operations, including
contract termination costs and asset write-downs.
NOTE 15 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
(In millions)
June 30,
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Corporate and Other
Total
2017
$ 14,291
13,464
3,420
13,304
$ 44,479
2016
$ 12,497
11,472
3,334
6,606
$ 33,909
Corporate and Other consists of the net revenue deferral from Windows 10. Revenue from Windows 10 is primarily
recognized at the time of billing in the More Personal Computing segment, and the deferral and subsequent recognition of
revenue is reflected in Corporate and Other.
Construction and Operating Leases
NOTE 16 — COMMITMENTS
We have committed $1.1 billion for constructing new buildings, building improvements, and leasehold improvements as of
June 30, 2017.
86
We have operating leases for most U.S. and international sales and support offices, datacenters, research and development
facilities, manufacturing facilities, retail stores, and certain equipment. Rental expense for facilities operating leases was
$1.3 billion, $1.0 billion, and $989 million, in fiscal years 2017, 2016, and 2015, respectively.
Future minimum rental commitments under non-cancellable facilities operating leases in place as of June 30, 2017 are as
follows:
(In millions)
Year Ending June 30,
2018
2019
2020
2021
2022
Thereafter
Total
Capital Leases
$
2
0
5
8
9
8
$
2
1,29
1,22
1,11
90
74
2,58
7,87
We have capital leases for datacenters and corporate offices. As of June 30, 2017 and 2016, capital lease obligations
included in other current liabilities were $113 million and $25 million, respectively, and capital lease obligations included in
other long-term liabilities were $2.4 billion and $761 million, respectively.
Future minimum lease payments under non-cancellable capital leases as of June 30, 2017 were as follows:
(In millions)
Year Ending June 30,
2018
2019
2020
2021
2022
Thereafter
Total (a)
$
9
7
2
7
2
3
$
0
20
21
22
22
23
2,35
3,46
(a)
Includes imputed interest of $922 million.
As of June 30, 2017, we had additional purchase obligations for capital leases executed but not yet recorded of $3.2 billion.
87
Patent and Intellectual Property Claims
IPCom patent litigation
NOTE 17 — CONTINGENCIES
IPCom GmbH & Co. (“IPCom”) is a German company that holds a large portfolio of mobile technology-related patents
spanning about 170 patent families and addressing a broad range of cellular technologies. IPCom has asserted 19 of these
patents in litigation against Nokia Corporation (“Nokia”) and many of the leading cell phone companies and operators. In
November 2014, Microsoft and IPCom entered into a standstill agreement staying all of the pending litigation against
Microsoft to permit the parties to pursue settlement discussions, which continue.
88
InterDigital patent litigation
InterDigital Technology Corporation and InterDigital Communications Corporation (collectively, “IDT”) filed four patent
infringement cases against Nokia in the International Trade Commission (“ITC”) and in U.S. District Court for the District of
Delaware between 2007 and 2013. We were added to these cases as a defendant after we acquired the Nokia phone
business. Each of the ITC matters was resolved in our favor. In September 2015, in an inter partes review the United States
Patent Trial and Appeal Board issued a final written decision that deemed unpatentable all asserted claims of the patent
remaining at issue in the Delaware case. IDT’s appeal of this decision was heard by the U.S. Court of Appeals for the
Federal Circuit on April 7, 2017 and the Delaware case was stayed pending final completion of the inter partes review
(including appeals and any subsequent proceedings in the Patent Office). We filed an antitrust complaint against IDT in the
District of Delaware in August 2015 asserting violations of Section 2 of the Sherman Act, alleging unlawful exploitation of
standard essential patents. Microsoft and IDT settled these cases in May 2017 and they have been dismissed.
European copyright levies
We assumed from Nokia all potential liability due to Nokia’s alleged failure to pay “private copyright levies” in various
European countries based upon sale of memory cards and mobile phones that incorporate blank memory. The levies are
based upon a 2001 European Union (“EU”) Directive establishing a right for end users to make copies of copyrighted works
for personal or private use, but also allowing the collection of levies based upon sales of blank media or recording devices
to compensate copyright holders for private copying. Various collecting societies in EU countries initiated litigation against
Nokia, stating it must pay levies not only based upon sales of blank memory cards, but also phones that include blank
memory for data storage on the phones, regardless of actual usage of that memory. The most significant cases against
Nokia were pending in Germany and Austria, due to both the high volume of sales and high levy amounts sought in these
countries. We reached a settlement of the Austrian case in August 2016. In Germany, the only period for which settlement
has not been reached is 2004 through 2007. In July 2016, the German Supreme Court heard our appeal contesting the
legality of the levy assessed on phones with music players and over five megabytes of memory. The Supreme Court issued
a ruling in December 2016, finding that the levy may not be appropriate for phones that have the ability to receive music
files only via Bluetooth or infrared inputs, and remanded for further proceedings. A new case schedule has not been set,
and we have reached a tentative settlement.
Other patent and intellectual property claims
In addition to the IPCom cases, there were 41 other patent infringement cases pending against Microsoft as of June 30,
2017.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec,
Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft
operating system software and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. The plaintiffs filed their case in chief in August 2016,
setting out claims made, authorities, and evidence in support of their claims. A six-month oral hearing is scheduled to
commence in September 2017, consisting of cross examination on witness affidavits. The Ontario and Quebec cases are
inactive.
Other Antitrust Litigation and Claims
China State Administration for Industry and Commerce investigation
In 2014, Microsoft was informed that China’s State Administration for Industry and Commerce (“SAIC”) had begun a formal
investigation relating to China’s Anti-Monopoly Law, and the SAIC conducted onsite inspections of Microsoft
89
offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAIC has stated the investigation relates to compatibility, bundle
sales, file verification issues related to Windows and Office software, and potentially other issues.
Product-Related Litigation
U.S. cell phone litigation
Nokia, along with other handset manufacturers and network operators, is a defendant in 19 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 as part of our acquisition of
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 10 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, defendants in the consolidated cases moved to exclude 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 defendants’ motion to
exclude plaintiffs’ general causation experts. The defendants filed an interlocutory appeal challenging the standard for
evaluating expert scientific evidence, which the District of Columbia Court of Appeals heard en banc. In October 2016, the
Court of Appeals issued its decision adopting the standard advocated by defendants and remanding the cases to the trial
court for further proceedings under that standard. Plaintiffs have filed a motion to reopen discovery and file additional expert
evidence.
Canadian cell phone class action
Nokia, along with other handset manufacturers and network operators, is a defendant in a 2013 class action lawsuit filed in
the Supreme Court of British Columbia by a purported class of Canadians who have used cellular phones for at least 1,600
hours, including a subclass of users with brain tumors. Microsoft was served with the complaint in June 2014 and has been
substituted for the Nokia defendants. The litigation has been dormant for more than two years.
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 on 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 June 30, 2017, we accrued aggregate legal liabilities of $352 million. While we intend to defend these matters
vigorously, adverse outcomes that we estimate could reach approximately $1.0 billion in aggregate beyond recorded
amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material
adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable.
Indemnifications
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property
infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have
agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud
90
business. We evaluate estimated losses for these indemnifications, and we consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we
have not encountered significant costs as a result of these obligations and have not accrued any liabilities related to these
indemnifications on our consolidated financial statements.
NOTE 18 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
(In millions)
Year Ended June 30,
Balance, beginning of year
Issued
Repurchased
Balance, end of year
Share Repurchases
2017
2016
2015
7,808 8,027 8,239
83
(295)
7,708 7,808 8,027
75
(294)
70
(170)
On September 16, 2013, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in
share repurchases. This share repurchase program became effective on October 1, 2013, and was completed on
December 22, 2016.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional
$40.0 billion in share repurchases. This share repurchase program commenced on December 22, 2016 following
completion of the prior program approved on September 16, 2013, has no expiration date, and may be suspended or
discontinued at any time without notice. As of June 30, 2017, $36.8 billion remained of this $40.0 billion share repurchase
program.
We repurchased the following shares of common stock under the share repurchase programs:
(In millions)
Year Ended June 30,
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Shares
63
59
25
23
17
0
Amount
2017
$ 3,550
Shares
Amount
Shares
2016
89
$ 4,000
43
Amount
2015
$ 2,000
3,533
1,600
1,600
66
69
70
3,600
3,600
3,600
43
116
93
2,000
5,000
4,209
$ 10,283
294
$ 14,800
295
$ 13,209
Shares repurchased during the third and fourth quarter of fiscal year 2017 were under the share repurchase program
approved September 20, 2016. All other shares repurchased were under the share repurchase program approved
September 16, 2013. The above table excludes shares repurchased to settle statutory employee tax withholding related to
the vesting of stock awards. All repurchases were made using cash resources.
91
Dividends
In fiscal year 2017, our Board of Directors declared the following dividends:
Declaration Date
September 20, 2016
November 30, 2016
March 14, 2017
June 13, 2017
Dividend
Per Share
Record Date
Total Amount
Payment Date
$ 0.39
November 17, 201
6
0.39
7
February 16, 201
0.39
2017
0.39
2017
May 18,
August 17,
(In millions)
$ 3,024
December 8, 2016
3,012
March 9, 2017
3,009
June 8, 2017
3,006 September 14, 2017
The dividend declared on June 13, 2017 will be paid after the filing date of the 2017 Form 10-K and was included in other
current liabilities as of June 30, 2017.
In fiscal year 2016, our Board of Directors declared the following dividends:
Declaration Date
September 15, 2015
December 2, 2015
March 15, 2016
June 14, 2016
Dividend
Per Share
Record Date
Total Amount
(In millions)
Payment Date
$ 0.36
November 19, 2015
February 18, 2016
May 19, 2016
August 18, 2016
0.36
0.36
0.36
$ 2,868
December 10, 2015
March 10, 2016
2,842
2,821
June 9, 2016
2,800 September 8, 2016
The dividend declared on June 14, 2016 was included in other current liabilities as of June 30, 2016.
NOTE 19 — ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated other comprehensive income by component:
(In millions)
Year Ended June 30,
Derivatives
Balance, beginning of period
Unrealized gains, net of tax effects of $4, $24 and $35
Reclassification adjustments for gains included in revenue
Tax expense included in provision for income taxes
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income (loss)
Balance, end of period
Investments
Balance, beginning of period
Unrealized gains, net of tax effects of $267, $120 and $59
Reclassification adjustments for gains included in other income (expense), net
Tax expense included in provision for income taxes
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive loss
Balance, end of period
Translation Adjustments and Other
Balance, beginning of period
92
2017
2016
2015
$
$
352
328
(555)
9
(546)
(218)
134
$ 2,941
517
(2,513)
880
(1,633)
(1,116)
$ 1,825
$
$
590
351
(625)
36
(589)
(238)
352
$ 3,169
219
(688)
241
(447)
(228)
$ 2,941
$
$
31
1,152
(608)
15
(593)
559
590
$ 3,531
110
(728)
256
(472)
(362)
$ 3,169
$ (1,756)
$ (1,237)
$
146
(In millions)
Translation adjustments and other, net of tax effects of $9, $(33) and $16
Balance, end of period
Accumulated other comprehensive income, end of period
228
$ (1,528)
431
$
(519)
$ (1,756)
$ 1,537
(1,383)
$ (1,237)
$ 2,522
93
NOTE 20 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2017, an aggregate of 127 million shares
were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares
generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting
of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
(In millions)
Year Ended June 30,
Stock-based compensation expense
2017
$ 3,266
2016
$ 2,668
2015
$ 2,574
Income tax benefits related to stock-based compensation
1,066
882
868
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally
vest over a four or five-year service period.
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain
senior executives. RSUs generally vest ratably over a four-year service period. PSUs generally vest over a three-year
performance period. The number of shares the PSU holder receives is based on the extent to which the corresponding
performance goals have been achieved.
Activity for all stock plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
Year Ended June 30,
Dividends per share (quarterly amounts)
Interest rates
2017
2016
2015
$ 0.36 - $ 0.39
$ 0.31 - $ 0.36
$
1
0.28 - $ 0.3
1.2% - 2.2%
1.1% - 1.8%
%
1.2% - 1.9
During fiscal year 2017, the following activity occurred under our stock plans:
Stock Awards
Nonvested balance, beginning of year
Granted (a)
Assumed in acquisitions (b)
Vested
Forfeited
Nonvested balance, end of year
Weighted
Average
Grant-Date
Fair Value
$ 36.92
55.64
59.09
37.36
43.71
46.32
Shares
(In millions)
194
84
23
(80)
(20)
201
(a)
Includes 2 million PSUs granted during fiscal year 2017. During both fiscal year 2016 and 2015 we granted 1 million
PSUs.
(b) Substantially all awards assumed were related to LinkedIn. See Note 9 – Business Combinations for further
information.
94
As of June 30, 2017, there was approximately $6.5 billion of total unrecognized compensation costs related to stock awards.
These costs are expected to be recognized over a weighted average period of 3 years. The weighted average grant-date
fair value of stock awards granted was $55.64, $41.51, and $42.36 for fiscal years 2017, 2016, and 2015, respectively. The
fair value of stock awards vested was $4.8 billion, $3.9 billion, and $4.2 billion, for fiscal years 2017, 2016, and 2015,
respectively.
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month
intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase
shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the
following shares during the periods presented:
(Shares in millions)
Year Ended June 30,
Shares purchased
Average price per share
2017
13
2016
15
2015
16
$ 56.36
$ 44.83
$ 39.87
As of June 30, 2017, 129 million shares of our common stock were reserved for future issuance through the ESPP.
Savings Plan
We have a savings plan in the U.S. that qualifies under Section 401(k) of the Internal Revenue Code, and a number of
savings plans in international locations. Participating U.S. employees may contribute a portion of their salary, subject to
certain limitations. Beginning January 2016, we contribute fifty cents for each dollar a participant contributes in this plan,
with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Prior to January 2016, we
contributed fifty cents for each dollar of the first 6% a participant contributed in this plan, with a maximum contribution of the
lesser of 3% of a participant’s earnings or 3% of the IRS compensation limit for the calendar year. Matching contributions
for all plans were $734 million, $549 million, and $454 million in fiscal years 2017, 2016, and 2015, respectively, and were
expensed as contributed.
NOTE 21 — 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 U.S. 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.
In December 2016, we completed our acquisition of LinkedIn Corporation. LinkedIn is reported as part of our Productivity
and Business Processes segment.
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, including Office 365 subscriptions and Office licensed on-premises, comprising Office,
Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access Licenses (“CALs”).
• Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer
Services, including Skype, Outlook.com, and OneDrive.
95
•
LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.
• Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and
Dynamics 365, a set of cloud-based applications across ERP and CRM.
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power
modern business. This segment primarily comprises:
• Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System
Center, and related CALs, and Azure.
• Enterprise Services, including Premier Support Services and Microsoft Consulting Services.
More Personal Computing
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end
users, developers, and IT professionals across all devices. This segment primarily comprises:
• Windows, including Windows original equipment manufacturer 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; Windows Internet
of Things (“IoT”); and MSN display advertising.
• Devices, including Microsoft Surface, PC accessories, and other intelligent devices.
• Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions,
subscriptions, and advertising (“Xbox Live”), video games, and third-party video game royalties.
• Search advertising.
Corporate and Other includes adjustments to conform our internal accounting policies to U.S. GAAP, and impairment,
integration, and restructuring expenses. Significant internal accounting policies that differ from U.S. GAAP relate to Windows
10 revenue recognition.
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 on 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 incurred at a corporate level that are identifiable and that benefit our segments are allocated to
them. These allocated costs include costs of: legal, including settlements, and fines; information technology; human
resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation
is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level
activity is not allocated to our segments, including impairment, integration, and restructuring expenses.
96
Segment revenue and operating income (loss) were as follows during the periods presented:
(In millions)
Year Ended June 30,
Revenue
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Corporate and Other
Total
(In millions)
Year Ended June 30,
Operating income (loss)
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Corporate and Other
Total
2017
2016
2015
$ 30,444
27,440
38,773
(6,707)
$ 89,950
$ 26,487
25,042
40,434
(6,643)
$ 85,320
$ 26,430
23,715
43,435
0
$ 93,580
2017
2016
2015
$ 11,913
9,138
8,288
(7,013)
$ 22,326
$ 12,418
9,315
6,202
(7,753)
$ 20,182
$ 13,274
9,803
5,095
(10,011)
$ 18,161
Corporate and Other operating loss activity was as follows during the periods presented:
(In millions)
Year Ended June 30,
Net revenue deferral from Windows 10
Impairment, integration, and restructuring expenses
Total Corporate and Other
2017
$ (6,707)
(306)
$ (7,013)
2016
$ (6,643)
(1,110)
$ (7,753)
2015
0
$
(10,011)
$ (10,011)
No sales to an individual customer or country other than the United States accounted for more than 10% of fiscal year 2017,
2016, or 2015 revenue. Revenue, classified by the major geographic areas in which our customers are located, was as
follows:
(In millions)
Year Ended June 30,
United States (a)
Other countries
Total
2017
$ 45,248
44,702
$ 89,950
2016
$ 40,578
2015
$ 42,941
44,742
$ 85,320
50,639
$ 93,580
(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.
97
Revenue from external customers, classified by significant product and service offerings, were as follows:
(In millions)
Year Ended June 30,
Microsoft Office system
Server products and tools
Xbox
Windows PC operating system
Advertising
Consulting and product support services
Devices
LinkedIn
Other
Total
2017
2016
2015
$ 25,389
$ 23,588
21,758
19,177
9,256
9,395
8,625 (a)
8,104 (a)
6,971
5,588
4,557
2,268 (b
)
6,098
5,641
7,466
0
5,538
5,851
$ 89,950
$ 85,320
$
8
2
1
6
7
0
2
0
4
$
0
23,53
18,61
9,12
14,82
4,55
5,09
11,60
6,23
93,58
(a)
(b)
Includes the net revenue deferral from Windows 10.
Includes advertising revenue.
Our total commercial cloud revenue, which primarily comprises Office 365 commercial, Azure, Dynamics 365, and other
cloud properties, was $14.9 billion, $9.5 billion, and $5.8 billion in fiscal years 2017, 2016, and 2015, respectively. These
amounts are included in their respective product categories in the table above.
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.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory
company and with countries over 10% of the total shown separately, were as follows:
(In millions)
June 30,
United States
Ireland
Luxembourg
Other countries
Total
98
2017
$ 39,118
12,876
6,845
10,123
$ 68,962
2016
$ 22,819
2,078
6,854
8,210
$ 39,961
2015
$ 19,562
1,595
6,879
8,469
$ 36,505
NOTE 22 — QUARTERLY INFORMATION (UNAUDITED)
(In millions, except per share amounts)
Quarter Ended
Fiscal Year 2017 (a)
Revenue (b)
Gross margin
Operating income
Net income
Basic earnings per share
Diluted earnings per share
Fiscal Year 2016
Revenue (d)
Gross margin
Operating income
Net income
Basic earnings per share
Diluted earnings per share
September 30
December 31
March 31
June 30
Total
$ 20,453
12,609
5,225
4,690
0.60
0.60
$ 20,379
13,172
5,793
4,902
0.61
0.61
$ 24,090
14,189
6,177
5,200
0.67
0.66
$ 23,796
13,924
6,026
5,018
0.63
0.62
$ 22,090
14,030
5,594
4,801
0.62
0.61
$ 20,531
12,809
5,283
3,756
0.48
0.47
$ 23,317
14,861
5,330
6,513 (c)
0.84
0.83 (c)
$ 20,614
12,635
3,080
3,122 (e)
0.40
0.39 (e)
$ 89,950
55,689
22,326
21,204 (c)
2.74
2.71 (c)
$ 85,320
52,540
20,182
16,798 (e)
2.12
2.10 (e)
(a) On December 8, 2016, we acquired LinkedIn Corporation. LinkedIn has been included in our consolidated results of
operations starting on the acquisition date.
(b) Reflects the impact of the net revenue deferral from Windows 10 of $1.9 billion, $2.0 billion, $1.5 billion, and
$1.4 billion, for the first, second, third, and fourth quarter of fiscal year 2017, respectively, and $6.7 billion for fiscal
year 2017.
Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring
plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.03,
respectively.
(c)
(d) Reflects the impact of the net revenue deferral from Windows 10 of $1.3 billion, $1.7 billion, $1.6 billion, and
$2.0 billion, for the first, second, third, and fourth quarter of fiscal year 2016, respectively, and $6.6 billion for fiscal
year 2016.
Includes $630 million of asset impairment charges related to our phone business, and $480 million of restructuring
charges associated with our 2016 restructuring plans, which together decreased operating income, net income, and
diluted EPS by $1.1 billion, $895 million, and $0.11, respectively.
(e)
99
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”)
as of June 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, cash flows, and
stockholders’ equity for each of the three years in the period ended June 30, 2017. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Microsoft Corporation and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated August 2, 2017 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
August 2, 2017
100
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the
company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of
our financial reporting for external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately
and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for
preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets
are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition,
use, or disposition of company assets that could have a material effect on our financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to
provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial
reporting was effective as of June 30, 2017. Deloitte & Touche LLP has audited our internal control over financial reporting
as of June 30, 2017; their report follows.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During fiscal
year 2017, we implemented internal controls to ensure we have adequately evaluated our contracts and properly assessed
the impact of the new accounting standards related to revenue recognition and leases on our financial statements to facilitate
the adoption on July 1, 2017. We do not expect significant changes to our internal control over financial reporting due to the
adoption of the new standards.
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the “Company”) as
of June 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
June 30, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended June 30, 2017 of the Company and our report dated
August 2, 2017 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
August 2, 2017
102
DIRECTORS AND EXECUTIVE OFFICERS OF MICROSOFT CORPORATION
DIRECTORS
John W. Thompson 3,4
Independent Chairman,
Microsoft Corporation
Teri L. List-Stoll 1,3
Executive Vice President and Chief
Financial Officer, Gap, Inc.
Helmut G. W. Panke 1,4
Former Chairman of the Board
of Management, BMW AG
William H. Gates III
Co-Chair and Trustee,
Bill & Melinda Gates Foundation
G. Mason Morfit 1,2
President and Chief Investment
Officer, ValueAct Capital
Sandra E. Peterson 2,4
Group Worldwide Chairman,
Johnson & Johnson
Reid G. Hoffman 4
Partner, Greylock Partners
Satya Nadella
Chief Executive Officer,
Microsoft Corporation
Hugh F. Johnston 1
Vice Chairman and Chief Financial
Officer, PepsiCo
Charles H. Noski 1,3
Former Vice Chairman,
Bank of America Corporation
Audit Committee
Board Committees
1.
2. Compensation Committee
3. Governance and Nominating Committee
4. Regulatory and Public Policy Committee
EXECUTIVE OFFICERS
Satya Nadella
Chief Executive Officer
Christopher C. Capossela
Executive Vice President, Marketing and Consumer
Business, and Chief Marketing Officer
Jean-Philippe Courtois
Executive Vice President and President, Microsoft
Global Sales, Marketing and Operations
Kathleen T. Hogan
Executive Vice President, Human Resources
Charles W. Scharf 2,3
Chief Executive Officer,
The Bank of New York Mellon
Corporation
John W. Stanton 2,4
Chairman, Trilogy Partnerships
Padmasree Warrior 2
Chief Executive Officer, NIO USA, Inc.
Amy E. Hood
Executive Vice President, Chief
Financial Officer
Margaret L. Johnson
Executive Vice President, Business
Development
Bradford L. Smith
President and Chief Legal Officer
103
INVESTOR RELATIONS
Investor Relations
You can contact Microsoft Investor Relations at any
time to order financial documents such as annual
reports and Form 10-Ks free of charge.
Call us toll-free at (800) 285-7772 or outside the United
States, call (425) 706-4400. We can be contacted between
the hours of 9:00 a.m. to 5:00 p.m. Pacific Time to answer
investment oriented questions about Microsoft.
For access to additional financial information, visit the
Investor Relations website online at:
www.microsoft.com/investor
Our e-mail is msft@microsoft.com
Our mailing address is:
Investor Relations
Microsoft Corporation
One Microsoft Way
Redmond, Washington 98052-6399
Annual Meeting
8:00 a.m. Pacific Time November 29, 2017
Meydenbauer Center
11100 NE 6th Street
Bellevue, Washington 98004
Proof of Ownership Required
You are entitled to attend the Annual Meeting only if you
are a shareholder as of the close of business on
September 29, 2017, the record date, or hold a valid proxy
for the meeting. In order to be admitted to the Annual
Meeting, you must present proof of ownership of Microsoft
stock on the record date.
• The Notice of Internet Availability of Proxy Materials
• A proxy card
•
• Voting instruction card
•
Legal proxy provided by your bank, broker, or nominee
If you received your proxy materials by email, a printout
of the email
• Brokerage statement or letter from a bank or broker
indicating ownership on September 29, 2017
Any holder of a proxy from a shareholder must present the
proxy card, properly executed, and a copy of the proof of
ownership. Shareholders and proxy holders must also
present a form of photo identification such as a driver’s
license or passport. We reserve the right to deny entry to
any person who does not present identification or refuses
to comply with our security procedures.
104
Registered Shareholder Services
American Stock Transfer & Trust Company (AST), our
transfer agent, can help you with a variety of shareholder
related services including:
Lost stock certificates
• Change of address
•
• Transfer of stock to another person
• Additional administrative services
AST also administers a direct stock purchase plan and a
dividend reinvestment program for the company.
To find out more about these services and programs you
may contact AST directly at 800-285-7772, option 1
between the hours of 5:00 a.m. and 5:00 p.m. Pacific Time,
Monday through Fridays, or visit AST online at:
https://www.astfinancial.com/
You can e-mail the transfer agent at:
msft@astfinancial.com
You can also send mail to the transfer agent at:
Microsoft Corporation
c/o American Stock Transfer & Trust Company
P.O. Box 2362
New York, NY 10272-2362
the
information you need
Shareholders can sign up for electronic alerts to access the
annual report and proxy statement online. The service gets
you
faster and also
gives you the power and convenience of online proxy
voting. To sign up for this free service, visit the Annual
Report site on
Investor Relations website at:
http://www.microsoft.com/investor/AnnualReports/default.aspx
the
long-term value
Corporate Social Responsibility
We appreciate the inquiries we receive from many investors
about our commitment to corporate social responsibility. Our
to our
CSR commitments contribute
business, our shareholders, and communities around the
world. Microsoft cannot fulfill our mission to empower every
person and every organization on the planet to achieve more
just by providing products and services that let our users do
great things. Achieving that mission requires us to be
thoughtful about the impact of our own business practices
and policies and our investments in communities. And it’s not
a mission we can achieve alone. It requires partnerships to
apply our technologies to address some of the world’s
toughest challenges. In short, we see corporate responsibility
as both a responsibility and an opportunity to work together
to advance societal needs and technology at the same time.
For more about Microsoft’s CSR commitments and
performance, please visit:
http://www.microsoft.com/csr.