Dear shareholders, colleagues, customers, and partners:
While the start of a new decade typically brings hope, we quickly saw the world come to a near standstill in 2020, conf ronted
by compounding crises: a public health and economic crisis, persistent issues of systemic racial injustice and inequity, and
the devastating ef f ects of climate change. It is easy to f all prey to pessimism, or the sense that we individually or as a
company can’t make a dif f erence. But helplessness is corrosive to hope, and hope plus work is what is required. Amid this
disruption, what’s clear is that we have a once-in-a-generation opportunity to harness digital technology to def ine the world
we want to live in. And f or that, I am optimistic.
It is in times like these that our ability to stay true to Microsof t’s mission and corporate p urpose is of the utmost importance.
As a company, we are steadf ast in our mission to empower every person and every organization on the planet to
achieve more. Our mission is enduring. It drives who we are and everything we do, emphasizing our passion to e mpower
both people and the lasting institutions they build. And it means we must always use technology to help address the world’s
challenges, not create new ones.
I’m proud of how our ecosystem of customers and partners has stepped up over the past year to help people and
organizations in every country use technology to be resilient and transf orm during the most trying of circumstances. We’ve
acted as digital f irst responders to the world’s f irst responders, supporting those on the f ront lines, f rom healt hcare, to
education, to public sector, to critical manuf acturing, grocery, and retail. And we’re helping organizations navigate the
response, recovery, and reimagine phases of the crisis, equipping them not only to stay open f or business but to innovate.
We’ve witnessed years of digital transf ormation in mere months.
Amid this rapid change, we delivered strong results: Our commercial cloud surpassed $50 billion in revenue f or the f irst time
– up 36 percent year-over-year. All-up, we delivered $143 billion in revenue, $53 billion in operating income, and more than
$60 billion in operating cash f low – and returned $35 billion to shareholders.
OUR OPPORTUNITY
Although this year has taught us that no business is 100 percent resilient, those f ortif ied by digital technology are more
resilient and more capable of transf orming when f aced with sweeping changes like those we are experiencing. The way
people interact with businesses is f undamentally shif ting, and there is no going back. Digital technology is the most
malleable tool ever created, and we believe that businesses that use it to build their own digital capability will recover f a ster
and emerge stronger. At Microsof t, we call this dynamic tech intensity: adopting best-in-class digital tools and platf orms for
the purpose of building new, proprietary products and services.
I’ve been inspired by the ingenuity and creativity of so many people and organizations in every industry around the world
applying tech intensity to address big challenges, including those created by COVID -19:
•
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•
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In healthcare, Dr. Amanda Randles at Duke University is using the power of Azure to conduct hundreds of
millions of simulations required to help more patients have access to critical ventilators.
In the public sector, the state of Calif ornia built 90 percent of its COVID-19 inf rastructure with GitHub and Azure
DevOps, reducing the time it takes to stand up a new website f rom 18 mont hs to just three hours.
In telecom, two analysts at T-Mobile used Power Platf orm to build an app that helped the company keep retail
associates employed and keep customers, including f irst responders, connected during the critical f irst weeks
of the crisis.
In retail, Patagonia is using Dynamics 365 to ship inventory directly f rom a store or f rom a warehouse,
optimizing to send single shipments to customers, while reducing the load on all locations.
In education, the University of Bologna in Italy moved 90 percent of courses f or its 80,000 students online to
Microsof t Teams within three days – a f irst in the university’s 900-plus year history.
• And, in sports, the NBA is using our technology to reimagine the game experience so f ans can f eel like t hey’re
together f rom the saf ety of their homes and players can experience the energy of cheering f ans – virtually – in
the arena.
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We are living in the era of the intelligent cloud and intelligent edge, which is being shaped by rapid advances in distrib uted
computing, ambient intelligence, and multisense, multidevice experiences. This means the places we go and the things we
interact with will increasingly become digitized, creating new opportunities and new breakthroughs: f rom precision medicine
to precision agriculture, f rom personalized e-commerce to personalized education, and f rom connected manuf acturing f loors
to connected homes.
Our collective opportunity is to channel this intelligent cloud and intelligent edge era into tech intensity f or every o rganization
on the planet. Our customer solution areas were built f or this era. They enable people, organizations, and entire industries
to not only thrive but reimagine the world. So organizations can empower their employees, f ostering a new culture f or h ybrid
work; engage customers intelligently and virtually; transf orm products with new business models; and optimize operations
to keep customers and employees saf e and secure.
Across our customer solution areas, we are expanding our opportunity to help ev ery organization in every industry build
their tech intensity – with a business model that is trusted and aligned with their success.
Applications and Infrastructure
More than ever, organizations are relying on Azure to stay up and running and support critical workloads, f rom healthcare
triage with AI-assisted bots, to digital twins in manuf acturing, to e-commerce in retail. Today, leaders in every industry –
including 95 percent of the Fortune 500 – run on Azure. We are building Azure as the world’s computer to support them,
with more datacenter regions than any other provider – now 61.
Fif ty billion devices will come online by 2030, and Azure is the only cloud that extends to the edge, with consistency across
operating models, development models, and inf rastructure stack. Azure Arc enables organizations to deploy Azure services
anywhere and extend Azure management to any inf rastructure. Azure Stack Edge brings rapid m achine learning inf erencing
closer to where data is generated, including the harshest of conditions, like disaster response. Our acquisitions of Af firmed
and Metaswitch, along with new Azure Edge Zones, expand our of f erings f or telecom operators as they mo ve to 5G. And,
with Azure Orbital, we’re taking our inf rastructure to space, enabling anyone to access satellite data and capabilities f rom
Azure.
Data and AI
There will be 175 zettabytes of data by 2025, and processing this data in real time will be an imperative f or every
organization. At the data layer, Azure is the only cloud with limitless data and analytics capabilities. Azure Synapse brings
together big data analytics and data warehousing, enabling data scientists to generate immediate insights f ro m structured
and unstructured data. And together with Azure SQL Hyperscale, Cosmos DB, and our other data services, we are able to
deliver a cloud-native data estate f or every organization.
In AI, we have the most comprehensive portf olio of tools, f ramewo rks, and inf rastructure. Azure Cognitive Services makes
it easier to build applications that see, hear, speak, search, understand, and accelerate decision -making. Azure Machine
Learning helps organizations build and deploy models f aster, while ensuring they can do so responsibly and saf ely. And,
we are pushing the bounds of how AI can generalize learning beyond narrow domains, collaborating with OpenAI on a
supercomputing platf orm to train and run AI models of unprecedented scale. Their new GPT-3 model was trained on our
Azure AI supercomputer and constitutes a new breakthrough in natural language understanding and generation, promising
breakthrough scenarios within our products and those of our customers, when saf ely deployed.
Developer Tools
Today, the majority of job openings f or developers are outside the tech sector, and developers will increasingly drive and
inf luence every business process and f unction. We have the most used and loved developer tools to build any app f or any
platf orm. With the world’s most popular code editing tools – Visual Studio and VS Code – developers are more productive
than ever. With GitHub, more than 50 million developers across 3 million organizations, including
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the majority of the Fortune 50, are able to collaborate and build sof tware together. And, with Azure, they have best -in-class
services to build cloud-native apps and modernize existing ones.
This year, we went f urther to give developers new tools to power remote development, productivit y, and collaboration,
wherever they are. Codespaces brings together the best of GitHub, Visual Studio, and Azure to help developers go f rom
code to cloud in seconds. VS Live Share enables real-time collaboration between developers, regardless of their location.
And with Azure Communications Services, any developer can integrate rich communications APIs into their applications
across any device, on any platf orm, using the same reliable and secure inf rastructure that powers Teams.
Power Platform
500 million apps will be created by 2023 to drive transf ormation and productivity f or every organization. To accelerate this,
we must enable a new category of developers – citizen developers – equipping domain experts with tools that are low-code
or no-code to create solutions that solve their unique business needs and help them better collaborate with prof essional
developers. With Power Platf orm, anyone can become a citizen developer, able to create an application, build a virtual
agent, automate a workf low, and analyze data in hours or days, not weeks or months.
Power BI is the clear leader in business intelligence in the cloud. Power Virtual Agents enables anyone to build an intellige nt
bot with just a point and click. And Power Automate enables customers to automate manual business processes across
both legacy and modern applications.
Modern Workplace
Microsof t 365 is empowering people and organizations to be productive and secure as they adapt to more f luid ways of
working and learning. The PC has been mission-critical across work, school, and lif e to sustain productivity in a remote
everything world. More than 1 billion active devices now run Windows 10, and Of f ice 365 usage is higher than ever. New
Microsof t Edge – with enterprise-class security – protects individuals’ privacy online and makes it easier to f ind inf ormation
at work. And with Surf ace, we are reimagining every layer of the stack – f rom how we inf use AI f rom the silicon up, to device
f orm f actors, to the role of operating systems – investing across f orm and f unction to create new device categories.
The past six months have served as the largest at-scale experiment we’ve ever seen f or remote work. We’ve been studying
this closely to understand the changing nature of productivity and are applying thes e learnings to inf orm how we build our
products. We think about the f uture of work through three vectors. First, we are creating a system of collaboration for every
organization. Work doesn’t begin and end inside a meeting, and with Teams, we are f ocused o n the entire workf low around
a meeting – bef ore, during, and af ter. It’s the only solution with meetings, calls, chat, content collaboration with Of f ice, and
business process workf lows, in a secure, integrated user experience. Second, learning in the f low of work will be increasingly
important. A new Teams app will help organizations skill, reskill, and upskill employees, surf acing learning content f rom
LinkedIn Learning and other content providers. Finally, prioritizing employee well -being is core to an organization’s success.
New capabilities like Together mode in Teams help reduce cognitive load, while a new “virtual commute” will provide much -
needed structure f or the remote workday.
Business Applications
Dynamics 365 is helping organizations in every industry digitize their business operations and make every part of their
operations remote, f rom manuf acturing, to supply -chain management, to sales and customer service, including new
scenarios like contactless shopping. As much as 73 percent of the data in the world is still not being analyzed. And f rom
Dynamics 365 Customer Insights f or personalized customer experiences and Dynamics 365 Commerce f or omnichannel
retail, Dynamics 365 is the only AI-powered business cloud that gives customers a 360-degree view of their business to
unif y data and unlock insights. And the combination of LinkedIn Sales Navigator and Dynamics 365 gives sales
prof essionals tools f or more ef f ective remote selling.
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Amid a rapidly changing jobs market, LinkedIn’s role in creating economic opportunity f or every member of the global
workf orce has never been more acute. LinkedIn is where more than 706 million prof essionals around the world go to
connect, learn, and plan f or the f uture. People are turning to LinkedIn Learning more than ever to acquire new skills. And
we are helping organizations attract, retain, and develop the best talent with our portf olio of Talent Solutions, Talent Insi ghts,
and Glint.
Security
Identity, security, management, and compliance underlie our entire tech stack. Cybercrime will cost businesses,
governments, and individuals $1 trillion this year, and the shif t to remote everything has only increased the need f or a “Zer o
Trust” architecture that reduces both cost and complexity. We are the only company that of fers integrated, end-to-end
capabilities to protect people and organizations.
In identity, Azure Active Directory now provides identity and access management to more than 345 million monthly active
users across more than 200,000 organizations. In security, Def ender of fers broad coverage, spanning identities, cloud apps,
devices, IoT, and more. It complements Azure Sentinel, which analyzes security signals across the entire organization,
using AI to detect, investigate, and automatically remediate threats. In device and data management, Microsof t Endpoint
Manager monitors and manages an organization’s devices in a unif ied management platf orm. And, in compliance, we
provide tools to help organizations govern their data and comply with increasing regulatory requirements.
Gaming
Gaming is the most expansive category in the entertainment industry. Three billion people around the world look to gaming
f or entertainment, community, and achievement, and our ambition is to empower each of them, wherever they pla y. We
saw record engagement and monetization this year, led by strength on and of f console, as people everywhere turn to
gaming to connect, socialize, and play with their f riends during a time of social distancing.
Our Xbox Game Pass service now has more than 15 million subscribers. Quality dif f erentiated content – f rom Flight
Simulator to Minecraft – is the engine behind the service’s growth, and our pending acquisition of ZeniMax Media, one of
the world’s largest, privately held game developers and publishers, will add iconic f ranchises to the more than 100 high-
quality games already available. We’re also transf orming how games are distributed, played, and viewed, bringing cloud
gaming to Game Pass, so subscribers can stream games to a phone or tablet and play along with nearly 100 million Xbox
Live players.
OUR PURPOSE
As we pursue our mission, we also recognize our enormous responsibility to ensure the technology we build benef its
everyone on the planet, including the planet itself . Our customers see t his urgent need and are looking to us – in partnership
with them – to take action. We’re committed to working across the public and private sectors to f oster partnerships and
solutions that will have lasting impact and redef ine what “achieve more” means f o r the world. For us, “achieve more” has
f our important attributes:
Support inclusive economic opportunity
First, we must ensure that the economic growth we drive is inclusive. This starts with protecting public health. COVID -19
has underscored that without a healthy society, we cannot sustain a healthy economy. That’s why, through our AI f or Health
initiative, we’re empowering those working to tackle some of the toughest challenges in global health, including those on
the f ront lines of COVID-19 research.
It also requires that we equip everyone with the skills, technology, and opportunity to pursue the in -demand jobs of a
changing economy. We’re accelerating ef f orts to close the skills and broadband gaps, ensuring underrepresented and
overlooked communities can compete on equal ground. COVID -19 has intensif ied the need f or these ef f orts, forcing tens of
millions of people out of work. That’s why we’re bringing together assets f rom across Microsof t, inclusive of LinkedIn and
GitHub, to help 25 million job seekers gain digital skills f or in-demand roles. We are also
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working to expand broadband access to 40 million unserved and underserved people in rural areas globally, and to 3 million
people in unserved and rural communities in the US by July 2022.
We also prioritize accessibility in our culture, products, and services, ensuring we use technology to design a m ore
accessible world f or the 1 billion-plus people around the world with disabilities. As we continue our own accessibility journey,
we seek to inspire and enable others to advance theirs, including through our f ive-year investment in AI f or Accessibility.
Nonprof its are on the f ront lines of solving some of the world’s most pressing challenges. We make our technology af f ordable
and accessible to nonprof it organizations around the world, enabling them to drive greater impact f or the causes and
communities they serve. This year, we provided $1.9 billion in donated or discounted products and services to help 243,000
nonprof its better serve their communities. And our employees donated an additional $221 million (including company match)
through our employee giving program to the organizations and causes they care about.
Protect fundamental rights
Second, we unequivocally support the f undamental rights of all people, f rom def ending democracy to addressing systemic
racial injustice and inequity around the world . Recent events are shining a bright light on how much work there is still to do.
Seeing injustice in the world calls us all to take action.
We’re committed to addressing racial injustice and inequity f or the Black and Af rican American community in the United
States and f or vulnerable communities globally. This starts with our own culture at Microsof t, extends to how we engage
our suppliers and partners to create change, and includes strengthening our communities. Our ef f orts include investing an
additional $150 million to advance racial justice and includes work on our own cultural transf ormation, doubling the number
of Black-owned suppliers in our ecosystem, doubling the percentage of our transaction volumes through Black -owned
f inancial institutions, and accelerating our justice ref orm initiatives.
But we can’t stop there. Democracy itself is under attack. That’s why we are helping protect the integrity of our democratic
processes and institutions around the world through our Def ending Democracy Program, which works with governments,
NGOs, academics, and industry to explore technological solutions to preserve and protect electoral processes an d to def end
against disinf ormation.
Commit to a sustainable future
Third, we must protect our most f inite resource – the planet – by working toward a more sustainable f uture. Over the past
year, we’ve set ambitious climate goals and outlined detailed plans to achieve them, including to be carbon negative, zero
waste, and water positive by 2030. We are also building a new planetary computing platf orm to help manage Earth’s natural
systems.
Addressing the climate crisis is good f or the planet and good f or M icrosof t. That’s why we’re innovating and empowering
customers, partners, NGOs, and governments around the world with technology to help them set and achieve their own
climate goals, including the creation of a $1 billion Climate Innovation Fund to accelerate innovation.
Earn trust
Finally, we are committed to building trust in technology and its use. Without trust, none of our progress is possible. For
Microsof t, trust is built on privacy, security, the responsible use of AI, and transparency.
Our approach to privacy and data protection is grounded in our belief that customers own their own data. Our privacy
principles include a commitment to be transparent in our privacy practices, to of f er meaningf ul privacy choices, and to
responsibly manage the data we store and process. It’s why we were early supporters of the European Union’s General
Data Protection Regulation (GDPR) and why we were the f irst major technology company
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to expand GDPR’s core rights to all our customers around the world. To date, more than 43 million people have visited
these tools.
Security is a central challenge in the digital age. In an increasingly complex world, technology alone is not enough to combat
increasing threats. It also requires partnerships, both with governments and i ndustries. Our Digital Crimes Unit – an
international team of technical, legal, and business experts – has coordinated with partners across countries to disrupt
threats targeting governments, universities, human rights organizations, individuals, and more. This year, f or example, they
took control of domains being used to send COVID -19-themed phishing emails in 62 countries.
AI has proved itself to be a powerf ul tool f or tackling the kinds of challenges that this year has highlighted. However, when
we build AI, we must do so responsibly, taking a principled approach and asking difficult questions, like not what technology
can do, but what should it do? Fairness, reliability and saf ety, privacy and security, inclusiveness, transparency, and
accountability are the ethical principles that guide our work and advocacy. Our Of f ice of Responsible AI helps ensure our
products adhere to these principles. We’ve released guidelines, sof tware development tools, and other resources to enable
our developer community to do the same.
Finally, transparency is f oundational to trust, so we provide clear inf ormation on how we run our business and how we work
with customers and partners. We provide details on our CSR Reports Hub covering everything f rom law enf orcement access
to data, to environmental data, details on our political activities, workf orce demographics, and human rights.
OUR CULTURE
Ultimately, we will only achieve our mission if we live our culture. It is at the root of every decision we make. We
f undamentally believe that we need a culture f ounded in a growth mindset. It starts with a belief that everyone can grow and
develop; that potential is nurtured, not predetermined; and that anyone can change their mindset. It’s not by claiming a
growth mindset but by knowing that we are imperf ect but can learn and get better that we can close the gap between our
espoused culture and the lived experience f or every employee at the company.
Our success is dependent on our customers’ success, and we need to obsess about them – listening and then innovating
to meet their unmet and unarticulated needs. No customer of ours cares about our organizati onal boundaries, and we need
to operate as One Microsof t to deliver the best solutions f or them. Finally, we need to actively seek diversity and embrace
inclusion to best serve our customers around the world and create a culture where everyone can do their best work. Diversity
and inclusion continues to be a core priority f or every employee at Microsof t as part of our annual perf ormance and
development approach. This past year, we expanded our global allyship program, adapting learning experiences f or the
work f rom home conditions of COVID-19. As we ref lect on our opportunity to address racial injustice, we announced our
aspiration to increase representation and strengthen our culture of inclusion, including a commitment to double the number
of Black and Af rican American and Hispanic and Latinx people managers, senior individual contributors, and senior leaders
in the US by 2025.
If we commit to being customer obsessed, operating as One Microsof t, and becoming more diverse and inclusive, I believe
there is no limit to what we can achieve.
The world is at an inf lection point, and digital technology will be key to def ining what comes next. Over the next decade,
technology spending as a percentage of gross domestic product is projected to double. And, we are we ll positioned to not
only participate in that growth but drive it by expanding our impact and building the key technologies that empower every
person and every organization on the planet to achieve more.
Satya Nadella
Chief Executive Of f icer
October 13, 2020
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(In millions, except per share amounts)
FINANCIAL HIGHLIGHTS
Year Ended June 30,
Revenue
Gross margin
Operating income
Net income
Diluted earnings per share
Cash dividends declared per common share
Cash, cash equivalents, and short-term
investments
Total assets
Long-term obligations
Stockholders’ equity
2020
$ 143,015
96,937
52,959
44,281
5.76
2.04
136,527
301,311
110,697
118,304
2019 (a)
$ 125,843
82,933
42,959
39,240 (b)
5.06 (b)
1.84
2018
$ 110,360
72,007
35,058
16,571 (c)
2.13 (c)
1.68
133,819
286,556
114,806
102,330
133,768
258,848
117,642
82,718
2017 (d)(e)
2016 (d)
$ 96,571
62,310
29,025 (f)
25,489 (f)
3.25 (f)
1.56
132,981
250,312
106,856
87,711
$ 91,154
58,374
26,078 (g)
20,539 (g)
2.56 (g)
1.44
113,240
202,897
66,705
83,090
(a) GitHub has been included in our consolidated results of operations starting on the October 25, 2018 acquisition date.
Includes a $2.6 billion net income tax benefit related to intangible property transfers and a $157 million net charge
(b)
related to the enactment of the Tax Cuts and Jobs Act (“TCJA”), which t ogether increased net income and diluted
earnings per share (“EPS”) by $2.4 billion and $0.31, respectively. Refer to Note 12 – Income Taxes of the Notes to
Financial Statements.
Includes a $13.7 billion net charge related to the enactment of the TCJA, which decreased net income and diluted
EPS by $13.7 billion and $1.75, respectively. Refer to Note 12 – Income Taxes of the Notes to Financial Statements.
(d) Reflects the impact of the adoption of new accounting standards in fiscal year 2018 related to revenue recognition and
(c)
leases.
(e) LinkedIn has been included in our consolidated results of operations starting on the December 8, 2016 acquisition
(f )
(g)
date.
Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan,
income, net income, and diluted EPS by $306 million, $243 million, and $0.04,
which decreased operating
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.
ISSUER PURCHASES OF EQUITY SECURITIES, DIVIDENDS, AND STOC K PERFORMANCE
SHARE REPURCHASES AND DIVIDENDS
Share Repurchases
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in
share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.
On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in
share repurchases. This share repurchase program commenced in February 2020, f ollowing completion of the program
approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2020,
$31.7 billion remained of this $40.0 billion share repurchase program.
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We repurchased the f ollowing 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
Amount Shares
Amount Shares
2020
29 $ 4,000
4,600
32
6,000
37
28
5,088
126 $ 19,688
2019
24 $ 2,600
6,100
57
3,899
36
33
4,200
150 $ 16,799
Amount
2018
22 $ 1,600
1,800
22
3,100
34
21
2,100
99 $ 8,600
Shares repurchased during the f ourth quarter of f iscal year 2020 were under the share repurchase program approved on
September 18, 2019. Shares repurchased during the third quarter of f iscal year 2020 were under the share repurchase
programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the
share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle
employee tax withholding related to the vesting of stoc k awards of $3.3 billion, $2.7 billion, and $2.1 billion f or f iscal years
2020, 2019, and 2018, respectively. All share repurchases were made using cash resources.
Dividends
Our Board of Directors declared the f ollowing dividends:
Declaration Date
Fiscal Year 2020
September 18, 2019
December 4, 2019
March 9, 2020
June 17, 2020
Total
Fiscal Year 2019
September 18, 2018
November 28, 2018
March 11, 2019
June 12, 2019
Total
Record Date
Payment Date
November 21, 2019 December 12, 2019
March 12, 2020
February 20, 2020
June 11, 2020
May 21, 2020
August 20, 2020 September 10, 2020
Dividend
Per Share
Amount
(In millions)
$ 0.51 $ 3,886
3,876
3,865
3,861
$ 2.04 $ 15,488
0.51
0.51
0.51
November 15, 2018 December 13, 2018
March 14, 2019
February 21, 2019
June 13, 2019
May 16, 2019
August 15, 2019 September 12, 2019
$ 0.46 $ 3,544
3,526
3,521
3,510
0.46
0.46
0.46
$ 1.84 $ 14,101
The dividend declared on June 17, 2020 was included in other current liabilities as of June 30, 2020.
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STOCK PERFORMANCE
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Microsof t Corporation, the S&P 500 Index
and the NASDAQ Computer Index
Microsoft Corporation
S&P 500
NASDAQ Computer
6/15
100.00
100.00
100.00
6/16
119.12
103.99
102.87
6/17
164.45
122.60
142.49
6/18
239.83
140.23
187.03
6/19
331.13
154.83
203.97
6/20
509.27
166.45
296.29
* $100 invested on 6/30/15 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 “f orward-looking statements” within the meaning of the Private Securities Litigation Ref orm 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 f ollowing sections: “Business”, and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations”. These f orward -looking statements generally are identif ied
by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “f uture,” “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
dif f er materially. We describe risks and uncertainties that could cause actual results and events to dif f er 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 f iscal year 2020 Form 10-K. Readers are cautioned not to place undue
reliance on f orward-looking statements, which speak only as of the date they are made. We undertake no obligation to
update or revise publicly any f orward -looking statements, whether because of new inf ormation, f uture events, or otherwise.
BUSINESS
GENERAL
Embracing Our Future
Microsof t 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 platf orms
and tools help drive small business productivity, large business competitiveness, and public -sector ef f iciency. They also
support new startups, improve educational and health outcomes, and empower human ingenuity. As the world responds to
the outbreak of a novel strain of the coronavirus (“COVID -19”), we are working to do our part by ensuring the saf ety of our
employees, striving to protect the health and well-being of the communities in which we operate, and providing technology
and resources to our customers to help them do their best work while remote.
We continue to transf orm our business to lead in the new era of the intelligent cloud and intelligent edge. We bring
technology and products together into experiences and solutions that unlock value f or our customers. Our unique role as a
platf orm and tools provider allows us to connect the dots, bring together an ecosystem of partners, and enable organizations
of all sizes to build the digital capability required to address these challenges.
In this next phase of innovation, computing is more powerf ul and ubiquitous from the cloud to the edge. Artificial intelligence
(“AI”) capabilities are rapidly advancing, f ueled by data and knowledge of the world. Physical and virtual worlds are coming
together with the Internet of Things (“IoT”) and mixed reality to create richer experiences that understand the context
surrounding people, the things they use, the places they go, and t heir activities and relationships. A person’s experience
with technology spans a multitude of devices and has become increasingly more natural and multi -sensory with voice, ink,
and gaze interactions.
What We Offer
Founded in 1975, we develop and support sof tware, services, devices, and solutions that deliver new value f or customers
and help people and businesses realize their f ull potential.
We of f er an array of services, including cloud -based solutions that provide customers with sof tware, services, platf orms,
and content, and we provide solution support and consulting services. We also deliver relevant online advertising to a global
audience.
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Our products include operating systems; cross -device productivity applications; server applications; business solution
applications; desktop and server management tools; sof tware development tools; and video games. We also design,
manuf acture, and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and
related accessories.
The Ambitions That Drive Us
To achieve our vision, our research and development ef f orts f ocus on three interconnected ambitions:
• Reinvent productivity and business processes.
• Build the intelligent cloud and intelligent edge platf orm.
• Create more personal computing.
Reinvent Productivity and Business Processes
At Microsof t, we’re providing technology and resources to help our customers navigate a remote environment. We’re s eeing
our f amily of products play key roles in the ways the world is continuing to work, learn, and connect.
Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration
tools and services, including Of f ice, Dynamics, and LinkedIn. Microsof t 365 brings together Of f ice 365, Windows 10, and
Enterprise Mobility + Security to help organizations empower their employees with AI-backed tools that unlock creativity,
increase teamwork, and f uel innovation, all the while enabling compliance coverage and data protection. Microsof t Teams
is enabling rapid digital transf ormation by giving people a single tool to chat, call, meet, and collaborate. Microsoft
Relationship Sales solution brings together LinkedIn Sales Navigator and Dynamics to transf orm business to business sales
through social selling. Dynamics 365 f or Talent with LinkedIn Recruiter and Learning gives human resource prof essionals
a complete solution to compete f or talent. Microsof t Power Platf orm empowers employees to build custom applications,
automate workf low, and analyze data no matter their technical expertise.
These scenarios represent a move to unlock creativity and discover new habits, while simplif ying security and management.
Organizations of all sizes have digitized business-critical f unctions, redef ining what they can expect f rom their business
applications. This creates an opportunity to reach new customers and increase usage and engagement with existing
customers.
Build the Intelligent Cloud and Intelligent Edge Platform
In the new remote world, companies have accelerated their own digital transf ormation to empower their employees, optimize
their operations, engage customers, and in some cases, change the very core of their products a nd services. Partnering
with organizations on their digital transf ormation during this period is one of our largest opportunities and we are uniquely
positioned to become the strategic digital transf ormation platf orm and partner of choice; their success is our success.
Our strategy requires continued investment in datacenters and other hybrid and edge inf rastructure to support our services.
Azure is a trusted cloud with comprehensive compliance coverage and AI-based security built in.
Our cloud business benef its f rom three economies of scale: datacenters that deploy computational resources at signif icantly
lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and
application demand patterns, improving the utilization of computing, storage, and network resources; and multi -tenancy
locations that lower application maintenance labor costs.
As one of the two largest providers of cloud computing at scale, we believe we work f rom a position of strength. Be ing a
global-scale cloud, Azure uniquely of f ers hybrid consistency, developer productivity, AI capabilities, and
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trusted security and compliance. We see more emerging use cases and needs f or compute and security at the edge and
are accelerating our innovation across the spectrum of intelligent edge devices, f rom IoT sensors to gateway devices and
edge hardware to build, manage, and secure edge workloads. With Azure Stack, organizations can extend Azure into their
own datacenters to create a consistent stack across the public cloud and the intelligent edge. Our hybrid inf rastructure
consistency spans identity, data, compute, management, and security, helping to support the real -world needs and evolving
regulatory requirements of commercial customers and enterprises. We are accelerating our development of mixed reality
solutions with new Azure services and devices. The opportunity to merge the physical and digital worlds, when combined
with the power of Azure cloud services, unlocks the potential f or entirely new workloads which we believe will shape the
next era of computing.
The ability to convert data into AI drives our competitive advantage. Azure SQL Database makes it possible f or customers
to take SQL Server f rom their on-premises datacenter to a f ully managed instance in the cloud to utilize built-in AI. We are
accelerating adoption of AI innovations f rom research to products. Our innovation helps every developer be an AI developer,
with approachable new tools f rom Azure Machine Learning Studio f or creating simple machine learning models, to the
powerf ul Azure Machine Learning Workbench f or the most advanced AI modeling and data science.
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. In support of this, we are bringing Of f ice, Windows, and devices
together f or an enhanced and more cohesive customer experience.
Windows 10 serves the enterprise as the most secure and productive operating system. It empowers people with AI-f irst
interf aces ranging f rom voice-activated commands through Cortana, inking, immersive 3D content storytelling, and mixed
reality experiences. Our ambition f or Windows 10 monetization opportunities includes gaming, services, subscriptions, and
search advertising. Windows also plays a critical role in f ueling our cloud business and Microsof t 365 strategy, and it power s
the growing range of devices on the “intelligent edge.”
We are committed to designing and marketing f irst-party devices to help drive innovation, create new device categories,
and stimulate demand in the Windows ecosystem. We recently added several new products and accessories into the
Surf ace f amily, including Surf ace Book 3 and Surf ace Go 2. These new Surf ace products join Surf ace Pro 7, Surf ace Laptop
3, and Surf ace Pro X.
To expand usage and deepen engagement, we continue to invest in content, community, and cloud services as we pursue
the expansive opportunity in the gaming industry. We are broadening our approach to how we think about gaming end -to-
end, f rom the way games are created and distributed to how they are played and viewed across PC, console, and mobile.
We have a strong position with our large and growing highly engaged community of gamers. Xbox Game Pass, with over
10 million members f rom 41 countries, is a community with access to a curated library of over 100 f irst - and third-party
console and PC titles. Project xCloud is Microsof t’s game streaming technology that is complementary to our console
hardware and will give f ans the ultimate choice to play the games they want, with the people they want, on the devices they
want.
Our Future Opportunity
In a time of great disruption and uncertainty, customers are looking to us to accelerate their own digital transf ormations as
sof tware and cloud computing play a huge role across every industry and around the world. We continue to develop
complete, intelligent solutions f or our customers that empower p eople to stay productive and collaborate, while saf eguarding
businesses and simplif ying 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 signif icant resources in:
• Transf orming the workplace to deliver new modern, 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 f or
businesses and individuals.
• Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs
using natural methods of communication.
• Using Windows to f uel our cloud business and Microsof t 365 strategy, and to develop new categories of devices
– both our own and third-party – on the intelligent edge.
Inventing new gaming experiences that bring people together around their shared love f or ga mes on any
devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of
entertainment.
•
Our f uture growth depends on our ability to transcend current product category def initions, business models, and sales
motions. We have the opportunity to redef ine what customers and partners can expect and are working to deliver new
solutions that ref lect the best of Microsoft.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID -19 to be a pandemic. The COVID-19
pandemic is having widespread, rapidly evolving, and unpredictable impacts on global society, economies, f inancial
markets, and business practices. Federal and state governments have implemented measures in an ef f ort to contain the
virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work f rom home,
supply chain logistical changes, and closure of non-essential businesses. To protect the health and well-being of our
employees, suppliers, and customers, we have made substantial modif ications to employee travel policies, implemented
of f ice closures as employees are advised to work f rom home, and cancelled or shif ted our conf erences and other marketing
events to virtual-only through f iscal year 2021. The COVID-19 pandemic has impacted and may continue to impact our
business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty
in the nature and degree of its continued ef f ects over time. Ref er to Management’s Discussion and Analysis of Financial
Condition and Results of Operations f or f urther discussion regarding the impact of COVID -19 on our f iscal year 2020
f inancial results.
The extent to which the COVID-19 pandemic impacts our business going f orward will depend on numerous evolving f actors
we cannot reliably predict, including the duration and scope of the pandemic; governmental, business, and individuals’
actions in response to the pandemic; and the impact on economic activity i ncluding the possibility of recession or f inancial
market instability. These f actors may adversely impact consumer, business, and government spending on technology as
well as customers’ ability to pay f or our products and services on an ongoing basis. This uncertainty also af f ects
management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that
depend on these estimates and assumptions, including investments, receivables, and f orward -looking guidance. Ref er to
Risk Factors in our f iscal year 2020 Form 10-K f or a discussion of these f actors and other risks.
Commitment to Sustainability
We work to ensure that technology is inclusive, trusted, and increases sustainability. We’re empowering our customers a nd
partners with new technology to help them drive ef f iciencies, transf orm their businesses, and create their own solutions for
sustainability. In January 2020, we announced a bold new environmental sustainability strategy f ocused on carbon, water,
waste, and ecosystems. As part of our commitment, we are investing $1 billion over the next f our years in new technologies
and innovative climate solutions. We set an ambitious goal to reduce and ultimately remove Microsof t’s carbon footprint. By
2030 Microsof t will be carbon negative, and by 2050 Microsof t will remove f rom the environment all the carbon the company
has emitted directly or by electrical consumption since it was f ounded in 1975. We also launched a new initiative to use
Microsof t technology to help our suppliers and customers around the world reduce their own carbon f ootprint.
The investments we make in sustainability carry through to our products, services, and devices. We design our devices,
f rom Surf ace to Xbox, to minimize their impact on the environment. Our cloud and AI services help
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businesses cut energy consumption, reduce physical f ootprints, and design sustainable products. We also pledged a
$50 million investment in AI f or Earth to accelerate innovation by putting AI in the hands of those working to directly address
sustainability challenges. Lastly, this work is supported by using our voice to support policies we think can advance
sustainability ef f orts.
Addressing Racial Injustice
Our f uture opportunity depends on reaching and empowering all communities, and we are committed to taking action to
help address racial injustice and inequity. With signif icant input f rom employees and leaders who are members of the Black
and Af rican American community, our senior leadership team and board of directors has developed a set of actions to help
improve the lived experience at Microsof t and drive change in the communities in which we live and work. These ef f orts
include increasing our representation and culture of inclusion by doubling the number of Black and Af rican American people
managers, senior individual contributors, and senior leaders in the United States by 2025; engaging our ecosystem by using
our balance sheet and engagement with suppliers and partners to extend the vision f or societal change; and strengthening
our communities by using the power of data, technology, and partnership to help improve the lives of Black and Af rican
American citizens across the United States.
Investing in Digital Skills
With a continued f ocus on digital transf ormation, Microsof t is making ef f orts to help ensure that no one is lef t behind,
particularly as economies start to recover f rom the COVID -19 pandemic. We are expanding access to the digital skills that
have become increasingly vital to many of the world’s jobs, and especially to individuals hardes t hit by recent job losses,
including those with lower incomes, women, and underrepresented minorities. Our skills initiative brings together learning
resources, certif ication opportunities, and job -seeker tools f rom LinkedIn, GitHub, and Microsof t Learn, and is built on data
insights drawn f rom LinkedIn’s Economic Graph. This is combined with $20 million we are investing in key non-profit
partnerships through Microsof t Philanthropies.
OPERATING SEGMENTS
We operate our business and report our f inancial perf ormance using three segments: Productivity and Business Processes,
Intelligent Cloud, and More Personal Computing. Our segments provide management with a comprehensive f inancial 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 f ramework f or timely and rational allocation of resources within
businesses.
Additional inf ormation on our operating segments and geographic and produc t inf ormation is contained in Note 19 –
Segment Inf ormation 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 consis ts of products and services in our portf olio of productivity,
communication, and inf ormation services, spanning a variety of devices and platf orms. This segment primarily comprises:
• Of f ice Commercial, including Of f ice 365 subscriptions, the Of f ice porti on of Microsof t 365 Commercial
subscriptions, and Of f ice licensed on-premises, comprising Of f ice, Exchange, SharePoint, Microsof t Teams,
Of f ice 365 Security and Compliance, and Skype f or Business, and related Client Access Licenses (“CALs”).
• Of f ice Consumer, including Microsof t 365 Consumer (f ormerly Of f ice 365 Consumer) subscriptions and Of f ice
licensed on-premises, and Of f ice Consumer Services, including Skype, Outlook.com, and OneDrive.
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•
LinkedIn, including Talent Solutions, Learning Solutions, Marketing Solutions, Sales Solutions, and Premium
Subscriptions.
• Dynamics business solutions, including Dynamics 365, a set of cloud -based applications across ERP and CRM,
Dynamics ERP on-premises, and Dynamics CRM on-premises.
Office Commercial
Of f ice 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 in new markets such as f irst -line workers, small and medium
businesses, and growth markets, as well as add value to our core product and service of f erings to span productivity
categories such as communication, collaboration, analytics, security, and compliance. Of fice Commercial revenue is mainly
af f ected by a combination of continued installed base growth and average revenue per user expansion, as well as the
continued shif t f rom Of f ice licensed on-premises to Of f ice 365. CALs provide certain Of f ice Commercial products and
services with access rights to our server products and CA L revenue is reported with the associated Of f ice products and
services.
Office Consumer
Of f ice 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 of f erings
into new markets. Of f ice Consumer revenue is mainly af f ected by the percentage of customers that buy Of f ice with their
new devices and the continued shif t f rom Of f ice licensed on-premises to Microsof t 365 Consumer subscriptions. Office
Consumer Services revenue is mainly af f ected by the demand f or 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 prof essionals to make them more productive and successf ul and transf orms the way
companies hire, market, sell, and learn. Our vision is to create economic opportunity f or every member of the global
workf orce through the ongoing development of the world’s f irst Economic Graph, a digital representation of the global
economy. In addition to LinkedIn’s f ree services, LinkedIn of f ers monetized solutions: Talent Solutions, Learning Solutions,
Marketing Solutions, Sales Solutions, and Premium Subscriptions. Talent Solutions provide insights f or workf orce planning
and tools to hire, nurture, and develop talent. Learning Solutions, including Glint, help businesses close critical skills ga ps
in times where companies are having to do more with existing talent. Marketing Solutions help companies grow relationships
between businesses. Sales Solutions help companies strengthen customer relationships, empower teams with digital selling
tools, and acquire new opportunities. Finally, Premium Subscriptions enables prof essionals to manage their prof essional
identity, grow their network, and connect with talent through additional services like premium search. LinkedIn has over
700 million members and has of f ices around the g lobe. Growth will depend on our ability to increase the number of LinkedIn
members and our ability to continue of f ering services that provide value f or our members and increase their engagement.
LinkedIn revenue is mainly af f ected by demand f rom enterprises and prof essional organizations f or subscriptions to Talent
Solutions, Learning Solutions, Sales Solutions, and Premium Subscriptions offerings, as well as member engagement and
the quality of the sponsored content delivered to those members to drive Mark eting Solutions.
Dynamics
Dynamics provides cloud-based and on-premises business solutions f or f inancial management, enterprise resource
planning (“ERP”), customer relationship management (“CRM”), supply chain management, and other application
development platf orms f or small and medium businesses, large organizations, and divisions of global enterprises. Dynamics
revenue is driven by the number of users licensed, expansion of average revenue per user, and the continued shif t to
Dynamics 365, a unif ied set of cloud-based intelligent business applications.
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Competition
Competitors to Of f ice include sof tware and global application vendors, such as Apple, Cisco Systems, Facebook, Google,
IBM, Okta, Proof point, Slack, Symantec, Zoom, and numerous web -based and mobile application competitors as well as
local application developers. Apple distributes versions of its pre-installed application software, such as email and calendar
products, through its PCs, tablets, and phones. Cisco Systems is using its position in enterprise communications equipment
to grow its unif ied communications business. Google provides a hosted messaging and productivity suite. Slack provides
teamwork and collaboration sof tware. Zoom of f ers videoconferencing and cloud phone solutions. Sky pe f or Business and
Skype also compete with a variety of instant messaging, voice, and video communication providers, ranging f rom start -ups
to established enterprises. Okta, Proof point, and Symantec provide security solutions across email security, inf orm ation
protection, identity, and governance. Web -based of f erings competing with individual applications have also positioned
themselves as alternatives to our products and services. We compete by providing powerf ul, f lexible, secure, integrated
industry-specif ic, and easy-to-use productivity and collaboration tools and services that create comprehensive solutions and
work well with technologies our customers already have both on-premises or in the cloud.
LinkedIn f aces competition f rom online prof essional networks, recruiting companies, talent management companies, and
larger companies that are f ocusing on talent management and human resource services; job boards; traditional recruiting
f irms; and companies that provide learning and development products and services. Marketing Solutions competes with
online and of f line outlets that generate revenue f rom advertisers and marketers, and Sales Solutions competes with online
and of f line outlets f or companies with lead generation and customer intelligence and insig hts.
Dynamics competes with vendors such as Oracle, Salesf orce.com, and SAP to provide cloud -based and on-premises
business solutions f or small, medium, and large organizations.
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power
modern business and developers. This segment primarily comprises:
• Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System
Center, and related CALs; and GitHub.
• Enterprise Services, including Premier Support Services and Microsof t Consulting Services.
Server Products and Cloud Services
Azure is a comprehensive set of cloud services that of fer developers, IT prof essionals, and enterprises f reedom to build,
deploy, and manage applications on any platf orm or device. Customers can use Azure through our global network of
datacenters f or computing, networking, storage, mobile and web appli cation services, AI, IoT, cognitive services, and
machine learning. Azure enables customers to devote more resources to development and use of applications that benefit
their organizations, rather than managing on-premises hardware and sof tware. Azure revenue is mainly af f ected by
inf rastructure-as-a-service and platf orm-as-a-service consumption-based services, and per user-based services such as
Enterprise Mobility + Security.
Our server products are designed to make IT prof essionals, developers, and thei r systems more productive and ef f icient.
Server sof tware is integrated server inf rastructure and middleware designed to support sof tware applications built on the
Windows Server operating system. This
includes the server platf orm, database, business intell igence, storage,
management and operations, virtualization, service-oriented architecture platf orm, security, and identity sof tware. We also
license standalone and sof tware development lif ecycle tools f or sof tware architects, developers, testers, and proje ct
managers. GitHub provides a collaboration platf orm and code hosting service f or developers. Server products revenue is
mainly af f ected by purchases through volume licensing programs, licenses sold to original equipment manuf acturers
(“OEM”), 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.
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Enterprise Services
Enterprise Services, including Premier Support Services and Microsof t Consulting Services, assist customers in developing,
deploying, and managing Microsof t server and desktop solutions and provide training and certif ication to developers and IT
prof essionals on various Microsof t products.
Competition
Azure f aces diverse competition f rom companies such as Amazon, Google, IBM, Oracle, VMware, and open source
of f erings. Our Enterprise Mobility + Security of ferings also compete with products f rom a range of competitors including
identity vendors, security solution vendors, and numerous other security point solution vendors. Azure’s competitive
advantage includes enabling a hybrid cloud, allowing deployment of existing datacenters with our public cloud into a single,
cohesive inf rastructure, and the ability to run at a scale that meets the needs of businesses of all sizes and complexities.
We believe our cloud’s global scale, coupled with our broad portf olio of identity and security solutions, allows us to ef f ect ively
solve complex cybersecurity challenges f or our customers and dif f erentiates us f rom the competition.
Our server products f ace competition f rom a wide variety of server operating systems and applications of fered by companies
with a range of market approaches. Vertically integrated computer manuf ac turers such as Hewlett-Packard, IBM, and Oracle
of f er their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manuf acturers
of f er server hardware f or the Linux operating system and many contribute to Linux operating system development. The
competitive position of Linux has also benef ited f rom the large number of compatible applications now produced by many
commercial and non-commercial sof tware developers. A number of companies, such as Red Hat, supply versions o f Linux.
We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial sof tware
vendors that of f er solutions and middleware technology platf orms, software applications f or connectivity (both Internet and
intranet), security, hosting, database, and e-business servers. IBM and Oracle lead a group of companies f ocused on the
Java Platf orm Enterprise Edition that competes with our enterprise-wide computing solutions. Commercial competitors for
our server applications f or PC-based distributed client-server environments include CA Technologies, IBM, and Oracle. Our
web application platf orm sof tware competes with open source sof tware such as Apache, Linux, MySQL, and PHP. In
middleware, we compete against Java vendors.
Our database, business intelligence, and data warehousing solutions of f erings compete with products f rom IBM, Oracle,
SAP, and other companies. Our system management solutions compete with server management and server virtualization
platf orm providers, such as BMC, CA Technologies, Hewlett-Packard, IBM, and VMware. Our products f or sof tware
developers compete against of f erings f rom 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 perf ormance, total costs of ownership, and
productivity by delivering superior applications, development tools, compatibility with a broad ba se of hardware and sof tware
applications, security, and manageability.
Our Enterprise Services business competes with a wide range of companies that provide strategy and business planning,
application development, and inf rastructure services, including multinational consulting f irms and small niche businesses
f ocused on specif ic technologies.
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience
with our technology. This segment primarily comprises:
• Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows
operating system; Windows Commercial, comprising volume licensing of the Windows operating
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system, Windows cloud services, and other Windows commercial of f erings; patent licensing; Windows IoT; and
MSN advertising.
• Devices, including Surf ace and PC accessories.
• Gaming, including Xbox hardware and Xbox content and services, comprising Xbox Live (transactions,
subscriptions, cloud services, and advertising), video games, and third -party video game royalties.
• Search.
Windows
The Windows operating system is designed to deliver a more personal computing experience f or users by enabling
consistency of experience, applications, and inf ormation across their devices. Windows OEM revenue is impacted
signif icantly 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 f orm f actor and screen size.
• Dif f erences in device market demand between developed markets and growth markets.
• Attachment of Windows to devices shipped.
• Customer mix between consumer, small and medium businesses, and large enterprises.
• Changes in inventory levels in the OEM channel.
• Pricing changes and promotions, pricing variation that occurs when the mix of devices manuf actured shif ts f rom
local and regional system builders to large multinational OEMs, and dif f erent pricing of Windows versions
licensed.
• Constraints in the supply chain of device components.
• Piracy.
Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud
services such as Microsof t Def ender Advanced Threat Protection, is af f ected mainly by the demand f rom commercial
customers f or volume licensing and Sof tware Assurance (“SA”), as well as advanced security of f erings. Windows
Commercial revenue of ten ref lects the number of inf ormation workers in a licensed enterprise and is relatively inde pendent
of the number of PCs sold in a given year.
Patent licensing includes our programs to license patents we own f or use across a broad array of technology areas, including
mobile devices and cloud of ferings.
Windows IoT extends the power of Windows and the cloud to intelligent systems by delivering specialized operating
systems, tools, and services f or use in embedded devices.
MSN advertising includes both native and display ads.
Devices
We design, manuf acture, and sell devices, including Surf ace and PC accessories. 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. Surf ace is designed to help organizations, students, and consumers be more productive. Growth in
Devices is dependent on total PC shipments, the ability to attract new customers, our product roadmap, and expanding into
new categories.
Gaming
Our gaming platf orm is designed to provide a variety of entertainment through a unique combination of content, community,
and cloud. Our exclusive game content is created through Xbox Game Studios, a collection of f irst -party
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studios creating iconic and dif f erentiated gaming experiences. We continue to invest in new gaming studios and content to
expand our IP roadmap and leverage new content creators. These unique gaming experiences are the cornerstone of Xbox
Game Pass, a subscription service and gaming community with access to a curated library of over 100 f irst- and third-party
console and PC titles.
The gamer remains at the heart of the Xbox ecosystem. We continue to open new opportunities f or gamers to engage both
on- and of f -console with both the launch of Project xCloud, our game streaming service, and continued investment in gaming
hardware. Project xCloud utilizes Microsof t’s Azure cloud technology to allow direct and on-demand streaming of games to
PCs, consoles, and mobile devices, enabling gamers to take t heir f avorites games with them and play on the device most
convenient to them. Project xCloud will provide players with more choice over how and where they play.
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 benef it users by providing access to a network of certif ied
applications and services and to benef it our developer and partner ecosystems by providing access to a large cus tomer
base. Xbox revenue is mainly af f ected by subscriptions and sales of f irst - and third-party content, as well as advertising.
Growth of our Gaming business is determined by the overall active user base through Xbox 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 through f irst -party content creators.
Search
Our Search business, including Bing and Microsof t Advertising, is designed to deliver relevant online advertising to a global
audience. We have several partnerships with other companies, including Verizon Media Group, 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 of f erings.
Competition
Windows f aces competition f rom various sof tware products and f rom alternative platf orms and devices, mainly f rom Apple
and Google. We believe Windows competes ef f ectively by giving customers choice, value, f lexibility, security, an easy -to-
use interf ace, and compatibility with a broad range of hardware and sof tware applications, including those that enable
productivity.
Devices f ace competition f rom various computer, tablet, and hardware manuf acturers who of fer a unique combination of
high-quality industrial design and innovative technologies across various price points. These manuf acturers, many of which
are also current or potential partners and customers, include Apple and our Windows OEMs.
Xbox Live and our cloud gaming services f ace competition f rom various online gaming ecosystems and game streaming
services, including those operated by Amazon, Apple, Fac ebook, Google, and Tencent. We also compete with other
providers of entertainment services such as Netf lix and Hulu. Our gaming platf orm competes with console platf orms from
Nintendo and Sony, both of which have a large, established base of customers. We b elieve our gaming platf orm is ef f ectively
positioned against, and uniquely dif f erentiated f rom, competitive products and services based on signif icant innovation in
hardware architecture, user interf ace, developer tools, online gaming and entertainment services, and continued strong
exclusive content f rom our own f irst-party game f ranchises as well as other digital content of f erings.
Our search business competes with Google and a wide array of websites, social platf orms like Facebook, and portals that
provide content and online of f erings to end users.
19
OPERATIONS
We have operations centers that support operations in their regions, including customer contract and order processing,
credit and collections, inf ormation processing, and vendor management and logistics. The regional center in Ireland
supports the European, Middle Eastern, and Af rican region; the center in Singapore supports the Japan, India, Greater
China, and Asia-Pacif ic 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, Europe, Australia, and Asia, as well as in the Middle East and Af rica.
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 ref lect local languages and conventions. Localizing a product may require
modif ying the user interf ace, altering dialog boxes, and translating text.
Our devices are primarily manuf actured by third -party contract manuf acturers. We generally have the ability to use other
manuf acturers if a current vendor becomes unavailable or unable to meet our requirements. The majority of our hardware
products contain components f or which there is only one qualif ied supplier. Extended disruptions at these suppliers could
lead to a similar disruption in our ability to manuf acture devices.
Product and Service Development, and Intellectual Property
We develop most of our products and services internally through the f ollowing engineering groups.
RESEARCH AND DEVELOPMENT
• Cloud and AI, f ocuses on making IT prof essionals, developers, and their systems more productive and ef f icient
through development of cloud inf rastructure, server, database, CRM, ERP, management and development
tools, AI cognitive services, and other business process applications and services f or enterprises.
• Experiences and Devices, f ocuses on instilling a unif ying product ethos across our end -user experiences and
devices, including Of f ice, Windows, Enterprise Mobility + Security, and Surf ace.
• AI and Research, f ocuses on our AI innovations and other f orward -looking research and development ef f orts
spanning inf rastructure, services, applications, and search.
LinkedIn, f ocuses on our services that transf orm the way customers hire, market, sell, and learn.
•
• Gaming, f ocuses on developing hardware, content, and services across a large range of platforms to help grow
our user base through game experiences and social interaction.
Internal development allows us to maintain competitive advantages that come f rom product dif f erentiation and closer
technical control over our products and services. It also gives us the f reedom to decide which modif ications and
enhancements are most important and when they should be implemented. We strive to obtain inf ormation as early as
possible about changing usage patterns and hardware advanc es that may af f ect sof tware and hardware design. Bef ore
releasing new sof tware platf orms, and as we make signif icant modif ications to existing platf orms, we provide application
vendors with a range of resources and guidelines f or 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 enf orcement of copyright, trademark, trade secret, and other protections that apply to our sof tware and hardware
products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and
currently have a portf olio of over 63,000 U.S. and international patents issued and over 24,500 pending worldwide. While
we employ much of our internally-developed intellectual property exclusively in our products and services, we also engage
in outbound licensing of specific patented technologies that are incorporated into licensees’ products. From time to time, we
enter into broader cross-license agreements with other technology
20
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. Our increasing engagement with open source sof tware will also cause us to license our intellectual
property rights broadly in certain situations.
While it may be necessary in the f uture 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 f or 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 of fer
signif icant opportunities to deliver value to our customers and growth f or 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 platf orms spanning digital work and lif e ex periences, cloud computing, AI, devices, and operating
systems.
While our main product research and development f acilities are located in Redmond, Washington, we also operate researc h
and development f acilities in other parts of the U.S. and around the wo rld, including Canada, China, Czech Republic, 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 f rom across the world.
In addition to our main research and development operations, we also operate Microsof t Research. Microsof t Research is
one of the world’s largest corporate research organizations and works in close collaboration with top universities around the
world to advance the state-of -the-art in computer science and a broad range of other disciplines, providing us a unique
perspective on f uture trends and contributing to our innovation.
We generally f und research at the corporate level to ensure that we are looking beyond immediate product considerations
to opportunities f urther in the f uture. We also f und 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.
We plan to continue to make signif icant investments in a broad range of research and development ef f orts.
DISTRIBUTION, SALES, AND MARKETING
We market and distribute our products and services through the f ollowing channels: OEMs, direct, and distributors and
resellers. Our sales f orce perf orms a variety of f unctions, including working directly with commercial enterprises and public -
sector organizations worldwide to identif y and meet their technology and digital transf ormation requirements; managing
OEM relationships; and supporting system integrators, independent sof tware vendors, and other partners who engage
directly with our customers to perf orm sales, consulting, and f ulf illment f unctions f or our products and services.
OEMs
We distribute our products and services through OEMs that pre-install our sof tware 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 Microsof t products and services, including applications such as Of f ice and the capability to
subscribe to Of f ice 365.
21
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 Microsof t 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, Sharp, Toshiba, and with many regional and local OEMs. The second broad category of OEMs are system
builders consisting of lower-volume PC manuf acturers, which source Microsof t so f tware f or pre-installation and local
redistribution primarily through the Microsof t distributor channel rather than through a direct agreement or relationship wit h
Microsof t.
Direct
Many organizations that license our products and services transact directly with us through Enterprise Agreements and
Enterprise Services contracts, with sales support f rom system integrators, independent sof tware vendors, web agencies,
and partners that advise organizations on licensing our products and services (“Enterprise Agreement Sof tware Advisors”
or “ESA”). Microsof t offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to
those of f ered through the reseller channel. A large network of partner advisors support many of these s ales.
We also sell commercial and consumer products and services directly to customers, such as cloud services, search, and
gaming, through our digital marketplaces and online stores. In June 2020, we announced a strategic change in our retail
operations, including closing our Microsof t Store physical locations.
Distributors and Resellers
Organizations also license our products and services indirectly, primarily through licensing solution partners (“LSP”),
distributors, value-added resellers (“VAR”), 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, and VARs typically
reach small and medium organizations. ESAs are also typ ically authorized as LSPs and operate as resellers f or our other
volume licensing programs. Microsof t Cloud Solution Provider is our main partner program f or reselling cloud 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 f ield sales representatives and f ield support personnel that solicit
orders f rom distributors and resellers, and provide product training and sales support.
Our Dynamics business solutions are also licensed to enterprises through a global network of channel partners providing
vertical solutions and specialized services.
LICENSING OPTIONS
We of f er options f or organizations that want to purchase our cloud services, on-premises sof tware, and Sof tware Assurance.
We license sof tware 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 dif f erent programs
designed to provide f lexibility f or organizations of various sizes. While these programs may dif fer in various parts of the
world, generally they include those discussed below.
SA conveys rights to new sof tware and upgrades f or perpetual licenses released o ver the contract period. It also provides
support, tools, training, and other licensing benef its to help customers deploy and use sof tware ef f iciently. SA is included
with certain volume licensing agreements and is an optional purchase with others.
22
Volume Licensing Programs
Enterprise Agreement
Enterprise Agreements of f er large organizations a manageable volume licensing program that gives them the f lexibility to
buy cloud services and sof tware licenses under one agreement. Enterprise Agreements are designed f or medium or large
organizations that want to license cloud services and on-premises sof tware organization-wide over a three-year period.
Organizations can elect to purchase perpetual licenses or subscribe to licenses. SA is included.
Microsoft Product and Services Agreement
Microsof t Product and Services Agreements are designed f or medium and large organizations that want to license cloud
services and on-premises sof tware as needed, with no organization-wide commitment, under a single, non-expiring
agreement. Organizations purchase perpetual licenses or subscribe to licenses. SA is optional f or customers that purchase
perpetual licenses.
Open
Open agreements are a simple, cost-ef f ective way to acquire the latest Microsof t technology. Open agreements are
designed f or small and medium organizations that want to license cloud services and on-premises sof tware over a one- to
three-year period. Under the Open agreements, organizations purchase perpetual licenses and SA is optional. Under Open
Value agreements, organizations can elect to purchase perpetual licenses or subscribe to licenses and SA is included.
Select Plus
Select Plus agreements are designed f or government and academic organizations to acquire on -premises licenses at any
af f iliate or department level, while realizing advantages as one organization. Organizations purchase perpetual licenses
and SA is optional.
Microsoft Online Subscription Agreement
Microsof t Online Subscription Agreements are designed f or small and medium organizations that want to subscribe to,
activate, provision, and maintain cloud services seamlessly and directly via the web. The agreement allows customers to
acquire monthly or annual subscriptions f or cloud -based services.
Partner Programs
The Microsof t Cloud Solution Provider program of f ers customers an easy way to license the cloud services they need in
combination with the value-added services of f ered by their systems integrator, managed services provider, or cloud reseller
partner. Partners in this program can easily package their own products and servic es to directly provision, manage, and
support their customer subscriptions.
The Microsof t Services Provider License Agreement allows hosting service providers and independent sof tware vendors
who want to license eligible Microsof t software products to pro vide sof tware services and hosted applications to their end
customers. Partners license sof tware over a three-year period and are billed monthly based on consumption.
The Independent Sof tware Vendor Royalty program enables partners to integrate Microsof t products into other applications
and then license the unif ied business solution to their end users.
23
Our customers include individual consumers, small and medium organizations, large global enterprises, public -sector
institutions, Internet service providers, application developers, and OEMs. Our practice is to ship our products promptly
upon receipt of purchase orders f rom customers; consequently, backlog is not signif icant.
CUSTOMERS
EMPLOYEES
As of June 30, 2020, we employed approximately 163,000 people on a f ull-time basis, 96,000 in the U.S. and 67,000
internationally. Of the total employed people, 56,000 were in operations, including manuf acturing, distribution, product
support, and consulting services; 55,000 were in product research and developm ent; 40,000 were in sales and marketing;
and 12,000 were in general and administration. Certain of our employees are subject to collective bargaining agreements.
AVAILABLE INFORMATION
Our Internet address is www.microsof t.com. At our Investor Relations website, www.microsof t.com/investor, we make
available f ree of charge a variety of inf ormation f or investors. Our goal is to maintain the Investor Relations website as a
portal through which investors can easily f ind or navigate to pertinent inf ormation 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 af ter we electronically f ile that material with
or f urnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov.
Inf ormation on our business strategies, f inancial results, and metrics f or investors.
•
• Announcements of investor conf erences, speeches, and events at which our executives talk about our product,
service, and competitive strategies. Archives of these events are also available.
• Press releases on quarterly earnings, product and service announcements, legal developments, and
international news.
• Corporate governance inf ormation 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 f rom time to time that investors might f ind usef ul or
interesting.
• Opportunities to sign up f or email alerts to have inf ormation pushed in real time.
The inf ormation f ound on our website is not part of this or any other report we f ile with, or f urnish to, the SEC. In additio n to
these channels, we use social media to communicate to the public. It is possible that the inf ormation 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 inf ormation 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 f ollowing 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 f inancial condition of Microsoft Corporation. MD&A is
provided as a supplement to, and should be read in conjunction with, our consolidated f inancial statements and the
accompanying Notes to Financial Statements.
OVERVIEW
Microsof t 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 platf orms
and tools help drive small business productivity, large business competitiveness, and public -sector ef f iciency. They also
support new startups, improve educational and health outcomes, and empower human ingenuity.
We generate revenue by of f ering a wide range of cloud-based and other services to people and businesses; licensing and
supporting an array of sof tware products; designing, manuf acturing, and selling devices; and delivering relevant online
advertising to a global audience. Our most signif icant expenses are related to compensating employees; designing,
manuf acturing, marketing, and selling our products and services; datacenter costs in support of our cloud -based services;
and income taxes.
As the world responds to the outbreak of a novel strain of the coronavirus (“COVID-19”), we are working to do our part by
ensuring the saf ety of our employees, striving to protect the health and well-being of the communities in which we operate,
and providing technology and resources to our customers to help them do their best work while remote.
Highlights f rom f iscal year 2020 compared with f iscal year 2019 included:
• Commercial cloud revenue increased 36% to $51.7 billion.
• Of f ice Commercial products and cloud services revenue increased 12%, driven by Of f ice 365 Commercial
growth of 24%.
• Of f ice Consumer products and cloud services revenue increased 11%, with continued growth in Of f ice 365
Consumer subscribers to 42.7 million.
LinkedIn revenue increased 20%.
•
• Dynamics products and cloud services revenue increased 14%, driven by Dynamic s 365 growth of 42%.
• Server products and cloud services revenue increased 27%, driven by Azure growth of 56%.
• Enterprise Services revenue increased 5%.
• Windows Commercial products and cloud services revenue increased 18%.
• Windows original equipment manuf acturer licensing (“Windows OEM”) revenue increased 9%.
• Surf ace revenue increased 8%.
• Xbox content and services revenue increased 11%.
• Search advertising revenue, excluding traf f ic acquisition costs, was relatively unchanged.
Industry Trends
Our industry is dynamic and highly competitive, with f requent changes in both technologies and business models. Each
industry shif t is an opportunity to conceive new products, new technologies, or new ideas that can f urther
25
transf orm the industry and our business. At Microsof t, we push the boundaries of what is possible through a broad range of
research and development activities that seek to identif y and address the changing demands of customers and users,
industry trends, and competitive f orces.
Economic Conditions, Challenges, and Risks
The markets f or sof tware, devices, and cloud -based services are dynamic and highly competitive. Our competitors are
developing new sof tware and devices, while also deploying competing cloud -based services f or consumers and businesses.
The devices and f orm f actors customers pref er evolve rapidly, and inf luence 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 inf rastructure 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 qualif ied employees. We hire a mix of university and
industry talent worldwide. We compete f or talented individuals globally by of f ering an exceptional working environment,
broad customer reach, scale in resources, the ability to grow one’s career across many dif f erent products and businesses,
and competitive compensation and benef its. Aggregate demand f or our sof tware, services, and devices is correlated to
global macroeconomic and geopolitical f actors, which remain dynamic.
Our international operations provide a signif icant 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 f oreign exchange rates may
signif icantly af f ect revenue and expenses. Strengthening of the U.S. dollar relative to certain f oreign currencies did not
signif icantly impact reported revenue or expenses f rom our international operations in the f irst and second quarters of f iscal
year 2019, and reduced reported revenue and expenses f rom our international operations in the third and f ourth quarters
of f iscal year 2019. Strengthening of the U.S. dollar relative to certain f oreign currencies reduced reported revenue and
expenses f rom our international operations in f iscal year 2020.
Ref er to Risk Factors in our f iscal year 2020 Form 10-K f or a discussion of these f actors and other risks.
COVID-19
In f iscal year 2020, the COVID-19 pandemic impacted our business operations, including our employees, customers,
partners, and communities, and we saw the f ollowing trends in our f inancial operating results. In the Productivity and
Business Processes and Intelligent Cloud segments, cloud usage and demand increased as customers shif ted to work and
learn f rom home. We also experienced a slowdown in transactional licensing, particularly in small and medium businesses,
and LinkedIn was negatively impacted by the weak job market and reductions in advertising spend. In the More Personal
Computing segment, Windows OEM, Surf ace, and Gaming benef ited f rom increased demand to support remote work -,
play-, and learn-f rom-home scenarios, while Search was negatively impacted by reductions in advertising spend. The
COVID-19 pandemic may continue to impact our business operations and f inancial operating results, and there is substantial
uncertainty in the nature and degree of its continued ef f ects over time.
The extent to which the COVID-19 pandemic impacts our business going f orward will depend on numerous evolving f actors
we cannot reliably predict, including the duration and scope of the pandemic; governmental, business, and individuals’
actions in response to the pandemic; and the impact on economic activity including the possibility of recession or f inancial
market instability. These f actors may adversely impact consumer, business, and government spending on technology as
well as customers’ ability to pay f or our products and services on an ongoing basis. This uncertainty also af f ects
management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that
depend on these estimates and assumptions, including investments, receivables, and f orward -looking guidance. Ref er to
Risk Factors in our f iscal year 2020 Form 10-K f or a discussion of these f actors and other risks.
Seasonality
Our revenue f luctuates quarterly and is generally higher in the second and f ourth quarters of our f iscal year. Second quarter
revenue is driven by corporate year-end spending trends in our major markets and holiday season spending
26
by consumers, and f ourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the
period.
Reportable Segments
We report our f inancial perf ormance based on the f ollowing 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 dif f erences between our internal management reporting basis and accounting
principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity,
are included in Corporate and Other.
Additional inf ormation on our reportable segments is contained in Note 19 – Segment Inf ormation and Geographic Data of
the Notes to Financial Statements.
Metrics
We use metrics in assessing the perf ormance of our business and to make inf ormed decisions re garding the allocation of
resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into
perf ormance trends, and ref lect the continued evolution of our products and services. Our commercial and othe r business
metrics are f undamentally connected based on how customers use our products and services. The metrics are disclosed in
the MD&A or the Notes to Financial Statements. Financial metrics are calculated based on GAAP results and growth
comparisons relate to the corresponding period of last f iscal year.
Commercial
Our commercial business primarily consists of Server products and cloud services, Of f ice Commercial, Windows
Commercial, the commercial portion of LinkedIn, Enterprise Services, and Dynami cs. Our commercial metrics allow
management and investors to assess the overall health of our commercial business and include leading indicators of f uture
perf ormance.
Commercial remaining perf ormance obligation
Commercial cloud revenue
Commercial cloud gross margin percentage
Commercial portion of revenue allocated to remaining perf ormance
obligations, which includes unearned revenue and amounts that will be
invoiced and recognized as revenue in f uture periods
Revenue f rom our commercial cloud business, which includes Of f ice
365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics
365, and other commercial cloud properties
Gross margin percentage f or our commercial cloud business
Productivity and Business Processes and Intelligent Cloud
Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core
businesses within these segments. The metrics ref lect our cloud and on-premises product strategies and trends.
Of f ice Commercial products and cloud services
revenue growth
Of f ice Consumer products and cloud services
revenue growth
Revenue
f rom Of f ice Commercial products and cloud services,
including Of f ice 365 subscriptions, the Of f ice 365 portion of Microsoft
365 Commercial subscriptions, and Of f ice licensed on-premises,
comprising Of f ice, Exchange, SharePoint, Microsof t Teams, Of f ice 365
Security and Compliance, and Skype f or Business, and related Client
Access Licenses (“CALs”)
Revenue f rom Of f ice Consumer products and cloud services, including
Microsof t 365 Consumer (f ormerly Of f ice 365 Consumer) subscriptions
and Of f ice licensed on-premises
27
Of f ice 365 Commercial seat growth
Of f ice 365 Consumer subscribers
Dynamics products and cloud services revenue
growth
LinkedIn revenue growth
Server products and cloud services revenue
growth
Enterprise Services revenue growth
The number of Of f ice 365 Commercial seats at end of period where
seats are paid users covered by an Of f ice 365 Commercial subscription
The number of Of fice 365 Consumer subscribers at end of period
Revenue
f rom Dynamics products and cloud services, including
Dynamics 365, a set of cloud-based applications across ERP and CRM,
Dynamics ERP on-premises, and Dynamics CRM on-premises
Revenue f rom LinkedIn, including Talent Solutions, Learning Solutions,
Marketing Solutions, Sales Solutions, and Premium Subscriptions
Revenue f rom Server products and cloud services, including Azure;
SQL Server, Windows Server, Visual Studio, System Center, and
related CALs; and GitHub
Revenue f rom Enterprise Services, including Premier Support Services
and Microsof t Consulting Services
More Personal Computing
Metrics related to our More Personal Computing segment assess the perf ormance of key lines of business within this
segment. These metrics provide strategic product insights which allow us to assess the perf ormance across our commercial
and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we
monitor metrics that are ref lective of those varying motions.
Windows OEM Pro revenue growth
Windows OEM non-Pro revenue growth
Windows Commercial products and cloud
services revenue growth
Surf ace revenue
Xbox content and services revenue growth
Revenue f rom sales of Windows Pro licenses sold through the OEM
channel, which primarily addresses demand in the commercial market
Revenue f rom sales of Windows non-Pro licenses sold through the
OEM channel, which primarily addresses demand in the consumer
market
Revenue f rom Windows Commercial products and cloud services,
comprising volume licensing of the Windows operating system,
Windows cloud services, and other Windows commercial of ferings
Revenue f rom Surf ace devices and accessories
Revenue
f rom Xbox content and services, comprising Xbox Live
(transactions, subscriptions, cloud services, and advertising), video
games, and third-party video game royalties
Search advertising revenue, excluding TAC,
growth
Revenue f rom search advertising excluding traf f ic acquisition costs
(“TAC”) paid to Bing Ads network publishers
SUMMARY RESULTS OF OPERATIONS
(In millions, except percentages and per share amounts)
2020
2019
2018
Percentage
Change 2020
Versus 2019
Percentage
Change 2019
Versus 2018
Revenue
Gross margin
Operating income
Net income
Diluted earnings per share
Non-GAAP net income
Non-GAAP diluted earnings per share
$ 143,015
96,937
52,959
44,281
5.76
44,281
5.76
$ 125,843
82,933
42,959
39,240
5.06
36,830
4.75
$ 110,360
72,007
35,058
16,571
2.13
30,267
3.88
14%
17%
23%
13%
14%
20%
21%
14%
15%
23%
137%
138%
22%
22%
28
Non-GAAP net income and diluted earnings per share (“EPS”) exclude the net tax impact of transf er of intangible properties
in f iscal year 2019 and the net tax impact of the Tax Cuts and Jobs Act (“TCJA”) in f iscal years 2019 and 2018. Ref er to the
Non-GAAP Financial Measures section below f or a reconciliation of our f inancial results reported in accordance with GAAP
to non-GAAP f inancial results.
Fiscal Year 2020 Compared with Fiscal Year 2019
Revenue increased $17.2 billion or 14%, driven by growth across each of our segments. Intelligent Cloud revenue
increased, driven by server products and cloud services. Productivity and Business Processes revenue increased, driven
by Of f ice Commercial and LinkedIn. More Personal Computing revenue increased, driven by Windows and Surf ace.
Gross margin increased $14.0 billion or 17%, driven by growth across each of our segments. Gross margin percentage
increased, driven by sales mix shif t to higher margin businesses. Commercial cloud gross margin percentage increased 4
points to 67%, primarily driven by improvement in Azure.
Operating income increased $10.0 billion or 23%, driven by growth across each of our segments.
Key changes in expenses were:
• Cost of revenue increased $3.2 billion or 7%, driven by growth in commercial cloud.
• Research and development expenses increased $2.4 billion or 14%, driven by investments in cloud
engineering, LinkedIn, Devices, and Gaming.
• Sales and marketing expenses increased $1.4 billion or 8%, driven by investments in LinkedIn and commercial
sales, and an increase in bad debt expense.
• General and administrative expenses increased $226 million or 5%, driven by charges associated with the
closing of our Microsof t Store physical locations, of f set in part by a reduction in business taxes and legal
expenses.
Gross margin and operating income included an unf avorable f oreign currency impact of 2% and 4%, respectively.
Prior year net income included a $2.6 billion net income tax benef it related to intangible property transf ers and a $157 million
net charge related to the enactment of the TCJA, which together resulted in an increase to net income and diluted EPS of
$2.4 billion and $0.31, respectively.
Fiscal Year 2019 Compared with Fiscal Year 2018
Revenue increased $15.5 billion or 14%, driven by growth across each of our segments. Intelligent Cloud revenue
increased, driven by server products and cloud services. Productivity and Business Processes revenue increased, driv en
by Of f ice and LinkedIn. More Personal Computing revenue increased, driven by Surf ace, Gaming, and Windows.
Gross margin increased $10.9 billion or 15%, driven by growth across each of our segments. Gross margin percentage
increased slightly, due to gross margin percentage improvement across each of our segments and f avorable segment sales
mix. Gross margin included a 5 percentage point improvement in commercial cloud, primarily f rom Azure.
Operating income increased $7.9 billion or 23%, driven by growth across each of our segments.
Key changes in expenses were:
• Cost of revenue increased $4.6 billion or 12%, driven by growth in commercial cloud, Surf ace, and Gaming.
• Research and development expenses increased $2.2 billion or 15%, driven by investments in cloud and
artif icial intelligence (“AI”) engineering, Gaming, LinkedIn, and GitHub.
29
• Sales and marketing expenses increased $744 million or 4%, driven by investments in commercial sales
capacity, LinkedIn, and GitHub, of f set in part by a decrease in marketing. Sales and marketing expenses
included a f avorable f oreign currency impact of 2%.
Fiscal year 2019 net income included a $2.6 billion net income tax benef it related to intangible property transf ers and a
$157 million net charge related to the enactment of the TCJA, which together resulted in an increase to net income and
diluted EPS of $2.4 billion and $0.31, respectively. Fiscal year 2018 net income and diluted EPS were negatively impacted
by the net charge related to the enactment of the TCJA, which resulted in a decrease to net income and diluted EPS of
$13.7 billion and $1.75, respectively.
(In millions, except percentages)
Revenue
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Total
Operating Income
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Total
SEGMENT RESULTS OF OPERATIONS
2020
2019
2018
Percentage
Change 2020
Versus 2019
Percentage
Change 2019
Versus 2018
$
46,398
48,366
48,251
$ 143,015
$
41,160 $
38,985
45,698
35,865
32,219
42,276
$ 125,843 $ 110,360
$
$
18,724
18,324
15,911
52,959
$
$
16,219 $
13,920
12,820
42,959 $
12,924
11,524
10,610
35,058
13%
24%
6%
14%
15%
32%
24%
23%
15%
21%
8%
14%
25%
21%
21%
23%
Reportable Segments
Fiscal Year 2020 Compared with Fiscal Year 2019
Productivity and Business Processes
Revenue increased $5.2 billion or 13%.
• Of f ice Commercial products and cloud services revenue increased $3.1 billion or 12%, driven by Of f ice 365
Commercial, of f set in part by lower revenue f rom products licensed on-premises, ref lecting a continued shift to
cloud of ferings. Of fice 365 Commercial revenue grew 24%, due to seat growth and higher revenue per user.
• Of f ice Consumer products and cloud services revenue increased $458 million or 11%, driven by Microsof t 365
Consumer subscription revenue and transactional strength in Japan. Of f ice 365 Consumer subscribers
increased 23% to 42.7 million with increased demand f rom remote work and learn scenarios.
LinkedIn revenue increased $1.3 billion or 20%, driven by growth across all businesses.
•
• Dynamics products and cloud services revenue increased 14%, driven by Dynamics 365 growth of 42%.
Operating income increased $2.5 billion or 15%.
• Gross margin increased $4.1 billion or 13%, driven by growth in Of f ice Commercial and LinkedIn. Gross marg in
percentage was relatively unchanged, due to gross margin percentage improvement in LinkedIn, of f set in part
by an increased mix of cloud of ferings.
• Operating expenses increased $1.6 billion or 11%, driven by investments in LinkedIn and cloud engineering.
30
Revenue, gross margin, and operating income included an unf avorable f oreign currency impact of 2%, 2%, and 4%,
respectively.
Intelligent Cloud
Revenue increased $9.4 billion or 24%.
• Server products and cloud services revenue increased $8.8 billion or 27%, driven by Azure. Azure revenue
grew 56%, due to growth in our consumption-based services. Server products revenue increased 8%, due to
hybrid and premium solutions, as well as demand related to SQL Server 2008 and Windows Server 2008 end
of support.
• Enterprise Services revenue increased $285 million or 5%, driven by growth in Premier Support Services.
Operating income increased $4.4 billion or 32%.
• Gross margin increased $6.9 billion or 26%, driven by growth in server products and cloud services revenue
and cloud services scale and ef f iciencies. Gross margin percentage increased slightly, due to gross margin
percentage improvement in Azure, of fset in part by an increased mix of cloud offerings.
• Operating expenses increased $2.5 billion or 19%, driven by investments in Azure.
Revenue, gross margin, and operating income included an unf avorable f oreign currency impact of 2%, 2%, and 4%,
respectively.
More Personal Computing
Revenue increased $2.6 billion or 6%.
• Windows revenue increased $1.9 billion or 9%, driven by growth in Windows Commercial and Windows OEM.
Windows Commercial products and cloud services revenue increased 18%, driven by increased demand f or
Microsof t 365. Windows OEM revenue increased 9%, ahead of PC market growth. Windows OEM Pro revenue
grew 11%, driven by Windows 7 end of support and healthy Windows 10 demand, of f set in part by weakness
in small and medium businesses. Windows OEM non-Pro revenue grew 5%, driven by consumer demand f rom
remote work and learn scenarios.
• Surf ace revenue increased $457 million or 8%, driven by increased demand f rom remote work and learn
scenarios.
• Gaming revenue increased $189 million or 2%, driven by an increase in Xbox content and services, of fset in
part by a decrease in Xbox hardware. Xbox content and services revenue increased $943 million or 11% on a
strong prior year comparable, driven by gro wth in Minecraf t, third-party titles, and subscriptions, accelerated by
higher engagement during stay-at-home guidelines. Xbox hardware revenue declined 31%, primarily due to a
decrease in volume and price of consoles sold.
• Search advertising revenue increased $112 million or 1%. Search advertising revenue, excluding traf fic
acquisition costs, was relatively unchanged.
Operating income increased $3.1 billion or 24%.
• Gross margin increased $3.0 billion or 12%, driven by growth in Windows, Gaming, and Surf ace. Gross margin
percentage increased, due to sales mix shif t to higher margin businesses and gross margin percentage
improvement in Gaming.
• Operating expenses decreased $119 million or 1%, driven by the redeployment of engineering resources, of fset
in part by charges associated with the closing of our Microsof t Store physical locations and investments in
Gaming.
Gross margin and operating income included an unf avorable f oreign currency impact of 2% and 3%, respectively.
31
Fiscal Year 2019 Compared with Fiscal Year 2018
Productivity and Business Processes
Revenue increased $5.3 billion or 15%.
• Of f ice Commercial products and cloud services revenue increased $3.2 billion or 13%, driven by Of f ice 365
Commercial, of f set in part by lower revenue f rom products licensed on-premises, ref lecting a continued shift to
cloud of f erings. Of fice 365 Commercial grew 33%, due to growth in seats and higher average revenue per user.
• Of f ice Consumer products and cloud services revenue increased $286 million or 7%, driven by Microsof t 365
Consumer, due to recurring subscription revenue and transactional strength in Japan.
LinkedIn revenue increased $1.5 billion or 28%, driven by growth across each line of business.
•
• Dynamics products and cloud services revenue increased 15%, driven by Dynamics 365 growth.
Operating income increased $3.3 billion or 25%, including an unf avorable f oreign currency impact of 2%.
• Gross margin increased $4.1 billion or 15%, driven by growth in Of f ice Commercial and LinkedIn. Gross margin
percentage increased slightly, due to gross margin percentage improvement in LinkedIn and Of f ice 365
Commercial, of fset in part by an increased mix of cloud offerings.
• Operating expenses increased $806 million or 6%, driven by investments in LinkedIn and cloud engineering,
of f set in part by a decrease in marketing.
Intelligent Cloud
Revenue increased $6.8 billion or 21%.
• Server products and cloud services revenue, including GitHub, increased $6.5 billion or 25%, driven by Azure.
Azure revenue growth was 72%, due to higher
inf rastructure-as-a-service and platf orm-as-a-service
consumption-based and per user-based services. Server products revenue increased 6%, due to continued
demand f or premium versions and hybrid solutions, GitHub, and demand ahead of end -of -support f or SQL
Server 2008 and Windows Server 2008.
• Enterprise Services revenue increased $278 million or 5%, driven by growth in Premier Support Services and
Microsof t Consulting Services.
Operating income increased $2.4 billion or 21%.
• Gross margin increased $4.8 billion or 22%, driven by growth in server products and cloud services revenue
and cloud services scale and ef f iciencies. Gross margin percentage increased slightly, due to gross margin
percentage improvement in Azure, of fset in part by an increased mix of cloud offerings.
• Operating expenses increased $2.4 billion or 22%, driven by investments in clo ud and AI engineering, GitHub,
and commercial sales capacity.
More Personal Computing
Revenue increased $3.4 billion or 8%.
• Windows revenue increased $877 million or 4%, driven by growth in Windows Commercial and Windows OEM,
of f set in part by a decline in patent licensing. Windows Commercial products and cloud services revenue
increased 14%, driven by an increased mix of multi-year agreements that carry higher in-quarter revenue
recognition. Windows OEM revenue increased 4%. Windows OEM Pro revenue grew 10%, ahead of the
commercial PC market, driven by healthy Windows 10 demand. Windows OEM non-Pro revenue declined 7%,
below the consumer PC market, driven by continued pressure in the entry level category.
• Surf ace revenue increased $1.1 billion or 23%, with strong growth across commercial and consumer.
32
• Gaming revenue increased $1.0 billion or 10%, driven by Xbox sof tware and services growth of 19%, primarily
due to third-party title strength and subscriptions growth, of f set in part by a decline in Xbox hardware of 13%
primarily due to a decrease in volume of consoles sold.
• Search advertising revenue increased $616 million or 9%. Search advertising revenue, excluding traf fic
acquisition costs, increased 13%, driven by higher revenue per search.
Operating income increased $2.2 billion or 21%, including an unf avorable f oreign currency impact of 2%.
• Gross margin increased $2.0 billion or 9%, driven by growth in Windows, Gaming, and Search. Gross margin
percentage increased slightly, due to sales mix shif t to higher gross margin businesses in Windows and
Gaming.
• Operating expenses decreased $172 million or 1%.
OPERATING EXPENSES
Research and Development
(In millions, except percentages)
Research and development
As a percent of revenue
2020
2019
2018
Percentage
Change 2020
Versus 2019
Percentage
Change 2019
Versus 2018
$ 19,269
13%
$ 16,876
13%
$ 14,726
13%
14%
0ppt
15%
0ppt
Research and development expenses include payroll, employee benef its, 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 sof tware f or international markets, and
the amortization of purchased sof tware code and services content.
Fiscal Year 2020 Compared with Fiscal Year 2019
Research and development expenses increased $2.4 billion or 14%, driven by investments in cloud engineering, LinkedIn,
Devices, and Gaming.
Fiscal Year 2019 Compared with Fiscal Year 2018
Research and development expenses increased $2.2 billion or 15%, driven by investments in cloud and AI engineering,
Gaming, LinkedIn, and GitHub.
Sales and Marketing
(In millions, except percentages)
Sales and marketing
As a percent of revenue
2020
2019
2018
$ 19,598
14%
$ 18,213
14%
$ 17,469
16%
Percentage
Change 2020
Versus 2019
8%
0ppt
Percentage
Change 2019
Versus 2018
4%
(2)ppt
Sales and marketing expenses include payroll, employee benef its, 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 2020 Compared with Fiscal Year 2019
Sales and marketing expenses increased $1.4 billion or 8%, driven by investments in LinkedIn and commercial sales, and
an increase in bad debt expense.
33
Fiscal Year 2019 Compared with Fiscal Year 2018
Sales and marketing expenses increased $744 million or 4%, driven by investments in commercial sales capacity, LinkedIn,
and GitHub, of f set in part by a decrease in marketing. Expenses included a f avorable f oreign currency impact of 2%.
General and Administrative
(In millions, except percentages)
General and administrative
As a percent of revenue
2020
2019
2018
Percentage
Change 2020
Versus 2019
Percentage
Change 2019
Versus 2018
$ 5,111
4%
$ 4,885
4%
$ 4,754
4%
5%
0ppt
3%
0ppt
General and administrative expenses include payroll, employee benef its, stock -based compensation expense, severance
expense, and other headcount-related expenses associated with f inance, legal, f acilities, certain human resources and
other administrative personnel, certain taxes, and legal and other administrative f ees.
Fiscal Year 2020 Compared with Fiscal Year 2019
General and administrative expenses increased $226 million or 5%, driven by charges associated with the closing of our
Microsof t Store physical locations, offset in part by a reduction in business taxes and legal expenses.
Fiscal Year 2019 Compared with Fiscal Year 2018
General and administrative expenses increased $131 million or 3%.
The components of other income (expense), net were as f ollows:
OTHER INCOME (EXPENSE), NET
(In millions)
Year Ended June 30,
Interest and dividends income
Interest expense
Net recognized gains on investments
Net gains (losses) on derivatives
Net losses on f oreign currency remeasurements
Other, net
Total
2020
2019
(2,686)
2018
$ 2,680 $ 2,762 $ 2,214
(2,733)
648 2,399
(187)
144
(82)
(218)
(59)
(57)
729 $ 1,416
(2,591)
32
187
(191)
(40)
77 $
$
We use derivative instruments to: manage risks related to f oreign currencies, equity prices, interest rates, and credit;
enhance investment returns; and f acilitate portf olio diversif ication. Gains and losses f rom changes in f air values of
derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.
Fiscal Year 2020 Compared with Fiscal Year 2019
Interest and dividends income decreased due to lower yields, of f set in part by higher average portf olio bal ances on f ixed-
income securities. Interest expense decreased due to capitalization of interest expense and a decrease in outstanding long -
term debt due to debt maturities, of f set in part by debt exchange transaction f ees and higher f inance lease expense. N et
recognized gains on investments decreased due to lower gains and higher other-than-
34
temporary impairments on equity investments, of fset in part by gains on f ixed income securities in the current period
compared to losses in the prior period. Net gains on derivatives increased due to higher gains on f oreign exchange and
equity derivatives.
Fiscal Year 2019 Compared with Fiscal Year 2018
Interest and dividends income increased primarily due to higher yields on f ixed -income securities. Interest expense
decreased primarily driven by a decrease in outstanding long -term debt due to debt maturities, of f set in part by higher
f inance lease expense. Net recognized gains on investments decreased primarily due to lower gains on sales of equity
investments. Net gains on derivatives includes gains on f oreign exchange and interest rate derivatives in the current period
as compared to losses in the prior period.
Effective Tax Rate
Fiscal Year 2020 Compared with Fiscal Year 2019
INCOME TAXES
Our ef f ective tax rate f or f iscal years 2020 and 2019 was 17% and 10%, respectively. The increase in our ef f ective tax rate
f or f iscal year 2020 compared to f iscal year 2019 was primarily due to a $2.6 billion net income tax benef it in the f ourth
quarter of f iscal year 2019 related to intangible property transf ers. Our ef f ective tax rate was lower than the U.S. f ederal
statutory rate, primarily due to earnings taxed at lower rates in f oreign jurisdictions res ulting f rom producing and distributing
our products and services through our f oreign regional operations centers in Ireland and Puerto Rico, and tax benef its
relating to stock-based compensation.
The mix of income bef ore income taxes between the U.S. and f oreign countries impacted our ef f ective tax rate as a result
of the geographic distribution of, and customer demand f or, our products and services. In f iscal year 2020, our U.S. income
bef ore income taxes was $24.1 billion and our f oreign income bef ore income taxes was $28.9 billion. In f iscal year 2019,
our U.S. income bef ore income taxes was $15.8 billion and our f oreign income bef ore income taxes was $27.9 billion.
Fiscal Year 2019 Compared with Fiscal Year 2018
Our ef f ective tax rate f or f iscal years 2019 and 2018 was 10% and 55%, respectively. The decrease in our ef f ective tax rate
f or f iscal year 2019 compared to f iscal year 2018 was primarily due to the net charge related to the enactment of the TCJA
in the second quarter of f iscal year 2018 and a $2.6 billion net income tax benef it in the f ourth quarter of f iscal year 2019
related to intangible property transf ers. Our ef f ective tax rate was lower than the U.S. f ederal statutory rate, primarily du e to
the tax benef it related to intangible property transf ers, and earnings taxed at lower rates in f oreign jurisdictions resulting
f rom producing and distributing our products and services through our f oreign regional operations centers in Ireland,
Singapore, and Puerto Rico.
The mix of income bef ore income taxes between the U.S. and f oreign countries impacted our ef f ective tax rate as a result
of the geographic distribution of, and customer demand f or, our products and services. In f iscal year 2019, our U.S. income
bef ore income taxes was $15.8 billion and our f oreign income bef ore income taxes was $27.9 billion. In f iscal year 2018,
our U.S. income bef ore income taxes was $11.5 billion and our f oreign income bef ore income taxes was $24.9 billion.
Tax Cuts and Jobs Act
On December 22, 2017, the TCJA was enacted into law, which signif icantly changed existing U.S. tax law and included
numerous provisions that af f ect our business. We recorded a provisional net charge of $13.7 billion related to the enactment
of the TCJA in f iscal year 2018, and adjusted the p rovisional net charge by recording additional tax expense of $157 million
in f iscal year 2019 pursuant to Securities and Exchange Commission Staf f Accounting Bulletin No. 118.
35
In f iscal year 2019, in response to the TCJA and recently issued regulations, we transf erred certain intangible properties
held by our f oreign subsidiaries to the U.S. and Ireland. The transf ers of intangible properties resulted in a $2.6 billion net
income tax benef it recorded in the f ourth quarter of f iscal year 2019, as the value of f uture tax deductions exceeded the
current tax liability f rom f oreign jurisdictions and U.S. global intangible low-taxed income tax.
Ref er to Note 12 – Income Taxes of the Notes to Financial Statements f or f urther discussion.
Uncertain Tax Positions
We settled a portion of the Internal Revenue Service (“IRS”) audit f or tax years 2004 to 2006 in f iscal year 2011. In Februar y
2012, the IRS withdrew its 2011 Revenue Agents Rep ort related to unresolved issues f or tax years 2004 to 2006 and
reopened the audit phase of the examination. We also settled a portion of the IRS audit f or tax years 2007 to 2009 in f iscal
year 2016, and a portion of the IRS audit f or tax years 2010 to 2013 in f iscal year 2018. We remain under audit f or tax years
2004 to 2013. In April 2020, the IRS commenced the audit f or tax years 2014 to 2017.
As of June 30, 2020, the primary unresolved issues f or the IRS audits relate to transf er pricing, which could have a material
impact in our consolidated f inancial statements when the matters are resolved. We believe our allowances f or income tax
contingencies are adequate. We have not received a proposed assessment f or the unresolved issues and do not expect a
f inal resolution of these issues in the next 12 months. Based on the inf ormation currently available, we do not anticipate a
signif icant increase or decrease to our tax contingencies f or 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 f or tax years 1996 to 2019, some of which are currently under audit by local tax authorities. The resolution of
each of these audits is not expected to be material to our consolidated f inancial statements.
NON-GAAP FINANCIAL MEASURES
Non-GAAP net income and diluted EPS are non-GAAP f inancial measures which exclude the net tax impact of transf er of
intangible properties in f iscal year 2019 and the net tax impact of the TCJA in f iscal years 2019 and 2018. We believe these
non-GAAP measures aid investors by providing additional insight into our operational perf ormance and help clarif y trends
af f ecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with
GAAP f inancial results in evaluating business perf ormance. These non-GAAP f inancial measures presented should not be
considered a substitute f or, or superior to, the measures of f inancial perf ormance prepared in accordance with GAAP.
The f ollowing table reconciles our f inancial results reported in accordance with GAAP to non-GAAP f inancial results:
2020
2019
0
0
2018
$ 44,281 $ 39,240 $ 16,571
(2,567)
0
13,696
157
$ 44,281 $ 36,830 $ 30,267
2.13
0
1.75
3.88
5.06 $
(0.33)
0.02
4.75 $
5.76 $
0
0
5.76 $
$
$
Percentage
Change 2020
Versus 2019
13%
*
*
20%
14%
*
*
21%
Percentage
Change 2019
Versus 2018
137%
*
*
22%
138%
*
*
22%
(In millions, except percentages and per share amounts)
Net income
Net tax impact of transf er of intangible properties
Net tax impact of the TCJA
Non-GAAP net income
Diluted earnings per share
Net tax impact of transf er of intangible properties
Net tax impact of the TCJA
Non-GAAP diluted earnings per share
*
Not meaningful.
36
Cash, Cash Equivalents, and Investments
FINANCIAL CONDITION
Cash, cash equivalents, and short-term investments totaled $136.5 billion and $133.8 billion as of June 30, 2020 and 2019.
Equity investments were $3.0 billion and $2.6 billion as of June 30, 2020 and 2019, respectively. Our short-term investments
are primarily intended to f acilitate liquidity and capital preservation. They consist predominantly of highly liquid investment -
grade f ixed-income securities, diversif ied among industries and individual issuers. The investments are predominantly U.S.
dollar-denominated securities, but also include f oreign currency -denominated securities to diversif y risk. Our f ixed -income
investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our f ixed -income portf olio
are managed to achieve economic returns that correlate to certain f ixed -income indices. The settlement risk related to these
investments is insignif icant given that the short-term investments held are primarily highly liquid investment -grade f ixed-
income securities.
Valuation
In general, and where applicable, we use quoted prices in active markets f or identical assets or liabilities to determine the
f air value of our f inancial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government
securities, common and pref erred stock, and mutual f unds. If quoted prices in active markets f or identical assets or liabilit ies
are not available to determine f air value, then we use quoted prices f or similar assets and liabilities or inputs other tha n the
quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments,
such as commercial paper, certif icates of deposit, U.S. agency securities, f oreign government bonds, mortgage - and asset-
backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-
developed models with unobservable inputs. Assets and liabilities measured at f air value on a recurring basis using
unobservable inputs are an immaterial portion of our portf olio.
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 f or their pricing without applying
signif icant 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 ref lective of f air values in the market in which t he investment trades.
Our broker-priced investments are generally classif ied as Level 2 investments because the broker prices these investments
based on similar assets without applying signif icant adjustments. In addition, all our broker -priced investments have a
suf f icient level of trading volume to demonstrate that the f air values used are appropriate f or these investments. Our f air
value processes include controls that are designed to ensure appropriate f air values are recorded. These controls include
model validation, review of key model inputs, analysis of period -over-period f luctuations, and independent recalculation of
prices where appropriate.
Cash Flows
Fiscal Year 2020 Compared with Fiscal Year 2019
Cash f rom operations increased $8.5 billion to $60.7 billion f or f iscal year 2020, mainly due to an increase in cash f rom
customers, of f set in part by an increase in cash used to pay income taxes, suppliers, and employees. Cash used in f inancing
increased $9.1 billion to $46.0 billion f or f iscal year 2020, mainly due to a $3.4 billion cash premium on our debt exchange,
a $3.4 billion increase in common stock repurchases, a $1.5 billion increase in repayments of debt, and a $1.3 billion
increase in dividends paid. Cash used in investing decreased $3.6 billion to $12.2 billion f or f iscal year 2020, mainly due to
a $6.4 billion increase in cash f rom net investment purchases, sales, and maturities, of f set in part by a $1.5 billion increase
in additions to property and equipment and $1.2 billion in other investing to f acilitate the purchase of components.
Fiscal Year 2019 Compared with Fiscal Year 2018
Cash f rom operations increased $8.3 billion to $52.2 billion f or f iscal year 2019, mainly due to an increase in cash received
f rom customers, of fset in part by an increase in cash paid to suppliers and employees and an increase in
37
cash paid f or income taxes. Cash used in f inancing increased $3.3 billion to $36.9 billion f or f iscal year 2019, mainly due to
an $8.8 billion increase in common stock repurchases and a $1.1 billion increase in dividends paid, of f set in part by a
$6.2 billion decrease in repayments of debt, net of proceeds f rom issuance of debt. Cash used in investing increased
$9.7 billion to $15.8 billion f or f iscal year 2019, mainly due to a $6.0 billion decrease in cash f rom net investment purchases,
sales, and maturities, a $2.3 billion increase in additions to property and equipment, and a $1.5 billion increase in cash used
f or acquisitions of companies, net of cash acquired, and purchases of intangible and other assets.
Debt
We issue debt to take advantage of f avorable pricing and liquidity in the debt markets, ref lecting our credit rating and the
low interest rate environment. The proceeds of these issuances were or will be used f or general corporate purposes, which
may include, among other things, f unding f or working capital, capital expenditures, repurchases of capital stock,
acquisitions, and repayment of existing debt. In June 2020, we exchanged a portion of our existing debt at premium f or cash
and new debt with longer maturities to take advantage of f avorable f inancing rates in the debt markets, ref lecting our credit
rating and the low interest rate environment. Ref er to Note 11 – Debt of the Notes to Financial Statements f or f urther
discussion.
Unearned Revenue
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Sof tware
Assurance (“SA”) and cloud services. Unearned revenue is generally invoiced annually at the beginning of each co ntract
period f or multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes
payments f or other of f erings f or which we have been paid in advance and earn the revenue when we transf er control of the
product or service. Ref er to Note 1 – Accounting Policies of the Notes to Financial Statements f or f urther discussion.
The f ollowing table outlines the expected f uture recognition of unearned revenue as of June 30, 2020:
(In millions)
Three Months Ending
September 30, 2020
December 31, 2020
March 31, 2021
June 30, 2021
Thereaf ter
Total
$ 13,884
10,950
7,476
3,690
3,180
$ 39,180
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 shif t f rom being recognized at the time of the transaction to being
recognized over the subscription period or upon consumption, as applicable.
Share Repurchases
For f iscal years 2020, 2019, and 2018, we repurchased 126 million shares, 150 million shares, and 99 million shares of our
common stock f or $19.7 billion, $16.8 billion, and $8.6 billion, respectively, through our share repurchase programs. All
repurchases were made using cash resources. Ref er to Note 16 – Stockholders’ Equity of the Notes to Financial Statements
f or f urther discussion.
Dividends
Ref er to Note 16 – Stockholders’ Equity of the Notes to Financial Statements f or f urther discussion.
38
Off-Balance Sheet Arrangements
We provide indemnif ications of varying scope and size to certain customers against claims of intellectual property
inf ringement made by third parties arising f rom the use of our products and certain other matters. Additionally, we have
agreed to cover damages resulting f rom breaches of certain security and privacy commitments in our cloud business. In
evaluating estimated losses on these obligations, we consider f actors such as the degree of probability of an unf avorable
outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material
impact in our consolidated f inancial statements during the periods presented.
Contractual Obligations
The f ollowing table summarizes the payments due by f iscal year f or our outstanding contractual obligations as of June 30,
2020:
(In millions)
Long-term debt: (a)
Principal payments
Interest payments
Construction commitments (b)
Operating leases, including imputed interest (c)
Finance leases, including imputed interest (c)
Transition tax (d)
Purchase commitments (e)
Other long-term liabilities (f)
Total
$
$
2021
2022-2023
2024-2025
Thereafter
Total
3,750 $ 10,716 $
2,028
4,761
2,420
992
1,450
25,059
0
7,500 $ 45,441
25,265
3,293
0
0
4,409
2,929
9,611
2,676
4,531
6,343
272
369
356
32
40,460 $ 25,478 $ 23,142 $ 89,885
3,736
280
3,986
2,243
2,899
1,324
294
$ 67,407
34,322
5,041
13,744
15,522
15,223
27,024
682
$ 178,965
(a) Refer to Note 11 – Debt of the Notes to Financial Statements.
(b) Refer to Note 7 – Property and Equipment of the Notes to Financial Statements.
(c) Refer to Note 14 – Leases of the Notes to Financial Statements.
(d) Refer to Note 12 – Income Taxes of the Notes to Financial Statements.
(e) Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not
presented as construction commitments above.
(f ) We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $15.2 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 inf rastructure, and existing and adva nced areas of
technology, as well as continue making acquisitions that align with our business strategy. Additions to property and
equipment will continue, including new f acilities, datacenters, and computer systems f or research and development, sales
and marketing, support, and administrative staf f . We expect capital expenditures to increase in coming years to support
growth in our cloud of f erings. We have operating and f inance leases f or datacenters, corporate of f ices, research and
development f acilities, retail stores, 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 af f ect liquidity or the
availability of capital resources.
Liquidity
As a result of the TCJA, we are required to pay a one-time transition tax on def erred f oreign income not previously subject
to U.S. income tax. Under the TCJA, the transition tax is payable in interest -f ree installments over eight years, with 8% due
in each of the f irst f ive years, 15% in year six, 20% in year seven, and 25% in year eight. We have paid
39
transition tax of $3.2 billion, which included $1.2 billion f or f iscal year 2020. The remaining transition tax of $15.2 billion is
payable over the next six years with a f inal payment in f iscal year 2026. During f iscal year 2020, we also paid $3.7 billion
related to the transf er of intangible properties that occurred in the f ourth quarter of f iscal year 2019.
We expect existing cash, cash equivalents, short-term investments, cash f lows f rom operations, and access to capital
markets to continue to be suf f icient to f und our operating activities and cash commitments f or investing and f inancing
activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax rela ted
to the TCJA, f or at least the next 12 mo nths and thereaf ter f or the f oreseeable f uture.
Ref er to Note 1 – Accounting Policies of the Notes to Financial Statements f or f urther discussion.
RECENT ACCOUNTING GUIDANCE
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated f inancial statements and accompanying notes are prepared in accordance with GAAP. Preparing
consolidated f inancial statements requires management to make estimates and assumptions that af f ect the reported
amounts of assets, liabilities, revenue, and expenses. These estimat es and assumptions are af f ected by management’s
application of accounting policies, as well as uncertainty in the current economic environment due to the recent outbreak of
COVID-19. Critical accounting policies f or us include revenue recognition, impairment of investment securities, goodwill,
research and development costs, contingencies, income taxes, and inventories.
Revenue Recognition
Our contracts with customers of ten include promises to transf er multiple products and services to a customer. Determi ning
whether products and services are considered distinct perf ormance obligations that should be accounted f or separately
versus together may require signif icant judgment. When a cloud -based service includes both on-premises sof tware licenses
and cloud services, judgment is required to determine whether the sof tware license is considered distinct and accounted
f or separately, or not distinct and accounted f or together with the cloud service and recognized over time. Certain cloud
services, primarily Of f ice 365, depend on a signif icant level of integration, interdependency, and interrelation between the
desktop applications and cloud services, and are accounted f or together as one perf ormance obligation. Revenue f rom
Of f ice 365 is recognized ratably over the period in which the cloud services are provided.
Judgment is required to determine the stand -alone selling price (“SSP”) f or each distinct perf ormance obligation. We use a
single amount to estimate SSP f or items that are not sold separately, including on-premises licenses sold with SA or sof tware
updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products
and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the
various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we
determine the SSP using inf ormation that may include market conditions and other observable inputs. We typically have
more than one SSP f or individual products and services due to the stratif ication of those products and services by customers
and circumstances. In these instances, we may use inf ormation such as the size of the custo mer and geographic region in
determining the SSP.
Due to the various benef its f rom and the nature of our SA program, judgment is required to assess the pattern of delivery,
including the exercise pattern of certain benef its across our portf olio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances
we estimate customer usage of our products and services, which are accounted f or as variable consideration when
determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at
the end of each reporting period if additional inf ormation becomes available. Changes to our estimated variable
consideration were not material f or the periods presented.
40
Impairment of Investment Securities
We review debt investments quarterly f or indicators of other-than-temporary impairment. This determination requires
signif icant judgment. In making this judgment, we employ a systematic methodolo gy quarterly that considers available
quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment
exceeds its f air value, we evaluate, among other f actors, general market conditions, credit qual ity of debt instrument issuers,
and the duration and extent to which the f air value is less than cost. 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 bef ore recovery. In addition, we consider
specif ic adverse conditions related to the f inancial health of and business outlook f or the investee, including industry and
sector perf ormance, changes in technology, and operational and f inancing cash f low f actors. Once a decline in f air value is
determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost
basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur f uture
impairments.
Equity investments without readily determinable f air values are written down to f air value if a qualitative assessment
indicates that the investment is impaired and the f air value of the investment is less than carrying value. We perf orm a
qualitative assessment on a quarterly basis. We are required to estimate the f air value of the investment to determine the
amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other
income (expense), net.
Goodwill
We allocate goodwill to reporting units based on the reporting unit expected to benef it f rom the business combination. We
evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative f air value allocation
approach. Goodwill is tested f or impairment at the reporting unit level (operating segment or one level below an operating
segment) on an annual basis (May 1 f or us) and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the f air value of a reporting unit below its carrying value. These events or circumstances
could include a signif icant change in the business climate, legal f actors, operating perf ormance indicators, competition, or
sale or disposition of a signif icant portion of a reporting unit.
Application of the goodwill impairment test requires judgment, including the identif ication of reporting units, assignment of
assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the f air value of each
reporting unit. The f air value of each reporting unit is estimated primarily through the use of a discounted cash f low
methodology. This analysis requires signif icant judgments, including estimation o f future cash f lows, which is dependent on
internal f orecasts, estimation of the long -term rate of growth f or our business, estimation of the usef ul lif e over which cash
f lows will occur, and determination of our weighted average cost of capital.
The estimates used to calculate the f air value of a reporting unit change f rom year to year based on operating results,
market conditions, and other f actors. Changes in these estimates and assumptions could materially af f ect the determination
of f air value and goodwill impairment f or each reporting unit.
Research and Development Costs
Costs incurred internally in researching and developing a computer sof tware product are charged to expense until
technological f easibility has been established f or the product. Once technological f easibility is established, sof tware costs
are capitalized until the product is available f or general release to customers. Judgment is required in determining when
technological f easibility of a product is established. We have determined that technological f easibility f or our sof tware
products is reached af ter all high-risk development issues have been resolved through coding and testing. Generally, this
occurs shortly bef ore the products are released to production. The amortization of these costs is included in cost of revenue
over the estimated lif e of the products.
41
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to signif icant uncertainty. An estimated loss
f rom 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 f actors, the degree of probability of an unf avorable outcome
and the ability to make a reasonable estimate of the amount of loss. Changes in these f actors could materially impact our
consolidated f inancial statements.
Income Taxes
The objectives of accounting f or income taxes are to recognize the amount of taxes payable or ref undable f or the current
year, and def erred tax liabilities and assets f or the f uture tax consequences of events that have been recognized in an
entity’s f inancial statements or tax returns. We recognize the tax benef it f rom an uncertain tax position only if it is mor e likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of t he
position. The tax benef its recognized in the f inancial statements f rom such a position are measured based on the larges t
benef it 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, classif ication of def erred income tax assets and liabilities,
accounting f or interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in
assessing the f uture tax consequences of events that have been recognized in our consolidated f inancial statements or tax
returns. Variations in the actual outcome of these f uture tax consequences could materially impact our consolidated f inancial
statements.
The TCJA signif icantly changes existing U.S. tax law and includes numerous provisions that af f ect our business. Ref er to
Note 12 – Income Taxes of the Notes to Financial Statements f or f urther discussion.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor,
and manuf acturing overhead related to the purchase and production of inventories. Net realizable value is the estimated
selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on
hand, f uture purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include
analysis of demand f orecasts, product lif e 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.
CHANGE IN ACCOUNTING ESTIMATE
In July 2020, we completed an assessment of the usef ul lives of our server and network equipment and determined w e
should increase the estimated usef ul lif e of server equipment f rom three years to f our years and increase the estimated
usef ul lif e of network equipment f rom two years to f our years. This change in accounting estimate will be ef f ective beginning
f iscal year 2021. Based on the carrying amount of server and network equipment included in “Property and equipment, net”
as of June 30, 2020, it is estimated this change will increase our f iscal year 2021 operating income by $2.7 billion.
42
STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible f or the preparation of the consolidated f inancial statements and related inf ormation that are
presented in this report. The consolidated f inancial statements, which include amounts based on management’s estimates
and judgments, have been prepared in conf ormity with accounting principles generally accepted in the United States of
America.
The Company designs and maintains accounting and internal control systems to provide reasonable assu rance at
reasonable cost that assets are saf eguarded against loss f rom unauthorized use or disposition, and that the f inancial records
are reliable f or preparing consolidated f inancial statements and maintaining accountability f or assets. These systems are
augmented by written policies, an organizational structure providing division of responsibilities, caref ul selection and trai ning
of qualif ied personnel, and a program of internal audits.
The Company engaged Deloitte & Touche LLP, an independent registered public accounting f irm, to audit and render an
opinion on the consolidated f inancial statements and internal control over f inancial 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 pub lic accounting f irm to ensure that each
is meeting its responsibilities and to discuss matters concerning internal controls and f inancial reporting. Deloitte & Touche
LLP and the internal auditors each have f ull and f ree access to the Audit Committee.
Satya Nadella
Chief Executive Of f icer
Amy E. Hood
Executive Vice President and Chief Financial Of f icer
Frank H. Brod
Corporate Vice President, Finance and Administration;
Chief Accounting Of f icer
43
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS
We are exposed to economic risk f rom f oreign exchange rates, interest rates, credit risk, and equity prices. We use
derivatives instruments to manage these risks, however, they may still impact our consolidated f inancial statements.
Foreign Currencies
Certain f orecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our f oreign currenc y
exposures daily to maximize the economic ef f ectiveness of our f oreign currency positions, including hedges. Principal
currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Interest Rate
Securities held in our f ixed-income portf olio are subject to different interest rate risks based on their maturities. We manage
the average maturity of the f ixed-income portf olio to achieve economic returns that correlate to certain global f ixed -income
indices.
Credit
Our f ixed-income portfolio is diversified and consists primarily of investment -grade securities. We manage credit exposures
relative to broad-based indices and to f acilitate portf olio diversification.
Equity
Securities held in our equity investments portf olio are subject to price risk.
SENSITIVITY ANALYSIS
The f ollowing table sets f orth the potential loss in f uture earnings or f air values, including associated derivatives, result ing
f rom hypothetical changes in relevant market rates or prices:
(In millions)
Risk Categories
Foreign currency – Revenue
Foreign currency – Investments
Interest rate
Credit
Equity
Hypothetical Change
10% decrease in f oreign exchange rates
10% decrease in f oreign exchange rates
100 basis point increase in U.S. treasury
interest rates
100 basis point increase in credit spreads
10% decrease in equity market prices
June 30,
2020
$ (4,142)
(119)
Impact
Earnings
Fair Value
(3,951)
(301)
(239)
Fair Value
Fair Value
Earnings
44
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
Operating income
Other income, net
Income bef ore income taxes
Provision f or income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Ref er to accompanying notes.
2020
2019
2018
$ 68,041 $ 66,069
59,774
125,843
74,974
143,015
$ 64,497
45,863
110,360
16,017
30,061
46,078
96,937
19,269
19,598
5,111
52,959
77
53,036
8,755
$ 44,281
16,273
26,637
42,910
82,933
16,876
18,213
4,885
42,959
729
43,688
4,448
$ 39,240
15,420
22,933
38,353
72,007
14,726
17,469
4,754
35,058
1,416
36,474
19,903
$ 16,571
$
$
5.82
5.76
$
$
5.11
5.06
$
$
2.15
2.13
7,610
7,683
7,673
7,753
7,700
7,794
45
2020
2018
$ 44,281 $ 39,240 $ 16,571
2019
(38)
(426)
39
(173)
(2,717)
3,990 2,405
(178)
(318)
(2,856)
3,526 1,914
$ 47,807 $ 41,154 $ 13,715
COMPREHENSIVE INCOME STATEMENTS
(In millions)
Year Ended June 30,
Net income
Other comprehensive income (loss), net of tax:
Net change related to derivatives
Net change related to investments
Translation adjustments and other
Other comprehensive income (loss)
Comprehensive income
Ref er to accompanying notes.
46
BALANCE SHEETS
2020
2019
(In millions)
June 30,
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Total cash, cash equivalents, and short-term investments
Accounts receivable, net of allowance f or doubtful accounts of $788 and $411
Inventories
Other current assets
Total current assets
Property and equipment, net of accumulated depreciation of $43,197 and $35,330
Operating lease right-of -use assets
Equity investments
Goodwill
Intangible assets, net
Other long-term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Current portion of long-term debt
Accrued compensation
Short-term income taxes
Short-term unearned revenue
Other current liabilities
Total current liabilities
Long-term debt
Long-term income taxes
Long-term unearned revenue
Def erred income taxes
Operating lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,571 and 7,643
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
Ref er to accompanying notes.
1,895
$ 13,576 $ 11,356
122,951 122,463
136,527 133,819
32,011 29,524
2,063
11,482 10,146
181,915 175,552
44,151 36,477
7,379
2,649
43,351 42,026
7,750
13,138 14,723
$ 301,311 $ 286,556
8,753
2,965
7,038
$ 12,530 $
3,749
7,874
2,130
9,382
5,516
6,830
5,665
36,000 32,676
10,027
9,351
72,310 69,420
59,578 66,662
29,432 29,612
3,180
4,530
204
233
7,671
6,188
7,581
10,632
183,007 184,226
80,552 78,520
34,566 24,150
(340)
118,304 102,330
$ 301,311 $ 286,556
3,186
47
CASH FLOWS STATEMENTS
(In millions)
Year Ended June 30,
Operations
Net income
Adjustments to reconcile net income to net cash f rom operations:
Depreciation, amortization, and other
Stock-based compensation expense
Net recognized gains on investments and derivatives
Def erred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other long-term assets
Accounts payable
Unearned revenue
Income taxes
Other current liabilities
Other long-term liabilities
Net cash f rom operations
Financing
Repayments of short-term debt, maturities of 90 days or less, net
Proceeds f rom issuance of debt
Cash premium on debt exchange
Repayments of debt
Common stock issued
Common stock repurchased
Common stock cash dividends paid
Other, net
Net cash used in f inancing
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
Other, net
Net cash used in investing
Ef f ect 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
Ref er to accompanying notes.
48
2020
2019
2018
$ 44,281 $ 39,240 $ 16,571
12,796 11,682 10,261
5,289 4,652 3,940
(2,212)
(5,143)
(792)
11 (6,463)
(219)
168
(3,862)
(2,577) (2,812)
(465)
597
(952)
(2,330) (1,718)
(285)
(1,037) (1,834)
3,018
232 1,148
2,212 4,462 5,922
(3,631) 2,929 18,183
798
1,346 1,419
1,348
(20)
591
60,675 52,185 43,884
0
(7,324)
0
0 7,183
0
(3,417)
0
0
(5,518) (4,000)
(10,060)
1,343 1,142 1,002
(10,721)
(22,968) (19,543)
(12,699)
(15,137) (13,811)
(971)
(675)
(33,590)
(46,031) (36,887)
(334)
(15,441) (13,925)
(11,632)
(2,521) (2,388)
(888)
(77,190) (57,697) (137,380)
66,449 20,043 26,360
17,721 38,194 117,577
(98)
0
(1,241)
(6,061)
(12,223) (15,773)
(201)
(115)
50
(590) 4,283
2,220
11,356 11,946 7,663
$ 13,576 $ 11,356 $ 11,946
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
Other, net
Balance, end of period
Retained earnings
Balance, beginning of period
Net income
Common stock cash dividends
Common stock repurchased
Cumulative ef f ect of accounting changes
Balance, end of period
Accumulated other comprehensive income (loss)
Balance, beginning of period
Other comprehensive income (loss)
Cumulative ef f ect of accounting changes
Balance, end of period
Total stockholders’ equity
2020
2019
2018
(4,599)
$ 78,520 $ 71,223 $ 69,315
1,343 6,829 1,002
(3,033)
5,289 4,652 3,940
(1)
80,552 78,520 71,223
(4,195)
(1)
11
24,150 13,682 17,769
44,281 39,240 16,571
(12,917)
(7,699)
(42)
34,566 24,150 13,682
(14,103)
(15,346)
677
(15,483)
(18,382)
0
(340)
(2,187) 627
(2,856)
3,526 1,914
42
0
3,186
(2,187)
$ 118,304 $ 102,330 $ 82,718
(67)
(340)
Cash dividends declared per common share
$
2.04 $
1.84 $
1.68
Ref er to accompanying notes.
49
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated f inancial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts to conf orm to the current period presentation. The recast of these prior period
amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash f rom or used in
operating, f inancing, or investing on our consolidated cash f lows statements.
Principles of Consolidation
The consolidated f inancial statements include the accounts of Microsof t Corporation and its subsidiaries. Intercompany
transactions and balances have been eliminated.
Estimates and Assumptions
Preparing f inancial statements requires management to make estimates and assumptions that af f ect the reported amounts
of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: f or revenue recognition,
determining the nature and timing of satisf action of perf ormance obligations, and determining the standalone selling price
(“SSP”) of perf ormance obligations, variable consideration, and other obligations such as product returns and ref unds; loss
contingencies; product warranties; the f air value of and/or potential impairment of goodwill and intangible assets f or our
reporting units; product lif e cycles; usef ul lives of our tangible and intangible assets; allowances f or doubtful accounts; t he
market value of , and demand f or, our inventory; stock -based compensation f orf eiture rates; when technological f easibility
is achieved f or our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated
f inancial statements or tax returns; and determining the timing and amount of impairment s f or investments. Actual results
and outcomes may dif f er f rom management’s estimates and assumptions due to risks and uncertainties, including
uncertainty in the current economic environment due to the recent outbreak of a novel strain of the coronavirus (“COVID-
19”).
In July 2020, we completed an assessment of the usef ul lives of our server and network equipment and determined we
should increase the estimated usef ul lif e of server equipment f rom three years to f our years and increase the estimated
usef ul lif e of network equipment f rom two years to f our years. This change in accounting estimate will be ef f ective beginning
f iscal year 2021.
Foreign Currencies
Assets and liabilities recorded in f oreign 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
f rom this process are recorded to other comprehensive income.
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales f rom operating systems; cross -device productivity applications; server applications;
business solution applications; desktop and server management tools; sof tware development too ls; video games; and
hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
50
Service and other revenue includes sales f rom cloud -based solutions that provide customers with sof tware, services,
platf orms, and content such as Of f ice 365, Azure, Dynamics 365, and Xbox Live; solution support; and consulting services.
Service and other revenue also includes sales f rom online advertising and LinkedIn.
Revenue Recognition
Revenue is recognized upon transf er of control of promised products or services to customers in an amount that ref lects
the consideration we expect to receive in exchange f or those products or services. We enter into contracts that can include
various combinations of products and services, which are generally capable of being distinct and accounted f or as separate
perf ormance obligations. Revenue is recognized net of allowances f or returns and any taxes collected f rom customers,
which are subsequently remitted to governmental autho rities.
Nature of Products and Services
Licenses f or on-premises sof tware provide the customer with a right to use the sof tware as it exists when made available
to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which pr ovide customers with the
same f unctionality and dif f er mainly in the duration over which the customer benef its f rom the sof tware. Revenue f rom
distinct on-premises licenses is recognized upf ront at the point in time when the sof tware is made available to t he customer.
In cases where we allocate revenue to sof tware updates, primarily because the updates are provided at no additional
charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated lif e of the related
device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Sof tware
Assurance (“SA”). SA conveys rights to new sof tware and upgrades released over the contract period and provides support,
tools, and training to help customers deploy and use products more ef f iciently. On-premises licenses are considered distinct
perf ormance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract
period as customers simultaneously consume and receive benef its, given that SA comprises distinct perf ormance
obligations that are satisf ied over time.
Cloud services, which allow customers to use hosted sof tware over the contract period without taking possession of the
sof tware, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a
subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a
consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such
resources. When cloud services require a signif icant level of integration and interdependency with sof tware and the
individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are
provided.
Revenue f rom search advertising is recognized when the advertisement appears in the search results or when the action
necessary to earn the revenue has been completed. Revenue f rom consulting services is recognized as services are
provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot f unction
without the operating system. In these cases, the hardware and sof tware license are accounted f or as a single perf ormance
obligation and revenue is recognized at the point in time when ownership is transf erred to resellers or directly to end
customers through retail stores and online marketplaces.
Ref er to Note 19 – Segment Inf ormation and Geographic Data f or f urther inf ormation, including revenue by signif icant
product and service of f ering.
Significant Judgments
Our contracts with customers of ten include promises to transf er multiple products and services to a customer. Determining
whether products and services are considered distinct perf ormance obligations that should be
51
accounted f or separately versus together may require signif icant judgment. When a cloud -based service includes both on-
premises sof tware licenses and cloud services, judgment is required to determine whether the sof tware license is
considered distinct and accounted f or separately, or not distinct and accounted f or together with the cloud service and
recognized over time. Certain cloud services, primarily Of f ice 365, depend on a signif icant level of integration,
interdependency, and interrelation between the desktop applications and cloud services, and are accounted f or together as
one perf ormance obligation. Revenue f rom Of f ice 365 is recognized ratably over the period in which the cloud services are
provided.
Judgment is required to determine the SSP f or each distinct perf ormance obligation. We use a single amount to estimate
SSP f or items that are not sold separately, including o n-premises licenses sold with SA or sof tware updates provided at no
additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately
and need to determine whether there is a discount to be allocated bas ed on the relative SSP of the various products and
services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we
determine the SSP using inf ormation that may include market conditions and ot her observable inputs. We typically have
more than one SSP f or individual products and services due to the stratif ication of those products and services by customers
and circumstances. In these instances, we may use inf ormation such as the size of the cust omer and geographic region in
determining the SSP.
Due to the various benef its f rom and the nature of our SA program, judgment is required to assess the pattern of delivery,
including the exercise pattern of certain benef its across our portf olio of custom ers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances
we estimate customer usage of our products and services, which are accounted f or as variable consideration when
determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at
the end of each reporting period if additional inf ormation becomes available. Changes to our estimated variable
consideration were not material f or the periods presented.
Contract Balances
Timing of revenue recognition may dif fer f rom the timing of invoicing to customers. We record a receivable when revenue
is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi -year
agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a
receivable related to revenue recognized f or multi-year on-premises licenses as we have an unconditional right to invoice
and receive payment in the f uture related to those licenses.
As of June 30, 2020 and 2019, long-term accounts receivable, net of allowance f or doubtful accounts, was $2.7 billion and
$2.2 billion, respectively, and is included in other long -term assets in our consolidated balance sheets.
The allowance f or doubtf ul accounts ref lects 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 f or doubtf ul accounts was as f ollows:
(In millions)
Year Ended June 30,
Balance, beginning of period
Charged to costs and other
Write-of f s
Balance, end of period
52
2020
2018
2019
$ 434 $ 397 $ 361
560 153 134
(178) (116)
(98)
$ 816 $ 434 $ 397
Allowance f or doubtful accounts included in our consolidated balance sheets:
(In millions)
June 30,
Accounts receivable, net of allowance f or doubtful accounts
Other long-term assets
Total
2020
2018
2019
$ 788 $ 411 $ 377
28 23 20
$ 816 $ 434 $ 397
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and
cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period f or multi -year
agreements and recognized ratably over the coverage period. Unearned revenue also includes payments f or consulting
services to be perf ormed in the f uture; LinkedIn subscriptions; Of fice 365 subscriptions; Xbox Live subscriptions; Windows
10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other of ferings for
which we have been paid in advance and earn the revenue when we transf er control of the product or service.
Ref er to Note 13 – Unearned Revenue f or f urther inf ormation, includ ing unearned revenue by segment and changes in
unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30
to 60 days. In instances where the timing of revenue recognition dif fers f rom the timing of invoicing, we have determined
our contracts generally do not include a signif icant f inancing component. The primary purpose of our invoicing terms is to
provide customers with simplif ied and predictable ways of purchasing our products and services, not to receive f inancing
f rom our customers or to provide customers with f inancing. Examples include invoicing at the beginning of a subscription
term with revenue recognized ratably over the contract period, and multi -year on-premises licenses that are invoiced
annually with revenue recognized upf ront.
We record f inancing receivables when we of f er certain of our customers the option to acquire our sof tware products and
services of f erings through a f inancing program in a limited number of countries. As of June 30, 2020 and 2019, our f inancing
receivables, net were $5.2 billion and $4.3 billion, respectively, f or short-term and long-term f inancing receivables, which
are included in other current assets and other long -term assets in our consolidated balance sheets. We record an allowance
to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset f or the incremental costs of obtaining a contract with a customer if we expect the benef it of those
costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be
capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in
other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred f or costs to obtain a contract with a customer when the
amortization period would have been one year or less . These costs include our internal sales f orce compensation program
and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual
sales activities.
Cost of Revenue
Cost of revenue includes: manuf acturing and distribution costs f or products sold and programs licensed; operating costs
related to product support service centers and product distribution centers; costs incurred to include sof tware on PCs sold
by original equipment manuf acturers (“OEM”), to d rive traf f ic to our websites, and to acquire online advertising space; costs
incurred to support and maintain online 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
sof tware development costs. Capitalized sof tware development costs are amortized over the estimated lives of the products.
53
Product Warranty
We provide f or the estimated costs of f ulf illing our obligations under hardware and sof tware warranties at the time the related
revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product f ailure
rates, historical and projected repair costs, and knowledge of specif ic product f ailures (if any). The specif ic 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 f rom 90 days to three years. For sof tware warranties, we estimate
the costs to provide bug fixes, such as security patches, over the estimated lif e of the sof tware. We regularly reevaluate ou r
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 benef its, 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 sof tware f or international markets, and
the amortization of purchased sof tware code and services content. Such costs related to sof tware development are included
in research and development expense until the point that technological f easibility is reached, which f or our sof tware
products, is generally shortly bef ore the products are released to production. Once technological f easibility is reached, suc h
costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benef its, 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 $1.6 billion in
f iscal years 2020, 2019, and 2018.
Stock-Based Compensation
Compensation cost f or stock awards, which include restricted stock units (“RSUs”) and perf ormance stock units (“PSUs”),
is measured at the f air value on the grant date and recognized as expense, net of estimated f orf eitures, over the related
service or perf ormance period. The f air 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 f air value
of PSUs using a Monte Carlo valuation model. Compensation cost f or RSUs is recognized using the straight-line method
and f or PSUs is recognized using the accelerated method.
Compensation expense f or 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, and interest and penalties on uncertain tax positions.
Certain income and expenses are not reported in tax returns and f inancial statements in the same year. The tax ef f ect of
such temporary dif ferences is reported as def erred income taxes. Def erred tax assets are reported net of a valuation
allowance when it is more likely than not that a tax benef it will not be realized. All def erred income taxes are classif ied as
long-term in our consolidated balance sheets.
54
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 f air 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 classif ied as short -term
investments. Investments with maturities beyond one year may be classif ied as short -term based on their highly liquid nature
and because such marketable securities represent the investment of cash that is available f or current operations.
Debt investments are classif ied as available-f or-sale and realized gains and losses are recorded using the specific
identif ication method. Changes in f air value, excluding other-than-temporary
impairments, are recorded in other
comprehensive income. Debt investments are impaired when a decline in f air value is judged to be other-than-temporary .
Fair value is calculated based on publicly available market inf ormation 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 f air value, we evaluate, among
other f actors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the
f air value is less than cost. 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 bef ore recovery. In addition, we consider specif ic adverse conditions related to the
f inancial health of , and business outlook, f or the investee, including industry and sector perf ormance, changes in technology ,
and operational and f inancing cash f low f actors. Once a decline in f air value is determined to be other -than-temporary, an
impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.
Equity investments with readily determinable f air values are measured at f air value. Equity investments without readily
determinable f air values are measured using the equity method or measured at cost with adjustments f or observable
changes in price or impairments (ref erred to as the measurement alternative). We perf orm a qualitative assessment on a
quarterly basis and recognize an impairment if there are suf f icient indicators that the f air value of the investment is less than
carrying value. Changes in value are recorded in other income (expense), net.
Derivatives
Derivative instruments are recognized as either assets o r liabilities and measured at f air value. The accounting f or changes
in the f air value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as f air value hedges, gains and losses are recognized in other income (expense),
net with of f setting gains and losses on the hedged items. Gains and losses representing hedge components excluded from
the assessment of ef f ectiveness are recognized in other income (expense), net.
For derivative instruments designated as cash f low hedges, gains and losses are initially reported as a component of other
comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses
representing hedge components excluded f rom the assessment of ef fectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains and losses f rom changes in f air values are primarily
recognized in other income (expense), net.
Fair Value Measurements
We account f or certain assets and liabilities at f air value. The hierarchy below lists three levels of f air value based on th e
extent to which inputs used in measuring f air value are observable in the market. We categorize each of our f air
55
value measurements in one of these three levels based on the lowest level input that is signif icant to the f air value
measurement in its entirety. These levels are:
•
•
•
Level 1 – inputs are based upon unadjusted quoted prices f or identical instruments in active markets. Our
Level 1 investments include U.S. government securities, common and pref erred stock, and mutual f unds. Our
Level 1 derivative assets and liabilities include those actively traded on exchanges.
Level 2 – inputs are based upon quoted prices f or similar instruments in active markets, quoted prices f or
identical or similar instruments in markets that are not active, and model -based valuation techniques (e.g. the
Black-Scholes model) f or which all signif icant inputs are observable in the market or can be corroborated by
observable market data f or substantially the f ull term of the assets or liabilities. Where applicable, these models
project f uture cash f lows and discount the f uture amounts to a present value using market -based observable
inputs including interest rate curves, credit spreads, f oreign exchange rates, and f orward and spot prices f or
currencies. Our Level 2 investments include commercial paper, certif icates of deposit, U.S. agency securities,
f oreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal
securities. 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 ref lect management’s estimates of assumptions that
market participants would use in pricing the asset or liability. The f air values are theref ore determined using
model-based techniques, including option pricing models and discounted cash f low models. Our Level 3 assets
and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and
intangible assets, when they are recorded at f air value due to an impairment charge. Unobservable inputs used
in the models are signif icant to the f air values of the assets and liabilities.
We measure equity investments without readily determinable f air values on a nonrecurring basis. The f air values of thes e
investments are determined based on valuation techniques using the best inf ormation available, and may include quoted
market prices, market comparables, and discounted cash f low projections.
Our other current f inancial assets and current f inancial liabilities have f air values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor,
and manuf acturing overhead related to the purchase and production of inventories. Net realizable value is the estimated
selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on
hand, f uture purchase commitments with our suppliers, and the es timated 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 usef ul lif e of the asset or the lease term. The estimated usef ul lives of our property and
equipment are generally as f ollows: computer sof tware developed or acquired f or internal use, three to seven years;
computer equipment, two to three years; buildings and improvements, f ive to 15 years; leasehold improvements, three to
20 years; and f urniture and equipment, one to 10 years. Land is not depreciated.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right -of -use
(“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases
are included in property and equipment, other current liabilities, and other long -term liabilities in our consolidated balance
sheets.
56
ROU assets represent our right to use an underlying asset f or the lease term and lease liabilities represent our obliga tion
to make lease payments arising f rom the lease. Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease term. As most of our leases do not
provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest f or
collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset
also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will exercise that option. Lease expense f or lease payments is
recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted f or separately. For certain
equipment leases, such as vehicles, we account f or the lease and non-lease components as a single lease component.
Additionally, f or certain equipment leases, we apply a portf olio approach to ef fectively account f or the operating lease ROU
assets and liabilities.
Goodwill
Goodwill is tested f or impairment at the reporting unit level (operating segment or one level below an operating segment)
on an annual basis (May 1 f or us) and between annual tests if an event occurs or circumstances change that would more
likely than not reduce the f air value of a reporting unit below its carrying value.
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight -line method over their estimated
period of benef it, ranging f rom one to 20 years. We evaluate the recoverability of intangible assets periodically by taking
into account events or circumstances that may warrant revised estimates of usef ul lives or that indicate the asset may be
impaired.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Financial Instruments – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (“FASB”) issued new guidance related to accounting f or hedging
activities. This guidance expands strategies that qualif y f or hedge accounting, changes how many hedging relationships
are presented in the f inancial statements, and simplif ies the application of hedge accounting in certain situations. We
adopted the standard ef f ective July 1, 2019. As we did not hold derivative instruments requiring an adjustment upon
adoption, there was no impact in our consolidated f inancial statements. Adoption of the standard enhanced the presentation
of the ef f ects of our hedging instruments and the hedged items in o ur consolidated f inancial statements to increase the
understandability of the results of our hedging strategies.
Recent Accounting Guidance Not Yet Adopted
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP
with a methodology that ref lects expected credit losses and requires consideration of a broader range of reasonable and
supportable inf ormation to inf orm credit loss estimates. We will be required to use a f orward-looking expected credit loss
model f or accounts receivable, loans, and other f inancial instruments. Credit losses relating to available -f or-sale debt
securities will also be recorded through an allowance f or credit losses rather than as a reduction in the amortized cost basis
of the securities. The standard will be adopted upon the ef f ective date f or us beginning July 1, 2020. Adoption of the standard
will be applied using a modif ied retrospective approach through
57
a cumulative-ef f ect adjustment to retained earnings as of the ef f ective date to align our credit loss methodology with the
new standard. We have evaluated the impact of this standard in our consolidated financial statements, including accounting
policies, processes, and systems. We continue to monitor economic implications of the COVID -19 pandemic. Based on
current market conditions, adoption of the standard will not have a material impact on our consolidated f inancial statements.
Accounting for Income Taxes
In December 2019, the FASB issued a new standard to simplif y the accounting f or income taxes. The guidance eliminates
certain exceptions related to the approach f or intraperiod tax allocation, the methodology f or calculating income taxes in an
interim period, and the recognition of def erred tax liabilities f or outside basis differences related to changes in ownership of
equity method investments and f oreign subsidiaries. The guidance also simplif ies aspects of accounting f or f ranchise taxes
and enacted changes in tax laws or rates, and clarif ies the accounting f or transactions that result in a step -up in the tax
basis of goodwill. The standard will be ef f ective f or us beginning July 1, 2021, with early adoption permitted. We are currently
evaluating the impact of this standard in our consolidated f inancial statements, including accounting policies, processes,
and systems.
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 ef f ect 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 f ollows:
(In millions, except earnings per share)
Year Ended June 30,
Net income available f or common shareholders (A)
Weighted average outstanding shares of common stock (B)
Dilutive ef f ect of stock-based awards
Common stock and common stock equivalents (C)
Earnings Per Share
Basic (A/B)
Diluted (A/C)
2020
2018
$ 44,281 $ 39,240 $ 16,571
2019
7,610
73
7,683
7,673
80
7,753
7,700
94
7,794
$
$
5.82 $
5.76 $
5.11 $
5.06 $
2.15
2.13
Anti-dilutive stock-based awards excluded f rom the calculations of diluted EPS were immaterial during the periods
presented.
The components of other income (expense), net were as f ollows:
NOTE 3 — OTHER INCOME (EXPENSE), NET
(In millions)
Year Ended June 30,
Interest and dividends income
Interest expense
Net recognized gains on investments
Net gains (losses) on derivatives
Net losses on f oreign currency remeasurements
Other, net
Total
58
2019
2020
(2,686)
2018
$ 2,680 $ 2,762 $ 2,214
(2,733)
648 2,399
(187)
144
(218)
(82)
(57)
(59)
729 $ 1,416
(2,591)
32
187
(191)
(40)
77 $
$
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as f ollows:
(In millions)
Year Ended June 30,
Realized gains f rom sales of available-f or-sale securities
Realized losses f rom sales of available-f or-sale securities
Other-than-temporary impairments of investments
Total
Net recognized gains (losses) on equity investments were as f ollows:
(In millions)
Year Ended June 30,
Net realized gains on investments sold
Net unrealized gains on investments still held
Impairments of investments
Total
2020
$ 50
(37)
(17)
(4)
$
2019
$ 12
(93)
(16)
$ (97)
$
2018
27
(987)
(6)
$ (966)
2020
$ 83
69
(116)
36
$
2019
$ 276
479
(10)
$ 745
2018
$ 3,406
0
(41)
$ 3,365
59
Investment Components
The components of investments were as f ollows:
NOTE 4 — INVESTMENTS
Fair Value
Level
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
Cash
and Cash
Equivalents
Short-term
Investments
Equity
Investments
(In millions)
June 30, 2020
Changes in Fair Value Recorded in
Other Comprehensive Income
4,687 $
2,898
1
Level 2 $
Level 2
0
Level 1 92,067 6,495
2
Level 2
6
Level 2
2,439
6,982
$
3,070 $
4,688 $ 1,618 $
0 $
0
1,252
2,898 1,646
(1) 98,561 3,168 95,393
1,992
0
6,984
(3)
2,441
6,985
449
1
Level 2
Level 2
Level 3
Level 2
Level 3
41
4,865
327
8,500
0
58
57
313
0
91
$ 122,900 $ 6,929
(6)
(17)
0
(4)
0
4,900
8,810
58
366
91
0
0
0
0
0
4,900
8,810
58
366
91
$ (31) $ 129,798 $ 6,882 $ 122,916 $
0
0
0
0
0
0
0
0
0
0
0
Level 1
Other
$
$
414
0 $
784 $
1,198 $
2,551
0
0
2,551
0 $ 2,965
3,749 $
784 $
0
0 $
5,910 $ 5,910 $
0
35
0
$ 139,492 $ 13,576 $ 122,951 $ 2,965
35
$
Commercial paper
Certif icates of deposit
U.S. government securities
U.S. agency securities
Foreign government bonds
Mortgage- and asset-backed
securities
Corporate notes and bonds
Corporate notes and bonds
Municipal securities
Municipal securities
Total debt investments
Changes in Fair Value
Recorded in Net Income
Equity investments
Equity investments
Total equity investments
Cash
Derivatives, net (a)
Total
60
Fair Value
Level
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
Cash
and Cash
Equivalents
Short-term
Investments
Equity
Investments
(In millions)
June 30, 2019
Changes in Fair Value Recorded in
Other Comprehensive Income
Commercial paper
Certif icates of deposit
U.S. government securities
U.S. agency securities
Foreign government bonds
Mortgage- and asset-backed
securities
Corporate notes and bonds
Corporate notes and bonds
Municipal securities
Municipal securities
Total debt investments
Changes in Fair Value
Recorded in Net Income
Equity investments
Equity investments
Total equity investments
Cash
Derivatives, net (a)
Total
2,211 $
2,018
0 $
Level 2 $
Level 2
0
Level 1 104,925 1,854
0
Level 2
4
Level 2
988
6,350
(104) 106,675
988
2,211 $ 1,773 $
2,018 1,430
438 $
588
769 105,906
290
698
3,840
6,346 2,506
0 $
0
0
(8)
Level 2
Level 2
Level 3
Level 2
Level 3
3,554
7,437
15
242
7
3,561
7,541
15
290
7
$ 127,747 $ 2,027 $ (122) $ 129,652 $ 7,176 $ 122,476 $
3,561
7,541
15
290
7
(3)
(7)
0
0
0
10
111
0
48
0
0
0
0
0
0
Level 1
Other
$
$
409 $
973 $
0
2,085
3,058 $
409 $
3,771 $ 3,771 $
0
0 $
0
0 $
0 $
(13)
$ 136,468 $ 11,356 $ 122,463 $
(13)
$
0
0
0
0
0
0
0
0
0
0
0
564
2,085
2,649
0
0
2,649
(a) Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.
Equity investments presented as “Other” in the tables above include investments without readily determinable f air values
measured using the equity method or measured at cost with adjustments f or observable changes in price or impairments,
and investments measured at f air value using net asset value as a practical expedient which are not categorized in the f air
value hierarchy. As of June 30, 2020 and 2019, equity investments without readily determinable f air values measured at
cost with adjustments f or observable changes in price or impairments were $1.4 billion and $1.2 billion, respectively.
61
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses f or less than 12 months and 12 months or greater and their related f air
values were as f ollows:
(In millions)
June 30, 2020
U.S. government and agency securities
Foreign government bonds
Mortgage- and asset-backed securities
Corporate notes and bonds
Municipal securities
Total
(In millions)
June 30, 2019
U.S. government and agency securities
Foreign government bonds
Mortgage- and asset-backed securities
Corporate notes and bonds
Total
Less than 12 Months
Unrealized
Losses
Fair Value
12 Months or Greater
Unrealized
Losses
Fair Value
Total
Fair Value
Total
Unrealized
Losses
$ 2,323
500
1,014
649
66
$ 4,552
$
$
(1)
(3)
(6)
(17)
(4)
(31)
$
$
0
0
0
0
0
0
$
$
0
0
0
0
0
0
$ 2,323 $
500
1,014
649
66
$ 4,552 $
(1)
(3)
(6)
(17)
(4)
(31)
Less than 12 Months
Unrealized
Losses
Fair Value
12 Months or Greater
Unrealized
Losses
Fair Value
Total
Fair Value
Total
Unrealized
Losses
$ 1,491 $
25
664
498
$ 2,678 $
(1) $ 39,158 $
0
(1)
(3)
(5) $ 39,989 $
77
378
376
(103) $ 40,649 $
(8)
(2)
(4)
102
1,042
874
(117) $ 42,667 $
(104)
(8)
(3)
(7)
(122)
Unrealized losses f rom f ixed-income securities are primarily attributable to changes in interest rates. 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, 2020
Due in one year or less
Due af ter one year through f ive years
Due af ter f ive years through 10 years
Due af ter 10 years
Total
Cost Basis
Estimated
Fair Value
$
36,169
51,465
32,299
2,967
$ 122,900
$
36,276
54,700
35,674
3,148
$ 129,798
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to f oreign currencies, interest rates, equity prices, and credit; to
enhance investment returns; and to f acilitate portf olio diversification. Our objectives f or holding derivatives include reduc ing,
eliminating, and ef f iciently managing the economic impact of these exposures as ef f ectively as possible. Our derivative
programs include strategies that both qualif y and do not qualif y f or hedge accounting treatment.
Foreign Currencies
Certain f orecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our f oreign currency
exposures daily to maximize the economic ef f ectiveness of our f oreign currency hedge positions.
62
Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using f oreign exchange
f orward contracts that are designated as f air value hedging instruments. Foreign currency risks related to certain Euro -
denominated debt are hedged using f oreign exchange f orward contracts that are designated as cash f low hedging
instruments.
In the past, option and f orward contracts were used to hedge a portion of f orecasted international revenue and were
designated as cash f low hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound,
Canadian dollar, and Australian dollar.
Certain options and f orwards not designated as hedging instruments are also used to manage the variability in f oreign
exchange rates on certain balance sheet amounts and to manage other f oreign currency exposures.
Interest Rate
Interest rate risks related to certain f ixed -rate debt are hedged using interest rate swaps that are designated as f air value
hedging instruments to ef f ectively convert the f ixed interest rates to f loating interest rates.
Securities held in our f ixed-income portf olio are subject to different interest rate risks based on their maturities. We manage
the average maturity of our f ixed-income portf olio to achieve economic returns that correlate to certain broad -based f ixed-
income indices using exchange-traded option and f utures contracts and over-the-counter swap and option contracts. These
contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portf olio are subject to market price risk. At times, we may hold options, f utures,
and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in
the tables below.
Credit
Our f ixed-income portf olio is diversif ied and consists primarily of investment -grade securities. We use credit def ault swap
contracts to manage credit exposures relative to broad -based indices and to f acilitate portf olio diversif ication. These
contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements f or derivative instruments contain provisions that require our issued and outstan ding
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 f ail 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, 2020, 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.
63
The f ollowing table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar
equivalents:
(In millions)
Designated as Hedging Instruments
Foreign exchange contracts purchased
Foreign exchange contracts sold
Interest rate contracts purchased
Not Designated as Hedging Instruments
Foreign exchange contracts purchased
Foreign exchange contracts sold
Other contracts purchased
Other contracts sold
Fair Values of Derivative Instruments
The f ollowing table presents our derivative instruments:
(In millions)
Designated as Hedging Instruments
Foreign exchange contracts
Interest rate contracts
Not Designated as Hedging Instruments
Foreign exchange contracts
Other contracts
Gross amounts of derivatives
Gross amounts of derivatives of fset in the balance sheet
Cash collateral received
Net amounts of derivatives
Reported as
Short-term investments
Other current assets
Other long-term assets
Other current liabilities
Other long-term liabilities
Total
June 30,
2020
June 30,
2019
$
635
6,754
1,295
$
0
6,034
0
11,896
15,595
1,844
757
14,889
15,614
2,007
456
Derivative
Assets
Derivative
Liabilities
June 30,
2020
Derivative
Assets
Derivative
Liabilities
June 30,
2019
$
44
93
$
(54) $
0
0
0
$
(93)
0
245
18
400
(154)
0
$ 246
(334)
(11)
(399)
158
(154)
204
46
250
(113)
0
$ (395) $ 137
35
$
199
12
0
0
$ 246
$
0
0
0
(334)
(61)
(13)
$
146
4
0
0
$ (395) $ 137
(172)
(7)
(272)
114
(78)
$ (236)
$
0
0
0
(221)
(15)
$ (236)
Gross derivative assets and liabilities subject to legally enf orceable master netting agreements f or which we have elected
to of fset were $399 million and $399 million, respectively, as of June 30, 2020, and $247 million and $272 million,
respectively, as of June 30, 2019.
64
The f ollowing table presents the f air value of our derivatives instruments on a gross basis:
(In millions)
June 30, 2020
Derivative assets
Derivative liabilities
June 30, 2019
Derivative assets
Derivative liabilities
Level 1
Level 2
Level 3
Total
$
1 $ 398
(399)
0
$
1 $ 400
(399)
0
0
0
247
(272)
3
0
250
(272)
Gains (losses) on derivative instruments recognized in our consolidated income statements were as f ollows:
(In millions)
Year Ended June 30,
Designated as Fair Value Hedging Instruments
Foreign exchange contracts
Derivatives
Hedged items
Excluded f rom ef f ectiveness assessment
Interest rate contracts
Derivatives
Hedged items
Equity contracts
Derivatives
Hedged items
Excluded f rom ef f ectiveness assessment
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Amount reclassif ied f rom accumulated other
comprehensive income
Excluded f rom ef f ectiveness assessment
Not Designated as Hedging Instruments
Foreign exchange contracts
Other contracts
2020
Other
Income
(Expense),
Net
Revenue
2019
Other
Income
(Expense),
Net
2018
Other
Income
(Expense),
Net
Revenue
Revenue
$ 0 $
0
0
1
3
139
$
0
0
0
0
0
0
0
0
$ (130) $
130
168
0
0
0
0
0
0
0
0
0
0
0
0
0
$
(78)
78
103
0
0
(324)
324
80
341
(64)
0
0
185
(255)
0
0
93
(93)
0
0
0
0
0
(123)
50
0
0
(97)
38
0
0
(33)
(104)
0
0
0
0
0
0
0
0
0
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were
as f ollows:
(In millions)
Year Ended June 30,
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Included in ef f ectiveness assessment
2020
2019
2018
$ (38) $ 159 $ 219
65
The components of inventories were as f ollows:
NOTE 6 — INVENTORIES
(In millions)
June 30,
Raw materials
Work in process
Finished goods
Total
The components of property and equipment were as f ollows:
NOTE 7 — PROPERTY AND EQUIPMENT
$
2020
2019
700 $ 399
53
83
1,112 1,611
$ 1,895 $ 2,063
(In millions)
June 30,
Land
Buildings and improvements
Leasehold improvements
Computer equipment and sof tware
Furniture and equipment
Total, at cost
Accumulated depreciation
Total, net
2020
2019
$ 1,823 $ 1,540
26,288
5,316
33,823
4,840
71,807
(35,330)
$ 44,151 $ 36,477
33,995
5,487
41,261
4,782
87,348
(43,197)
During f iscal years 2020, 2019, and 2018, depreciation expense was $10.7 billion, $9.7 billion, and $7.7 billion, respectively.
We have committed $5.0 billion f or the construction of new buildings, building improvements, and leasehold improvements
as of June 30, 2020.
During f iscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold
improvements, due to the closing of our Microsof t Store physical locations.
GitHub, Inc.
NOTE 8 — BUSINESS COMBINATIONS
On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a sof tware development platf orm, in a $7.5 billion stock
transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity
escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lif ecycle,
accelerate enterprise use of GitHub, and bring Microsof t’s developer tools and services to new audiences. The f inancial
results of GitHub have been included in our consolidated f inancial statements since the date of the acquisition. GitHub is
reported as part of our Intelligent Cloud segment.
The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and
liabilities to which we allocated the purchase price were as f ollows:
(In millions)
Cash, cash equivalents, and short-term investments
Goodwill
Intangible assets
Other assets
Other liabilities
Total
66
$ 234
5,497
1,267
143
(217)
$ 6,924
The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies f rom f uture
growth and is not expected to be deductible f or tax purposes. We assigned the goodwill to our Intelligent Cloud segment.
Following are the details of the purchase price allocated to the intangible assets acquired:
(In millions)
Customer-related
Technology-based
Marketing-related
Contract-based
Total
Amount
Weighted
Average Life
$
8 years
648
447
5 years
170 10 years
2 years
7 years
2
$ 1,267
Transactions recognized separately f rom the purchase price allocation were approximately $600 million, primarily related
to equity awards recognized as expense over the related service period.
Other
During f iscal year 2020, we completed 15 acquisitions f or $2.4 billion, substantially all of which were paid in cash. These
entities have been included in our consolidated results of operations since their respective acquisition dates. The ef f ects o f
these business combinations, individually and in aggregate, were not material to our consolidated results of operations.
Changes in the carrying amount of goodwill were as f ollows:
NOTE 9 — GOODWILL
June 30,
(In millions)
2018
Productivity and Business Processes $ 23,823
5,703
Intelligent Cloud
6,157
More Personal Computing
$ 35,683
Total
June 30,
Acquisitions
Other
$
514 $ (60) $ 24,277
11,351
43 (a)
6,398
(48)
$ 6,408 $ (65) $ 42,026
5,605 (a)
289
2019 Acquisitions
$
June 30,
Other
2020
(94 ) $ 24,190
12,697
(5 )
6,464
(30 )
$ 1,454 $ (129 ) $ 43,351
7 $
1,351
96
(a)
Includes goodwill of $5.5 billion related to GitHub. See Note 8 – Business Combinations for further information.
The measurement periods f or the valuation of assets acquired and liabilities assumed end as soon as inf ormation on the
f acts 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 f rom f oreign currency translations and purchase accounting adjustments are
presented as “Other” in the table above. Also included in “Other” are business dispositions and transf ers between segments
due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill f or impairment annually on May 1 at the reporting unit level, primarily using a discounted cash f low
methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use o f a discounted cash f low
approach is the most reliable indicator of the f air values of the businesses.
67
No instances of impairment were identif ied in our May 1, 2020, May 1, 2019, or May 1, 2018 tests. As of June 30, 2020 and
2019, accumulated goodwill impairment was $11.3 billion.
The components of intangible assets, all of which are f inite-lived, were as f ollows:
NOTE 10 — INTANGIBLE ASSETS
(In millions)
June 30,
Technology-based
Customer-related
Marketing-related
Contract-based
Total
Gross
Carrying
Amount
Accumulated
Amortization
$ 8,160 $
4,967
4,158
474
(6,381) $
(2,320)
(1,588)
(432)
Gross
Carrying
Amount
Net Carrying
Amount
2020
1,779 $ 7,691
4,709
2,647
4,165
2,570
574
42
$ 17,759 $ (10,721) $
7,038 $ 17,139 (a)
Accumulated
Amortization
$ (5,771)
(1,785)
(1,327)
(506)
$ (9,389)
Net Carrying
Amount
2019
$ 1,920
2,924
2,838
68
$ 7,750
(a)
Includes intangible assets of $1.3 billion related to GitHub. See Note 8 – Business Combinations for further
information.
No material impairments of intangible assets were identif ied during f iscal years 2020, 2019, or 2018. We estimate that we
have no signif icant residual value related to our intangible assets.
The components of intangible assets acquired during the periods presented were as f ollows:
(In millions)
Year Ended June 30,
Technology-based
Customer-related
Marketing-related
Contract-based
Total
Amount
2020
$ 531
303
2
0
$ 836
Weighted
Average Life
Amount
2019
814
6 years $
710
5 years
177
2 years
0 years
7
5 years $ 1,708
Weighted
Average Life
5 years
8 years
10 years
3 years
7 years
Intangible assets amortization expense was $1.6 billion, $1.9 billion, and $2.2 billion f or f iscal years 2020, 2019, and 2018,
respectively.
The f ollowing table outlines the estimated f uture amortization expense related to intangible assets held as of Jun e 30, 2020:
(In millions)
Year Ending June 30,
2021
2022
2023
2024
2025
Thereaf ter
Total
68
$ 1,483
1,399
1,219
851
447
1,639
$ 7,038
The components of debt were as f ollows:
(In millions, issuance by calendar year)
2009 issuance of $3.8 billion (a)
2010 issuance of $4.8 billion (a)
2011 issuance of $2.3 billion (a)
2012 issuance of $2.3 billion
2013 issuance of $5.2 billion (a)
2013 issuance of €4.1 billion
2014 issuance
2015 issuance of $23.8 billion (a)
2016 issuance of $19.8 billion (a)
2017 issuance of $17.0 billion (a)
2020 issuance of $10.0 billion (a)
Total f ace value
Unamortized discount and issuance costs
Hedge f air value adjustments (b)
Premium on debt exchange (a)
Total debt
Current portion of long-term debt
Long-term debt
NOTE 11 — DEBT
Maturities
(calendar year)
2039
Stated Interest
Rate
5.20%
Effective Interest
Rate
5.24% $
2020–2040 3.00%–4.50% 3.14%–4.57%
2021–2041 4.00%–5.30% 4.08%–5.36%
2022–2042 2.13%–3.50% 2.24%–3.57%
2023–2043 2.38%–4.88% 2.47%–4.92%
2021–2033 2.13%–3.13% 2.23%–3.22%
2020–2055 2.00%–4.75% 2.09%–4.78%
2021–2056 1.55%–3.95% 1.64%–4.03%
2022–2057 2.40%–4.50% 2.52%–4.53%
2050–2060 2.53%–2.68% 2.53%–2.68%
June 30,
2020
559 $
1,571
1,270
1,650
2,919
4,549
0
15,549
16,955
12,385
10,000
67,407
June 30,
2019
750
2,000
1,500
1,650
3,500
4,613
18
22,000
19,750
17,000
0
72,781
(603)
0
0
72,178
(5,516)
$ 59,578 $ 66,662
(554)
93
(3,619)
63,327
(3,749)
(a)
In June 2020, we exchanged a portion of our existing debt at premium for cash and new debt with longer maturities.
The premium will be amortized over the term of the new debt.
(b) Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.
As of June 30, 2020 and 2019, the estimated f air value of long -term debt, including the current portion, was $77.1 billion
and $78.9 billion, respectively. The estimated f air values are based on Level 2 inputs.
Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding
obligations. Interest is paid semi-annually, except f or the Euro-denominated debt, which is paid annually.
The f ollowing table outlines maturities of our long -term debt, including the current portion, as of June 30, 2020:
(In millions)
Year Ending June 30,
2021
2022
2023
2024
2025
Thereaf ter
Total
$
3,750
7,966
2,750
5,250
2,250
45,441
$ 67,407
69
Tax Cuts and Jobs Act
NOTE 12 — INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which signif icantly changed existing
U.S. tax law and included numerous provisions that af f ect our business. We recorded a provisional net charge of
$13.7 billion related to the enactment of the TCJA in f iscal year 2018, and adjusted the provisional net charge by recording
additional tax expense of $157 million in f iscal year 2019 pursuant to Securities and Exchange Commission Staf f Accounting
Bulletin No. 118.
In f iscal year 2019, in response to the TCJA and recently issued regulations, we transf erred certain intangible properties
held by our f oreign subsidiaries to the U.S. and Ireland. The transf ers of intangible properties resulted in a $2.6 billion net
income tax benef it recorded in the f ourth quarter of f iscal year 2019, as the value of f uture tax deductions exceeded the
current tax liability f rom f oreign jurisdictions and U.S. global intangible low-taxed income (“GILTI”) tax.
Provision for Income Taxes
The components of the provision f or income taxes were as f ollows:
2020
2019
2018
$ 3,537 $ 4,718 $ 19,764
934
662
4,348
5,531
$ 8,744 $ 10,911 $ 25,046
763
4,444
$
58 $ (5,647) $
(6)
(41)
11 $ (6,463) $
(4,292)
(458)
(393)
(5,143)
$
$ 8,755 $ 4,448 $ 19,903
(1,010)
194
2020
2019
2018
$ 24,116 $ 15,799 $ 11,527
28,920
24,947
27,889
$ 53,036 $ 43,688 $ 36,474
(In millions)
Year Ended June 30,
Current Taxes
U.S. f ederal
U.S. state and local
Foreign
Current taxes
Deferred Taxes
U.S. f ederal
U.S. state and local
Foreign
Def erred taxes
Provision f or income taxes
U.S. and f oreign components of income bef ore income taxes were as f ollows:
(In millions)
Year Ended June 30,
U.S.
Foreign
Income bef ore income taxes
70
Effective Tax Rate
The items accounting f or the dif f erence between income taxes computed at the U.S. f ederal statutory rate and our ef f ective
rate were as f ollows:
Year Ended June 30,
Federal statutory rate
Ef f ect of:
Foreign earnings taxed at lower rates
Impact of the enactment of the TCJA
Impact of intangible property transf ers
Foreign-derived intangible income deduction
State income taxes, net of f ederal benef it
Research and development credit
Excess tax benef its relating to stock-based compensation
Interest, net
Other reconciling items, net
Ef f ective rate
2020
2018
2019
21.0% 21.0% 28.1%
(4.1)%
(7.8)%
(3.7)%
0.4% 37.7%
0%
0%
(5.9)%
0%
0%
(1.4)%
(1.1)%
0.7%
1.3%
1.3%
(1.3)%
(1.1)%
(1.1)%
(2.5)%
(2.2)%
(2.2)%
1.2%
1.0%
1.0%
1.3%
(2.1)%
1.8%
16.5% 10.2% 54.6%
The decrease f rom the f ederal statutory rate in f iscal year 2020 is primarily due to earnings taxed at lower rates in f oreign
jurisdictions resulting f rom producing and distributing our products and services through our f oreign regional operations
centers in Ireland and Puerto Rico, and tax benef its relating to stock -based compensation. The decrease f rom the f ederal
statutory rate in f iscal year 2019 is primarily due to a $2.6 billion net income tax benef it related to intangible property
transf ers, and earnings taxed at lower rates in f oreign jurisdictions resulting f rom producing and distributing our products
and services through our f oreign regional operations centers in Ireland, Singapore, and Puerto Rico. The increase f rom the
f ederal statutory rate in f iscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second
quarter of f iscal year 2018, of f set in part by earnings taxed at lower rates in f oreign jurisdictions. In f iscal year 2020, o ur
f oreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated
86% of our f oreign income bef ore tax. In f iscal years 2019 and 2018, our f oreign regional operating centers in Ireland,
Singapore, and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% and 87% of our f oreign
income bef ore tax, respectively. Other reconciling items, net consists primarily of tax credits and GILTI tax. In f iscal year s
2020, 2019, and 2018, there were no individually signif icant other reconciling items.
The increase in our ef f ective tax rate f or f iscal year 2020 compared to f iscal year 2019 was primarily due to a $2.6 billion
net income tax benef it in the f ourth quarter of f iscal year 2019 related to intangible property transf ers. The decrease in our
ef f ective tax rate f or f iscal year 2019 compared to f iscal year 2018 was primarily due to the net charge related to the
enactment of the TCJA in the second quarter of f iscal year 2018, and a $2.6 billion net income tax benef it in the f ourth
quarter of f iscal year 2019 related to intangible property transf ers.
71
The components of the def erred income tax assets and liabilities were as f ollows:
(In millions)
June 30,
Deferred Income Tax Assets
Stock-based compensation expense
Accruals, reserves, and other expenses
Loss and credit carryf orwards
Depreciation and amortization
Leasing liabilities
Unearned revenue
Other
Def erred income tax assets
Less valuation allowance
Def erred income tax assets, net of valuation allowance
Deferred Income Tax Liabilities
Book/tax basis differences in investments and debt
Unearned revenue
Leasing assets
Def erred GILTI tax liabilities
Other
Def erred income tax liabilities
Net def erred income tax assets
Reported As
Other long-term assets
Long-term def erred income tax liabilities
Net def erred income tax assets
2020
2019
$
461 $
2,721
865
6,361
3,025
1,553
354
15,340
(755)
406
2,287
3,518
7,046
1,594
475
367
15,693
(3,214)
$ 14,585 $ 12,479
$
$
$
$
$
(2,642) $
0
(2,817)
(2,581)
(344)
(738)
(30)
(1,510)
(2,607)
(291)
(8,384) $ (5,176)
6,201 $ 7,303
6,405 $ 7,536
(204)
(233)
6,201 $ 7,303
Def erred income tax balances ref lect the ef f ects of temporary dif f erences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax rates expected to be in ef f ect when the taxes are paid or
recovered.
As of June 30, 2020, we had f ederal, state, and f oreign net operating loss carryf orwards of $547 million, $975 million, and
$2.0 billion, respectively. The f ederal and state net operating loss carryf orwards will expire in various years f rom f iscal 2021
through 2040, if not utilized. The majority of our f oreign net operating loss carryf orwards do not expire. Certain acquired net
operating loss carryf orwards are subject to an annual limitation, but are expected to be realized with the exception of those
which have a valuation allowance.
The valuation allowance disclosed in the table above relates to the f oreign net operating loss carryf orwards and other net
def erred tax assets that may not be realized. In f iscal year 2020, we removed $2.0 billion of f oreign net operating losses
and corresponding valuation allowances as a result of the liquidation of a f oreign subsidiary. There was no impact to our
consolidated f inancial statements.
Income taxes paid, net of ref unds, were $12.5 billion, $8.4 billion, and $5.5 billion in f iscal years 2020, 2019, and 2018,
respectively.
Uncertain Tax Positions
Gross unrecognized tax benef its related to uncertain tax positions as of June 30, 2020, 2019, and 2018, were $13.8 billion,
$13.1 billion, and $12.0 billion, respectively, which were primarily included in long -term income taxes in
72
our consolidated balance sheets. If recognized, the resulting tax benef it would af f ect our ef f ective tax rates f or f iscal years
2020, 2019, and 2018 by $12.1 billion, $12.0 billion, and $11.3 billion, respectively.
As of June 30, 2020, 2019, and 2018, we had accrued interest expense related to uncertain tax positions of $4.0 billion,
$3.4 billion, and $3.0 billion, respectively, net of income tax benef its. The provision f or income taxes f or f iscal years 2020,
2019, and 2018 included interest expense related to uncertain tax positions of $579 million, $515 million, and $688 million,
respectively, net of income tax benef its.
The aggregate changes in the gross unrecognized tax benef its related to uncertain tax positions were as f ollows:
(In millions)
Year Ended June 30,
Beginning unrecognized tax benef its
Decreases related to settlements
Increases f or tax positions related to the current year
Increases f or tax positions related to prior years
Decreases f or tax positions related to prior years
Decreases due to lapsed statutes of limitations
Ending unrecognized tax benef its
2020
2019
2018
$ 13,146 $ 11,961 $ 11,737
(193)
1,445
151
(1,176)
(3)
$ 13,792 $ 13,146 $ 11,961
(316)
2,106
508
(1,113)
0
(31)
647
366
(331)
(5)
We settled a portion of the Internal Revenue Service (“IRS”) audit f or tax years 2004 to 2006 in f iscal year 2011. In Februar y
2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues f or tax years 2004 to 2006 and
reopened the audit phase of the examination. We also settled a portion of the IRS audit f or tax years 2007 to 2009 in f iscal
year 2016, and a portion of the IRS audit f or tax years 2010 to 2013 in f iscal year 2018. We remain under audit f or tax years
2004 to 2013. In April 2020, the IRS commenced the audit f or tax years 2014 to 2017.
As of June 30, 2020, the primary unresolved issues f or the IRS audits relate to transf er pricing, which could have a material
impact in our consolidated f inancial statements when the matters are resolved. We believe our allowances f or income tax
contingencies are adequate. We have not received a proposed assessment f or the unresolved issues and do not expect a
f inal resolution of these issues in the next 12 months. Based on the inf ormation currently available, we do not anticipate a
signif icant increase or decrease to our tax contingencies f or 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 f or tax years 1996 to 2019, some of which are currently under audit by local tax authorities. The resolution of
each of these audits is not expected to be material to our consolidated f inancial statements.
NOTE 13 — UNEARNED REVENUE
Unearned revenue by segment was as f ollows:
(In millions)
June 30,
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Total
2020
2019
$ 18,643 $ 16,831
16,988
16,620
3,387
3,917
$ 39,180 $ 37,206
73
Changes in unearned revenue were as f ollows:
(In millions)
Year Ended June 30, 2020
Balance, beginning of period
Def erral of revenue
Recognition of unearned revenue
Balance, end of period
$ 37,206
78,922
(76,948)
$ 39,180
Revenue allocated to remaining perf ormance obligations, which includes unearned revenue and amounts that will be
invoiced and recognized as revenue in f uture periods, was $111 billion as of June 30, 2020, of which $107 billion is related
to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months
and the remainder thereaf ter.
NOTE 14 — LEASES
We have operating and f inance leases f or datacenters, corporate of f ices, research and development f aciliti es, retail stores,
and certain equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to
extend the leases f or up to 5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as f ollows:
2020
2018
$ 2,043 $ 1,707 $ 1,585
2019
$
$
611 $
336
947 $
370 $
247
617 $
243
175
418
2020
2019
2018
$ 1,829 $ 1,670 $ 1,522
175
144
247
221
336
409
3,677
3,467
2,303
2,532
1,571
1,933
(In millions)
Year Ended June 30,
Operating lease cost
Finance lease cost:
Amortization of right-of -use assets
Interest on lease liabilities
Total f inance lease cost
Supplemental cash f low inf ormation related to leases was as f ollows:
(In millions)
Year Ended June 30,
Cash paid f or amounts included in the measurement of lease liabilities:
Operating cash f lows f rom operating leases
Operating cash f lows f rom f inance leases
Financing cash f lows f rom f inance leases
Right-of -use assets obtained in exchange f or lease obligations:
Operating leases
Finance leases
74
Supplemental balance sheet inf ormation related to leases was as f ollows:
(In millions, except lease term and discount rate)
June 30,
Operating Leases
Operating lease right-of -use assets
Other current liabilities
Operating lease liabilities
Total operating lease liabilities
Finance Leases
Property and equipment, at cost
Accumulated depreciation
Property and equipment, net
Other current liabilities
Other long-term liabilities
Total f inance lease liabilities
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
Maturities of lease liabilities were as f ollows:
(In millions)
Year Ending June 30,
2021
2022
2023
2024
2025
Thereaf ter
Total lease payments
Less imputed interest
Total
2020
2019
$
$ 8,753 $ 7,379
1,515
6,188
7,703
1,616 $
7,671
9,287 $
$
$ 10,371 $
(1,385)
8,986 $
540 $
$
$
8,956
9,496 $
$
7,041
(774)
6,267
317
6,257
6,574
8 years
13 years
7 years
13 years
2.7%
3.9%
3.0%
4.6%
Operating
Leases
$ 1,807 $
1,652
1,474
1,262
1,000
3,122
10,317
(1,030)
Finance
Leases
880
894
903
916
1,236
7,194
12,023
(2,527)
$ 9,287 $ 9,496
As of June 30, 2020, we have additional operating and f inance leases, primarily f or datacenters, that have not yet
commenced of $3.4 billion and $3.5 billion, respectively. These operating and f inance leases will commence between f iscal
year 2021 and f iscal year 2023 with lease terms of 1 year to 16 years.
During f iscal year 2020, we recorded an impairment charge of $161 million to operating lease right-of -use assets due to the
closing of our Microsoft Store physical locations.
NOTE 15 — CONTINGENCIES
Patent and Intellectual Property Claims
There were 64 patent inf ringement cases pending against Microsof t as of June 30, 2020, none of which are material
individually or in aggregate.
75
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unf air competition class action lawsuits were f iled against us in British Columbia, Ontario, and Quebec,
Canada. All three have been certif ied on behalf of Canadian indirect purchasers who acquired licenses f or Microsoft
operating system sof tware and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global
settlement of all three Canadian actions, and submitted the proposed settlem ent agreement to the courts in all three
jurisdictions f or approval. The f inal settlement has been approved by the courts in British Columbia, Ontario, and Quebec,
and the claims administration process will commence once each court approves the f orm of not ice to the class.
Other Antitrust Litigation and Claims
China State Administration for Industry and Commerce Investigation
In 2014, Microsof t was inf ormed that China’s State Agency f or Market Regulation (“SAMR”) (f ormerly State Administration
f or Industry and Commerce) had begun a f ormal investigation relating to China’s Anti -Monopoly Law, and the SAMR
conducted onsite inspections of Microsoft of f ices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented
its preliminary views as to certain possible violations of China’s Anti -Monopoly Law, and discussions are expected to
continue.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsof t Mobile Oy, a subsidiary of Microsof t, along with other handset manuf acturers and network operators, is a
def endant in 40 lawsuits f iled in the Superior Court f or the District of Columbia by individual plaintif f s who allege that radio
emissions f rom cellular handsets caused their brain tumors and other adverse health ef f ects. We assumed responsibility
f or these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted f or the
Nokia def endants. Nine of these cases were f iled in 2002 and are consolidated f or certain pre-trial proceedings; the
remaining cases are stayed. In a separate 2009 decision, the Court of Appeals f or the District of Columbia held that adverse
health ef f ect claims arising f rom the use of cellular handsets that operate within the U.S. Federal Communications
Commission radio f requency emission guidelines (“FCC Guidelines”) are pre-empted by f ederal law. The plaintif f s allege
that their handsets either operated outside the FCC Guidelines or were manuf actured bef ore the FCC Guidelines went into
ef f ect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission
guidelines.
In 2013, the def endants in the consolidated cases mo ved to exclude the plaintif f s’ expert evidence of general causation on
the basis of f lawed scientif ic methodologies. In 2014, the trial court granted in part and denied in part the def endants’ mot ion
to exclude the plaintif f s’ general causation experts. The def endants f iled an interlocutory appeal to the District of Columbia
Court of Appeals challenging the standard f or evaluating expert scientif ic evidence. In October 2016, the Court of Appeals
issued its decision adopting the standard advocated by the def endants and remanding the cases to the trial court f or f urther
proceedings under that standard. The plaintif f s have f iled supplemental expert evidence, portions of which the def endants
have moved to strike. In August 2018, the trial court issued an order s triking portions of the plaintif f s’ expert reports. A
hearing is expected to occur in the second quarter of f iscal year 2021.
Other Contingencies
We also are subject to a variety of other claims and suits that arise f rom time to time in the ordinary course of our business.
Although management currently believes that resolving claims against us, individually or in aggregate, will not have a
material adverse impact in our consolidated f inancial statements, these matters are subject to inherent uncertainties and
management’s view of these matters may change in the f uture.
76
As of June 30, 2020, we accrued aggregate legal liabilities of $306 million. While we intend to def end these matters
vigorously, adverse outcomes that we estimate could reach approximately $500 million in aggregate beyond recorded
amounts are reasonably possible. Were unf avorable f inal outcomes to occur, there exists the possibility of a material
adverse impact in our consolidated f inancial statements f or the period in which the ef f ects b ecome reasonably estimable.
Shares Outstanding
Shares of common stock outstanding were as f ollows:
NOTE 16 — STOCKHOLDERS’ EQUITY
(In millions)
Year Ended June 30,
Balance, beginning of year
Issued
Repurchased
Balance, end of year
Share Repurchases
2020
7,643
54
(126)
7,571
2019
7,677
116
(150)
7,643
2018
7,708
68
(99)
7,677
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in
share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.
On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in
share repurchases. This share repurchase program commenced in February 2020, f ollowing completion of the program
approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2020,
$31.7 billion remained of this $40.0 billion share repurchase program.
We repurchased the f ollowing 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
Amount Shares
Amount Shares
2020
29 $ 4,000
4,600
32
6,000
37
5,088
28
126 $ 19,688
2019
24 $ 2,600
6,100
57
3,899
36
33
4,200
150 $ 16,799
Amount
2018
22 $ 1,600
1,800
22
3,100
34
21
2,100
99 $ 8,600
Shares repurchased during the f ourth quarter of f iscal year 2020 were under the share repurchase program approved on
September 18, 2019. Shares repurchased during the third quarter of f iscal year 2020 were under the share repurchase
programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the
share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle
employee tax withholding related to the vesting of stoc k awards of $3.3 billion, $2.7 billion, and $2.1 billion f or f iscal years
2020, 2019, and 2018, respectively. All share repurchases were made using cash resources.
77
Dividends
Our Board of Directors declared the f ollowing dividends:
Declaration Date
Fiscal Year 2020
September 18, 2019
December 4, 2019
March 9, 2020
June 17, 2020
Total
Fiscal Year 2019
September 18, 2018
November 28, 2018
March 11, 2019
June 12, 2019
Total
Record Date
Payment Date
November 21, 2019 December 12, 2019
March 12, 2020
June 11, 2020
August 20, 2020 September 10, 2020
February 20, 2020
May 21, 2020
November 15, 2018
February 21, 2019
May 16, 2019
December 13, 2018
March 14, 2019
June 13, 2019
August 15, 2019 September 12, 2019
Dividend
Per Share
$ 0.51
0.51
0.51
0.51
$ 2.04
Amount
(In millions)
$ 3,886
3,876
3,865
3,861
$ 15,488
$ 0.46
0.46
0.46
0.46
$ 1.84
$ 3,544
3,526
3,521
3,510
$ 14,101
The dividend declared on June 17, 2020 was included in other current liabilities as of June 30, 2020.
NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The f ollowing table summarizes the changes in accumulated other comprehensive income (loss) by c omponent:
(In millions)
Year Ended June 30,
Derivatives
Balance, beginning of period
Unrealized gains (losses), net of tax of $(10), $2, and $11
Reclassif ication adjustments f or gains included in revenue
Tax expense included in provision f or income taxes
Amounts reclassif ied f rom accumulated other comprehensive income (loss)
Net change related to derivatives, net of tax of $(10), $(6), and $5
Balance, end of period
Investments
Balance, beginning of period
Unrealized gains (losses), net of tax of $1,057, $616, and $(427)
Reclassif ication adjustments f or (gains) losses included in other income (expense),
net
Tax expense (benef it) included in provision f or income taxes
Amounts reclassif ied f rom accumulated other comprehensive income (loss)
Net change related to investments, net of tax of $1,058, $635, and $(1,165)
Cumulative ef f ect of accounting changes
Balance, end of period
Translation Adjustments and Other
Balance, beginning of period
Translation adjustments and other, net of tax ef f ects of $1, $(1), and $0
Balance, end of period
Accumulated other comprehensive income (loss), end of period
78
2020
2019
2018
$
$
0 $
(38)
0
0
0
(38)
(38) $
173 $
160
(341)
8
(333)
(173)
0 $
134
218
(185)
6
(179)
39
173
$ 1,488 $
3,987
(850) $ 1,825
(1,146)
2,331
4
(1)
3
3,990
0
93
(19)
74
2,405
(67)
$ 5,478 $ 1,488 $
(2,309)
738
(1,571)
(2,717)
42
(850)
$ (1,828) $ (1,510) $ (1,332)
(178)
(426)
(318)
$ (1,828
)
$ (2,254)
$ 3,186 $
$ (1,510)
(340) $ (2,187)
NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2020, an aggregate of 283 million shares
were authorized f or f uture grant under our stock plans. Awards that expire or are canceled without delivery of shares
generally become available f or issuance under the plans. We issue new shares of Microsof t common stock to satisfy vesting
of awards granted under our stock plans. We also have an ESPP f or all eligible employees.
Stock-based compensation expense and related income tax benef it s were as f ollows:
(In millions)
Year Ended June 30,
Stock-based compensation expense
Income tax benef its related to stock-based compensation
Stock Plans
2020
$ 5,289
938
2019
$ 4,652
816
2018
$ 3,940
823
Stock awards entitle the holder to receive shares of Microsof t common stock as the award vests. Stock awards generally
vest over a service period of f our years or f ive years.
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive of f icers and certain
senior executives. RSUs generally vest ratably over a service period of f our years. PSUs generally vest over a perf ormance
period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding
perf ormance goals have been achieved.
Activity for All Stock Plans
The f air value of stock awards was estimated on the date of grant using the f ollowing assumptions:
Year ended June 30,
Dividends per share (quarterly amounts)
Interest rates
2020
2018
$ 0.46 - 0.51 $ 0.42 - 0.46 $ 0.39 - 0.42
1.7% - 2.9%
1.8% - 3.1%
0.1% - 2.2%
2019
During f iscal year 2020, the f ollowing activity occurred under our stock plans:
Stock Awards
Nonvested balance, beginning of year
Granted (a)
Vested
Forf eited
Nonvested balance, end of year
Weighted
Average
Grant-Date
Fair Value
Shares
(In millions)
147
53
(65)
(9)
126
$ 78.49
140.49
75.35
90.30
$ 105.23
(a)
Includes 2 million, 2 million, and 3 million of PSUs granted at target and performance adjustments above target levels
for fiscal years 2020, 2019, and 2018, respectively.
79
As of June 30, 2020, there was approximately $10.2 billion of total unrecognized compensation costs related to stock
awards. These costs are expected to be recognized over a weighted average period of three years. The weighted average
grant-date f air value of stock awards granted was $140.49, $107.02, and $75.88 f or f iscal years 2020, 2019, and 2018,
respectively. The f air value of stock awards vested was $10.1 billion, $8.7 billion, and $6.6 billion, f or f iscal years 2020,
2019, and 2018, respectively.
Employee Stock Purchase Plan
We have an ESPP f or all eligible employees. Shares of our common stock may be purchased by employees at three -month
intervals at 90% of the f air 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 of f ering period. Employees purchased the
f ollowing shares during the periods presented:
(Shares in millions)
Year Ended June 30,
Shares purchased
Average price per share
2020
9
$ 142.22
2019
11
$ 104.85
2018
13
$ 76.40
As of June 30, 2020, 96 million shares of our common stock were reserved f or f uture issuance through the ESPP.
Savings Plan
We have savings plans in the U.S. that qualif y under Section 401(k) of the Internal Revenue Code, and a number of savings
plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans,
subject to certain limitations. We contribute f if ty cents f or each dollar a participant contributes into the plans, with a ma ximum
employer contribution of 50% of the IRS contribution limit f or the calendar year. Employer-f unded retirement benef its f or all
plans were $1.0 billion, $877 million, and $807 million in f iscal years 2020, 2019, and 2018, respectively, and were expensed
as contributed.
NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive
Of f icer, reviews certain f inancial inf ormation, including segmented internal p rof it and loss statements prepared on a basis
not consistent with GAAP. During the periods presented, we reported our f inancial perf ormance based on the f ollowing
segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing .
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portf olio of productivity,
communication, and inf ormation services, spanning a variety of devices and platf orms. This segment primarily comprises:
• Of f ice Commercial, including Of f ice 365 subscriptions, the Of f ice portion of Microsof t 365 Commercial
subscriptions, and Of f ice licensed on-premises, comprising Of f ice, Exchange, SharePoint, Microsof t Teams,
Of f ice 365 Security and Compliance, and Skype f or Business, and related Client Access Licenses (“CALs”).
• Of f ice Consumer, including Microsof t 365 Consumer (f ormerly Of f ice 365 Consumer) subscriptions and Of f ice
•
licensed on-premises, and Of f ice Consumer Services, including Skype, Outlook.com, and OneDrive.
LinkedIn, including Talent Solutions, Learning Solutions, Marketing Solutions, Sales Solutions, and Premium
Subscriptions.
• Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM,
Dynamics ERP on-premises, and Dynamics CRM on-premises.
80
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power
modern business and developers. This segment primarily comprises:
• Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System
Center, and related CALs; and GitHub.
• Enterprise Services, including Premier Support Services and Microsof t Consulting Services.
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience
with our technology. This segment primarily comprises:
• Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system;
Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services,
and other Windows commercial of f erings; patent licensing; Windows Internet of Things; and MSN advertising.
• Devices, including Surf ace and PC accessories.
• Gaming, including Xbox hardware and Xbox content and services, comprising Xbox Live (transactions,
subscriptions, cloud services, and advertising), video games, and third -party video game royalties.
• Search.
Revenue and costs are generally directly attributed to our segment s. However, due to the integrated structure of our
business, certain revenue recognized and costs incurred by one segment may benef it other segments. Revenue f rom
certain contracts is allocated among the segments based on the relative value of the underlyi ng 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 ex penses that
are allocated primarily include those relating to marketing of products and services f rom which multiple segments benef it
and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identif iable and that benef it our segments are allocated to
them. These allocated costs include costs of : legal, including settlements and f ines; inf ormation technology; human
resources; f inance; excise taxes; f ield selling; shared f acilities services ; and customer service and support. Each allocation
is measured dif ferently based on the specif ic f acts and circumstances of the costs being allocated. Certain corporate -level
activity is not allocated to our segments.
Segment revenue and operating income were as f ollows during the periods presented:
(In millions)
Year Ended June 30,
Revenue
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Total
Operating Income
Productivity and Business Processes
Intelligent Cloud
More Personal Computing
Total
2020
2019
2018
$ 46,398 $
48,366
48,251
35,865
32,219
42,276
$ 143,015 $ 125,843 $ 110,360
41,160 $
38,985
45,698
$ 18,724 $
18,324
15,911
$ 52,959 $
16,219 $
13,920
12,820
42,959 $
12,924
11,524
10,610
35,058
81
No sales to an individual customer or country other than the United States accounted f or more than 10% of revenue f or
f iscal years 2020, 2019, or 2018. Revenue, classif ied by the major geographic areas in which our customers were located,
was as f ollows:
(In millions)
Year Ended June 30,
United States (a)
Other countries
Total
2020
$ 73,160 $
69,855
2018
55,926
54,434
$ 143,015 $ 125,843 $ 110,360
2019
64,199 $
61,644
(a)
Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the
impracticability of determining the geographic source of the revenue.
Revenue f rom external customers, classif ied by significant product and service of f erings, was as f ollows:
(In millions)
Year Ended June 30,
Server products and cloud services
Of f ice products and cloud services
Windows
Gaming
LinkedIn
Search advertising
Devices
Enterprise Services
Other
Total
2019
2020
$ 41,379 $ 32,622 $
2018
26,129
28,316
19,518
10,353
5,259
7,012
5,134
5,846
2,793
$ 143,015 $ 125,843 $ 110,360
31,769
20,395
11,386
6,754
7,628
6,095
6,124
3,070
35,316
22,294
11,575
8,077
7,740
6,457
6,409
3,768
Our commercial cloud revenue, which includes Of f ice 365 Commercial, Azure, the commercial portion of LinkedIn,
Dynamics 365, and other commercial cloud properties, was $51.7 billion, $38.1 billion and $26.6 billion in f iscal years 2020,
2019, and 2018, respectively. These amounts are primarily included in Of f ice products and cloud services, Server products
and cloud services, and LinkedIn in the table above.
Assets are not allocated to segments f or internal reporting presentations. A portion of amortizatio n and depreciation is
included with various other costs in an overhead allocation to each segment. It is impracticable f or us to separately identif y
the amount of amortization and depreciation by segment that is included in the measure of segment prof it or loss.
Long-lived assets, excluding f inancial instruments and tax assets, classif ied by the location of the controlling statutory
company and with countries over 10% of the total shown separately, were as f ollows:
$
2020
2018
2019
60,789 $ 55,252 $ 44,501
12,958 12,843
12,734
25,422 22,538
29,770
$ 103,293 $ 93,632 $ 79,882
(In millions)
June 30,
United States
Ireland
Other countries
Total
82
NOTE 20 — QUARTERLY INFORMATION (UNAUDITED)
(In millions, except per share amounts)
Quarter Ended
Fiscal Year 2020
Revenue
Gross margin
Operating income
Net income
Basic earnings per share
Diluted earnings per share
Fiscal Year 2019
Revenue
Gross margin
Operating income
Net income (a)
Basic earnings per share
Diluted earnings per share (b)
September 30
December 31
March 31
June 30
Total
$ 33,055
22,649
12,686
10,678
1.40
1.38
29,084
19,179
9,955
8,824
1.15
1.14
$ 36,906 $ 35,021 $ 38,033 $ 143,015
96,937
24,548
52,959
13,891
44,281
11,649
5.82
1.53
5.76
1.51
24,046
12,975
10,752
1.41
1.40
25,694
13,407
11,202
1.48
1.46
32,471
20,048
10,258
8,420
1.09
1.08
30,571
20,401
10,341
8,809
1.15
1.14
33,717
23,305
12,405
13,187
1.72
1.71
125,843
82,933
42,959
39,240
5.11
5.06
(a) Reflects the $157 million net charge related to the enactment of the TCJA for the second quarter and the $2.6 billion
net income tax benefit related to the intangible property transfers for the fourth quarter, which together increased net
income by $2.4 billion for fiscal year 2019. See Note 12 – Income Taxes for further information.
(b) Reflects the net charge related to the enactment of the TCJA and the net income tax benefit related to the intangible
property transfers, which decreased (increased) diluted EPS $0.02 for the second quarter, $(0.34) for the fourth
quarter, and $(0.31) for fiscal year 2019.
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”)
as of June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash f lows, and
stockholders’ equity, f or each of the three years in the period ended June 30, 2020, and the related notes (collectively
ref erred to as the “f inancial statements”). In our opinion, the f inancial statements present f airly, in all material respects, the
f inancial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash f lows for each
of the three years in the period ended June 30, 2020, in conf ormity 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)
(PCAOB), the Company’s internal co ntrol over f inancial reporting as of June 30, 2020, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated July 30, 2020, expressed an unqualif ied opinion on the Company’s internal control over
f inancial reporting.
Basis for Opinion
These f inancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s f inancial statements based on our audits. We are a public accounting f irm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. f ederal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perf orm
the audit to obtain reasonable assurance about whether the f inancial statements are f ree o f material misstatement, whether
due to error or f raud. Our audits included perf orming procedures to assess the risks of material misstatement of the f inancia l
statements, whether due to error or f raud, and perf orming procedures that respond to those risks . Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the f inancial statements. Our audits also
included evaluating the accounting principles used and signif icant estimates made by management, as well as e valuating
the overall presentation of the f inancial statements. We believe that our audits provide a reasonable basis f or our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising f rom the current -period audit of the f inancial statements
that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or
disclosures that are material to the f inancial statements and (2) involved our especially challenging, subjective, o r complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the f inancial statements,
taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
84
Revenue Recognition — Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transf er of control of promised products or services to customers in an amount that
ref lects the consideration the Company expects to receive in exchange f or those products or services. The Company of fers
customers the ability to acquire multiple licenses of sof tware products and services, including cloud -based services, in its
customer agreements through its volume licensing programs.
Signif icant judgment is exercised by the Company in determining revenue recognition f o r these customer agreements, and
includes the f ollowing:
• Determination of whether products and services are considered distinct perf ormance obligations that should be
accounted f or separately versus together, such as sof tware licenses and related servic es that are sold with cloud-based
services.
• The pattern of delivery (i.e., timing of when revenue is recognized) f or each distinct perf ormance obligation.
•
Identif ication and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g.,
variable consideration, optional purchases, and f ree services).
• Determination of stand-alone selling prices f or each distinct perf ormance obligation and f or products and services that
are not sold separately.
Given these f actors and due to the volume of transactions, the related audit ef f ort in evaluating management’s judgments
in determining revenue recognition f or these customer agreements was extensive and required a high degree of auditor
judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company’s revenue recognition f or these customer agreements included the
f ollowing:
• We tested the ef f ectiveness of controls related to the identif ication of distinct perf ormance obligations, the determination
of the timing of revenue recognition, and the estimation of variable consideration.
• We evaluated management’s signif icant accounting policies related to these customer agreements f or reasonableness.
• We selected a sample of customer agreements and perf ormed the f ollowing procedures:
- Obtained and read contract source documents f or each selection, including master agreements, and other documents
that were part of the agreement.
Tested management’s identif ication and treatment of contract terms.
-
- Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of
their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
• We evaluated the reasonableness of management’s estimate of stand-alone selling prices f or products and services
that are not sold separately.
• We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue
recognized in the f inancial statements.
85
Income Taxes — Uncertain Tax Positions — Refer to Note 12 to the financial statements
Critical Audit Matter Description
The Company’s long-term income taxes liability includes uncertain tax positions related to transf er pricing issues that remain
unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, f or
tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining
matters could have a material impact on the Company’s f inancial statements.
Conclusions on recognizing and measuring uncertain tax positions involv e significant estimates and management judgment
and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior -year audit
settlements. Given the complexity and the subjective nature of the transf er pricing is sues that remain unresolved with the
IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit
ef f ort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transf er
pricing issues included the f ollowing:
• We evaluated the appropriateness and consistency of management’s methods and assumptions used in the
tax positions, which included testing the
identif ication, recognition, measurement, and disclosure of uncertain
ef f ectiveness of the related internal controls.
• We read and evaluated management’s documentation, including relevant accounting policies and inf ormation obtained
by management f rom outside tax specialists, that detailed the basis of the uncertain tax positions.
• We tested the reasonableness of management’s judgments regarding t he f uture resolution of the uncertain tax
positions, including an evaluation of the technical merits of the uncertain tax positions.
• For those uncertain tax positions that had not been ef f ectively settled, we evaluated whether management had
appropriately considered new inf ormation that could signif icantly change the recognition, measurement or disclosure of
the uncertain tax positions.
• We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes,
regulations and case law, impacted management’s judgments.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 30, 2020
We have served as the Company’s auditor since 1983.
86
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 Of f icer and Chief
Financial Of f icer, we have evaluated the ef f ectiveness 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 Of f icer
and Chief Financial Of f icer have concluded that these disclosure controls and procedures are ef f ective.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible f or establishing and maintaining adequate internal control over f inancial reporting f or the
Company. Internal control over f inancial reporting is a process to provide reasonable assurance regarding the re liability of
our f inancial reporting f or external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control over f inancial reporting includes maintaining records that in reasonable detail accurat ely
and f airly ref lect our transactions; providing reasonable assurance that transactions are recorded as necessary f or
preparation of our consolidated f inancial 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 ef f ect on our consolidated
f inancial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control
over f inancial reporting is not intended to provide absolute assurance that a misstatement of our consolidated f inancial
statements would be prevented or detected.
Management conducted an evaluation of the ef f ectiveness of our internal control over f inancial reporting based on the
f ramework 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 f inancial
reporting was ef f ective as of June 30, 2020. There were no changes in our internal control over f inancial reporting during
the quarter ended June 30, 2020 that have materially af f ected, or are reasonably likely to materially af f ect, our internal
control over f inancial reporting. Deloitte & Touche LLP has audited our internal control over f inancial reporting as of June 30,
2020; their report f ollows.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over f inancial reporting of Microsoft Corporation and subsidiaries (the “Company”) as
of June 30, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, ef f ective internal control over f inancial reporting as of June 30, 2020, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated f inancial statements and the related notes (collectively ref erred to as the “f inancial statements”)
as of and f or the year ended June 30, 2020, of the Company and our report dated July 30, 2020, expressed an unqualif ied
opinion on those f inancial statements.
Basis for Opinion
The Company’s management is responsible f or maintaining ef f ective internal control over f inancial reporting and f or its
assessment of the ef f ectiveness of internal control over f inancial 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 f inancial reporting b ased on our audit. We are a public accounting f irm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. f ederal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perf orm
the audit to obtain reasonable assurance about whether ef f ective internal control over f inancial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over f inancial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating ef f ectiveness of i nternal control
based on the assessed risk, and perf orming such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis f or our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over f inancial reporting is a process designed to provide reasonable assurance regarding the
reliability of f inancial reporting and the preparation of f inancial statements f or external purposes in accordance with generally
accepted accounting principles. A company’s internal control over f inancial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and f airly ref lect the transac tions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of f inancial 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 ef f ect on the f inancial statements.
Because of its inherent limitations, internal control over f inancial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of ef f ectiveness to f uture periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 30, 2020
88
DIRECTORS AND EXECUTIVE OFFICERS OF MICROSOFT CORPORATION
John W. Thompson 3,4
Independent Board Chair,
Microsof t Corporation
Reid G. Hoffman
Partner, Greylock Partners
Hugh F. Johnston 1
Vice Chairman, Executive Vice
President, and Chief Financial
Of f icer, PepsiCo
DIRECTORS
Satya Nadella
Chief Executive Of f icer,
Microsof t Corporation
Sandra E. Peterson 2,3
Operating Partner,
Clayton, Dubilier & Rice
Arne M. Sorenson 1
President and Chief Executive
Of f icer, Marriott International, Inc.
John W. Stanton 1,4
Founder and Chairman, Trilogy
Partnerships
Penny S. Pritzker 4
Founder and Chairman, PSP
Partners
Emma N. Walmsley 2,4
Chief Executive Of f icer,
GlaxoSmithKline
Teri L. List-Stoll 1,3
Former Executive Vice President and
Chief Financial Of f icer, The Gap, Inc.
Charles W. Scharf 2,3
President and Chief Executive Of f icer,
Wells Fargo & Company
Padmasree Warrior 2
Founder, Chief Executive
Of f icer and President,
Fable Group Inc.
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 Of f icer
Christopher C. Capossela
Executive Vice President, Marketing and Consumer
Business, and Chief Marketing Of f icer
Jean-Philippe Courtois
Executive Vice President and President, Microsof t
Global Sales, Marketing
and Operations
Kathleen T. Hogan
Executive Vice President,
Human Resources
Amy E. Hood
Executive Vice President, Chief
Financial Of f icer
Bradford L. Smith
President and Chief Legal Of f icer
89
INVESTOR RELATIONS
Investor Relations
You can contact Microsof t Investor Relations at any time to
order f inancial documents such as annual reports and Form
10-Ks f ree of charge.
Call us toll-f ree 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. Pacif ic Time to answer
investment oriented questions about Microsof t.
For access to additional f inancial inf ormation, visit the
Investor Relations website online at:
www.microsof t.com/investor
Our e-mail is msf t@microsoft.com
Our mailing address is:
Investor Relations
Microsof t Corporation
One Microsof t Way
Redmond, Washington 98052-6399
Attending the Annual Meeting
The 2020 Annual Shareholders Meeting will be held as
a virtual-only meeting. Any shareholder can join the
Annual Meeting, while shareholders of record as of
October 8, 2020 will be able to vote and submit questions
during the meeting.
Date: Wednesday, December 2, 2020
Time: 8:00 a.m. Pacif ic Time
Virtual Shareholder Meeting:
www.virtualshareholdermeeting.com/MSFT20
Submit Your Question
We invite you to submit any questions via the proxy vot ing
site at www.proxyvote.com. We will include as many of your
questions as possible during the Q&A session of the
meeting and will provide answers to questions on the
Microsof t Investor Relations website under the Annual
Meeting page.
90
Registered Shareholder Services
Computershare, our transf er agent, can help you with a
variety of shareholder related services including:
•
•
•
•
Change of address
Lost stock certificates
Transf er of stock to another person
Additional administrative services
Computershare also administers a direct stock purchase
plan and a dividend reinvestment program f or the company.
Contact Computershare directly to find out more about these
services and programs at 800-285-7772, option 1, or visit
online at:
https://www.computershare.com/Microsoft
You can e-mail the transf er agent at:
web.queries@computershare.com
You can also send mail to the transf er agent at:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Shareholders can sign up f or electronic alerts to access the
annual report and proxy statement online. The service gets
you the inf ormation you need f aster and also gives you the
power and convenience of online proxy voting. To sign up for
this f ree service, visit the Annual Report site on the Investor
Relations website at:
http://www.microsoft.com/investor/AnnualReports/default.
aspx
(“ESG”)/Corporate
Environmental, Social, Governance
Social Responsibility (“CSR”)
Many of our shareholders are increasingly f ocused on the
importance of the ef f ective engagement and action on ESG
topics. To meet the expectations of our stakeholders and to
and maintain their trust, we are committed to conducting our
business in ways that are principled, transparent, and
accountable and we have made a broad range of
environmental and social commitments. From our CEO and
Senior Leadership Team and throughout our organization,
people at Microsof t are working to conduct our business in
principled ways that make a signif icant positive impact on
important global issues. Microsoft’s Board of Directors
provides insight, f eedback, and oversight across a broad
range of environmental and social matters. In particular,
among the responsibilities of the Board’s Regulatory and
Public Policy Committee is to review and provide guidance
to the Board and management about the Company’s policies
and programs that relate to CSR.
For more about Microsoft’s CSR commitments and
perf ormance, please visit:
www.microsof t.com/transparency