Microsoft MSFT · USD

NOTE 18 — SEGMENT INFORMATION AND GEOGRAPHIC DATAIn its operation of the business, management, including our chief operating decision maker (“CODM”), who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements. The primary profitability measure used by the CODM to review segment operating results is operating income. The CODM uses operating income to allocate resources during our annual planning process and throughout the year, as well as to assess the performance of our segments, primarily by monitoring actual results compared to prior periods and expected results. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. We have recast certain prior period amounts to conform to the way we internally manage and monitor our business. Refer to Note 1 – Accounting Policies for further information.Our reportable segments are described below. Productivity and Business Processes Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:•Microsoft 365 Commercial products and cloud services, including Microsoft 365 Commercial cloud, comprising Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot; and Microsoft 365 Commercial products, comprising Windows Commercial on-premises and Office licensed on-premises.•Microsoft 365 Consumer products and cloud services, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other consumer services.•LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.•Dynamics products and cloud services, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate; and on-premises ERP and CRM applications.Intelligent CloudOur Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that power modern business and developers.

NOTE 12 — UNEARNED REVENUE Unearned revenue by segment was as follows: (In millions) June 30, 2025 2024 Productivity and Business Processes $ 50,567 $ 43,599 Intelligent Cloud 14,022 13,683 More Personal Computing 2,676 2,902 Total $ 67,265 $ 60,184 We have recast certain prior period amounts to conform to the way we internally manage and monitor our business. Refer to Note 1 – Accounting Policies for further information.Changes in unearned revenue were as follows: (In millions) Year Ended June 30, 2025 Balance, beginning of period $ 60,184 Deferral of revenue 186,957 Recognition of unearned revenue (179,876 ) Balance, end of period $ 67,265 Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $375 billion as of June 30, 2025, of which $368 billion is related to the commercial portion of revenue. We expect to recognize approximately 40% of our total company remaining performance obligation revenue over the next 12 months and the remainder thereafter.

NOTE 10 — DEBT Short-term DebtAs of June 30, 2025, we had no commercial paper issued or outstanding. As of June 30, 2024, we had $6.7 billion of commercial paper issued and outstanding, with a weighted average interest rate of 5.4% and maturities ranging from 28 days to 152 days. The estimated fair value of this commercial paper approximates its carrying value.Long-term DebtThe components of long-term debt were as follows: (In millions, issuance by calendar year) Maturities(calendar year) Stated InterestRate Effective InterestRate June 30,2025 June 30,2024 2009 issuance of $3.8 billion 2039 5.20% 5.24% $ 520 $ 520 2010 issuance of $4.8 billion 2040 4.50% 4.57% 486 486 2011 issuance of $2.3 billion 2041 5.30% 5.36% 718 718 2012 issuance of $2.3 billion 2042 3.50% 3.57% 454 454 2013 issuance of $5.2 billion 2043 3.75% – 4.88% 3.83% – 4.92% 314 314 2013 issuance of €4.1 billion 2028 – 2033 2.63% – 3.13% 2.69% – 3.22% 2,700 2,465 2015 issuance of $23.8 billion 2025 – 2055 3.13% – 4.75% 3.18% – 4.78% 7,555 9,805 2016 issuance of $19.8 billion 2026 – 2056 2.40% – 3.95% 2.46% – 4.03% 7,930 7,930 2017 issuance of $17.1 billion 2026 – 2057 3.30% – 4.50% 3.38% – 5.49% 6,833 6,833 2020 issuance of $10.1 billion 2030 – 2060 1.35% – 2.68% 2.53% – 5.43% 10,111 10,111 2021 issuance of $8.2 billion 2052 – 2062 2.92% – 3.04% 2.92% – 3.04% 8,185 8,185 2023 issuance of $0.1 billion 2026 – 2050 1.35% – 4.50% 5.16% – 5.49% 56 56 2024 issuance of $3.3 billion 2026 – 2050 1.35% – 4.50% 5.16% – 5.49% 3,344 3,344 Total face value 49,206 51,221 Unamortized discount and issuance costs (1,155 ) (1,227 ) Hedge fair value adjustments (a) (36 ) (81 ) Premium on debt exchange (4,864 ) (4,976 ) Total debt 43,151 44,937 Current portion of long-term debt (2,999 ) (2,249 ) Long-term debt $ 40,152 $ 42,688 (a)Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.As of June 30, 2025 and 2024, the estimated fair value of long-term debt, including the current portion, was $40.4 billion and $42.3 billion, respectively. The estimated fair values are based on Level 2 inputs. Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2025, 2024, and 2023 was $1.6 billion, $1.7 billion, and $1.7 billion, respectively.

NOTE 11 — INCOME TAXESProvision for Income Taxes The components of the provision for income taxes were as follows: (In millions) Year Ended June 30, 2025 2024 2023 Current Taxes U.S. federal $ 14,086 $ 12,165 $ 14,009 U.S. state and local 3,342 2,366 2,322 Foreign 11,423 9,858 6,678 Current taxes $ 28,851 $ 24,389 $ 23,009 Deferred Taxes U.S. federal $ (6,250 ) $ (4,791 ) $ (6,146 ) U.S. state and local (1,087 ) (379 ) (477 ) Foreign 281 432 564 Deferred taxes $ (7,056 ) $ (4,738 ) $ (6,059 ) Provision for income taxes $ 21,795 $ 19,651 $ 16,950 U.S. and foreign components of income before income taxes were as follows: (In millions) Year Ended June 30, 2025 2024 2023 U.S. $ 69,212 $ 62,886 $ 52,917 Foreign 54,415 44,901 36,394 Income before income taxes $ 123,627 $ 107,787 $ 89,311 Effective Tax RateThe items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows: Year Ended June 30, 2025 2024 2023 Federal statutory rate 21.0% 21.0% 21.0% Effect of: Foreign earnings taxed at lower rates (1.5)% (1.4)% (1.8)% Foreign-derived intangible income deduction (1.0)% (1.1)% (1.3)% State income taxes, net of federal benefit 1.5% 1.5% 1.6% Research and development credit (1.1)% (1.1)% (1.1)% Excess tax benefits relating to stock-based compensation (0.9)% (1.1)% (0.7)% Interest, net 1.0% 1.1% 0.8% Other reconciling items, net (1.4)% (0.7)% 0.5% Effective rate 17.6% 18.2% 19.0% The decrease from the federal statutory rate in fiscal years 2025, 2024, and 2023 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland. In fiscal years 2025, 2024, and 2023, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated 81%, 83%, and 81% of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and the U.S. global intangible low-taxed income tax, and in fiscal year 2024, includes tax benefits from tax law changes. In fiscal year 2024, tax benefits from tax law changes primarily relate to the delay of the effective date of final foreign tax credit regulations. In fiscal years 2025, 2024, and 2023, there were no individually significant other reconciling items.

NOTE 13 — LEASES We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year. The components of lease expense were as follows: (In millions) Year Ended June 30, 2025 2024 2023 Operating lease cost $ 5,524 $ 3,555 $ 2,875 Finance lease cost: Amortization of right-of-use assets $ 3,408 $ 1,800 $ 1,352 Interest on lease liabilities 1,417 734 501 Total finance lease cost $ 4,825 $ 2,534 $ 1,853 Supplemental cash flow information related to leases was as follows: (In millions) Year Ended June 30, 2025 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 4,931 $ 3,550 $ 2,706 Operating cash flows from finance leases 1,372 734 501 Financing cash flows from finance leases 2,283 1,286 1,056 Right-of-use assets obtained in exchange for lease obligations: Operating leases 7,826 6,703 3,514 Finance leases 20,511 11,633 3,128 Supplemental balance sheet information related to leases was as follows: (In millions, except lease term and discount rate) June 30, 2025 2024 Operating Leases Operating lease right-of-use assets $ 24,823 $ 18,961 Other current liabilities $ 5,424 $ 3,580 Operating lease liabilities 17,437 15,497 Total operating lease liabilities $ 22,861 $ 19,077 Finance Leases Property and equipment, at cost $ 53,876 $ 32,248 Accumulated depreciation (9,861 ) (6,386 ) Property and equipment, net $ 44,015 $ 25,862 Other current liabilities $ 3,172 $ 2,349 Other long-term liabilities 43,000 24,796 Total finance lease liabilities $ 46,172 $ 27,145 Weighted Average Remaining Lease Term Operating leases 6 years 7 years Finance leases 13 years 12 years Weighted Average Discount Rate Operating leases 3.5% 3.3% Finance leases 4.2% 3.

NOTE 7 — BUSINESS COMBINATIONS Activision Blizzard, Inc.On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) for a total purchase price of $75.4 billion, consisting primarily of cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The financial results of Activision Blizzard have been included in our consolidated financial statements since the date of the acquisition. Activision Blizzard is reported as part of our More Personal Computing segment.The allocation of the purchase price to the assets acquired and liabilities assumed was completed as of September 30, 2024. The major classes of assets and liabilities to which we have allocated the purchase price were as follows: (In millions) Cash and cash equivalents $ 12,976 Goodwill 51,001 Intangible assets 21,969 Other assets 2,503 Long-term debt (2,799 ) Long-term income taxes (1,946 ) Deferred income taxes (4,676 ) Other liabilities (3,620 ) Total purchase price $ 75,408 Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of Activision Blizzard. Substantially all of the goodwill is expected to be non-deductible for income tax purposes.Following are the details of the purchase price allocated to the intangible assets acquired: (In millions, except average life) Amount WeightedAverage Life Marketing-related $ 11,619 24 years Technology-based 9,689 4 years Customer-related 661 4 years Fair value of intangible assets acquired $ 21,969 15 years Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2022: (In millions, except per share amounts) Year Ended June 30, 2024 2023 Revenue $ 247,442 $ 219,790 Net income 88,308 71,383 Diluted earnings per share 11.82 9.55 These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods.

ITEM 1C. CYBERSECURITY RISK MANAGEMENT AND STRATEGYMicrosoft plays a central role in the world’s digital ecosystem. We have made it the top corporate priority to protect the computing environment used by our customers and employees and to support the resiliency of our cloud infrastructure and services, products, devices, and our internal corporate resources from determined adversaries. In response to the evolving cybersecurity threat landscape, we launched the Secure Future Initiative (“SFI”) in November 2023 and expanded the scope of SFI in May 2024. The SFI focuses our business strategy and efforts on continual improvement in cybersecurity protection, and is aligned around three security principles:•Secure by Design: Security comes first when designing any product or service. •Secure by Default: Security protections are enabled and enforced by default, require no extra effort, and are not optional. •Secure Operations: Security controls and monitoring will continuously be improved to meet current and future threats. We operate a cybersecurity program and governance framework designed to protect our computing environments against cybersecurity threats, and we have controls, policies, and procedures to identify, manage, and mitigate cybersecurity threats. Annually, we assess our cybersecurity program’s alignment with the National Institute of Standards & Technology’s Cyber Security Framework (“NIST”) and other applicable industry standards. We also undertake integrated planning and preparedness activities to support business continuity and operational resiliency. We assess our program's effectiveness through various exercises, including tabletop simulations and production environment tests, penetration and vulnerability tests, red team exercises, and other related activities. We conduct mandatory cybersecurity training, provide employees with tools to report suspected incidents and assess their own security posture, and conduct real-time simulated employee education exercises, such as phishing email campaigns designed to emulate real-world attacks. We also engage in robust cybersecurity assessments and remediation efforts for acquired companies. Our computing environments, products, and services are reviewed by our internal audit teams as well as independent third-party assessors. We are committed to managing the most significant risks to our strategies and ambitions, including cybersecurity risks.

NOTE 8 — GOODWILL Changes in the carrying amount of goodwill were as follows: (In millions) June 30,2023 Acquisitions Other June 30,2024 Acquisitions Other June 30,2025 Productivity and Business Processes $ 31,359 $ 0 $ 2 $ 31,361 $ 0 $ 96 $ 31,457 Intelligent Cloud 25,676 0 (28 ) 25,648 0 41 25,689 More Personal Computing 10,851 51,235 125 62,211 0 152 62,363 Total $ 67,886 $ 51,235 $ 99 $ 119,220 $ 0 $ 289 $ 119,509 We have recast certain prior period amounts to conform to the way we internally manage and monitor our business. Refer to Note 1 – Accounting Policies for further information.The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable. As discussed in Note 1 – Accounting Policies, during the first quarter of fiscal year 2025 we made changes to our segments. These segment changes also resulted in changes to our reporting units. We reallocated goodwill across impacted reporting units using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed. Goodwill ImpairmentWe test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. No instances of impairment were identified in our May 1, 2025, May 1, 2024, or May 1, 2023 tests. As of June 30, 2025 and 2024, accumulated goodwill impairment was $11.3 billion.