For a discussion of the year ended June 30, 2020 compared to the year ended June 30, 2019, please refer to, Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended June 30, 2020. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Microsoft Online Subscription Agreements are designed for small and medium organizations that want to subscribe to, activate, provision, and maintain cloud services seamlessly and directly via the web. The earnings provide a further lift to Microsoft after it agreed to acquire gaming giant Activision Blizzard in a $68.7 billion, all-cash deal. Dynamics products and cloud services revenue increased 25% driven by Dynamics 365 growth of 43%. Dynamics 365 for Talent with LinkedIn Recruiter and Learning gives human resource professionals a complete solution to compete for talent. Our products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. Microsoft offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to those offered through the reseller channel. Every organization is looking to digitize their end-to-end operationsfrom sales and customer service to supply chain managementso they can rapidly adapt to changing market dynamics. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. Satya Nadella . Azure is a trusted cloud with comprehensive compliance coverage and AI-based security built in. Adjusted earnings, which exclude stock-based compensation expenses and other items, were 88 cents a share, compared with $1.32 a share in the year-ago period. Using Windows to fuel our cloud business, grow our share of the PC market, and drive increased engagement with our services like Microsoft 365 Consumer, Teams, Edge, Bing, Xbox Game Pass, and more. The small to medium business (SMB) segment is divided into three subsegments: Corporate scale subsegment is the largest existing SMB customers with the most opportunity for Microsoft. As part of our effort to promote a One Microsoft and inclusive culture, we expanded stock eligibility to all Microsoft employees as part of our annual rewards process. Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2021: As of June 30, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $70.0 billion and $77.1 billion, respectively. How the Critical Audit Matter Was Addressed in the Audit. Windows OEM and devices revenue was particularly . Inventories are stated at average cost, subject to the lower of cost or net realizable value. Nuance is a cloud and artificial intelligence (AI) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic. 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 for collateralized borrowing over a similar term of the lease payments at commencement date. Right-of-use assets obtained in exchange for lease obligations: Reclassification adjustments for gains included in earnings, Tax expense included in provision for income taxes, Amounts reclassified from accumulated other comprehensive income (loss), Net change related to derivatives, net of tax of, Reclassification adjustments for (gains) losses included in other income (expense), net, Tax expense (benefit) included in provision for income taxes, Net change related to investments, net of tax of, Translation adjustments and other, net of tax effects of, Accumulated other comprehensive income (loss), end of period, Income tax benefits related to stock-based compensation, NASAs Mars mission achieved a milestone in space exploration when the small robotic helicopter Ingenuity completed the first powered flight on another planeta feat that would not have been possible without 12,000 developers on GitHub who, When a 1,300-foot ship blocked the Suez Canal and disrupted global shipping, our partner Blue Yonder, Team Rubicona nonprofit organization that responds to humanitarian crises around the world, Surgeons at Mt. Chief Executive Officer and Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, including: We publish a variety of reports and resources related to our Corporate Social Responsibility programs and progress on our Reports hub website, www.microsoft.com/corporate-responsibility/reports-hub, including reports on sustainability, responsible sourcing, accessibility, digital trust, and public policy engagement. Deloitte & Touche LLP has audited our internal control over financial reporting as of June 30, 2021; their report follows. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved. Our vision is to create economic opportunity for every member of the global workforce through the ongoing development of the worlds first Economic Graph, a digital representation of the global economy. In fiscal year 2021, the COVID-19 pandemic continued to impact our business operations and financial results. We are building a Planetary Computer to help manage and protect Earths natural systems. Any shareholder can join the Annual Meeting, while shareholders of record as of September 30, 2021, will be able to vote and submit questions during the meeting. The pandemic has underscored that without it, people lack access to education, healthcare, economic opportunity, and more. The figure also lagged the Zacks Consensus Estimate of $255 million. Our approach to hybrid work starts with Teamsthe only all-in-one solution that supports meetings, calls, chat, collaboration, and business process automation in day-to-day workflow. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Applying AI to drive insights and act on our customers behalf by understanding and interpreting their needs using natural methods of communication. We read and evaluated managements documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. We also pledged a $50 million investment in AI for Earth to accelerate innovation by putting AI in the hands of those working to directly address sustainability challenges. Talent Solutions provide insights for workforce planning and tools to hire, nurture, and develop talent. Lead Independent Director, Also included in Other are business dispositions and transfers between segments due to reorganizations, as applicable. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. Digital transformation that was projected to happen over the next 10 years is happening today. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. 118. In response, we will invest $20 billion over the next five years to advance our security solutions. Cash paid for interest on our debt for fiscal years 2021, 2020, and 2019 was $2.0 billion, $2.4 billion, and $2.4 billion, respectively. Development, Strategy, and Ventures, Kathleen T. Hogan Windows 10 serves the enterprise as the most secure and productive operating system. Are you interested in testing our business solutions? As of June 30, 2021 and 2020, our financing receivables, net were $4.4 billion and $5.2 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. Chairman and Chief Executive Officer, Oct 14, 2022. Likewise, Microsoft's revenue has grown by 74% to US$168.1 billion, and its net profit has grown by 140% to US$61.2 billion over the same period. This means the places we go and the things we interact with will increasingly become digitized, creating new opportunities and new breakthroughs. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Revenue from consulting services is recognized as services are provided. In a time of great disruption and uncertainty, customers are looking to us to accelerate their own digital transformations as software and cloud computing play a huge role across every industry and around the world. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks. In the Gaming segment, Microsoft's Xbox shares a 20-year rivalry with Sony's PlayStation. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. Xbox Cloud Gaming is now available on PCs, as well as phones and tablets, and later this year will come to the console. You need at least a Starter Account to use this feature. President, Wells Fargo & Company. Marketing Solutions competes with online and offline outlets that generate revenue from advertisers and marketers, and Sales Solutions competes with online and offline outlets for companies with lead generation and customer intelligence and insights. Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, To the Stockholders and the Board of Directors of Microsoft Corporation. In fiscal year 2020, we removed $2.0 billion of foreign net operating losses and corresponding valuation allowances as a result of the liquidation of a foreign subsidiary. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). Artificial intelligence (AI) capabilities are rapidly advancing, fueled by data and knowledge of the world. We license software to organizations under volume licensing agreements to allow the customer to acquire multiple licenses of products and services instead of having to acquire separate licenses through retail channels. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We have served as the Companys auditor since 1983. Finally, Learning Solutions, including Glint, help businesses close critical skills gaps in times where companies are having to do more with existing talent. In April 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc., a cloud and AI software provider with healthcare and enterprise AI experience. Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2021, 2020, and 2019, were $14.6 billion, $13.8 billion, and $13.1 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. Search advertising revenue increased $788 million or 10%. 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 transfer agent at: web.queries@computershare.com. The service gets you the information you need faster and also gives you the power and convenience of online proxy voting. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. 6 . These scenarios represent a move to unlock creativity and discover new habits, while simplifying security and management. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Surface revenue increased $302 million or 5%. Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. Build the intelligent cloud and intelligent edge platform. 12.80%. In 2021, Microsoft's total annual Xbox gaming revenue amounted to 16.28 billion U.S. dollars. We also compete with other providers of entertainment services such as video streaming platforms. Search advertising revenue, excluding traffic acquisition costs, increased 13%. The company brought in $51.9 billion in revenue, which is an increase of 12%. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. We strive to create local opportunity, growth, and impact in every country around the world. The following table presents the fair value of our derivatives instruments on a gross basis: Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows: Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows: The components of inventories were as follows: The components of property and equipment were as follows: During fiscal years 2021, 2020, and 2019, depreciation expense was $9.3 billion, $10.7 billion, and $9.7 billion, respectively. We perform a qualitative assessment on a periodic basis. Microsoft's revenue from 2012 to 2022 financial years, by segment (in billion U.S. dollars) [Graph]. Forward-looking statements may appear throughout this report, including the following sections: Business, and Managements Discussion and Analysis of Financial Condition and Results of Operations. Quarterly smartphone market share worldwide by vendor 2009-2022, Apple iPhone unit sales worldwide 2007-2018, by quarter, Global market share held by smartphone operating systems 2009-2018, by quarter, Virtual reality (VR) - statistics & facts, Research expert covering the consumer electronics industry, Profit from additional features with an Employee Account. Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. We have lease agreements with lease and non-lease components, which are generally accounted for separately. ZeniMax is reported as part of our More Personal Computing segment. Transforming the workplace to deliver new modern, modular business applications to improve how people communicate, collaborate, learn, work, play, and interact with one another. All of our approximately 23,000 people managers must complete between 25-30 hours of required manager capability and excellence training and are assigned ongoing required training each year. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance. Our ecosystem of customers and partners has stepped up to help people and organizations in every country use technology to be resilient and transform during the most trying of circumstances. Microsoft Relationship Sales solution brings together LinkedIn Sales Navigator and Dynamics to transform business to business sales through social selling. This determination requires significant judgment. Advertising costs are expensed as incurred. Segment. Over 42 million people across every continent have accessed free training through our skills initiative. We believe our allowances for income tax contingencies are adequate. Land is not depreciated. The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. Cash from operations increased $16.1 billion to $76.7 billion for fiscal year 2021, mainly due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. We intend to request shareholder approval for a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031 at our 2021 Annual Shareholders Meeting. Please do not hesitate to contact me. The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. It empowers people with AI-first interfaces ranging from voice-activated commands through Cortana, inking, immersive 3D content storytelling, and mixed reality experiences. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. IMPORTANT NOTICE TO USERS (summary only, click here for full text of notice); All information is unaudited unless otherwise noted or accompanied by an audit opinion and is subject to the more comprehensive information contained in our SEC reports and filings. At our Investor Relations website, www.microsoft.com/investor, we make available free of charge a variety of information for investors. Executive Vice President, Marketing and Consumer Windows 11 builds on the strengths of productivity, versatility, and security on Windows 10 today and adds in new experiences that include powerful task switching tools like new snap layouts, snap groups, and desktops; new ways to stay connected through chat; the information you want at your fingertips; and more. We hire a mix of university and industry talent worldwide. The Microsoft Services Provider License Agreement allows hosting service providers and independent software vendors who want to license eligible Microsoft software products to provide software services and hosted applications to their end customers. The metrics reflect our cloud and on-premises product strategies and trends. The purchase price included $768 million of cash and cash equivalents acquired. In addition to these channels, we use social media to communicate to the public. Our reportable segments are described below. Its personal computing segment was an eyesore, impacted by the broader decline in PC sales, as revenue in the category fell 19% to $14.2 billion. Azure Synapse Analytics, a limitless analytics service, brings together data integration, enterprise data warehousing, and big data analytics for immediate business intelligence and machine learning needs. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. To achieve our vision, our research and development efforts focus on three interconnected ambitions: Reinvent Productivity and Business Processes. Managers evaluate and recommend rewards based on, for example, how well we leverage the work of others and contribute to the success of our colleagues. Ultimately, our culture will determine the lengths of what we will achieve. Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. In June 2020, with tens of millions of people displaced from their jobs due to the pandemic, we brought resources together from across Microsoft, inclusive of LinkedIn and GitHub, to help 25 million people connect to the digital skills for in-demand roles. Commercial cloud gross margin percentage increased 4 points to 71% driven by gross margin percentage improvement in Azure and the change in estimated useful lives of our server and network equipment, offset in part by sales mix shift to Azure. Cash used in investing increased $15.4 billion to $27.6 billion for fiscal year 2021, mainly due to a $6.4 billion increase in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets, a $5.2 billion increase in additions to property and equipment, and a $4.1 billion decrease in cash from net investment purchases, sales, and maturities. Similar assets without applying significant adjustments Matter Was Addressed in the Gaming segment, Microsoft #! Are subject to the public skills initiative useful lives of our fiscal year year! For a discussion of these factors and other risks business dispositions and transfers between segments due to reorganizations, applicable... Streaming platforms higher in the second and fourth quarters of our commercial business and leading. And penalties on uncertain tax positions remain dynamic quarters of our core businesses within these segments subsequent! 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