Microsoft recasts FY2024–2026 into two segments
Agents and Infra accounted for $268.127 billion of fiscal 2026 revenue, up 23% under the recast segment presentation.
Sentiment and the balance of points
Rhea-AI Sentiment reads the wording of the document, how positive or negative its language is on a 1 to 5 scale. The balance of points shown with the takes weighs what the document actually discloses, so the two can disagree, for example when a trial that missed its main goal is described in upbeat language.
Microsoft Corporation recast certain fiscal 2024–2026 information to reflect its two reportable segments, Agents and Infra and Devices and Consumer, following segment reporting changes announced in September 2026. The new presentation aligns prior-period segment information with how management evaluates the business beginning in fiscal 2027. Microsoft says the changes do not restate previously issued financial statements or amend its audited consolidated statements.
Fiscal 2026 revenue was $331.839 billion, up 18% from fiscal 2025; operating income was $155.237 billion, up 21%, and net income was $133.749 billion, up 31%. Microsoft Cloud revenue increased 27% to $214.4 billion, while Azure revenue increased 40%. Agents and Infra revenue increased 23% to $268.127 billion; Devices and Consumer revenue increased 1% to $63.712 billion. Microsoft Cloud gross margin percentage decreased to 66% from 69%, with AI infrastructure investment and growing AI product usage partly offset by efficiency gains. Fiscal 2026 net income and diluted EPS included $5.0 billion and $0.67, respectively, from gains on OpenAI investments.
How this balance works
Rhea-AI gives every point it takes from this document a weight. Minor counts 1, Moderate 3 and Major 9, so one Major point outweighs several Minor ones. The bar adds up the weights on each side, and when neither side holds more than 65% of the total the balance reads Mixed.
It reads the document as published, with the same rules for every company, and it does not look at what the market expected or at how the stock traded, so a point can be objectively good on a day the stock falls.
Rhea-AI Sentiment measures something else, the tone of the wording.
Positive
- Moderate pointFiscal 2026 revenue increased 18% to $331.839 billion.
- Moderate pointFiscal 2026 net income increased 31% to $133.749 billion.
Negative
- None.
8-K Event Classification
Key Figures
Key Terms
commercial remaining performance obligation financial
traffic acquisition costs financial
equity method financial
hypothetical liquidation at book value financial
FAQ
AI-generated questions and answers. How Rhea-AI works. Not financial advice.
How much revenue did MSFT report in fiscal 2026?
What was MSFT’s commercial remaining performance obligation?
Did MSFT’s segment reporting changes restate its financial statements?
How much revenue did MSFT report from commercial arrangements with OpenAI?
AI-generated analysis. How Rhea-AI works. Not financial advice.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
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www.microsoft.com/investor
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act: |
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 8.01. |
Other Events |
Microsoft Corporation (the “Company”) is filing this Current Report on Form 8-K to recast certain previously reported amounts to conform with segment reporting changes made to align our segments with how we manage our business, with respect to the financial information contained in our Annual Report on Form 10-K for the year ended June 30, 2026 (“2026 Form 10-K”).
In September 2026, we announced changes in our segment reporting structure. These changes align our segments with how we currently manage our business, creating the Agents and Infra segment that brings together our applications and agents, our multi-model system, and Azure infrastructure, and the Devices and Consumer segment that comprises our key consumer offerings. Beginning in fiscal year 2027, the information that our chief operating decision maker is regularly provided and reviews for purposes of allocating resources and assessing performance reflects these segment changes. We provided a brief description of the segment changes in a Form 8-K filed on September 2, 2026.
The rules of the Securities and Exchange Commission require that when a registrant prepares, on or after the date a registrant reports an accounting change such as the segment changes noted above, a new registration, proxy, or information statement (or amends a previously filed registration, proxy, or information statement) that includes or incorporates by reference financial statements, the registrant must recast the prior period financial statements included or incorporated by reference in the registration, proxy, or information statement to reflect these types of changes. Accordingly, the Company is filing this Form 8-K to recast our consolidated financial statements for each of the three years in the period ended June 30, 2026, to reflect the changes in segment reporting as described above. The updates do not represent a restatement of previously issued financial statements. The recast information of Items contained in the 2026 Form 10-K is presented in Exhibit 99.1 to this Form 8-K, which is incorporated herein by reference.
The information included in this Form 8-K is presented for informational purposes only in connection with the segment reporting changes described above and does not amend or restate our audited consolidated financial statements, which were included in our 2026 Form 10-K. This Form 8-K does not reflect events occurring after we filed our 2026 Form 10-K and does not modify or update the disclosures therein in any way, other than to illustrate the impact of the segment changes as described above. For developments subsequent to the filing of the 2026 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2026. This Form 8-K should be read in conjunction with the 2026 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2026.
Item 9.01. |
Financial Statements and Exhibits |
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Updates, where applicable, to Part I, Item 1. Business, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 8. Financial Statements and Supplementary Data, from Microsoft’s Annual Report on Form 10-K for the year ended June 30, 2026, as filed with the Securities and Exchange Commission on July 29, 2026 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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MICROSOFT CORPORATION |
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Date: October 28, 2026 |
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Exhibit 99.1
PART I
Item 1
PART I
ITEM 1. BUSINESS
GENERAL
Microsoft is a technology company committed to making digital technology and artificial intelligence (“AI”) available broadly and doing so responsibly. Our mission is to empower every person and every organization on the planet to achieve more.
We develop and support a broad portfolio of technology solutions for individuals and businesses, focusing on secure, trusted, and innovative platforms and applications that meet evolving customer needs across AI, cloud computing, productivity and collaboration, and personal computing. We strive to create opportunity, growth, and impact in every country around the world.
AI is fundamentally transforming productivity for every individual, organization, and industry. Microsoft's AI offerings span every layer of the technology stack, enabling transformative outcomes across sectors and unlocking opportunity for every country, community, and individual.
We believe AI should be as empowering as it is powerful, and we’re committed to designing and deploying AI responsibly with safety and security from the outset.
What We Offer
Founded in 1975, we develop and support software, services, devices, and solutions that deliver new value for customers and help people and businesses realize their full potential.
We offer an array of services, including cloud-based solutions that provide customers with AI, software, services, platforms, and content, and we provide solution support and consulting services. We also deliver relevant online advertising to a global audience.
Our products include operating systems, server applications, business solution applications, software development tools, desktop and server management tools, and video games. We also design and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Digital transformation and adoption of AI continues to revolutionize more business workstreams for organizations in every sector across the globe. For enterprises, digital technology empowers employees, optimizes operations, engages customers, and in some cases, changes the very core of products and services.
The Microsoft Cloud provides integration across the technology stack while offering openness, improving time to value, reducing costs, and increasing agility. Our cloud business benefits from three economies of scale: datacenters that deploy computational resources at significantly 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.
We prioritize security above all else and we offer our customers integrated AI-driven products addressing security, compliance, identity, management, and privacy across customers’ multi-cloud, application, and device assets.
The Ambitions That Drive Us
To achieve our vision, our research and development efforts focus on two interconnected ambitions:
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Item 1
As we build this ecosystem, the layers of our stack are not separate opportunities but reinforce each other. Investing in one strengthens the others and allows us to deliver customer value in a differentiated way.
Our Future Opportunity
We are focused on helping customers use the breadth and depth of the Microsoft Cloud to get the most value out of their digital spend while leading the AI platform wave across our solution areas. We continue to develop complete, intelligent solutions for our customers that empower people to be productive and collaborate, while safeguarding businesses and simplifying IT management. Our goal is to lead the industry in several distinct areas of technology over the long term, which we expect will translate to sustained growth. We are investing significant resources in:
Our future growth depends on our ability to transcend current product category definitions, business models, and sales motions.
Commitment to Sustainability
Microsoft is committed to sustainability and our approach to addressing climate change starts with the sustainability of our own business. In 2020, we announced goals to become a carbon negative, water positive, and zero waste company by 2030. Since announcing these goals, we have seen major changes in both the technology sector and in our understanding of what it will take to meet our goals. More information about our progress toward these goals can be found in our annual Environmental Sustainability Report.
OPERATING SEGMENTS
We operate our business and report our financial performance using two segments: Agents and Infra, and Devices and Consumer. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations, and they provide a framework for timely and rational allocation of resources within businesses.
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In September 2026, we announced changes in our segment reporting structure. These changes align our segments with how we currently manage our business, creating the Agents and Infra segment that brings together our applications and agents, our multi-model system, and Azure infrastructure, and the Devices and Consumer segment that comprises our key consumer offerings. Beginning in fiscal year 2027, the information that our chief operating decision maker is regularly provided and reviews for purposes of allocating resources and assessing performance reflects these segment changes. The segment information in this Form 8-K has been recast to conform to the way we internally manage and monitor our business during fiscal year 2027.
Additional information on our operating segments and geographic and product information is contained in Note 18 – Segment Information and Geographic Data of the Notes to Financial Statements.
Our reportable segments are described below.
Agents and Infra
Our Agents and Infra segment brings together our applications and agents, our multi-model system, and Azure infrastructure. This segment primarily comprises:
Azure
Azure is a comprehensive set of cloud services that offer developers, IT professionals, and enterprises freedom to build, deploy, and manage applications on any platform or device. Customers can use Azure through our global network of datacenters for computing, networking, storage, mobile and web application services, AI, and Internet of Things. Azure enables customers to devote more resources to development and use of applications that benefit their organizations, rather than managing on-premises hardware and software. Azure revenue is mainly affected by infrastructure-as-a-service and platform-as-a-service consumption-based services.
Azure AI offerings provide a competitive advantage as companies seek ways to optimize and scale their business with AI. We offer supercomputing power for AI at scale to run large workloads, complemented by our rapidly expanding portfolio of AI cloud services (including the latest models) and hardware, which includes custom-built silicon and strong partnerships with chip manufacturers. Azure AI Foundry is a unified platform for developers to design, customize, and manage AI applications and agents.
Microsoft 365 Cloud
Microsoft 365 cloud includes Microsoft 365 commercial cloud and Microsoft 365 consumer cloud.
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Microsoft 365 commercial cloud is an AI-powered business and productivity solutions platform that brings together Office, Windows, Microsoft 365 Copilot, and Enterprise Mobility + Security to help organizations empower their employees. Growth depends on our ability to reach new users in new markets such as frontline workers, small and medium businesses, and growth markets, as well as add AI-enabled tools, features, and agentic scenarios to our core product and service offerings across communication, collaboration, analytics, security, compliance, and other AI business productivity categories. Microsoft 365 commercial cloud also includes GitHub cloud and other developer cloud services. GitHub provides a collaboration platform for developers to manage code and incorporate AI and agent-based tools across the software development lifecycle. Microsoft 365 commercial cloud revenue is mainly affected by a combination of continued installed base growth and average revenue per user expansion, as well as the continued shift from Office licensed on-premises to Microsoft 365.
Microsoft 365 consumer cloud is designed to increase personal productivity and creativity through a range of products and services. Growth depends on our ability to reach new users, add value to our core product set with new features including AI tools, and continue to expand our product and service offerings into new markets. Microsoft 365 consumer cloud revenue and Office consumer products revenue is mainly affected by the percentage of customers that buy Office with their new devices and the continued shift from Office licensed on-premises to Microsoft 365 consumer subscriptions. Microsoft 365 consumer cloud revenue is also affected by the demand for communication and storage through Outlook.com and OneDrive, which is largely driven by subscriptions and advertising.
Productivity and Server Licensing
Productivity and server licensing brings together licensing offerings across our products including server products, Microsoft 365 commercial products, and Microsoft 365 consumer products.
Our server products are designed to make IT professionals, developers, and their systems more productive and efficient. Server software is integrated server infrastructure and middleware designed to support software applications built on the Windows Server operating system. This includes the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software. We also license standalone and software development lifecycle tools for software architects, developers, testers, and project managers. Server products revenue is mainly affected by purchases through volume licensing programs, licenses sold to OEMs, and retail packaged products. Client Access Licenses provide access rights to certain server products, including SQL Server and Windows Server, and revenue is reported along with the associated server product.
Microsoft 365 commercial products revenue is mainly affected by a combination of continued installed base growth of Microsoft 365 and Windows licensed on-premises, as well as the continued shift from Office licensed on-premises to Microsoft 365.
Microsoft 365 consumer products revenue is mainly affected by the percentage of customers that buy Office with their new devices and the continued shift from Office licensed on-premises to Microsoft 365 consumer subscriptions.
Industry Solutions
Industry solutions brings together our vertical commercial offerings across LinkedIn, Dynamics, and Healthcare, including Industry solutions cloud, comprising LinkedIn Talent Solutions and Sales Solutions, Dynamics 365, and Healthcare and Life Sciences cloud; and Industry solutions products, which is the on-premises portion of these businesses.
LinkedIn connects the world’s professionals to make them more productive and successful. In addition to free services, LinkedIn offers paid Talent Solutions and Sales Solutions that provide enterprises and professionals with data, insights and AI-enabled capabilities to support talent acquisition, talent development, sales intelligence, and customer engagement. Growth will depend on our ability to increase member engagement on the LinkedIn platform and to continue delivering valuable insights, data, and AI-enabled services to members and customers. Revenue is primarily affected by demand from enterprises and professionals for LinkedIn Talent Solutions and Sales Solutions offerings.
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Item 1
Dynamics provides cloud-based and on-premises business solutions for financial management, enterprise resource planning (“ERP”), customer relationship management (“CRM”), and supply chain management, as well as agentic AI and other low code application development platforms, for small and medium businesses, large organizations, and divisions of global enterprises. Dynamics revenue is driven by the number of users licensed and applications consumed, expansion of average revenue per user, and the continued shift to Dynamics 365, a unified set of cloud-based intelligent business applications, including our low code development platforms, such as Power Apps and Power Automate.
Frontier and Support Services
Frontier and support services assist customers in developing, deploying, and managing Microsoft server solutions, Microsoft desktop solutions, and conversational AI and ambient intelligent solutions, along with providing training and certification to developers and IT professionals on various Microsoft products.
Competition
Azure faces diverse competition from cloud service providers and open-source offerings. Azure’s competitive advantage includes enabling a hybrid cloud, allowing deployment of existing datacenters with our public cloud into a single, cohesive infrastructure, and the ability to run at a scale that meets the needs of businesses of all sizes and complexities. Our AI offerings compete with AI products from hyperscalers, as well as products from other emerging competitors and other open-source offerings, many of which are also current or potential partners. Our Azure Security offerings include our cloud security solution and our security information and event management solution, which compete with providers in the cybersecurity and cloud security space. We believe our cloud’s global scale, coupled with our broad portfolio of identity and security solutions, allows us to effectively solve complex cybersecurity challenges for our customers and differentiates us from the competition.
Competitors to Office include software and global application vendors, web-based and mobile application companies, AI-first application companies, as well as local application developers. We compete by providing secure, integrated industry-specific, 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.
Windows faces competition from various software products and from alternative platforms and devices. Microsoft Defender for Endpoint competes with endpoint security solution providers.
Our Enterprise Mobility + Security offerings compete with products from a range of competitors including identity vendors, security solution vendors, and numerous other security point solution vendors.
Our server products face competition from a wide variety of server operating systems and applications offered by companies with a range of market approaches. Vertically integrated computer manufacturers offer their own versions of the Unix operating system preinstalled on server hardware and nearly all computer manufacturers offer server hardware for the Linux operating system.
We compete to provide enterprise-wide computing and point solutions with numerous commercial software vendors that offer solutions and middleware technology platforms, software applications for connectivity, security, hosting, database, and e-business servers.
Our database, business intelligence, and data warehousing solutions offerings compete with products from providers in the data and analytics industry. Our system management solutions compete with server management and server virtualization platform providers. Our products for software developers compete against offerings from major technology providers, as well as open-source alternatives.
We believe our server products provide customers with advantages in performance, total costs of ownership, and productivity by delivering superior applications, development tools, compatibility with a broad base of hardware and software applications, security, and manageability.
LinkedIn faces competition from online professional networks; recruiting, talent management, and human resource services companies; job boards; companies that provide learning and development products and services; and online and offline outlets for companies with lead generation and customer intelligence and insights.
Dynamics competes with cloud-based and on-premises business solution providers.
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Item 1
Our Frontier and support services business competes with a wide range of companies that provide strategy and business planning, application development, and infrastructure services, including multinational consulting firms and small niche businesses focused on specific technologies.
Devices and Consumer
Our Devices and Consumer segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
Search and Advertising
Our Search and advertising business is designed to deliver relevant search, native, and display advertising to a global audience. Microsoft Copilot is a digital companion designed to inform, entertain, and inspire. Our Microsoft Edge browser and Bing search engine with Copilot are key tools to enable user acquisition and engagement, while our technology platform enables accelerated delivery of digital advertising solutions. In addition to first-party tools, we have several partnerships with companies through which we provide and monetize search offerings. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content on advertising offerings.
LinkedIn connects the world’s professionals to make them more productive and successful. LinkedIn provides Marketing Solutions that help customers reach and engage professional audiences through relevant and targeted content. We also offer Premium Subscriptions that provide members with enhanced features, insights, and AI-enabled capabilities. LinkedIn revenue is primarily affected by member engagement, the quality and relevance of sponsored content delivered to members that drives Marketing Solutions, and demand from enterprises and professionals for Premium Subscriptions offerings.
XBOX
Microsoft is expanding how billions of people globally access and play video games on PC, console, mobile, and cloud. Our game content is developed through a collection of first-party studios creating iconic and differentiated gaming experiences. We continue to invest in gaming studios and content to expand our intellectual property 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 first- and third-party titles.
The gamer remains at the heart of the XBOX ecosystem. We are identifying new opportunities to attract gamers across a variety of different end points through our first- and third-party content and business diversification across subscriptions, ads, and digital stores. We’ve seen new devices from third-party manufacturers along with key PC and mobile end points that help us empower gamers to play in a way that is most convenient to them. We are focused on growing the platform and expanding to new ecosystems to engage as many gamers as possible.
XBOX enables people to connect and share online gaming experiences that are accessible on XBOX consoles, Windows-enabled devices, and other devices. XBOX is designed to benefit users by providing access to a network of certified applications and services and to benefit our developer and partner ecosystems by providing access to a large customer base. XBOX revenue is mainly affected by subscriptions and sales of first- and third-party content, as well as advertising. Growth of our XBOX 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.
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Item 1
Windows OEM and Devices
The Windows operating system is designed to deliver a more personal computing experience for users by enabling consistency of experience, applications, and information across their devices. Windows OEM revenue is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell. In addition to computing device market volume, Windows OEM revenue is impacted by:
We design and sell devices, such as Surface (including Copilot+ PCs) 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. Surface 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.
Competition
Our Search and advertising business competes with search engines, and a wide array of websites, social platforms, and portals that provide content and online offerings to end users.
LinkedIn faces competition from online professional networks, as well as online and offline advertising and marketing platforms.
XBOX and our cloud gaming services face competition from various online gaming ecosystems and game streaming services. Our gaming platform competes with other console platforms. We believe our gaming platform is effectively positioned against, and uniquely differentiated from, competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong content from our own first-party game franchises as well as other digital content offerings.
Windows faces competition from various software products and from alternative platforms and devices. We believe Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-use interface, and compatibility with a broad range of hardware and software applications, including those that enable productivity.
Devices face competition from various computer, tablet, and hardware manufacturers who offer a unique combination of high-quality industrial design and innovative technologies across various price points. Many of these manufacturers are also current or potential partners and customers, including our Windows OEMs.
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Item 7
PART II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements.
OVERVIEW
Microsoft is a technology company committed to making digital technology and artificial intelligence (“AI”) available broadly and doing so responsibly, with a mission to empower every person and every organization on the planet to achieve more. We create platforms and applications, powered by AI, that deliver innovative solutions that meet the evolving needs of our customers.
We generate revenue by offering a wide range of cloud-based solutions, content, and other services to people and businesses; licensing and supporting an array of software products; delivering relevant online advertising to a global audience; and designing and selling devices. Our most significant expenses are related to compensating employees; supporting and investing in our cloud-based services, including datacenter operations; designing, manufacturing, marketing, and selling our other products and services; and income taxes.
Highlights from fiscal year 2026 compared with fiscal year 2025 included:
Industry Trends and Opportunities
Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.
We have a long-term strategic partnership with OpenAI which was originally established in 2019. In October 2025 and April 2026, we extended this partnership and continue to build on our shared vision to advance artificial intelligence responsibly and make its benefits broadly accessible. Microsoft is a major investor in OpenAI and will continue to receive revenue-sharing payments. We hold rights to OpenAI’s intellectual property, including models and infrastructure, for integration into our products.
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Economic Conditions, Challenges, and Risks
The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, influencing how users access services in the cloud and, in some cases, the user’s choice of which suite of cloud-based services to use. Aggregate demand for our software, services, and devices is also correlated to global macroeconomic and geopolitical factors, which remain dynamic. We must continue to evolve and adapt over an extended time in pace with this changing environment.
The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins. We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services. Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units and other components. Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. Extended or unforeseen disruptions, or limited availability of components from these suppliers could impact our ability to operate our datacenters and manufacture devices on time to meet consumer demand.
Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits.
Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Fluctuations in the U.S. dollar relative to certain foreign currencies increased reported revenue and did not have a material impact on reported expenses from our international operations in fiscal year 2026.
Further, global, regional, and local economic developments and changes in global trade policies such as restrictions on international trade, including tariffs and other controls on imports or exports, could result in increased supply chain challenges, cost volatility, and consumer and economic uncertainty which may adversely affect our results of operations.
Refer to Risk Factors (Part I, Item 1A of our fiscal year 2026 Form 10-K) for a discussion of these factors and other risks.
Seasonality
Our revenue fluctuates quarterly and is generally higher in the fourth quarter of our fiscal year. Fourth quarter revenue is driven by a higher volume of multi-year contracts executed during the period.
Reportable Segments
We report our financial performance based on the following two segments: Agents and Infra, and Devices and Consumer. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting.
In September 2026, we announced changes in our segment reporting structure. These changes align our segments with how we currently manage our business, creating the Agents and Infra segment that brings together our applications and agents, our multi-model system, and Azure infrastructure, and the Devices and Consumer segment that comprises our key consumer offerings. Beginning in fiscal year 2027, the information that our chief operating decision maker is regularly provided and reviews for purposes of allocating resources and assessing performance reflects these segment changes. The segment information in this Form 8-K has been recast to conform to the way we internally manage and monitor our business during fiscal year 2027.
Additional information on our reportable segments is contained in Note 18 – Segment Information and Geographic Data of the Notes to Financial Statements.
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Metrics
We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Financial metrics are calculated based on financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and growth comparisons relate to the corresponding period of last fiscal year.
In the first quarter of fiscal year 2026, we made updates to our metrics to align with how we manage and monitor certain businesses. As part of these updates, Microsoft 365 consumer subscribers was removed as a metric.
In the first quarter of fiscal year 2027, we made updates to our metrics in connection with the segment changes described above. These changes align our metrics with how we manage and monitor certain businesses. The changes include updating the Azure, Microsoft 365 commercial cloud, and the Search and advertising revenue growth metrics for the movement of certain components, as well as the creation of the Industry solutions cloud revenue growth metric, which combines revenue from Dynamics 365 together with revenue from LinkedIn Talent Solutions, LinkedIn Sales Solutions, and Healthcare and Life Sciences cloud. Other changes include updating the Microsoft 365 commercial seat growth metric to include paid GitHub seats.
Agents and Infra
Metrics related to our Agents and Infra segment assess the performance of our core businesses within this segment. The metrics primarily reflect growth across our commercial and cloud services.
Commercial remaining performance obligation |
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Commercial portion of revenue (comprising Azure, Microsoft 365 commercial cloud, Server products, Microsoft 365 commercial products, Industry solutions, and Frontier and support services) allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods |
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Microsoft Cloud revenue and revenue growth |
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Revenue from Azure, Microsoft 365 commercial cloud, and Industry solutions cloud |
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Microsoft Cloud gross margin percentage |
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Gross margin percentage for our Microsoft Cloud business |
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Azure revenue growth |
|
Revenue from Azure, comprising consumption-based services across non-GPU workloads, including compute, data and analytics, storage, networking, and security; and GPU workloads, including GPU infrastructure-as-a-service and Foundry |
|
|
|
Microsoft 365 commercial cloud revenue growth |
|
Revenue from Microsoft 365 commercial subscriptions and services, GitHub cloud and other cloud-based developer services, Microsoft 365 Copilot, GitHub Copilot, and security offerings including Agent 365 and Security Copilot |
|
|
|
Microsoft 365 commercial seat growth |
|
The number of Microsoft 365 commercial seats and GitHub cloud seats at end of period where seats are paid users covered by a Microsoft 365 commercial subscription or GitHub subscription |
|
|
|
Microsoft 365 consumer cloud revenue growth |
|
Revenue from Microsoft 365 consumer subscriptions and other consumer services |
|
|
|
Industry solutions cloud revenue growth |
|
Revenue from LinkedIn Talent Solutions and Sales Solutions, Dynamics 365 (including a set of intelligent, cloud-based applications across ERP, CRM, Service, Power Apps, and Power Automate), and Healthcare and Life Sciences cloud |
10
PART II
Item 7
Devices and Consumer
Metrics related to our Devices and Consumer segment assess the performance of our key consumer businesses.
Search and advertising revenue (ex TAC) growth |
|
Revenue from search advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers and content partners, as well as revenue from LinkedIn Marketing Solutions (ex TAC) and Premium Subscriptions |
|
|
|
XBOX content and services revenue growth |
|
Revenue from XBOX content and services, comprising first- and third-party content (including games and in-game content), XBOX Game Pass and other subscriptions, XBOX Cloud Gaming, advertising, and other cloud services |
|
|
|
Windows OEM and devices revenue growth |
|
Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel, first-party devices (including Surface and PC accessories), and related Windows offerings beyond OEM licensing |
SUMMARY RESULTS OF OPERATIONS
(In millions, except percentages and per share amounts) |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
331,839 |
|
|
$ |
281,724 |
|
|
$ |
245,122 |
|
|
|
18% |
|
|
|
15% |
|
Gross margin |
|
|
225,465 |
|
|
|
193,893 |
|
|
|
171,008 |
|
|
|
16% |
|
|
|
13% |
|
Operating income |
|
|
155,237 |
|
|
|
128,528 |
|
|
|
109,433 |
|
|
|
21% |
|
|
|
17% |
|
Net income |
|
|
133,749 |
|
|
|
101,832 |
|
|
|
88,136 |
|
|
|
31% |
|
|
|
16% |
|
Diluted earnings per share |
|
|
17.95 |
|
|
|
13.64 |
|
|
|
11.80 |
|
|
|
32% |
|
|
|
16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP) |
|
|
128,786 |
|
|
|
105,452 |
|
|
|
89,262 |
|
|
|
22% |
|
|
|
18% |
|
Adjusted diluted earnings per share (non-GAAP) |
|
|
17.28 |
|
|
|
14.13 |
|
|
|
11.95 |
|
|
|
22% |
|
|
|
18% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net gains and losses from investments in OpenAI. Refer to the Non-GAAP Financial Measures section of our fiscal year 2026 Form 10-K for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.
Fiscal Year 2026 Compared with Fiscal Year 2025
Revenue increased $50.1 billion or 18% driven by growth in Agents and Infra. Agents and Infra revenue increased driven by Azure and Microsoft 365 commercial cloud. Devices and Consumer revenue increased driven by Search and advertising, offset in part by a decline in XBOX.
Cost of revenue increased $18.5 billion or 21% driven by growth in Agents and Infra.
Gross margin increased $31.6 billion or 16% with growth across both of our segments.
Operating expenses increased $4.9 billion or 7% driven by continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio, impairment and other related expenses in our XBOX business, investments in commercial sales, and higher Copilot advertising expenses.
Operating income increased $26.7 billion or 21% with growth across both of our segments.
Revenue and operating income both included a favorable foreign currency impact of 2%.
11
PART II
Item 7
Fiscal year 2026 net income and diluted EPS were positively impacted by net gains from investments in OpenAI, which resulted in an increase in net income and diluted EPS of $5.0 billion and $0.67, respectively. Fiscal year 2025 net income and diluted EPS were negatively impacted by net losses from investments in OpenAI, which resulted in a decrease in net income and diluted EPS of $3.6 billion and $0.49, respectively.
Fiscal Year 2025 Compared with Fiscal Year 2024
Revenue increased $36.6 billion or 15% driven by growth in Agents and Infra. Agents and Infra revenue increased driven by Azure and Microsoft 365 commercial cloud. Devices and Consumer revenue increased driven by Search and advertising and XBOX.
Cost of revenue increased $13.7 billion or 19% driven by growth in Agents and Infra.
Gross margin increased $22.9 billion or 13% with growth across both of our segments.
Operating expenses increased $3.8 billion or 6% driven by investments in cloud and AI engineering and XBOX, including the impact of the Activision Blizzard acquisition.
Operating income increased $19.1 billion or 17% with growth across both of our segments.
SEGMENT RESULTS OF OPERATIONS
(In millions, except percentages) |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|
Percentage |
|
|
Percentage |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Agents and Infra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Revenue |
|
$ |
268,127 |
|
|
$ |
218,783 |
|
|
$ |
186,910 |
|
|
|
23% |
|
|
|
17% |
|
Cost of revenue |
|
|
81,417 |
|
|
|
61,292 |
|
|
|
48,104 |
|
|
|
33% |
|
|
|
27% |
|
Operating expenses |
|
|
50,345 |
|
|
|
46,677 |
|
|
|
44,344 |
|
|
|
8% |
|
|
|
5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
136,365 |
|
|
$ |
110,814 |
|
|
$ |
94,462 |
|
|
|
23% |
|
|
|
17% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Devices and Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
63,712 |
|
|
$ |
62,941 |
|
|
$ |
58,212 |
|
|
|
1% |
|
|
|
8% |
|
Cost of revenue |
|
|
24,957 |
|
|
|
26,539 |
|
|
|
26,010 |
|
|
|
(6)% |
|
|
|
2% |
|
Operating expenses |
|
|
19,883 |
|
|
|
18,688 |
|
|
|
17,231 |
|
|
|
6% |
|
|
|
8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
18,872 |
|
|
$ |
17,714 |
|
|
$ |
14,971 |
|
|
|
7% |
|
|
|
18% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
331,839 |
|
|
$ |
281,724 |
|
|
$ |
245,122 |
|
|
|
18% |
|
|
|
15% |
|
Cost of revenue |
|
|
106,374 |
|
|
|
87,831 |
|
|
|
74,114 |
|
|
|
21% |
|
|
|
19% |
|
Operating expenses |
|
|
70,228 |
|
|
|
65,365 |
|
|
|
61,575 |
|
|
|
7% |
|
|
|
6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
155,237 |
|
|
$ |
128,528 |
|
|
$ |
109,433 |
|
|
|
21% |
|
|
|
17% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
PART II
Item 7
Reportable Segments
Fiscal Year 2026 Compared with Fiscal Year 2025
Agents and Infra
Revenue increased $49.3 billion or 23%.
Operating income increased $25.6 billion or 23%.
Revenue, gross margin, and operating income each included a favorable foreign currency impact of 2%.
Devices and Consumer
Revenue increased $771 million or 1%.
Operating income increased $1.2 billion or 7%.
13
PART II
Item 7
Operating income included a favorable foreign currency impact of 2%.
Fiscal Year 2025 Compared with Fiscal Year 2024
Agents and Infra
Revenue increased $31.9 billion or 17%.
Operating income increased $16.4 billion or 17%.
Devices and Consumer
Revenue increased $4.7 billion or 8%.
Operating income increased $2.7 billion or 18%.
14
PART II
Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
(In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
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 (expense), net |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Income before income taxes |
|
|
|
|
|
|
|
|
|
|||
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|||
Diluted |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
Refer to accompanying notes.
15
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
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 |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
16
PART II
Item 8
BALANCE SHEETS
(In millions) |
|
|
|
|
|
|
||
|
|
|||||||
|
|
|
|
|||||
June 30, |
|
2026 |
|
|
2025 |
|
||
|
|
|
||||||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Short-term investments |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and short-term investments |
|
|
|
|
|
|
||
Accounts receivable, net of allowance for doubtful accounts of $ |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Total current assets |
|
|
|
|
|
|
||
Property and equipment, net of accumulated depreciation of $ |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
Equity and other 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 |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Commitments and contingencies |
|
|
|
|
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Stockholders’ equity: |
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Common stock and paid-in capital – shares authorized |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
) |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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Refer to accompanying notes.
17
PART II
Item 8
CASH FLOWS STATEMENTS
(In millions) |
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Year Ended June 30, |
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2026 |
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2025 |
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2024 |
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Operations |
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Net income |
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$ |
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$ |
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$ |
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Adjustments to reconcile net income to net cash from operations: |
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Depreciation, amortization, and other |
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Stock-based compensation expense |
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Net recognized losses (gains) on investments and derivatives |
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( |
) |
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Deferred income taxes |
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( |
) |
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( |
) |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
) |
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( |
) |
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( |
) |
Inventories |
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( |
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Other current assets |
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( |
) |
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( |
) |
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( |
) |
Other long-term assets |
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( |
) |
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( |
) |
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( |
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Accounts payable |
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Unearned revenue |
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Income taxes |
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( |
) |
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( |
) |
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Other current liabilities |
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Other long-term liabilities |
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( |
) |
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( |
) |
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Net cash from operations |
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Financing |
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Proceeds from issuance (repayments) of debt, maturities of 90 days or less, net |
|
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( |
) |
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||
Proceeds from issuance of debt |
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Repayments of debt |
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( |
) |
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( |
) |
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( |
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Common stock issued |
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Common stock repurchased |
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( |
) |
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( |
) |
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( |
) |
Common stock cash dividends paid |
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( |
) |
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( |
) |
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( |
) |
Other, net |
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( |
) |
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( |
) |
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( |
) |
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Net cash used in financing |
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( |
) |
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( |
) |
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( |
) |
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Investing |
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Additions to property and equipment |
|
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( |
) |
|
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( |
) |
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( |
) |
Acquisition of companies, net of cash acquired and divestitures, and purchases of intangible and other assets |
|
|
( |
) |
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|
( |
) |
|
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( |
) |
Purchases of investments |
|
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( |
) |
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( |
) |
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( |
) |
Maturities of investments |
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Sales of investments |
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Other, net |
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( |
) |
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( |
) |
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Net cash used in investing |
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( |
) |
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( |
) |
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( |
) |
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Effect of foreign exchange rates on cash and cash equivalents |
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( |
) |
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( |
) |
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Net change in cash and cash equivalents |
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( |
) |
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( |
) |
|
Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
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Refer to accompanying notes.
18
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
(In millions, except per share amounts) |
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Year Ended June 30, |
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2026 |
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2025 |
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2024 |
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|||
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Common stock and paid-in capital |
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Balance, beginning of period |
|
$ |
|
|
$ |
|
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$ |
|
|||
Common stock issued |
|
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|
|||
Common stock repurchased |
|
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( |
) |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation expense |
|
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|
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Other, net |
|
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( |
) |
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Balance, end of period |
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Retained earnings |
|
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Balance, beginning of period |
|
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|
|||
Net income |
|
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|
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|
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|
|||
Common stock cash dividends |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
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( |
) |
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Balance, end of period |
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|
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Accumulated other comprehensive loss |
|
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|
|
Balance, beginning of period |
|
|
( |
) |
|
|
( |
) |
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( |
) |
Other comprehensive income |
|
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|||
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|
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Balance, end of period |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
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|
|
|
|
|
|
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|
|||
|
|
|
|
|
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|
|
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|
|||
Total stockholders’ equity |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
19
PART II
Item 8
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Recast of Certain Prior Period Information
In September 2026, we announced changes in our segment reporting structure. These changes align our segments with how we currently manage our business, creating the Agents and Infra segment that brings together our applications and agents, our multi-model system, and Azure infrastructure, and the Devices and Consumer segment that comprises our key consumer offerings. Beginning in fiscal year 2027, the information that our chief operating decision maker (“CODM”) is regularly provided and reviews for purposes of allocating resources and assessing performance reflects these segment changes. The segment information in this Form 8-K has been recast to conform to the way we internally manage and monitor our business during fiscal year 2027. These changes impacted Note 7 – Business Combinations, Note 8 – Goodwill, Note 12 – Unearned Revenue, and Note 18 – Segment Information and Geographic Data.
As disclosed in our 2026 Form 10-K, we also recast certain prior period amounts on our consolidated cash flows statements to conform to the current period presentation.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of measurement adjustments or impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems, server applications, business solution applications, software development tools, desktop and server management tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
20
PART II
Item 8
Service and other revenue includes sales from cloud-based solutions that provide customers with AI, software, services, platforms, and content such as Azure, Office 365, Enterprise Mobility and Security, LinkedIn, Dynamics 365, and XBOX; solution support; and consulting services. Service and other revenue also includes sales from online advertising.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for 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 for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software 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 life of the related device or license.
Cloud services, which include software-as-a-service, infrastructure-as-a-service, and platform-as-a-service, 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 significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. 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.
Revenue from 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 from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 18 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
21
PART II
Item 8
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software 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 information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio 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 for 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 information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Estimating revenue that will be allocated to remaining performance obligations can involve significant judgments, including identifying and assessing variable consideration and potential renegotiation of commitments. We consider factors such as the nature of the terms and duration of the contract across our portfolio of contracts.
Contract Balances and Other Receivables
Timing of revenue recognition may differ from 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 for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include cloud services and SA. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for LinkedIn subscriptions, Office 365 subscriptions, consulting services to be performed in the future, XBOX subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 12 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
22
PART II
Item 8
As of June 30, 2026 and 2025, long-term accounts receivable, net of allowance for doubtful accounts, was $
As of June 30, 2026 and 2025, the current portion of other receivables related to activities to facilitate the purchase of server components was $
We record financing receivables when we offer certain customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2026 and 2025, our financing receivables, net were $
We record an allowance for doubtful accounts which reflects our best estimate of credit losses inherent in the accounts receivable and financing receivable balances. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit 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 for 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 organization 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: costs incurred to support and maintain cloud-based and other online products and services, including datacenter costs and royalties; operating costs related to product support service centers and product distribution centers; manufacturing and distribution costs for products sold and programs licensed; traffic acquisition costs to drive traffic to our websites and to acquire online advertising space; and costs associated with the delivery of consulting services.
Research and Development
Research and development expenses include payroll, stock-based compensation expense, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include technology development costs, including AI training and other infrastructure costs, third-party development and programming costs, and the depreciation and amortization of assets used to conduct research and development. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
23
PART II
Item 8
Sales and Marketing
Sales and marketing expenses include payroll, stock-based compensation expense, employee benefits, 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 $
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. We are subject to global intangible low-taxed income (“GILTI”) in the U.S. and have elected to include GILTI in the measurement of deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge 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 future impairments.
24
PART II
Item 8
Equity investments with readily determinable fair values are generally measured at fair value. Equity investments that are not recorded at fair value are measured using the equity method of accounting when required or measured at cost less impairments, if any, with adjustments for observable changes in price (referred to as the measurement alternative). Identifying observable changes in price requires judgment in evaluating whether transactions are orderly and whether the securities are comparable, including consideration of the rights and preferences of the securities, the composition of the investor group, and other relevant facts and circumstances. For equity investments not recorded at fair value, we perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in fair value are recorded in other income (expense), net. Equity method investments may be recorded on a lag of up to three months when sufficient financial information is not available in a timely manner. For equity method investments recorded on a lag, we recognize the impact of intervening events that have a material impact on our consolidated financial statements in the period in which they occurred.
Investments that are considered variable interest entities (“VIEs”) are evaluated to determine whether we are the primary beneficiary of the VIE, in which case we would be required to consolidate the entity. We evaluate whether we have (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have determined we are not the primary beneficiary of any of our VIE investments. Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting or the measurement alternative.
We have a long-term strategic partnership with OpenAI. In October 2025, we signed a new definitive agreement with OpenAI that extends this partnership. We have an investment accounted for under the equity method that represents an approximate
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
25
PART II
Item 8
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: software developed or acquired for internal use,
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.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from 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 for 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 for lease payments is recognized on a straight-line basis over the lease term.
26
PART II
Item 8
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
Our intangible assets are subject to amortization and are amortized over the estimated useful life in proportion to the economic benefits received. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Income Taxes – Improvements to Income Tax Disclosures
In December 2023, the Financial Accounting Standards Board (“FASB”) issued a new standard to improve income tax disclosures. The guidance requires additional disclosure of disaggregated income taxes paid and prescribes standardized categories for the components of the effective tax rate reconciliation. We adopted the standard prospectively beginning with our annual reporting for fiscal year 2026. The adoption resulted in incremental income tax disclosures. Refer to Note 11 – Income Taxes.
Recent Accounting Guidance Not Yet Adopted
Income Statement – Disaggregation of Income Statement Expenses
In November 2024, the FASB issued a new standard to expand disclosures about income statement expenses. The guidance requires disaggregation of certain costs and expenses included in each relevant expense caption on our consolidated income statements in a separate note to the financial statements at each interim and annual reporting period, including amounts of purchases of inventory, employee compensation, depreciation, and intangible asset amortization. The standard will be effective for us beginning with our annual reporting for fiscal year 2028 and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact of this standard on our disclosures.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
27
PART II
Item 8
The components of basic and diluted EPS were as follows:
(In millions, except per share amounts) |
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|||
|
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|
|||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
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|||
|
|
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|
|
|
|
Net income available for common shareholders (A) |
|
$ |
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|
$ |
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|
$ |
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|||
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|
Weighted average outstanding shares of common stock (B) |
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|||
Dilutive effect of stock-based awards |
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|||
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|
Common stock and common stock equivalents (C) |
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|||
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Earnings Per Share |
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Basic (A/B) |
|
$ |
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|
$ |
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|
$ |
|
|||
Diluted (A/C) |
|
$ |
|
|
$ |
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|
$ |
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|||
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|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
(In millions) |
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|||
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|||||||||||
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|||||||||||
Year Ended June 30, |
|
2026 |
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|
2025 |
|
|
2024 |
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|||
|
|
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|||||||||
Interest and dividends income |
|
$ |
|
|
$ |
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|
$ |
|
|||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net recognized gains (losses) on investments |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net gains (losses) on derivatives |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net gains (losses) on foreign currency remeasurements |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Other, net |
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|
|
( |
) |
|
|
( |
) |
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|
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|
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|
|||
|
|
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|
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|
|||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net included $
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
(In millions) |
|
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|||||||||||
|
|
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||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Realized gains from sales of available-for-sale securities |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Realized losses from sales of available-for-sale securities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Impairments and allowance for credit losses |
|
|
( |
) |
|
|
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|
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|
||
|
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|
|
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|
|||
|
|
|
|
|
|
|
|
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|
|||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses) on equity investments were as follows:
(In millions) |
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|
|||
|
|
|||||||||||
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|
|
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|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Net realized gains on investments sold |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net unrealized gains on investments still held |
|
|
|
|
|
|
|
|
|
|||
Impairments of investments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
PART II
Item 8
NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
(In millions) |
|
Fair Value Level |
|
|
Adjusted Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Recorded Basis |
|
|
Cash and Cash Equivalents |
|
Short-term Investments |
|
|
Equity and Other Investments |
|
|||||||||
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|
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|
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|
|
June 30, 2026 |
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|
|
Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
Level 2 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Certificates of deposit |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. government securities |
|
|
Level 1 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
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|
||||||
U.S. agency securities |
|
|
Level 2 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Foreign government bonds |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Mortgage- and asset-backed securities |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Municipal securities |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Municipal securities |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
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|
||||||
|
|
|
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|
|
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|
|
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|
|
|
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
|
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Equity investments |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||
|
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|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
29
PART II
Item 8
(In millions) |
|
Fair Value Level |
|
|
Adjusted Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Recorded Basis |
|
|
Cash and Cash Equivalents |
|
Short-term Investments |
|
|
Equity and Other Investments |
|
|||||||||
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
Level 2 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Certificates of deposit |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. government securities |
|
|
Level 1 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. agency securities |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Foreign government bonds |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Mortgage- and asset-backed securities |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate notes and bonds |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Municipal securities |
|
|
Level 2 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Municipal securities |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
|
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Equity investments |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments, measured using the equity method, or measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2026 and 2025, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $
30
PART II
Item 8
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In millions) |
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Total |
|
|
||||||||
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
June 30, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
U.S. government and agency securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Foreign government bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Mortgage- and asset-backed securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Corporate notes and bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Municipal securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
|
|
|
|
|
Total |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In millions) |
|
|
Fair Value |
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
|
Unrealized |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Foreign government bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Mortgage- and asset-backed securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Corporate notes and bonds |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Municipal securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.
Debt Investment Maturities
The following table outlines maturities of our debt investments as of June 30, 2026:
(In millions) |
|
Adjusted Cost Basis |
|
|
Estimated Fair Value |
|
||
|
|
|||||||
|
|
|
|
|||||
June 30, 2026 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Due in one year or less |
|
$ |
|
|
$ |
|
||
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through 10 years |
|
|
|
|
|
|
||
Due after 10 years |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
31
PART II
Item 8
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using option, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
(In millions) |
|
June 30, 2026 |
|
|
June 30, 2025 |
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
||||||
Foreign exchange contracts purchased |
|
$ |
|
|
$ |
|
||
Interest rate contracts purchased |
|
|
|
|
|
|
||
|
|
|
||||||
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
||||||
Foreign exchange contracts purchased |
|
|
|
|
|
|
||
Foreign exchange contracts sold |
|
|
|
|
|
|
||
Equity contracts purchased |
|
|
|
|
|
|
||
Equity contracts sold |
|
|
|
|
|
|
||
Other contracts purchased |
|
|
|
|
|
|
||
Other contracts sold |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
32
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
Derivative |
|
Derivative |
|
Derivative |
|
Derivative |
|
|||||||
(In millions) |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
|||||||
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2026 |
|
June 30, 2025 |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Equity contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Other contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amounts of derivatives |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Gross amounts of derivatives offset in the balance sheets |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Cash collateral received |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts of derivatives |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
|
|
$ |
0 |
|
|
$ |
|
|
$ |
0 |
|
||
Other current assets |
|
|
|
|
|
0 |
|
|
|
|
|
|
0 |
|
||
Equity and other investments |
|
|
|
|
|
0 |
|
|
|
|
|
|
0 |
|
||
Other long-term assets |
|
|
|
|
|
0 |
|
|
|
|
|
|
0 |
|
||
Other current liabilities |
|
|
0 |
|
|
|
( |
) |
|
|
0 |
|
|
|
( |
) |
Other long-term liabilities |
|
|
0 |
|
|
|
( |
) |
|
|
0 |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $
The following table presents the fair value of our derivatives instruments on a gross basis:
(In millions) |
|
Level 1 |
|
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivative liabilities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liabilities |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
PART II
Item 8
Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:
(In millions) |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Designated as Fair Value Hedging Instruments |
|
|
|
|||||||||
|
|
|
|
|||||||||
Interest rate contracts |
|
|
|
|||||||||
Derivatives |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Hedged items |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Cash Flow Hedging Instruments |
|
|
|
|||||||||
|
|
|
|
|||||||||
Foreign exchange contracts |
|
|
|
|||||||||
Amount reclassified from accumulated other comprehensive loss |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
( |
) |
|
|
|
||
Equity contracts |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other contracts |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
Included in effectiveness assessment |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
NOTE 6 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
(In millions) |
|
|||||||
|
|
|||||||
|
|
|
|
|||||
June 30, |
|
2026 |
|
|
2025 |
|
||
|
|
|
||||||
Land |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Servers, network equipment, and software |
|
|
|
|
|
|
||
Furniture and equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Total, at cost |
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Total, net |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
During fiscal years 2026, 2025, and 2024, depreciation expense was $
As of June 30, 2026, 2025, and 2024, purchases of property and equipment remaining in accounts payable were $
NOTE 7 — BUSINESS COMBINATIONS
Activision Blizzard, Inc.
On
34
PART II
Item 8
The allocation of the purchase price to the assets acquired and liabilities assumed was completed as of September 30, 2024.
(In millions) |
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ |
|
||||
Goodwill |
|
|
|
||||
Intangible assets |
|
|
|
||||
Other assets |
|
|
|
||||
Long-term debt |
|
|
( |
) |
|||
Long-term income taxes |
|
|
( |
) |
|||
Deferred income taxes |
|
|
( |
) |
|||
Other liabilities |
|
|
( |
) |
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
Total purchase price |
|
$ |
|
||||
|
|
|
|
|
|
|
|
Goodwill was assigned to our Devices and Consumer 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 |
|
|
Weighted Average Life |
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Marketing-related |
|
$ |
|
|
|
|
||
Technology-based |
|
|
|
|
|
|
||
Customer-related |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of intangible assets acquired |
|
$ |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
$ |
|
||
Net income |
|
|
|
|
|
|
||
Diluted earnings per share |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.
NOTE 8 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
(In millions) |
|
June 30, 2024 |
|
|
Acquisitions |
|
|
Other |
|
|
June 30, 2025 |
|
|
Acquisitions |
|
|
Other |
|
|
June 30, |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents and Infra |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Devices and Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
PART II
Item 8
We have recast certain previously reported 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.
During the first quarter of fiscal year 2027 we made changes to our segments. These segment changes also resulted in changes to 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 Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
NOTE 9 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
(In millions) |
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
||||||
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
June 30, |
|
|
|
|
|
|
|
|
2026 |
|
|
|
|
|
|
|
|
|
|
2025 |
|
|||
|
|
|
|
|
|
|
||||||||||||||||||
Marketing-related |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Technology-based |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Customer-related |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Contract-based |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No material impairments of intangible assets were identified during fiscal years 2026, 2025, or 2024. We estimate that we have no significant residual value related to our intangible assets.
The components of intangible assets acquired during the periods presented were as follows:
(In millions) |
|
Amount |
|
|
Weighted Average Life |
|
|
Amount |
|
|
Weighted Average Life |
|
||||
|
|
|||||||||||||||
|
|
|
|
|
|
|||||||||||
Year Ended June 30, |
|
2026 |
|
|
|
|
|
2025 |
|
|
|
|
||||
|
|
|
|
|
||||||||||||
Marketing-related |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||||
Technology-based |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer-related |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contract-based |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $
36
PART II
Item 8
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2026:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending June 30, |
|
|
|
|
|
|
|||
2027 |
|
$ |
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
2030 |
|
|
|
|
2031 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
NOTE 10 — DEBT
The components of long-term debt were as follows:
(In millions, issuance by calendar year) |
|
Maturities (calendar year) |
|
Stated Interest Rate |
|
|
Effective Interest Rate |
|
June 30, 2026 |
|
|
June 30, 2025 |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
– |
|
|
– |
|
|
|
|
|
|
|
||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total face value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Unamortized discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||||
Hedge fair value adjustments (a) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||||
Premium on debt exchange |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
As of June 30, 2026 and 2025, the estimated fair value of long-term debt, including the current portion, was $
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 2026, 2025, and 2024 was $
37
PART II
Item 8
The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2026:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending June 30, |
|
|
|
|
|
|
|
|
|
2027 |
|
$ |
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
2030 |
|
|
|
|
2031 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
NOTE 11 — INCOME TAXES
Provision for Income Taxes
The components of the provision for income taxes were as follows:
(In millions) |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
|
|
$ |
|
|
$ |
|
|||
U.S. state and local |
|
|
|
|
|
|
|
|
|
|||
Foreign |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
U.S. state and local |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Foreign |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
(In millions) |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
U.S. |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Foreign |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
38
PART II
Item 8
Effective Tax Rate
We adopted Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”) prospectively.
(In millions, except percentages) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Year Ended June 30, |
|
2026 |
|
|||||
|
|
|
||||||
Federal statutory tax rate |
|
$ |
|
|
|
|
||
Effect of: |
|
|
|
|
|
|
|
|
State and local income tax, net of federal income tax effect (a) |
|
|
|
|
|
|
||
Foreign tax effects: |
|
|
|
|
|
|
|
|
Ireland: |
|
|
|
|
|
|
|
|
Statutory tax rate difference |
|
|
( |
) |
|
|
( |
|
Other |
|
|
|
|
|
|
||
Other foreign jurisdictions (b) |
|
|
|
|
|
|
||
Effect of cross-border tax laws: |
|
|
|
|
|
|
|
|
Global intangible low-taxed income (GILTI) (c) |
|
|
|
|
|
|
||
Foreign-derived intangible income deduction |
|
|
( |
) |
|
|
( |
|
Other |
|
|
|
|
|
|
||
Tax credits: |
|
|
|
|
|
|
|
|
Research and development credit |
|
|
( |
) |
|
|
( |
|
Foreign tax credits |
|
|
( |
) |
|
|
( |
|
Other |
|
|
( |
) |
|
|
( |
|
Changes in unrecognized tax benefits (d) |
|
|
|
|
|
|
||
Other reconciling items, net |
|
|
( |
) |
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate |
|
$ |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
As previously disclosed for the years ended June 30, 2025 and 2024, prior to the adoption of ASU 2023-09, the items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Year Ended June 30, |
|
2025 |
|
|
2024 |
|
||
|
|
|
||||||
Federal statutory rate |
|
|
|
|
|
|
||
Effect of: |
|
|
|
|
|
|
|
|
Foreign earnings taxed at lower rates |
|
|
( |
|
|
|
( |
|
Foreign-derived intangible income deduction |
|
|
( |
|
|
|
( |
|
State income taxes, net of federal benefit |
|
|
|
|
|
|
||
Research and development credit |
|
|
( |
|
|
|
( |
|
Excess tax benefits relating to stock-based compensation |
|
|
( |
|
|
|
( |
|
Interest, net |
|
|
|
|
|
|
||
Other reconciling items, net |
|
|
( |
|
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
39
PART II
Item 8
The decrease from the federal statutory rate in fiscal years 2026, 2025, and 2024 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 2026, 2025, and 2024, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated
The increase in our effective tax rate for fiscal year 2026 compared to fiscal year 2025 was primarily due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries. The decrease in our effective tax rate for fiscal year 2025 compared to fiscal year 2024 was due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries.
The components of the deferred income tax assets and liabilities were as follows:
(In millions) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
June 30, |
|
2026 |
|
|
2025 |
|
||
|
|
|
||||||
Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
||||||
Stock-based compensation expense |
|
$ |
|
|
$ |
|
||
Accruals, reserves, and other expenses |
|
|
|
|
|
|
||
Loss and credit carryforwards |
|
|
|
|
|
|
||
Amortization |
|
|
|
|
|
|
||
Leasing liabilities |
|
|
|
|
|
|
||
Unearned revenue |
|
|
|
|
|
|
||
Book/tax basis differences in investments and debt |
|
|
|
|
|
|
||
Capitalized research and development |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets |
|
|
|
|
|
|
||
Less valuation allowance |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, net of valuation allowance |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
||||||
Book/tax basis differences in investments and debt |
|
$ |
( |
) |
|
$ |
|
|
Leasing assets |
|
|
( |
) |
|
|
( |
) |
Depreciation |
|
|
( |
) |
|
|
( |
) |
Deferred tax on foreign earnings |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Reported As |
|
|
|
|
|
|
|
|
|
|
|
||||||
Other long-term assets |
|
$ |
|
|
$ |
|
||
Long-term deferred income tax liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
40
PART II
Item 8
As of June 30, 2026, we had federal, state, and foreign net operating loss carryforwards of $
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and foreign tax credits carryforwards that may not be realized.
Income taxes paid, net of refunds, pursuant to the disclosure requirements of ASU 2023-09 in fiscal year 2026 were as follows:
(In millions) |
|
|
|
|
|
|
|||
|
|
|
|
|
Year Ended June 30 |
|
|
2026 |
|
|
|
|
||
U.S. federal |
|
$ |
|
|
U.S. state and local |
|
|
|
|
Foreign |
|
|
|
|
Ireland |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
|
|
|
|
|
|
|
Income taxes paid, net of refunds, were $
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2026, 2025, and 2024, were $
As of June 30, 2026, 2025, and 2024, we had accrued interest expense related to uncertain tax positions of $
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Beginning unrecognized tax benefits |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Decreases related to settlements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Increases for tax positions related to the current year |
|
|
|
|
|
|
|
|
|
|||
Increases for tax positions related to prior years |
|
|
|
|
|
|
|
|
|
|||
Decreases for tax positions related to prior years |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Decreases due to lapsed statutes of limitations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending unrecognized tax benefits |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $
41
PART II
Item 8
We are subject to income tax in many jurisdictions outside the U.S., some of which are currently under audit by local tax authorities. The resolution of these audits is not expected to be material to our consolidated financial statements. Our operations in Ireland remain subject to examination for tax years 2021 and thereafter.
NOTE 12 — UNEARNED REVENUE
Substantially all unearned revenue relates to the Agents and Infra segment.
Changes in unearned revenue were as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|||
Year Ended June 30, 2026 |
|
|
|
|
|
|
|||
Balance, beginning of period |
|
$ |
|
|
Deferral of revenue |
|
|
|
|
Recognition of unearned revenue |
|
|
( |
) |
|
|
|||
|
|
|||
Balance, end of period |
|
$ |
|
|
|
|
|
|
|
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts expected to be invoiced and recognized as revenue in future periods, was $
NOTE 13 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, and certain equipment. Our leases have remaining lease terms of less than
The components of lease expense were as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
||
Year Ended June 30, |
|
2026 |
|
|
|
2025 |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Operating lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
||
Year Ended June 30, |
|
2026 |
|
|
|
2025 |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|||
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
|
|||
Finance leases |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
42
PART II
Item 8
Supplemental balance sheet information related to leases was as follows:
(In millions, except lease term and discount rate) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
||||||
June 30, |
|
2026 |
|
|
2025 |
|
||
|
|
|
||||||
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 finance lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
The following table outlines maturities of our lease liabilities as of June 30, 2026:
(In millions) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Year Ending June 30, |
|
Operating Leases |
|
|
Finance Leases |
|
||
|
|
|
||||||
2027 |
|
$ |
|
|
$ |
|
||
2028 |
|
|
|
|
|
|
||
2029 |
|
|
|
|
|
|
||
2030 |
|
|
|
|
|
|
||
2031 |
|
|
|
|
|
|
||
Thereafter |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
||
Less imputed interest |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
As of June 30, 2026, we had additional leases, primarily for datacenters, that had not yet commenced of $
NOTE 14 — CONTINGENCIES
Irish Data Protection Commission Matter
In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In October 2024, the IDPC provided LinkedIn with a final decision alleging GDPR violations and assessing a fine. In November 2024, LinkedIn appealed the final decision. A preliminary hearing was held in December 2025. The court issued a ruling on the standard of appeal, which the IDPC may appeal.
43
PART II
Item 8
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2026, we accrued aggregate legal liabilities of $
NOTE 15 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Balance, beginning of year |
|
|
|
|
|
|
|
|
|
|||
Issued |
|
|
|
|
|
|
|
|
|
|||
Repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Balance, end of year |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $
On September 16, 2024, our Board of Directors approved a share repurchase program authorizing up to $
We repurchased the following shares of common stock under the share repurchase programs:
(In millions) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
||||||
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
First Quarter |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
Second Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Third Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fourth Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All share repurchases were made using cash resources. Shares repurchased during fiscal year 2026 were under the share repurchase program approved on September 16, 2024. Shares repurchased during the fourth quarter of fiscal year 2025 were under the share repurchase programs approved on September 14, 2021 and September 16, 2024. All other shares repurchased were under the share repurchase program approved on September 14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $
44
PART II
Item 8
Dividends
Our Board of Directors declared the following dividends:
Declaration Date |
|
|
Record Date |
|
|
|
Payment Date |
|
Dividend Per Share |
|
|
Amount |
|
|||
|
|
|||||||||||||||
|
|
|||||||||||||||
Fiscal Year 2026 |
|
|
|
|
|
|
|
|
(In millions) |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dividend declared on June 10, 2026 was included in other current liabilities as of June 30, 2026.
NOTE 16 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Unrealized gains (losses), net of tax of $( |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Reclassification adjustments for (gains) losses included in other income (expense), net |
|
|
|
|
|
( |
) |
|
|
|
||
Tax expense (benefit) included in provision for income taxes |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change related to derivatives, net of tax of $ |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|||||||||
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Unrealized gains, net of tax of $ |
|
|
|
|
|
|
|
|
|
|||
Reclassification adjustments for (gains) losses included in other income (expense), net |
|
|
( |
) |
|
|
|
|
|
|
||
Tax expense (benefit) included in provision for income taxes |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Amounts reclassified from accumulated other comprehensive loss |
|
|
( |
) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Net change related to investments, net of tax of $ |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|||||||||
Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Translation adjustments and other, net of tax of $ |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Accumulated other comprehensive loss, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
45
PART II
Item 8
NOTE 17 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
(In millions) |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Stock-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Income tax benefits related to stock-based compensation |
|
|
|
|
|
|
|
|
|
|||
|
|
|||||||||||
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
|
||||||||||
|
|
|
|
|
|
|
||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|
|
|||||||
Dividends per share (quarterly amounts) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Interest rates |
|
|
|
|
|
|
|
|
|
|||
|
|
|
||||||||||
During fiscal year 2026, the following activity occurred under our stock plans:
Shares |
|
|
Weighted Average Grant-Date Fair Value |
|
||||
|
|
|||||||
|
|
|||||||
(In millions) |
|
|
|
|
||||
|
||||||||
Stock Awards |
|
|||||||
|
|
|
||||||
Nonvested balance, beginning of year |
|
|
|
|
$ |
|
||
Granted (a) |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, end of year |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
As of June 30, 2026, total unrecognized compensation costs related to stock awards were $
46
PART II
Item 8
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at
Employees purchased the following shares during the periods presented:
(Shares in millions) |
|
|
|
|
|
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|||
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|
|||||||||||
|
|
|
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|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Shares purchased |
|
|
|
|
|
|
|
|
|
|||
Average price per share |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|||||||||||
As of June 30, 2026,
Savings Plans
We have savings plans in the U.S. that qualify 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 match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $
NOTE 18 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In September 2026, we announced changes in our segment reporting structure. We have recast certain previously reported amounts to conform to the way we internally manage and monitor our business. Refer to Note 1 – Accounting Policies for further information.
In its operation of the business, management, including our 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.
Our reportable segments are described below.
Agents and Infra
Our Agents and Infra segment brings together our applications and agents, our multi-model system, and Azure infrastructure. This segment primarily comprises:
47
PART II
Item 8
Devices and Consumer
Our Devices and Consumer segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to our investments in AI infrastructure and training, as well as marketing of products and services, from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.
Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|||||||||||
Year Ended June 30, |
|
|
2026 |
|
|
|
2025 |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents and Infra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Operating expenses |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices and Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Operating expenses |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Operating expenses |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
48
PART II
Item 8
(In millions) |
|
|
|
|||||||||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
United States (a) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other countries |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, classified by significant product and service offerings, was as follows:
(In millions) |
|
|
|
|||||||||
|
|
|||||||||||
|
|
|
|
|
||||||||
Year Ended June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
Azure |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Microsoft 365 cloud |
|
|
|
|
|
|
|
|
|
|||
Productivity and server licensing |
|
|
|
|
|
|
|
|
|
|||
Search and advertising |
|
|
|
|
|
|
|
|
|
|||
XBOX |
|
|
|
|
|
|
|
|
|
|||
Industry solutions |
|
|
|
|
|
|
|
|
|
|||
Windows OEM and devices |
|
|
|
|
|
|
|
|
|
|||
Frontier and support services |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Microsoft Cloud revenue, which includes Azure, Microsoft 365 commercial cloud, and Industry solutions cloud, was $
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
(In millions) |
|
|
|
|||||||||
|
|
|||||||||||
|
|
|
|
|
||||||||
June 30, |
|
2026 |
|
|
2025 |
|
|
2024 |
|
|||
|
|
|
|
|||||||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other countries |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
49
PART II
Item 8
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, 2026 and 2025, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2026, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2026 and 2025, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2026, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2026, 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 29, 2026 (not presented herein), expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial 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 financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial 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.
Revenue Recognition – Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
50
PART II
Item 8
Significant judgment is exercised by the Company in determining revenue recognition for certain customer agreements, and includes the following:
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for certain 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 for certain customer agreements included the following:
Income Taxes – Uncertain Tax Positions – Refer to Note 11 to the financial statements
Critical Audit Matter Description
The Company’s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. During fiscal year 2024, the Company received Notices of Proposed Adjustments (“NOPAs”) for the tax years 2004 to 2013, primarily related to intercompany transfer pricing. 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 financial statements.
51
PART II
Item 8
Conclusions on recognizing and measuring uncertain tax positions involve 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 certain transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required 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 transfer pricing issues included the following:
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 29, 2026
(October 28, 2026 as to the effects of the retrospective adjustments in Notes 1, 7, 8, 12, and 18)
We have served as the Company's auditor since 1983.
52