MICROSOFT CORP

Previous wording

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 Annual Report on Form 10-K for the year ended June 30, 2024, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Current wording

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 Annual Report on Form 10-K for the year ended June 30, 2024, our Form 8-K filed on December 3, 2024, and our consolidated financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Previous wording

Highlights from the first quarter of fiscal year 2025 compared with the first quarter of fiscal year 2024 included:

Current wording

Highlights from the second quarter of fiscal year 2025 compared with the second quarter of fiscal year 2024 included:

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Dynamics products and cloud services revenue increased 14% driven by Dynamics 365 revenue growth of 18%.

Current wording

Dynamics products and cloud services revenue increased 15% driven by Dynamics 365 revenue growth of 19%.

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Windows OEM and Devices revenue increased 2%.

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Xbox content and services revenue increased 2%.

Previous wording

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 did not have a material impact on reported revenue and expenses from our international operations in the first quarter of fiscal year 2025.

Current wording

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 did not have a material impact on reported revenue and expenses from our international operations for the three and six months ended December 31, 2024.

Previous wording

Operating income increased $2.2 billion or 16%.

Current wording

Cost of revenue increased $2.2 billion or 11% driven by growth in Microsoft Cloud, offset in part by Gaming.

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Microsoft Cloud gross margin percentage decreased to 71% driven by scaling our AI infrastructure.

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Microsoft Cloud gross margin percentage decreased to 70% driven by scaling our AI infrastructure.

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Revenue increased $9.1 billion or 16% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Microsoft 365 Commercial cloud. More Personal Computing revenue increased driven by Gaming.

Current wording

Revenue increased $16.7 billion or 14% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Microsoft 365 Commercial cloud. More Personal Computing revenue increased driven by Gaming.

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Cost of revenue increased $3.8 billion or 23% driven by growth in Microsoft Cloud and Gaming.

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Cost of revenue increased $6.0 billion or 17% driven by growth in Microsoft Cloud.

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Gross margin percentage decreased driven by Intelligent Cloud.

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Gross margin percentage decreased slightly driven by Intelligent Cloud, offset in part by More Personal Computing.

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Microsoft 365 Commercial products and cloud services revenue increased $2.4 billion or 13%. Microsoft 365 Commercial cloud revenue grew 15% with seat growth of 8% driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Microsoft 365 Commercial products revenue grew 2% driven by the on-premises components of Microsoft 365 suite sales, offset in part by continued shift from Office Commercial products to Microsoft 365 Commercial cloud.

Current wording

Microsoft 365 Commercial products and cloud services revenue increased $2.8 billion or 15%. Microsoft 365 Commercial cloud revenue grew 16% with Microsoft 365 Commercial seat growth of 7% driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Microsoft 365 Commercial products revenue grew 13% driven by the Windows Commercial on-premises components of Microsoft 365 suite sales and an increase in transactional purchasing with the launch of Office 2024.

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Microsoft 365 Consumer products and cloud services revenue increased $84 million or 5%. Microsoft 365 Consumer cloud revenue grew 6% with Microsoft 365 Consumer subscriber growth of 10% to 84.4 million.

Current wording

Microsoft 365 Consumer products and cloud services revenue increased $142 million or 8%. Microsoft 365 Consumer cloud revenue grew 8% driven by Microsoft 365 Consumer subscriber growth of 10% to 86.3 million with mix shift to Microsoft 365 Basic.

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Dynamics products and cloud services revenue increased $223 million or 14% driven by growth in Dynamics 365, offset in part by a decline in Dynamics on-premises products. Dynamics 365 revenue grew 18% driven by growth across all workloads.

Current wording

Dynamics products and cloud services revenue increased $254 million or 15% driven by growth in Dynamics 365, offset in part by a decline in Dynamics on-premises products. Dynamics 365 revenue grew 19% driven by growth across all workloads.

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Gross margin increased $2.0 billion or 15% driven by growth in Azure. Gross margin percentage decreased driven by scaling our AI infrastructure.

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Gross margin increased $1.8 billion or 12% driven by growth in Azure. Gross margin percentage decreased driven by scaling our AI infrastructure.

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Search and news advertising revenue increased $207 million or 7%. Search and news advertising revenue excluding traffic acquisition costs increased 18% driven by higher search volume and higher revenue per search.

Current wording

Search and news advertising revenue increased $390 million or 12%. Search and news advertising revenue excluding traffic acquisition costs increased 21% driven by higher search volume and higher revenue per search.

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LinkedIn revenue increased $379 million or 10% driven by growth across all lines of business – Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.

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LinkedIn revenue increased $771 million or 10% driven by growth across all lines of business – Marketing Solutions, Talent Solutions, Premium Subscriptions, and Sales Solutions.

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Server products and cloud services revenue increased $4.1 billion or 23% driven by Azure and other cloud services. Azure and other cloud services revenue grew 33% driven by demand for our portfolio of services, including 12 points from our AI services. Server products revenue decreased 1% driven by lower transactional purchasing ahead of the Windows Server 2025 launch, as well as lower purchasing of licenses running in multi-cloud environments.

Current wording

Server products and cloud services revenue increased $8.1 billion or 22% driven by Azure and other cloud services. Azure and other cloud services revenue grew 32% driven by demand for our portfolio of services, including 12 points from our AI services which grew 178%. Server products revenue decreased 2% driven by a decrease in transactional purchasing.

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Enterprise and partner services revenue decreased $16 million or 1%.

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Enterprise and partner services revenue decreased $41 million or 1% driven by a decline in Industry Solutions.

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Revenue increased $1.9 billion or 17%.

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Revenue increased $1.9 billion or 7%.

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Windows and Devices revenue decreased slightly. Windows OEM and Devices revenue increased 2% driven by growth in Windows OEM, offset in part by a decline in Devices.

Current wording

Windows and Devices revenue increased $138 million or 2%. Windows OEM and Devices revenue increased 3% as commercial inventory builds drove growth in Windows OEM, offset in part by a decline in Devices.

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Gaming revenue increased $1.7 billion or 43% driven by growth in Xbox content and services. Xbox content and services revenue increased 61% driven by 53 points of net impact from the Activision Blizzard acquisition. Xbox hardware revenue decreased 29% driven by lower volume of consoles sold.

Current wording

Gaming revenue increased $1.2 billion or 11% driven by growth in Xbox content and services, offset in part by a decline in Xbox hardware. Xbox content and services revenue increased 24% driven by the impact of the Activision Blizzard acquisition. Xbox hardware revenue decreased 29% driven by lower volume of consoles sold.

Previous wording

Gross margin increased $984 million or 16% driven by growth in Gaming, with 12 points of net impact from the Activision Blizzard acquisition. Gross margin percentage was relatively unchanged as improvement in Gaming and Search and news advertising was offset by sales mix shift to those businesses.

Current wording

Gross margin increased $1.9 billion or 15% driven by growth in Gaming, including the impact of the Activision Blizzard acquisition. Gross margin percentage increased driven by sales mix shift to higher margin businesses and improvement in Search and news advertising and Gaming.

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Operating expenses increased $1.1 billion or 49% driven by Gaming, with 51 points of growth from the Activision Blizzard acquisition.

Current wording

Operating expenses increased $1.1 billion or 17% driven by the impact of the Activision Blizzard acquisition.

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Operating expenses increased $101 million or 2% primarily driven by investments in commercial sales and cloud engineering.

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Sales and marketing expenses increased $194 million or 3% driven by investments in commercial sales.

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Sales and marketing expenses increased $530 million or 10% driven by Gaming, with 9 points of growth from the Activision Blizzard acquisition, and investments in commercial sales.

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Sales and marketing expenses increased $724 million or 6% driven by the impact of the Activision Blizzard acquisition and investments in commercial sales.

Previous wording

Interest and dividends income decreased primarily due to lower portfolio balances. Interest expense increased primarily due to higher finance lease interest expense. Net recognized gains on investments increased primarily due to gains on equity investments in the current period as compared to losses in the prior period. Net losses on derivatives increased primarily due to losses on equity derivatives in the current period as compared to gains in the prior period. Other, net primarily reflects net recognized losses on equity method investments, including OpenAI.

Current wording

Interest and dividends income decreased primarily due to lower portfolio balances. Interest expense decreased primarily due to maturities of commercial paper, offset in part by higher finance lease interest expense. Net recognized losses on investments increased primarily due to higher impairments, offset in part by higher gains on equity investments in the current period. Net losses on derivatives increased primarily due to higher losses on equity derivatives in the current period. Other, net primarily reflects net recognized losses on equity method investments, including OpenAI.

Previous wording

Our effective tax rate was 19% and 18% for the three months ended September 30, 2024 and 2023, respectively. The increase in our effective tax rate for the current quarter compared to the prior year was primarily due to tax benefits from tax law changes in the first quarter of fiscal year 2024, including the impact from the issuance of Notice 2023-55 by the Internal Revenue Service (“IRS”) and U.S. Treasury Department, which delayed the effective date of final foreign tax credit regulations to fiscal year 2024 for Microsoft. Notice 2023-80, issued in the second quarter of fiscal year 2024, further delayed the effective date of final foreign tax credit regulations indefinitely.

Current wording

Our effective tax rate was 18% for both the three months ended December 31, 2024 and 2023, and 18% for both the six months ended December 31, 2024 and 2023. Our effective tax rate for the three and six months ended December 31, 2024 was primarily impacted by tax benefits from tax law changes in the prior fiscal year, including the delay of the effective date of final foreign tax credit regulations, and changes in the mix of our earnings and tax expenses between the U.S. and foreign countries.

Previous wording

Our effective tax rate was lower than the U.S. federal statutory rate for the three months ended September 30, 2024, 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.

Current wording

Our effective tax rate was lower than the U.S. federal statutory rate for the three and six months ended December 31, 2024, 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.

Previous wording

Cash, cash equivalents, and short-term investments totaled $78.4 billion and $75.5 billion as of September 30, 2024 and June 30, 2024, respectively. Equity and other investments were $15.8 billion and $14.6 billion as of September 30, 2024 and June 30, 2024, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

Current wording

Cash, cash equivalents, and short-term investments totaled $71.6 billion and $75.5 billion as of December 31, 2024 and June 30, 2024, respectively. Equity and other investments were $15.6 billion and $14.6 billion as of December 31, 2024 and June 30, 2024, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

Previous wording

Cash from operations increased $3.6 billion to $34.2 billion for the three months ended September 30, 2024, primarily due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees. Cash used in financing increased $31.3 billion to $16.6 billion for the three months ended September 30, 2024, primarily due to a $31.0 billion increase in cash used for repayments of debt, net of proceeds. Cash used in investing increased $15.7 billion to $15.2 billion for the three months ended September 30, 2024, primarily due to a $10.1 billion decrease in cash from net investment purchases, sales, and maturities and a $5.0 billion increase in additions to property and equipment.

Current wording

Cash from operations increased $7.0 billion to $56.5 billion for the six months ended December 31, 2024, primarily due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees and cash used to pay income taxes. Cash used in financing increased $32.4 billion to $27.8 billion for the six months ended December 31, 2024, primarily due to $6.7 billion in cash used for repayments of debt, net of proceeds in the current period compared to $23.6 billion in proceeds from the issuance of debt, net of repayments in the prior period. Cash used in investing decreased $42.1 billion to $29.3 billion for the six months ended December 31, 2024, primarily due to a $63.0 billion decrease in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets, offset in part by an $11.1 billion increase in additions to property and equipment and an $8.5 billion decrease in cash from net investment purchases, sales, and maturities.

Previous wording

For the three months ended September 30, 2024 and 2023, we repurchased 7 million shares and 11 million shares of our common stock for $2.8 billion and $3.6 billion, respectively, through our share repurchase program. All repurchases were made using cash resources. As of September 30, 2024, $7.5 billion remained of our $60 billion share repurchase program. Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Current wording

For the six months ended December 31, 2024 and 2023, we repurchased 15 million shares and 18 million shares of our common stock for $6.3 billion and $6.4 billion, respectively, through our share repurchase program. All repurchases were made using cash resources. As of December 31, 2024, $4.0 billion remained of our $60 billion share repurchase program. Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Previous wording

For the three months ended September 30, 2024 and 2023, our Board of Directors declared dividends totaling $6.2 billion and $5.6 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.

Current wording

For the six months ended December 31, 2024 and 2023, our Board of Directors declared dividends totaling $12.3 billion and $11.1 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 15 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.