Attached files

file filename
EX-32.2 - EX-32.2 - MICROSOFT CORPmsft-ex322_10.htm
EX-32.1 - EX-32.1 - MICROSOFT CORPmsft-ex321_6.htm
EX-31.2 - EX-31.2 - MICROSOFT CORPmsft-ex312_9.htm
EX-31.1 - EX-31.1 - MICROSOFT CORPmsft-ex311_7.htm
EX-15.1 - EX-15.1 - MICROSOFT CORPmsft-ex151_8.htm
EX-10.14 - EX-10.14 - MICROSOFT CORPmsft-ex1014_505.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From            to

Commission File Number: 001-37845

 

MICROSOFT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1144442

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

One Microsoft Way, Redmond, Washington

 

98052-6399

(Address of principal executive offices)

 

(Zip Code)

(425) 882-8080

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer  (Do not check if a smaller reporting company)

 

Smaller reporting company 

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of January 26, 2018

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,699,792,852 shares

 

 

 

 

 

 


 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended December 31, 2017

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

 

 

 

a)

Income Statements for the Three and Six Months Ended December 31, 2017 and 2016

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three and Six Months Ended December 31, 2017 and 2016

4

 

 

 

 

 

 

 

c)

Balance Sheets as of December 31, 2017 and June 30, 2017

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three and Six Months Ended December 31, 2017 and 2016

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three and Six Months Ended December 31, 2017 and 2016

7

 

 

 

 

 

 

 

f)

Notes to Financial Statements

8

 

 

 

 

 

 

 

g)

Report of Independent Registered Public Accounting Firm

39

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

55

 

 

 

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

57

 

 

 

 

 

 

Item 1A.

Risk Factors

57

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

 

 

 

Item 5.

Other Information

67

 

 

 

 

 

 

Item 6.

Exhibits

68

 

 

 

 

 

SIGNATURE

69

 

 

 

2


PART I

Item 1

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

 

(In millions, except per share amounts) (Unaudited)

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

17,926

 

 

$

18,273

 

 

$

  32,224

 

 

$

33,241

 

Service and other

 

 

10,992

 

 

 

7,553

 

 

 

21,232

 

 

 

14,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

  28,918

 

 

 

25,826

 

 

 

53,456

 

 

 

47,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

5,498

 

 

 

5,378

 

 

 

8,478

 

 

 

8,959

 

Service and other

 

 

5,566

 

 

 

4,523

 

 

 

10,864

 

 

 

8,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

11,064

 

 

 

9,901

 

 

 

19,342

 

 

 

17,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

17,854

 

 

 

15,925

 

 

 

34,114

 

 

 

30,009

 

Research and development

 

 

3,504

 

 

 

3,062

 

 

 

7,078

 

 

 

6,168

 

Sales and marketing

 

 

4,562

 

 

 

4,079

 

 

 

8,374

 

 

 

7,297

 

General and administrative

 

 

1,109

 

 

 

879

 

 

 

2,275

 

 

 

1,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

8,679

 

 

 

7,905

 

 

 

16,387

 

 

 

14,620

 

Other income, net

 

 

490

 

 

 

117

 

 

 

766

 

 

 

229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

9,169

 

 

 

8,022

 

 

 

17,153

 

 

 

14,849

 

Provision for income taxes

 

 

15,471

 

 

 

1,755

 

 

 

16,879

 

 

 

2,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,302

)

 

$

6,267

 

 

$

274

 

 

$

11,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.82

)

 

$

0.81

 

 

$

0.04

 

 

$

1.54

 

Diluted

 

$

(0.82

)

 

$

0.80

 

 

$

0.04

 

 

$

1.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,710

 

 

 

7,755

 

 

 

7,709

 

 

 

7,772

 

Diluted

 

 

7,710

 

 

 

7,830

 

 

 

7,799

 

 

 

7,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.42

 

 

$

0.39

 

 

$

0.84

 

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

 

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,302

)

 

$

6,267

 

 

$

274

 

 

$

11,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

(7

)

 

 

280

 

 

 

(113

)

 

 

243

 

Net change related to investments

 

 

(878

)

 

 

(994

)

 

 

(1,166

)

 

 

(911

)

Translation adjustments and other

 

 

(40

)

 

 

(592

)

 

 

253

 

 

 

(474

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

(925

)

 

 

(1,306

)

 

 

(1,026

)

 

 

(1,142

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(7,227

)

 

$

4,961

 

 

$

(752

)

 

$

10,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes. Refer to Note 18 – Accumulated Other Comprehensive Income (Loss) for further information.

 

 

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

December 31,
2017

 

 

June 30,
2017

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,859

 

 

$

7,663

 

Short-term investments (including securities loaned of $4,247 and $3,694)

 

 

129,921

 

 

 

125,318

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

142,780

 

 

 

132,981

 

Accounts receivable, net of allowance for doubtful accounts of $337 and $345

 

 

18,428

 

 

 

22,431

 

Inventories

 

 

2,003

 

 

 

2,181

 

Other

 

 

4,422

 

 

 

5,103

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

167,633

 

 

 

162,696

 

Property and equipment, net of accumulated depreciation of $26,849 and $24,179

 

 

26,304

 

 

 

23,734

 

Operating lease right-of-use assets

 

 

6,749

 

 

 

6,555

 

Equity and other investments

 

 

3,961

 

 

 

6,023

 

Goodwill

 

 

35,355

 

 

 

35,122

 

Intangible assets, net

 

 

9,034

 

 

 

10,106

 

Other long-term assets

 

 

6,967

 

 

 

6,076

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

256,003

 

 

$

250,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,850

 

 

$

7,390

 

Short-term debt

 

 

12,466

 

 

 

9,072

 

Current portion of long-term debt

 

 

3,446

 

 

 

1,049

 

Accrued compensation

 

 

4,427

 

 

 

5,819

 

Short-term income taxes

 

 

788

 

 

 

718

 

Short-term unearned revenue

 

 

21,309

 

 

 

24,013

 

Securities lending payable

 

 

26

 

 

 

97

 

Other

 

 

7,787

 

 

 

7,587

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

58,099

 

 

 

55,745

 

Long-term debt

 

 

73,348

 

 

 

76,073

 

Long-term income taxes

 

 

30,050

 

 

 

13,485

 

Long-term unearned revenue

 

 

2,500

 

 

 

2,643

 

Deferred income taxes

 

 

3,186

 

 

 

5,734

 

Operating lease liabilities

 

 

5,640

 

 

 

5,372

 

Other long-term liabilities

 

 

4,820

 

 

 

3,549

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

177,643

 

 

 

162,601

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,705 and 7,708

 

 

70,192

 

 

 

69,315

 

Retained earnings

 

 

8,567

 

 

 

17,769

 

Accumulated other comprehensive income (loss)

 

 

(399

)

 

 

627

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

78,360

 

 

 

87,711

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

256,003

 

 

$

250,312

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

December 31,

 

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,302

)

 

$

6,267

 

 

$

274

 

 

$

11,934

 

Adjustments to reconcile net income (loss) to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

2,536

 

 

 

2,166

 

 

 

5,035

 

 

 

3,982

 

Stock-based compensation expense

 

 

986

 

 

 

767

 

 

 

1,959

 

 

 

1,470

 

Net recognized gains on investments and derivatives

 

 

(684

)

 

 

(652

)

 

 

(1,207

)

 

 

(963

)

Deferred income taxes

 

 

(2,305

)

 

 

5

 

 

 

(2,358

)

 

 

545

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,908

)

 

 

(2,789

)

 

 

4,041

 

 

 

4,398

 

Inventories

 

 

1,205

 

 

 

1,132

 

 

 

182

 

 

 

265

 

Other current assets

 

 

354

 

 

 

1,300

 

 

 

36

 

 

 

335

 

Other long-term assets

 

 

(344

)

 

 

(200

)

 

 

(622

)

 

 

(293

)

Accounts payable

 

 

938

 

 

 

99

 

 

 

531

 

 

 

(344

)

Unearned revenue

 

 

(1,065

)

 

 

(1,077

)

 

 

(2,871

)

 

 

(2,884

)

Income taxes

 

 

15,974

 

 

 

843

 

 

 

16,635

 

 

 

1,407

 

Other current liabilities

 

 

643

 

 

 

(1,267

)

 

 

(1,521

)

 

 

(1,727

)

Other long-term liabilities

 

 

(153

)

 

 

(301

)

 

 

201

 

 

 

(283

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

7,875

 

 

 

6,293

 

 

 

20,315

 

 

 

17,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance (repayments) of short-term debt, maturities of 90 days or less, net

 

 

3,759

 

 

 

(3,755

)

 

 

49

 

 

 

(7,145

)

Proceeds from issuance of debt

 

 

3,229

 

 

 

17,069

 

 

 

7,183

 

 

 

42,046

 

Repayments of debt

 

 

(3,327

)

 

 

(4,118

)

 

 

(4,496

)

 

 

(4,343

)

Common stock issued

 

 

189

 

 

 

131

 

 

 

496

 

 

 

372

 

Common stock repurchased

 

 

(2,008

)

 

 

(3,599

)

 

 

(4,578

)

 

 

(7,961

)

Common stock cash dividends paid

 

 

(3,238

)

 

 

(3,024

)

 

 

(6,241

)

 

 

(5,824

)

Other, net

 

 

(156

)

 

 

312

 

 

 

(306

)

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used in) financing

 

 

(1,552

)

 

 

3,016

 

 

 

(7,893

)

 

 

17,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(2,586

)

 

 

(1,988

)

 

 

(4,718

)

 

 

(4,151

)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

 

 

(27

)

 

 

(24,760

)

 

 

(206

)

 

 

(24,784

)

Purchases of investments

 

 

(45,154

)

 

 

(46,775

)

 

 

(78,115

)

 

 

(103,956

)

Maturities of investments

 

 

6,352

 

 

 

8,715

 

 

 

11,578

 

 

 

17,374

 

Sales of investments

 

 

41,261

 

 

 

48,987

 

 

 

64,297

 

 

 

81,310

 

Securities lending payable

 

 

(177

)

 

 

1,070

 

 

 

(71

)

 

 

986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(331

)

 

 

(14,751

)

 

 

(7,235

)

 

 

(33,221

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

(17

)

 

 

(18

)

 

 

9

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

5,975

 

 

 

(5,460

)

 

 

5,196

 

 

 

1,958

 

Cash and cash equivalents, beginning of period

 

 

6,884

 

 

 

13,928

 

 

 

7,663

 

 

 

6,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

12,859

 

 

$

8,468

 

 

$

12,859

 

 

$

8,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

 

6


PART I

Item 1

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

69,419

 

 

$

67,747

 

 

$

69,315

 

 

$

68,178

 

Common stock issued

 

 

189

 

 

 

131

 

 

 

496

 

 

 

372

 

Common stock repurchased

 

 

(402

)

 

 

(561

)

 

 

(1,577

)

 

 

(1,935

)

Stock-based compensation expense

 

 

986

 

 

 

767

 

 

 

1,959

 

 

 

1,470

 

Other, net

 

 

0

 

 

 

93

 

 

 

(1

)

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

70,192

 

 

 

68,177

 

 

 

70,192

 

 

 

68,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

19,702

 

 

 

12,757

 

 

 

17,769

 

 

 

13,118

 

Net income (loss)

 

 

(6,302

)

 

 

6,267

 

 

 

274

 

 

 

11,934

 

Common stock cash dividends

 

 

(3,232

)

 

 

(3,003

)

 

 

(6,471

)

 

 

(6,028

)

Common stock repurchased

 

 

(1,601

)

 

 

(3,021

)

 

 

(3,005

)

 

 

(6,024

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

8,567

 

 

 

13,000

 

 

 

8,567

 

 

 

13,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

526

 

 

 

1,958

 

 

 

627

 

 

 

1,794

 

Other comprehensive loss

 

 

(925

)

 

 

(1,306

)

 

 

(1,026

)

 

 

(1,142

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

(399

)

 

 

652

 

 

 

(399

)

 

 

652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

78,360

 

 

$

81,829

 

 

$

78,360

 

 

$

81,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

 

7


PART I

Item 1

 

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation 2017 Form 10-K filed with the U.S. Securities and Exchange Commission on August 2, 2017.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments for which we are able to exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments for which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

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; product warranties; 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; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized on our consolidated financial statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.

Revenue  

Product Revenue and Service and Other Revenue

Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

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.

8


PART I

Item 1

 

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.

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.  

Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, 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.

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 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

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.  

9


PART I

Item 1

 

Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.

Contract Balances  

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.

The opening balance of current and long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 billion as of July 1, 2016.

As of December 31, 2017 and June 30, 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $1.6 billion and $1.7 billion, respectively, and are included in other long-term assets on our consolidated balance sheets.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

Activity in the allowance for doubtful accounts was as follows: 

 

 

 

(In millions)

 

 

 

 

 

Six Months Ended December 31, 2017 

 

 

 

Balance, beginning of period

 

$

361

 

Charged to costs and other

 

 

45

 

Write-offs

 

 

(53

 

 

 

 

 

 

 

Balance, end of period

 

$

353

 

 

 

 

 

 

 

 

 

 

 

Reported as of December 31, 2017 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

$

337

 

Other long-term assets

 

 

16

 

 

 

 

 

 

 

 

Total

 

$

353

 

 

 

 

 

 

 

Unearned revenue is comprised mainly of unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Dynamics business solutions; Windows 10 post-delivery support; Skype prepaid credits and subscriptions; 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 14 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

10


PART I

Item 1

 

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 on 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 force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

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 on our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on 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 use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. 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.

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.

Recent Tax Legislation

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 12 – Income Taxes for further discussion.

As a result of the TCJA, we have recast certain prior period income tax liabilities on our consolidated balance sheets to conform to the current period presentation. Previously reported balances were impacted as follows:

 

(In millions)

 

As

Previously

Reported

 

 

As

Adjusted

 

 

As

Previously

Reported

 

 

As

Adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheets

 

 

 

 

 

 

June 30,

2017

 

 

 

 

 

 

September 30,

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term income taxes

 

$

0

 

 

$

13,485

 

 

$

0

 

 

$

13,944

 

Other long-term liabilities

 

 

17,034

 

 

 

3,549

 

 

 

18,173

 

 

 

4,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

These adjustments had no impact on our consolidated income statements or net cash from or used in operating, financing, or investing on our consolidated cash flows statements.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets

11


PART I

Item 1

 

and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The standard had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Adoption of the standard required us to restate certain previously reported results, including the recognition of additional ROU assets and lease liabilities for operating leases. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

We elected to early adopt the standard effective July 1, 2017, using the full retrospective method, which required us to restate each prior reporting period presented. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and SA, we recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard depends on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional services remains substantially unchanged.

Adoption of the standard using the full retrospective method required us to restate certain previously reported results, including the recognition of additional revenue and an increase in the provision for income taxes, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard resulted in an increase in accounts receivable and other current and long-term assets, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and SA; a reduction of unearned revenue, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes, driven by the upfront recognition of revenue. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.

12


PART I

Item 1

 

Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:

 

(In millions, except per share amounts)

 

As

Previously

Reported

 

 

New

Revenue

Standard

Adjustment

 

 

As

Restated

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Income Statements

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Three Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Revenue

 

$

24,090

 

 

$

1,736

 

 

$

25,826

 

Provision for income taxes

 

 

1,163

 

 

 

592

 

 

 

1,755

 

Net income

 

 

5,200

 

 

 

1,067

 

 

 

6,267

 

Diluted earnings per share

 

 

0.66

 

 

 

0.14

 

 

 

0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

44,543

 

 

$

3,211

 

 

$

47,754

 

Provision for income taxes

 

 

1,798

 

 

 

1,117

 

 

 

2,915

 

Net income

 

 

9,890

 

 

 

2,044

 

 

 

11,934

 

Diluted earnings per share

 

 

1.26

 

 

 

0.26

 

 

 

1.52

 

 

 

 

(In millions)

 

As

Previously

Reported

 

 

New

Revenue

Standard

Adjustment

 

 

New Lease

Standard

Adjustment

 

 

As

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

$

19,792

 

 

$

2,639

 

 

$

0

 

 

$

22,431

 

Operating lease right-of-use assets

 

 

0

 

 

 

0

 

 

 

6,555

 

 

 

6,555

 

Other current and long-term assets

 

 

11,147

 

 

 

32

 

 

 

0

 

 

 

11,179

 

Unearned revenue

 

 

44,479

 

 

 

(17,823

)

 

 

0

 

 

 

26,656

 

Deferred income taxes

 

 

531

 

 

 

5,203

 

 

 

0

 

 

 

5,734

 

Operating lease liabilities

 

 

0

 

 

 

0

 

 

 

5,372

 

 

 

5,372

 

Other current and long-term liabilities

 

 

23,464

 

 

 

(26

)