Microsoft(MSFT) - 2025 Q4 - Annual Report

Part I Business Microsoft is a global technology company focused on empowering individuals and organizations through digital technology and AI - Microsoft's mission is to empower every person and organization to achieve more, with a strong commitment to making digital technology and AI broadly available and responsible[13] - The company's strategic investments are heavily focused on AI, including reinventing productivity with Microsoft 365 Copilot, building the intelligent cloud and edge platform, and inventing new gaming experiences[22][25] - In August 2024, Microsoft realigned its reporting segments to better reflect its business management, notably consolidating the commercial components of Microsoft 365 into the Productivity and Business Processes segment[28] | Category | Number of Employees | | :--- | :--- | | Total Full-Time Employees | ~228,000 | | U.S. Employees | ~125,000 | | International Employees | ~103,000 | | By Function | | | Operations | 89,000 | | Product Research and Development | 80,000 | | Sales and Marketing | 44,000 | | General and Administration | 15,000 | Operating Segments Microsoft operates and reports financials across three main segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing - Productivity and Business Processes: Focuses on productivity, communication, and information services, with growth driven by Microsoft 365 adoption, LinkedIn engagement, and the shift to Dynamics 365 cloud services[30][33][34] - Intelligent Cloud: Consists of public, private, and hybrid server products and cloud services, with growth primarily driven by Azure's infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) consumption, emphasizing AI offerings[38][40] - More Personal Computing: Centers on products and services enhancing the personal computing experience, with key revenue drivers including Windows OEM licensing, Surface device sales, Xbox content and services, and search advertising revenue[52][55][58] Human Capital Resources As of June 30, 2025, Microsoft employed approximately 228,000 people globally, focusing on attracting and retaining talent through competitive compensation and continuous learning | Category | Number of Employees | | :--- | :--- | | Total Full-Time Employees | ~228,000 | | U.S. Employees | ~125,000 | | International Employees | ~103,000 | | By Function | | | Operations | 89,000 | | Product Research and Development | 80,000 | | Sales and Marketing | 44,000 | | General and Administration | 15,000 | - Microsoft's human capital strategy emphasizes attracting, rewarding, and retaining talent through competitive compensation, significant investment in employee wellbeing, and continuous professional development[66] Information about our Executive Officers As of July 30, 2025, Microsoft's executive team is led by Satya Nadella, Chairman and CEO, alongside other experienced senior leaders | Name | Age | Position with the Company | | :--- | :--- | :--- | | Satya Nadella | 57 | Chairman and Chief Executive Officer | | Judson B. Althoff | 52 | Executive Vice President and Chief Commercial Officer | | Amy L. Coleman | 53 | Executive Vice President and Chief Human Resources Officer | | Kathleen T. Hogan | 59 | Executive Vice President, Office of Strategy and Transformation | | Amy E. Hood | 53 | Executive Vice President and Chief Financial Officer | | Takeshi Numoto | 54 | Executive Vice President and Chief Marketing Officer | | Bradford L. Smith | 66 | Vice Chair and President | Risk Factors Microsoft faces a wide range of risks, including intense competition, speculative investments, cybersecurity threats, and evolving regulations - The company faces intense competition from diversified global companies and specialized firms, with challenges in platform-based ecosystems, vertically-integrated models, and various business models including free, ad-supported, and open-source offerings[119][120][123] - Significant investments in cloud and AI services present execution risks and incur substantial costs, with success dependent on market adoption, platform attractiveness, reliability, and security[125] - Cybersecurity is a critical risk, highlighted by a previously disclosed nation-state attack that compromised a test account and gained access to email accounts and source code repositories, potentially leading to ongoing threats[134] - The development and deployment of AI present risks including flawed algorithms, biased data, harmful outputs, and evolving regulations (e.g., EU AI Act), which could lead to liability, reputational harm, and competitive disadvantage[153] - The company is subject to significant legal and regulatory scrutiny, including competition laws, trade policies, and tax audits, with the IRS issuing Notices of Proposed Adjustment (NOPAs) for tax years 2004-2013 seeking an additional tax payment of $28.9 billion plus penalties and interest[161][167] Unresolved Staff Comments Microsoft reports no unresolved written comments from the SEC staff issued 180 days or more before the 2025 fiscal year-end - There are no unresolved written comments from the SEC staff regarding periodic or current reports issued 180 days or more before the fiscal year-end[193] Cybersecurity Microsoft has made cybersecurity its top corporate priority, launching the Secure Future Initiative (SFI) in November 2023, with governance overseen by the Board and a dedicated Cybersecurity Governance Council - The Secure Future Initiative (SFI) was launched in November 2023, focusing on three principles: Secure by Design, Secure by Default, and Secure Operations[195][198] - Cybersecurity governance includes Board of Directors oversight with at least quarterly reviews and a Cybersecurity Governance Council (CGC) comprised of executive-level Deputy CISOs[205][206] - Microsoft utilizes its own security products and leverages AI to analyze 84 trillion signals per day, tracking over 1,500 unique threat actors with a team of over 10,000 security experts[197] Properties As of June 30, 2025, Microsoft owns and leases 97 million square feet of property globally, including its 15 million square feet corporate headquarters in Redmond, Washington | (Square feet in millions) | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | U.S. | 34 | 23 | 57 | | International | 13 | 27 | 40 | | Total | 47 | 50 | 97 | - The corporate headquarters in Redmond, Washington includes approximately 12 million square feet of owned space on 530 acres and 3 million square feet of leased space[208] Legal Proceedings Information regarding legal proceedings involving Microsoft is detailed in Note 14 – Contingencies of the Notes to Financial Statements - For details on legal proceedings, refer to Note 14 – Contingencies in Part II, Item 8 of this Form 10-K[212] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Microsoft's common stock (MSFT) trades on NASDAQ, with the company repurchasing 7.5 million shares and returning $9.4 billion to shareholders in Q4 FY2025, alongside a new $60.0 billion share repurchase program Share Repurchases for Q4 FY2025 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares That May Yet Be Purchased (In millions) | | :--- | :--- | :--- | :--- | | April 1, 2025 – April 30, 2025 | 3,180,776 | $376.90 | $59,350 | | May 1, 2025 – May 31, 2025 | 2,360,700 | $448.01 | $58,293 | | June 1, 2025 – June 30, 2025 | 1,979,017 | $476.78 | $57,349 | | Total | 7,520,493 | | | - A new share repurchase program authorizing up to $60.0 billion was approved on September 16, 2024, and commenced in April 2025[220] - The Board of Directors declared a quarterly dividend of $0.83 per share on June 10, 2025, payable on September 11, 2025[220] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2025, Microsoft's revenue grew 15% to $281.7 billion, and operating income increased 17% to $128.5 billion, driven by strong cloud and AI performance, despite increased infrastructure investments and ongoing tax liabilities FY2025 vs FY2024 Financial Highlights | (In millions, except percentages and per share amounts) | 2025 | 2024 | Percentage Change | | :--- | :--- | :--- | :--- | | Revenue | $281,724 | $245,122 | 15% | | Gross margin | $193,893 | $171,008 | 13% | | Operating income | $128,528 | $109,433 | 17% | | Net income | $101,832 | $88,136 | 16% | | Diluted earnings per share | $13.64 | $11.80 | 16% | - Microsoft Cloud revenue increased 23% to $168.9 billion in FY2025[231] - Server products and cloud services revenue grew 23%, driven by a 34% increase in Azure and other cloud services revenue[231] - The company maintains a strategic partnership with OpenAI, holding rights to its IP for product integration and serving as the exclusive cloud provider for the OpenAI API[230] Segment Results of Operations For fiscal year 2025, all three segments reported growth in revenue and operating income, with Productivity and Business Processes revenue up 13%, Intelligent Cloud revenue up 21% (fueled by 34% Azure growth), and More Personal Computing revenue up 7% FY2025 Segment Performance vs. FY2024 | (In millions, except percentages) | 2025 Revenue | 2024 Revenue | % Change | 2025 Operating Income | 2024 Operating Income | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Productivity and Business Processes | $120,810 | $106,820 | 13% | $69,773 | $59,661 | 17% | | Intelligent Cloud | $106,265 | $87,464 | 21% | $44,589 | $37,813 | 18% | | More Personal Computing | $54,649 | $50,838 | 7% | $14,166 | $11,959 | 18% | - Productivity and Business Processes growth was driven by a 15% increase in Microsoft 365 Commercial cloud revenue and 9% growth in LinkedIn revenue[257][259] - Intelligent Cloud growth was led by a 34% increase in Azure and other cloud services revenue, reflecting strong demand for its portfolio[261][267] - More Personal Computing growth was driven by a 16% increase in Xbox content and services revenue, largely due to the Activision Blizzard acquisition, and a 20% increase in Search and news advertising revenue (ex-TAC)[263][267] Operating Expenses In fiscal year 2025, total operating expenses increased 6% to $65.4 billion, with Research and development (R&D) expenses growing 10% and Sales and marketing expenses rising 5% FY2025 Operating Expenses vs. FY2024 | (In millions, except percentages) | 2025 | 2024 | Percentage Change | | :--- | :--- | :--- | :--- | | Research and development | $32,488 | $29,510 | 10% | | Sales and marketing | $25,654 | $24,456 | 5% | | General and administrative | $7,223 | $7,609 | (5)% | - The 10% increase in R&D expenses was primarily due to investments in cloud and AI engineering, as well as costs associated with the Activision Blizzard acquisition[269] Income Taxes Microsoft's effective tax rate was 18% for both fiscal years 2025 and 2024, primarily due to lower-taxed foreign earnings, while the company contests an IRS claim for an additional $28.9 billion in tax payments - The effective tax rate for FY2025 and FY2024 was 18%, below the U.S. statutory rate of 21%, mainly due to lower tax rates on foreign earnings from its operations in Ireland[278][279] - The company is contesting IRS Notices of Proposed Adjustment (NOPAs) for tax years 2004-2013, which propose an additional tax payment of $28.9 billion plus penalties and interest, primarily related to intercompany transfer pricing[283] - The company is assessing the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, which sets a 14% U.S. global intangible low-taxed income effective tax rate for Microsoft starting in FY2027[282] Liquidity and Capital Resources As of June 30, 2025, Microsoft held $94.6 billion in cash and investments, with cash from operations increasing to $136.2 billion, and significant contractual obligations totaling $397.0 billion - Cash, cash equivalents, and short-term investments totaled $94.6 billion as of June 30, 2025[287] - Cash from operations increased by $17.6 billion to $136.2 billion for fiscal year 2025[290] Contractual Obligations as of June 30, 2025 | (In millions) | 2026 | Thereafter | Total | | :--- | :--- | :--- | :--- | | Long-term debt (Principal & Interest) | $4,509 | $71,733 | $76,242 | | Construction commitments | $26,859 | $5,290 | $32,149 | | Operating and finance leases | $12,798 | $165,903 | $178,701 | | Purchase commitments | $103,940 | $6,013 | $109,953 | | Total | $148,106 | $248,939 | $397,045 | - In FY2025, the company returned capital to shareholders through $13.0 billion in share repurchases and $24.7 billion in dividends[296][297] Quantitative and Qualitative Disclosures About Market Risk Microsoft is exposed to market risks from foreign exchange rates, interest rates, credit, and equity prices, which it manages using derivative instruments, with a hypothetical 10% decrease in foreign exchange rates potentially reducing earnings by approximately $11.6 billion Market Risk Sensitivity Analysis (as of June 30, 2025) | Risk Category | Hypothetical Change | Potential Loss (in millions) | Impact Type | | :--- | :--- | :--- | :--- | | Foreign currency – Revenue | 10% decrease in FX rates | $(11,596) | Earnings | | Interest rate | 100 bp increase in U.S. treasury rates | $(1,415) | Fair Value | | Credit | 100 bp increase in credit spreads | $(436) | Fair Value | | Equity | 10% decrease in equity market prices | $(1,213) | Earnings | Financial Statements and Supplementary Data This section presents Microsoft's audited consolidated financial statements for the fiscal year ended June 30, 2025, including the Income Statement, Balance Sheet, and Cash Flow Statement, with Deloitte & Touche LLP providing an unqualified opinion - The financial statements have been audited by Deloitte & Touche LLP, which provided an unqualified opinion[517] - Critical Audit Matters identified were Revenue Recognition, due to significant judgments in complex customer agreements, and Income Taxes, specifically related to uncertain tax positions and unresolved transfer pricing issues with the IRS[521][523][528] Income Statements For the fiscal year ended June 30, 2025, Microsoft reported total revenue of $281.7 billion, a 15% increase, with operating income growing 17% to $128.5 billion, and net income reaching $101.8 billion Income Statement Summary (FY2025 vs. FY2024) | (In millions, except per share amounts) | 2025 | 2024 | | :--- | :--- | :--- | | Total revenue | $281,724 | $245,122 | | Gross margin | $193,893 | $171,008 | | Operating income | $128,528 | $109,433 | | Net income | $101,832 | $88,136 | | Diluted earnings per share | $13.64 | $11.80 | Balance Sheets As of June 30, 2025, Microsoft's total assets were $619.0 billion, up from $512.2 billion in 2024, with total liabilities increasing to $275.5 billion and stockholders' equity growing to $343.5 billion Balance Sheet Summary (as of June 30) | (In millions) | 2025 | 2024 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $191,131 | $159,734 | | Property and equipment, net | $204,966 | $135,591 | | Goodwill | $119,509 | $119,220 | | Total assets | $619,003 | $512,163 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $141,218 | $125,286 | | Long-term debt | $40,152 | $42,688 | | Total liabilities | $275,524 | $243,686 | | Total stockholders' equity | $343,479 | $268,477 | Cash Flows Statements For fiscal year 2025, net cash from operations was $136.2 billion, a significant increase from $118.5 billion in 2024, with cash used in investing activities at $72.6 billion and financing activities at $51.7 billion Cash Flow Summary (FY2025 vs. FY2024) | (In millions) | 2025 | 2024 | | :--- | :--- | :--- | | Net cash from operations | $136,162 | $118,548 | | Net cash used in financing | $(51,699) | $(37,757) | | Net cash used in investing | $(72,599) | $(96,970) | | Net change in cash and cash equivalents | $11,927 | $(16,389) | | Cash and cash equivalents, end of period | $30,242 | $18,315 | Note 7 — Business Combinations On October 13, 2023, Microsoft completed its acquisition of Activision Blizzard, Inc. for $75.4 billion, primarily in cash, allocating $51.0 billion to goodwill and $22.0 billion to intangible assets - Microsoft acquired Activision Blizzard on October 13, 2023, for a total purchase price of $75.4 billion[442] Activision Blizzard Purchase Price Allocation | (In millions) | Amount | | :--- | :--- | | Goodwill | $51,001 | | Intangible assets | $21,969 | | Cash and cash equivalents | $12,976 | | Other assets | $2,503 | | Liabilities assumed | $(8,341) | | Total purchase price | $75,408 | Note 11 — Income Taxes Microsoft's effective tax rate for FY2025 was 17.6%, primarily due to lower-taxed foreign earnings, while the company contests $28.9 billion in additional tax payments from IRS NOPAs for 2004-2013 - The effective tax rate for FY2025 was 17.6%, down from 18.2% in FY2024[465] - Gross unrecognized tax benefits related to uncertain tax positions were $24.7 billion as of June 30, 2025[470] - The company is contesting IRS Notices of Proposed Adjustment (NOPAs) for tax years 2004-2013 seeking an additional tax payment of $28.9 billion plus penalties and interest[472] Note 14 — Contingencies Microsoft is involved in various legal claims, including an appeal against an Irish Data Protection Commission (IDPC) fine for LinkedIn, with $541 million accrued for legal liabilities and an estimated $600 million in reasonably possible additional losses - LinkedIn is appealing a final decision and fine from the Irish Data Protection Commission (IDPC) alleging GDPR violations[482] - As of June 30, 2025, Microsoft has accrued $541 million for legal liabilities[485] - Management estimates that reasonably possible losses from adverse outcomes could be approximately $600 million beyond the amounts already accrued[485] Part III Directors, Executive Officers, and Corporate Governance This section incorporates by reference information from the company's Proxy Statement for the December 5, 2025 annual shareholders' meeting, covering directors, the Audit Committee, and insider trading policies - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the definitive Proxy Statement for the December 5, 2025 Annual Meeting of Shareholders[548] - Microsoft has adopted a finance code of ethics applicable to its CEO, CFO, and other finance employees, which is available on its website[549] Executive Compensation This section incorporates by reference information regarding director and executive compensation from the company's Proxy Statement - Information on director and executive compensation is incorporated by reference from the Proxy Statement[552] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information from the company's Proxy Statement concerning stock ownership by principal shareholders and management, as well as details on equity compensation plans - Information on security ownership and equity compensation plans is incorporated by reference from the Proxy Statement[553] Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information from the company's Proxy Statement regarding director independence and any related party transactions - Information on director independence and related transactions is incorporated by reference from the Proxy Statement[554] Principal Accountant Fees and Services This section incorporates by reference information from the company's Proxy Statement concerning the fees billed by and services provided by the principal accountant, Deloitte & Touche LLP, and the Audit Committee's pre-approval policy - Information regarding fees and services from the principal accountant, Deloitte & Touche LLP, is incorporated by reference from the Proxy Statement[556] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements included in the report under Item 8 and provides a comprehensive list of exhibits filed with the 10-K, including corporate governance documents, debt indentures, and compensatory plans - Provides an index to the financial statements located on pages 50 through 86[559][560] - Includes a detailed listing of all exhibits filed with the report, such as Articles of Incorporation, Bylaws, debt indentures, and executive compensation plans[561][563][565] Form 10-K Summary No Form 10-K summary is provided in this section - This item is noted as 'None'[576]