annual report 2021 22

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Microsoft Annual Report 2021

Annual report 2021, satya nadella.

Chief Executive Officer

Dear shareholders, colleagues, customers, and partners:

As I write this, people and organizations everywhere continue to struggle with the uncertainty of a pandemic that continues to cause so much suffering. And yet, as I reflect on what has been a very challenging year for so many—one that will be forever remembered as a heartbreaking chapter in our history—I find reasons to be hopeful.

Our mission to empower every person and every organization on the planet to achieve more has never been more urgent or more needed. And every day this past year, I have had the privilege to see it in action, as customers of every size, in every industry, in every part of the world use our platforms and tools to help address their own challenges and opportunities as well as those of their communities and society at-large.

I have had the honor to see how the hard work and commitment of Microsoft’s employees, the ingenuity of our partners, the trust of our customers, and the support of our shareholders translate into strong results. In fiscal year 2021, we delivered $168 billion in revenue, up 18 percent year-over-year. Operating income grew 32 percent to $70 billion. And we continue to create successful new franchises. LinkedIn and our security business both passed $10 billion in annual revenue for the first time.

OUR OPPORTUNITY

For all the disruption and suffering that the pandemic has wrought on our lives and our communities, it has also been the catalyst for an unprecedented digital transformation that is driving massive technological and societal shifts that are creating important new opportunities for our customers and for Microsoft.

Tech as a percentage of total GDP will double from 5 to 10 percent by 2030. But the most notable thing is what will happen to the other 90 percent. Digital transformation that was projected to happen over the next 10 years is happening today.

Microsoft was built for this moment. Our goal is to foster innovation that generates new ecosystems of inventors, partners, developers, creators, changemakers, public servants, frontline workers, and knowledge workers who, together, drive the engines of growth and opportunity in ways that benefit everyone.

Today, it is exciting to see how our platforms and tools are enabling people and organizations to achieve remarkable things that would have been unimaginable even a few years ago.

Here are just a few examples:

• NASA’s Mars mission achieved a milestone in space exploration when the small robotic helicopter Ingenuity completed the first powered flight on another planet—a feat that would not have been possible without 12,000 developers on GitHub who contributed code to the open source software that powered the flight.
• When a 1,300-foot ship blocked the Suez Canal and disrupted global shipping, our partner Blue Yonder used Microsoft AI technologies to help its customers find alternate sources for more than $500 million worth of products and parts affected by the delay.
• Team Rubicon—a nonprofit organization that responds to humanitarian crises around the world— set up 169 COVID-19 response sites across the United States in just 30 days, using Dynamics 365 to manage the deployment of thousands of volunteers.
• Surgeons at Mt. Sinai Health System in New York and Kyabirwa Surgical Centre in Uganda have together performed more than 500 surgeries using mixed reality technology that enables doctors in New York to provide annotated recommendations that appear in the field of vision of their Ugandan colleagues—even though they are thousands of miles apart.
• Anheuser-Busch InBev—the world’s largest brewer—used Azure Digital Twins to create a comprehensive digital model of its breweries and supply chain. Synchronized with its physical environment, this model replicates the complex relationships between natural ingredients and the brewing process, enabling brewmasters to make adjustments based on real-time conditions.

Across our solution areas, we are delivering platforms and tools that expand our opportunity to help organizations around the world build their own tech intensity.

Applications and Infrastructure

Computing architecture is undergoing radical transformation as the number of connected devices and the volume of data generated at the edge increase dramatically. With more than 60 datacenter regions —including 15 new regions added this year on five continents—we are delivering faster access to data and cloud services while addressing critical data residency requirements.

This year, we expanded our hybrid capabilities to enable organizations to build, manage, and deploy applications anywhere. With Azure Arc , customers can deploy Azure data services on-premises, at the edge, or in multicloud environments. Azure Space is extending Azure capabilities through worldwide satellite-based connectivity. And with Azure for Operators , we provide telecom operators and enterprises with the ultra-low latency cloud computing power at the edge needed for breakthrough scenarios like precision inventory tracking at ports and production lines that automatically adjust to changing demand.

We are also at the forefront of the enterprise metaverse , a new infrastructure layer made possible through the convergence of the digital and physical worlds. By combining the Internet of Things, AI, and mixed reality, this platform layer enables the creation of rich digital twin simulations of real-world processes, places, and things so organizations can monitor complex systems in real time, interact within them using mixed reality, and run simulations to model, analyze, and predict performance.

Data and AI

No asset is more strategic than data. In the next three years, we’ll create more data than we did in the past 10. But our ability to make sense of data is growing more difficult as the volume, velocity, and variety expand. The leading indicator of digital transformation success can be measured by an organization’s ability to build predictive and analytical power.

We offer organizations the ability to ensure their data is being used only for their benefit. Azure Synapse brings together data integration, data warehousing, and big data analytics so organizations can query data on their own terms at any scale. And, new Azure Purview offers organizations comprehensive data management and governance to map all their data, whether it resides on-premises, in the cloud, or in software as a service (SaaS) applications.

And we continue to bring rich AI capabilities directly into the data stack as large-scale models become powerful platforms in their own right. During the past year, our partner OpenAI achieved dramatic advances training models like GPT-3—the largest and most advanced language model in the world—on our Azure AI supercomputer. We exclusively licensed GPT-3 , allowing us to leverage its technical innovations to deliver advanced AI solutions for our customers, as well as create new solutions that harness the power of advanced natural language generation.

Developer Tools

As organizations focus on creating their own technology solutions, they will need standardized tools to modernize existing apps and build new ones.

To address this, we provide a complete chain of software development tools across every cloud and client platform. From Visual Studio to GitHub, we deliver the best tools for moving quickly from idea to code and from code to the cloud. Visual Studio has more than 25 million monthly users, and GitHub is home to over 65 million developers who use it to build, ship, and maintain their software.

At the platform as a service (PaaS) level, new Azure Communication Services enable developers to integrate rich communications APIs into their applications using the same infrastructure that powers Microsoft Teams.

With Azure Mixed Reality Services, digital information can be represented within the context of the three-dimensional world we live in. And Microsoft Mesh enables developers to build immersive, multiuser, cross-platform mixed reality apps. It transforms how people connect holographically with others in a natural way.

And, finally, our comprehensive portfolio of AI tools, frameworks, and infrastructure enables developers to build solutions that comprehend speech, make predictions, provide insights, and support decision-making.

Power Platform

Application development is moving beyond professional developers and into the hands of citizen developers—everyone from domain experts, to designers, marketers, salespeople, customer service professionals, teachers, students, and others.

In the same way that Office revolutionized productivity for knowledge workers, Power Platform—which has over 16 million monthly users—is transforming application development so that anyone can automate workflows, create apps, build virtual agents, and analyze data.

Business Applications

Every organization is looking to digitize their end-to-end operations—from sales and customer service to supply chain management—so they can rapidly adapt to changing market dynamics.

With Dynamics 365, we’re building a new generation of business applications to meet this challenge. New integrations between Dynamics 365 and Teams enable everyone across an organization to view and collaborate on customer records seamlessly within Teams, and to meet, chat, and collaborate within Dynamics 365.

More broadly, we are leading the way with solutions tailored to the needs of key industries. During the past year, we introduced industry clouds for financial services, healthcare, manufacturing, nonprofits, and retail that make it easier for organizations to take advantage of the full power of our tech stack and to utilize new, industry-specific customizations that improve time to value, increase agility, and lower costs.

AI is technology’s most important priority, and healthcare is its most urgent application. And with our pending acquisition of Nuance Communications , we’ll provide ambient clinical intelligence capabilities for healthcare organizations that improve the patient experience and reduce the overwhelming burden of work that physicians struggle with today.

In our rapidly changing digital economy, people need a platform where they can acquire new skills, expand their networks, and connect with employers. The strong success of LinkedIn is a clear indicator of how important this is. In the five years since Microsoft acquired LinkedIn, revenue has nearly tripled and growth has accelerated.

Today, LinkedIn has more than 774 million members and is a leader in B2B advertising, professional hiring, corporate learning, and sales intelligence. From LinkedIn profiles within Office, to LinkedIn Learning courses within Microsoft Viva, and LinkedIn Sales Navigator leads within Dynamics 365, we continue to bring the power of LinkedIn and Microsoft together to transform how people learn, sell, and connect.

Modern Work

The rise of hybrid work will be one of the most profound changes to the way people work in more than a century. To navigate it, organizations will need to embrace flexibility across their entire operating model, including the ways people work, the places they inhabit, and how they manage business process.

Our approach to hybrid work starts with Teams—the only all-in-one solution that supports meetings, calls, chat, collaboration, and business process automation in day-to-day workflow. Over the past year, we introduced hundreds of new features, from new presenter modes to new inclusive meeting experiences, that make it easy for everyone to be full participants in meetings, whether they’re joining from home, the office, a conference room, or a factory floor. Nearly 250 million people use Teams every month.

In this new hybrid work environment, having a digital employee experience platform will be key to business success. This is why we introduced Microsoft Viva , which brings the information, resources, and support employees need to stay connected to each other and their company’s mission directly into the flow of work.

The past year has also made clear how essential PCs are to work, learning, and life at home. With Windows 11 —the biggest update to our operating system in a decade—we’re reimagining everything from the platform to the store to help people and organizations be more productive, connected, and secure, and to build a more open ecosystem for developers and creators. With every new generation of Windows, we also unlock the next generation of hardware innovation across our ecosystem. And I’m excited to see new PCs from Surface and our OEM ecosystem ship with Windows 11 this holiday season that include the latest innovations in touch, pen, and voice, as well as new breakthroughs in both accessibility and sustainability.

And with Windows 365 , we are creating a new category: the cloud PC. By bringing the operating system to the cloud, we’re enabling organizations to stream the full Windows experience to their employees’ personal or corporate device with just a few clicks. This will give organizations greater flexibility and a more secure way to empower employees to be productive and connected, regardless of their location.

The threat landscape has never been more complex or challenging, and security has never been more critical for our customers or society as a whole. In response, we will invest $20 billion over the next five years to advance our security solutions. Our goal is to help every organization strengthen its security capabilities through a Zero Trust architecture built on our comprehensive solutions that span identity, security, compliance, and device management across all clouds and platforms.

Beyond our products, our operational security posture and threat intelligence help customers defend themselves. Last year, we intercepted 30 billion email threats and 31 billion authentication attacks. And as I write this, we are tracking more than 140 groups that pose an active threat to global cybersecurity.

Three billion people around the world play games, which makes gaming the largest category in the entertainment industry. We are expanding our opportunity to reach every one of them.

With Xbox Game Pass, we are transforming how people discover, connect, and engage with games. Great content drives Game Pass’ growth, and our acquisition this year of ZeniMax Media adds some of the world’s most iconic franchises to the service. We also continue to lead in the fast-growing cloud gaming market. Xbox Cloud Gaming is now available on PCs, as well as phones and tablets, and later this year will come to the console.

Introduced in November 2020 , the new Xbox Series S and X are our fastest-selling consoles ever. And we continue to expand our opportunity in the creator economy by adding new ways for players to build and monetize their creations in many of our most popular games.

OUR PURPOSE

As we pursue the opportunities ahead, we also recognize our increased responsibility in a world that will require much more from technology to address its most pressing challenges. To help people and organizations everywhere achieve more, we are focused on four interconnected pillars.

Support inclusive economic opportunity

At Microsoft, we believe that the economic growth we help drive must reach every person, community, and country. This starts with access to broadband. The pandemic has underscored that without it, people lack access to education, healthcare, economic opportunity, and more. We are continuing our efforts to extend broadband access to millions of people in rural and underserved communities in the United States and around the globe. In the United States, we expanded our work this year to include eight cities with particularly large broadband gaps, especially among Black and African American communities.

We must also continue to increase access to digital skills. In June 2020, with tens of millions of people displaced from their jobs due to the pandemic, we brought resources together from across Microsoft, inclusive of LinkedIn and GitHub, to help 25 million people connect to the digital skills for in-demand roles . Together with our partners, we have reached more than 47 million people to date, across 250 countries, but the work doesn’t stop there. We’re helping companies make 250,000 skills-based hires this year—ensuring those who learn digital skills can convert them into jobs and opportunity. For example, through LinkedIn’s new Skills Path pilot, we’re providing tools to help businesses source job candidates in a more equitable way—based on their proven proficiencies.

To build a more inclusive economy, we also have a responsibility to help close the Disability Divide, which impacts more than 1 billion people with disabilities around the world. That’s why in April we announced a new five-year commitment to spur the development of accessible technology, expand opportunities for people with disabilities in the workforce, and build a more inclusive workplace.

And we continue to make our technology affordable and accessible to nonprofit organizations around the world. This year, we provided $2.5 billion in donated and discounted products and services to help 295,000 nonprofits better serve their communities. Our employees donated an additional $214 million (including the company match) to the organizations and causes they care about.

Protect fundamental rights

We support the fundamental rights of all people. This year, we made progress in our work to address racial injustice and inequity . We released our first annual Racial Equity Initiative: Strengthening Our Communities report , which focuses on justice reform, affordable broadband, skills and education, and support for community-based nonprofits. And we continue to improve the representation of our ecosystem by engaging with diverse suppliers, financial institutions, and channel partners. While we’re proud of our progress, we know we have much more work to do to help our communities, increase representation, and strengthen our culture of inclusion to influence broader, systemic change.

We must also protect the institutions and processes of democracy. Through our Democracy Forward Program , we’re working across sectors to safeguard electoral processes and defend against disinformation. And to preserve and protect journalism , we’re helping strengthen local news ecosystems, restore trust in news, and provide cybersecurity and legal security for journalists.

Finally, we continue to stand up for human rights , which includes taking action to prevent modern slavery and human trafficking in our business and supply chain and supporting humanitarian action and emergency response . Last year, we mobilized resources to respond to the Beirut explosion, hurricanes in Central America, wildfires in the United States, and more. To date, we’ve committed cash, technology, and other resources with a value of more than $410 million to support ongoing COVID-19 response efforts.

Commit to a sustainable future

While the pandemic has been the defining issue of the past year-and-a-half, climate change is the challenge of our lifetime. And as a global technology company, we have a particular responsibility to do our part. In January, we released our first annual sustainability report , sharing our progress toward becoming carbon negative, zero waste, and water positive by 2030. In fiscal year 2020, Microsoft reduced its carbon emissions by 587,000 metric tons and purchased the removal of 1.3 million metric tons of carbon. We are building a Planetary Computer to help manage and protect Earth’s natural systems. And we have made a commitment to match 100 percent of our electricity consumption with zero carbon energy purchases 100 percent of the time by 2030.

We also know that solving the carbon problem will require new technology and partnerships. This is why we launched the Microsoft Cloud for Sustainability —to create a new business process category that will help every organization measure, report, and reduce their environmental impact. It’s also why we’re making direct investments through our $1 billion Climate Innovation Fund to help organizations accelerate the development of solutions for carbon reduction and removal technology.

We want our customers and partners to build their own digital capability and become independent with us, not dependent on us. This is not possible without trust. For Microsoft, trust is built on privacy, security, digital safety, the responsible use of AI, and transparency.

Our approach to privacy begins with the belief that people have a right to own their personal data and that companies have a responsibility to collect and use personal data responsibly. This is why we were the first major tech company to support GDPR—the EU’s privacy law that is the standard for privacy legislation around the world—and why we are strong advocates for passage of comprehensive federal privacy legislation in the United States.

It extends to our investments in security, and our belief that the public and private sectors—including tech companies—must be transparent so we can work together on a coordinated global response.

How we develop and use AI is also a critical component of trust. To ensure our AI technologies are used responsibly and to avoid unintended consequences, we take a principled approach built on fairness, reliability and safety, privacy and security, inclusiveness, transparency, and accountability. Our Office of Responsible AI ensures that we put these principles into practice, and our Responsible AI Resources Center shares guidelines and tools to help our customers and the developer community do the same.

Finally, we believe transparency is the foundation of trust, so we continue to offer clear information on how we run our business and work with customers and partners. Our CSR Reports Hub provides detailed information on law enforcement access to data, our environmental data, our political activities, our workforce demographics, and our human rights work.

No one company, industry, or country can solve these challenges alone. While our own actions are important, our most critical contribution will come from sharing our learnings and helping other organizations achieve their own goals for a better future too.

OUR CULTURE

Ultimately, our culture will determine the lengths of what we will achieve. We aspire to create a culture where employees are encouraged to be curious, to experiment, and to share things they learn. This is why we put so much emphasis over the past few years on building a culture that centers on our commitment to a growth mindset .

This growth mindset served us well during the past year of crisis, disruption, and transformation. It drives our passion to obsess about our customers, and to learn about and from them. It has helped us become more empathetic toward our colleagues and enabled us to work together as a team—as One Microsoft. And it underlies our approach to diversity and inclusion.

We know that as we become more representative of the communities where we live and work, and the people around the world who we aspire to serve, we become better at helping everyone on the planet achieve more. Diversity and inclusion continues to be a core priority for every employee at Microsoft and is incorporated into our performance and career development approach. To accelerate the inclusion journey for employees, as well as our ecosystem, we hosted Include 2021 , a global event focused on diversity and inclusion, and continue to invest in shared understanding by publishing resources and learnings broadly. And in the first year of our commitment to address inequity and racial injustice, we are well on our way to doubling the number of Black and African American, Hispanic, and Latinx employees in leadership positions at Microsoft in the United States by 2025.

Care is the new currency for every leader, and we’ve built a new framework to help our managers strengthen their teams and deliver success through empowerment and accountability. Our managers strive to model our culture and values in their actions, to coach their teams to define objectives and adapt and learn, and to care deeply for their employees, seeking to understand their capabilities, ambitions, and invest in their growth.

Although it may be difficult to imagine in this time of immeasurable hardship and deep uncertainty, I see boundless possibility ahead. I am encouraged because of the power of you, our shareholders, our employees, our partners, our customers, and everyone who has continued to work hard to make the world a better place in the face of constraints. And if we continue to pursue our mission, I am certain that we will collectively achieve so much more together.

I couldn’t be more optimistic.

Satya Nadella Chairman and Chief Executive Officer October 12, 2021

Financial Review

Issuer purchases of equity securities, dividends, and stock performance, share repurchases and dividends.

Share Repurchases

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020, following completion of the program approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2021, $8.7 billion remained of this $40.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase programs:

Shares repurchased during fiscal year 2021 and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $4.4 billion, $3.3 billion, and $2.7 billion for fiscal years 2021, 2020, and 2019, respectively. All share repurchases were made using cash resources.

Our Board of Directors declared the following dividends:

The dividend declared on June 16, 2021 was included in other current liabilities as of June 30, 2021.

STOCK PERFORMANCE

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, the S&P 500 Index and the NASDAQ Computer Index

• $100 invested on 6/30/16 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Business”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in our fiscal year 2021 Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

Embracing Our Future

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. They also support new startups, improve educational and health outcomes, and empower human ingenuity.

We bring technology and products together into experiences and solutions that unlock value for our customers. Our ecosystem of customers and partners has stepped up to help people and organizations in every country use technology to be resilient and transform during the most trying of circumstances. Amid rapid change we’ve witnessed technology empower telehealth, remote manufacturing, and new ways of working from home and serving customers. These capabilities have relied on the public cloud, which is built on the investments we have made over time.

We are living in the new era of the intelligent cloud and intelligent edge, which is being sharpened by rapid advances in distributed computing, ambient intelligence, and multidevice experiences. This means the places we go and the things we interact with will increasingly become digitized, creating new opportunities and new breakthroughs. In the next phase of innovation, computing is more powerful and ubiquitous from the cloud to the edge. Artificial intelligence (“AI”) capabilities are rapidly advancing, fueled by data and knowledge of the world. Physical and virtual worlds are coming together with the Internet of Things (“IoT”) and mixed reality to create richer experiences that understand the context surrounding people, the things they use, the places they go, and their activities and relationships. A person’s experience with technology spans a multitude of devices and has become increasingly more natural and multi-sensory with voice, ink, and gaze interactions.

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 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, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. We also design and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

The Ambitions That Drive Us

To achieve our vision, our research and development efforts focus on three interconnected ambitions:

• Reinvent productivity and business processes.
• Build the intelligent cloud and intelligent edge platform.
• Create more personal computing.

Reinvent Productivity and Business Processes

At Microsoft, we’re providing technology and resources to help our customers navigate a remote environment. We’re seeing our family of products play key roles in the ways the world is continuing to work, learn, and connect.

Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including Office, Dynamics, and LinkedIn. Microsoft 365 brings together Office 365, Windows, and Enterprise Mobility + Security to help organizations empower their employees with AI-backed tools that unlock creativity, increase teamwork, and fuel innovation, all the while enabling compliance coverage and data protection. Microsoft Teams is enabling rapid digital transformation by giving people a single tool to chat, call, meet, and collaborate. Microsoft Viva is an employee experience platform that brings together communications, knowledge, learning, resources, and insights powered by Microsoft 365. Microsoft Relationship Sales solution brings together LinkedIn Sales Navigator and Dynamics to transform business to business sales through social selling. Dynamics 365 for Talent with LinkedIn Recruiter and Learning gives human resource professionals a complete solution to compete for talent. Microsoft Power Platform empowers employees to build custom applications, automate workflow, and analyze data no matter their technical expertise.

These scenarios represent a move to unlock creativity and discover new habits, while simplifying security and management. Organizations of all sizes have digitized business-critical functions, redefining what they can expect from their business applications. This creates an opportunity to reach new customers and increase usage and engagement with existing customers.

Build the Intelligent Cloud and Intelligent Edge Platform

In the new remote world, companies have accelerated their own digital transformation to empower their employees, optimize their operations, engage customers, and in some cases, change the very core of their products and services. Partnering with organizations on their digital transformation during this period is one of our largest opportunities and we are uniquely positioned to become the strategic digital transformation platform and partner of choice; their success is our success.

Our strategy requires continued investment in datacenters and other hybrid and edge infrastructure to support our services. Azure is a trusted cloud with comprehensive compliance coverage and AI-based security built in.

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.

The Microsoft Cloud is the most comprehensive and trusted cloud, providing the best integration across the technology stack while offering openness, improving time to value, reducing costs, and increasing agility. Being a global-scale cloud, Azure uniquely offers hybrid consistency, developer productivity, AI capabilities, and trusted security and compliance. We see more emerging use cases and needs for compute and security at the edge and are accelerating our innovation across the spectrum of intelligent edge devices, from IoT sensors to gateway devices and edge hardware to build, manage, and secure edge workloads. With Azure Stack, organizations can extend Azure into their own datacenters to create a consistent stack across the public cloud and the intelligent edge. Our hybrid infrastructure consistency spans security, compliance, identity, and management, helping to support the real-world needs and evolving regulatory requirements of commercial customers and enterprises. Azure Arc simplifies governance and management by delivering a consistent multi-cloud and on-premises management platform. Security, compliance, identity, and management underlie our entire tech stack. We offer integrated, end-to-end capabilities to protect people and organizations. In April 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc., a cloud and AI software provider with healthcare and enterprise AI experience. The acquisition will build on our industry-specific cloud offerings.

We are accelerating our development of mixed reality solutions with new Azure services and devices. Microsoft Mesh enables presence and shared experiences from anywhere through mixed reality applications. The opportunity to merge the physical and digital worlds, when combined with the power of Azure cloud services, unlocks the potential for entirely new workloads and experiences which we believe will shape the next era of computing.

The ability to convert data into AI drives our competitive advantage. Azure SQL Database makes it possible for customers to take SQL Server from their on-premises datacenter to a fully managed instance in the cloud to utilize built-in AI. Azure Synapse Analytics, a limitless analytics service, brings together data integration, enterprise data warehousing, and big data analytics for immediate business intelligence and machine learning needs. We are accelerating adoption of AI innovations from research to products. Our innovation helps every developer be an AI developer, with approachable new tools from Azure Machine Learning Studio for creating simple machine learning models, to the powerful Azure Machine Learning Workbench for the most advanced AI modeling and data science. From GitHub to Visual Studio, we provide a developer tool chain for everyone, no matter the technical experience, across all platforms, whether Azure, Windows, or any other cloud or client platform.

Create More Personal Computing

We strive to make computing more personal by putting people at the core of the experience, enabling them to interact with technology in more intuitive, engaging, and dynamic ways. Microsoft 365 is empowering people and organizations to be productive and secure as they adapt to more fluid ways of working and learning. The PC has been mission-critical across work, school, and life to sustain productivity in a remote everything world.

Windows 10 serves the enterprise as the most secure and productive operating system. It empowers people with AI-first interfaces ranging from voice-activated commands through Cortana, inking, immersive 3D content storytelling, and mixed reality experiences. Our ambition for Windows 10 monetization opportunities includes gaming, services, subscriptions, and search advertising. In June 2021, Microsoft announced the next generation of Windows – Windows 11. Windows 11 builds on the strengths of productivity, versatility, and security on Windows 10 today and adds in new experiences that include powerful task switching tools like new snap layouts, snap groups, and desktops; new ways to stay connected through chat; the information you want at your fingertips; and more. Windows also plays a critical role in fueling our cloud business and Microsoft 365 strategy, and it powers the growing range of devices on the “intelligent edge.”

Microsoft Edge is our fast and secure browser that helps protect your data, with built-in shopping tools designed to save you time and money. Organizational tools such as Collections, Vertical Tabs, and Immersive Reader help you make the most of your time while browsing, streaming, searching, sharing, and more.

We are committed to designing and marketing first-party devices to help drive innovation, create new device categories, and stimulate demand in the Windows ecosystem. The Surface family includes Surface Book 3, Surface Laptop Go, Surface Go 2, Surface Pro 7, Surface Laptop 4, Surface Pro X, Surface Studio 2, and Surface Duo.

To expand usage and deepen engagement, we continue to invest in content, community, and cloud services as we pursue the expansive opportunity in the gaming industry. We have broadened our approach to how we think about gaming end-to-end, from the way games are created and distributed to how they are played, including cloud gaming so players can stream across PC, console, and mobile. We have a strong position with our large and growing highly engaged community of gamers, including the March 2021 acquisition of ZeniMax Media Inc., the parent company of Bethesda Softworks LLC, one of the largest, privately held game developers and publishers in the world. Xbox Game Pass is a community with access to a curated library of over 100 first- and third-party console and PC titles. Xbox Cloud Gaming is Microsoft’s game streaming technology that is complementary to our console hardware and gives fans the ultimate choice to play the games they want, with the people they want, on the devices they want.

Our Future Opportunity

In a time of great disruption and uncertainty, customers are looking to us to accelerate their own digital transformations as software and cloud computing play a huge role across every industry and around the world. We continue to develop complete, intelligent solutions for our customers that empower people to stay 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:

• Transforming the workplace to deliver new modern, modular business applications to improve how people communicate, collaborate, learn, work, play, and interact with one another.
• Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses and individuals.
• Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using natural methods of communication.
• Using Windows to fuel our cloud business, grow our share of the PC market, and drive increased engagement with our services like Microsoft 365 Consumer, Teams, Edge, Bing, Xbox Game Pass, and more.
• Tackling security from all angles with our integrated, end-to-end solutions spanning security, compliance, identity, and management, across all clouds and platforms.
• Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of entertainment.

Our future growth depends on our ability to transcend current product category definitions, business models, and sales motions. We have the opportunity to redefine what customers and partners can expect and are working to deliver new solutions that reflect the best of Microsoft.

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic continues to have widespread and unpredictable impacts on global society, economies, financial markets, and business practices, and continues to impact our business operations, including our employees, customers, partners, and communities. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion regarding the impact of COVID-19 on our fiscal year 2021 financial results. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict. Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks.

Corporate Social Responsibility

Commitment to Sustainability

We work to ensure that technology is inclusive, trusted, and increases sustainability. We are accelerating progress toward a more sustainable future by reducing our environmental footprint, advancing research, helping our customers build sustainable solutions, and advocating for policies that benefit the environment. In January 2020, we announced a bold commitment and detailed plan to be carbon negative by 2030, and to remove from the environment by 2050 all the carbon we have emitted since our founding in 1975. This included a commitment to invest $1 billion over four years in new technologies and innovative climate solutions. We built on this pledge by adding commitments to be water positive by 2030, zero waste by 2030, and to protect ecosystems by developing a Planetary Computer. We also help our suppliers and customers around the world use Microsoft technology to reduce their own carbon footprint.

In January 2021, we announced that in fiscal year 2020 we reduced Microsoft’s carbon emissions by 586,683 metric tons. We purchased the removal of 1.3 million metric tons of carbon from 26 projects around the world. Furthermore, we shared a commitment to transparency by subjecting the data in our annual sustainability report to third-party review and to accountability by including progress on sustainability goals as a factor in determining executive pay.

The investments we make in sustainability carry through to our products, services, and devices. We design our devices, from Surface to Xbox, to minimize their impact on the environment. Our cloud and AI services and datacenters help businesses cut energy consumption, reduce physical footprints, and design sustainable products. We also pledged a $50 million investment in AI for Earth to accelerate innovation by putting AI in the hands of those working to directly address sustainability challenges. We are committed to playing our part to help accelerate the world’s transition to a more economically and environmentally sustainable future for us all.

Addressing Racial Injustice and Inequity

Our future opportunity depends on reaching and empowering all communities, and we are committed to taking action to help address racial injustice and inequity. With significant input from employees and leaders who are members of the Black and African American community, our senior leadership team and board of directors announced in June 2020 that we had developed a set of actions to help improve the lived experience at Microsoft and drive change in the communities in which we live and work. These efforts include increasing our representation and strengthening our culture of inclusion by doubling the number of Black and African American people managers, senior individual contributors, and senior leaders in the United States by 2025; evolving our ecosystem with our supply chain, banking partners, and partner ecosystem; and strengthening our communities by using data, technology, and partnerships to help address racial injustice and inequities of the Black and African American communities in the U.S. and improve the safety and wellbeing of our employees and their communities.

Over the last year, we have collaborated with partners and worked within neighborhoods and communities to launch and scale a number of projects and programs including: expanding our existing justice reform work with a five-year, $50 million sustained effort, expanding access to affordable broadband and devices for Black and African American communities and key institutions that support them in major urban centers, expanding access to skills and education to support Black and African American students and adults to succeed in the digital economy, and increasing technology support for nonprofits that provide critical services to Black and African American communities.

We have more than doubled our percentage share of transaction volume with Black- and African American-owned financial institutions and increased our deposits with Black- and African American-owned minority depository institutions, enabling increased funds into local communities. Additionally, we have seen growth in our Black- and African American-owned supplier base and in Black- and African American-owned technology partners in the Microsoft Partner Network, and we launched the Black Channel Partner Alliance community to support partners onboarding to the Microsoft Cloud and to unlock partner benefits for co-selling with Microsoft.

We acknowledge we have more work ahead of us to address racial injustice and inequity, and are applying many of the programs above to help other underrepresented communities.

Investing in Digital Skills

With a continued focus on digital transformation, Microsoft is helping to ensure that no one is left behind, particularly as economies recover from the COVID-19 pandemic. We announced in June 2020 that we are expanding access to the digital skills that have become increasingly vital to many of the world’s jobs, and especially to individuals hardest hit by recent job losses. Our skills initiative brings together learning resources, certification opportunities, and job-seeker tools from LinkedIn, GitHub, and Microsoft Learn, and is built on data insights drawn from LinkedIn’s Economic Graph. We also invested $20 million in key non-profit partnerships through Microsoft Philanthropies to help people from underserved communities that are often excluded by the digital economy.

Over 42 million people across every continent have accessed free training through our skills initiative. The effort surpassed its initial goals and has been expanded with a new emphasis on connecting learners with jobs that help put their new training to use and connecting employers with skilled job seekers they might not find in traditional networks.

HUMAN CAPITAL RESOURCES

Microsoft aims to recruit, develop, and retain diverse, world-changing talent. To foster their and our success, we seek to create an environment where people can do their best work – a place where they can proudly be their authentic selves, guided by our values, and where they know their needs can be met. We strive to maximize the potential of our human capital resources by creating a respectful, rewarding, and inclusive work environment that enables our global employees to create products and services that further our mission to empower every person and every organization on the planet to achieve more.

As of June 30, 2021, we employed approximately 181,000 people on a full-time basis, 103,000 in the U.S. and 78,000 internationally. Of the total employed people, 67,000 were in operations, including manufacturing, distribution, product support, and consulting services; 60,000 were in product research and development; 40,000 were in sales and marketing; and 14,000 were in general and administration. Certain of our employees are subject to collective bargaining agreements.

Our Culture

Microsoft’s culture is grounded in the growth mindset. This means everyone is on a continuous journey to learn and grow. We believe potential can be nurtured and is not pre-determined, and we should always be learning and curious – trying new things without fear of failure. We identified four attributes that allow growth mindset to flourish:

• Obsessing over what matters to our customers.
• Becoming more diverse and inclusive in everything we do.
• Operating as one company, One Microsoft, instead of multiple siloed businesses.
• Making a difference in the lives of each other, our customers, and the world around us.

Our employee listening systems enable us to gather feedback directly from our workforce to inform our programs and employee needs globally. 88% of employees globally participated in our fiscal year 2021 MS Poll engagement survey, which covers a variety of topics such as inclusion, pay and benefits, and learning and development. Throughout the fiscal year, we also collect nearly 75,000 Daily Pulse employee survey responses. During fiscal year 2021, our Daily Pulse surveys gave us invaluable insights into ways we could support employees through the COVID-19 pandemic and addressing racial injustice. In addition to poll and pulse surveys, we gain insights through onboarding and exit surveys, internal Yammer channels, employee Q&A sessions, and AskHR Service support.

Diversity and Inclusion

At Microsoft we have an inherently inclusive mission: to empower every person and every organization on the planet to achieve more. We think of diversity and inclusion as core to our business model, informing our actions to impact economies and people around the world. There are billions of people who want to achieve more, but have a different set of circumstances, abilities, and backgrounds that often limit access to opportunity and achievement. The better we represent that diversity inside Microsoft, the more effectively we can innovate for those we seek to empower.

We strive to include others by holding ourselves accountable for diversity, driving global systemic change in our workplace and workforce, and creating an inclusive work environment. Through this commitment we can allow everyone the chance to be their authentic selves and do their best work every day. We support multiple highly active Employee Resource Groups for women, families, racial and ethnic minorities, military, people with disabilities, or who identify as LGBTQI+, where employees can go for support, networking, and community-building. As described in our 2020 Proxy Statement, annual performance and compensation reviews of our senior leadership team include an evaluation of their contributions to employee culture and diversity. To ensure accountability over time, we publicly disclose our progress on a multitude of workforce metrics including:

• Detailed breakdowns of gender, racial, and ethnic minority representation in our employee population, with data by job types, levels, and segments of our business.
• Our EEO-1 report (equal employment opportunity).
• Disability representation.

Total Rewards

We develop dynamic, sustainable, and strategic programs with the goal of providing a highly differentiated portfolio to attract, reward, and retain top talent and enable our employees to do their best work. These programs reinforce our culture and values such as collaboration and growth mindset. Managers evaluate and recommend rewards based on, for example, how well we leverage the work of others and contribute to the success of our colleagues. We monitor pay equity and career progress across multiple dimensions.

As part of our effort to promote a One Microsoft and inclusive culture, we expanded stock eligibility to all Microsoft employees as part of our annual rewards process. This includes all non-exempt and exempt employees and equivalents across the globe including business support professionals and datacenter and retail employees.

In our 2020 Diversity and Inclusion Report, we reported that all racial and ethnic minority employees in the U.S. combined earn $1.006 for every $1.000 earned by their white counterparts, that women in the U.S. earn $1.001 for every $1.000 earned by their counterparts in the U.S. who are men, and women in the U.S. plus our ten other largest employee geographies (Australia, Canada, China, France, Germany, India, Ireland, Israel, Japan, and United Kingdom) combined earn $1.000 for every $1.000 by men in these countries. Our intended result is a global performance and development approach that fosters our culture, and competitive compensation that ensures equitable pay by role while supporting pay for performance.

Wellness and Safety

Microsoft is committed to supporting our employees’ well-being and safety while they are at work and in their personal lives.

We took a wide variety of measures to protect the health and well-being of our employees, suppliers, and customers during the COVID-19 pandemic. We made substantial modifications to employee travel policies and implemented office closures so non-essential employees could work remotely. We continued to pay hourly service providers such as cleaning and reception staff who may have otherwise been furloughed. We implemented a global Paid Pandemic School and Childcare Closure Leave to support working parents, added wellbeing days for those who needed to take time off for mental health and wellness, implemented on-demand COVID-19 testing and vaccinations on our Redmond, Washington campus, and extended full medical plan coverage for coronavirus testing, treatment, and telehealth services. We also expanded existing programs such as our Microsoft CARES Employee Assistance Program and family backup care.

In addition to the extraordinary steps and programs relating to COVID-19, our comprehensive benefits package includes many physical, emotional, and financial wellness programs including counseling through the Microsoft CARES Employee Assistance Program, flexible fitness benefits, savings and investment tools, adoption assistance, and back-up care for children and elders. Finally, our Occupational Health and Safety program helps ensure employees can stay safe while they are working.

Learning and Development

Our growth mindset culture begins with valuing learning over knowing – seeking out new ideas, driving innovation, embracing challenges, learning from failure, and improving over time. To support this culture, we offer a wide range of learning and development opportunities. We believe learning can be more than formal instruction, and our learning philosophy focuses on providing the right learning, at the right time, in the right way. Opportunities include:

• Personalized, integrated, and relevant views of all learning opportunities on our internal learning portal, our external learning portal MS Learn, and LinkedIn Learning that is available to all employees worldwide.
• In-the-classroom learning, learning “pods,” our early-in-career Aspire program, and manager excellence communities.
• On-the-job “stretch” and advancement opportunities.
• Managers holding conversations about employees’ career and development plans, coaching on career opportunities, and programs like mentoring and sponsorship.
• Customized manager learning to build people manager capabilities and similar learning solutions to build leadership skills for all employees including differentiated leadership development programs.
• New employee orientation covering a range of topics including company values, culture, and Standards of Business Conduct, as well as ongoing onboarding program.

Our employees embrace the growth mindset and take advantage of the formal learning opportunities as well as thousands of informal and on-the-job learning opportunities. In terms of formal on-line learning solutions, in fiscal year 2021 our employees completed over 5 million courses, averaging over 18 hours per employee. Given our focus on understanding core company beliefs and compliance topics, all employees complete required learning programs like Standards of Business Conduct, Privacy, Unconscious Bias, and preventing harassment courses. Our corporate learning portal has over 100,000 average monthly active users. All of our approximately 23,000 people managers must complete between 25-30 hours of required manager capability and excellence training and are assigned ongoing required training each year. In addition, all employees complete skills training based on the profession they are in each year.

New Ways of Working

The global pandemic has accelerated our capabilities and culture with respect to flexible work. Microsoft has introduced a Hybrid Workplace Flexibility Guide to better support managers and employees as they adapt to new ways of working that shift paradigms, embrace flexibility, promote inclusion, and drive innovation. Our ongoing survey data shows employees value the flexibility related to work location, work site, and work hours, and while many indicate they intend to return to a worksite once conditions permit, they also intend to adjust hours or spend some portions of workweeks working remotely. We are focused on building capabilities to support a variety of workstyles where individuals, teams, and our business can be successful.

OPERATING SEGMENTS

We operate our business and report our financial performance using three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. 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.

Additional information on our operating segments and geographic and product information is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements.

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

• Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business.
• Office Consumer, including Microsoft 365 Consumer subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.
• LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions.
• Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Office Commercial

Office Commercial is designed to increase personal, team, and organizational productivity through a range of products and services. 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 value to our core product and service offerings to span productivity categories such as communication, collaboration, analytics, security, and compliance. Office Commercial 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 Office 365.

Office Consumer

Office Consumer is designed to increase personal productivity through a range of products and services. Growth depends on our ability to reach new users, add value to our core product set, and continue to expand our product and service offerings into new markets. Office Consumer 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. Office Consumer Services revenue is mainly affected by the demand for communication and storage through Skype, Outlook.com, and OneDrive, which is largely driven by subscriptions, advertising, and the sale of minutes.

LinkedIn connects the world’s professionals to make them more productive and successful and transforms the way companies hire, market, sell, and learn. Our vision is to create economic opportunity for every member of the global workforce through the ongoing development of the world’s first Economic Graph, a digital representation of the global economy. In addition to LinkedIn’s free services, LinkedIn offers monetized solutions: Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions. Talent Solutions provide insights for workforce planning and tools to hire, nurture, and develop talent. Marketing Solutions help companies reach, engage, and convert their audiences at scale. Premium Subscriptions enables professionals to manage their professional identity, grow their network, and connect with talent through additional services like premium search. Sales Solutions help companies strengthen customer relationships, empower teams with digital selling tools, and acquire new opportunities. Finally, Learning Solutions, including Glint, help businesses close critical skills gaps in times where companies are having to do more with existing talent. LinkedIn has over 750 million members and has offices around the globe. Growth will depend on our ability to increase the number of LinkedIn members and our ability to continue offering services that provide value for our members and increase their engagement. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations for subscriptions to Talent Solutions, Learning Solutions, Sales Solutions, and Premium Subscriptions offerings, as well as member engagement and the quality of the sponsored content delivered to those members to drive Marketing Solutions.

Dynamics provides cloud-based and on-premises business solutions for financial management, enterprise resource planning (“ERP”), customer relationship management (“CRM”), supply chain management, and other 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 Power Apps and Power Automate.

Competition

Competitors to Office include software and global application vendors, such as Apple, Cisco Systems, Facebook, Google, IBM, Okta, Proofpoint, Slack, Symantec, Zoom, and numerous web-based and mobile application competitors as well as local application developers. Apple distributes versions of its pre-installed application software, such as email and calendar products, through its PCs, tablets, and phones. Cisco Systems is using its position in enterprise communications equipment to grow its unified communications business. Google provides a hosted messaging and productivity suite. Slack provides teamwork and collaboration software. Zoom offers videoconferencing and cloud phone solutions. Skype for Business and Skype also compete with a variety of instant messaging, voice, and video communication providers, ranging from start-ups to established enterprises. Okta, Proofpoint, and Symantec provide security solutions across email security, information protection, identity, and governance. Web-based offerings competing with individual applications have also positioned themselves as alternatives to our products and services. We compete by providing powerful, flexible, 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.

LinkedIn faces competition from online professional networks, recruiting companies, talent management companies, and larger companies that are focusing on talent management and human resource services; job boards; traditional recruiting firms; and companies that provide learning and development products and services. Marketing Solutions competes with online and offline outlets that generate revenue from advertisers and marketers, and Sales Solutions competes with online and offline outlets for companies with lead generation and customer intelligence and insights.

Dynamics competes with cloud-based and on-premises business solution providers such as Oracle, Salesforce.com, and SAP.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

• Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and GitHub.
• Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

Server Products and Cloud Services

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, IoT, cognitive services, and machine learning. 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, and per user-based services such as Enterprise Mobility + Security.

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. GitHub provides a collaboration platform and code hosting service for developers. Server products revenue is mainly affected by purchases through volume licensing programs, licenses sold to original equipment manufacturers (“OEM”), and retail packaged products. CALs provide access rights to certain server products, including SQL Server and Windows Server, and revenue is reported along with the associated server product.

Enterprise Services

Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing, deploying, and managing Microsoft server and desktop solutions and provide training and certification to developers and IT professionals on various Microsoft products.

Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, VMware, and open source offerings. Our Enterprise Mobility + Security offerings also compete with products from a range of competitors including identity vendors, security solution vendors, and numerous other security point solution vendors. 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. 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.

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 such as Hewlett-Packard, IBM, and Oracle offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system and many contribute to Linux operating system development. The competitive position of Linux has also benefited from the large number of compatible applications now produced by many commercial and non-commercial software developers. A number of companies, such as Red Hat, supply versions of Linux.

We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial software vendors that offer solutions and middleware technology platforms, software applications for connectivity (both Internet and intranet), security, hosting, database, and e-business servers. IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that competes with our enterprise-wide computing solutions. Commercial competitors for our server applications for PC-based distributed client-server environments include CA Technologies, IBM, and Oracle. Our web application platform software competes with open source software such as Apache, Linux, MySQL, and PHP. In middleware, we compete against Java vendors.

Our database, business intelligence, and data warehousing solutions offerings compete with products from IBM, Oracle, SAP, and other companies. Our system management solutions compete with server management and server virtualization platform providers, such as BMC, CA Technologies, Hewlett-Packard, IBM, and VMware. Our products for software developers compete against offerings from Adobe, IBM, Oracle, and other companies, and also against open-source projects, including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP, and Ruby on Rails.

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.

Our Enterprise 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.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

• Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows IoT; and MSN advertising.
• Devices, including Surface and PC accessories.
• Gaming, including Xbox hardware and Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising.
• Search advertising.

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:

• The mix of computing devices based on form factor and screen size.
• Differences in device market demand between developed markets and growth markets.
• Attachment of Windows to devices shipped.
• Customer mix between consumer, small and medium businesses, and large enterprises.
• Changes in inventory levels in the OEM channel.
• Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.
• Constraints in the supply chain of device components.

Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud services such as Microsoft Defender Advanced Threat Protection, is affected mainly by the demand from commercial customers for volume licensing and Software Assurance (“SA”), as well as advanced security offerings. Windows Commercial revenue often reflects the number of information workers in a licensed enterprise and is relatively independent of the number of PCs sold in a given year.

Patent licensing includes our programs to license patents we own for use across a broad array of technology areas, including mobile devices and cloud offerings.

Windows IoT extends the power of Windows and the cloud to intelligent systems by delivering specialized operating systems, tools, and services for use in embedded devices.

MSN advertising includes both native and display ads.

We design and sell devices, including Surface 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.

Our gaming platform is designed to provide a variety of entertainment through a unique combination of content, community, and cloud. Our exclusive game content is created through Xbox Game Studios, a collection of first-party studios creating iconic and differentiated gaming experiences. We continue to invest in new gaming studios and content to expand our IP 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 over 100 first- and third-party console and PC titles.

The gamer remains at the heart of the Xbox ecosystem. We continue to open new opportunities for gamers to engage both on- and off-console with both the launch of Xbox Cloud Gaming, our game streaming service, and continued investment in gaming hardware. Xbox Cloud Gaming utilizes Microsoft’s Azure cloud technology to allow direct and on-demand streaming of games to PCs, consoles, and mobile devices, enabling gamers to take their favorites games with them and play on the device most convenient to them.

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 Gaming 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 through first-party content creators.

Search Advertising

Our Search business, including Bing and Microsoft Advertising, is designed to deliver relevant online advertising to a global audience. We have several partnerships with other companies, including Verizon Media Group, through which we provide and monetize search queries. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content and advertiser offerings.

Windows faces competition from various software products and from alternative platforms and devices, mainly from Apple and Google. 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. These manufacturers, many of which are also current or potential partners and customers, include Apple and our Windows OEMs.

Xbox and our cloud gaming services face competition from various online gaming ecosystems and game streaming services, including those operated by Amazon, Apple, Facebook, Google, and Tencent. We also compete with other providers of entertainment services such as video streaming platforms. Our gaming platform competes with console platforms from Nintendo and Sony, both of which have a large, established base of customers. 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 exclusive content from our own first-party game franchises as well as other digital content offerings.

Our search business competes with Google and a wide array of websites, social platforms like Facebook, and portals that provide content and online offerings to end users.

We have operations centers that support operations in their regions, including customer contract and order processing, credit and collections, information processing, and vendor management and logistics. The regional center in Ireland supports the European, Middle Eastern, and African region; the center in Singapore supports the Japan, India, Greater China, and Asia-Pacific region; and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico, Redmond, Washington, and Reno, Nevada support Latin America and North America. In addition to the operations centers, we also operate datacenters throughout the Americas, Europe, Australia, and Asia, as well as in the Middle East and Africa.

To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we localize many of our products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.

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. For these components, we have limited near-term flexibility to use other manufacturers if a current vendor becomes unavailable or is unable to meet our requirements. Extended disruptions at these suppliers could lead to a similar disruption in our ability to manufacture devices on time to meet consumer demand.

RESEARCH AND DEVELOPMENT

Product and Service Development, and Intellectual Property

We develop most of our products and services internally through the following engineering groups.

• Cloud and AI , focuses on making IT professionals, developers, and their systems more productive and efficient through development of cloud infrastructure, server, database, CRM, ERP, management and development tools, AI cognitive services, and other business process applications and services for enterprises.
• Experiences and Devices , focuses on instilling a unifying product ethos across our end-user experiences and devices, including Office, Windows, Enterprise Mobility + Security, and Surface.
• AI and Research , focuses on our AI innovations and other forward-looking research and development efforts spanning infrastructure, services, applications, and search.
• LinkedIn , focuses on our services that transform the way customers hire, market, sell, and learn.
• Gaming, focuses on developing hardware, content, and services across a large range of platforms to help grow our user base through game experiences and social interaction.

Internal development allows us to maintain competitive advantages that come from product differentiation and closer technical control over our products and services. It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. We strive to obtain information as early as possible about changing usage patterns and hardware advances that may affect software and hardware design. Before releasing new software platforms, and as we make significant modifications to existing platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. Generally, we also create product documentation internally.

We protect our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to our software and hardware products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and currently have a portfolio of over 65,000 U.S. and international patents issued and over 21,000 pending worldwide. While we employ much of our internally-developed intellectual property exclusively in our products and services, we also engage in outbound licensing of specific patented technologies that are incorporated into licensees’ products. From time to time, we enter into broader cross-license agreements with other technology companies covering entire groups of patents. We may also purchase or license technology that we incorporate into our products and services. At times, we make select intellectual property broadly available at no or low cost to achieve a strategic objective, such as promoting industry standards, advancing interoperability, supporting societal and/or environmental efforts, or attracting and enabling our external development community. Our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain situations.

While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, services, and business methods, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our continuing research and product development are not materially dependent on any single license or other agreement with a third party relating to the development of our products.

Investing in the Future

Our success is based on our ability to create new and compelling products, services, and experiences for our users, to initiate and embrace disruptive technology trends, to enter new geographic and product markets, and to drive broad adoption of our products and services. We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the Company. Based on our assessment of key technology trends, we maintain our long-term commitment to research and development across a wide spectrum of technologies, tools, and platforms spanning digital work and life experiences, cloud computing, AI, devices, and operating systems.

While our main product research and development facilities are located in Redmond, Washington, we also operate research and development facilities in other parts of the U.S. and around the world. This global approach helps us remain competitive in local markets and enables us to continue to attract top talent from across the world.

In addition to our main research and development operations, we also operate Microsoft Research. Microsoft Research is one of the world’s largest corporate research organizations and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science and a broad range of other disciplines, providing us a unique perspective on future trends and contributing to our innovation.

We generally fund research at the corporate level to ensure that we are looking beyond immediate product considerations to opportunities further in the future. We also fund research and development activities at the operating segment level. Much of our segment level research and development is coordinated with other segments and leveraged across the Company. We plan to continue to make significant investments in a broad range of research and development efforts.

DISTRIBUTION, SALES, AND MARKETING

We market and distribute our products and services through the following channels: OEMs, direct, and distributors and resellers. Our sales force performs a variety of functions, including working directly with commercial enterprises and public-sector organizations worldwide to identify and meet their technology and digital transformation requirements; managing OEM relationships; and supporting system integrators, independent software vendors, and other partners who engage directly with our customers to perform sales, consulting, and fulfillment functions for our products and services.

We distribute our products and services through OEMs that pre-install our software on new devices and servers they sell. The largest component of the OEM business is the Windows operating system pre-installed on devices. OEMs also sell devices pre-installed with other Microsoft products and services, including applications such as Office and the capability to subscribe to Office 365.

There are two broad categories of OEMs. The largest category of OEMs are direct OEMs as our relationship with them is managed through a direct agreement between Microsoft and the OEM. We have distribution agreements covering one or more of our products with virtually all the multinational OEMs, including Dell, Hewlett-Packard, Lenovo, and with many regional and local OEMs. The second broad category of OEMs are system builders consisting of lower-volume PC manufacturers, which source Microsoft software for pre-installation and local redistribution primarily through the Microsoft distributor channel rather than through a direct agreement or relationship with Microsoft.

Many organizations that license our products and services transact directly with us through Enterprise Agreements and Enterprise Services contracts, with sales support from system integrators, independent software vendors, web agencies, and partners that advise organizations on licensing our products and services (“Enterprise Agreement Software Advisors” or “ESA”). Microsoft offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to those offered through the reseller channel. A large network of partner advisors support many of these sales.

We also sell commercial and consumer products and services directly to customers, such as cloud services, search, and gaming, through our digital marketplaces and online stores. In fiscal year 2021, we closed our Microsoft Store physical locations and opened our Microsoft Experience Centers. Microsoft Experience Centers are designed to facilitate deeper engagement with our partners and customers across industries.

Distributors and Resellers

Organizations also license our products and services indirectly, primarily through licensing solution partners (“LSP”), distributors, value-added resellers (“VAR”), and retailers. Although each type of reselling partner may reach organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs, and VARs typically reach small and medium organizations. ESAs are also typically authorized as LSPs and operate as resellers for our other volume licensing programs. Microsoft Cloud Solution Provider is our main partner program for reselling cloud services.

We distribute our retail packaged products primarily through independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain these products primarily through retail outlets. We distribute our devices through third-party retailers. We have a network of field sales representatives and field support personnel that solicit orders from distributors and resellers, and provide product training and sales support.

Our Dynamics business solutions are also licensed to enterprises through a global network of channel partners providing vertical solutions and specialized services.

LICENSING OPTIONS

We offer options for organizations that want to purchase our cloud services, on-premises software, and SA. We license software to organizations under volume licensing agreements to allow the customer to acquire multiple licenses of products and services instead of having to acquire separate licenses through retail channels. We use different programs designed to provide flexibility for organizations of various sizes. While these programs may differ in various parts of the world, generally they include those discussed below.

SA conveys rights to new software and upgrades for perpetual licenses released over the contract period. It also provides support, tools, training, and other licensing benefits to help customers deploy and use software efficiently. SA is included with certain volume licensing agreements and is an optional purchase with others.

Volume Licensing Programs

Enterprise Agreement

Enterprise Agreements offer large organizations a manageable volume licensing program that gives them the flexibility to buy cloud services and software licenses under one agreement. Enterprise Agreements are designed for medium or large organizations that want to license cloud services and on-premises software organization-wide over a three-year period. Organizations can elect to purchase perpetual licenses or subscribe to licenses. SA is included.

Microsoft Product and Services Agreement

Microsoft Product and Services Agreements are designed for medium and large organizations that want to license cloud services and on-premises software as needed, with no organization-wide commitment, under a single, non-expiring agreement. Organizations purchase perpetual licenses or subscribe to licenses. SA is optional for customers that purchase perpetual licenses.

Open agreements are a simple, cost-effective way to acquire the latest Microsoft technology. Open agreements are designed for small and medium organizations that want to license cloud services and on-premises software over a one- to three-year period. Under the Open agreements, organizations purchase perpetual licenses and SA is optional. Under Open Value agreements, organizations can elect to purchase perpetual licenses or subscribe to licenses and SA is included.

Select Plus

Select Plus agreements are designed for government and academic organizations to acquire on-premises licenses at any affiliate or department level, while realizing advantages as one organization. Organizations purchase perpetual licenses and SA is optional.

Microsoft Online Subscription Agreement

Microsoft Online Subscription Agreements are designed for small and medium organizations that want to subscribe to, activate, provision, and maintain cloud services seamlessly and directly via the web. The agreement allows customers to acquire monthly or annual subscriptions for cloud-based services.

Partner Programs

The Microsoft Cloud Solution Provider program offers customers an easy way to license the cloud services they need in combination with the value-added services offered by their systems integrator, managed services provider, or cloud reseller partner. Partners in this program can easily package their own products and services to directly provision, manage, and support their customer subscriptions.

The Microsoft Services Provider License Agreement allows hosting service providers and independent software vendors who want to license eligible Microsoft software products to provide software services and hosted applications to their end customers. Partners license software over a three-year period and are billed monthly based on consumption.

The Independent Software Vendor Royalty program enables partners to integrate Microsoft products into other applications and then license the unified business solution to their end users.

Our customers include individual consumers, small and medium organizations, large global enterprises, public-sector institutions, Internet service providers, application developers, and OEMs. Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog is not significant.

AVAILABLE INFORMATION

Our Internet address is www.microsoft.com. At our Investor Relations website, www.microsoft.com/investor, we make available free of charge a variety of information for investors. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, including:

• Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov.
• Information on our business strategies, financial results, and metrics for investors.
• Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. Archives of these events are also available.
• Press releases on quarterly earnings, product and service announcements, legal developments, and international news.
• Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies.
• Other news and announcements that we may post from time to time that investors might find useful or interesting.
• Opportunities to sign up for email alerts to have information pushed in real time.

We publish a variety of reports and resources related to our Corporate Social Responsibility programs and progress on our Reports hub website, www.microsoft.com/corporate-responsibility/reports-hub, including reports on sustainability, responsible sourcing, accessibility, digital trust, and public policy engagement.

The information found on these websites is not part of, or incorporated by reference into, this or any other report we file with, or furnish to, the SEC. In addition to these channels, we use social media to communicate to the public. It is possible that the information we post on social media could be deemed to be material to investors. We encourage investors, the media, and others interested in Microsoft to review the information we post on the social media channels listed on our Investor Relations website.

Discussion & Analysis

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. This section generally discusses the results of our operations for the year ended June 30, 2021 compared to the year ended June 30, 2020. For a discussion of the year ended June 30, 2020 compared to the year ended June 30, 2019, please refer to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2020.

We generate revenue by offering a wide range of cloud-based and other services to people and businesses; licensing and supporting an array of software products; designing, manufacturing, and selling devices; and delivering relevant online advertising to a global audience. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; datacenter costs in support of our cloud-based services; and income taxes.

As the world continues to respond to COVID-19, we are working to do our part by ensuring the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology and resources to our customers to help them do their best work while remote.

Highlights from fiscal year 2021 compared with fiscal year 2020 included:

• Commercial cloud revenue increased 34% to $69.1 billion.
• Office Commercial products and cloud services revenue increased 13% driven by Office 365 Commercial growth of 22%.
• Office Consumer products and cloud services revenue increased 10% and Microsoft 365 Consumer subscribers increased to 51.9 million.
• LinkedIn revenue increased 27%.
• Dynamics products and cloud services revenue increased 25% driven by Dynamics 365 growth of 43%.
• Server products and cloud services revenue increased 27% driven by Azure growth of 50%.
• Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased slightly.
• Windows Commercial products and cloud services revenue increased 14%.
• Xbox content and services revenue increased 23%.
• Search advertising revenue, excluding traffic acquisition costs, increased 13%.
• Surface revenue increased 5%.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC, for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $768 million of cash and cash equivalents acquired. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment. Refer to Note 8 – Business Combinations of the Notes to Financial Statements for further discussion.

Industry Trends

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.

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, and influence how users access services in the cloud, and in some cases, the user’s choice of which suite of cloud-based services to use. We must continue to evolve and adapt over an extended time in pace with this changing environment. The investments we are making in infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.

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. Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic.

Our devices are primarily manufactured by third-party contract manufacturers, some of which contain certain components for which there are very few qualified suppliers. For these components, we have limited near-term flexibility to use other manufacturers if a current vendor becomes unavailable or is unable to meet our requirements. Extended disruptions at these suppliers could lead to a similar disruption in our ability to manufacture devices on time to meet consumer demand.

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. Weakening of 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 2021.

Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks.

In fiscal year 2021, the COVID-19 pandemic continued to impact our business operations and financial results. Cloud usage and demand benefited as customers accelerate their digital transformation priorities. Our consumer businesses also benefited from the remote environment, with continued demand for PCs and productivity tools, as well as strong engagement across our Gaming platform. We saw improvement in customer advertising spend and savings in operating expenses related to COVID-19, but experienced weakness in transactional licensing. The COVID-19 pandemic may continue to impact our business operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects over time. Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks.

Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by corporate year-end spending trends in our major markets and holiday season spending by consumers, and fourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the period.

Change in Accounting Estimate

In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from three years to four years and increase the estimated useful life of network equipment from two years to four years. This change in accounting estimate was effective beginning fiscal year 2021. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2020, the effect of this change in estimate for fiscal year 2021 was an increase in operating income of $2.7 billion and net income of $2.3 billion, or $0.30 per both basic and diluted share.

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other.

Additional information on our reportable segments is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements.

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. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements. Financial metrics are calculated based on GAAP results and growth comparisons relate to the corresponding period of last fiscal year.

Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise Services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.

Productivity and Business Processes and Intelligent Cloud

Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics reflect our cloud and on-premises product strategies and trends.

Metrics related to our More Personal Computing segment assess the performance of key lines of business within this segment. These metrics provide strategic product insights which allow us to assess the performance across our commercial and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we monitor metrics that are reflective of those varying motions.

SUMMARY RESULTS OF OPERATIONS

Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures which exclude tax benefits related to an India Supreme Court decision on withholding taxes in fiscal year 2021. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results. See Note 12 – Income Taxes of the Notes to Financial Statements for further discussion.

Revenue increased $25.1 billion or 18% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Office 365 Commercial and LinkedIn. More Personal Computing revenue increased driven by Gaming.

Cost of revenue increased $6.2 billion or 13% driven by growth in commercial cloud and Gaming, offset in part by a reduction in depreciation expense due to the change in estimated useful lives of our server and network equipment.

Gross margin increased $18.9 billion or 20% driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage decreased slightly driven by gross margin percentage reduction in More Personal Computing. Commercial cloud gross margin percentage increased 4 points to 71% driven by gross margin percentage improvement in Azure and the change in estimated useful lives of our server and network equipment, offset in part by sales mix shift to Azure.

Operating expenses increased $2.0 billion or 4% driven by investments in cloud engineering and commercial sales, offset in part by savings related to COVID-19 across each of our segments, prior year charges associated with the closing of our Microsoft Store physical locations, and a reduction in bad debt expense.

Key changes in operating expenses were:

Research and development expenses increased $1.4 billion or 8% driven by investments in cloud engineering.

Sales and marketing expenses increased $519 million or 3% driven by investments in commercial sales, offset in part by a reduction in bad debt expense. Sales and marketing included an unfavorable foreign currency impact of 2%.

General and administrative expenses were relatively unchanged, driven by prior year charges associated with the closing of our Microsoft Store physical locations, offset in part by an increase in certain employee-related expenses and business taxes.

Operating income increased $17.0 billion or 32% driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment.

Current year net income and diluted EPS were positively impacted by the tax benefit related to the India Supreme Court decision on withholding taxes, which resulted in an increase to net income and diluted EPS of $620 million and $0.08, respectively.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 3%, 3%, and 4%, respectively.

SEGMENT RESULTS OF OPERATIONS

Revenue increased $7.5 billion or 16%.

• Office Commercial products and cloud services revenue increased $4.0 billion or 13%. Office 365 Commercial revenue grew 22% driven by seat growth of 17% and higher revenue per user. Office Commercial products revenue declined 23% driven by continued customer shift to cloud offerings and transactional weakness.
• Office Consumer products and cloud services revenue increased $474 million or 10% driven by Microsoft 365 Consumer subscription revenue, on a strong prior year comparable that benefited from transactional strength in Japan. Microsoft 365 Consumer subscribers increased 22% to 51.9 million.
• LinkedIn revenue increased $2.2 billion or 27% driven by advertising demand in our Marketing Solutions business.

Operating income increased $5.6 billion or 30%.

• Gross margin increased $6.5 billion or 18% driven by growth in Office 365 Commercial and LinkedIn, and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage decreased slightly driven by a sales mix shift to cloud offerings, on a low prior year comparable impacted by increased usage.
• Operating expenses increased $839 million or 5% driven by investments in commercial sales, cloud engineering, and LinkedIn.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 3%, and 4%, respectively.

Revenue increased $11.7 billion or 24%.

• Server products and cloud services revenue increased $11.2 billion or 27% driven by Azure. Azure revenue grew 50% due to growth in our consumption-based services. Server products revenue increased 6% driven by hybrid and premium solutions, on a strong prior year comparable that benefited from demand related to SQL Server 2008 and Windows Server 2008 end of support.
• Enterprise Services revenue increased $534 million or 8% driven by growth in Premier Support Services.

Operating income increased $7.8 billion or 43%.

• Gross margin increased $9.7 billion or 29% driven by growth in Azure and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage was relatively unchanged driven by gross margin percentage improvement in Azure, offset in part by sales mix shift to Azure.
• Operating expenses increased $1.9 billion or 12% driven by investments in Azure.

Revenue increased $5.8 billion or 12%.

• Windows revenue increased $933 million or 4% driven by growth in Windows Commercial. Windows Commercial products and cloud services revenue increased 14% driven by demand for Microsoft 365. Windows OEM revenue increased slightly driven by consumer PC demand, on a strong prior year OEM Pro comparable that benefited from Windows 7 end of support. Windows OEM Pro revenue decreased 9% and Windows OEM non-Pro revenue grew 21%.
• Gaming revenue increased $3.8 billion or 33% driven by growth in Xbox content and services and Xbox hardware. Xbox content and services revenue increased $2.3 billion or 23% driven by growth in third-party titles, Xbox Game Pass subscriptions, and first-party titles. Xbox hardware revenue increased 92% driven by higher price of consoles sold due to the Xbox Series X|S launches.
• Search advertising revenue increased $788 million or 10%. Search advertising revenue excluding traffic acquisition costs increased 13% driven by higher revenue per search and search volume.
• Surface revenue increased $302 million or 5%.

Operating income increased $3.5 billion or 22%.

• Gross margin increased $2.8 billion or 10% driven by growth in Windows, Gaming, and Search advertising. Gross margin percentage decreased driven by sales mix shift to Gaming hardware.
• Operating expenses decreased $752 million or 6% driven by prior year charges associated with the closing of our Microsoft Store physical locations and reductions in retail store expenses and marketing, offset in part by investments in Gaming.

Gross margin and operating income included a favorable foreign currency impact of 2% and 3%, respectively.

OPERATING EXPENSES

Research and Development

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content.

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs.

General and Administrative

General and administrative expenses include payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.

OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.

Interest and dividends income decreased due to lower yields on fixed-income securities. Interest expense decreased due to a decrease in outstanding long-term debt due to debt maturities. Net recognized gains on investments increased due to higher gains on equity securities. Net gains on derivatives decreased due to lower gains on foreign currency contracts.

INCOME TAXES

Effective Tax Rate

Our effective tax rate for fiscal years 2021 and 2020 was 14% and 17%, respectively. The decrease in our effective tax rate was primarily due to tax benefits from a decision by the India Supreme Court on withholding taxes in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax, an agreement between the U.S. and India tax authorities related to transfer pricing, final Tax Cuts and Jobs Act (“TCJA”) regulations, and an increase in tax benefits relating to stock-based compensation.

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

Our effective tax rate was lower than the U.S. federal statutory rate, 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 centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes.

The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2021, our U.S. income before income taxes was $35.0 billion and our foreign income before income taxes was $36.1 billion. In fiscal year 2020, our U.S. income before income taxes was $24.1 billion and our foreign income before income taxes was $28.9 billion.

Uncertain Tax Positions

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of June 30, 2021, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2020, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NON-GAAP FINANCIAL MEASURES

Adjusted net income and adjusted diluted EPS are non-GAAP financial measures which exclude the tax benefits related to the India Supreme Court decision on withholding taxes in fiscal year 2021. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:

• Not meaningful.

FINANCIAL CONDITION

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and short-term investments totaled $130.3 billion and $136.5 billion as of June 30, 2021 and 2020. Equity investments were $6.0 billion and $3.0 billion as of June 30, 2021 and 2020, 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.

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

Cash from operations increased $16.1 billion to $76.7 billion for fiscal year 2021, mainly due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees. Cash used in financing increased $2.5 billion to $48.5 billion for fiscal year 2021, mainly due to a $4.4 billion increase in common stock repurchases and a $1.4 billion increase in dividends paid, offset in part by a $1.8 billion decrease in repayments of debt and a $1.7 billion decrease in cash premium paid on debt exchange. Cash used in investing increased $15.4 billion to $27.6 billion for fiscal year 2021, mainly due to a $6.4 billion increase in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets, a $5.2 billion increase in additions to property and equipment, and a $4.1 billion decrease in cash from net investment purchases, sales, and maturities.

We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating and the low interest rate environment. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities to take advantage of favorable financing rates in the debt markets, reflecting our credit rating and the low interest rate environment. Refer to Note 11 – Debt of the Notes to Financial Statements for further discussion.

Unearned Revenue

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“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 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 1 – Accounting Policies of the Notes to Financial Statements for further discussion.

The following table outlines the expected future recognition of unearned revenue as of June 30, 2021:

If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable.

During fiscal years 2021 and 2020, we repurchased 101 million shares and 126 million shares of our common stock for $23.0 billion and $19.7 billion, respectively, through our share repurchase programs. All repurchases were made using cash resources. Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.

Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.

Off-Balance Sheet Arrangements

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In evaluating estimated losses on these obligations, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact in our consolidated financial statements during the periods presented.

Contractual Obligations

The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30, 2021:

• Refer to Note 11 – Debt of the Notes to Financial Statements.
• Refer to Note 7 – Property and Equipment of the Notes to Financial Statements.
• Refer to Note 14 – Leases of the Notes to Financial Statements.
• Refer to Note 12 – Income Taxes of the Notes to Financial Statements.
• Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not presented as construction commitments above.
• We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $14.6 billion from the amounts presented as the timing of these obligations is uncertain. We have also excluded unearned revenue and non-cash items.

Other Planned Uses of Capital

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt. The acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as continue making acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings. We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. We have paid transition tax of $4.7 billion, which included $1.5 billion for fiscal year 2021. The remaining transition tax of $13.6 billion is payable over the next five years with a final payment in fiscal year 2026.

We expect existing cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax related to the TCJA, for at least the next 12 months and thereafter for the foreseeable future.

RECENT ACCOUNTING GUIDANCE

Refer to Note 1 – Accounting Policies of the Notes to Financial Statements for further discussion.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies, as well as uncertainty in the current economic environment due to COVID-19. Critical accounting policies for us include revenue recognition, impairment of investment securities, goodwill, research and development costs, contingencies, income taxes, and inventories.

Revenue Recognition

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 stand-alone selling price (“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.

Impairment of Investment Securities

We review debt investments quarterly for credit losses and impairment. 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. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. 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.

Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a periodic basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net.

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. 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 for us) 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. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Research and Development Costs

Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

The TCJA significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 12 – Income Taxes of the Notes to Financial Statements for further discussion.

Inventories

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include analysis of demand forecasts, product life cycle status, product development plans, current sales levels, pricing strategy, and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America.

The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified personnel, and a program of internal audits.

The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The Board of Directors, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management, internal auditors, and our independent registered public accounting firm to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Deloitte & Touche LLP and the internal auditors each have full and free access to the Audit Committee.

Satya Nadella Chief Executive Officer

Amy E. Hood Executive Vice President and Chief Financial Officer

Alice L. Jolla Corporate Vice President and Chief Accounting Officer

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. We use derivatives instruments to manage these risks, however, they may still impact our consolidated financial statements.

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 positions, including hedges. Principal currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices.

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices and to facilitate portfolio diversification.

Securities held in our equity investments portfolio are subject to price risk.

SENSITIVITY ANALYSIS

The following table sets forth the potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Income statements.

Refer to accompanying notes.

COMPREHENSIVE INCOME STATEMENTS

Balance sheets, cash flows statements, stockholders’ equity 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 (“GAAP”).

We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

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 uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

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.

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 Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

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.

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

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.

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 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 subscriptions, Windows 10 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 13 – 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.

As of June 30, 2021 and 2020, other receivables due from suppliers were $965 million and $442 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of June 30, 2021 and 2020, long-term accounts receivable, net of allowance for doubtful accounts, was $3.4 billion and $2.7 billion, respectively, and is included in other long-term assets in 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:

We record financing receivables when we offer certain of our 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, 2021 and 2020, our financing receivables, net were $4.4 billion and $5.2 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on 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 force 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: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.

Product Warranty

We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. 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.

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, 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 $1.5 billion, $1.6 billion, and $1.6 billion in fiscal years 2021, 2020, and 2019, respectively.

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 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. 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.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). 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 value are recorded in other income (expense), net.

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 earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.

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.

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:

• Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.
• Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.
• Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

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.

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

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: computer software developed or acquired for internal use, three to seven years; computer equipment, two to four years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

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.

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 is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) 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 using the straight-line method over their estimated period of benefit, ranging from one to 20 years. 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

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard effective July 1, 2020. We use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. The adoption of the standard did not have a material impact on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021. We have completed our assessment and concluded that adoption of the new standard will not have a material impact on our consolidated financial statements.

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.

The components of basic and diluted EPS were as follows:

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

Net recognized gains (losses) on equity investments were as follows:

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

• Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments 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, 2021 and 2020, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $3.3 billion and $1.4 billion, respectively.

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:

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

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.

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 non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

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 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 exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

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 and are included in “Other contracts” in the tables below.

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 of our 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 $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2021, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $395 million and $335 million, respectively, as of June 30, 2021, and $399 million and $399 million, respectively, as of June 30, 2020.

The following table presents the fair value of our derivatives instruments on a gross basis:

Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

NOTE 6 — INVENTORIES

The components of inventories were as follows:

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

During fiscal years 2021, 2020, and 2019, depreciation expense was $9.3 billion, $10.7 billion, and $9.7 billion, respectively. Depreciation expense declined in fiscal year 2021 due to the change in estimated useful lives of our server and network equipment. We have committed $9.5 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2021.

During fiscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold improvements, due to the closing of our Microsoft Store physical locations.

NOTE 8 — BUSINESS COMBINATIONS

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $768 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.

Following are details of the purchase price allocated to the intangible assets acquired:

GitHub, Inc.

On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences. The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.

Following are the details of the purchase price allocated to the intangible assets acquired:

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

Nuance Communications, Inc.

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

• Includes goodwill of $5.5 billion related to ZeniMax. See Note 8 – Business Combinations 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.

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.

No instances of impairment were identified in our May 1, 2021, May 1, 2020, or May 1, 2019 tests. As of June 30, 2021 and 2020, accumulated goodwill impairment was $11.3 billion.

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

• Includes intangible assets of $2.0 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2021, 2020, or 2019. 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:

Intangible assets amortization expense was $1.6 billion, $1.6 billion, and $1.9 billion for fiscal years 2021, 2020, and 2019, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2021:

NOTE 11 — DEBT

The components of debt were as follows:

• In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt.
• Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $70.0 billion and $77.1 billion, respectively. The estimated fair values are based on Level 2 inputs.

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 2021, 2020, and 2019 was $2.0 billion, $2.4 billion, and $2.4 billion, respectively.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2021:

NOTE 12 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $13.7 billion related to the enactment of the TCJA in fiscal year 2018 and adjusted the provisional net charge by recording additional tax expense of $157 million in fiscal year 2019 pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.

In fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. global intangible low-taxed income (“GILTI”) tax.

Provision for Income Taxes

The components of the provision for income taxes were as follows:

U.S. and foreign components of income before income taxes were as follows:

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

The decrease from the federal statutory rate in fiscal year 2021 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 centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 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 centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. In fiscal year 2021 and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% and 86% of our foreign income before tax. In fiscal years 2019, our foreign regional operating centers in Ireland, Singapore, and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% of our foreign income before tax, respectively. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2021, 2020, and 2019, there were no individually significant other reconciling items.

The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation. The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers.

The components of the deferred income tax assets and liabilities were as follows:

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.

As of June 30, 2021, we had federal, state, and foreign net operating loss carryforwards of $304 million, $1.3 billion, and $2.0 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2022 through 2041, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized. In fiscal year 2020, we removed $2.0 billion of foreign net operating losses and corresponding valuation allowances as a result of the liquidation of a foreign subsidiary. There was no impact to our consolidated financial statements.

Income taxes paid, net of refunds, were $13.4 billion, $12.5 billion, and $8.4 billion in fiscal years 2021, 2020, and 2019, respectively.

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2021, 2020, and 2019, were $14.6 billion, $13.8 billion, and $13.1 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2021, 2020, and 2019 by $12.5 billion, $12.1 billion, and $12.0 billion, respectively.

As of June 30, 2021, 2020, and 2019, we had accrued interest expense related to uncertain tax positions of $4.3 billion, $4.0 billion, and $3.4 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2021, 2020, and 2019 included interest expense related to uncertain tax positions of $274 million, $579 million, and $515 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

Changes in unearned revenue were as follows:

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $146 billion as of June 30, 2021, of which $141 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

Supplemental cash flow information related to leases was as follows:

Supplemental balance sheet information related to leases was as follows:

The following table outlines maturities of our lease liabilities as of June 30, 2021:

As of June 30, 2021, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $5.4 billion and $7.3 billion, respectively. These operating and finance leases will commence between fiscal year 2022 and fiscal year 2026 with lease terms of 1 year to 15 years.

During fiscal year 2020, we recorded an impairment charge of $161 million to operating lease right-of-use assets due to the closing of our Microsoft Store physical locations.

NOTE 15 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 63 patent infringement cases pending against Microsoft as of June 30, 2021, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.

The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement and form of notice have been approved by the courts in British Columbia, Ontario, and Quebec. The ten-month claims period commenced on November 23, 2020 and will close on September 23, 2021.

Other Antitrust Litigation and Claims

China State Administration for Market Regulation Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.

Product-Related Litigation

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for January and February of 2022.

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, 2021, we accrued aggregate legal liabilities of $339 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $500 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2021, an aggregate of 251 million shares were authorized for future grant under our stock plans. 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:

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 four years or five years.

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 four years. PSUs generally vest over a performance period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:

During fiscal year 2021, the following activity occurred under our stock plans:

• Includes 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2021, 2020, and 2019.

As of June 30, 2021, there was approximately $12.0 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $221.13, $140.49, and $107.02 for fiscal years 2021, 2020, and 2019, respectively. The fair value of stock awards vested was $13.4 billion, $10.1 billion, and $8.7 billion, for fiscal years 2021, 2020, and 2019, respectively.

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 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Under the terms of the ESPP that were approved in 2012, the plan will terminate on December 31, 2022. We intend to request shareholder approval for a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031 at our 2021 Annual Shareholders Meeting. No additional shares will be requested at this meeting. Employees purchased the following shares during the periods presented:

As of June 30, 2021, 88 million shares of our common stock were reserved for future issuance through the ESPP.

Savings Plan

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 contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $1.2 billion, $1.0 billion, and $877 million in fiscal years 2021, 2020, and 2019, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

• Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things; and MSN advertising.

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 marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.

Segment revenue and operating income were as follows during the periods presented:

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2021, 2020, or 2019. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

• Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

Revenue from external customers, classified by significant product and service offerings, was as follows:

Our commercial cloud revenue, which includes Azure, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $69.1 billion, $51.7 billion and $38.1 billion in fiscal years 2021, 2020, and 2019, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn in the table above.

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:

Auditor's Report

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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, 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, 2021, 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, 2021, 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.

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

• Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.
• The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
• Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).
• Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

Given these factors and due to the volume of transactions, the related audit effort in evaluating management’s judgments in determining revenue recognition for these 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 these customer agreements included the following:

• We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.
• We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.
• We selected a sample of customer agreements and performed the following procedures:
• Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
• Tested management’s identification and treatment of contract terms.
• Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
• We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.
• We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.

Income Taxes — Uncertain Tax Positions — Refer to Note 12 to the financial statements

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. 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.

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 the transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.

Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

• We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.
• We read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.
• We tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.
• For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.
• We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.

/s/    DELOITTE & TOUCHE LLP Seattle, Washington July 29, 2021

We have served as the Company’s auditor since 1983.

Controls & Procedures

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use, or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2021. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Deloitte & Touche LLP has audited our internal control over financial reporting as of June 30, 2021; their report follows.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on the criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and the related notes (collectively referred to as the “financial statements”) as of and for the year ended June 30, 2021, of the Company and our report dated July 29, 2021, expressed an unqualified opinion on those financial statements.

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Directors & Officers

DIRECTORS AND EXECUTIVE OFFICERS OF MICROSOFT CORPORATION

Satya Nadella Chairman and Chief Executive Officer, Microsoft Corporation

Sandra E. Peterson 2,3 Operating Partner, Clayton, Dubilier & Rice

John W. Thompson 3,4 Lead Independent Director, Microsoft Corporation

Reid G. Hoffman General Partner, Greylock Partners

Penny S. Pritzker 4 Founder and Chairman, PSP Partners

Emma N. Walmsley 2,4 Chief Executive Officer, GlaxoSmithKline

Hugh F. Johnston 1 Vice Chairman and Executive Vice President and Chief Financial Officer, PepsiCo

Charles W. Scharf 2,3 Chief Executive Officer and President, Wells Fargo & Company

Padmasree Warrior 2 Founder, Chief Executive Officer and President, Fable Group Inc.

Teri L. List 1,3 Former Executive Vice President and Chief Financial Officer, Gap, Inc.

John W. Stanton 1,4 Founder and Chairman, Trilogy Partnerships

Board Committees

• Audit Committee
• Compensation Committee
• Governance and Nominating Committee
• Regulatory and Public Policy Committee

Executive Officers

Satya Nadella Chairman and Chief Executive Officer

Amy E. Hood Executive Vice President, Chief Financial Officer

Judson Althoff Executive Vice President, Chief Commercial Officer

Bradford L. Smith President and Vice Chair

Christopher C. Capossela Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer

Christopher D. Young Executive Vice President, Business Development, Strategy, and Ventures

Kathleen T. Hogan Executive Vice President, Human Resources

Investor Relations

You can contact Microsoft Investor Relations at any time to order financial documents such as annual reports and Form 10-Ks free of charge.

Call us toll-free at (800) 285-7772 or outside the United States, call (425) 706-4400. We can be contacted between the hours of 9:00 a.m. to 5:00 p.m. Pacific Time to answer investment oriented questions about Microsoft.

For access to additional financial information, visit the Investor Relations website online at: www.microsoft.com/investor

Our e-mail is [email protected]

Our mailing address is:

Investor Relations Microsoft Corporation One Microsoft Way Redmond, Washington 98052-6399

Attending the Annual Meeting

The 2021 Annual Shareholders Meeting will be held as a virtual-only meeting. Any shareholder can join the Annual Meeting, while shareholders of record as of September 30, 2021, will be able to vote and submit questions during the meeting.

Date: Tuesday, November 30, 2021 Time: 8:30 a.m. Pacific Time Virtual Shareholder Meeting: www.virtualshareholdermeeting.com/MSFT21

Submit Your Question

We invite you to submit any questions via the proxy voting site at www.proxyvote.com . We will include as many of your questions as possible during the Q&A session of the meeting and will provide answers to questions on the Microsoft Investor Relations website under the Annual Meeting page.

Registered Shareholder Services

Computershare, our transfer agent, can help you with a variety of shareholder related services including:

• Change of address
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services

Computershare also administers a direct stock purchase plan and a dividend reinvestment program for the company.

Contact Computershare directly to find out more about these services and programs at 800-285-7772, option 1, or visit online at: https://www.computershare.com/Microsoft

You can e-mail the transfer agent at: [email protected]

You can also send mail to the transfer agent at:

Computershare P.O. Box 505000 Louisville, KY 40233-5000

Shareholders can sign up for electronic alerts to access the annual report and proxy statement online. The service gets you the information you need faster and also gives you the power and convenience of online proxy voting. To sign up for this free service, visit the Annual Report site on the Investor Relations website at: http://www.microsoft.com/investor/AnnualReports/default.aspx

Environmental, Social, Governance (ESG)/Corporate Social Responsibility (CSR)

Many of our shareholders are increasingly focused on the importance of the effective engagement and action on ESG topics. To meet the expectations of our stakeholders and to and maintain their trust, we are committed to conducting our business in ways that are principled, transparent, and accountable and we have made a broad range of environmental and social commitments. From our CEO and Senior Leadership Team and throughout our organization, people at Microsoft are working to conduct our business in principled ways that make a significant positive impact on important global issues. Microsoft’s Board of Directors provides insight, feedback, and oversight across a broad range of environmental and social matters. In particular, among the responsibilities of the Board’s Regulatory and Public Policy Committee is to review and provide guidance to the Board and management about the Company’s policies and programs that relate to CSR.

For more about Microsoft’s CSR commitments and performance, please visit: www.microsoft.com/transparency .

< -->Annual Reports

Annual Reports

2022- 2023 annual report, esg/sustainability reports, subsidiary financials, other information, 2021- 2022 annual report, other information, annual reports, esg/ sustainability reports, 2019- 2020 annual report, 2018- 2019 annual report, 2017- 2018 annual report, 2016- 2017 annual report, 2015- 2016 annual report, 2014- 2015 annual report, 2013- 2014 annual report, 2012- 2013 annual report, 2011- 2012 annual report, 2010- 2011 annual report, 2009- 2010 annual report, 2008- 2009 annual report, 2007- 2008 annual report, 2006- 2007 annual report, 2005 – 2006 annual report, 2004- 2005 annual report, 2003- 2004 annual report, 2002- 2003 annual report, 2001- 2002 annual report, 2000- 2001 annual report, 1999- 2000 annual report, investor contacts.

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Setting New Standards in Banking Excellence

Annual report 2021 - 22.

Chairman’s Message

Dear shareholders,.

It gives me immense pleasure to place before you the highlights of your Bank’s performance during FY2022. Details of the achievements and initiatives taken by your Bank are provided in the enclosed Annual Report for FY2022.

– Dinesh Kumar Khara

SBI’s Journey through Numbers

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$ 29 / month, $ 49 / month, frequently asked questions.

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• ICICI Bank at a Glance
• Financial Highlights
• Message from the Chairman
• Board of Directors
• Message from the Wholetime Directors
• Our Business Model
• Our Business Strategy
• Fair to Customer, Fair to Bank
• Values and Culture
• Risk Governance Framework
• Managing Risks Impacting Our Business
• Human Capital
• Social and Relationship Capital
• Environmental Sustainability
• Director's Report

• Management Discussion & Analysis
• Key Financial Indicators: Last 10 Years
• Financial Statements of ICICI Bank Limited
• Balance Sheet
• Profit and Loss Account
• Cash Flow Statement
• Consolidated Financial Statements of ICICI Bank Limited and its Subsidiaries
• Consolidated Balance Sheet
• Consolidated Profit & Loss Account
• Consolidated Cash Flow Statement

Bank to Bank Tech

ICICI BANK AT A GLANCE

₹ 14,112.98 billion.

Standalone Total Assets

₹ 383.47 billion

Core Operating Profit*

₹ 233.39 billion

Profit After Tax*

₹ 474.66 billion

Net Interest Income*

Net Interest Margin*

₹ 10,645.72 billion

Period-end Deposits

₹ 8,590.20 billion

Period-end Advances

₹ 19.16 %

Total Capital Adequacy Ratio

*During fiscal 2022; others at March 31, 2022

FINANCIAL HIGHLIGHTS

Total deposits, total advances, capital adequacy, provision coverage ratio & net npa ratio, core operating profit, standalone net profit, message from the chairman.

During fiscal 2022, ICICI Bank stayed committed to its articulated strategy of targeting risk-calibrated growth in core operating profit, while ensuring resilience against potential risks and being well-poised to capitalise on market opportunities.

Girish Chandra Chaturvedi

Message from the wholetime directors.

Sandeep Bakhshi

Managing director & ceo.

We aim to be the trusted financial services provider of choice for our customers and deliver sustainable returns to our shareholders.

Anup Bagchi

Executive director.

The strong recovery in the economy is encouraging corporates to enhance capacity.

Executive Director (Designate)*

Our digital platforms and usage of analytics and behavioural sciences underpin our banking solutions.

Sandeep Batra

Our employees continued to show exceptional commitment to serving customers in this phase of transition to the new normal.

* Will be inducted from date of RBI approval of his appointment.

OUR BUSINESS MODEL

Value Drivers

OUR BUSINESS STRATEGY

The Bank’s objective is to grow the core operating profit in a risk-calibrated manner, based on the principles of ‘Fair to Customer, Fair to Bank’ and ‘One Bank, One ROE’.

ICICI BANK'S BUSINESS MODEL

FAIR TO CUSTOMER, FAIR TO BANK

The Bank’s philosophy of ‘Fair to Customer, Fair to Bank’ emphasises the need to deliver fair value to customers, including selling products and offer services which meet societal needs and are in the interest of customers.

VALUES AND CULTURE

ICICI Bank recognises the importance of establishing effective frameworks and supporting processes that encourage employees to exhibit the desired ethos of the Bank.

MANAGING RISKS IMPACTING OUR BUSINESS

The Bank aims to continuously evaluate the various risks impacting its business, and develop strategies to monitor and manage these risks, while meeting the objective of risk-calibrated growth and long-term sustainability.

RISK GOVERNANCE FRAMEWORK

As a financial intermediary, the Bank is exposed to various risks, primarily credit risk, market risk, liquidity risk operational risk, technology risk, cyber risk, compliance risk, legal risk and reputation risk.

HUMAN CAPITAL

The Bank has invested in training its employees and enhancing their ability to comprehensively serve customers.

SOCIAL AND RELATIONSHIP CAPITAL

The Bank continuously endeavours to understand the concerns and opinions expressed by stakeholders and respond to them promptly.

ENVIRONMENTAL SUSTAINABILITY

The Bank has been making efforts in these areas through various initiatives. In fiscal 2022, a consulting firm was appointed to review the ESG practices at the Bank, and recommend steps to strengthen the same.

Copyright© 2022 . All rights Reserved.

Bank to Bank Tech refers to the digital and technological transformation of the Bank. At ICICI Bank, technology is being integrated into every aspect, from delivering value to customers to optimising internal operations. We believe this would enable the Bank to be responsive to the dynamic preferences of customers while strengthening our vision to be the trusted financial service provider to customers.

The Bank recognises the need for an effective technology architecture that facilitates faster transactions, is ubiquitous, enables decision-making and creates value proposition for every customer. We are investing in strengthening our technological capabilities, with key priorities being technology platforms, embedded banking, cloud adoption and data platforms and analytics.

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Walmart Releases 2021 Annual Report and Proxy Statement

April 22, 2021

Press Center

BENTONVILLE, Ark., April 22, 2021 — Walmart Inc. (NYSE: WMT) today issued its 2021 Annual Report and filed its Proxy Statement in preparation for the company’s upcoming virtual Annual Shareholders’ Meeting on Wednesday, June 2, 2021. Shareholders will be able to attend the meeting online. There will be no physical location for the meeting, and the company is not hosting its usual in-person Associate Celebration due to the COVID-19 pandemic. Instead, it will host a virtual Associate Celebration on Friday, June 4, with entertainment and messages from senior leadership.

Annual Report Highlights The 2021 Annual Report showcases the strength and resiliency of Walmart’s associates over the course of the past year in light of the extraordinary challenges brought on by the pandemic, as well Walmart’s financial strength and positioning for ongoing success.

In his annual letter to shareholders, associates and customers, Walmart President and Chief Executive Officer Doug McMillon commemorated the incredible achievements of Walmart’s associates and how the company has prioritized its associates, customers and helping local communities over the past year.

“The pandemic brought extraordinary challenges, heartbreaking stories, significant loss and moments of inspiration as our associates overcame challenge after challenge. We witnessed their courage, kindness and generosity. Across the world in our stores, clubs and supply chain, they have come together to serve our customers, each other and their communities.

“Our 2020 priorities remain unchanged today, and to support them we paid $1.6 billion in special cash bonuses to our associates last year, implemented special COVID benefits, hired hundreds of thousands of displaced workers, set up COVID testing sites, provided relief to small businesses, donated more than 625 million pounds of food, pledged over $55 million in grants for hunger relief, and now we’re helping with vaccination efforts across the U.S., Canada and Mexico.”

McMillon also outlined the strategic path forward for the company and touched on the ways Walmart will continue to invest in a more diverse and inclusive workforce.

“We have a powerful set of assets that provide a strong foundation as we write the next chapter of the Walmart story. We have made gains in recent years that we’ll protect, including the value for customers we offer and the lead we’ve built in pickup services. We’re broadening the scope of products and services we offer to increase relevance in more customers' lives, while layering in a more robust digital experience to improve engagement. And now we’ll accelerate investments in key areas to support faster sales growth and keep the current asset base fresh.

“In September of 2020, Walmart announced its aspiration to become a regenerative company. Our company has also taken a leadership role to help tackle other challenges that face our society. I’m really proud of the work we’re doing on racial equity…We’re finding ways to leverage our size and influence to shape financial, healthcare, education and criminal justice systems and create more equity, more often. Ensuring equality for all citizens is the right thing to do, and it’s smart business. A more diverse and inclusive workforce is a more powerful workforce.”

2021 Annual Shareholders’ Meeting, Proxy Statement and Proposal Voting In light of the ongoing COVID-19 pandemic the company’s 2021 Annual Shareholders’ Meeting will be held in a virtual meeting format only with no physical location. The live audio webcast of the meeting will begin on Wednesday, June 2, 2021, at 10:30 a.m. CDT.

Shareholders who held shares as of the close of business on the record date of April 9, 2021, will be able to vote their shares before the meeting online at proxyvote.com , by calling 1-800-690-6903, by mailing a completed proxy card or by mobile device by scanning the QR code on the proxy card or notice of internet availability. Shareholders may also vote while logged in and participating in the 2021 Annual Shareholders’ Meeting at virtualshareholdermeeting.com/WMT2021 .

This year’s proxy materials seek shareholders’ votes on 12 director nominees, two company proposals and five shareholder proposals. The public will also be able to listen to the Annual Shareholders’ Meeting, without the option to vote, through a link on the company’s website . The 2021 Proxy Statement can be read online .

About Walmart Walmart Inc. (NYSE: WMT) helps people around the world save money and live better - anytime and anywhere - in retail stores, online, and through their mobile devices. Each week, approximately 220 million customers and members visit approximately 10,500 stores and clubs under 48 banners in 24 countries and eCommerce websites. With fiscal year 2021 revenue of $559 billion, Walmart employs more than 2.3 million associates worldwide. Walmart continues to be a leader in sustainability, corporate philanthropy and employment opportunity. Additional information about Walmart can be found by visiting corporate.walmart.com , on Facebook at facebook.com/walmart and on Twitter at twitter.com/walmart .

Corporate information

Corporate overview +.

• 01. Fuelling India’s Growth Sustainably
• 02. High-Octane Performance Achieved through our Capitals
• 03. Chairman’s Message
• 04. Strong Governance in Letter and Spirit
• 05. Managing Risks with Clear Foresight
• 06. A Sustainable Model for Longterm Value Creation
• 07. Wide-ranging Interactions with all Stakeholders
• 08. Materiality Assessment
• 09. Supporting the SDGs

Description of Capitals +

• 01. Financial Capital
• 02. Manufactured Capital
• 03. Intellectual Capital
• 04. Natural Capital
• 05. Human Capital
• 06. Social and Relationship Capital

Awards and Recognitions

Corporate information +.

• 01. Core Team
• 02. Senior Management Team
• 03. Main Offices & Major Units
• 04. RTA, Bankers, etc.
• 05. Auditors
• 06. Group Companies
• 07. Performance at a Glance

Statutory Reports +

• 01. Directors’ Report
• 02. Annexure I - SC / ST / OBC Report
• 03. Annexure II - Highlights of CSR Activities
• 04. Annexure III - Secretarial Audit Report
• 05. Annexure IV - Report on Energy Conservation, Technology Absorption and Foreign Exchange Earning
• 06. Report on Corporate Governance
• 07. Management’s Discussion & Analysis

Financial Statements +

Standalone financial statements.

• 01. Independent Auditors’ Report
• 02. Balance Sheet
• 03. Statement of Profit & Loss
• 04. Cash Flow Statement
• 05. Statement of Changes in Equity
• 07. Income & Expenditure Account - Township

Consolidated Financial Statements

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At IndianOil, we believe ‘high-octane’ is not just a characteristic of the fuel we produce, it defines the spirit of every IOCian. With the zeal, enthusiasm, and quest to provide the best to customers, stakeholders, channel partners and associates, we have been transforming relentlessly to be a socially responsible and sustainable energy company.

Performance and Experience that is unparalleled, is what, IndianOil offers to its stakeholders. Over the years, the Company has strived relentlessly to develop best-in-class energy solutions for the nation. Consolidating its existing businesses, converting each challenge into an opportunity, realising sustainable energy alternatives, innovating across domains, and traversing across the skies and deep seas, IndianOil’s agility and tenacity keeps the wheels of growth moving year after year. The commitment, dedication and passion of the Company as a whole has indeed gravitated IndianOil’s character of being a game-changer across the oil and gas industry.

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Transparency, integrity and accountability are the three principles that guide corporate governance at IndianOil. The governance system is intended to set high standards of ethical and responsible conduct of the Company’s business to maximise value for all stakeholders, including shareholders, customers, employees, contractors, vendors, and society at large. It aims to strengthen the relationship of trust between IndianOil and its stakeholders and help the Company achieve its goals and objectives. IndianOil’s governance structures and processes are duly evolved and adapted from time to time to reflect emerging best practices.

A Sustainable Model for Long-term Value Creation

Our attractive growth trajectory since inception and sustained contribution to the progress of the nation bear testimony to the strength of our business model. As one of India’s biggest commercial enterprises, we continue to evolve our value creation framework in response to the changing expectations of all stakeholders.

Managing Risks with Clear Foresight

Our operations are prone to both internal and external risks, which can substantially impact our ability to create value for the short, medium and long term. Our Enterprise Risk Management (ERM) policy and integrated assurance methodologies ensure that we have the right risk resilience mechanism. Our internal processes are strong enough to monitor and manage risks in a holistic manner, taking into cognisance the interests of all stakeholders. Our ERM framework is regularly reviewed in line with the changing risk landscape relevant to our business. Data on risk management is submitted by respective risk owners through internally designed ERM portal in order to enable all users to have access to data on real time basis.

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Fiscal 2021-22 has been another year of sustained value creation for Dabur. The resilience of our business model helped us steer through the uncertain business climate due to the pandemic. As the outlook turned positive, we also started our journey to build back better and step up our efforts to achieve our triple bottom line goals.

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Dabur india ltd is one of india’s leading fmcg companies . building on a legacy of quality and experience for 138 years, dabur is today india’s most trusted name and the world’s largest ayurvedic and natural health care company. dabur’s fmcg portfolio includes nine power brands: dabur chyawanprash, dabur honey, dabur honitus, dabur pudin hara and dabur lal tail in the healthcare space; dabur amla, dabur red paste and vatika in the personal care space; and réal in the foods category..

As part of this Power Brand strategy, Dabur has been putting in disproportionate investments behind these brands to not just improve visibility, but also enhance distribution and increase the pace of innovation by way of new products, variants, and format launches. This strategy has paid rich dividends with the Power Brands reporting stronger growth even during trying times.

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The flagship health supplement brand from the House of Dabur, Dabur Chyawanprash is known as the elixir of life and is a time-tested Ayurvedic formulation of more than 41 Ayurvedic herbs that aid in boosting the immune system, thereby protecting the body from everyday infections.

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Dermatologically tested for safety, Dabur Lal Tail is safe and efficacious for baby’s bones & muscles strength, besides offering skin protection & natural glow. It is clinically tested to give 2x faster physical growth in babies.

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Dabur Vatika: One of the youngest and largest brands in the Dabur portfolio, Vatika has a large overseas presence with sales outside India accounting for a lion’s share of the brand’s overall turnover.

Dabur Amla Hair Oil

India’s largest selling Hair Oil brand, Dabur Amla hair oil has been the most preferred Hair Care brand for generations of Indians. Packed with amla extracts, Dabur Amla hair oil also helps in dandruff reduction and helps maintain the natural colour of hair.

Dabur Red Paste

The flagship toothpaste brand in the Dabur portfolio, Dabur Red Paste is India’s No. 1 Ayurvedic Fluoride-Free Paste which offers complete Ayurvedic Oral Care for your family. Packed with 13 potent Ayurvedic ingredients such as Laung, Pudina & Tomar, Dabur Red Paste provides protection from 7 dental problems like cavities, gingivitis, plaque, toothache, bad breath, yellow teeth, plus weak teeth, and gums.

The youngest brand in the Dabur portfolio, Réal has been the fastest brand to cross the ₹1,000 Crore turnover mark. Packed with real fruits, Réal contains no added colours or preservatives.

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What to Know about Medicare Spending and Financing

Juliette Cubanski and Tricia Neuman Published: Jan 19, 2023

Medicare, the federal health insurance program for 65 million people ages 65 and older and younger people with long-term disabilities, helps to pay for hospital and physician visits, prescription drugs, and other acute and post-acute care services. This brief provides an overview of Medicare spending and financing, based on the most recent historical and projected data published in the 2022 annual report of the Board of Medicare Trustees and the 2022 Medicare baseline and projections from the Congressional Budget Office (CBO). The brief highlights trends in Medicare spending and key drivers of spending growth, including higher enrollment, growth in health care costs, and increases in payments to Medicare Advantage plans.

Overview of Medicare Spending

Medicare accounts for 21% of national health spending and 10% of the federal budget.

Medicare plays a major role in the health care system, accounting for 21% of total national health spending in 2021, 26% of spending on both hospital care and physician and clinical services, and 32% of spending on retail prescription drug sales (Figure 1).

In 2021, Medicare spending, net of income from premiums and other offsetting receipts, totaled $689 billion and accounted for 10% of the federal budget—a similar share as spending on Medicaid, the Affordable Care Act (ACA), and the Children’s Health Insurance Program combined, and defense spending (Figure 2).

Historical and Projected Medicare Spending

Medicare spending on Part A, Part B, and Part D benefits in 2021 totaled $829 billion, up from $541 billion in 2011, according to the Medicare Trustees (Figure 3). These amounts reflect gross spending, not subtracting premiums or other offsetting receipts, and include spending on beneficiaries in both traditional Medicare and Medicare Advantage. Medicare benefit spending is expected to grow to $1.8 trillion in 2031 (Figure 3).

CBO projects that between 2021 and 2032, net Medicare spending—after subtracting premiums and other offsetting receipts—will grow as a share of both the federal budget, from 10.1% to 17.8%, and the nation’s economy, from 3.1% to 4.3% of gross domestic product (GDP). Projected spending growth for Medicare is due in part to growing enrollment in Medicare related to the aging of the population, increased use of services and intensity of care, and rising health care costs.

Over the longer term, net Medicare spending will increase to 5.9% of GDP in 2052, according to CBO’s most recent long-term projections . CBO projects that rising health care costs per person will account for two-thirds of the increase in spending on the nation’s major health care programs (Medicare, Medicaid, and subsidies for ACA Marketplace coverage) over the next 30 years, and the aging of the population will account for one-third.

Spending on Physician and Other Outpatient Services Accounts for a Growing Share of Medicare Spending

Spending on benefits under each part of Medicare (A, B, and D) increased in dollar terms between 2011 and 2021, but the distribution of total benefit payments by part has changed over time. Spending on Part B benefits, including physician services, hospital outpatient services, physician-administered drugs, and other outpatient services, increased from 41% in 2011 to 48% in 2021, and now accounts for the largest share of total spending on Medicare benefits (Figure 4). The share of total spending on Part A benefits (mainly hospital inpatient services) decreased from 47% to 39%, reflecting a shift from inpatient to outpatient services. Moving forward, Medicare spending on physician services and other services covered under Part B is expected to grow to just over half of total Medicare spending by 2031, while spending on hospital care and other services covered under Part A is projected to decrease further as a share of the total.

Spending on Part D prescription drug benefits has been a roughly constant share of total Medicare spending since the drug benefit began in 2006 (around 12-13%) and is expected to account for a similar share in the coming decade (11% in 2031). This projection does not take into account any savings to Medicare associated with implementation of the prescription drug provisions in the Inflation Reduction Act , which CBO projects will reduce the federal deficit by $237 billion between 2022 and 2031.

Spending on Medicare Advantage Has Grown as a Share of Total Medicare Spending

Another notable change in Medicare spending over the past decade is the increase in payments to Medicare Advantage plans, which are private health plans, such as HMOs and PPOs, that cover all Part A and Part B benefits and typically also Part D benefits. Medicare payments to Medicare Advantage plans for benefits covered under Part A and Part B nearly tripled between 2011 and 2021, from $124 billion to $361 billion—increasing from 26% of total Part A and Part B spending to 47% over this period. These payments are expected to increase to $943 billion in 2031, accounting for nearly 60% of total Part A and B spending that year (Figure 5). Beginning in 2023, Medicare spending on Part A and Part B benefits for beneficiaries in Medicare Advantage will exceed Part A and Part B benefits spending for beneficiaries in traditional Medicare.

Historically, growth in spending on Medicare Advantage is due in large part to steady growth in private plan enrollment. In 2022, 48% of eligible Medicare beneficiaries are enrolled in Medicare Advantage plans, up from 26% in 2011. Based on CBO’s latest Medicare enrollment projections , Medicare Advantage enrollment will increase to 61% of eligible Medicare beneficiaries by 2031.

In addition, Medicare pays more to private Medicare Advantage plans for enrollees than their costs would be in traditional Medicare, on average, and these higher payments have contributed to growth in spending on Medicare Advantage and overall Medicare spending. In 2022, payments to Medicare Advantage plans are estimated to be 104%  of what traditional Medicare would have spent on these beneficiaries, on average, according to MedPAC. This percentage is lower than in 2010, when Congress made changes to how Medicare Advantage plans are paid, but it has been trending higher since 2017.

According to the Congressional Budget Office, higher payments to Medicare Advantage plans, relative to traditional Medicare spending, are due to three factors . First, the payment methodology is based on benchmarks that are higher than traditional Medicare spending in half of all U.S. counties. Second, Medicare Advantage enrollees have higher “risk scores” than traditional Medicare beneficiaries in part because plans have a financial incentive to code for diagnoses, which increases the amount they are paid per enrollee. Third, Medicare Advantage plans typically receive higher payments based on their quality-based star ratings ( $10 billion in 2022 , according to KFF analysis), but these bonus payments do not apply to traditional Medicare.

Administrative Expenses in Traditional Medicare Are Relatively Low, But Higher for Medicare Part D and Medicare Advantage Plans

The overall cost of administering benefits for traditional Medicare is relatively low. In 2021, administrative expenses for traditional Medicare (plus CMS administration and oversight of Part D) totaled $10.8 billion, or 1.3% of total program spending , according to the Medicare Trustees; this includes expenses for the contractors that process claims submitted by beneficiaries in traditional Medicare and their providers.

This estimate does not include insurers’ costs of administering private Medicare Advantage and Part D drug plans, which are considerably higher. Medicare’s actuaries estimate that insurers’ administrative expenses and profits for Part D plans were 8% of total net plan benefit payments in 2021 . The actuaries have not provided a comparable estimate for Medicare Advantage plans, but according to KFF analysis , medical loss ratios (medical claims covered by insurers as a share of total premiums income) averaged 83% for Medicare Advantage plans in 2020, which means that administrative expenses, including profits, were 17% for Medicare Advantage plans.

Medicare Spending Grew More Slowly in the Past Decade than in Decades Prior but Faster Growth Is Projected in the Coming Years

Looking at the average annual rate of growth in Medicare spending, both overall and per beneficiary, growth was notably slower in the most recent decade (2010-2020) than in prior decades, and somewhat slower than growth in private health insurance (PHI) per capita spending. For 2020-2030, the Medicare Trustees project that Medicare per capita spending growth will be higher than in the past decade, but on par with growth in private health insurance (PHI) per capita spending (Figure 6).

Growth in Total Medicare Spending

• Between 2010 and 2020, average annual growth in total Medicare spending was 5.9%, down from 9.0% between 2000 and 2010. The influx of younger, healthier beneficiaries since 2011, when the baby boom generation started becoming eligible for Medicare, was a contributing factor in the slower rate of growth in overall Medicare spending in the 2010s. Slower growth in Medicare spending can also be attributed to policy changes made by the ACA, including reductions in Medicare payments to plans and providers and increased revenues, and the Budget Control Act of 2011, which lowered Medicare spending through sequestration that reduced payments to providers and plans by 2%, beginning in 2013 and since extended through 2031.
• Between 2020 and 2030, average annual growth in total Medicare spending is projected to be somewhat higher than between 2010 and 2020 (6.5% vs. 5.9%).

Growth in Medicare Spending Per Person

Prior to 2010, per enrollee spending growth rates were comparable for Medicare and private health insurance. With the recent slowdown in the growth of Medicare spending and the recent expansion of private health insurance through the ACA, the difference in growth rates between Medicare and private health insurance spending per enrollee widened but is expected to be roughly the same over the next decade.

• In the 1990s and 2000s, Medicare spending per enrollee grew at a similar rate to per enrollee spending among people with private insurance: 5.8% and 5.9%, respectively, in the 1990s and 7.4% and 7.0% in the 2000s.
• Between 2010 and 2020, Medicare per capita spending was relatively low, and grew more slowly than private insurance spending, increasing at an average annual rate of 1.9% over these years, while average annual private health insurance spending per capita grew at a rate of 2.8%.
• Between 2020 and 2030, Medicare per capita spending is projected to grow at a faster rate than between 2010 and 2020, on par with average annual growth in per capita private health insurance spending (5.4% vs. 5.3%).

Growth in Per Capita Medicare Spending on Parts A, B, and D

• Between 2010 and 2020, per capita spending on each of the three parts of Medicare (A, B, and D) grew more slowly than in previous decades (Figure 7). For Part D, estimates are based on spending starting in 2006, the first year of the Part D benefit. For example, the average annual growth rate for Part A was 0.5% between 2010 and 2020, down from 4.5% between 2000 and 2010. For Part B, average annual spending grew at 3.2% between 2010 and 2020, down from 7.0% between 2000 and 2010.
• Between 2020 and 2030, Medicare’s actuaries project a higher per capita growth rate for each part of Medicare, compared to growth between 2010 and 2020: 4.5% for Part A (up from 0.5%), 7.2% for Part B (up from 3.2%), and 3.7% for Part D (up from 2.0%). The Medicare Trustees project faster growth in Part B per capita spending due to higher spending on outpatient hospital services and physician-administered drugs, while the projected increase in Part D per capita spending growth is driven by a slowdown in the generic dispensing rate and increased specialty drug use, offset somewhat but not completely by higher manufacturer rebates negotiated by private plans. The projections for Part B and Part D do not take into account any savings associated with implementation of the prescription drug provisions in the Inflation Reduction Act . The Medicare Trustees have not yet updated spending projections to reflect these changes.

How is Medicare Financed?

Funding for medicare comes primarily from general revenues, payroll taxes, and premiums.

Funding for Medicare, which totaled $888 billion in 2021, comes primarily from general revenues (46%), payroll tax revenues (34%), and premiums paid by beneficiaries (15%) (Figure 8). Other sources include taxes on Social Security benefits, payments from states, and interest. The different parts of Medicare are funded in varying ways, and revenue sources dedicated to one part of the program cannot be used to pay for another part.

• Part A, which covers inpatient hospital stays, skilled nursing facility (SNF) stays, some home health visits, and hospice care, is financed primarily through a 2.9% tax on earnings paid by employers and employees (1.45% each). Higher-income taxpayers (more than $200,000 per individual and $250,000 per couple) pay a higher payroll tax on earnings (2.35%). Payroll taxes accounted for 90% of Part A revenue in 2021.
• Part B, which covers physician visits, outpatient services, preventive services, and some home health visits, is financed primarily through a combination of general revenues (73% in 2021) and beneficiary premiums (25%) (and 2% from interest and other sources). Beneficiaries with annual incomes over $97,000 per individual or $194,000 per couple pay a higher, income-related Part B premium reflecting a larger share of total Part B spending, ranging from 35% to 85% (Figure 9).
• Part D, which covers  outpatient prescription drugs  , is financed primarily by general revenues (74%) and beneficiary premiums (15%), with an additional 11% of revenues coming from state payments for beneficiaries enrolled in both Medicare and Medicaid. Higher-income enrollees pay a larger share of the cost of Part D coverage, as they do for Part B.

Medicare Advantage Is Not Separately Financed

The Medicare Advantage program (sometimes referred to as Part C) does not have its own separate revenue sources. Funds for Part A benefits provided by Medicare Advantage plans are drawn from the Medicare HI trust fund (accounting for 42% of Medicare Advantage spending on Part A and B benefits in 2021). Funds for Part B and Part D benefits are drawn from the Supplementary Medical Insurance (SMI) trust fund. Beneficiaries enrolled in Medicare Advantage plans pay the Part B premium and may pay an additional premium if required by their plan. In 2022, 69% of Medicare Advantage enrollees pay no additional premium.

Assessing Medicare’s Financial Condition

Medicare’s financial condition can be assessed in different ways, including comparing various measures of Medicare spending—overall or per capita—to other spending measures, such as Medicare spending as a share of the federal budget or as a share of GDP, as discussed above, and estimating the solvency of the Medicare Hospital Insurance (Part A) trust fund.

The Medicare Hospital Insurance Trust Fund Faces Solvency Challenges

The solvency of the Medicare Hospital Insurance trust fund, out of which Part A benefits are paid, is one way of measuring Medicare’s financial status, though because it only focuses on the status of Part A, it does not present a complete picture of total program spending. The solvency of Medicare in this context is measured by the level of assets in the Part A trust fund. In years when annual income to the trust fund exceeds benefits spending, the asset level increases, and when annual spending exceeds income, the asset level decreases. When spending exceeds income and the assets are fully depleted, Medicare will not have sufficient funds to pay all Part A benefits for the full year.

Each year, Medicare’s actuaries provide an estimate of the year when the asset level is projected to be fully depleted. In the 2022 Medicare Trustees report, the actuaries projected that the Part A trust fund will be depleted in 2028 , six years from now. This is a modest improvement from the projection in the 2021 Medicare Trustees report, when the depletion date was projected to be 2026 , based primarily on projections of higher revenues from payroll taxes resulting from higher employment and wage growth. Since 1990, the Trustees have projected that the Medicare Part A trust fund will come within six years of depletion six times (Figure 10).

The actuaries estimate that in 2028, Medicare will be able to cover almost all of Part A benefits spending with revenues plus the small amount of assets remaining at the beginning of the year, and just under 90% with revenues alone in 2029 through 2031, once the assets are depleted. Over a longer 75-year timeframe, the  Medicare Trustees estimate  that it would take either an increase of 0.70% of taxable payroll (from 2.9% to 3.6%) or a 15% reduction in benefit payments to bring the Part A trust fund into balance.

The Solvency of the Part A Trust Fund Is Affected by Several Factors

In addition to legislative and regulatory changes that affect Part A spending (including utilization of services and payments for services provided by hospitals, skilled nursing facilities, and other providers, and for Part A services covered by Medicare Advantage plans) and revenues, Part A trust fund solvency is affected by:

• The level of growth in the economy , which affects Medicare’s revenue from payroll tax contributions: economic growth that leads to higher employment and wages boosts revenue to the trust fund, while an economic downturn can have the opposite effect.
• Overall health care spending trends : higher health care price and cost growth can lead to higher spending for services covered under Medicare Part A, which could hasten the depletion date, while moderation in the growth of prices and costs could slow spending growth.
• Demographic trends : this includes the aging of the population, which is leading to  increased Medicare enrollment , especially between 2010 and 2030 when the baby boom generation reaches Medicare eligibility age; a declining ratio of workers per beneficiary making payroll tax contributions, which means lower revenue; and other factors, such as fertility rates and immigration.

While Part A is funded primarily by payroll taxes, benefits for Part B physician and other outpatient services and Part D prescription drugs are funded by general revenues and premiums paid for out of separate accounts in the Supplementary Medical Insurance (SMI) trust fund. The revenues for Medicare Part B and Part D are determined annually to meet expected spending obligations, meaning that the SMI trust fund does not face a funding shortfall, in contrast to the HI trust fund. But higher projected spending for benefits covered under Part B and Part D will increase the amount of general revenue funding and beneficiary premiums required to cover costs for these parts of the program in the future.

Impact of COVID-19 on Medicare Spending and Financing

According to the Medicare Trustees, the COVID-19 pandemic has had a significant impact on Medicare spending and financing , and some effects are expected to continue for several years. In terms of revenues, the pandemic initially resulted in a substantial increase in unemployment that caused a drop in payroll tax revenue to the HI trust fund. Spending was affected by new outlays for COVID-19 treatment, testing , and vaccine administration , plus accelerated and advance payments to providers, but this higher spending was more than offset by a steep reduction in spending on non-COVID services, as utilization dropped sharply in 2020. While utilization picked up again in 2021, it remained lower than expected that year. In addition, beneficiaries who died of COVID-19 had higher costs pre-pandemic than the average Medicare beneficiary, and the lower morbidity among the surviving Medicare population contributed to modestly lower costs in 2020 and 2021, according to the Medicare Trustees.

Moving forward, the Trustees project that the spending effects of the pandemic will not have a large effect on the financial status of the Medicare program beyond 2028. Accelerated and advance payments are expected to be fully repaid by the end of 2022. A rebound in employment since the early days of the pandemic has bolstered payroll tax revenue in the short term, while Medicare spending trends are expected to return to pre-pandemic levels in 2024 as beneficiaries seek care that was deferred in 2020 and 2021, which in fact may lead to more intensive and costly services. The morbidity effect associated with deaths due to COVID-19 is expected to decrease over time and end in 2028.

The Future Outlook

Over the longer term, the Medicare program faces financial pressures associated with higher health care costs, growing enrollment, and an aging population. Growth in Medicare spending places pressure on the federal budget, contributes to the depletion of the Part A trust fund, and results in higher Medicare premiums, deductibles, and cost sharing paid by beneficiaries.

A number of changes to Medicare have been proposed in the past to address Medicare’s fiscal challenges, including options such as raising the age of Medicare eligibility and transitioning Medicare to a premium support system. More recently, Congress passed the Inflation Reduction Act of 2022 , which aims to control the growth in Medicare prescription drug spending by requiring the federal government to negotiate drug prices in Medicare and requiring drug manufacturers to pay rebates for drug price increases faster than inflation, among other changes. To sustain Medicare for the long run, policymakers may consider adopting broader changes to the program that could include both changes in payments to health care providers and Medicare Advantage plans or reductions in benefits, and additional revenues, such as payroll tax increases or new sources of tax revenue.

At the same time, proposals that could increase Medicare spending are also being discussed, or have been adopted, including policies related to provider payments and Medicare benefit improvements. For example, the recently-enacted Consolidated Appropriations Act, 2023 includes several Medicare spending provisions, such as a reduction in the scheduled physician payment cut for 2023 from 4.5% to 2%, increases in payments to certain hospitals, an extension of Medicare telehealth coverage through 2024, and improvements in Medicare coverage of mental health services. Spending on these provisions will be offset in part by extending the 2% Medicare payment sequestration, currently set to expire in 2031, partway into fiscal year 2032. In addition, policymakers have expressed interest in other policies that could increase Medicare spending, such as enhancing Medicare’s benefit package by adding coverage of vision, hearing, and dental care, adding an out-of-pocket spending cap to traditional Medicare, making permanent Medicare coverage of telehealth, and strengthening financial protections for low-income beneficiaries.

While the prospects for proposals that would affect Medicare spending and financing over the long term are unknown, evaluating such changes will involve a consideration of their effects on federal expenditures, the Medicare program’s finances, and beneficiaries, health care providers, and taxpayers.

This work was supported in part by Arnold Ventures. KFF maintains full editorial control over all of its policy analysis, polling, and journalism activities.

• Medicare's Future
• Medicare Advantage
• Federal Budget
• Medicare Part D

Also of Interest

• FAQs on Medicare Financing and Trust Fund Solvency
• Medicare Advantage 2023 Spotlight: First Look
• An Overview of the Medicare Part D Prescription Drug Benefit

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McKinsey Global Private Markets Review 2024: Private markets in a slower era

At a glance, macroeconomic challenges continued.

McKinsey Global Private Markets Review 2024: Private markets: A slower era

If 2022 was a tale of two halves, with robust fundraising and deal activity in the first six months followed by a slowdown in the second half, then 2023 might be considered a tale of one whole. Macroeconomic headwinds persisted throughout the year, with rising financing costs, and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline from 2021’s lofty peak, weighed down by the “denominator effect” that persisted in part due to a less active deal market. Managers largely held onto assets to avoid selling in a lower-multiple environment, fueling an activity-dampening cycle in which distribution-starved limited partners (LPs) reined in new commitments.

About the authors

This article is a summary of a larger report, available as a PDF, that is a collaborative effort by Fredrik Dahlqvist , Alastair Green , Paul Maia, Alexandra Nee , David Quigley , Aditya Sanghvi , Connor Mangan, John Spivey, Rahel Schneider, and Brian Vickery , representing views from McKinsey’s Private Equity & Principal Investors Practice.

Performance in most private asset classes remained below historical averages for a second consecutive year. Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past. As private market managers look to boost performance in this new era of investing, a deeper focus on revenue growth and margin expansion will be needed now more than ever.

Perspectives on a slower era in private markets

Global fundraising contracted.

Fundraising fell 22 percent across private market asset classes globally to just over $1 trillion, as of year-end reported data—the lowest total since 2017. Fundraising in North America, a rare bright spot in 2022, declined in line with global totals, while in Europe, fundraising proved most resilient, falling just 3 percent. In Asia, fundraising fell precipitously and now sits 72 percent below the region’s 2018 peak.

Despite difficult fundraising conditions, headwinds did not affect all strategies or managers equally. Private equity (PE) buyout strategies posted their best fundraising year ever, and larger managers and vehicles also fared well, continuing the prior year’s trend toward greater fundraising concentration.

The numerator effect persisted

Despite a marked recovery in the denominator—the 1,000 largest US retirement funds grew 7 percent in the year ending September 2023, after falling 14 percent the prior year, for example 1 “U.S. retirement plans recover half of 2022 losses amid no-show recession,” Pensions and Investments , February 12, 2024. —many LPs remain overexposed to private markets relative to their target allocations. LPs started 2023 overweight: according to analysis from CEM Benchmarking, average allocations across PE, infrastructure, and real estate were at or above target allocations as of the beginning of the year. And the numerator grew throughout the year, as a lack of exits and rebounding valuations drove net asset values (NAVs) higher. While not all LPs strictly follow asset allocation targets, our analysis in partnership with global private markets firm StepStone Group suggests that an overallocation of just one percentage point can reduce planned commitments by as much as 10 to 12 percent per year for five years or more.

Despite these headwinds, recent surveys indicate that LPs remain broadly committed to private markets. In fact, the majority plan to maintain or increase allocations over the medium to long term.

Investors fled to known names and larger funds

Fundraising concentration reached its highest level in over a decade, as investors continued to shift new commitments in favor of the largest fund managers. The 25 most successful fundraisers collected 41 percent of aggregate commitments to closed-end funds (with the top five managers accounting for nearly half that total). Closed-end fundraising totals may understate the extent of concentration in the industry overall, as the largest managers also tend to be more successful in raising non-institutional capital.

While the largest funds grew even larger—the largest vehicles on record were raised in buyout, real estate, infrastructure, and private debt in 2023—smaller and newer funds struggled. Fewer than 1,700 funds of less than $1 billion were closed during the year, half as many as closed in 2022 and the fewest of any year since 2012. New manager formation also fell to the lowest level since 2012, with just 651 new firms launched in 2023.

Whether recent fundraising concentration and a spate of M&A activity signals the beginning of oft-rumored consolidation in the private markets remains uncertain, as a similar pattern developed in each of the last two fundraising downturns before giving way to renewed entrepreneurialism among general partners (GPs) and commitment diversification among LPs. Compared with how things played out in the last two downturns, perhaps this movie really is different, or perhaps we’re watching a trilogy reusing a familiar plotline.

Dry powder inventory spiked (again)

Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and have grown nearly 20 percent per annum since 2018. Dry powder reserves—the amount of capital committed but not yet deployed—increased to $3.7 trillion, marking the ninth consecutive year of growth. Dry powder inventory—the amount of capital available to GPs expressed as a multiple of annual deployment—increased for the second consecutive year in PE, as new commitments continued to outpace deal activity. Inventory sat at 1.6 years in 2023, up markedly from the 0.9 years recorded at the end of 2021 but still within the historical range. NAV grew as well, largely driven by the reluctance of managers to exit positions and crystallize returns in a depressed multiple environment.

Private equity strategies diverged

Buyout and venture capital, the two largest PE sub-asset classes, charted wildly different courses over the past 18 months. Buyout notched its highest fundraising year ever in 2023, and its performance improved, with funds posting a (still paltry) 5 percent net internal rate of return through September 30. And although buyout deal volumes declined by 19 percent, 2023 was still the third-most-active year on record. In contrast, venture capital (VC) fundraising declined by nearly 60 percent, equaling its lowest total since 2015, and deal volume fell by 36 percent to the lowest level since 2019. VC funds returned –3 percent through September, posting negative returns for seven consecutive quarters. VC was the fastest-growing—as well as the highest-performing—PE strategy by a significant margin from 2010 to 2022, but investors appear to be reevaluating their approach in the current environment.

Private equity entry multiples contracted

PE buyout entry multiples declined by roughly one turn from 11.9 to 11.0 times EBITDA, slightly outpacing the decline in public market multiples (down from 12.1 to 11.3 times EBITDA), through the first nine months of 2023. For nearly a decade leading up to 2022, managers consistently sold assets into a higher-multiple environment than that in which they had bought those assets, providing a substantial performance tailwind for the industry. Nowhere has this been truer than in technology. After experiencing more than eight turns of multiple expansion from 2009 to 2021 (the most of any sector), technology multiples have declined by nearly three turns in the past two years, 50 percent more than in any other sector. Overall, roughly two-thirds of the total return for buyout deals that were entered in 2010 or later and exited in 2021 or before can be attributed to market multiple expansion and leverage. Now, with falling multiples and higher financing costs, revenue growth and margin expansion are taking center stage for GPs.

Real estate receded

Demand uncertainty, slowing rent growth, and elevated financing costs drove cap rates higher and made price discovery challenging, all of which weighed on deal volume, fundraising, and investment performance. Global closed-end fundraising declined 34 percent year over year, and funds returned −4 percent in the first nine months of the year, losing money for the first time since the 2007–08 global financial crisis. Capital shifted away from core and core-plus strategies as investors sought liquidity via redemptions in open-end vehicles, from which net outflows reached their highest level in at least two decades. Opportunistic strategies benefited from this shift, with investors focusing on capital appreciation over income generation in a market where alternative sources of yield have grown more attractive. Rising interest rates widened bid–ask spreads and impaired deal volume across food groups, including in what were formerly hot sectors: multifamily and industrial.

Private debt pays dividends

Debt again proved to be the most resilient private asset class against a turbulent market backdrop. Fundraising declined just 13 percent, largely driven by lower commitments to direct lending strategies, for which a slower PE deal environment has made capital deployment challenging. The asset class also posted the highest returns among all private asset classes through September 30. Many private debt securities are tied to floating rates, which enhance returns in a rising-rate environment. Thus far, managers appear to have successfully navigated the rising incidence of default and distress exhibited across the broader leveraged-lending market. Although direct lending deal volume declined from 2022, private lenders financed an all-time high 59 percent of leveraged buyout transactions last year and are now expanding into additional strategies to drive the next era of growth.

Infrastructure took a detour

After several years of robust growth and strong performance, infrastructure and natural resources fundraising declined by 53 percent to the lowest total since 2013. Supply-side timing is partially to blame: five of the seven largest infrastructure managers closed a flagship vehicle in 2021 or 2022, and none of those five held a final close last year. As in real estate, investors shied away from core and core-plus investments in a higher-yield environment. Yet there are reasons to believe infrastructure’s growth will bounce back. Limited partners (LPs) surveyed by McKinsey remain bullish on their deployment to the asset class, and at least a dozen vehicles targeting more than $10 billion were actively fundraising as of the end of 2023. Multiple recent acquisitions of large infrastructure GPs by global multi-asset-class managers also indicate marketwide conviction in the asset class’s potential.

Private markets still have work to do on diversity

Private markets firms are slowly improving their representation of females (up two percentage points over the prior year) and ethnic and racial minorities (up one percentage point). On some diversity metrics, including entry-level representation of women, private markets now compare favorably with corporate America. Yet broad-based parity remains elusive and too slow in the making. Ethnic, racial, and gender imbalances are particularly stark across more influential investing roles and senior positions. In fact, McKinsey’s research  reveals that at the current pace, it would take several decades for private markets firms to reach gender parity at senior levels. Increasing representation across all levels will require managers to take fresh approaches to hiring, retention, and promotion.

Artificial intelligence generating excitement

The transformative potential of generative AI was perhaps 2023’s hottest topic (beyond Taylor Swift). Private markets players are excited about the potential for the technology to optimize their approach to thesis generation, deal sourcing, investment due diligence, and portfolio performance, among other areas. While the technology is still nascent and few GPs can boast scaled implementations, pilot programs are already in flight across the industry, particularly within portfolio companies. Adoption seems nearly certain to accelerate throughout 2024.

Private markets in a slower era

If private markets investors entered 2023 hoping for a return to the heady days of 2021, they likely left the year disappointed. Many of the headwinds that emerged in the latter half of 2022 persisted throughout the year, pressuring fundraising, dealmaking, and performance. Inflation moderated somewhat over the course of the year but remained stubbornly elevated by recent historical standards. Interest rates started high and rose higher, increasing the cost of financing. A reinvigorated public equity market recovered most of 2022’s losses but did little to resolve the valuation uncertainty private market investors have faced for the past 18 months.

Within private markets, the denominator effect remained in play, despite the public market recovery, as the numerator continued to expand. An activity-dampening cycle emerged: higher cost of capital and lower multiples limited the ability or willingness of general partners (GPs) to exit positions; fewer exits, coupled with continuing capital calls, pushed LP allocations higher, thereby limiting their ability or willingness to make new commitments. These conditions weighed on managers’ ability to fundraise. Based on data reported as of year-end 2023, private markets fundraising fell 22 percent from the prior year to just over $1 trillion, the largest such drop since 2009 (Exhibit 1).

The impact of the fundraising environment was not felt equally among GPs. Continuing a trend that emerged in 2022, and consistent with prior downturns in fundraising, LPs favored larger vehicles and the scaled GPs that typically manage them. Smaller and newer managers struggled, and the number of sub–$1 billion vehicles and new firm launches each declined to its lowest level in more than a decade.

Despite the decline in fundraising, private markets assets under management (AUM) continued to grow, increasing 12 percent to $13.1 trillion as of June 30, 2023. 2023 fundraising was still the sixth-highest annual haul on record, pushing dry powder higher, while the slowdown in deal making limited distributions.

Investment performance across private market asset classes fell short of historical averages. Private equity (PE) got back in the black but generated the lowest annual performance in the past 15 years, excluding 2022. Closed-end real estate produced negative returns for the first time since 2009, as capitalization (cap) rates expanded across sectors and rent growth dissipated in formerly hot sectors, including multifamily and industrial. The performance of infrastructure funds was less than half of its long-term average and even further below the double-digit returns generated in 2021 and 2022. Private debt was the standout performer (if there was one), outperforming all other private asset classes and illustrating the asset class’s countercyclical appeal.

Private equity down but not out

Higher financing costs, lower multiples, and an uncertain macroeconomic environment created a challenging backdrop for private equity managers in 2023. Fundraising declined for the second year in a row, falling 15 percent to $649 billion, as LPs grappled with the denominator effect and a slowdown in distributions. Managers were on the fundraising trail longer to raise this capital: funds that closed in 2023 were open for a record-high average of 20.1 months, notably longer than 18.7 months in 2022 and 14.1 months in 2018. VC and growth equity strategies led the decline, dropping to their lowest level of cumulative capital raised since 2015. Fundraising in Asia fell for the fourth year of the last five, with the greatest decline in China.

Despite the difficult fundraising context, a subset of strategies and managers prevailed. Buyout managers collectively had their best fundraising year on record, raising more than $400 billion. Fundraising in Europe surged by more than 50 percent, resulting in the region’s biggest haul ever. The largest managers raised an outsized share of the total for a second consecutive year, making 2023 the most concentrated fundraising year of the last decade (Exhibit 2).

Despite the drop in aggregate fundraising, PE assets under management increased 8 percent to $8.2 trillion. Only a small part of this growth was performance driven: PE funds produced a net IRR of just 2.5 percent through September 30, 2023. Buyouts and growth equity generated positive returns, while VC lost money. PE performance, dating back to the beginning of 2022, remains negative, highlighting the difficulty of generating attractive investment returns in a higher interest rate and lower multiple environment. As PE managers devise value creation strategies to improve performance, their focus includes ensuring operating efficiency and profitability of their portfolio companies.

Deal activity volume and count fell sharply, by 21 percent and 24 percent, respectively, which continued the slower pace set in the second half of 2022. Sponsors largely opted to hold assets longer rather than lock in underwhelming returns. While higher financing costs and valuation mismatches weighed on overall deal activity, certain types of M&A gained share. Add-on deals, for example, accounted for a record 46 percent of total buyout deal volume last year.

Real estate recedes

For real estate, 2023 was a year of transition, characterized by a litany of new and familiar challenges. Pandemic-driven demand issues continued, while elevated financing costs, expanding cap rates, and valuation uncertainty weighed on commercial real estate deal volumes, fundraising, and investment performance.

Managers faced one of the toughest fundraising environments in many years. Global closed-end fundraising declined 34 percent to $125 billion. While fundraising challenges were widespread, they were not ubiquitous across strategies. Dollars continued to shift to large, multi-asset class platforms, with the top five managers accounting for 37 percent of aggregate closed-end real estate fundraising. In April, the largest real estate fund ever raised closed on a record $30 billion.

Capital shifted away from core and core-plus strategies as investors sought liquidity through redemptions in open-end vehicles and reduced gross contributions to the lowest level since 2009. Opportunistic strategies benefited from this shift, as investors turned their attention toward capital appreciation over income generation in a market where alternative sources of yield have grown more attractive.

In the United States, for instance, open-end funds, as represented by the National Council of Real Estate Investment Fiduciaries Fund Index—Open-End Equity (NFI-OE), recorded $13 billion in net outflows in 2023, reversing the trend of positive net inflows throughout the 2010s. The negative flows mainly reflected $9 billion in core outflows, with core-plus funds accounting for the remaining outflows, which reversed a 20-year run of net inflows.

As a result, the NAV in US open-end funds fell roughly 16 percent year over year. Meanwhile, global assets under management in closed-end funds reached a new peak of $1.7 trillion as of June 2023, growing 14 percent between June 2022 and June 2023.

Real estate underperformed historical averages in 2023, as previously high-performing multifamily and industrial sectors joined office in producing negative returns caused by slowing demand growth and cap rate expansion. Closed-end funds generated a pooled net IRR of −3.5 percent in the first nine months of 2023, losing money for the first time since the global financial crisis. The lone bright spot among major sectors was hospitality, which—thanks to a rush of postpandemic travel—returned 10.3 percent in 2023. 2 Based on NCREIFs NPI index. Hotels represent 1 percent of total properties in the index. As a whole, the average pooled lifetime net IRRs for closed-end real estate funds from 2011–20 vintages remained around historical levels (9.8 percent).

Global deal volume declined 47 percent in 2023 to reach a ten-year low of $650 billion, driven by widening bid–ask spreads amid valuation uncertainty and higher costs of financing (Exhibit 3). 3 CBRE, Real Capital Analytics Deal flow in the office sector remained depressed, partly as a result of continued uncertainty in the demand for space in a hybrid working world.

During a turbulent year for private markets, private debt was a relative bright spot, topping private markets asset classes in terms of fundraising growth, AUM growth, and performance.

Fundraising for private debt declined just 13 percent year over year, nearly ten percentage points less than the private markets overall. Despite the decline in fundraising, AUM surged 27 percent to $1.7 trillion. And private debt posted the highest investment returns of any private asset class through the first three quarters of 2023.

Private debt’s risk/return characteristics are well suited to the current environment. With interest rates at their highest in more than a decade, current yields in the asset class have grown more attractive on both an absolute and relative basis, particularly if higher rates sustain and put downward pressure on equity returns (Exhibit 4). The built-in security derived from debt’s privileged position in the capital structure, moreover, appeals to investors that are wary of market volatility and valuation uncertainty.

Direct lending continued to be the largest strategy in 2023, with fundraising for the mostly-senior-debt strategy accounting for almost half of the asset class’s total haul (despite declining from the previous year). Separately, mezzanine debt fundraising hit a new high, thanks to the closings of three of the largest funds ever raised in the strategy.

Over the longer term, growth in private debt has largely been driven by institutional investors rotating out of traditional fixed income in favor of private alternatives. Despite this growth in commitments, LPs remain underweight in this asset class relative to their targets. In fact, the allocation gap has only grown wider in recent years, a sharp contrast to other private asset classes, for which LPs’ current allocations exceed their targets on average. According to data from CEM Benchmarking, the private debt allocation gap now stands at 1.4 percent, which means that, in aggregate, investors must commit hundreds of billions in net new capital to the asset class just to reach current targets.

Private debt was not completely immune to the macroeconomic conditions last year, however. Fundraising declined for the second consecutive year and now sits 23 percent below 2021’s peak. Furthermore, though private lenders took share in 2023 from other capital sources, overall deal volumes also declined for the second year in a row. The drop was largely driven by a less active PE deal environment: private debt is predominantly used to finance PE-backed companies, though managers are increasingly diversifying their origination capabilities to include a broad new range of companies and asset types.

Infrastructure and natural resources take a detour

For infrastructure and natural resources fundraising, 2023 was an exceptionally challenging year. Aggregate capital raised declined 53 percent year over year to $82 billion, the lowest annual total since 2013. The size of the drop is particularly surprising in light of infrastructure’s recent momentum. The asset class had set fundraising records in four of the previous five years, and infrastructure is often considered an attractive investment in uncertain markets.

While there is little doubt that the broader fundraising headwinds discussed elsewhere in this report affected infrastructure and natural resources fundraising last year, dynamics specific to the asset class were at play as well. One issue was supply-side timing: nine of the ten largest infrastructure GPs did not close a flagship fund in 2023. Second was the migration of investor dollars away from core and core-plus investments, which have historically accounted for the bulk of infrastructure fundraising, in a higher rate environment.

The asset class had some notable bright spots last year. Fundraising for higher-returning opportunistic strategies more than doubled the prior year’s total (Exhibit 5). AUM grew 18 percent, reaching a new high of $1.5 trillion. Infrastructure funds returned a net IRR of 3.4 percent in 2023; this was below historical averages but still the second-best return among private asset classes. And as was the case in other asset classes, investors concentrated commitments in larger funds and managers in 2023, including in the largest infrastructure fund ever raised.

The outlook for the asset class, moreover, remains positive. Funds targeting a record amount of capital were in the market at year-end, providing a robust foundation for fundraising in 2024 and 2025. A recent spate of infrastructure GP acquisitions signal multi-asset managers’ long-term conviction in the asset class, despite short-term headwinds. Global megatrends like decarbonization and digitization, as well as revolutions in energy and mobility, have spurred new infrastructure investment opportunities around the world, particularly for value-oriented investors that are willing to take on more risk.

Private markets make measured progress in DEI

Diversity, equity, and inclusion (DEI) has become an important part of the fundraising, talent, and investing landscape for private market participants. Encouragingly, incremental progress has been made in recent years, including more diverse talent being brought to entry-level positions, investing roles, and investment committees. The scope of DEI metrics provided to institutional investors during fundraising has also increased in recent years: more than half of PE firms now provide data across investing teams, portfolio company boards, and portfolio company management (versus investment team data only). 4 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023.

In 2023, McKinsey surveyed 66 global private markets firms that collectively employ more than 60,000 people for the second annual State of diversity in global private markets report. 5 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023. The research offers insight into the representation of women and ethnic and racial minorities in private investing as of year-end 2022. In this chapter, we discuss where the numbers stand and how firms can bring a more diverse set of perspectives to the table.

The statistics indicate signs of modest advancement. Overall representation of women in private markets increased two percentage points to 35 percent, and ethnic and racial minorities increased one percentage point to 30 percent (Exhibit 6). Entry-level positions have nearly reached gender parity, with female representation at 48 percent. The share of women holding C-suite roles globally increased 3 percentage points, while the share of people from ethnic and racial minorities in investment committees increased 9 percentage points. There is growing evidence that external hiring is gradually helping close the diversity gap, especially at senior levels. For example, 33 percent of external hires at the managing director level were ethnic or racial minorities, higher than their existing representation level (19 percent).

Yet, the scope of the challenge remains substantial. Women and minorities continue to be underrepresented in senior positions and investing roles. They also experience uneven rates of progress due to lower promotion and higher attrition rates, particularly at smaller firms. Firms are also navigating an increasingly polarized workplace today, with additional scrutiny and a growing number of lawsuits against corporate diversity and inclusion programs, particularly in the US, which threatens to impact the industry’s pace of progress.

Fredrik Dahlqvist is a senior partner in McKinsey’s Stockholm office; Alastair Green  is a senior partner in the Washington, DC, office, where Paul Maia and Alexandra Nee  are partners; David Quigley  is a senior partner in the New York office, where Connor Mangan is an associate partner and Aditya Sanghvi  is a senior partner; Rahel Schneider is an associate partner in the Bay Area office; John Spivey is a partner in the Charlotte office; and Brian Vickery  is a partner in the Boston office.

The authors wish to thank Jonathan Christy, Louis Dufau, Vaibhav Gujral, Graham Healy-Day, Laura Johnson, Ryan Luby, Tripp Norton, Alastair Rami, Henri Torbey, and Alex Wolkomir for their contributions

The authors would also like to thank CEM Benchmarking and the StepStone Group for their partnership in this year's report.

This article was edited by Arshiya Khullar, an editor in the Gurugram office.

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“The FTC is focused on ensuring that American consumers, workers, and entrepreneurs can enjoy honest markets and the economic liberty that fair and free competition provides,” said FTC Chair Lina M. Khan. “As detailed in this report, the work of our talented and dedicated staff in FY 2023 made Americans’ lives better in meaningful and material ways—from safeguarding people’s access to affordable healthcare to protecting people’s sensitive data from unchecked surveillance.”

The report lays out the Commission’s work to vigorously enforce the nation’s antitrust and consumer protection laws in a constantly evolving modern economy. As artificial intelligence and algorithmic decision-making tools proliferated, the FTC’s enforcement and policy efforts have been forward-looking—enabling the agency to stay on the cutting edge as these technologies develop.

In FY 2023, the FTC made programmatic strides to protect Americans’—and especially children’s—privacy; hold companies that defraud the public accountable; stop companies from hiking prices with needless junk fees; shut down subscription tricks and traps; make clear there is no AI exemption for the laws on the books; and ensure that domestic manufacturers, independent repairers, and other small businesses can compete on a level playing field. As part of its work to protect consumers, the FTC in FY 2023:

• Sued  Amazon for engaging in a years-long effort to enroll consumers into its Prime program without their consent while knowingly making it difficult for consumers to cancel their Prime subscriptions;
• Announced the  largest telemarketing sweep in U.S. history, in partnership with more than 100 federal and state law enforcers, targeting operations responsible for billions of illegal robocalls to Americans;
• Filed a lawsuit against owners of a  money-making scheme that claimed to use artificial intelligence to boost earnings for consumers’ e-commerce storefronts; and  
• Took action to protect Americans’ privacy by bringing several cases. They included actions against  Amazon and  Microsoft for violating the Children’s Online Privacy Protection Act, against  BetterHelp for deceiving users about their health data sharing practices, against the maker of the  Premom app for violating the Health Breach Notification Rule, and against  Ring for failing to stop employees from viewing customer videos and hackers from taking control of consumers’ accounts, cameras, and videos.

The FTC also continued to deploy its full toolkit to block anticompetitive mergers, halt anticompetitive practices to monopolize markets, and prevent businesses from using unfair tactics to gain an advantage. In critical sectors across the economy, the agency brought important and justified, yet challenging, theories and cases and pursued bold remedies to fully restore and prevent competitive harms. In addition to the FTC’s enforcement work, the agency worked to update U.S. federal enforcers’ merger policy to reflect market realities and help courts develop and clarify the law through amicus briefs. This work included:

• Taking action, in partnership with 17 state attorneys general, against  Amazon by alleging the company illegally maintained its monopoly power and raised prices for sellers and shoppers;
• Filing a lawsuit against U.S. Anesthesia Partners and  private equity firm Welsh Carson for engaging in a multi-year scheme to monopolize anesthesiology practices in Texas, driving up the prices of anesthesia services for Texas patients to increase profits; and
• Blocking anticompetitive mergers in sectors across the economy, including the world’s largest health care data provider,  IQVIA’s , proposed acquisition of Propel Media, Inc.

Across the agency’s work, the FTC continued to prioritize opening its doors to hear from Americans across the country—including through Open Commission Meetings, comment dockets, public workshops, and listening forums. 

The Federal Trade Commission works to promote competition , and protect and educate consumers . The FTC will never demand money, make threats, tell you to transfer money, or promise you a prize. You can  learn more about consumer topics  and report scams, fraud, and bad business practices online at  ReportFraud.ftc.gov . Follow the FTC on social media , read our blogs and subscribe to press releases for the latest FTC news and resources.

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Juliana Gruenwald Henderson Office of Public Affairs 202-326-2924

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