We began manufacturing and selling Microsoft Lumia (“Lumia”) phones and other phones with the acquisition of NDS in April 2014. This decrease relates primarily to tax credits available for carryover and a partial settlement of the IRS audit for tax years 2007 to 2009, offset by increases relating to intercompany transfer pricing. Dividends and interest income increased due to higher portfolio balances and slightly higher yields on fixed-income securities. Part of this strategy involves focusing our phone devices on a narrower range of customer categories and differentiating through the combination of hardware and software we are uniquely positioned to offer. Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. Windows revenue is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell. This resulted in a change in our operating segments and reporting units. Designed primarily for small- and medium-sized organizations, the Open programs allow customers to acquire perpetual or subscription licenses and, at the customer’s election, rights to future versions of software products over a specified time period (generally two or three years depending on the specific programs used). Enterprise Mobility customers nearly doubled year-over-year to over 33,000. Devices revenue decreased $3.7 billion or 32%, mainly due to lower revenue from phones, driven by the change in strategy for the phone business, offset in part by higher Microsoft Surface (“Surface”) revenue. The stock awards vest ratably in August of each of the four years following the grant date. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These programs include direct sales, direct sales supported by a large network of partner advisors, and resale of services through operator channels, such as telephone, cell, and cable providers. On July 25, 2016, there were 106,534 registered holders of record of our common stock. Office Commercial revenue decreased $152 million or 1%, driven by lower transactional license volume, reflecting a decline in the business PC market following Windows XP end of support in the prior year, and declines in Japan, offset in part by subscriber growth and higher premium mix of Office 365 commercial. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. This creates an opportunity to reach new customers and expand the usage of our services by our existing customers. IT Infrastructure and Networks Microsoft 20345-2 Designing and Deploying Microsoft Exchange Server 2016/2019 ; Microsoft Exchange Courses Close. Import your Visio files to view and edit diagrams in Lucidchart with collaborators on Mac, PC, Linux, and any device – no download required! The tax effect of such temporary differences is reported as deferred income taxes. Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. Cash used in financing increased $1.0 billion to $9.7 billion, mainly due to a $7.1 billion increase in cash used for common stock repurchases, offset in part by a $6.7 billion increase in proceeds from issuances of debt, net of repayments. The amortization of these costs is included in cost of revenue over the estimated life of the products. The Ontario and Quebec cases are inactive. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. No gain or loss was recorded upon termination of this agreement, as it was determined to be at market value. See a discussion of these factors and other risks under Risk Factors in our fiscal year 2016 Form 10-K. Our revenue historically has fluctuated quarterly and has generally been highest in the second quarter of our fiscal year due to corporate calendar year-end spending trends in our major markets and holiday season spending by consumers. Microsoft cannot fulfill our mission to empower every person and every organization on the planet to achieve more just by providing products and services that let our users do great things. Revenue included an unfavorable foreign currency impact of approximately 6%. Web-based offerings competing with individual applications have also positioned themselves as alternatives to our products. 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. Research and development expenses increased $567 million or 21% and sales and marketing expenses increased $347 million or 9%, driven by increased strategic investments and acquisitions to drive cloud sales capacity and innovation. During fiscal year 2016, we deferred net revenue from Windows 10 of $6.6 billion. When Microsoft announced Teams in November 2016, it entered a market firmly controlled by Slack, which had popularized business text chat as a convenient solution to email. Just as we are transforming business and society through cloud computing, we’re also revolutionizing the workplace to help organizations be more productive, and people do more. 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 also recently announced the sale of our entry-level feature phone business in May 2016. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities in order to diversify risk. We engineer our applications so users can find, try, and buy them in friction-free ways. 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. Microsoft Corporation, Satya Nadella Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of July 1, 2015, where the cumulative effect of these changes are required to be recorded. We currently do not intend nor foresee a need to repatriate these funds. Operating income increased $2.0 billion or 11%, primarily due to a decrease in impairment, integration, and restructuring expenses and sales and marketing expenses, offset in part by lower gross margin. Although each type of reselling partner reaches organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs, and VARs typically reach small- and medium-sized organizations. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. Together we will have a transformative effect through our shared ambition to reinvent ways for professionals to be more productive. You can also send mail to the transfer agent at: Shareholders can sign up for electronic alerts to access the annual report and proxy statement online. We consider the launch of Windows 10 in July 2015 to be a transformative moment as we moved from an operating system that runs on a PC to a service that can power the full spectrum of devices. Dan Truax 4 minutes. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. Revenue included an unfavorable foreign currency impact of approximately 2%. 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. The levies are based upon a 2001 European Union (“EU”) Directive establishing a right for end users to make copies of copyrighted works for personal or private use, but also allowing the collection of levies based upon sales of blank media or recording devices to compensate copyright holders for private copying. Dynamics revenue increased 4%, mainly due to higher revenue from Dynamics CRM Online, driven by seat growth. Chief Executive Officer, Visa, Inc. William H. Gates III Our effective tax rate was lower than the U.S. federal statutory rate primarily due to foreign earnings taxed at lower rates resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. Because our annual test indicated that Phone Hardware’s carrying value exceeded its estimated fair value, a second phase of the goodwill impairment test (“Step 2”) was performed specific to Phone Hardware. While our main 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, including Canada, China, Denmark, Finland, France, India, Ireland, Israel, Japan, and the United Kingdom. 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. Our annual goodwill impairment test as of May 1, 2015 indicated that the carrying value of our previous Phone Hardware reporting unit goodwill exceeded its estimated fair value. Revenue deferred on Windows 10 licenses to reflect ratable recognition over the life of the device. 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. Research and development expenses increased $665 million or 6%, mainly due to increased investment in new products and services, including $739 million higher phone expenses, offset in part by reduced headcount-related expenses. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. Development, Christopher C. Capossela We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. These entities have been included in our consolidated results of operations since their respective acquisition dates. 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. Windows OEM Pro revenue decreased, primarily due to benefits realized from the expiration of support for Windows XP in the prior year, and declines in the business PC market. Changes in market value, excluding other-than-temporary impairments, are reflected in OCI. Microsoft Office 365. Equity and other investments were $10.4 billion as of June 30, 2016, compared with $12.1 billion as of June 30, 2015. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition. We're the company that cares most deeply about computing technologies for both people and the organizations they build. The transaction is expected to accelerate the growth of LinkedIn, as well as Office 365 and Dynamics. More Personal Computing revenue decreased, mainly due to lower revenue from Devices and Windows, offset in part by higher revenue from search advertising and Gaming. The impairment charges for both periods related to our phone business. Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive unspecified future versions of software products and are accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the coverage period. Revenue related to licensing for games published by third parties for use on the Xbox consoles is recognized when games are manufactured by the game publishers. Revenue and costs are generally directly attributed to our segments. Xbox Live enables people to connect and share online gaming experiences and is accessible on Xbox consoles, Windows-enabled devices, and other devices. 17. Gaming is another area where Windows 10 will open new user experiences and scenarios. Productivity and Business Processes revenue increased slightly, primarily due to an increase in Office and Dynamics revenue. 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. The following table presents the fair values of derivative instruments designated as hedging instruments (“designated hedge derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”). Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. * Not applicable. Windows OEM non-Pro revenue increased 7%, outperforming the consumer PC market, driven by a higher mix of premium licenses sold. In fiscal years 2016, 2015, and 2014, there were no individually significant other reconciling items. Our fixed-income investments are exposed to interest rate risk and credit risk. We provide commercial cloud-based solutions such as Office 365, Azure, and Dynamics CRM Online. Partner strategy. 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. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. Our securities lending payable balance was $294 million as of June 30, 2016. Our responsibility is to express an opinion on these financial statements based on our audits. 18. Our ability to early adopt using the full retrospective method is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements. Net losses on derivatives increased due to higher losses on currency and equity contracts and lower gains on interest rate contracts in the current period as compared to the prior period, offset in part by lower losses on commodity contracts. 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. We plan to continue to make significant investments in a broad range of research and development efforts. The most significant cases against Nokia are pending in Germany and Austria, due to both the high volume of sales and high levy amounts sought in these countries. | Microsoft Asia News Center. We primarily used the income approach to determine the fair value of the intangible assets and determine the amount of impairment. Customer Licensing Programs — Online Services Only. 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 transaction is expected to close in the second half of 2016, subject to regulatory approvals and other closing conditions. The lifecycle for gaming and entertainment consoles averages five to ten years. And more than 80 percent of the world’s largest banks are Azure customers. During fiscal year 2014, we repurchased 175 million shares for $6.4 billion; 128 million shares were repurchased for $4.9 billion under the share repurchase program approved by our Board of Directors on September 16, 2013, and 47 million shares were repurchased for $1.5 billion under the share repurchase program that was announced on September 22, 2008 and expired September 30, 2013. What this means for our customers is that they can scale their solutions without worrying about their cloud platform’s capacity or the complex demands of transparency, reliability, security, privacy, and compliance. During fiscal years 2016, 2015, and 2014, research and development expense was $12.0 billion, $12.0 billion, and $11.4 billion, respectively. We distribute software through OEMs that pre-install our software on new devices and servers they sell. Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. The distribution of the potential changes in total market value of all holdings is computed based on the historical volatilities and correlations among foreign exchange rates, interest rates, equity prices, and commodity prices, assuming normal market conditions. The mix of computing devices based on form factor and screen size. During fiscal year 2016, we recorded $630 million of asset impairment charges related to our phone business. Microsoft was served with the complaint in June 2014 and has been substituted for the Nokia defendants. Our effective tax rate for fiscal years 2016 and 2015 was 15% and 34%, respectively. 23. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content and advertiser offerings. 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. Net recognized gains on investments increased primarily due to higher gains on sales of equity securities, offset in part by higher other-than-temporary impairments. Unearned revenue as of June 30, 2016 was comprised mainly of unearned revenue from volume licensing programs. Equity investments through which we are able to exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable. Software Assurance also provides support, tools, and training to help customers deploy and use software efficiently. Differentiation. Windows is also built to support everyday experiences for everyone. Phone revenue decreased $4.2 billion or 56%, as we sold 13.8 million Microsoft Lumia phones and 75.5 million other phones in fiscal year 2016, compared with 36.8 million and 126.8 million sold, respectively, in fiscal year 2015. As of June 30, 2016, $7.1 billion remained of our $40.0 billion share repurchase program. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We acquired NDS in the fourth quarter of fiscal year 2014. Excel for Microsoft 365 Excel 2019 Excel 2016 Excel 2013 Excel 2010 Excel 2007 More... Less. All repurchases were made using cash resources. Commercial competitors for our server applications for PC-based distributed client/server environments include CA Technologies, IBM, and Oracle. We launched Windows 10 with a new concept – to enable Windows as a service, continuously delivering differentiated value across our ecosystem to better serve the needs of our customers. Forward-looking statements may appear throughout this report, including the following sections: “Business,” “Management’s Discussion and Analysis,” and “Risk Factors.” 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. Revenue included an unfavorable foreign currency impact of approximately 5%. Skype is designed to connect friends, family, clients, and colleagues through a variety of devices. Research and development expenses increased $159 million or 6%, mainly due to increased investment in new products and services. Microsoft Product and Services Agreement Licensing. And we continue to see great momentum as innovative companies like GE, Facebook, Hershey, and Discovery Communications adopt Office 365. ValueAct Capital, Sandra E. Peterson 4 Other news and announcements that we may post from time to time that investors might find useful or interesting. There are several distinct areas of technology that we aim to drive forward. This was the year of reinventing Windows and delivering a renewed vision of one of the world’s most successful operating systems. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Service revenue exceeded 10% of total revenue for the first time in fiscal year 2016. Also included in “Other” are business dispositions and transfers between business segments due to reorganizations, as applicable. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors”, “Quantitative and Qualitative Disclosures about Market Risk” and “Management’s Discussion and Analysis” in our fiscal year 2016 Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise. The fiscal year 2015 effective tax rate included the tax impact of losses in foreign jurisdictions for which we may not realize a tax benefit, primarily as a result of impairment and restructuring charges. 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. Revenue from our cloud platform, Azure, grew triple digits, with usage of key computing and database workloads more than doubling year-over-year. The plaintiffs are expected to file their case in chief in August 2016, setting out claims made, authorities, and evidence in support. As of June 30, 2016 an aggregate of 214 million shares were authorized for future grant under our stock plans. Dynamics users increased, with 30% growth in number of Dynamics paid seats, and we ended fiscal year 2015 with over eight million paid seats. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. These costs are included in impairment, integration, and restructuring expenses on our consolidated income statement. In fiscal year 2015, income before income taxes included the net impact of U.S. and foreign impairment, integration, and restructuring expenses relating to our phone business of $1.1 billion and $8.9 billion, respectively. In making this judgment, we employ a systematic methodology quarterly that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. We elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to both net cash from operations and net cash used in financing of $588 million and $271 million for the years ended June 30, 2015 and 2014, respectively. These costs are expected to be recognized over a weighted average period of 3 years. Gross margin decreased $564 million or 3%, reflecting lower revenue, offset in part by a reduction in cost of revenue. A computing device should be not just a tool, but a partner. With worldwide per capita GDP and productivity growth at roughly 1 percent, how do we return to vigorous growth that benefits everyone? Impairment, integration, and restructuring expense relating to our phone business decreased our fiscal year 2015 U.S income before income taxes by $1.1 billion and foreign income before income taxes by $8.9 billion. Our Dynamics software offerings are also licensed to enterprises through a global network of channel partners providing vertical solutions and specialized services. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. Our common stock is traded on the NASDAQ Stock Market under the symbol MSFT. 21. 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. Corporate and Other operating loss decreased $2.0 billion, primarily due to an $8.9 billion reduction in impairment, integration, and restructuring expenses, driven by prior year goodwill and asset impairment charges related to our phone business, offset in part by lower revenue. See Note 1 – Accounting Policies of the Notes to Financial Statements for further discussion. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Designed primarily for medium- and large-sized organizations that want to obtain the best value by standardizing on a common IT platform across their organization. We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2016 and 2015, and 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, 2016. The addition of Minecraft and its community enhances our gaming portfolio across Windows, Xbox, and other ecosystems besides our own. 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. Server products and cloud services revenue is mainly affected by purchases through volume licensing programs, licenses sold to OEMs, and retail packaged products. Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, Salesforce.com, VMware, and open source offerings. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Achieving that mission requires us to be thoughtful about the impact of our own business practices and policies and our investments in communities. We estimate that we have no significant residual value related to our intangible assets.