Software & IT Services: Remaining performance obligations

Commercial remaining performance obligation	Commercial portion of revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods
Microsoft Cloud revenue and revenue growth	Revenue from Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365
Microsoft Cloud gross margin percentage	Gross margin percentage for our Microsoft Cloud business

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 primarily reflect growth across our cloud services.

Microsoft 365 Commercial cloud revenue growth	Revenue from Microsoft 365 Commercial subscriptions, comprising Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot
Microsoft 365 Commercial seat growth	The number of Microsoft 365 Commercial seats at end of period where seats are paid users covered by a Microsoft 365 Commercial subscription
Microsoft 365 Consumer cloud revenue growth	Revenue from Microsoft 365 Consumer subscriptions and other consumer services
LinkedIn revenue growth	Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions
Dynamics 365 revenue growth	Revenue from Dynamics 365, including a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate
Azure and other cloud services revenue growth	Revenue from Azure and other cloud services, including cloud and AI consumption-based services, GitHub cloud services, Health and Life Sciences cloud services (formerly Nuance Healthcare cloud services), virtual desktop offerings, and other cloud services

PART II

Item 7

More Personal Computing

Metrics related to our More Personal Computing segment assess the performance of our key consumer businesses.

If our accounting estimates and judgments turn out to be inaccurate, our future financial results could fall short of expectations, which could have a material adverse effect on our stock price. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make certain estimates, judgments and assumptions that can affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates, judgments and assumptions on information available to us at the time that they are made, as discussed in “Critical Accounting Estimates” under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Significant Accounting Policies” discussed in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report. For example, we make certain judgments related to revenue recognition and remaining performance obligations. While we believe these judgments and assumptions are reasonable under the circumstances, they are subject to uncertainties and actual results may differ.

Risks Related to Our Common and Preferred Stock

Our stock price could become more volatile and your investment could lose value. All of the factors discussed within this Risk Factors section have affected and could in the future affect our stock price. The timing of announcements in the public market by us or by our competitors regarding new cloud services, AI advancements, products, product enhancements, technological advances, data center capacity, acquisitions, joint ventures and strategic alliances or major transactions could also affect our stock price. Changes in the amounts and frequency of stock repurchases or dividends could affect our stock price. Our stock price could also be affected by factors, some

• our expectations regarding our revenue, expenses, and other operating results, including statements relating to the portion of our remaining performance obligations that we expect to recognize as revenue in future periods;

• our ability to acquire new customers and successfully retain existing customers;

• our ability to maintain and increase consumption on our platform;

• our ability to continue to innovate and make new features generally available to customers, including our development and use of artificial intelligence (AI) and machine learning technology (collectively, AI Technology), and our customers’ adoption and use of such features;

• our ability to achieve or sustain our profitability;

• future investments in our business, our anticipated capital expenditures, and our estimates regarding our capital requirements;

• the costs and success of our sales and marketing efforts, and our ability to promote our brand;

• our growth strategies for, and market acceptance of, our platform and the AI Data Cloud, including emerging product areas, as well as our ability to execute such strategies;

• our ability to successfully integrate and realize the benefits of strategic acquisitions;

• our reliance on key personnel and our ability to identify, recruit, and retain skilled personnel;

• our ability to effectively manage our growth, including any international expansion;

• our ability to protect our intellectual property rights and any costs associated therewith;

• our ability to prevent or mitigate disruptions, outages, defects, and other performance and quality problems with our platform or with the public cloud and internet infrastructure on which it relies;

• our expectations regarding general market conditions and the effects of those conditions, including on customer and partner activity;

• our ability to compete effectively with existing competitors and new market entrants;

• the growth rates of the markets in which we compete;

• our expectations regarding our strategic investments, including the impact of changes in market conditions;

• our expectations regarding our convertible senior notes, including the expected use of proceeds we received and our ability to meet the requirements of the notes;

• our expectations regarding our stock repurchase program;

• our expectations regarding stock-based compensation; and

• the impacts of volatility and uncertainty in the global economy on our business and the businesses of our customers and partners.

Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include deferred revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.

Convertible Senior Notes

On December 12, 2024, the Company issued $ 1.0 billion aggregate principal amount of the “2029 Notes”.

The 2029 Notes are classified as non-current liabilities until the reporting period date is within one year of maturity of the 2029 Notes or when the Company has received a redemption request, but settlement will occur after the reporting period date.

Cost of Revenue

Cost of revenue consists primarily of costs related to providing subscription services to paying customers, including data center and networking expenses, employee compensation (including stock-based compensation) and other employee-related expenses for customer experience and technical operations staff, payments to outside service providers, payment processing fees, amortization of capitalized internally developed software costs and acquired developed technology, and allocated overhead costs.

Research and Development Costs

Research and development costs are expensed as incurred, with the exception of certain software development costs which are eligible for capitalization. Research and development costs consist of employee compensation (including stock-based compensation) and other employee-related expenses, materials and supplies, and allocated overhead costs such as rent and facilities costs.

Sales and Marketing Costs

Sales and marketing costs consist primarily of personnel costs for the Company’s sales and marketing organization, including stock-based compensation and commissions, costs of general marketing and promotional activities, including the free tier and introductory trials of the Company’s products, travel-related expenses, amortization of acquired customer relationships, and allocated overhead costs.

Advertising Costs

Advertising costs are expensed as incurred and were approximately $ 36.7 million, $ 30.0 million and $ 21.8 million for the years ended December 31, 2025, 2024 and 2023, respectively, and are included in sales and marketing expense in the accompanying consolidated statement of operations.

Income Taxes

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to remaining performance obligations is influenced by several factors, including the timing of renewals and average contract term. We applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, sales and usage-based royalties not yet consumed and any estimated amounts of variable consideration that are subject to constraint.

Remaining performance obligations were approximately $ 22.52 billion as of November 28, 2025. Non-cancellable and non-refundable committed funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 4 % of the total remaining performance obligations. Approximately 65 % of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.

Contract Acquisition Costs

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.

The costs capitalized are primarily sales commissions paid to our sales force personnel. Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners.

Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. Amortization of capitalized costs are included in sales and marketing expense in our Consolidated Statements of Income. During fiscal 2025, 2024 and 2023, we amortized $ 282 million, $ 272 million and $ 254 million of capitalized contract acquisition costs into sales and marketing expense, respectively. We did not incur any impairment losses for all periods presented.