SEC Company Response from MICROSOFT CORP (MSFT) (CIK 0000789019) (MSFT) — Dec 20, 2017
MICROSOFT CORP (MSFT) (CIK 0000789019)
Date: Dec. 20, 2017 · CIK: 0000789019 · Accession: 0001193125-17-375054
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-37845
Referenced dates: December 14, 2017, October 15, 2014
Letter
Division of Corporation Finance Filed August 2, 2017 Form 10-Q for the Quarterly Period Ended September 30, 2017 Filed October 26, 2017 File No. 001-37845
Dear Mr. Krikorian,
This letter responds to your comments communicated to us in your letter dated December 14, 2017. Following are responses to the specific comments in your letter.
Form 10-K for the Fiscal Year Ended June 30, 2017
General
1. You told us in your letter dated October 15, 2014 that you provided certain software and services to Sudan and Syria. Sudan and Syria are designated by the State Department as state sponsors of terrorism and are subject to U.S. economic sanctions and/or export controls. Your Form 10-K does not include disclosure about any contacts with Sudan or Syria. Please describe to us the nature and extent of your past, current and anticipated contacts with Sudan and Syria, if any, whether through subsidiaries, joint ventures, customers or other direct or indirect arrangements, since your referenced letter. You should describe any products, software, technology or services you have provided to Sudan or Syria, directly or indirectly, and any agreements, arrangements or other contacts you have had with the governments of those countries or entities they control.
Response:
We do not conduct business in Sudan or Syria, or any other country identified as a state sponsor of terrorism and subject to U.S. economic sanctions and/or Office of Foreign Asset Controls (“OFAC”) export controls, except in accordance with U.S. export authorization or other applicable law. We have no employees in Sudan or Syria. We have not had any agreements, arrangements, or other contacts with the governments of Syria or Sudan or entities they control in the relevant time period. The following is a description of contacts we have had with Sudan or Syria:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Tel 425 882 8080
Fax 425 936 7329
www.microsoft.com
●
Microsoft software products and services
We hold a validated export license from the U.S. Department of Commerce for sales in Syria of up to $3,872,385 between August 2016 and August 2018. This license allows us to sell commercial off-the-shelf software for telecommunications equipment and associated software. To date, we have sold approximately $330,000 in software under that license to a Lebanon-based systems integrator performing work for a telecommunications company in Syria. We may make additional sales under this license but not more than the permitted amount.
●
Skype
We offer Skype (free and paid) in Sudan and Syria through a foreign subsidiary, as permitted by applicable law. Revenue in the relevant time period associated with paid Skype in Sudan and Syria was approximately $110,000 and $80,000, respectively. We have extensive policies and practices to comply with U.S. trade policy and applicable laws and regulations. We also screen Skype users worldwide, including in Sudan and Syria, against the OFAC Specially Designated Nationals and Blocked Parties list and other denied parties lists maintained by the U.S. government.
●
LinkedIn allows individuals around the world, including in Sudan and Syria, to access and use its free, publicly available social networking services, including company profiles. LinkedIn utilizes applicable exemptions to provide these services. We do not offer paid LinkedIn services in Syria. We did not permit paid services involving Sudan prior to the termination of relevant U.S. sanctions on October 12, 2017. To date, we are aware of only one paid transaction relating to Sudan after that date, involving the use of a template by a non-Sudanese user to create a listing for a Sudanese affiliate. We anticipate the potential for similar paid transactions involving users in Sudan in the future, as they are not prohibited by U.S. law, but otherwise we do not anticipate any change in our contacts with Syria and Sudan with respect to LinkedIn.
Except to the extent specifically described above, we do not anticipate any change in our contacts with Syria and Sudan.
This response addresses the time period beginning October 15, 2014, except the response regarding LinkedIn, which dates from December 8, 2016, the date we acquired LinkedIn. This response covers Microsoft as well as its subsidiaries and joint ventures. While we do not know everything third parties do, we have no information indicating that our customers or other parties are directly or indirectly creating contacts between Microsoft and Syria or Sudan.
Considering the scope, nature, and purposes of the contacts described above, we do not believe such contacts are quantitatively or qualitatively material to our investors. We have extensive policies and practices to comply with U.S. trade policy and applicable laws and regulations. Products and services available in Sudan and Syria are consistent with U.S. foreign policy objectives. We are not aware of any concern raised by our shareholders about these transactions.
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Tel 425 882 8080
Fax 425 936 7329
www.microsoft.com
Form 10-Q for the Quarterly Period Ended September 30,
Notes to Financial Statements (Unaudited)
Note 1 – Accounting Policies
Revenue
Revenue Recognition, page 8
2. Please help us better understand how and when you are recognizing revenue from Office 365. In this regard, please provide us with a specific and comprehensive analysis of how you concluded that the desktop applications and the cloud services are not distinct. Please clarify if customers take possession of the software license. In addition, please clarify your consideration of upgrades and technical support. Finally, we note your disclosure that revenue is recognized over time. Please tell us the method used and why such method provides a faithful depiction of the transfer of services. Separately discuss your considerations of consumer and commercial offerings, as applicable. Reference ASC 606-10-25-19 through 25-21, 606-10-50-12 and 606-10-50-18.
Response:
Office 365 (“O365”) is a cloud-based subscription service that brings together our unique applications with our powerful cloud services and lets customers create and collaborate anywhere on any device. There are various O365 plans for customers to choose from based on their individual needs, with the goal of providing unique functionality with continued integration of software and innovative services to provide the total customer experience.
O365 plans can include different combinations of on-premises software licenses for desktop applications (where customers can take possession of the software) and cloud services (which allow customers to use our hosted software services). The plans that include the combined desktop applications and cloud services enable the full functionality of O365. Certain O365 plans are comprised entirely of cloud services with revenue recognized ratably over the contract period as the cloud services are provided. Other plans include desktop applications that are accessible over the contract period in addition to cloud services.
To account for the desktop applications and cloud services as distinct performance obligations under ASC 606-10-25-19, the goods and services must be capable of being distinct, and distinct within the context of the contract. The intent is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or to transfer a combined performance obligation.
ASC 606-10-25-21 includes several factors that indicate two or more goods or services in a contract may not be separately identifiable, though there may be other factors an entity could consider, as acknowledged in BC29 of ASU 2016-10. When evaluating whether the desktop applications and cloud services are distinct in the context of the contract we also considered the Basis for Conclusions paragraphs in ASU 2016-10 to understand the Financial Accounting Standards Boards’ intent:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Tel 425 882 8080
Fax 425 936 7329
www.microsoft.com
BC29 of FASB ASU 2016-10:
“…The inputs to a combined item (or items) concept might be further explained, in many cases, as those in which an entity’s promise to transfer the promised goods or services results in a combined item (or items) that is greater than (or substantively different from) the sum of those promised (component) goods and services.”
BC32 of FASB ASU 2016-10:
“…Therefore, the entity should evaluate whether two or more promised goods or services (for example, a delivered item and an undelivered item) each significantly affect the other (and, therefore, are highly interrelated or highly interdependent) in the contract. The entity should not merely evaluate whether one item, by its nature, depends on the other (for example, an undelivered item that would never be obtained by a customer absent the presence of the delivered item in the contract or the customer having obtained that item in a different contract).”
BC33(b) of FASB ASU 2016-10:
“…Therefore, utility also is relevant in evaluating whether two or more promises in a contract are separately identifiable because even if two or more goods or services are capable of being distinct because the customer can derive some measure of economic benefit from each one, the customer’s ability to derive its intended benefit from the contract may depend on the entity transferring each of those goods or services.”
In evaluating whether the desktop applications and cloud services are distinct in the context of the contract we also looked to AICPA Software Revenue Recognition Issue #14-1: Determining Whether Software Intellectual Property is Distinct in Cloud Computing Arrangements (i.e., Hosting, Software-as-a-Service and Hybrid Software/SAAS), specifically paragraph 16(b):
“A portion of the hosted functionality is available from other vendors, but the entity provides significant additional utility from the manner in which it integrates the software with its own hosted functionality. For example, the online storage and sharing is integrated with the on-premise software in such a manner that the customer gains capabilities or workflow efficiencies that would not be available when using another vendor’s hosted services. In such circumstances the on-premise software is capable of being distinct, but the customer obtains a significant functional benefit by purchasing the complete hybrid offering from the entity. This may indicate that the software license and hosting service are interrelated to each other, and are not distinct within the context of the contract.”
While we concluded our desktop applications and cloud services are each capable of being distinct because customers can derive some level of benefit and use from the applications and cloud services separately, we concluded they are not distinct within the context of the contract as they are highly integrated, interdependent, and interrelated as described under ASC 606-10-25-21(a) and (c).
Our conclusions are based on an extensive evaluation of the specific functionalities and experiences customers receive. While we continue to sell our desktop applications individually, many customers are electing to pay a premium and migrate to O365 because of the significant benefits realized from using a
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Tel 425 882 8080
Fax 425 936 7329
www.microsoft.com
cloud or hybrid-cloud platform. Customers that do not value the integration with cloud services that comes with O365 typically purchase the on-premises Office desktop applications. Therefore, it is likely that customers purchasing O365 do so because of the integration and additional functionality that is enabled with the combined desktop applications and cloud services and the value that they receive continuously over the contract period. We provide a significant service of integrating our desktop applications and cloud services, which allows customers to utilize additional features and benefits within our desktop applications using our cloud services that cannot be obtained using our desktop applications with third-party cloud storage. For example, the integration of desktop applications and cloud services enables customers to easily move between desktop and online applications and across devices. Users can access online versions of Word, Excel, PowerPoint, and OneNote for basic document capabilities, or seamlessly transition to the Office 2016 desktop applications powered by the cloud services to enable real-time collaboration.
The core value proposition of O365 is the interaction of the desktop applications and cloud services. The following are examples of desktop applications and cloud services being delivered and integrated together, with ongoing interaction between the desktop applications and cloud services to provide unique functionality:
●
Co-authoring in desktop applications, such as Word, Excel, PowerPoint, and OneNote, for documents that are saved on our cloud services, including OneDrive, OneDrive for Business, or SharePoint Online. Co-authoring offers real-time typing in Word which allows people to see where others are typing and view their edits as they make them.
●
OneDrive for Business provides 1 TB of storage for each user for mobile access to their documents. Files can be shared inside and outside the user’s organization, with the ability to control who can see and edit each file, while easily syncing files with PCs/Macs and other devices.
●
Simplified sharing in desktop applications which allows people to quickly and easily invite others to review or edit a document shared on the cloud. The sharing pane also makes it possible to see who has access to a document, see who is currently working in the document, and instant message or call someone through the Skype for Business integration in these applications.
●
Skype for Business broadcast allows users to reach up to 10,000 attendees for large meetings. The attendees can dial-in from any browser or device.
●
Improved version history which allows people to return to earlier drafts of documents created in either the desktop or online applications that are stored on OneDrive for Business or SharePoint Online.
●
In the desktop application OneNote people can share notebooks, providing a centralized place to share all project information including photos, videos, drawings, typed or hand-written notes, screen clippings, and web pages. People can work together in the same notebook and OneNote will sync their changes.
We believe evaluating the marketing focus of an offering provides a valuable indicator of what customers understand they are purchasing: a solution or individual components. In example 10, Case C of ASC 606 (antivirus software example), the conclusion is that the software and updates “are not separately identifiable because the license and the updates are, in effect, inputs to a combined item (anti-virus protection) in the contract. Consequently, the license and updates fulfill a single promise to the customer in the contract (a promise to provide protection from computer viruses.)”
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Tel 425 882 8080
Fax 425 936 7329
www.microsoft.com
The value proposition to the customer, supported by how we ma
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CORRESP 1 filename1.htm CORRESP Microsoft Corporation Tel 425 882 8080 One Microsoft Way Fax 425 936 7329 Redmond, WA 98052-6399 www.microsoft.com December 20, 2017 Mr. Stephen Krikorian Accounting Branch Chief Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549 RE: Microsoft Corporation Form 10-K for the Fiscal Year Ended June 30, 2017 Filed August 2, 2017 Form 10-Q for the Quarterly Period Ended September 30, 2017 Filed October 26, 2017 File No. 001-37845 Dear Mr. Krikorian, This letter responds to your comments communicated to us in your letter dated December 14, 2017. Following are responses to the specific comments in your letter. Form 10-K for the Fiscal Year Ended June 30, 2017 General 1. You told us in your letter dated October 15, 2014 that you provided certain software and services to Sudan and Syria. Sudan and Syria are designated by the State Department as state sponsors of terrorism and are subject to U.S. economic sanctions and/or export controls. Your Form 10-K does not include disclosure about any contacts with Sudan or Syria. Please describe to us the nature and extent of your past, current and anticipated contacts with Sudan and Syria, if any, whether through subsidiaries, joint ventures, customers or other direct or indirect arrangements, since your referenced letter. You should describe any products, software, technology or services you have provided to Sudan or Syria, directly or indirectly, and any agreements, arrangements or other contacts you have had with the governments of those countries or entities they control. Response: We do not conduct business in Sudan or Syria, or any other country identified as a state sponsor of terrorism and subject to U.S. economic sanctions and/or Office of Foreign Asset Controls (“OFAC”) export controls, except in accordance with U.S. export authorization or other applicable law. We have no employees in Sudan or Syria. We have not had any agreements, arrangements, or other contacts with the governments of Syria or Sudan or entities they control in the relevant time period. The following is a description of contacts we have had with Sudan or Syria: 1 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Tel 425 882 8080 Fax 425 936 7329 www.microsoft.com ● Microsoft software products and services We hold a validated export license from the U.S. Department of Commerce for sales in Syria of up to $3,872,385 between August 2016 and August 2018. This license allows us to sell commercial off-the-shelf software for telecommunications equipment and associated software. To date, we have sold approximately $330,000 in software under that license to a Lebanon-based systems integrator performing work for a telecommunications company in Syria. We may make additional sales under this license but not more than the permitted amount. ● Skype We offer Skype (free and paid) in Sudan and Syria through a foreign subsidiary, as permitted by applicable law. Revenue in the relevant time period associated with paid Skype in Sudan and Syria was approximately $110,000 and $80,000, respectively. We have extensive policies and practices to comply with U.S. trade policy and applicable laws and regulations. We also screen Skype users worldwide, including in Sudan and Syria, against the OFAC Specially Designated Nationals and Blocked Parties list and other denied parties lists maintained by the U.S. government. ● LinkedIn LinkedIn allows individuals around the world, including in Sudan and Syria, to access and use its free, publicly available social networking services, including company profiles. LinkedIn utilizes applicable exemptions to provide these services. We do not offer paid LinkedIn services in Syria. We did not permit paid services involving Sudan prior to the termination of relevant U.S. sanctions on October 12, 2017. To date, we are aware of only one paid transaction relating to Sudan after that date, involving the use of a template by a non-Sudanese user to create a listing for a Sudanese affiliate. We anticipate the potential for similar paid transactions involving users in Sudan in the future, as they are not prohibited by U.S. law, but otherwise we do not anticipate any change in our contacts with Syria and Sudan with respect to LinkedIn. Except to the extent specifically described above, we do not anticipate any change in our contacts with Syria and Sudan. This response addresses the time period beginning October 15, 2014, except the response regarding LinkedIn, which dates from December 8, 2016, the date we acquired LinkedIn. This response covers Microsoft as well as its subsidiaries and joint ventures. While we do not know everything third parties do, we have no information indicating that our customers or other parties are directly or indirectly creating contacts between Microsoft and Syria or Sudan. Considering the scope, nature, and purposes of the contacts described above, we do not believe such contacts are quantitatively or qualitatively material to our investors. We have extensive policies and practices to comply with U.S. trade policy and applicable laws and regulations. Products and services available in Sudan and Syria are consistent with U.S. foreign policy objectives. We are not aware of any concern raised by our shareholders about these transactions. 2 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Tel 425 882 8080 Fax 425 936 7329 www.microsoft.com Form 10-Q for the Quarterly Period Ended September 30, 2017 Notes to Financial Statements (Unaudited) Note 1 – Accounting Policies Revenue Revenue Recognition, page 8 2. Please help us better understand how and when you are recognizing revenue from Office 365. In this regard, please provide us with a specific and comprehensive analysis of how you concluded that the desktop applications and the cloud services are not distinct. Please clarify if customers take possession of the software license. In addition, please clarify your consideration of upgrades and technical support. Finally, we note your disclosure that revenue is recognized over time. Please tell us the method used and why such method provides a faithful depiction of the transfer of services. Separately discuss your considerations of consumer and commercial offerings, as applicable. Reference ASC 606-10-25-19 through 25-21, 606-10-50-12 and 606-10-50-18. Response: Office 365 (“O365”) is a cloud-based subscription service that brings together our unique applications with our powerful cloud services and lets customers create and collaborate anywhere on any device. There are various O365 plans for customers to choose from based on their individual needs, with the goal of providing unique functionality with continued integration of software and innovative services to provide the total customer experience. O365 plans can include different combinations of on-premises software licenses for desktop applications (where customers can take possession of the software) and cloud services (which allow customers to use our hosted software services). The plans that include the combined desktop applications and cloud services enable the full functionality of O365. Certain O365 plans are comprised entirely of cloud services with revenue recognized ratably over the contract period as the cloud services are provided. Other plans include desktop applications that are accessible over the contract period in addition to cloud services. To account for the desktop applications and cloud services as distinct performance obligations under ASC 606-10-25-19, the goods and services must be capable of being distinct, and distinct within the context of the contract. The intent is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or to transfer a combined performance obligation. ASC 606-10-25-21 includes several factors that indicate two or more goods or services in a contract may not be separately identifiable, though there may be other factors an entity could consider, as acknowledged in BC29 of ASU 2016-10. When evaluating whether the desktop applications and cloud services are distinct in the context of the contract we also considered the Basis for Conclusions paragraphs in ASU 2016-10 to understand the Financial Accounting Standards Boards’ intent: 3 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Tel 425 882 8080 Fax 425 936 7329 www.microsoft.com BC29 of FASB ASU 2016-10: “…The inputs to a combined item (or items) concept might be further explained, in many cases, as those in which an entity’s promise to transfer the promised goods or services results in a combined item (or items) that is greater than (or substantively different from) the sum of those promised (component) goods and services.” BC32 of FASB ASU 2016-10: “…Therefore, the entity should evaluate whether two or more promised goods or services (for example, a delivered item and an undelivered item) each significantly affect the other (and, therefore, are highly interrelated or highly interdependent) in the contract. The entity should not merely evaluate whether one item, by its nature, depends on the other (for example, an undelivered item that would never be obtained by a customer absent the presence of the delivered item in the contract or the customer having obtained that item in a different contract).” BC33(b) of FASB ASU 2016-10: “…Therefore, utility also is relevant in evaluating whether two or more promises in a contract are separately identifiable because even if two or more goods or services are capable of being distinct because the customer can derive some measure of economic benefit from each one, the customer’s ability to derive its intended benefit from the contract may depend on the entity transferring each of those goods or services.” In evaluating whether the desktop applications and cloud services are distinct in the context of the contract we also looked to AICPA Software Revenue Recognition Issue #14-1: Determining Whether Software Intellectual Property is Distinct in Cloud Computing Arrangements (i.e., Hosting, Software-as-a-Service and Hybrid Software/SAAS), specifically paragraph 16(b): “A portion of the hosted functionality is available from other vendors, but the entity provides significant additional utility from the manner in which it integrates the software with its own hosted functionality. For example, the online storage and sharing is integrated with the on-premise software in such a manner that the customer gains capabilities or workflow efficiencies that would not be available when using another vendor’s hosted services. In such circumstances the on-premise software is capable of being distinct, but the customer obtains a significant functional benefit by purchasing the complete hybrid offering from the entity. This may indicate that the software license and hosting service are interrelated to each other, and are not distinct within the context of the contract.” While we concluded our desktop applications and cloud services are each capable of being distinct because customers can derive some level of benefit and use from the applications and cloud services separately, we concluded they are not distinct within the context of the contract as they are highly integrated, interdependent, and interrelated as described under ASC 606-10-25-21(a) and (c). Our conclusions are based on an extensive evaluation of the specific functionalities and experiences customers receive. While we continue to sell our desktop applications individually, many customers are electing to pay a premium and migrate to O365 because of the significant benefits realized from using a 4 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Tel 425 882 8080 Fax 425 936 7329 www.microsoft.com cloud or hybrid-cloud platform. Customers that do not value the integration with cloud services that comes with O365 typically purchase the on-premises Office desktop applications. Therefore, it is likely that customers purchasing O365 do so because of the integration and additional functionality that is enabled with the combined desktop applications and cloud services and the value that they receive continuously over the contract period. We provide a significant service of integrating our desktop applications and cloud services, which allows customers to utilize additional features and benefits within our desktop applications using our cloud services that cannot be obtained using our desktop applications with third-party cloud storage. For example, the integration of desktop applications and cloud services enables customers to easily move between desktop and online applications and across devices. Users can access online versions of Word, Excel, PowerPoint, and OneNote for basic document capabilities, or seamlessly transition to the Office 2016 desktop applications powered by the cloud services to enable real-time collaboration. The core value proposition of O365 is the interaction of the desktop applications and cloud services. The following are examples of desktop applications and cloud services being delivered and integrated together, with ongoing interaction between the desktop applications and cloud services to provide unique functionality: ● Co-authoring in desktop applications, such as Word, Excel, PowerPoint, and OneNote, for documents that are saved on our cloud services, including OneDrive, OneDrive for Business, or SharePoint Online. Co-authoring offers real-time typing in Word which allows people to see where others are typing and view their edits as they make them. ● OneDrive for Business provides 1 TB of storage for each user for mobile access to their documents. Files can be shared inside and outside the user’s organization, with the ability to control who can see and edit each file, while easily syncing files with PCs/Macs and other devices. ● Simplified sharing in desktop applications which allows people to quickly and easily invite others to review or edit a document shared on the cloud. The sharing pane also makes it possible to see who has access to a document, see who is currently working in the document, and instant message or call someone through the Skype for Business integration in these applications. ● Skype for Business broadcast allows users to reach up to 10,000 attendees for large meetings. The attendees can dial-in from any browser or device. ● Improved version history which allows people to return to earlier drafts of documents created in either the desktop or online applications that are stored on OneDrive for Business or SharePoint Online. ● In the desktop application OneNote people can share notebooks, providing a centralized place to share all project information including photos, videos, drawings, typed or hand-written notes, screen clippings, and web pages. People can work together in the same notebook and OneNote will sync their changes. We believe evaluating the marketing focus of an offering provides a valuable indicator of what customers understand they are purchasing: a solution or individual components. In example 10, Case C of ASC 606 (antivirus software example), the conclusion is that the software and updates “are not separately identifiable because the license and the updates are, in effect, inputs to a combined item (anti-virus protection) in the contract. Consequently, the license and updates fulfill a single promise to the customer in the contract (a promise to provide protection from computer viruses.)” 5 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Tel 425 882 8080 Fax 425 936 7329 www.microsoft.com The value proposition to the customer, supported by how we ma