Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Okay. I'll get going here. Sorry, I was not expecting just some silence there. Good morning, everybody. It's a real delight to have Microsoft present to us. We, once again, appreciate everybody taking the time out of their days to -- the next several days to dial into this conference. We have to make it a virtual conference given everything that's going on in the world. But we're really proud to present an absolutely amazing lineup here. And our next guest here, who we'll interact with, is Rohan Kumar, who is Corporate Vice President of the Azure business. So with that introduction, quick introduction out of the way, Rohan, a real delight to be able to host you on this conference call, or meeting, shall we say, virtual meeting. And thank you, Jonathan Neilson, for everything that you do, and Jonathan is here on the line here with us as well.

Rohan, maybe if you could just give us an introduction. What is your role at Microsoft? What are the things that you've worked on in your past several years serving Microsoft? That would be a good context to jump into some Q&A.

Sounds good. First of all, thank you so much, Kash and team, for having me at your conference. I really appreciate it. Just by way of a quick introduction, I'm the Corporate Vice President leading engineering for what's called the Azure data and analytics team inside of Microsoft. So that's the team that's responsible for everything that we do around data and analytics, both on-prem and in the public cloud, so starting with the SQL Server product, which is an on-prem database and then all the managed services that we have in Azure, our operational databases, SQL, of course, open source, everything we do around NoSQL analytics and governance of data. So that's basically the team that I lead. Being at Microsoft for 21 years, grew up as an engineer and working on the Windows team and then moved to SQL and I've been there ever since.

I have to share with you a very ironic thing. I was the worst -- I majored in engineering back in India, and I was the worst programmer on the campus. I tried to program and the jobs do not run on the mainframe. So I decided to be a software analyst instead. But I've been having a blast. Ironically, had I been a good programmer, I would have been a programmer and I would not have had a chance to cover the industry at a 20,000 feet altitude related to. So doing this for 25 years, I cannot believe that I failed programming, but I'm covering the software industry while coming up on 25, 26 years. So with that funny -- a slightly embarrassing self-disclosure about my background out of the way, let's talk about the topic that is on people's minds, the coronavirus impact. It looks like Microsoft's Azure business is actually benefiting from this. Can you talk about how customer buying behavior or priorities might have changed for the better or worse with respect to coronavirus and your particular line of work on the Azure Data side?

So thanks for that question, Kash. It's obviously a very relevant and important one. But first and foremost, what I would say is our focus, frankly, has been helping our customers, the communities, our employees and partners, just dealing with such a challenging time, definitely first responders, health care workers have been a priority for Azure and in fact, all of Microsoft. We're definitely, to your point, seeing some growth in Azure consumption, particularly when you look at workloads that enable remote work. I mean I think we've publicly spoken about the growth in the usage of Microsoft Teams, which, of course, internally relies on a lot of the Azure -- core Azure services. So that's definitely an area where we've seen growth. The other workloads, of course, the virtual desktop, Windows Virtual Desktop and the usage of Active Directory. Now specifically, it's interesting, as you called out, when I look at the data and the analytics business, it's been fascinating. And Satya sort of has mentioned this, where we've seen 2 years' worth of transformation in a couple of weeks. And we definitely see that in several industries who are looking into digitally transform themselves. Over the last, I'd say, at least 3, 3.5 years, we've been in conversations with several of our enterprise customers, both medium and really large ones, around their own digital transformation, which could be related to them -- everyone's looking at becoming a data-driven company where you have decisions that are made based on systems that actually give you the insights that are needed. This could be around better engaging with customers, building better products. So even the class like saving in operational cost by having a very deep understanding of the value chain. And at the heart of it, any such transformation of course is a modern data platform, especially heavily focused on a cloud-native design that allows you to very economically scale, do predictive analytics, and so that's been -- that's the journey a lot of our customers been on. And apart from newer renovation, there is -- what I will say is there's a lot of cost savings element as well, right, which is now you're able to sort of really pay for the services that you're using and you're not preprovisioning a lot of resources like you had to do on-prem. So if anything, I've been hearing from several of our customers who have been on this journey who are looking at what happened with COVID as a way in which they can significantly expedite their transformation. So in that sense, what I feel is just given the disruption that we are seeing happen around digital transformation, we definitely see that as a trend that's going to have a positive impact just all up on the data and analytics business. And specifically, if you look at -- I'll sort of speak about a few products like Synapses, our unified analytics story that we launched at Ignite last year, and there's been a significant interest in our customers in leveraging Synapse because the simplicity it creates, everything from data integration to data warehousing to big data analytics into a single unified product, right? So there's a cost element there where our customers are looking at that and saying, "Look, how do I move to a cloud-native service that significantly reduces not just the time but the cost?" And so -- and then -- and on the operational side, of course, where we're seeing significant growth in the migrations. So imagine existing SQL server customers who are looking to move their workloads to the public cloud to save on cost and build more intelligent applications by extending their workloads. The same thing we see with Cosmos DB, where a lot of the NoSQL workloads around Mongo, Cassandra, Graph databases. Essentially, a lot of our customers are looking at moving their -- expediting their move of their operational databases to both SQL, Cosmos DB and our open source offerings.

Got it. And specifically, what about COVID, Rohan, is catalyzing this?

I think there's 2 things. There is definitely a value piece, I would say, Kash, which is every industry at this point is looking at the investments that they're going to make to -- specifically, how do they -- there is the whole cost element, right, which is how do they save. And so there is that -- those discussions that are happening, which is the business requirements don't go away. If anything, if you look at driving the business based on clear insights, it becomes even more important. So the investments that they have to make to modernize their data platform, analytics platform, if anything, the urgency is built out. The discussions we are having because of COVID is they're saying, "Okay, so it's not just about the innovation piece. How do we actually get a lot more value in terms of lower cost?" Right? And that's really where if you look at one of the key pieces of innovation, what our customers are expecting is, as they modernize their data platform, there is a ton of friction today, like if you look at -- I'll give you a specific example, if you look at modernizing of the core enterprise data warehouse, you may have -- most of our customers have an on-prem system like a multi -- like a massively powerful processing architecture, where you have a scale-out design, which effectively is, in many ways, has reached its limits in terms of how far it can scale. Now to go from that system to something in the public cloud, the amount of services that need to be stitched together to create a solution is very high. So this was a problem we realized about 3, 3.5 years ago, and we were working on this service called Synapse, which greatly reduces the friction. So it's both in terms of time to insight and the cost it takes, the amount of engineering effort you need to do to stitch together is drastically reduced, right, which directly translates into not just savings on time, but savings in cost, maintenance or software that you don't need to write, which the system is taking care of you. So COVID, I'd say, has definitely pushed -- our discussions with our customers are really pushing to understand that aspect, which is, okay, great, this digital transformation, we have to continue this journey, obviously. But what COVID has pushed forward is how do we do the same thing while reducing cost. So the aspiration doesn't go away, but the discussions have turned a lot more into the value creation piece. Does that make sense?

Absolutely. It certainly does. [Operator Instructions] Another question for you, Rohan. Microsoft and certainly other software companies have talked about how there has been increasing usage of the Azure platform within a set of customers and certain verticals, whereas other verticals have seen usage come down. What is the net effect of this on the Azure business, the up versus the down?

Again, it's a very good question. What I will say is, as it's expected, right, I mean, every customer that we sort of speak to in every industry, almost just across the board, everyone is sort of going through a very, very challenging time, right, just in terms of the situation they find themselves in. And it is fascinating, though, like if you take a look at certain aspects that are clearly changing at a very fast pace. One of them we talk about is this whole notion of remote everything. That has like foundationally changed how people work. And for the foreseeable future, this is sort of going to remain. And as Satya mentioned, the discussions that we've been having with maybe CIOs, CEOs, CTOs, in terms of the investments that they plan to make, like everyone's effectively acknowledged that the pace at which they're transforming has sort of become very, very significant. There's clearly a call to reduce the TCO while maintaining their innovation agenda. They're looking at business continuity plans. I mean, that's a pretty big thing we look at. They're getting at where people are like, hey, what happens if a specific region is not accessible, how do we ensure that our business continues? So overall, like we do believe that we are very well positioned to capitalize on all these trends given the offerings that we have, both for the changes in terms of how we work, how we live that we're seeing and also, like I mentioned previously, just the whole push towards getting -- having this data-driven culture where insights are truly driving your business, which means you have to invest in the data platform infrastructure. Now in terms of the overall trends, what I will say is, especially for the Azure business, security, productivity apps, where we basically -- our business applications, the investments we are making for developers, we are seeing a ton of traction around there. And specifically, if I look -- had to just take a look at structural changes, the whole play we have with digital twins and IoT, that's sort of we see there's a lot of traction happening around that because there is this whole notion of like how do we replicate a lot of the IoT infrastructure very quickly to make progress. So everything around smart building, automated factories, remote selling, curbside pickup, just given the restrictions that are there, all these are leading to areas where, in the past, we hadn't maybe seen a lot of growth but because of the changes that we're seeing. Now overall, what I would say is, while it's hard to sort of -- clearly, in certain verticals, we are definitely seeing a lot of what we believe is a temporary contraction as they deal with the challenges they're going through, but we absolutely remain very bullish and have an encouraging view of what the future holds just given the offerings that we have.

Wonderful. It used to be that Microsoft SQL server was not that highly regarded. Like 15, 20 years back, people would always consider the Oracle database or the Sabre database is the truly enterprise-worthy database, and Microsoft SQL server departmental installation. And we do our IT buyer surveys. Perennially, over a period of time, Microsoft had always come in second or third in terms of consideration. Now in the last 2 years, Microsoft has shot up in #1 position with respect to what customers are looking at, and Oracle slipped to #2 position. How did this happen? And what does this mean for the future of the database market? This is not an insignificant market. This is even bigger than the cloud computing market as at stands. But of course, cloud computing market, the compute and storage is going to naturally overtake databases. But databases are the highest value item in that IT sector. It's always baffled me why you can spend $40,000 per processor when you spend $3,000, $5,000 per instance for the operating system. So this highest value part of the IT stack where my job is now coming out of the left field and rising in terms of customer priority. Talk to us about the significance of this going forward, Rohan.

Thank you again. I think it's a great question. So to the first point that you raised around SQL Server about 20, 25 years ago, it was more of a departmental database. I mean that's a fact, right? I mean if you take a look at how we sort of started off, clearly, you had Oracle and others who had been in the market for a long time. And especially when it came to sort of I remember back in 2000 earlier, that's between 2000 and 2005, that was the time I sort of joined the SQL Server team as well. That part was clear where for a lot of the departmental apps, like the Tier 2, Tier 3 kind of workloads, the SQL Server was gaining prominence. But to your point, there were questions around, hey, what about really running the Tier 0, Tier 1 mission-critical enterprise workloads. So what I will say, Kash, is over the last -- definitely over the last almost 20 years now, there's 2 things that we are very, very clearly focused on, of course, being very driven in terms of the technology trends that we've seen, the -- our relationships that we're building up with enterprise customers to learn how best to serve them. So there's 2 things. One was, clearly, we had to make substantial investments, which we've done over the several releases culminating right now, most recently with SQL Server 2019. If you look at the journey we started off of SQL Server 2005, which was a very pivotal release in terms of making like fairly substantial changes architecturally to enable very high scale, very high throughput, very low latency. And ever since then, we've expanded the total types of data we're dealing with. If you look at the focus we've had around high availability, disaster recovery, the focus on in-memory processing, just looking at hardware trend, how do we leverage SSDs, a lot better GPUs. More recently, if you look at process and memory, that's still becoming a big thing. So there's been a very laser and intentional focus on meeting the needs of the highest class of demanding enterprise customers. So that's been one part. The other thing really has been around -- the focus around the developer experience, the ease of use. Frankly, if I had to reflect back, the thing that really got us to be successful in the enterprise was this whole combination we had with the dev tools experience in Microsoft was building inside .NET and Visual Basic and all of that. And just the ease of you, the ease of managing. So that core aspect of making things easy, your database is not complex, was very, very critical. In fact, that's one of the pieces of feedback we heard where the adoption of SQL Servers grew because you didn't have to learn like 50,000 different knobs to go set up your database. There's a lot of intelligence that we embed to make things very easy. If you wanted to build a highly performant application, you didn't have to be a rocket scientist to do that, right? Of course, there's a certain amount of understanding of the system, relational model, relational algebra to see this thing and all. But that's a constant area of focus for us, how do we make it simple. And part of that, like I reflect back on that, Kash, is the genesis of us as a -- you go back to our mission, we talk about empowering every human and every organization to achieve more, it's really -- the basis of that comes down to us being a tools company and how do we sort of provide that to make things easy. So it's been fascinating. I mean, we've seen several analysts, of course, like you mentioned, in a lot of reports, we are coming across as the preferred vendor to run mission-critical applications. Over the last 4, 5 years, and this is -- I actually -- this is my hypothesis on what foundationally changed us and put us right at the top of the data platforms is not only do we have this deep understanding of our enterprise customer market because of our heritage with SQL Server and how we grew with that. But if you look at the pivot since 2010 we've made into cloud computing, and having offerings to manage not just SQL Server, but open source databases, now we're getting big into analytics, we have a fairly wide portfolio of services that we offer. And when I speak to a lot of the CIOs, and frankly, even the CTOs, they say, look, we prefer SQL, we prefer Microsoft because we have a path towards -- we have -- we do want to sort of bet on a company that is well positioned for the future. So the investments that I make, let's say, on-prem today, even though I may move to the cloud over the next maybe 1 or 3 years, how do you ensure that all the investments we made around the app model, business model, et cetera, carry forward. And there, with all humility, I say this, I do believe as a data platform, both on the tech innovation we've done and the business model innovation to ensure that our customers who've been betting on SQL Server gets significant value as they move to the cloud has been super beneficial. So focus on like performance and scale, ease of use for developers and then the long-term bet, just given our portfolio in the cloud and our innovation agenda, has really resonated very well with customers. Sorry, that was a long-winded answer, but I just wanted you to...

Yes. That was very passionate, and so I completely appreciate that. When you look at the PaaS market, I think Mike Schutz has said for a number of years now that there will be a pivot within the Azure cloud business to PaaS. And PaaS has certainly higher value, higher retention, higher margin, less capital intensive, albeit versus compute and storage. Can you talk to us about what the future of the PaaS business looks like for Microsoft? What are the biggest things Microsoft is investing to be successful in -- on the PaaS side? Because our sense is that your exposure to PaaS is a lot higher as a percentage of your overall business relative to, say, an Amazon or a Google. Because this is Microsoft's legacy. This is where you're really -- this is where you came out, right?

Absolutely.

Can you talk to us a little bit more about what are your aspirations for PaaS?

No. I mean -- and just again, what I will say is, I think, the -- our point of view really is where we believe, Kash, the investments are going to happen in the future. So there's multiple trends that are going on right now. There's clearly this element of what we call lift and shift modernization where a lot of our customers have strategic assets in terms of applications and workloads that they want to move to the cloud. And of course, they want to move to the cloud with very little investment on their side in terms of changes they need to make, right? So there is this -- there's a whole -- and when you look at trends like that, while the offerings that we have in PaaS have significantly improved in terms of compatibility, we do see -- just to sort of reduce any change that they need to make, it's easier to move from, let's say, you have an application deployed in a virtual machine on-prem, and you just basically want to rent a virtual machine into the cloud to host that. That's definitely, in terms of friction and all that, it's the easiest way. Our belief is, while, of course, there is -- we have a huge business around infrastructure, and we support our customers with both Windows Server and SQL Server, that's a very key play for us, that migration motion. If we look at the future of how applications will be written, especially when you sort of start thinking around the intelligent cloud and the intelligent edge, where the applications will tend to be very distributed, what PaaS as a layer enables you is you focus a lot more on your business logic, your scale requirements and not worry too much about how the underlying resources are getting provisioned, right? So when you look at like these new server less or micro services designs that are becoming extremely popular among the developer community, those inherently, at their foundation, require a PaaS service, let's say, for your data layer, right? And now the offerings that you need, the purpose build, let's say, you need a relational database, you need a NoSQL database, you want to sort of use open source like Postgres, MySQL and MongoDB, that -- those are developer preferences. So that compatibility is important, but the notion of creating a VM, provisioning desk, provisioning the network, tying it all together, all that complexity and making sure that you're behind -- securely locked behind a virtual network, all of those things, effectively, the PaaS layer makes greatly simplified. So when you think about time to build an application, get ready, get the app running and going, there is no question where -- and this is a very strong point of view we have, is that the investments we have made in all the PaaS apps, like services that we have on the data and the analytics side, the way we are sort of thinking about functions is the app model where you basically just write your code and then the compute just gets provisioned for you to sort of get going, the simplicity for the developers that it creates is going to be pretty amazing. So if I look at all app usage right now, I would say migrations is definitely a very, very strong play. But I do believe if you play out the next maybe 3 to 7 years, over that time, I do believe lots and lots of new applications, that's going to be written into the PaaS model.

I heard from one of your resellers that last fiscal '19, I believe, and I won't mention numbers here -- expose anybody here, but there were a certain number of databases installed by the incumbent market leader that were actually replaced by Microsoft Azure SQL Server. Can you talk to us about what are you hearing from customers and partners with respect to any appetite, or is it just completely made up, to replace on-prem databases, albeit their superiority what not with a Microsoft cloud-based database?

So there is a lot of discussion around that. And it's -- and there's 2 -- there's, I'd say, maybe broadly 2 things that are driving this discussion, Kash. The first, of course, is there is a general approach towards like a company imagining, hey, as we sort of digitally transform, how does our -- all our compute data footprint look like, right? So there is a very natural thing around, okay, I don't want to sort of manage data centers, I don't want to manage physical machines, I don't want to manage power and everything that comes with it. So there is that strategic bet around, okay, let's go move our workloads to the public cloud. Now as a part of that, obviously, every customer is looking at their spend, and they may be using different versions of on-prem databases on-prem and then they're looking at, okay, as we move to the cloud, both in terms of what is the modern architecture, what's the cloud-native design that helps me as I move, as I transition? Even if it may not be the first step, you may move to an IaaS-based model, but then for the strategic workload or a strategic application, how do I get to the design point that essentially helps me scale, saves me cost, helps me build out intelligent workloads where I'm able to leverage machine learning and AI in a way that takes me forward? So we basically have both these discussions around -- independent of which database you are sort of coming out from. There is a very healthy trend in terms of migrations that we see from even competitive databases, on-prem, not just to SQL Server, but even to things like Postgres, to things like Cosmos DB, depending on the nature of the workload that they're running. And this -- these move to eventual PaaS services essentially gives them that assurance, right? Like, if you believe that this specific application is going to be strategic for you 5 years from now, making that investment that essentially modernizes it, so you can -- both from a performance, scale, security, ease of use, predictive intelligence, integrating that, and there's lots of high-value capabilities we've added to our PaaS services. So we definitely see a lot of discussions around that. In fact, what I will say is migrations, not just of SQL Server, but a lot of the on-prem databases and their corresponding workloads to the cloud, is our #1 motion.

That's amazing. We always like to simplify complicated things in the technology industry into very easy to understand terms. The way I explain what's going on in the database market is, I would say to clients, "Look, Ferrari is a great car, but the use case for Uber is very different. So -- and people at the margin want Uber. They don't need more Ferrari." So that's how I would characterize a shift to the database market from on-prem to -- it's not a question of this or that, but where the incremental demand is coming from is more Uber. In the couple of minutes that we have, I'm curious to get your perspective. Azure's competitive advantage is a differentiation over AWS and GCP. If you want to just stick to database, that's okay. But if you have a broader perspective, how should we think about the edge that you have over AWS and GCP?

Got it. Yes. No, I think it's -- that's a very fair question. In fact, we get that asked all the time. The thing I always sort of start off with is, while, of course, it's important to be aware of what trends, what investments are going on, the thing that fundamentally drives our innovation agenda is what we're hearing from our customers, our own point of view that gets built up in terms of how best to serve them. So that's -- it's interesting because it's not like -- when I take a look at my own day, I'm a lot more worried about, hey, what issues our customers are running into with where we have and how we're getting the signals from them because that's really the richest thing that we have in terms of the investments we make. Now some of the things that I normally share is what we've heard from our customers, right? Like when they're successful in Azure, they basically share multiple things. The thing that, in many ways, sort of stands out is our focus just around enterprise security governance. These are the things that we've learned, having worked with customers for more than 25 years now, where -- while there is a lot of talk about performance, scale and predictive intelligence and how AI is going to change the world, which is all true and great, the reality is some of the biggest things customers worry about when they look at any major transition like this is, hey, is my environment going to be secure? If I'm putting my data somewhere else, what are the guarantees you're providing around encryption, isolation, just given everything else that they've heard around leakage, et cetera, right? So basically, that trust around Microsoft and the offering. And it's interesting, you look at like how we've led in a lot of our products is the core capabilities that we've built around security, privacy, governance of data and sort of leading with that, and that's what our customers tell us that, hey, you have a very unique and a strong point of view there, which resonates very well with them, especially for ones that are from regulated industries like financial services, health care, government, manufacturing. So these really resonates. The other thing, like you said, is we sort of briefly discussed is this whole -- our focus around not just the current lift and shift in what you really need to do maybe in the next 1 to 3 years but how do we believe our world evolves. Like we have very specific patterns that we talk to our customers in a very deep engagement manner around, depending on their business need, depending on the time frames they're looking at, they could go down the path of IaaS first and then pick the strategic workloads. Or if they have a more longer lead time, how do we sort of short circuit that. And that's the other thing that we've heard from our customers, which is Microsoft has such a clear point of view based on our requirements. We don't force them on to go here, go there. It's always a discussion based on -- and we talk about what we've learned, right? And because in many cases, migrating to a different database may not be the best option if you're looking at completing the move, let's say, within 3 months or 6 months versus just coming, saving the cost and then really looking at how do we do that transition because some of that, it could take a little longer. And that part, which is having that clear point of view of where the future we believe is, why do we believe that, and we also always talk about what Microsoft is doing. So for us, when we offer these services, Kash, it's not just -- one of the things I always talk about in a customer presentation is, let me tell you how Microsoft has evolved and what decisions we made and why did we make them? And our ambition, really, and this is what Satya has effectively made this one of the requirements for us, is azure should be the computer for the entire world and Microsoft, of course. So we talk about our own journey, what are the best we are making, and that resonates very well. So it's not we do something different and we are selling a whole bunch of services or products to our customers, but a lot of the learning, that Microsoft scale that we've had, helps us create that very clear point of view. And then finally, if you look at how publicly we've spoken about our investments in IoT, the intelligent edge, which we believe is going to become so critical, so it's not just about the cloud. It's not just about applications of the future. Almost everything that's connected is going to be intelligent. It could be all your consumer devices. It could be all your manufacturing plants, connected cars, whatever you have. And we have invested for the last 3 years in an application model which gives you consistency across all of these. So you don't have to worry about am I deploying this to an ARM device, which has low power? Or am I deploying this on a public cloud, which is like thousands of cores. The programming model is consistent, the security aspect is consistent. And as people get to understand more of this, they'll realize that the consistency, like today, for example, SQL Server, I'll give you an example, runs on everything from an ARM device, which is maybe less than 1 gig to 1,000-plus nodes running a Synapse query, right, across petabytes of data. And as a developer, you write the same T-SQL, and the security models, all the built-in AI is exactly the same for you to score. And that's super powerful, right, as these applications become very distributed. So I actually think -- and part of this comes from our genesis, our understanding of the developer community and the broader reach we're having with open source right now. So those are the things I'd call out is stuff that our customers tell us is differentiated, and that helps us sort of build out our agenda. Hopefully, that was useful.

Absolutely. Now that -- we're at the end of our allocated time, but it was very in-depth, very insightful. Thank you very much, Rohan. Thank you, Jonathan, as always, for your support, for everything you do for our conference. So with that, I just have a quick announcement to make. I believe the next presentation we have will be, one -- my colleague, Wamsi Mohan, will be doing a fireside chat with Michael Dell, CEO of Dell Technologies, after which, I'll be with the CEO of Workday, Aneel Bhusri. We've got plenty of good presentations throughout the day over the next couple of days. Please consult your agenda. With that, Rohan, once again, thank you very much. Jonathan, thank you very much. Have a lovely day, and thanks so much for participating in our conference.

Thank you so much.