Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Hello. My name is Victoria Irving, and I'm part of Morgan Stanley's Global Sustainability Research Team. Welcome to our session on big data's environmental footprint. Before we start, I have one disclaimer to read out. Please note that this webcast is for our client base and Morgan Stanley employees. The webcast is not for members of the press. And if you are a member of the press, please disconnect and reset. Please also note, this webcast is not for retail and individual wealth management clients. And for the [indiscernible] please visit our website. And if you have any questions, please reach out to your Morgan Stanley sales representative. And so it's with great pleasure that I can introduce you to Brian Janous, General Manager of Data Center Energy and Sustainability at Microsoft who'll be sharing his insights today into how Microsoft is working to improve sustainability of big data. Brian is responsible for leading the development and execution of Microsoft's global data center energy and sustainability strategy. In his role, he has [indiscernible] into renewable energy, distributed generation and overall environmental impact to ensure Microsoft's cloud infrastructure is reliable and sustainable. And Microsoft has been stepping up to lead environmental stewardship in the tech sector. In January, Microsoft announced its commitment to be carbon-negative by 2030. And to achieve that goal, Microsoft will have to reduce its carbon footprint by 50%. From 2030 to 2050, the company plans to remove an amount of carbon equal to Microsoft's total emission since its inception in 1975. We should have a little bit of time at the end for questions. [Operator Instructions] And so with that, I'll pass over now to Keith Weiss, who's our Head of Morgan Stanley's U.S. software research, who'll be moderating this session.

So thank you, Victoria, and thank you, Brian, for joining us this afternoon. And thank you to all the clients on the line. I really appreciate your support and partnership. And hopefully, this should prove to be a really interesting session because Microsoft really has been on the forefront of pushing towards sustainability. And I think, as Victoria was talking about earlier, the carbon goals that you guys have set out at the beginning of this year is really ahead of the pack and ahead of anybody else in technology. And so Brian, you got a tough job ahead of yourself.

So Brian, maybe you could, to start out, you could talk to us a little bit about how we got here, the evolution of the sustainability efforts and Microsoft's position on climate change and sustainability. How has that evolved over the past 3 to 5 years? And what kind of happened -- how did -- what was the catalyst to coming up with that carbon initiative at the beginning of this year to really sort of put a stake in the ground that we're going to lead in this initiative?

Yes. Well, thanks for having me, Keith. Really happy to be here. It's interesting. So I've been at Microsoft for coming on now 9 years, and so I've been here for a lot of this journey. And I've observed sort of an evolution, and it's not just at Microsoft, but I think it's of corporates in general on this issue, from beginning with some reluctant acceptance that we probably should be doing something towards what I see now, which is a full-throated embrace of our responsibility as a corporation as it relates to issues of climate. And not just issues of climate, but definitely that is a top-tier issue for the company. And if you go back even a few years, I don't think anyone in our SLT would have said that this is a top-tier issue for Microsoft. But I think if you polled them all today, they would absolutely say this is a top issue for us, and this is something that we, as a company, have a responsibility to be committed to. And as Brad Smith, our President, said in a book that he wrote last year, that if you create technology that changes the world, you bear some responsibility for the world you create. And I think that really applies in this space in that we are a company that has not only a large environmental footprint, particularly as the cloud grows and our energy consumption grows across the globe. But we also touch a huge percentage of the world's emissions through our customers and through the technology that we build. And we have an opportunity with that scope and scale to have a true planetary impact.

Got it. I wanted to better understand the executive leadership here and kind of where it comes from. I know Satya has talked about the world has to be doing well for us to do well or something of that -- I'm paraphrasing. And -- but how involved is Satya and the senior leadership team in setting these goals and ensuring that they're maintained? And does this sort of percolate -- like is this a Board-level initiative that comes down? Or like where do these -- where does the sponsorship come from?

No. Well, that, too, has been a really pleasant sort of surprisingly evolution for someone who's been working on these issues inside of Microsoft for years that historically had been pretty grassroots, right? And there are a number of us who are working on these issues, and we're trying to sort of bubble up awareness to our senior leadership team. But what's happened over time is these initiatives have started to come the other way. And even going into the announcement in January, we had -- as sort of the working teams who are on the ground working on these issues, we had certain sort of expectations and plans for what we were going to roll out in January. And what we ultimately rolled out was quite a bit more aggressive than what we had even proposed because we got to these meetings and then the questions were, "Well, can't we go bigger and can't we go faster? And why can't we do more?" And so yes, the level of engagement from the Board and from the SLT has been really phenomenal on this. And so I feel like, in a lot of ways, we have this amazing tailwind behind us with support, knowing that there is that high level of engagement and interest on these issues.

Got it. For those online who haven't sort of read through the carbon initiatives that you guys put out in January, can you give us an overview of kind of the goal that, that had set out, how that fits into Microsoft's broader perspective on sustainability? Maybe start to touch on kind of how you guys start to implement such aggressive goals into the overall operations of the company.

Yes. So there's basically 4 pillars that we look at and it's carbon, ecosystems, waste and water. And so we have those as sort of 4 focus areas. And we think about them both in the context of our own operations. How do we, for instance, manage our own carbon footprint? But also our supply chain, thinking how do we influence the carbon footprint of our suppliers, both upstream as well as our downstream supply chain? And then more broadly, our customers, right. So when we look at our own operations and suppliers, the goal there is to achieve carbon-negative operations by 2030 and ultimately pay back our climate debt from our founding in 1975 by 2050. And then more broadly, we think about how we leverage our customer base and the technology that we create. Because when you think about a company like Microsoft, I mean, we have a large carbon footprint. But in terms of the share of the planet's emissions, we're infinitesimally small. So Microsoft can be carbon-negative, and that's going to be a great achievement, but it's not really going to, in the grand scheme of things, alter the path that we're on. What will is the influence that we can have, both on hopefully other corporations that follow our lead but also how we leverage our own technology and our customers. And so we announced just last month an initiative called the Planetary Computer, where we're focusing on using data to better map and understand ecosystems around the globe so that, as a human race, we can understand the impact that we're having on the climate in far more advanced ways than we can today. And so those are the sorts of things getting me really excited because we're really able to then use our scale. It goes far beyond just our own operations.

Great. Yes. I mean, I think there's a couple of aspects in that in which Microsoft takes that leadership position. One is just an example of a very aggressive set of initiatives that you put out and taking a leadership role there. There's another like you're talking about in terms of the work that can do to sort of better understand the problem. But also, people could follow the template of how you're going about to do it. Because it's obviously no easy task to plan for this, to putting the technologies into place, to put the metrics in track and have accountability against those. It's a whole set of systems that you guys have to put in place in order to execute on these goals. And those systems, I would assume, at some point, become leverageable by your customers and by a broader population than just Microsoft. You're kind of setting out the kind of the operating system for sustainability for future endeavors.

Right. Yes. And so I think it is -- our approach has always been to share our learnings along the way. And so whether that's around data center efficiency, how we reduce the overall energy consumption in the data center, whether it's how -- things we're learning about the integration of data centers into the electric grid itself, how we leverage things like on-site generation and batteries to become a better, what we call, grid citizen, right? How can we make sure that the investments we're making are actually helping to move the grid towards our ultimate goal, which is decarbonization. And so there's always opportunities for us as we're learning to continue to share best practices. And this goes back to years ago when we first instituted our internal carbon tax. So we did that back in 2012 and have since published a number of white papers about that. And I still get questions for almost every month about that, saying, "Hey, can I learn more about your carbon tax?" We did that years ago, but people are still going, "Oh, there's something for us to learn here." And so yes, the goal is for us to be transparent about how we're doing it, to learn as we go and then publish those best practices so that others can follow. Because again, the goal is not that Microsoft achieves carbon negativity, right? It's that we actually have a true impact on the planet as it relates to climate.

Right. Got it. So I wanted to drill down into one of your core areas of responsibility, which is the data center and the sustainability in the data center. And I think a lot of people -- this has become a bigger topic for guys because we're building these huge-scale computational facilities. Can we really run them in an environmentally sustainable way on a go-forward basis? And you guys obviously think the answer is yes. There's a set of technologies. There's something you can do in terms of the energies that you're sourcing and also how you set up these data centers. Can you talk to us about sort of when you're thinking about your planned -- either existing data centers or sort of the new data centers that you're building, where does the sustainability initiative come into the process? Or is it all throughout? Like how do you make sure that you mesh sort of the corporate and commercial goals with the sustainability goals throughout that data center building process?

Yes. It really is integrated throughout. And it starts with, first of all, just selecting a location, right? My team is deeply involved in data center site selection, where we go influencing the decisions we're making to think about the environmental impact of those investments. And for instance, we announced a data center last year in Sweden. That data center was selected specifically for its ability to provide an extraordinarily high level of power reliability to the site using massive amounts of redundancy at the transmission level that was native to that particular location, which is going to allow us to actually operate the data center without backup generation, without any diesel generation because the electric grid connection is going to be so highly reliable, along with some supplementary batteries. So thinking from the very beginning before we even set foot into a region, how can we impact this to think about sustainability, it starts from the very beginning. And then it goes all the way through the supply chain as we think about sourcing materials. And as I mentioned, we actually have a supply chain in the full scope of our carbon-negative goals. And so that means we have to start thinking about, well, what is the embedded carbon in the cement that we're buying for pouring the foundations of the data center and the steel and all the materials and the construction activities. So it goes through the full life cycle of the data center.

Got it. So can you help us understand that a little bit better in terms of -- to me, it doesn't seem easy, but it makes sense how you guys could sort of control and have a large impact on what you're doing in your own data center and sort of how you're building sort of your own plant. How do you push that further down in the supply chain? How do you influence and push suppliers to move towards a more sustainable footing or more energy-efficient type footing? What's the tools that you guys use to enable that, to do that?

Yes. So one tool that's out there, and we actually piloted this on our campus build that's going on. We're in a major campus remodel. We're using a tool that was developed with Skanska called EC3. And what this basically does is allow for better accounting and identification of carbon in the construction process and materials so that we can start to surface that data to our teams and start to present options to say, "Hey, look, if we can alter, if we can switch to this different material or this different process, we can achieve a 10%, 20%, 30% reduction in embedded carbon in the building itself." And so we're rolling that -- starting to roll that out into our data center builds. So that's giving us a lot of learnings. And then we're going farther beyond that and looking deeper into the future of what the technologies that are going to be available. As part of the announcement in January, we established a $1 billion climate investment fund, and this is really focused on thinking about, "Okay, where are those key areas for Microsoft where we can have influence in terms of how the energy system is going to evolve, how material technology is going to evolve?" And now we have a platform for investment there. So we're really excited. We haven't announced yet our first investments coming out of that fund, but we will relatively soon. And I think you'll start to see the focus areas are really around that sphere of influence that we have. And so I'm really excited about what we're going to be able to do, not only in the near term with the technology that's available today, but how we can start to influence the technology so that 5 and 10 years from now we're actually able to acquire the types of materials that we ultimately need to achieve the carbon-negative objectives that we set out for ourselves.

Got it. Got it. Before you mentioned how the process starts even kind of in site selection, and you mentioned Sweden. I would imagine Sweden is probably one of the easier geographies to work in because they're kind of a little bit more forward-footed when it comes to environmental and sustainability. It's probably not the case in all geographies that you work in. Can you talk to us about sort of how do you deal with that? How do deal with the -- like you got to set up data centers where there's a commercial need for it. Some of those geographies aren't going to have the sort of the renewable energy available. They're not going to have the same type of grid. How do you deal with those geographic variances, if you will?

Yes. I mean, like politics, data centers, all data centers are local, right? I mean, we have to deal with the local conditions on the ground with the communities, and it does vary dramatically. And so we're constantly having to think about how do we effectively engage the communities. We have an entire team that focus on this. One of my peers runs our community engagement program, and their goal is to basically help us be smart about how we enter these communities. Like what are the top issues that the local community is concerned about? Is it power? Is it water? Is it labor -- access to labor? All of those things go into our thinking when we go into a community, and we actually send this team in to do listening sessions and start to engage the community so that we know what does it mean to be a good neighbor and a responsible neighbor in those communities. And this is a new area for us, right? Because if you go back prior to the cloud being central for Microsoft, I mean we had office space all over the world, but we weren't perceived as necessarily a presence in all of these markets other than here in the Pacific Northwest, right? But now suddenly, we come into some of these smaller regions, and we're -- become a huge employer, right? We become a huge presence in this community. And so that's really caused us to think deeply about what does it mean to be a positive impact on the communities that we're operating in.

Got it. Got it. I know Microsoft has had in play -- I mean, one of the big costs of running a data center is energy. So efficiency has been a big part of data center design architecture and sort of operations for a very long time. It's just from a commercial standpoint. The carbon initiatives announced in January, do they have any significant kind of step function or shift in sort of how you think about data center? Is there any particular changes that come into play now that they have these new levels of carbon initiatives in place?

Yes. The big change was the shift to focus on our supply chain. So prior to January's announcement, our big priorities around carbon reduction was focused exclusively on energy. So we had target to be 100% renewable. We set that as a date certain in January of 2025. But my team had been working on that initiative for years. What really has shifted is this idea of, "Well, you're no longer just responsible for the energy consumed in the data centers, but now the entire supply chain is in place." So we actually even took the carbon tax that we've been operating since 2012. That tax used to just be on our own operations. Suddenly, it's now expanded to our entire supply chain. So now all of the business units inside of Microsoft are being taxed not just on, say, for instance, the energy consumed for Microsoft 365, but it's now also all of the servers and all of the energy consumed in the production of those servers and the transport of those servers and the materials inside of those servers. So suddenly, the scope and the number of people inside the company that are accountable for this has grown enormously. And so I have people from different parts of the company now coming to me and saying, "Hey, we never had to think about this before. Now we do. You've got to help us figure this out because this is a whole new world for us." And so it's been kind of exciting in that it's kind of united a lot of different people across the company by giving more people ownership of this issue because supply chain affects a ton of people across the company.

Right. Got it. So I just want to make sure I understand this correctly. So when you're sourcing, let's say you're sourcing a chip and you're putting on a bid for a new chip, they come at you and they say, "Hey, listen, here's our cost for a chip." You guys are going to go assign an additional cost onto that based upon the carbon intensity or the sustainability. So you have an end cost that you're looking at that's different than what the supplier is saying, right?

That's right. So internally, that -- the way the tax is applied is that each business group would have that tax levied on them based on their own annual carbon footprint. For me, my core area of responsibility around energy, I, in essence, can avoid the tax by going out and purchasing renewable energy. So my tax burden is actually declining every year because I'm able to go out and say, "Hey, I can, in essence, have a tax credit because I've got these renewable energy claims." Likewise, on purchasing servers, we could do the same thing to say, "Hey, well, I'm purchasing servers from the supplier, and they're running 100% on renewable energy. So now I have a lower embedded carbon in my server supply chain and thereby, a lower internal tax for carbon."

So do the suppliers have visibility into the tax that you're putting on to their goods and saying, "Okay. You're telling me it's $1,000 for the server, but really, it's $1,000 plus this carbon tax, so you're actually more." Like does that push down to the suppliers to try to influence their decision?

That's ultimately the idea and why we instituted the program this way is because we wanted to sort of send those signals into the supply chain to say, "Look, we expect your behavior to evolve." When we're sitting on having conversations leading up to this and someone asks the question "Well, wait a minute, like what if the suppliers can't change? And what if they cancel?" And the response from one of our executives was, look, we set the target in 2030. Like we're not telling them tomorrow you've got to come and start delivering us carbon-neutral materials. We're saying we're giving you 10 years to figure this out, right? And not only giving you 10 years, we're going to help you. Like we'll help you along the way, try to figure out how we get there. So yes, the message to the supply chain is we expect you to change your behavior. And we're not expecting you to change overnight, but we're giving you notice that we have to be carbon-negative by 2030. And so of course, that's going to influence how we think about what we buy and who we buy it from. And so it is going to be a partnership, right? It is going to be something that we're going to work with the supply chain to figure out. But yes, we are expecting behavior change as a result of this.

Right. That's fascinating. I wanted to shift gears a little bit. And you brought up renewable energy. It's been a big area of focus for you guys. Can you give us kind of the update on where you are in terms of how much of your sourcing you've been able to push to renewable energy sources? And what's the kind of progress report on hitting your future targets?

Sure. So we're about 60% renewable today. We have a goal to be 100% by 2025. The challenge there, of course, is that the denominator is getting bigger every year. So we're not -- even maintaining 60% is a significant effort because we have to continue to buy more and more to just keep up with the growth of cloud. So today, we've purchased about 2 -- a little over 2 gigawatts of renewables globally. In the next few years, there will be another several gigawatts that we'll be purchasing to be able to achieve that ultimate target. And of course, that only gets us to 100%. We expect we'll continue to have to grow beyond there. So the next jump beyond '25, 2030 is not immaterial at all. So it is a pretty significant undertaking that we're embarking on.

Got it. Are there any particular sources or types of energy, renewable energy that you guys are seeing more or less success with that you're particularly excited about?

Well, I think the big development over the last 2 years or so has been just a massive decline in the cost of solar. So if you go back a couple of years, I'd say the vast majority of certainly corporate purchases were in wind. But we've seen, in the last year, I mean, solar has become so competitive. And I think we will continue to see that in the long run, where solar and particularly solar combined with ever-decreasing cost of storage is going to be really difficult to beat. So I anticipate -- our share today is somewhat more heavily weighted to wind. I expect in the next 5 years, that's going to shift. And solar PV will continue -- will certainly dominate the landscape over that time.

Got it. Got it. One more question for me. We have a bunch of good questions from the webcast that I want to try to hit as well. In terms of the efforts towards renewable energy, can you talk to some -- and sustainability and efficiency overall, can you talk to us a little bit about the customer dialogue? Is this just a Microsoft trying to take a leadership position to sort of push the world forward? Or is there a customer demand for this? Are you hearing customers saying, "Listen, we want to source our compute, we want to source our new technologies for more sustainable stuff." And there's a demand in the market that you guys are trying to meet with these types of initiatives?

Well, absolutely. And I think this is all part of that similar trend we were talking about earlier and just the -- whether it's increased interest in ESG investing, whether it's pension and sovereign wealth funds divesting in sectors that they no longer want to be supporting, I think there's a general movement across corporations to take greater responsibility and ownership of this issue. And so that, of course, leads to questions to us of like, "Well, if we're going to be moving workloads from on-prem to the cloud, what is the environmental impact of doing so?" And so in the January announcement, we actually released a sustainability calculator that allows customers to go in and actually look at their on-prem environment versus running those same applications inside the Microsoft Cloud. And we've been able to demonstrate that. For many customers, they see greater than 90% reduction in carbon emissions by moving to our cloud environment. And so the interest and uptake of that tool has been phenomenal and more so than we were even anticipating. We knew that there was demand out there, but the response from the market has been amazing. So there's huge interest from customers on this issue.

So moving from kind of running workloads and running their systems in their own on-premise facilities, moving that to public cloud because of the scale, the efficiencies, the sort of what you guys have been able to do in your plan, you're saying you can reduce carbon emissions going from on-prem to public cloud by 90%?

That's right, yes.

That's pretty incredible. All right. So first question I want to hit. And this -- I think this is along the lines of kind of drinking your own champagne. Has Microsoft done work into reducing corporate travel and fuel emissions through the use of Teams?

Yes. Well, that's been -- I mean, well, obviously, in the last few months, absolutely. And I think what we're looking -- and the carbon tax that I...

[indiscernible] from the last few months.

No, we're not. Yes. The carbon tax actually applies to travel as well. So organizations that are traveling are having to pay that tax on their airline travel. So that is all part of what we track for the business groups to ensure that they have full end-to-end ownership of the emissions that they're responsible for. And that's both their operations as well as their travel.

Got it. There's a question here about Microsoft's view on offsets and tax credits as a way to meet carbon neutrality goals. How much of that are you guys hitting kind of, I would say, organically? And what comes through kind of -- how much has to come through offsets or credits and the like?

Yes. So when we started in 2012 with our carbon tax, we also, at the time, became carbon-neutral. So we've been operating carbon-neutral since that time and have achieved carbon neutrality largely, at least initially, through the purchase of things like renewable energy credits and carbon offsets. But what we've set out to do sort of in this next decade and say, "We don't want to rely on just offsetting. We want to, to the greatest extent possible, eliminate the emissions inside of our operations and supply chain." And then what's left over is focused on carbon removal. So making sure that we have high-quality removal projects that allow us to actually ensure that we get that carbon out of the atmosphere and that we can do so for the long run. So part of what we're doing over the next few years is really deeply investing and looking at different carbon-removal technologies and carbon-capture technologies and how we can assure that because we're going to need to do that to get carbon-negative because we're not going to be able to reduce 100% of the emissions inside of our operations and supply chain. And then, of course, to pay back the emissions since 1975, that also will require a significant amount of carbon removal. And so yes, it's been an evolution for us from offsetting to ultimately reducing and removing the carbon.

Got it. Got it. One more question from the webcast I thought was pretty interesting. So given the shift to work from home that we've been seeing over the last 3 months, how does that impact sort of how you're measuring carbon neutrality and the carbon tax? Is that following your employees into their home? It seems like it got to be more difficult than trying to assess it within sort of your physical campus locations.

Yes. We haven't assessed it -- someone asked me that question yesterday of like, well, wait a minute, what if someone lives like closer to the office or farther from the office? I was like, no, we don't tax our own employees for their emissions. We do, for instance, have a bus system across the Puget Sound. And one of the things we're going to be doing is electrifying that system, right? So we're going to have electric buses that will be able to move employees around the city. So that's about the extent of which -- and we have other programs around encouraging ridesharing and car sharing and commuting. But no, we don't get down into the employees' actually -- homes or their own operations.

Got it. And then last one, we're coming to the end of our allotted time slot. But so Microsoft has been very forward-thinking on sustainability and sort of being a responsible corporate citizen and global citizen. When you look forward, anything coming down the pipe in the future that you're -- when it comes to sustainability that you're particularly excited about?

Yes. I think the thing I'm most excited about right now is some of the work we've been doing and thinking around environmental justice and climate equity. I think if there's anything that this cultural moment is teaching us that we're all in, not just in the United States, but now globally, it's that opportunities aren't equal. And that those of us that have influence have a responsibility to ensure that we're creating opportunities for disadvantaged communities and people groups and helping them to achieve more. In fact, Microsoft's mission statement is empowering every person and every organization on the planet to achieve more. And I think what we're realizing is that's not a passive activity, but it involves awareness of our communities. It involves listening and learning, and it ultimately involves allyship. And so one of the things we've been really thinking about and learning about is how -- as we're -- just taking, let's say, our renewable energy procurement, like how can we ensure that the dollars that are going to support the development of a new solar project or wind project in the community are actually getting directed in a way that truly benefit that community, right? And it's not people flying in and doing something and flying out, but rather, learning about the workforce issues in that community. And what are the opportunities for us to ensure that those dollars are being invested in a way that provide the greatest amount of climate benefit, yes, but also social and cultural benefit inside of those communities. And so we're learning a lot in that space, and we'll have some more stuff coming out in the coming months about exactly what we're doing and how we're doing it and hopefully being able to share best practices there for the industry.

Outstanding, outstanding. This has been a great conversation. I've learned a lot. Hopefully, our clients on the line learned a lot as well. So Brian, thank you very much for joining us. And thank you to all our clients on the line. We have a brief break going on, but we will continue the conversation and continue, I believe, with GM at the top of the hour at 11 a.m., so stay tuned. And everyone, stay safe out there. Thank you, Brian.

Thank you, Keith.