Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Yes. Yes. Well, it's interesting. The last 6 months, we've been pretty humbled by everything we've seen with Teams in terms of the mass adoption. And I have to, of course, acknowledge that the pandemic and COVID and work-from-home, as horrible as it's been on so many dimensions in terms of loss of life and personal tragedy and the economic impact, Teams has absolutely been a beneficiary in terms of that digital transformation and Microsoft 365 as a part of that. And so we say that with a lot of humility, but also, we're happy that we were able to deliver the service. Video conferencing, what we're doing right now is something that has been -- the workload that's been out front the most. But Teams offers a whole lot more than just video conferencing. And that's been the value proposition of the product, on what and why it's driven so much growth, is because it does offer a bunch of workloads on a single platform. It really is truly, as we talk about, a hub for teamwork. So yes, it's got meetings, it's got chat, it's got a phone system. It's got all these communications capabilities, and we'll continue to build that over time for sure. But it's also got the core integration of collaboration and productivity stuff. So it's got Office built in, really nicely integrated into it. It's got OneDrive and SharePoint for sort of document-oriented and workspace kind of collaboration. One that's been, I would say, building over the last 18 months in particular, and we've seen some acceleration with COVID and will certainly be doubling down on this piece too, is the notion of business processes and workflow being built into Teams as well. And so we're seeing this really interesting phenomenon where customers are appreciating the notion of a high-engagement surface that Teams is providing, and they want to build their line of business applications into that surface. It doesn't mean that it's an exclusive-oriented thing. Of course, they'll have their own experience as well, but they want to sort of hit that sweet spot of integrating their line of business app with Microsoft Teams to try and drive that engagement and that usage all up. And Teams provides really a wonderful scaffolding for that, along with Power Apps and workflow and our workflow automation stuff that we've got on top of it. So that's a biggie too, and we're going to continue to push hard in that area as well. And then another key innovation area, I would say, that's been very important, particularly given this, again, just a massive increase in usage that we've seen is customers saying, "Hey, this is all great, but I want to make sure that it's secure and compliant." And so whether it's DLP type of capability, whether it's threat protection kinds of capability, whether it's compliance features, whether it's things like -- well, in financial services, things like ethical walls, these have all been very, very important parts of the value proposition that's built inside of Teams all up. And it's been really, really strong that we've seen, and we're going to just kind of continue to work on these areas. I don't hear you, Brent. I think you're muted.

Sorry about that.

That's all right. You would have noticed if it was on Teams. We would have noticed.

Just talking through the voice and telephony feature, when you think about what you can do there, it seems like a tremendous opportunity. Where -- directionally on that side, where do you want to be?

Yes. No. We think that's a very important part of the value proposition for Teams. And as I mentioned a few minutes ago, as we think about Microsoft 365 all up and what's been driving E5, it's been security and compliance. But increasingly, we're seeing telephony. And I think it's kind of one of these natural outcroppings that's happening from a lot of the push or the rethink on what is really the digital -- what is a digital workplace. And lots of companies are rethinking their physical space, how they're going to manage work-from-home and so forth. And you can see lots of different opinions from CEOs in terms of how it's going to play out. But I think at the end of the day, people are feeling like, "You're going to need a phone number, no matter where you're working." And the whole telephony space is something that we've been working on for the last -- pretty hard the last 18 to 24 months within Teams, and we've got a very, very strong value proposition here. And we've got a legacy of working in this space before in the on-prem world with Skype for Business. But inside of Teams, we now offer phone system capabilities, routing, analytics. Of course, you can call within your tenant, but there's PSTN services, so you can reach outside your tenant, reach your customers and all the vendors and so forth that you're working with. The other thing that's important is we've added calling plans. And so you don't have to work with a telco if you don't want to. But we've also, over the last 12 months, really worked on a strategy within the ecosystem. Where if a company has already got an existing relationship with a big telco, and they want to maintain that, fantastic. They can bring their own trunk as we call it and have a direct routing solution inside of Microsoft Teams. So we're sort of providing a first-party experience, but also really embracing those third-party relationships too, which are super, super important for many big multinationals that exist. So this for us is a good example of how Teams is not only one where we're sort of bringing sort of new users to the platform, but one that's going to allow us to have some ARPU opportunity as well because, again, these are the kinds of capabilities that are in that E5 tier service.

And just on the video side, when you think about there's a lot of awesome things you can integrate in, but Zoom kind of came out of nowhere and kind of became the easy choice. How do you dislodge what's going on there?

Well, I think we're focused on our value proposition. And again, as I mentioned earlier, the broad notion of Teams having everything that companies are looking for in a single platform is a very, very strong value proposition. And I talked to lots of CIOs and leaders in IT and technology. And sometimes, there's this, "Oh, best-of-breed versus integration." And our view is it's kind of baloney. At the end of the day, we're going to do a great job of both. We aspire to have the best as we were just talking about calling and telephony solutions on the planet. We want to have the best chat and meetings infrastructure that's there. We've got the Office integration already built into Microsoft teams, which is, again, when you think about these high systems of engagement and so forth, having everything, a real true hub for teamwork is a pretty valuable -- it's a pretty valuable differentiator for us. And then as we talked about before, again, this notion of business process, I can't emphasize enough how sticky that ends up being when companies decide, "Hey, it's not sufficient just to have a video solution. I need to have a video solution that's connected into my line of business set of processes." And that's where this platform that we've got with Teams is just so unique from that perspective because it's not just chat, it's not just video. It's really bringing all of these components together and pulling through the rest of the Microsoft 365 platform. So that's our strategy. We've been pretty clear on it. We're pretty maniacally focused on it, and that's how we're going to ultimately win, we believe, customer mindshare in the market.

Just shifting to security. It feels -- you've been there, but it feels like it's a much louder voice, and you're having better traction than you maybe have had in the past. Maybe I'm wrong, but I think you'd said at RSA, I think you had just put in $1 billion into this with over 3,500 full-time employees. It's a big commitment.

Yes. No. And that's an old stat. And I think those numbers are actually bigger at this point. But you're right, the last -- I would say the last 3 years, we've been working pretty hard on the security space, really defining what's the breadth of the portfolio that we want to be into, what are the right markets for us to enter, what are our differentiators going to be. And the team has really, I think, done a nice job of executing. And we are in a unique position. It's in some ways similar to Teams. There are hundreds of security vendors that are on the planet today. Many of them are -- come from a legacy of building on-premises-oriented solutions. They're sort of very singularly vertically oriented. And that's been an okay sort of historical approach. But with the sophistication of threats today and the intensity of them, there's no question that security is moving to the cloud. And a vendor like us that is sort of with all the strengths that we have with Microsoft 365 and with Azure, there's quite an advantage, we think, there in terms of the scale. And so we've entered into markets like identity and access management. I think I mentioned the 345 million people we have on Azure Active Directory. That is a very, very key asset for us. When you think about Zero Trust security models, identity is at the core of that. And we have a very, very strong part of that offering. That, in many ways, is the umbrella for all the other solutions that we have around threat protection, whether that's at the endpoint, whether that's in services like e-mail or across Teams or across the application layer itself. As you know, obviously, in this world of "bring your own SaaS app," CIOs, they need to -- CISOs, they need to understand what end users are using inside of their organization. We've made a very intentional push, and we've had strength here for years in information protection and compliance and that's been a very nice way to round up the value proposition. And again, the CASB space and cloud app security, these have all been workloads that we've been in, and we have real strength in the market and have built a leadership position in. And it's really fantastic. And as I mentioned earlier, it's been a big, big driver of growth for us, being able to attach this to Microsoft 365, but then also have solutions that are independent of Microsoft 365. I'm not sure how familiar you are with Azure Sentinel. It's a new SIEM-based offering that we launched, I guess, about a year ago, went to general availability. It's done super, super well in the market. There's deep integration there with Microsoft 365. So we feel pretty, pretty good about where we are in the market and what our outlook looks like here.

The last 6 months, I think, have surprised us all. There's been -- I think a lot of people would never have thought we'd be as productive as we are sitting at home. What's been most surprising to you in how your customers have acted, products they've adopted? Is there a couple of things you'd call out that were most surprising?

Yes. Yes. This is a year where -- I think many of us will want to forget 2020 for lots of good reasons. But I think it's also a year where people will look back and go, this was the time, for all the sort of tragedy that's been associated with it, that the real birth of digital transformation kicked off and went into high mode. Of course, digital transformation has been happening for the last couple of years. But vendors like us and others, I think, have seen 2 or 3 years' worth of growth in a period of 4 to 6 months in a pretty massive way, and it's pretty incredible. I think when it all started, I would say the first few months of it was frankly almost like crisis management. How do companies let people like you and me work from home? How do they enable that to happen? And there was a real scramble we saw across a breadth of customers for everything from getting their VPN and strategy together, to making sure their users had great desktops. And those desktops were securely connecting into their networks. And there was a pretty massive shift, a pretty massive push to cloud, but also -- and things like Teams and so forth, but also people upgrading PCs and wanting to layer in security and thinking about information protection and so forth. And so it was very, very much a mad dash, I guess, I would say. In the last few months, I think the tenor has changed a bit. Of course, there's still some companies that are on that journey for sure and catching up and moving fast. But I also think that there are folks now that are looking for the long term. What's going to be really durable? How much is -- how much of what we're doing now is going to stick? How much is going to really change? And so they're thinking, I think, a lot more long term as opposed to firefighting in terms of what is going to be the durable technology platforms that they're going to go buy. And the stress test that many companies went through during this journey, I think, has been pretty intense. And the notion of having us a platform that is comprehensive, that is broad, that is going to be best-of-breed in these key workloads, it's going to enable further digital transformation of these business processes and moving them online, making sure that their employees are engaged and so forth. This stuff is going to matter a lot. And I think it really is going to be a catalyst for the next 3, 4, 5 years that we're going to see.

I know you don't talk about specifics on the road map, but maybe if you could kind of share the vision of how you expect things to look at a high level, and we get the questions, is there going to be an E7? Is there going to be -- so maybe if you can just talk to, at a high level, the road map.

Yes. No. You're right. It's hard to get too specific on this. I think we've talked a little bit about some of these things. We're super committed to creating great experiences for end users in the productivity and collaboration space. And there's -- we didn't get the chance today to talk much about all the work that ML and AI is able to enable in terms of creating really interesting scenarios for end users, and that's a big thing that we're going to focus on. I think we talked a little bit about security and compliance. That will continue to be a big thrust for us in terms of where we're pouring our engineers and our R&D and where we see market opportunity. I talked about this unique intersection between systems of record and systems of engagement and this notion of workflow and line of business, I think that's going to be a big area of investment for us. And then I touched on it briefly, but as we're going through all this digital transformation, there's a lot of culture change that organizations have to go through. And thinking about what that employee experience is, there's a lot there. We, for example, just a month or 2 ago, announced a new corporate learning application that we're going to be building into Teams. We've got a lot of data and analytics that we're using to help businesses understand how their employees are being productive, their well-being and so forth, and we think that's going to be a big opportunity for us, too.

Great. Kirk, thanks for joining us. Really appreciate the insight, and congrats on the ongoing success. Thank you very much.

Great. Thank you very much for having me. I appreciate it. Take care, everyone.