Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Right. So are there any other interesting examples in addition to what you just mentioned that you guys have been public about in terms of technologies that are helping to drive efficiencies and the outcome that, that has when you -- when those are actually implemented?

Yes. I mean one thing that I think is really important to touch on, especially during COVID, is that of cyber sovereignty. Microsoft, for a long time, has firmly believed, in fact, from our inception, we have believed in the needs of enterprises. And one of the clear needs of enterprises, both commercial enterprises as well as governments, is cyber sovereignty. During COVID, many countries around the world and many multinationals have had to think a lot more about their sovereignty, where do their goods come from, where is their supply chain, where is their data stored. And in line with this strong belief in the importance of cyber sovereignty, we've been building out data centers around the world. Today, Azure resides in 21 different countries. And over the last 6 months, you've seen us make announcements to expand that cloud into even more countries. We've seen announcements that we've made publicly around building, for example, in places like Mexico. We're expanding further in Europe into locations such as Italy or expansions in the Asia Pacific region and even growth in Africa and other emerging markets. And so certainly, the cyber sovereignty has allowed us to both grow our existing footprint with some of the efficiencies that I described and then also grow our cloud around the world for customers who deeply value that data residency and that cyber sovereignty. And this then gives us a way to be more flexible, to be closer to where our customers want their capabilities and their capacity and to meet their local rules and regulations, which is super important as we go in to serve restricted markets, like government, financial services, health, life sciences and increasingly now even supply chain and manufacturing. So that's another place where the innovations that we've made in economics on the back end allow us to more efficiently and effectively go and scale globally to meet that cyber sovereignty requirement.

Yes. I want to press on this a little bit further, and there's probably some overlap in terms of the questions that I'm about to ask and what you just mentioned. But let's dig a little bit further on data center expansion. So in the first couple of months post-COVID, the spike in usage across certain workloads and in certain geographies reportedly led to some data center outages. And if we look, last quarter, CapEx spend increased significantly and the Q1 guided for similar levels of spend. So how are you thinking about ensuring that there is sufficient capacity, I guess, to meet these growing cloud needs? I'm sure some of it has to do with what you're talking about, the technology enhancements that you guys have had and making sure data is closer to the customer. But how do you weigh decisions around expansions in a new data center region versus increasing footprint of existing regions?

Yes. Look, there's multiple parts to that, and we'll talk through each of them. I mean first of all, we're incredibly focused on ensuring that our customers can use cloud to grow and scale. COVID was, of course, an unpredictable event. But as we saw with Microsoft Teams, as an example, our cloud was able to scale literally overnight and grow at levels that nothing else has ever represented or been seen from customers around the world. And the fact that we had a global cloud infrastructure allowed us to scale through that in an incredible way. What we've also done to ensure that our customers can grow is focused, first, with our customers in some of the most critical industries, justice and public safety, police forces, as an example, human life and other critical workloads, and we've prioritized and focused on them. There are some lessons that we learned in terms of providing additional capacity, and we've been able to respond to that to ensure customers can continue to grow. And this is a place that we continue to optimize our supply chain, our software as well as our hardware to respond to customer demand wherever that demand is as quickly as we possibly can. When you look at our global infrastructure, we have hyperscale hero cloud regions, not just in North America or in Europe, in Amsterdam and Ireland, but increasingly now in more locations, be that Singapore, Australia, the United Kingdom. And so we've been doing a lot of work, both pre-COVID and post-COVID, to continue to grow that hyperscale footprint in large locations as well as then in emerging locations. And so with that, we've been delivering capacity to all of those locations. And we've done a pretty good job supporting Teams and communication and collaboration, critical customers in life and safety, our customers in essential restricted industries like financial services and health care and then continue to grow on that. And this is a place that we remain vigilant and incredibly focused.

Perfect. So now turning to the supply chain. Some vendors within the data center supply chain are expecting the cloud providers to enter a digestion phase in the back half of this year. So curious, how quickly are you able to provision increased capacity? And have historic buying patterns of server, networking and other data center equipment been lumpy? I guess how have data center efficiency gains impacted these purchases as well?

Yes. I think it's fair to say that in 2020, there's been a lot of thought around supply chain, not just in technology or cloud within every single industry. Companies are looking at where their supply chain resides, how is it globally resilient and how can it respond to different global events. And Microsoft and our suppliers are no different. So we continue to look at where we're sourcing our components from, how that can meet our business needs and how it can withstand the most unpredictable events that may occur, such as the global pandemic. As we look at that, we, of course, are continually innovating, both in terms of long lead activities as well as ensuring that we have the appropriate buffers and reserves to be able to respond to events, wherever those events occur in the world. And we, of course, are balancing efficiency here with customer responsiveness, and we continue to tweak and evaluate this approach based on our learnings. And during COVID, the fact that we had a number of reserves allowed us to rapidly scale. And then we have continued to optimize that formula based on our experiences. We've also had some learnings on our supply chain and continuing to diversify this globally to remove single points of dependence and to ensure that we have diversity across all of our fleet. And that's meant then the use of different parts of silicon. It's been continuing to do the work we do across different suppliers and then continuing to build partnerships across the industry. So definitely, as we look at capacity, buying patterns and all of the work that we're doing, we're, first and foremost, focused on ensuring customers continue to grow and that they can move the workloads that they need to move. We're hyper-focused on continuing to ensure that we have diversity in our suppliers, and that we then, of course, have all of the things that we need to continue to grow short, medium and long term across the data center, the servers and the software.

Got it. And maybe just to press a little bit further on this. So is there anything that you can -- is there any additional color you can provide in terms of these lead times? So when you see in your pipeline that you're going to have some increase in usage or you're going to see some greater demand, is it really easy to scale up this capacity? Or do purchases of these data center and this equipment, does it tend to be lumpier? Or do you have -- or are lead times actually fairly short, such that you don't have these like big lumpy purchases? Is there any, just any, I guess, additional color you can provide in terms of how you guys, when you think about data center expansion and a lot of these capacity buildouts, and how that relates to the spend on a lot of these data centers?

Yes. So if we start from the customer lens, obviously, what customers expect of us as a cloud computing provider is that the elasticity, the capacity that they need, is there when they need it. And that is, first and foremost, where we focus as an engineering team. The second is, of course, how quickly can we bring that capacity live. And so for a customer, we want that to be seamless. And the work that we constantly focus on is what we refer to as "doc to live," how long can it take to bring a server from a warehouse into a data center live and taking customer load. And that's a place where we have focused immensely on ensuring that, that process is automated, that it makes use of software through every step of the process and that there's no human being involved. And that's a continual journey that we are on to optimize that process. In addition, we continue to design the servers and take into account the evolution of technology. As new chips come in, new supply has come in, we're constantly building servers and ensuring that those servers are ready to go at the second that they hit the data center. So we're adding capacity in dozens of racks in megawatts of power built on networks that can scale to enormous scale. So we're focused across all those parts of the equation, and we're focused on that, first and foremost, with supporting customers because as we bring on customers and we help them be successful with adoption, they will continue to make use of our cloud, and we'll, during that process, continue to optimize our supply chain and the efficiency of how long it takes to bring those -- that capacity live.

Great. That's super helpful. And then now I would love to talk about the competitive environment with AWS and GCP. So do you think that Microsoft has been better positioned in this environment given its existing relationships with large enterprises? And I would love to get your thoughts on Microsoft's role in the multi-cloud world long term. How do customers utilize a multi-cloud strategy? And can all 3 major cloud providers be happy?

Yes. So first, on the second part of your question, multi-cloud is not new. And as a company, we've done a lot of work and we're constantly in a multi-cloud environment. In fact, as we look at organizations that may be making use of different cloud technologies, the common thread through a lot of that technology is, in fact, Microsoft's cloud. As we look at, for example, Azure Active Directory, that identity plane is often used by customers who may not be using Microsoft as their cloud provider for communication or collaboration or even IaaS or PaaS. We've seen a similar thing with our security suite, where Microsoft's cloud security products are, in fact, used across different cloud platforms and can monitor the security of other clouds. That's also true with on-premise and hybrid. We haven't talked much about hybrid, but the work we've done with Azure Arc allows the customer to connect their respective infrastructures together into one cloud. And so the Microsoft support of the multi-cloud environment has been a phenomenal success, and we have a number of customers who are using different cloud providers with different solutions and having phenomenal success. As we talk about the competitive landscape, we feel really good about the work that we've done over a prolonged period on trust. And this trust is, of course, the basis of why enterprises have felt comfortable with us. The investments that we've made in security, in compliance, in accreditation and connectivity gives enterprises confidence that they can make use of our cloud to their most sophisticated workloads. And we strongly feel that, that is a differentiator for us in the marketplace versus other. That trust also extends to our authenticity. We are, first and foremost, focused on making our customers successful. There's never a scenario in which we're focused on competing with our customers in their respective industries in which they reside. And the focus here has given us a lot of success in enterprise. And as you point out, that's a place where we're an incumbent supplier and we take those relationships and that trust very seriously. The focus on cyber sovereignty and our global footprint is another place that has given us phenomenal uplift, and we continue to invest, allowing our customers from all of the different markets around the world where Microsoft does business to make use of cloud regardless of what their requirements, regulatory need or sentiment is. And then, I think, finally, we've been incredibly focused on customers and customer needs in the context of hybrid. This allows a customer natively to make use of cloud where it makes sense or to make use of their own infrastructure where it makes sense. And I think the differentiation for us is that this is where Microsoft started. We natively have solutions that work on-premise and they natively work inside the cloud. And this is from our origins and beginnings, and we have been on this journey for a long period. This is not something that's new to us. It's something that's very natural to us. And as we focus on adoption around the world, we focus on helping our customers, and we do this not just as Microsoft, but from a network of thousands, tens of thousands of different partners. With that foundation of trust, we feel pretty good about the way in which that differentiates us versus other cloud providers.

Let's talk more about hybrid. So the server product segment continues to show very strong growth. And part of that success is attributed to the Azure Hybrid Benefit program. So can you discuss the progress Microsoft is having migrating its existing Windows Server and SQL Server installed base to Azure? Are these migrations inflecting? Or are customers purchasing premium additions in preparation for a move?

Yes. So obviously, the advantage that Microsoft has is that the best place to run Windows Server workloads or SQL Server workloads is Azure. And the flexibility that we provide there gives customers a lot of choice. For example, with SQL Server, we have a technology capability that allows a customer to burst their databases into the cloud based on their business needs. So they don't have to make an exclusive decision of cloud or on-premise. They have that choice and flexibility. And our business model and our licensing model reflects that. As we look at the migrations, we're seeing customers all over the world migrating at scale. And I mentioned some examples in financial services, like UBS, in governments, like the Veterans Affairs, and across the world, we're seeing it in every industry where we work, that those customers are moving those workloads and are taking advantage of these offerings. And this is a unique differentiator for us. The Hybrid Benefit is something that is unique and allows our customers to make use of Azure for SQL and for Windows, where it makes sense, coupled with that technology foundation of hybrid that I mentioned.

Great. And maybe as a last question, in the few remaining minutes we have, Microsoft has won several mega Azure deals over the last several quarters, including one with the Department of Defense, AT&T, Walgreens and several others. Currently, those are sitting in Microsoft's backlog. So is there any insight you can provide into how customers scale over time or the impact that those could have to future Azure revenue growth? And what does the current pipeline look for these mega deals?

So obviously, there's been a number of high-profile wins that we've had in the Azure business, and we're incredibly excited about them. And being closely involved with a lot of them, the approach that we've taken is consistent with everything that I've described on this call, which is, first and foremost, a focus on making the customer successful. And with that, that's through a tone of partnership and long-term relationship. And it's also through a tone of humility, one where we're willing to work with our partner to ensure that our cloud meets their most important needs. And that approach, I believe, has served us well and continues to serve us well. And with each of these large customers and the customers that are coming on board in the future, we are focused on ensuring that they can adopt, they can scale and then they can move their most important workloads over to the cloud. And all of the work we're doing, these deals, of course, don't happen overnight, but they begin and drive success. And that's where we are focused day and night is to go and help these customers feel comfortable. And as they feel comfortable, we see them making larger commitments to Microsoft. So we think all of those customers that you mentioned will continue to scale. They're already running at very large scale on our platform. And in fact, every day, every week, we see large essential workloads moving over based on the confidence that they're having from their day-to-day experience. So I feel good about where we stand with them. And I feel good about the approach that has enabled us to be successful with those customers. And we'll continue to apply that approach to future customers so that we can partner with them to help make their business successful.

Great. And in the last minute, I would be curious, what are the key areas of investment for Azure for FY '21? What areas of innovation are you most excited about in the coming years?

Well, as a technologist, there's a lot. And we're at a phenomenal time in technology where hardware and software are keeping pace with each other. As we look just at silicon, the advances that we're seeing that fundamentally upend computing from where we stand today with the processor into cold logic, quantum computing and the ability to fundamentally reinvent compute power is just incredibly exciting. And today, the work that we're doing across graphics- and physics-intensive places is literally removing constraints that have been in place for decades, where a customer was historically compute-constrained in solving some of their hardest problems. If we look at augmented intelligence and the work that we're doing there together with predictive analytics and data, coupled with those investments in silicon, there's some amazing things we're doing. A technology that we've just been talking publicly about is one that makes use of our edge to take images from space and images that may be cloudy on a day with poor weather and to use augmented intelligence to put them together to allow a constant feed that could then be used by an agriculture company or a government to see what's happening in their environment and how their environment may be behaving. IoT is another place where there's phenomenal innovation as critical infrastructure, which is an increasingly broadening area, is relying on cloud computing, to know that all of the different parts of an enterprise, a factory, a hospital, is secure, compliant and up to date. And in fact, we're seeing over 6 trillion IoT signals hit our cloud on a day-to-day basis. So they are just a couple of different examples of where we are spending a lot of time. We are having a lot of fun. And our customers are partnering with us to really push us to solve some of their hardest problems. So we're pretty excited about all of them.

Sounds all very exciting and interesting. But we're up against the time. So Tom, thank you so much for joining us today, and I appreciate the time you shared with us and the insights you provided.

Awesome. Thank you so much, Taylor.

And thank you, everyone, for tuning in on the line as well. Have a good rest of your day, everyone. Bye, Tom.