Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

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Hey there. Good morning again. Thanks, everyone, for joining us for day 2 of the Wells Fargo TMT Summit. I'm Michael Turrin, software analyst here at Wells. Very excited for our next session. I had the privilege of rolling coverage out on Microsoft here recently. And joining us today from the largest software company on the planet, I think it's been neck-and-neck for largest company, but haven't had a chance to check lately, Charles Lamanna, CVP of Business Apps & Platform for Microsoft. I'll start off with some questions. I have a list in front of me. [Operator Instructions] Charles, thank you for joining us today. I certainly appreciate the time.

Yes. Thanks for having me, Michael. I'm super excited for the discussion. I think we have a lot of good topics on Microsoft for sure.

I agree. So I mean, maybe and just framing the conversation to start with, we obviously admired just how many end markets the company has presence within these days. Maybe just -- you could help just add some context around your role, responsibilities, key product areas of focus, just to help steer the conversation, and we can just dive in from there.

Absolutely. Sounds good. So I head up what we call the Business Applications & Platform team, which basically maps to Dynamics 365 and Power Platform as our set of products. I lead the product management as well as the engineering components. So basically, all from design to implementation, to servicing of all of those different cloud offerings. I've been in this area for about 4 years. Before that, I worked in Azure for 4 years, and I joined Azure in 2013 when a company I founded was acquired by Microsoft. So I would say I slowly moved up stack from infrastructure to PaaS to now SaaS [ business applications ] platform.

The direction we tell are our software companies to head eventually. I mean it's great if you can start as an Azure in a question. And the time you started at Azure was pretty darn good, too, I have to say. So congrats on that. Let's start with just the evolution of business applications at Microsoft. I mean Dynamics has been around for some time, but Dynamics became 365 in a more recent period of time, the growth trajectory of Dynamics 365 has really stood out, particularly of late. So can you talk just more around the evolution of what you're doing with Dynamics and maybe what's driving some of the recent strength?

Absolutely. So as you mentioned, Dynamics has been around for a long time at Microsoft, but we went through a bit of a, I'd say, rapid evolution about -- starting about 5 years ago. And that's when we really started with this idea of Dynamics 365 and the future of business applications at Microsoft. And the first and biggest piece of that was really just moving our businesses to the cloud, to be cloud first and really make it so that these are businesses which are delivered as SaaS products, with easy sign-up, easy trials and easier go-to-market compared to, say, some legacy on-premise, very heavy CRM or ERP offerings. So that was the first and most important piece, and we're done with that for quite some time now. The second big thing we did is we started to reimagine what business applications mean kind of for the future. So not go build BizApps of 2005 or 2010, but build the BizApps of 2020, 2025, 2030. And we thought that really required us to focus on 3 main themes, which fundamentally change how you adopt and use business applications. First thing being data first, and it's this idea that every single company has this massive amount of data coming from everything, whether it's their e-commerce websites, mobile applications, with IoT, you name it. There's just a massive amount of data, which is just different from how BizApps were in the past, where most data was just entered by humans filling out forms. So there's this idea of large amounts of data and leveraging it in a business application. Second thing is that once you have all this data, you, of course, want to go make predictions and use intelligence and AI and natural language understanding, NLU, to get value from that data. And this idea of automation helps with things like reducing cost for delivering customer support by 20% or 25% or improving, targeting or upsell or cross-sell in your e-commerce website by 5%. Really top line and bottom line moving outcomes for AI, which is very different than just a pure AI platform. It's very tied to the business process. And the third piece is around collaboration. And it's this idea of that in the past, say, BizApp data and BizApp users kind of lived in little islands throughout the company. But a big push we wanted to go do is how do we reimagine a world where data is shared across the company and people can work together. So just like you don't want silos of data and silos of lines of business, how can you start to reimagine whether that silos of people either. People who come together and work with the right data in the right place at the right time. So we moved to the cloud, we focused on data AI and collaboration. And then, of course, the third piece which was critical was we built a product portfolio that was easy to adopt, and it's required us to break down our monolithic CRM and ERP offerings. So gone are the days that people will remember where we had Dynamics CRM and Dynamics F&O or Dynamics AX, 2 big apps, and that did everything in one that was very difficult to implement on-premise. In the cloud, we reimagine that to actually have a bunch of individually adoptable applications, which really span across 5 main areas for our customers. Area #1 is around customer support. How can we help our customers deliver world-class customer support. And we do that with things like Dynamics 365, customer service, power virtual agent, AI builder as well as some of our new omnichannel and digital voice capabilities. Item #2 is around supply chain, and we have core supply chain execution, we have supply chain insights, we have supply chain sustainability capabilities, all these individually adoptable modules where you don't have to go replace your existing ERP system. Item #3 is around revenue generation. So sales and marketing and commerce offerings. So how do we help our customers generate more revenue, whether it's through digital sales and direct selling or how we have a dedicated sales force. Next one is around service-centric operations, which is helping our customers move to this new way of doing work and providing services as opposed to just products. And the last pillar, #5, is the power platform, which really is all about enabling full company digital transformation. So those are really the 5 main areas where we decompose CRM and ERP to fit into and then provide a bunch of little adoptable components, which can replace your core apps or can provide value on top of those core apps. And that last bit is why we've been able to really accelerate the growth because gone are the days of having to go to customers and convince them to rip and replace stuff. But instead, we can provide value right in place. And the data really bears it out as being effective. Like we shared very recently, Dynamics 365 revenue grew 48% year-over-year, 45% in constant currency. Over 70% of that revenue is now in the cloud. And we have new areas like Power Apps, which are growing at right around 200% year-over-year growth. So a lot of new exciting rapidly growing products, kind of embracing this idea in the cloud and embracing this idea of data, AI and collaboration. Maybe a little bit longer answer than you wanted, but I think that's a good left to right view of we think about it.

Yes. No, it sets the stage for plenty. We've heard the intelligent applications and Power Platform mantra quite a bit. So it's good to get some more context behind it as well. I want to just go through some of the key pillars that you laid out and start with data, in particular. We're hearing a lot around data right now, changing standards, focus on first-party data, voice of the customer. Microsoft has customer insights, a position in and around CDP. But can you just talk more around just customer data and what you're doing from the application side there?

Absolutely. I think like this is an area which is really interesting right now for so many of our customers, because we have things like IDFA changes from Apple as well as the move to like the cookieless future in browsers, which is just basically requiring everybody to rethink and replan how you can track and know your customer, and how they engage with your digital surface areas. The good news is basically, every company is in some degree of digital transformation. So they actually have a lot of digital touch points directly with their customers. And that's where the value is because that's where the data comes from. So if you have an e-commerce website or a mobile app or IoT from your Keurig machine or something like that, that's all information that you can use to start to understand how your customers are using your products as well as what the next best product to offer to them or next best service to offer to them as well as how you can start to do direct marketing through various different channels like e-mail, message -- text messaging or just inside your own products. So anyway, so I say that's kind of the landscape we're in. And what's great is with Dynamics 365 customer insights, we have a customer data platform or CDP, that our customers can leverage to understand their customers by drawing from all the different data sources they have inside of basically, their IT landscape and their customer-facing landscape. And the way Customer Insights works is it can -- connects to over 50 different systems out of the box. You can very rapidly and easily ingest data, whether it's from your marketing system or, say, web analytics or your back-end ERP. We can pull all of that data together in real time to create dedicated profiles of your individual customers. And these profiles can then be used to change behavior in terms of how you engage your customer and also can be used across all your different marketing campaigns. And what's great is this data that our customers own. It's not data that is owned by an aggregator or a gatekeeper in some form and kept locked behind an advertising infrastructure, it's actually data that our customers own and can manage themselves. So it gives them some degree of independence, which is going to be more and more important as we go through all these fundamental changes and how you can track and what can be provided in the browser or on mobile devices. And if you don't do this, you're not going to be effective. And we can see the impact already. I know over the last couple of quarters, there's been a lot in the news about the impact of the IDFA changes in particular when it comes to B2C companies as well as companies that provide advertising.

That's great. The other area that you mentioned was automation, and I want to touch on that, too. But maybe to start, you can level set with all that Power Platform encompasses. We hear a lot about it. It seems like there are a number of permutations that you can take. So maybe you can just set the stage with where Power Platform currently sits and what the functionality of the platform encompasses today.

Yes, absolutely. And I like to always start when talking about the Power Platform by kind of like explaining why it's so important for our customers. because if -- we did a lot of great stats out there from IDC and Gartner, we talk about things like over the next 5 years, there are 500 million new apps that need to be built. And that's more than all the apps built in the last 40 years, longer than I've been alive, that's a huge volume of apps that need to be built. Additionally, something like 50% of office work could be automated today with current technology and tools, if there was just somebody to do it. Or 85% of organizations can't understand their own structure data. So basically, what all of that means is there's this huge unmet need to go build solutions to help our customers usually transform. And of course, the way you would normally solve that is by going and hiring an army of developers. But there's also been a study saying there's a 4 million professional developer shortfall over the next few years, which is going to make that impossible. So...

I'd be pretty expensive.

We'll look at what that means to supply and demand and cost. There's just a lot of challenges that are going to happen. And I'd say, over the last 20 years, there's been this, I'd say, a little bit naive view that we can solve these challenges, this huge demand and insufficient supply by going teaching everybody how to write code. Go teach just random people how to write code, go teach people who work in finance to write code. And we've tried that and it has not been successful at scale. It just hasn't. I mean it gets worse. Like literally, I used to have that stat, that there's 1 million developer shortfall. Now I got the update that there's a 4 million developer shortfall. So it grows every year. We think, though, that there is a way to go solve this. And that's through what we call low-code development. Low-code development is this idea that in a visual, interactive way, much like how you use Excel and PowerPoint, you can go develop solutions that actually get the job done. But you can go knock out a huge chunk of those 500 million new apps or that 50% of automation. And our offering in the low-code no-code space is something called the Power Platform. And Power Platform has 4 main products: Power BI for low-code data exploration, visualization and reporting; Power Apps for low-code web and mobile application development; Power Automate for low-code workflow automation and robotic process automation; and Power Virtual Agent for low-code conversational agents and chatbots. All 4 products kind of serve different needs, whether it's analyzing your data, acting on it or automating it. But the core idea is the same: super easy to get started and it can be used by everybody in the company. Business users can leverage it, IT professionals can leverage it and professional developers can leverage it to either start developing for the first time or start to actually go -- to code and develop solutions faster than ever. And if you look at this space, we have nearly 20 million monthly active users on Power Platform today. And it's something that we really start to go big on over the last 3 years or so, most of the Power Platform didn't even exist 5 years ago. And we think this opportunity is massive. We think basically, everybody on earth could ultimately be a Power Platform user, just like everybody on earth could be an Excel user or Outlook user. And that's kind of how big we think it can really go. And what's exciting for us is if we go look across the Power Platform areas because we've been in this space for a while, we really have strong credibility. Power BI is far and away the leader basically on every access in the Gartner Magic Quadrant when it comes to self-service BI. Power Apps, Gartner has come out and said it's the #1 low-code app development platform. And we just announced that it's over 10 million monthly active users on Power Apps alone. So very big market-leading offerings that we have, that we think are going to continue to grow at a very aggressive pace. And like I mentioned earlier, Power Apps is growing at right around 200% year-over-year from a revenue generation perspective as well. And this kind of all complements and extends what we have inside Dynamics 365. So you can go buy one of our apps, if we have it. And if you want to do something that an app doesn't do out of the box, you can easily build it in Power Platform. That is a winning combo, and that's actually why Dynamics and Power Platform are together inside of Microsoft, because we think they go so closely and so well when you leverage both because it's all about business process transformation, all about business value, business outcomes. In some cases, an app is great for off-the-shelf. Sometimes, there is no app for that, you've got to build it yourself, drop in the Power Platform. Tons of energy there, and that's something that I'd say definitely worth tracking over the next couple of years is how those -- kind of that vision continues to accelerate for us.

It makes a lot of sense. One of the areas that I think investors have become more conscious of is RPA. And Power Automate has a great story around automating repetitive tasks as well. And so I'm wondering if you can help characterize where Power Automate fits in that discussion. Is the right way to think about that more Microsoft-centric use cases? Or is it broader than that? And I'm just wondering if you could just help level set the vision around what you're doing with Automate.

Yes. I would say our view is that Power Automate today is a broad-based automation platform. And that today, we're a market leader from feature capability and adoption perspective. And of course, we're going to have great integration with other Microsoft products. That's what's really exciting about being Microsoft, we can build these amazing...

Easy for you to do, yes.

Yes, right? It's a lot easier. People who are down the hall or across the street to go build those integrations. But absolutely, connectivity to all kinds of systems is key. In fact, Power Automate has over 550 data connectors available out of the box to Salesforce, ServiceNow, Workday, SAP. You name it, we probably can connect to it for typical enterprise capability. And we also recently did an integration of a company to even go accelerate that further in the case of Power Automate for more deeper enterprise data connectivity. And also, we have Power Automate Desktop, which supports UI-based automation, the classical RPA, right on Windows, it's included in Windows 11 and it supports all applications on Windows. And there's lots of ways that we do that with accessibility handles and computer vision and AI, but it supports any type of app. And SAP is, I think, the most used -- SAP UI is probably the most used Power Automate desktop UI automation stuff today. So definitely, it's a broad-based RPA product, and this is a place where we think we really have something unique in Microsoft. And the reason I think the uniqueness is important is because RPA is going through a little bit of a change. Like internally, we call it the move from like RPA to cloud RPA or RPA to RPA 2.0, or Gartner calls it hyperautomation. It's this idea of automation just being UI macros is kind of a gross simplification of what you really want to do to go deliver business value. And instead, when we talk about cloud RPA, it's API connectivity, it's deep and integrated AI capabilities. You see ability to also do UI automation but also to even go run and manage VMs in the cloud for an intended bot. So people are deep in RPA. That's a key component. We recently announced Azure virtual desktop integration. So you can basically run everything elastically in the scale, with no infrastructure and nothing deployed locally with Power Automate. We're the only ones in the market that do that today. We have the most connectors via API of anyone in the market today. So that cloud RPA space is super key. And that's really what's unlocked the growth numbers we've seen. We have hundreds of thousands of organizations, organizations, not people, a lot more people, but hundreds of thousands of organizations using Power Automate today, doing billions of automation actions every month today. And the reason is because the cloud RPA delivery mechanism is so easy to get started. That's why we could put Power Automate Desktop inside of Windows 11. That's why people -- anyone in the world can walk up to powerautomate.com and build a bot in less than 60 seconds, no infrastructure required. That is really compelling. Fast time to value and it's not just on the low edge case, it's at the high end. We have great case studies with companies like Coca-Cola, where they've used Power Automate to simplify 11-step processes, which cost tens of millions of dollars and to really replace e-mails and spreadsheets and phone calls and that type of thing. And they actually have over 4,000 solutions already deployed at Coca-Cola. So you can really go broad. It's low-code, so it's accessible. And it scales all the way up to the complex, and we absolutely think that we're going to be a major player there. And if you look at the most recent Gartner MQ, we show up as a strong leader in RPA as well. And there's a few great studies I saw, like JPMorgan put one out where we're, I think, top 2 consideration for RPA vendors as well today. So a lot of great data out there about how power automate can be used broadly as well as narrowly at a lot of our customers.

Those are great stats. A couple of questions have come in from the audience, so I want to throw those in. And the first one is actually one that I was, I think, intending to ask, too. I mean you mentioned, I think, service and support very early in terms of the number of things that you laid out for us at the start. You talked about virtual agent. We've seen -- I mean we've seen the proliferation of where Teams has gotten to. And so the question is, do you have goals in and around the contact center? Is that an area that you could see Microsoft investing in more heavily in the future? Or how do you think about contact center, especially next to something like Teams?

Yes. So I'd say absolutely, that's an area that we look at. And I'd say like contact center is a way that you implement customer support as well as how you implement things even like revenue generation. Like a lot of companies have contact centers just for sales purposes. But I would say contact center is super exciting for us for a few reasons. Number one, we have a lot of great assets in that space already. Dynamics 365 customer service is an app module. It has a lot of market share out there. It's growing quickly, and it's something that support agents in a contact center use each and every day to work cases. Similarly, we also have Power Virtual Agent for automating conversational agents across WebChat as well as social channels and very recently, voice. And then we also have a lot of other contact center AI capabilities, which also go help basically our customers automate tasks by either coaching, assisting the support agents, or by automating and driving self-service for the customer themselves. And what's exciting about all of this is it's a $40-plus billion a year TAM. If you go look across customer CEC, CCaaS and CCAI, so 3 big categories, over $40 billion TAM. And it has 2 major disruptions happening right now. The first being, it's been a cloud laggard for a while. And -- but not anymore. I mean everybody now has to get the stuff to the cloud. And the last time I saw it's the majority -- and this is like from an analyst, the majority of folks still deploy their core contact center infrastructure on-premise. That's all going to go to the cloud, just like everything is. And that's where Teams is super valuable because we built this amazing call routing, call distribution, points of presence around the globe inside the Teams infrastructure. And we're able to build on top of that as we go think about moving that to the cloud. So cloud is a major disruptive item. Second one is AI. Like AI is a buzzword you head all the time. But inside the contact center, it's probably one of the best places where you can map AI back to business value. Because if you can say, automate 20% of customer support requests, that can be $0.5 billion return on investment over 5 years for large B2C companies. And it's rare where you find places where there's such clear yield. You give one more point of deflection or self-service through AI. And like an example of that would be, you call up an airline to change your flight, instead of having to talk to an agent, you can actually just do it by talking to a bot say, I want to change my flight, here's my flight number. I want to change it to this. One point can be $10 million for our large customers. And every time you make AI better, it's another point, it's another point, it's another point. So I would say that is a really exciting focus for us because you don't usually get those opportunities when it comes to business applications. Usually, it's a little more amorphic, right? Move to us for your customer support agent experience and it'll be better. Well, how do you measure it, what's the return? Here, it's very simple, use our contact center AI capabilities, and we can reduce your costs and we can prove it because your case volume that goes to agents will drop. That is a very, very exciting challenge for us. And at Microsoft, we have such strong AI assets across what we already built inside of Office, inside of Teams, inside of Azure and previously, in Dynamics that we really can deliver on this promise in a meaningful way for our customers. So super bullish in there. And Power Virtual Agent is one of the most important examples of the AI automation capabilities that our customers can do because it's a power virtual agent bot, which is going to go service a customer as opposed to a human. So that's kind of where we think the future is going very much in that space.

That's great. I -- it's amazing how many things you have in your view. There's another question that came in. It's more just classification or characterization of the Dynamics 365 growth. And the question is, is there a way to think about how much of that could be coming from just replacement of on-prem dynamics? Maybe you can just help us understand where you are in the journey of the transition from, like you said, the 2 products out to 365? Is that mostly complete? Or just add some more characterization on the growth?

Yes. So I think the data -- the stat that we shared to really highlight -- the first thing I would say is the growth is predominantly coming from net new workloads deployed by our customers, not by just migrating on-premise workloads. And you can see that really with the 2 stats that we shared. Number one, over 70% of Dynamics 365 revenue comes from the cloud, overall Dynamics comes from the cloud. So that's a super important stat. The base is now too small on-prem to really be meaningful to actually go drive that other growth number. Second, being just shy of 50% year-over-year growth, We also can't really do that just by converting our existing customer installed base. So I'd say, really, it's the migration phase is largely over. I'd say it's much more about to keep this growth up and the growth that we've done over the last 12 months really requires us to be landing cloud workloads that are new with our customers across those 5 pillars I talked about earlier. Those are really the 5 areas we focus on. And there's a lot of cloud-only workloads there, too. Like Power Platform, cloud only. If you go look at a lot of our supply chain assets, cloud only. So I'd say, definitely, it's cloud, cloud, cloud all day, and that's where our big focus is for sure.

How do you -- I'm just curious, how do you prioritize internally, given there are so many directions your applications business is going to evolve towards? We've talked about some of the most significant technology trends out there. And there's probably a long list of things that are underneath that, that you could explore, too. So how -- what is the decision process that informs what makes it to the top versus what might fall further down? Is it customer feedback? Is it just some of the data that you're able to analyze? Maybe you can just give us a sense because it's amazing, and I can't imagine what it looks like from your perspective.

Yes. I would say like first and foremost, we live and breathe the customer, both quantitatively and qualitatively. We have a fairly large -- I'd say, like a surprisingly large installed base, right? I talked about really, it's hundreds of thousands across Power Platform and Dynamics 365 of organizations. So you can do some interesting quantitative analysis based on that population to understand what features are being used, where deep customization has to happen, that type of thing. Also on the engineering team side, we work very closely with customers. We have things like a customer advisory board, a partner advisory council. We have things like power champions and our digital communities. So a lot of ways where it's very one-to-one. So customer is always at the center and it's always what informs what we go build. There's another piece, which is we choose kind of strategically where we want to go, what's the field look like. And those 5 pillars, I'd say we chose those 5 pillars around customer support, supply chain, service-centric operations, revenue generation and Power Platform because those are areas where we already have assets at Microsoft. Where we think there's a lot of disruption happening in those markets, I was able to talk about contact center customer support a bit, but if we have the same type of viewpoint across all 5 pillars, so the disruption is happening. And then item #3 is something that we think accrues into the broader Microsoft Cloud story. Because at the end of the day, like BizApps -- we love BizApps, but the most important thing is the Microsoft Cloud, the commercial cloud as we position it. And you can kind of see that in a lot of our announcements, in a lot of our positions. But we also always are carefully factoring in how do we contribute back to the overall Microsoft Cloud story. So those are the 3 main levers we use to choose the 5 investment areas. And within those areas, we focus on the customer feedback.

I mean you make it sound algorithmic, but it's really not.

Yes. I said I'm a frameworks guy, so I love how this works. So I may or may not have a document internally that we use to talk about it this way.

We would love to see it, but we'll know when we get there. That's fantastic. Well, look, I could spend all day kind of chatting through some of the things you're working on, but your time is valuable, and we've actually run up on what we allocated for here today. So Charles, this was fantastic. Really appreciate you joining. I wouldn't normally say this, but best of luck to your Fighting Irish, given the transition there too and appreciate the time, for sure.

Awesome. Absolutely. Thanks for having me, Michael, and thanks, everybody, for tuning in. Look forward to additional Q&A in the future offline. So thanks.

Excellent. Thanks, everyone, for joining. Much appreciated.