Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Welcome everyone. I'm Brett Iversen, General Manager of Investor Relations. This is the fourth in our series of quarterly videos focusing on strategic areas that are top of mind for our investors. Today's discussion will cover the evolution of Microsoft Teams in the hybrid world, with a focus on Teams Phone. We've brought together 2 of our key leaders to answer your most frequently asked questions. We have Jared Spataro who runs our Modern Work business; and Jeff Teper who leads product development for Microsoft Teams. As always, we welcome any feedback on specific topics, the format, or other suggestions you might have after you view the video. Please reach out to our Investor Relations team directly with any feedback. With that, let's kick things off.

And I'll start with a question for Jared. It was just a year ago that we started these quarterly video series with the 2 of you, fittingly. And so now that we're a year later, a lot has changed in the world. Where is Teams a year -- from a year ago? How would you share the current view?

Well, let's start with how the world's changed and we've really adapted to the world. A year ago, everyone was talking about remote, and companies had scrambled and were trying to figure out how to optimize how they helped their employee always work remotely. And the big question was, could people be productive? And the answer turned out to be, yes, they absolutely could. A year later though, it's not just all remote, there's this new thing happening that we call hybrid. Hybrid adds a lot of complexity into what's happening because it's not that everyone's back at home. Now, you have some people at home, some people in the office, lots of people in between. And so as we think about this macro sense of what's happening, it sets a new stage for us. It adds complexity. So our vision for Teams has adapted appropriately. At this point, we really want Teams to be this platform for this new world of work, this new set of patterns that's developing for how work happens. Brett, you know very well, that just recently, there was this great survey that came out that said that over 50% of CIOs had standardized on Teams, as that platform. And that within the next 3 years, more than 2/3 were planning to standardize on Teams for that platform. So, we're really excited about that, but we also recognize we have to continue to adapt with the times. And so that is really our vision, is to make sure that we are right there with our customers. As work continues to change, we continue to support them as their underlying platform.

Great. I did see that, I love it. It's great progress already. When there's an investor audience, the first thing we always get asked, show us the money, what's the addressable market opportunity, how would you help people think about it now even, versus where it was a year ago. What do you think about that now?

Sure. As we think about, okay, so where does that take us and what does that market look like? Really, what I hear customers say when I'm interacting with them, is they're trying to implement what I call kind of a digital fabric that connects everybody in their entire company. And that means frontline workers, that means even people outside of their company. And it's a really pretty vast vision that they have for what they're trying to do. So I think of our addressable market, really essentially being kind of 3 things. First, what we're trying to do is expand our user base, that starts with some great work that we've done as a team to go after the consumer opportunity, so we're really trying to get out there with Teams. On top of that, we've just recently launched this Teams Essentials SKU that we're very excited about, $4 SKU that combines some fantastic value for us. So that's really essentially a small business play for us. And then, we have frontline workers which allow us to expand even beyond the information worker opportunity. So first we're growing that user base, then once we've grown that user base and we are able to get people using it, we drive ARPU, or average revenue per user. Now lots of opportunities for us to do that. We do that of course, with phone, I hope we have a chance to talk a little bit more about phone here.

Absolutely.

Second, we have Rooms, an awesome opportunity with Rooms right now as people are headed back into the workplace and recognizing that space is going to be utilized differently. We have events, some really high value events that we can power inside and outside organizations. We have Microsoft Viva, one of my favorites, really an employee experience platform built right on top of Teams. And then we continue to hear a lot of demand from customers for additional management and control features on top of Teams, so we think there's monetization there. And then finally, the last thing for us after we do all that is we're building out our ecosystem. We have our Cloud Solution Provider partners who really see Teams as a great way to acquire new customers. We've got telco partners who are really interested in what we're doing, and some awesome opportunities with Teams Essentials there. And then we even have our device OEMs, who are working with us for device certified for Teams. So great opportunities for us.

Yes, a lot happening. A lot of innovation, which is great. Customers love it. Jeff, let me bring you in. And Jared mentioned Teams Phone and we'll spend a little bit of time on that. But before we do that, communication services that we offer more broadly, what would be kind of the larger frame for Microsoft in terms of the few kind of key ones you'd highlight for folks?

Yes. If I take the phone and communications opportunity that Jared outlined, it really is 3 very large and very dynamic categories. There's what we all experience picking up a phone in the workplace, calling somebody inside and outside the organization, that's often called UCaaS, or Unified Communications as a Service. There, we participate with Teams Phone and calling plans and our audio conferencing service. Then there's a set of employees in the organization that are using phones in a mission-critical way to contact with customers in their contact center or customer center. An area that's being completely transformed with a 360 view of customer engagement and customer relationships, and that's often called a Contact Center as a Service. And so we've got a great first party offer with Dynamics, but we've also got fabulous partnerships with a number of leading content center vendors we'll talk about. And then the last area is the work that underlies those both, that operators, other communications companies would use to transform their businesses, offer new opportunities to innovate and grow, and we call that CPaaS, Communications Platform as a Service. And that's where we're positioned with Azure Communication Services, which is what underlies Teams, and our Azure for Operators offering. So each of those 3 are huge areas in their own. We think there's a lot of synergy between them. And both for our customers and our partners, the start we've got with over a quarter billion Teams users is a great foundation for us to go after it.

Yes, love it. And it's been driving a lot of interest for sure. Jared, coming back to you, and we've mentioned this in some of our -- in our earnings calls and some of our investor outreach. Teams Phone usage has been great and we're excited about it. What are a couple things that you would highlight in terms of what's been driving the growth there?

Yes, let's talk a little bit about Teams Phone usage and just parse it out for a moment. There's really 2 components of it, when we talk about a Teams Phone user. First off, we're talking about unscheduled interactions with those scheduled interactions we call meetings. So there's a lot happening in the meeting space. But in these unscheduled interactions we have PSTN. So that is to where someone is actually taking the Teams system and they're calling out to a phone line that's outside of the Teams system. And then we have Voice over IP or this Voice over IP where you're able to call someone who's already on the Teams system. Those 2 things added up represent 2 really big trends. First PSTN is moving to the cloud, then Voice over IP increasingly is becoming a big part of the market. Now, if we look at what's driving things, we essentially have 3 things to look at. First off is collaboration. We increasingly see chat as the starting point for calls, regardless of whether they're PSTN or VoIP. And in fact, we've seen an increase year over year of over 50% of chats that escalate up into calls. And that makes a lot of sense, it's a little quick ping, "Hey Brett, can I call you real quick? I have a question."

Absolutely. Every day.

It's a great thing to do. The second big one that we see is mobility. And what I mean by that is, increasingly in the hybrid world, we're just not in our home offices solely, we might move to an office or be on the move. And it's tough because if you don't have your calling in the cloud, then that phone call, if you will, can't follow you, it can't go where you are. But with Teams, we can ring on any device, literally any device. So people can call the number, but they can get Brett on the bus, they can get Brett in the park, they can get Brett at his house, wherever he happens to be. And then the third thing that's happening for us is that we increasingly see this Voice over IP being calls between companies. Voice over IP, of course, can easily be within a company because you and I can talk to each other. But increasingly, as companies federate their Teams instances, we see Voice over IP being the way that they call. For instance, I haven't called my PR agency in years now because we're federated and all of our calls go through VoIP. And so those calls are starting to become a really interesting part of the way people use Teams as a communication system.

Yes. I can substantiate that some of those locations they've been able to find you at are -- I think I'm like, yes, they caught me there and there and there, which is great.

Fantastic.

So Jeff, Jared mentioned some of the -- at least how we think about the enterprise phone market, the VoIP and PSTN piece, what differentiates some of the offerings we have versus what competitive solutions are out there?

Yes. So first, it's that the phone or telephony experience is part of a more comprehensive offering. We like to say we're both best of breed and best of suite, so that we bring together in a unique way in Teams, chat in meetings and content collaboration and applications, along with a phone or telephony experience. In each of those pieces is a category leader, so the Gartner Magic Quadrants for UCaaS, for meetings, we're a leader in those and we continue to innovate. So that there's no compromises, you get the best pieces, as well as the whole being greater than the sum of the parts. The next thing is, Jared spoke to it, is being able to stay in the flow of work from a chat, or we have this concept in Teams called a channel, where a group of people could have a business process, maybe engaging with customers and you can have call queues right in that channel. And so people can seamlessly move between chat and voice and document collaboration in an incredibly efficient way. And so that staying in the flow has really resonated with customers. Another part of our differentiation is our ecosystem. This is something that for Microsoft all up is a strength. But particularly for Teams, we're working with dozens of operators around the world on our Operator Connect program, so that we can offer this bridging into the PSTN world from Teams in a very seamless way in 180 countries. And those would be some of the biggest ways we differentiate. And it all adds up to, what is, at the end, a better calling experience. I mean I think the user experience and the care we put into it on a mobile phone, on a desktop device, specialized devices built with our partners. You can do very modern things like a video call, screen sharing, all while bridging out to a traditional phone number for either receiving or making calls. So those would be the basis for our differentiation.

Got it. Thank you. Thanks for that. And Jared, we touched on some of this earlier, I guess, around the usage, but in terms of other customer trends or things that we're seeing people use around Teams Phone, what would be some examples of either specific or trends that you'd want to highlight and share?

Yes, sure. Let's start with kind of the trends and then I'll give some specific examples. So if we look at the hybrid trend in general and we talk about what it's driving, the good news is we're seeing adoption of phone across kind of all customer sizes, all industries, even all countries at this point. So it's pretty uniform the demand right now. And that's mostly, I would say because hybrid's driving this digital transformation. People are realizing, okay, if we're going to be flexible, we're going to have to make sure again, that we follow the person with the experience and that really equates to moving to the cloud. So that's kind of the driver of demand. Then in terms of what we see people doing, they're essentially consolidating a lot of what they have is on-prem phone systems now and putting them into the cloud, so there's this nice consolidation motion. They get the extra benefits of some pretty advanced features so they can get like auto attendant, they can get call queuing. They can do, as Jeff talked about, plug right it into the contact center and start to have this kind of unified converged communication system with Teams plugged right into the contact center itself. And then if we look at kind of what's happening in terms of return, the average return we see is pretty good. Our Enterprise customers report that their average return is over 130%, our SMB customers say it's averaging over 185% return on investment as they look at what they used to do versus what they can do with Teams. Now to some specific examples, I'll give you one of my favorites. Here in our area, there's a company called REI, Recreational Equipment Incorporated. They have a really interesting story in that they had just completed their headquarters just as the pandemic hit. And they paused for a moment, they hadn't even moved into this brand new headquarters. They paused for a moment, ultimately sold that off. And what they decided to do is instead of bringing everybody into one main campus, like it was pre-pandemic, kind of what we all did, they've created now 3 satellites, offices, all around the Puget Sound area. No one has an assigned desk, and instead you go into the office that makes sense for you on that given day or to meet up with colleagues. And they're able, again using Teams Phone, to allow all that telecommunications infrastructure, that used to essentially be bound to your desk, follow the person. And that really helps enable this kind of hybrid way of working. And the final thing they've done is they've used what Jeff was talking about, branching out from there, they can use that exact same infrastructure to allow them to do what they call their green vests interacting with customers. So they go out and have these green vests use Teams, not only as a phone system but a full video calling experience, to then do these consultations with their customers. And they're seeing great customer satisfaction from doing that, something they never were able to do. So again, it's a springboard of, hey, you start with a phone system, then you branch out into kind of new revenue opportunities for you as you think of what these communication services can do.

I love the example because it brings it to life for sure. As a finance guy, I'm still thinking about those ROI numbers that you shared, which I think would resonate with almost any company, which is great. Jeff, I know we feel good about how easy it is to get going, but for the audience, maybe you could share how do people get started? How are they purchasing to get into these solutions?

Yes. This is an incredibly large opportunity with lots of customer segments around the world and a variety of channels, and so we want to be incredibly flexible to go after the whole opportunity. So there's really 2 things. First, you need Teams as a phone system, and this is basically Teams as your cloud PBX. And we have that both standalone as an add-on to our Microsoft 365 offering, but you also can get it as part of our E5 SKU. And so that's the first component. And then you need a way to call, and there, we're trying to be very flexible. One of the options that we give people is to just use whatever they're doing now, and so we have direct routing where Teams phone can interface with your existing PSTN solution. And that has shown incredible growth. Just since 2020, direct routing call volume has grown tenfold. So a big option for us. But we also want to make sure that we're addressing the market for lots of new customer segments as well. And so I mentioned that Teams Operator Connect, where we're working with 22 partners around the world who offer a managed service, that a simpler one-stop shopping for people who want to just outsource that aspect of the business. And then lastly, is the sort of DYI, the ability to just go to the Teams admin center and provision and buy and assign phone numbers. We've got that third option, too. So I think with those 3 choices, we're covering the spectrum of not only customers but sales and partner channels to go after the whole opportunity.

Yes, you can get it. That makes sense. Thanks for sharing. I'm going to stay with you on one stuff, because we mentioned it a couple times earlier, but the CCaaS opportunity. We get -- lately, my team, the investor community, super interested in kind of how we see this opportunity and how we think about it. So I'd love to get your thoughts on that.

Yes, it's incredibly exciting. There's nothing more important to most organizations than doing a better job servicing their existing customers and growing their revenue from them. And there's a lot of forces, things we're talking about here with unified communications, AI, machine learning, cloud-based applications, they're really causing companies to rethink how they engage with their customers in a 360 way, online, through contact centers, in product engagement and so forth. And so again, there, that sort of revolutionary communications platform we've got in Teams, we're trying to make sure that we're addressing the whole market. Our hero offering is the customer service offering from Dynamics 365. Very rapid growth, deep integration with Teams. We made some exciting announcements there fairly recently that we're really, really bullish on the customer uptake there. But we know, just as we were talking about on the PSTN connectivity, there's a number of organizations who have existing solutions. And so the Teams platform have tried to make it very flexible. So whether it's something homegrown or purchased, we can integrate the rich Teams Phone capabilities into the contact center you already have. And just to go to that extra mile, we're working very closely with some of the leading contact center vendors to certify their offerings. So some of the big leaders like NICE or Genesys or Five9s, we've partnered with on both a technical and go to market offers so that we can provide solutions to both existing customers of these contact centers, but also gain some new business together.

So there's many ways they can participate. I like that for sure. Jared, last question. You can help take us home, but I know we spent some time on Teams Phone specifically, but if we broaden back up to where we started on Teams overall, things have changed a ton over the last year. I think things will continue to change a lot. What's next? What are the things that you would highlight and share for our audience in terms of where we see things going from here?

Man, we have such an opportunity with Teams. You're going to wind me up and get me started here.

How much time do we have?

Yes, I'll talk about 3, but just very quickly. First is physical space. As -- what we're seeing is, as companies have their employees work back into the offices and they start to experience it, it's just different. It's not January 2020. They're realizing that, that physical space is going to be used in new ways. They're realizing that with a hybrid work environment, they almost always have someone who is remotely joining some sort of interaction or meeting. So there's an opportunity for us really to engage with the physical space, it starts with the meeting rooms, but we believe it's an opportunity much, much bigger than just meeting rooms. So watch this space. We think that kind of the way companies use their square footage is really going to change. First one. Second one, digital space. Just a couple of weeks ago, we announced some great work that Jeff and the team are doing together with our Microsoft Mesh team. So Mesh for Teams, the metaverse is coming to business. It's very real. The fact is, we have been working in digital spaces now for almost 2 years, and the metaverse is going to make this even more real as we bring in things like avatars and we bring in immersive spaces. So again, watch for that. And then the third thing is collaborative apps. Once we have people in this amazing experience, where they have all sorts of different modalities of communication, in the flow of work, as Jeff said, we can start to insert in data, we can start to insert in AI, we can bring in these line of business systems. That's what our definition of a collaborative app is, it creates an entire ecosystem tons of monetization opportunity for us there. So that's another place for us to go.

Yes, a lot coming. Yes, the next one of these we do, it might be through our avatars. It's hard to [ fake ].

There you go. There you go.

Well, thanks for that. And thank you both really for the time today and the insights. We thank everyone for watching, we're excited about the value that customers are seeing in Teams Phone and really Teams more broadly. And we're glad we had some time to talk with you about it today, so thanks for watching.