Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Welcome back. I got to say I would never be in this position without Microsoft. I started as a developer in the '90s on the Microsoft platform at a little bank called Piper. So thanks for being here, Chris.

My pleasure.

Chris has spent a cool 31 years at Microsoft. I think, yes, we were talking before, one of the things he did was help Bill Gates in his presentations and had some great, great stories. So done a lot. And maybe we'll just address the headline today of the reduced guidance, and I think that was mainly due to FX and no other reason. So I think everyone would just love to get this out of the way.

Sure.

High level, what are you seeing on the macro? What was today's announcement? And we also have Brett Iversen. Brett, raise your hand. He runs IR here as well, so thanks, and his teammates. So thank you, gentlemen, for being here.

Well, Brent, thanks for having me. Obviously it's great to get a chance to talk with all of you and be here today. As you mentioned, my name is Chris Capossela. I'm the Chief Marketing Officer at Microsoft. I also run -- so I do marketing for all of the products at the company, but I also get to run a couple of our sales organizations that are on the sort of consumer sales side. So talking to retailers around the world and then all of our direct sales where somebody just comes to our website or our digital storefront and buys an Xbox or Azure, I believe. We do a lot of Azure direct. So that's a little bit about my responsibility. I'd say if you saw the 8-K today, it was purely currency fluctuating. Strength -- continued strength of the dollar essentially is what we talked about in that filing. And we're obviously incredibly bullish on just about everything else that we have. That's one thing we can't control. It's important for us to focus on the things we can control. But we're not immune to the macro environment that everybody, I think, is seeing. And so Amy and the team decided that it's important to file that -- of that 8-K with a little bit of additional detail on the foreign exchange that we're seeing. But broadly speaking, I don't think we could feel much more bullish about our position. There's no doubt we're not immune to the macroeconomic factors that the world sees. We've certainly seen continued supply chain challenges and which for our OEM partners and for our own [ services ] is a headwind for us to deal with. But we deal with it. That's a part of running a business. We're doing a lot of work, so matching up supply and demand on the [ PC ] side. And currency fluctuations, not much we can do about that. And so I think that's what that is.

Right. Maybe a little bit of your day to day. It's a big role. Where are you spending your time?

Well, there's sort of 3 big things we -- that my team focuses on. And I'd say that this wouldn't be exactly the same for everybody on the senior leadership team, all of Satya's direct reports. But probably most of them would give some version of this. A big part of what I spend my time on is driving growth for the company. Satya and Amy are very clear on our ambitions to continue to grow really well despite our size. And so a big part of what my team does is to look for those growth opportunities. We do all of the business planning for the company, in close partnership with finance, so pricing and licensing and yield management. Our business models that we run, that transitioned from traditional device-based business models to consumption-based and subscription-based and transaction-based and ad-based. Big advertiser, I believe, a lot of people [ believe that. ] That -- those transitions are a big part of my team's time. How do we transition to the future business models of the world? I spend a lot of time on culture, believe it or not, building a culture of people who behave the way we want them to behave and have the skill set that we feel like we [indiscernible]. Category creation is a big part of the culture we want to be. So rather than just shipping new features in an existing product, finding ways to create a brand-new category that the world hasn't really discovered yet, building that category and having a Microsoft product in that category. Microsoft Viva would be my best example of this recently, where that's an employee experience category, and now we have a suite of products in the space. Game Pass, Xbox Game Pass would be another example. There weren't really any cloud-based subscriptions for gamers. That was a brand-new category. So culture is another big part. And then, of course, brand. I think if I was the CMO and I didn't say creating brand love, creating fans for the company, that's a big one. Those would be 3 that if you were a fly on the wall at my staff meeting or if you were in my one-on-one with Satya, you'd hear me talk about those 3.

What do you think the biggest opportunity is when you sit -- when you think about -- we keep hearing this. As -- if we are going into a more difficult environment that there's this theme of consolidation. That ultimately, what you can do as a platform is pretty powerful. Like we authored a pretty big deep dive on Power Apps, and everyone's like -- had no idea like, oh my gosh, I didn't know you could build these apps for the mass market, and when you look at what's happening with Azure, what's happening with Office. Can you just talk about what you're seeing as it relates to these commitments from your clients and the broader platform?

Yes, it's a big -- it's obviously a really big question. We're in essentially 10 different businesses that we call customers. And if I had -- it's really hard to pick a couple of these to focus on, but I'll pick 2 that I think are somehow undertalked about because they're -- that we're very excited about. One would be security and you look at vendors consolidation. Average Fortune 1000 probably had 30 to [indiscernible] security vendors that they're paying. And so when times get hard and people are looking at vendor consolidation, security is an obvious place. And our end-to-end security portfolio now is really, really [ defensive ], and it's not focused on Microsoft tech. It's focused on customers' tech. So we secure other clouds. We secure other productivity solutions. We -- our security platform, if you bought nothing from Microsoft and you bought all of your tech from everybody else, security actually might be the thing you would start with as a Microsoft solution security... [Audio Gap] Even if none of them are writing in any Microsoft technology. I think security for me is one that, as I look into FY [ '22 ], it's probably one of the biggest, most exciting opportunities. Second one I'll throw out there that people don't pay enough to is the data space. For us, I would say it's not just data, but it's also analytics, and it's also governance. And we've put these 3 things together into what we call the Microsoft Intelligent Data Platform. And the products themselves, there's a whole variety of them. But I think the data estate is where so many more companies are now realizing they have to start as they digitally transform. You have to start with your estate. And they're turning to fewer and fewer companies for help bringing that to the cloud and modernizing it. And then once you have that data estate in place, then something like Power Apps, the Power Platform is -- becomes a huge unlock of the value of... [Audio Gap] But if you force me to pick 2, I'd say security and data are 2 of the ones I'm most excited about. If you let me do a third, I'd throw in games. Because there are 3 billion people on the planet who play digital games. And our opportunity to bring that experience across devices, not just the console -- we love consoles. But if you look at all the consoles sold compared to all the iPhones sold, a very small number. So bringing gaming to iOS, Android, many, many other devices and having it be cloud-powered, we're one of the few companies that has this cloud platform, where we can -- right now, you can go to xbox.com/play and you can stream Fortnite to just about any device. And that's us putting Fortnite in our data center and letting you play it in 5 seconds. I'm just -- that's -- 5 years ago, that would have been unthought, unheard of. And so I'd throw in gaming [indiscernible].

Great. We were having dinner last night and our head of infrastructure was mentioning to Brett, he was at your headquarters. He's like I want to talk about Office. And then you're like, how about Azure? Let's talk about Azure. Everyone wants to talk about Azure, including all your employees. So how does Azure tie into this? And you've come a long way. You also have a very large competitor in front of you with AWS. Give us a sense of what the landscape looks like there.

Yes. I mean just in terms of importance, it is the foundation for every other [indiscernible] we have. And Xbox doesn't do well without Azure, right? The whole cloud streaming business is all based on the Azure infrastructure. So you should just think of it as the oxygen that the company runs on, and Azure in itself has multiple businesses to it. Obviously, there's the infrastructure that's growing incredibly well, and we're gaining share. And we're predicted to gain more share, which we're very humbled by, and we have to execute really well. But there's wonderful growth on the infrastructure. I mentioned, obviously, data was one of the ones I mentioned a few minutes ago. That's obviously a foundation to Azure and Azure's [indiscernible]. There's still a lot of opportunity to move workloads from on-prem to the cloud, and we find that's sort of the gateway into the cloud. And they're doing new things on it, running premium workloads, SAP on Azure. Obviously, we're happy to be the market leader in that workload. But getting Tier 1 cloud workloads [indiscernible] another huge opportunity. So if you just look at infrastructure, you just look at lift and shift and the move to the cloud, you just look at Tier 1 workloads, then you add data on top, you add gaming on top, you add business on top, it is the backbone of the entire Microsoft. And we're very bullish that we can grow Azure very well. But we love that it's consumption based. And I don't think people believe [indiscernible] able to build a very powerful consumption [indiscernible] have done that. And we love that business model as we only succeed with customers. The number of $100 million-plus Azure contracts has over doubled year-over-year in [ Q3 ]. So we're seeing bigger and bigger investments for long-term contracts where people won't just pay for this. They're saying, no, no, we want to extend because we see that this is going to take a while. Digitizing my entire company, I'm betting on you. And so longer contracts, bigger contracts, those we think, are really healthy and off to the right track, even if there's wonderful competitors, not just AWS but [indiscernible].

We're 20% in the cloud as a firm. We're obviously financial services, so we're going to move a little slower maybe than most. But our goal is to get to 50%, 60%. And our head of infrastructure has noted that even if things slowed in the macro and we had a slower IT budget, that would not slow. Because we were going to physically just shut down data centers, move workloads to you and others. So when you think about ultimately where we're at in this journey -- and it seems that one of the questions we get is, again, in a tougher environment, can you just gain share relative to what's happening with some of the legacy infrastructure that's [indiscernible].

We would certainly say for sure. We feel like there's still a lot of legs in just the straightforward business of enterprises moving on-premise to cloud. And not every industry is going to move at the same pace. But honestly, that's kind of the -- what would I say. We're betting on that to happen. The real value is once somebody does that, now what do they do? Or what are the premium workloads that they add on top? Because just shifting your Linux servers or your window servers to the cloud, it's fine. We love that. We like that business. But it doesn't unlock the value. It's really looking at what is the data estate that you have? What's your data strategy? What's your [ interim ] strategy? What's your data governance strategy? There's a lot more than just turning off your data center and having that exact same data center on one of our regional data centers. So I think that's sort of just the starting gun. That's kind of getting to first base, in a baseball metaphor. The real value or the real margin is obviously those other things.

My favorite Microsoft product is what, Joe?

Excel.

No. Teams.

Teams, right.

So yes, these guys get tired of me video bombing them in on Teams, but...

Like on a [ page ] and he just shows up?

I just show up, yes. Yes.

I see.

But it seems like there's so much more room to go. Think about audio, video. I'm using it for internal calling. I'm not using it for external, but there's a big opportunity for that. There's obviously a big opportunity for external video. If you look at what the runway that you have there, can you talk about the next engines of what powers Teams forward?

Yes. Well, speaking of vendor consolidation, obviously, a lot of customers have looked at, hey, this is what I spend on Slack. This is what I spend on Zoom. This is what I spend on Google. I don't need to do that. With Microsoft, you essentially have Microsoft 365. And that compresses those 3 vendors into 1 vendor. And that's -- so that dynamic has fueled a lot of our growth. We're at something like 270 million monthly active users now. I think that was the latest number we announced. You can imagine that it's higher since we announced that number. Some of that vendor consolidation is driving that. Obviously, COVID has driven a lot of that. The product has gotten far better. I think the thing people don't get about Teams is that it's not just a Slack and Zoom and sort of Google replacement or vendor-consolidation opportunity. What we're seeing more and more now is people adding what we call Teams rooms. So taking average conference room in your facility, which might have 5 or 10 people in it, and making that a Teams room. So a remote person can experience a meeting really, really well, seeing everybody in the room as if they're sitting in the front row and not have that weird birds-eye camera that shoots the room, and if you're not in the room all you see is that weird corner shot. So Teams rooms is a big opportunity that we, in the hybrid world, more and more customers are looking to make [indiscernible] capabilities far better, their physical comm concerns far better. Teams Phone, the ability to use the Internet essentially to make voice calls so you can reach anybody on any device, whether inside your company or outside your company. Assign somebody a phone number that's theirs, handle all of that. And obviously, if you are looking at a new building, why would you put SDN in that building? Why not just use the infrastructure. So those would be a couple of obvious ones beyond just chat and meetings. The last one would be essentially business process automation within Teams itself. So when I approve an expense report at Microsoft, I'm not getting an e-mail. I'm not going to an expense tool. I literally just get a notification in Teams. I click on it. When I do a learning module to do training inside the company, it happens with inside of Teams. Viva Learning, which is inside of Teams. So taking business processes like expense management, like approvals, like training, et cetera, and having those be built in Teams with third parties, bringing thousands of applications, that's obviously a new growth opportunity, just a few.

I'm going to turn it over to my partner, Joe, who we call Cyber Joe. He does a lot of security work for us. I'm sure he's going to want to follow up on the security thread. And thanks so much for being a part of the conference.

Awesome. Yes, maybe just starting on the security element. You mentioned it as your #1 focus area. Microsoft has certainly evolved and really, really improved the last 5 years. How has that messaging changed? And do you view your yourselves as a security provider or more of a fiduciary responsibility to secure your own products given you're such a large attack [ surface ]?

Yes, it's a great question. We sort of think of it as 2 ways: First, there's what we would call sort of foundational security that we have to build into every single product. So if you buy a Windows 11 PC today, it's far more secure than a Windows 8 PC was. We just have Microsoft Defender built in to that Windows experience, and that would be foundational. If you buy Microsoft 365 from us, it comes with security baked into it. And then we think of advanced security, where we basically can build and sell solutions to customers who want to secure all of their devices no matter who they buy it from. They want to secure all their employee identity, no matter if they're using Azure Active Directory or some other solution. They want to secure all of their employee data, whether it's created in Microsoft tools or in somebody else's tools. They want to secure all their applications and most of those applications aren't from Microsoft, right? There are thousands of applications that companies have. So think of it as foundational data for the products we build, foundational security for the products we build. And then think of it as advanced security solutions that will secure any cloud from any vendor, any application, any piece of data, any identity, any device. And that's where we obviously see huge additional growth on top of what we already do in, let's say, Windows 11. And that's where -- when we talk about being a $15 billion security vendor, the largest vendor in the world. That's where that money is coming from, not Windows 11 on my home PC, which is super secure. So that's how I would say it. There's an additional layer that you know all about, which is the role we have in watching the cyberattacks that are happening around the world and then contacting government leaders and enterprise customers to share the threat intelligence that we're seeing. 24 trillion signals a day that we're looking at to see nation-state bad actors, all sorts of things. And that goes even beyond our revenue growth or our products. And that is a little bit of a responsibility of the position we have as a public cloud to make sure that we're keeping nations safe. And we do that by working head-on-hand with governments around the world. That's a, I guess, a third layer to what you were asking.

And what's the next journey for the security business? Is it awareness, making your customers even aware of what's possible with Microsoft? Because maybe 5 years ago, they didn't think any of this would ever come to fruition? Or is there a product area and investment that you need to build out more?

Well, I think the biggest thing people don't understand is that we can actually secure other clouds. So that's probably a big opportunity for us to do. Sort of a marketing and storytelling and selling perspective, it isn't just about securing Microsoft 365. If you're running things on somebody else's cloud, we have security solutions for you. I think that's a big go do, as we would say, for me and my team and Judson, who is our commercial sales leader. The other obvious one is the vendor consolidation, to see how [indiscernible] again and again. And that's a big opportunity for [indiscernible].

You mentioned, I think, #3 was gaming. I'm a customer, big customer of that.

Well, 3 -- you make me pick 3. And so I chose gaming but...

Well, I mean, you clearly have put a ton of investment dollars, and that business has done very, very well. What's the future of that business look like over the next couple of years?

Yes. The thing -- I mean, there's many things to love about the gaming business. But one thing maybe folks here don't understand is what a multidimensional business it is from a business model perspective and a monetization perspective. Because you typically think of gaming as, oh, yes, there's a console that someone buys. Then you attach a few games onto it. And that's the gaming business. In fact, that was the gaming business. But today, of course, the variety of ways money is made [indiscernible] got the sold, you've got games. You've got transactions. I mean look at a game like Fortnite, it is a free game, and yet they generate huge amounts of revenue from transactions in the game. You look at something like Candy Crush. It's a free-to-play game and yet there's tremendous revenue associated with it. You look at gaming subscriptions, right, 25 million Game Pass subscriptions, I think, was the last number. That's an amazing business model. So I think one of the things I love about it is that there's multiple ways to monetize, and it's a very rich ecosystem from that perspective. We love that. Content is certainly incredibly important. You see us looking to do acquisitions, like the Activision one that we've announced, like the Bethesda and ZeniMax one we already did. Content is just everything in [ this business ]. Community is really important. Most people don't understand that gaming is very, very social. The days of somebody sort of playing alone in their basement are kind of over. Well, people still do that. But it's far more of a social experience, where people want to come home from school. They want to play games with their friends while they talk to them. So a safe community is super important. And then, of course, the move to the cloud is very, very important. Like we've got a strong head start. So when you think about gaming, think about content, think about safe communities and think about cloud. And that's the recipe that we use to put the gamer at the center. And we talk about it as letting them play the games they love with the people they love and on the devices they love.

Other than gaming on the consumer side, you said you run the sales organizations and the digital motion. Where are you guys spending marketing dollars or investment dollars? What are you most excited about? And how resilient can that be if there is a recession?

Yes. So consumer demand is definitely very spiky, right. We've seen it over the past few years. Commercial demand on devices has been really strong, and we predict it to continue to be very strong. Emerging market consumer has been very consistent, but developed market consumer has been -- quarter-to-quarter, if you go look at the last 12 quarters, it's always up and down. And I bet that, that will certainly continue. We always need to spend money on Windows. It's such the fabric of so many things downstream. But I think if you were to look at how I'll spend marketing money in the coming year, you'll see on the consumer side, you'll continue to see investments in gaming. You'll continue to see some investments in Windows. I think you'll see us shifting some of our investments to what we would consider the post-sale monetization opportunities on the Windows [ piece ]. And so for us, that means things like Game Pass for the PC. That means Microsoft 365, the consumer versions. That thing -- means things like Edge. Edge, our browser continues to take share on the PC, and we're thrilled by that. That leads to more queries [indiscernible] that are revenue for us. So if you just asked me the question about marketing spend, I think you'll see a subtle shift to some of the post-sale monetization opportunities, knowing that the supply chain challenges are there, knowing that consumer demand is spiky. It has been. In one quarter, it looks great; the next quarter is like, wow, it's very soft. And so I would predict those spikes will continue, and our opportunity is perhaps a little bit more on the post-sale monetization. We're thrilled with the Edge progress, really excited to be a big advertising customer. We're not immune to the impact the economy has on ads. I think ad companies suffer. But luckily, we're incredibly diversified. So we can usually make up some cyclical ups and downs if one part of our business was [indiscernible].

Same question on the commercial side. Maybe outside of Azure, where are you guys shifting investment dollars?

Yes. I think I already tipped my hand on this one. Security is a -- will be a big focus for us. What we call modern work, which you all would probably [indiscernible] Microsoft [indiscernible], That will be a [indiscernible] for us. Can't ever [indiscernible] Azure. If I were to pick my top 3, those would probably be top 3 marketing spend. But there are some great things we can do without spending money that actually drive great growth in Power Platform and [indiscernible].

Unfortunately, I think we're out of time. But Chris, really, really appreciate the time today.

My pleasure. Thanks for having me.

Thanks, Brett.