Microsoft Corporation (MSFT) Earnings Call Transcript & Summary

Yes, exactly. I mean, it is amazing to not attend a meeting and feel like in 5 minutes of prompt GPT-based engine that you can understand exactly what happened. We've done a nice job of doing things like recordings and transcripts, but nobody goes to dig through those things. It takes long, it takes room as if you just attended the meeting. So not attending a meeting but getting something out, there's a wow factor there. It is immediate. GPT -- like these -- you know what it looks like because you use ChatGPT, very sophisticated. But then, that's not all. Typically, when I demo to customers, I'll ask them if I can transcribe the meeting, and I'll start down and I'll let it go for about 15 minutes. And then I'll say, hey, can I show you something. And I pull up Copilot and I say, ask any question about what we've talked about, any question. And first, they start typically with tentative kind of basic questions, so what did Jared ask, what did Bob answer. But then they start to realize that the thing is very, very good at analyzing sentiment. You can ask. The other day, I was in a meeting and my boss asked me a question, I answered it, and I thought all of this is a great chance. And so I asked Copilot,did Jared know what he was talking about when I answered Takeshi? And it came back and said, "it didn't seem like Jared really did know what he was" -- and I was making the answer up. So -- and my boss he was like, "Wow, that's very impressive." You can ask, did anybody tell a joke?" And it can say, yes, there were 3 jokes, how good were they in rate them in order of how good they were. Whoa. I mean its ability to understand the human dynamics of a situation is incredible. So during a very complex meeting, for instance, you can ask it things like, hey, parse out for me the different arguments people are making and who agrees with what sides. Tell me what is still left to be decided. Tell me what we did decide. I mean its ability to just do those types of things is amazing, and it changes human interaction in real time. And that's kind of one of those wow factor demos.

You love all your apps equally, but if there's kind of 1 that you're really excited about in the next 3 years, what would that 1 be?

We talked about Copilot. So I'll put that to the side, unless you want to ask me more questions about that in a moment. But there are 2 that are top of mind. One won't surprise you and one may. The one that won't surprise you would be Teams. We have over 300 million monthly active users now. We've been able to get to a point where it has a really nice position within the communications infrastructure of enterprises and increasingly smaller downmarket businesses. And the opportunity we have is to monetize that. The questions you will ask me is great, Jared, what are you going to do with that $300 million, can you further monetize? We see an incredible opportunity. We already see Phone taking off and becoming a very big opportunity for us. That really growing very nicely. We see rooms growing very nicely. We see something that we call Teams Premium growing very nicely even though we just introduced it. So I think Teams is very interesting for us as a platform for monetization and serving up more value. And then the other one that I'll flag for you that I think you'll understand a little bit better if you tuned into our build conference is Windows. I actually think Windows has a moment of revival coming as AI really changes what an operating system can be in personal computing. And I'm happy to talk more about that if you'd like to, or we can just skim over it. The Windows is really something that you should watch because the combination kind of the confluence of tech trends right now could make the operating system very interesting again.

Why is that?

Well, let me take the 2 big ones that are on my mind right now as I'm really trying to drive the team. The first is the move to the cloud. We have seen tremendous success with a product that we introduced called Windows 365. It essentially has taken some of the back-end virtualization technology, wrapped it up and turn it into a Software-as-a-Service offering. You can spin up a Windows kind of environment in the cloud within literally a matter of minutes, and it becomes your personal environment, you can stream that down to any device. People who are starting to use this, the signal we're getting from customers very strongly. First, we'll pilot it and 5, 10, 20. Now we see people going to hundreds, thousands and tens of thousands of Windows 365 licenses. So we've got a really good signal there that this kind of Windows in the cloud is very interesting. I see people starting to now use it on their iPads, I use it on my iPad. It's transformative as you see, oh, Windows can be anywhere. It really can be my most productive environment. So there's 1 trend there. And then the second trend that we're very excited about is Windows Copilot. If you think about what Windows Copilot can do, we demoed it at our conference call, Builds, last week. But Windows Copilot essentially can really bring together an agent, an assistant that understands everything that you're doing in your digital life. It can watch where you're browsing on the web. It can see the applications that you're using way outside the scope of M365, which is what the M365 Copilot is limited to and it can bring all those things together and what again would be a very personal assistant type of scenario. He knows every keystroke. So we think there's really something there to make personal computing more personal than it's ever been to follow you across any device big or small and to essentially call that the evolution of Windows. And as companies are starting to catch that vision, they're very excited about what it could do to end-user computing. So we think there's something there.

Everyone's been super surprised by Office. I mean to put up 17% to 21% constant currency growth consecutively. It's like Jimmy Butler or Steph Curry or you go through like it's just -- the consistency is insane. Like how do you do that?

It's -- I mean, first, I won't take credit for it. I mean there are kind of 2 components to it. I'd say we have a very good product team, and under Satya's leadership, they have not become complacent. They have tried to understand customers and say what's the core value that we're providing and how do we improve that. And you see that in both improvements to the core apps, where something like Excel is more loved than it's ever been, like despite the competition. Excel still is incredibly loved. And then with things like Teams that have had kind of breathe new life into the suite. So it starts with product. We think from our perspective, value is #1, but it's not just product. I love the people who work on my go-to-market team who help to turn what we have into a machine, a machine of execution. In fact, if you look at our Q3 results, it's not that the macroeconomic kind of conditions changed, it's just that the go-to-market team really executed for us. And so we have really worked hard and been very focused on 2 aspects of the business, both driving the Q and the P. So we both drive kind of seat growth and we try to drive the price up. And we have some really interesting ways of doing that as we move through E3, E5 kind of our SKU lineup.

I think you mentioned Power Apps earlier.

Yes.

We wrote a deep dive on Azure way back when the networks like AWS has already taken off, no room and here we go, kind of an interesting opportunity. Do you think Power Apps could be the next Azure?

It -- I'm very bullish on Power. And Power for us is Power Apps, Power Automate, Power BI. It's all of those. And we actually now have Power Pages and Power Virtual Agents. There are kind of there are some up-and-coming shoots of growth as well. Yes, if I were to cut to the chase, we would simply say the world is starting to move so fast that this idea of low-code solutions or easy automation, and it's incredibly attractive to the market. So we're just getting to a really big for us. We would say we're starting to see power tip from this early part of the market into what we call a majority buyer. So what used to be BDM type buyers where it'd be like we do pockets within enterprise. Now that buying habit has switched over very clearly over into IT. That's good because I will do these broad wall-to-wall type purchases. So we're definitely seeing kind of an opportunity right now as it's -- the technology is maturing and the market itself is maturing across all those different categories right now. So it's a space to watch, for sure.

Dynamics?

Yes, Dynamics. I'm very excited. People kind of give this one up for dead, but let me tell you, I've been in the midst of it. I took it over last quarter -- well, 2 quarters ago, and I've been in the midst of it kind of really trying to understand what's going on. First off, the products have gotten good. It's hard to take someone like a Salesforce straight on, head on in what you'd call a static market, where the structure of the market is set, they're so far ahead that could feel like a slog. But the products have gotten good. There's a lot of dissect, quite frankly, on some of the leaders like Salesforce. We're doing a lot of work in trying to understand the market, and there's a lot of unhappy Salesforce customers out there in terms of how they feel about the commercials and the product. And the big game changer goes back to Brent AI we think AI is a tremendous game changer and whether you're doing kind of like sales force enablement, so you're helping your sellers be more productive or like service centers or call centers, et cetera, like, "man, AI really changes the game." So it has been growing nicely for us, but we really see an opportunity here for us to kind of pounce on what we think will be a new structure of the market. So as the game changes, as the playing field tilts, we see an opportunity.

Do you envision a, I can walk in to my desk and say, "Show me the last 10 customers about Microsoft stock on our training desk and pull up their name and I get an automated call feature and they could just start calling people or send them on an e-mail." But it seems like there's so much we have sales force and it doesn't give me anything back, it sucks everything in, which is okay. It's that's where we're at with it. But this ability to then give you back your time, is this -- this seems like the direction this is going.

I'll go back to the beginning and say the most strategic thing you should take out of what we're doing is that cross app intelligence scenario. At the end of the day, your ability to walk into essentially a ChatGPT interface and say whatever question you have, "hey, tell me the last 10 customers that bought Microsoft, pull up their profile, tell me what else they bought and tell me what you recommend I should do next. That -- nothing exists like that today. And what we see essentially is people bopping around from application to application, essentially kind of trying to piece together really what are the meta goals of their job, which is how do I serve my customers better? What should I do next? What's the next most high-value action I should take? And we really think that these language interfaces can change the game. We do anticipate that people will spend less time in biz app type scenarios, interfaces. We think that people will spend less time, frankly, in other apps, even Outlook or Excel as well. But the race is on, we think, for this opportunity to have this interface that is an interface to your business, not to any particular app.

I mean, I'm hearing a theme of faster innovation.

That's for sure. Yes.

I mean it feels like we may get it to a more efficient R&D organization, faster dev times like the innovation comes?

We definitely see that. It's not like these things come for free, but I'll use an anecdote to give you a sense of what that looks like. One of the reasons we could move so fast on this Microsoft 365 Copilot is we had been working behind the scenes on a scripting language for all the apps. Think of a scripting language that allow you to do anything you can do in the ribbon in Excel or PowerPoint or Word. And the coolest thing happened in January, essentially, when we took the GPT foundational model, and we exposed it to that scripting language. Now remember, a GPT model, what it can do is it can understand the syntax, the vocabulary, the structure of a language, and scripting language is nothing more than a language. It learned how to speak scripting language for those apps. So the reason that we could introduce Copilot and it could command the apps, do this in bold, add a slide, take a picture of this and put it here was because it simply learned how to speak Microsoft app, and it did so within a matter of about 10 days. So is that fast R&D? We think so. Well, everything go that fast? No. But we do think it's kind of a sea change in what's happening.

Jared, exciting times. Thanks for joining.

Yes. My pleasure. Great to be here. Thanks for having me.