Microsoft Corporation (MSFT) Management Hosts 2018 Wells Fargo Tech Summit (Transcript)

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About: Microsoft Corporation (MSFT)
by: SA Transcripts

Microsoft Corporation (NASDAQ:MSFT) 2018 Wells Fargo Tech Summit Conference Call December 4, 2018 10:30 AM ET

Executives

Ron Markezich - Corporate Vice President For Microsoft 365 Commercial

Analysts

Philip Winslow - Wells Fargo

Philip Winslow

To begin, I do have the Safe Harbor statement to read. Microsoft may make some forward-looking statements during this presentation and you should refer to their SEC filings for the risk factors relating to their business and that's through whether you're here in person or listening on the web.

So Ron, thank you for joining us here in Park City this year and being for the first track to kick up the session.

Ron Markezich

Thanks for having us.

Philip Winslow

I guess maybe just to kick things off a little for everything and everybody in the room here, maybe if you could introduce yourself, give us some of your background, tenure at Microsoft et cetera?

Ron Markezich

Great. I'm Ron Markezich. I just hit 20 years of Microsoft last Friday.

Philip Winslow

Wow. Congrats.

Ron Markezich

Been into a number of jobs. I was started in IT, as well as a customer of Microsoft and served Microsoft for about six years. I became CIO at Microsoft. Started what we now call Office 365, 14 years ago as CIO, through that business and incubation for about six years. We ran our U.S. enterprise sales force for five years and now I'm responsible for our Microsoft 365 Commercial Business. Microsoft 365 would include Office 365, Windows and Enterprise Mobility + Security suite.

Philip Winslow

Awesome. Well, these are good thing getting started to. Microsoft have obviously gone through a lot of change over the past few years. From your perspective obviously haven't been there 20 years now color on this evolution of the company, and the culture, and the impact? Have had on the direction and culture of the company?

Ron Markezich

Yes. If I looked at when Satya came in, one of the first things he did was get us grounded on a mission that was fresh and new for the company. I think if you look at where Microsoft started in a mission being PC on every desk and in every home, we largely accomplished that mission. I think there was a period of time there where we didn't have that north star that we're all marching towards. Getting us grounded on a mission to help every person, to help every organization on the planet achieve more, was something that's super-helpful because it was aspirational, it was focused not on revenue and making money, all of that's super-important, that's why we're in business. Just focus on making people's lives better, making the organization more successful and really focusing from inside to outside, how our products and solutions help people. That was a big one.

The other one was really a focus on diversity and inclusion. In Microsoft, we hear a lot about that and tech companies are starting to share data, but it was more beyond just the data. It's just how do we integrate diversity inclusion into our product? How do we have a mindset that our job at Microsoft is to make sure everyone can participate in this movement that's happening in this world, that's new tech industrial revolution. That was core you might have seen recently something like even the Xbox Adaptive Controller to help people with disabilities to use the Xbox, or even if you look inside our products and having core accessibility capability of you add a picture into PowerPoint, you have text in there for people that visually can't see the picture. That was core for us just in terms of the mindset on the company.

The third I might say is you might hear a lot of this Microsoft runs on trust, especially as we move to cloud services, which we have been in the process of literally for 14 years. Trust is such a key component because you become part of that organization the supply chain, delivery chain, part of how they operate. So things like our cyber security, tech accord where rally tech companies around getting some policies and principles, the principle that privacy is a fundamental human right, some of the stances we've taken in the publicly, in the court have been all part of making sure customers can trust us and that we have the principles and policies in the company that we treat customers' data that it's their data, they own it, we don't monetize the data, we have a business model that focus on customer success, not our sole success. I think those three things would be keys.

Philip Winslow

And then obviously being a veteran in Microsoft in your 20 years, maybe you can talk about how your approach has changed? You had two specific business or I think market.

Ron Markezich

Yes. It's interesting having been a customer of Microsoft early on and now being part of the organization that serves our customers broadly. I think the biggest change at Microsoft in terms of how I've approached it is really around customer signal, customer listening and reaction to customers. We're particularly a software company with ship cycles of three years, it's really hard to get customers signal. When I was CIO, we used to sit down with Bill Gates once every other month for two hours just to talk about SCIO as a customer of Microsoft product, how could our product get better? Which is a horrible signal, customer, one.

Now, as we move to cloud services through Azure, through Microsoft 365, you get such great signal from customers across segments, geographies, industries, et cetera. And what the change has really been around our ability to be agile in that customer feedback, in the way in which Satya has reingeneered the engineering organization and improved the agility and the time to respond to feedback is the biggest change I've had where if I looked at 10 years ago, I'd say, 'Oh, we've got this thing we've got to do. It might show up in our product that ships in three years.' Now we're looking at, 'Hey, we need to make sure we support ethical walls for financial services companies in Microsoft Teams.' Boom, it's on the road map and we deliver that very quickly.

Philip Winslow

Great. I'm wondering if you can touch on from a sales perspective with customers just about the general tone of the relationship between your customers at Microsoft. Sort of what are you hearing? What's the feedback been from customers?

Ron Markezich

First of all, the Microsoft Cloud is something customers will say, 'If they're not there, it's not a question on whether they'll go there or not. It's a question of when.' Certainly our penetration on Office 365 and Azure has been remarkable especially in our commercial large enterprise segment. You might see in the past 10 years ago customers will say, 'I don't know if I want to sacrifice security by moving to the cloud.' Now they say, 'I got to move to the cloud to get the secure environment I need.' The mindset certainly has changed. We saw that with some of the hacks that happened that were largely publicized five or six years ago. The whole industry shifted to saying, 'Microsoft Cloud is more secure. I've got to get there to help my security posture.'

We see a lot more in terms of customer tone, 'How do I invest more in my employees?' If you look six years ago, you might have seen customers say, 'How do I squeeze to turn the people more and get more productivity out of people? How do I take that laptop and instead of a four-year life, make it a six-year life? How do I get a cheaper laptop?' That certainly has changed where the expectation of employees is they have great tools, they have great hardware, great services and our customers, the industry has to invest in their employees to keep them, retain them, attract those employees because their expectations for tech is much higher. So getting them the best and the latest.

The third thing I'd say is every company is a tech company. They're all searching for, 'How do I avoid disruption?' Even companies, what they thought had huge mode to recognize in ' I'm going to get disrupted' and it's not going to be the CEO that has all the answers, 'How do I tap into the ingenuity of the entire organization?'

Philip Winslow

Got it. One more high-level question before we drill down on O365 and Microsoft 365. But last year, you went through a big sales reordering at Microsoft. I wonder if you can talk about the core tenants of that change and how is that change the dialog with customers particularly in your area of focus over 365 and 365 Windows [ph 7:46].

Ron Markezich

Yes. There are two things we need to do. We needed to get deeper technical expertise in our field as our product portfolio has brought in. You look at Azure, Azure is a compilation of about 50 different services. Microsoft 365, we run from allowing you to run your PBX in the cloud to instead of security component. So we needed to have deeper technical expertise in the field. We also needed to organize more around industries. So many of our solutions become tailored by industry differently. If you look at our dynamics business, that's certainly different by industry. But even Microsoft 365, there's a number of flavors by industry that customers will want to implement and we need that expertise from the field around that.

We also changed our comp models significantly to comp much more about usage at our customers. So top-down, there are some people that are 100% comped on usage. Even our people that are comped on revenue have an aspect of usage. We want to make sure we didn't just sell licenses that we actually were our people to get customers who use the product that they bought and own.

And then we did a lot around our partners to better-segment our customers so it was clear where we are hunting and selling with Microsoft employees and where the white space was with partners and that we had coordination across those. And last one, we invested. We've been investing and we'll continue to invest quite heavily on as our insight sales organization to help with our breadth customers and to partner with those partners that sell to those breadth customers.

Philip Winslow

All right. We'll circle back through M365 in a second. Let's drill into the commercial side of Office 365 which obviously has been a great success if you just mention for the company and if I flashback to the 2017 financial and analyst meeting, Amy talked about an 8% CAGR for office commercial install base from fiscal '15 to fiscal '17. Now in my opinion, that was a sign of panic stance and we're talking about that type of a unit cager. What's really driving that new user growth that we're seeing because of all piracy, new users, first-line workers, et cetera. What is driving them and how do you think about that going forward?

Ron Markezich

Yes. Predominantly, new customers, new users. We always get this question be with folks like, 'Hey, how could Office 365 grow so much? I thought your penetration is pretty high?' It's amazing how much white space still exist out there for Office 365. I look at it at least on the user's side in a couple of perspectives. One, certainly the first-line workers. Folks,housekeeping staff here at the hotel, folks that work the slopes up in Deer Valley or Park City, people that pick grapes in Napa Valley, there's a whole set of first-line workers that never had technology depending on how you measure them. There could be two billion to three billion people in the world that are employees or workers of some sort that really for the most part don't have technology.

We really focused our engineering efforts on meeting the needs of that population. In the past, we have tried to just take what we offer for information workers and made it cheaper and slim down for these first-line workers and that didn't work at all. What we have done now is we've actually created capabilities into service to simply target at those first-line workers. Things like ship capability, ship sharing, polar lens to help people with support in the field so they can tap into an expert back at headquarters a number of those scenarios, that subscriber expansion and the population to frankly never subscribe to anything from Microsoft.

Then there's customers. We've made great progress in certain segments, but there's a lot of room to go in other segments. Certainly emerging markets, smaller businesses, customers that tend to not move as quickly. We made great progress just recently in the large banks, the GifCities where they have been hold out because of regulatory reason. We've done some things in the U.S. having private clouds for government so that we can meet all the U.S. regulations. We've done things like data centers that are Go Local certain countries, so that government, most countries feel more comfortable moving toe Microsoft Cloud. We've done things in that emerging markets using that app called Kaizala that allows you to essentially communicate with an organization through just cell numbers. They don't even have to be in the directory, just the phone number. You can reach out to those.

We are doing solutions to meet these segments that haven't yet moved to the cloud to give them a compelling reason to move and that meet their needs both regulatory as well as their business process needs.

Philip Winslow

Office 365 commercial growth has been outgrowing as you guys have been reporting. To me that shows obviously the mix up in this user saying the question I get form a lot of investors that I'd like to ask you about is about how do you think about ARPU growth during migration up to the higher ? Where are we? How do you think through that going forward?

Ron Markezich

We're in early days. We launched Microsoft E5, our E5 skew which will be our premium skew, which will have advanced security capabilities, advanced compliance, have a lot of advanced voice capabilities. For instance like moving your PBX to our cloud with our phone system and then power BI as well. That we've seen great uptake for larger customers in great early days. But the opportunity is still ahead of us on E5. That certainly helped our ARPU growth.

There's a lot of focus on E5, but even if we take it down to E3, we've seen a huge move from customers that kind of bought in at a stand alone work load like exchange online, our E1 work load moving to E3. So what our strategy is to help the customer meet their needs by getting into Microsoft 365 at one of our levels and then move them up the chain and we've seen a lot of success at moving up that chain either from E1 to E3, from stand alones to E3 and now E3 to E5. But there are still a lot of room to grow, getting the customers to E3, getting new customers, new users, as well as getting them up to E5.

Philip Winslow

new features. Let's talk about teams. I wonder if you can talk about just a moment what you're seeing there and how do you think about sort of continuing to differentiate Office 365 and obviously are recent addition to the package. But how do you think about continue to differentiate Office 365? Teams have been kind of the go-forward.

Ron Markezich

Yes. Teams are super-important to us because it is the hub for team work in Microsoft 365. It's the one place to go and it bridges the gaps across generations. Looking at this room, a lot of us probably start our day in Outlook. Look at our email, calendar. I can tell you, my kids never go to Outlook, I'm sure your kids never go to Outlook and your kids love probably things like mine, these gif feeds, videos, and stuff that I think is a waste of time, but that's a large way in which they communicate. Microsoft teams brings that together. You have generations working together in a productive way which is so needed today because if you look at the work force, the generations that exist are teaming together and they have very different styles in which they use technology.

Not only that, it's that hub for team work that brings everything together in Microsoft 365. Whether that's your Onenote, your online meetings, your one-on-ones, your artifacts from a meeting that go back in time. If you join a team how many of you have joined a team and said, 'Hey, send me all those emails from the past so I can get up to speed on this new team I'm on.' Now you join a team, all the content for that team and that history of that team is there, available to you. When you leave a team, you no longer have access to all that information on that team because you lose access to that site in Microsoft Team. So it's super important for us that, hub for team work. But it's also a new way for people to work. A lot of times you'd say, 'Hey, Office 365 got Word, Excel, PowerPoint. I'm kind of stuck in my old habits.' Microsoft Teams gets people out of their old habit and help them work in a modern way.

All these things combined, Microsoft Team actually less than two years in market where actually it's the fastest growing business application in the history of Microsoft. The growth has been phenomenal, the response has been phenomenal. Customers , I'll give you an example. They made Microsoft Teams available, didn't advertise it, didn't do any internal marketing, now they have about 145,000 users every month on Microsoft Team. Just organic growth. We see that quite common. We've also made a version of Microsoft Teams available for free because we see it as a great on-ramp into Microsoft 365 for customers that don't yet own Microsoft 365, they can start using Microsoft Teams. Getting real value out of that, it's not a trial, there's not an end date, they could stay in there, but we're seeing the conversion rate to subscribers be very high for folks that use the free version.

Philip Winslow

Yes. I actually speak millennial and only communicate my team with emojis. animated ones on Skype or business. I'm a fan of the vanishing ninja, a big fan. But let's transition over to Microsoft 365 and I'll a couple more questions and I'll open it to the audience . But back in , that was really interesting because reposition Microsoft 365 as not just completely sort of a bundle. When they 365 and , but rather as a platform for developers. We have web application, web and environment. How are you sort of inside Microsoft. about 365 and how you sort of position that as a platform?

Ron Markezich

Microsoft 365, to be fair, we started it a number of years ago as enterprise cloud suite and it was the packaging thing, you get 5% extra discount if you buy the full thing. The uptake was here. We are super surprised at how strong the uptake was with really no marketing behind it, not a great name. It was confusing what it even was. But then part of this, when I talk to the floor about kind of the outside-in view of the cultuer at Microsoft, we realized the reason customers were buying it as a suite wasn't really for the 5% discount. Although they'd gladly take that. It's because that's how they used it. Every customer uses Office 365, EMS and Windows together. They don't like to buy them as separtate packages. Historically we as a company have engineered this as three different products, so we sold them and licensed them as three different things.

So when we started as a licensing packaging thing, we actually changed the whole company over a year ago to engineer and organize around Microsoft 365. We have one engineering leader that owns all the engineering Microsoft 365. First time we've had Windows and Office together in one engineering organization and we're really taking that outside-in view. We prioritize work across Windows, Office and EMS. We ensure when we open up a Go Local Center, it supports Windows, Office and EMS. Our update policies are consistent across the three and it's all designed the way around customers and how they would take these products and give them to their users and how their users would view them.

Philip Winslow

One last questions and then I'll open up the audience. But when you talk about M365, how does that fit in with your cloud strategy and this is the whole strategy on digital transformation. Sort of how does this track and in particular, one of the questions I get from investors, too, is the support of Windows 7 is coming up in 2020. How does this fit in with Microsoft 365?

Ron Markezich

First of all, when we talk to customers, really lead with digital transformation. We have our cloud with Microsoft 365, Azure and Dynamic as the lead cloud to help customers digitally transform. Microsoft 365 is how you can empower your employees and really help them tap into the ingenuity those employees to help you stay competitive. life really quick, one is parts of Microsoft 365 customers do is really take Office and Windows and make them cloud-delivered. Allow you to take Office 365 Pro Plus and have it update your clients across whehter you're using iPad, iOS, Android, Windows, Mac, gives you those updates then so that we can manage those clients on you and make sure you always have the latest and greatest. Windows 10, same thing, allow you to manage the client so that you always have the latest and greatest. We see a large shift for customers that were on Windows 7 where they're coming at the end of life, using that to shift to what we would call the modern device or modern desktop. They always have the latestand greatest Officer, Windows and EMS on those devices and desktops.

Philip Winslow

Awesome. I'll pause for a minute to from our audience. Raise your hands. Otherwise, I'll finish up my Q&A.

All right. We're getting people rubbed up. It's still early here. It's still getting caffeineited. I'm going to ask one of my favorite questions about Edge. So anybody that has read my stuff knows I'm a big Edge guy. We've obviously a lot about it, but talk about how Microsoft 365 fits into the whole intelligent Edge, intelligent clouds strategy.

Ron Markezich

It's . When you think about Office 365 Pro Plus or Windows 10, or Windows Defender ATP which gives you security on your client, that is all about Edge, getting signal from the Edge, making sure you got the latest capabilities from our productivity perspective, but also ensure we have signal to help customers with their security posture; even help customers with their measuring the productivity and effectiveness from the way they use their tools. We have a secure score. We give every customer a secure score, tells them where they can improve their security posture and we get that by understanding what's happening at the Edge and what's happening at the core. That could include AD signals, Windows signals, Office signals, signals in Azure. We take that altogether, give them a security score. We'll do the same thing with productivity score. We'll launch a productivity score for customers so they can see individually, 'How can I be more productive?' And also as a manager, you could see in an anonymous way, 'How can I make my team more productive?' You could see as an organization leader, 'How do I make my organization more productive?' That's all signal we're getting from the intelligent cloud and intelligent edge that come together.

Philip Winslow

intelligent cloud, I would say EMS reached 88 million in Q2 . One of the things that Amy talked about is like, 'Hey it's still tied to human, so to speak versus the open-endedness, so to speak of Azure.' But how do you think about sort of the penetration of EMS inside of that Office 365 installa base and I guess where we are on the life cycle?

Ron Markezich

EMS. You have to think about EMS as EMS E3 and EMS E5. EMS E3, we see super strong attach rate to Officer 365 and what we do see is most customers moving in Microsoft 365 because they also want Windows 10 for those users. Microsoft 365 is your period of time is actually a multi-billion dollar business. It's a great growth and attach there. EMS E5 is also critical though and with EMS E5 we have a lot of security capabilities that expands things like threat analytics that I've mentioned signal that allows you to anticipate where a text might be coming, to address things before an attack happens. Has Microsoft cloud app security, so you can look at all of the cloud apps that are used within an organization, manage those and control those. If the CIO, 'How do I manage all these shadow IT?' Now shadow IT, you don't even need a server, you just sign up for a cloud service. You could use Microsoft cloud app security to manage all that shadow IT cloud apps that exist with your environment. What Azure , they allow you to have policy for TDPR to set automatic classification on documents. It's super-popular especially if customers look to meet TDPR requirements. All of that, we think of EMS E3, strongly attached to the Office, certainly per user, but lots of head room with EMS E5 because it's ealier days there. The last one in terms of per user, we areexperimenting with some things that are not per user versus we have something called Microsoft Workplace Analytic that allows you to take the Microsoft draft and understand how your organization works together, the connections, the inter-relationships. We actually don't do that as a per user. We do that as more about value-based pricing. So we'll come out with more things that are more value-oriented pricing versus just being tied per user.

Philip Winslow

Cool. Last question for you here. A kind of the forward road map, Microsoft 365, because there are a lot of areas I could imagine. You kind of continue suite and into whether it be security, virtual desktops, et cetera, it seems that multiple or how do you think between building some of it organically acquiring versus partnering in some of these? Where do you draw the lines?

Ron Markezich

Yes. It's really about I think we do all three and we would not say one of the three as a priority. They're all important. We've got a number of partners that integrate with Microsoft. If you just look in teams and look to add in new apps into teams, lots of partners out there are continuing to grow. If you look at even security, lots of partners that we worked within the security space that we integrate with the Microsoft 365, but at the same time, EMS E5, we've made some important acquisitions to build out that product in terms of the security capabilities and then where all these Microsoft teams, we built organically and we felt that was a super good decision because we feel really good about how that fits in with strong integration across all of Office 365 from day one. So it's really a balance across all of those three and they're all three very important.

Philip Winslow

Our 30 minutes are actually just finished up. It went fast. Thank you for everyone, for coming and thank you, Robert...

Ron Markezich

Thank you for coming. Appreciate it.

Philip Winslow

...for kicking off the . I appreciate it, man. Thank you. I did try to do Safe Harbor as well . Real-time responsiveness. I tried to do it as well as you do. I get a high bar here over the Safe Harbor, I kind of live up to it. website.

Question-and-Answer Session

End of Q&A