Microsoft Corporation (NASDAQ:MSFT) Jefferies 2020 Virtual Software Conference September 14, 2020 6:30 PM ET
Kirk Koenigsbauer – COO-CVP, Data Platform
Conference Call Participants
Brent Thill – Jefferies
Welcome back to the software conference at Jefferies. I’m Brent Thill and we saved one of the best for last Microsoft. Kirk Koenigsbauer is the COO-CVP of the Data Platform. Kirk has been at the company for 24 years and prior to that time he actually was at Amazon writing software and video games too. I didn’t realize I had video games way back then, but thank you so much Kirk for joining us and 24 years, that’s quite the run, congrats on that.
Yes, thanks, thanks a lot.
Maybe just to kick off on, we were probably kidding around saying that you are the Chief Operating Officer of the work from home remote everything in Microsoft and maybe just to dig in on Microsoft 365, just to kind of put this into — to frame the larger vision of Microsoft and how that fits in.
Yes, yes, for sure. When don’t I just start by giving you sort of a quick overview of our value proposition and so forth and talk a little bit about, I mean we’ve — it has been super gratifying the last three years to see the work really start to pay off. But the way we positioned Microsoft 365 is as the world’s productivity cloud and what we’re trying to do is bring together best-in-class productivity, collaboration, communications, content creation, and analytics capabilities on an integrated platform.
And from a brand perspective which might be more familiar with folks, that means Office, Microsoft teams, OneDrive, SharePoint, plus Windows and then the Enterprise Mobility and Security suite product that we have, bringing that together in a single lab, in a single offering for customers. As I mentioned it is about three years old and it has been about three years in the market or so at this point and we’ve seen just phenomenal growth, obviously accelerated over the course of the last six months for sure, but it has been fantastic.
Yes, and talk maybe about the kind of big key areas of big investment right now you can talk through teams and security. You’ve also been active in a lot of other kind of products that maybe aren’t as well known. Can you talk through those areas?
Yes, so in the case of Microsoft 365 there are a bunch of core workloads. Obviously there is the Teams workload. Well I’d say there is the sort of end user oriented workloads. So workloads that people are using on a day-to-day basis, and again that’s the Office set of products that’s Microsoft Teams, that’s Outlook, that’s OneDrive, all those products work together, and that’s a core obviously part of value proposition. But when we talk to folks about it, the offering a lot, one think it is important too, is that I refer to them as a several set of control planes essentially that are part of Microsoft 365.
And so for example, one of those control planes would be a common management layer and that’s supported by obviously Windows, on the Windows operating side, but also in Teams and the EMS suite or we have an identity, have an identity control plane as well powered by AED [ph]. We’ve got about 345 million active users on monthly basis using our active directory. Then there is the notion of a security plane that underpins all of this as well.
And so we have a bunch of offerings there we could talk a little bit more about with the Defender line of products on the endpoint side, a series of threat protection products, series of products that are used for Cloud App Security sort of securing applications with inside of a tenant [ph] support. So it’s a pretty deep, pretty broad set of services that are part of this thing.
Yes I know that this market is pretty enormous, but I don’t know how you breakdown kind of the TAM and opportunities that you are serving here it’s almost too big to maybe even go through, but how…?
Yes, at a high level when we think about the TAM, the total addressable market, depending on how you measure it or which analysts you are looking at, roughly about sort of core productivity and cloud duration side of it, it’s about $200 billion to $300 billion, so it is quite large. That’s not inclusive of the security and compliance space which is yet another $100 billion or so, were $100 billion. And so together $300 billion or $400 billion in opportunity, it’s a pretty big space.
The other way we think about it is from an audience lens too. And so for example, historically we focused on and folks think of us focusing on knowledge workers or what we sometimes refer to as information workers got — classifies about a billion of those workers on the planet today. But a really interesting new segment of the market that we’ve been sort of working at hard with Microsoft 365 and then also Microsoft Teams in particular is this notion of personal workers.
So folks that work at hospitality, retail, manufacturing, the front lines of the healthcare space, there are bunch of different industries there that have people that are not used to traditional knowledge worker per se, but there are 2 billion of them and that represents a pretty important part of the segment when companies are thinking about trying to connect their whole organization or do digital transformation across their whole organization. So that’s a pretty different way to think about it from that audience side as well. And then of course we’re an Enterprise, we’re an SMB in the consumer side of the market and education is a big part of the market too. So it’s big.
Yes, on the Office 365 commercial side the revenue growth continues to outpace seats and you’ve talked about the upgrades from E3 to E5 and getting more capabilities, maybe if you could just talk to, you don’t give a lot specific details, but how you think about how much room is left and how much ARPU is left — is in the tank here?
Yes, no, it is a terrific question. We — I’ll break it down by seats and then ARPU kind of the way you are outlining it, and there’s a couple different ways that we think about what sort of room is left or gas left in the tank as you referred to it. One step that we did offer last quarter which is a pretty good one I think directionally when you think about the shift from on-prem to cloud. We’ve got about 65% of the Office 365 commercial base is now in our cloud service, which is pretty — it is a pretty sizable piece, but it also means that there is room yet to grow. And then and that represents a seat or sort of an opportunity for us.
And then also I referenced a few moments ago the notion of this, these first line workers. These are folks that we’ve not been able to target typically, but now with everything moving to the cloud and digital transformation support there’s a big opportunity that we see in attracting personal workers as a way to grow our seats. I’d also say, small and midsize business is another big area for us. Certainly we’ve done historically quite well in the core part of the SMB space, but that lower kind of the SMB business is pretty ripe too for productivity and collaboration, let alone I would say emerging markets or developing markets is another opportunity for us to penetrate more deeply on the seat side. And all those retails like have really good opportunities for us. COVID has had some impact on thinks like SMB and what not, but generally speaking structurally we fell like there is a lot of room left there to go.
On the ARPU side, again shift to cloud is certainly we think of it really as an ARPU driver overall and there is certainly room to grow there. But one thing that’s been great to see again speaking of the beginning part of our chat which is Microsoft 365, we’re now generating over a third of the Office 365 seats are moving straight to Microsoft 365 a lot and so it is really gaining momentum for us and that is a great LTV and ARPU play for us a lot.
And then the third one I think I would mention which I don’t think I heard a lot of questions about is, this thing that we have called E5. We have a number of different ways that we talk about our SKUs different tiers almost think of them as cellphone plans. E3 is the core and E5 is the one that’s sort of the advanced premium set of SKUs and that represents a big opportunity for us well. And that E5 suite has typically been something that has been a big driver for us leading with security and compliance oriented workloads, but it is really interesting just the last six months alone we’ve seen quite a bit of uptick in our phone system and calling set of services, so that workload is also now dragged in the E5. So generally speaking, both on the seat side and the ARPU side we feel like there’s lots of room left to go for sure.
That’s great. Just on Windows Commercial and inside the both suite and 365 suite, what is this offer beyond the core OS?
Yes, so for folks that may not be familiar with all the branding around and SKUs around Windows, the baseline in the commercial space is sort of the pro business, that’s the royalty model that is acquired by customers through the OEMs and so forth. With Microsoft 365 when customers buy Microsoft 365, they are buying one of essentially the cloud editions of Windows that we refer to as the E3 and E5 SKUs.
And those SKUs really represent that notion of Windows being a cloud connected OS and that means essentially things like enhanced management, security capabilities, it brings in advanced identity workloads into that core and that’s kind of a pretty big driver for — of growth for us over the last year or so in particular. We think it is going to remain a pretty big growth driver for us in the coming quarters as well, again really driven by the notion of this advanced management and advanced security part of the value prop.
Great. I just want to shift over to Teams and if you can kind of share the next chapter, our firm went through enterprise wide adoption during COVID. It has really helped transform how we collaborate with each other, 4000 people across our firm globally, so thanks for that.
Can you maybe talk to kind of the next leg of this? I certainly have a lot of things that I could see where I can envision this going a lot further and wider away and yes, just sort of staging where we’re at with Teams and kind of what’s the next chapter?
Yes, well it’s interesting. The last six months we’ve been pretty humbled by everything we’ve seen with Teams in terms of the mass adoption and I have to of course acknowledge the pandemic and COVID and work from home is as horrible as it’s been on so many dimensions in terms of loss of life and personal tragedy and the economic impact, Teams has absolutely been a beneficiary in terms of that digital transformation and Microsoft 365 is a part of that. And so we say that with a lot of humility, but also we’re happy that we were able to deliver the service.
Video conferencing what we’re doing right now is something that has been the workload that’s been out front the most, but Teams offers a whole more than just video conferencing and that’s been the value proposition of the product a lot and why it’s driven so much growth is because, it does offer, a bunch of workloads on a single platform. It really is truly, as we talk about our hub for teamwork. So yes, it’s got meetings, it’s got chat. It’s got phone system. It’s got all these communications capabilities and we’ll continue to build that over time for sure. But it’s also got the core integration of collaboration and productivity stuff. So it’s got Office built-in really nicely integrated into it. It’s got OneDrive and SharePoint, for sort of document oriented, and workspace kind of collaboration.
One that’s been, I would say, building over the last 18 months in particular, and we’ve seen some acceleration with COVID and we’ll certainly be doubling down on this piece too, is the notion of business processes and workflow being built into teams as well. And so we’re seeing this really interesting phenomenon where customers are appreciating the notion of a high engagement surface that teams is providing, and they want to build their line of business applications into that surface. It doesn’t mean that it’s an exclusive oriented thing.
Of course, they’ll have their own experience as well, but they want to sort of, hit that sweet spot of integrating their line of business app with Microsoft Teams, to try and drive that engagement in that usage all up and Teams provides really a wonderful scaffolding for that, along with Power Apps and workflow and our REPL automation stuff that we’ve got. So that’s, that’s a biggie too and we’re going to continue to push hard in that area as well.
And then another key innovation area, I would say that’s been very important, particularly given this, again, just a massive increase in usage that we’ve seen is customer saying, hey, this is all great, but I want to make sure that it’s secure and compliant. And so, whether it’s DLP type of capability, whether it’s Threat Protection kinds of capability, whether it’s compliance features, whether it’s things like, well in financial services things like ethical walls, these have all been very, very important parts of the value proposition that’s built inside of Teams as well. And it’s been really, really strong, but we’ve seen and we’re going to just kind of continue to work on these areas. I don’t hear your Brent. I think you’re muted.
Sorry about that.
I’m sorry. You wouldn’t have even noticed if it was on Teams, we would have…
Just talking through the voice in telephone feature, what you can do there, it seems like a tremendous opportunity, where directionally on that side where do you want to be?
Yes, no, we think that’s a very important part of the value proposition for Teams. And as I mentioned a few minutes ago, as we think about Microsoft 365 all up and what’s been driving E5, it’s been Security and compliance. But increasingly, we’re seeing telephony and I think it’s kind of one of these natural outcroppings that’s happening from a lot of the push or the rethink on what is really the digital work, what is a digital workplace, and lots of companies are rethinking their physical space, how they’re going to manage work from home and so forth.
And you can see lots of different opinions from CEOs in terms of how it’s going to play out. But I think at the end of the day, people are feeling like, you’re going to need a phone number, no matter where you’re working. And the whole telephony space is something that, we’ve been working on for the last pretty hard the last 18 to 24 months within Teams, and we’ve got a very, very strong value proposition here.
We’ve got a legacy of working in this space before in the on-prem world with Skype for Business. But inside of teams, we now offer phone system capabilities, routing, analytics, of course, you can call it in your tenant [ph], but there’s PSTN services, so you can reach outside your tenant, reach your customers, and all the vendors and so forth that you’re working with.
The other thing that’s important is, we’ve added calling plans and so you don’t have to work with a Telco if you don’t want to, but we’ve also over the last, 12 months really worked on a strategy within the ecosystem, where if a company has already got an existing relationship with a big Telco, and they want to maintain that fantastic. They can bring their own trunk as we call it, and have a direct routing solution inside of Microsoft Teams.
So we’re sort of providing a first party experience but also really embracing, those third party relationships too which are super, super important for many big multinationals that exists. So this for us, is a good example of how Teams is not only one where we’re sort of bringing, sort of new users to the platform, but one that’s going to allow us to have some ARPU opportunity as well, because again, these are the kinds of capabilities that are in that E5 Tier service.
And just on the on the video side on, when you think about there’s a lot of awesome things you can integrate in, but on, Zoom kind of came out of nowhere and kind of became the easy choice. How do you dislodge, what’s going on there?
Well, I think we’re focused on our value proposition. And, and again, as I mentioned earlier, the broad notion of Teams having everything that companies are looking for in a single platform is a very, very strong value proposition. And, I talked to lots of, you know, CIOs and leaders in IT and technology, and sometimes there’s this, oh you know, best of breed versus, integration and our view is it’s kind of baloney.
At the end of the day, we’re going to do a great job of both. We aspire to have, the best. As we were just talking about calling and telephony, solutions on the planet, we want to have the best chat and meetings infrastructure that’s there. We’ve got the office integration already built into Microsoft Teams, which is, again when you think about these high systems of engagement and so forth, having everything, a real true hub for teamwork is a pretty valuable, is pretty valuable differentiator for us.
And then, as we talked about, before, again, this notion of business process, I can’t emphasize enough how sticky that ends up being, when companies decide, hey, it’s not sufficient just to have a video solution, I need to have a video solution that’s connected, into my line of business center processes. And that’s where this platform that we’ve got with Teams is just so unique from that perspective, because it’s not just chat. It’s not just video, it’s really bringing all of these components together and pulling through the rest of the Microsoft 365 platform. So, that’s our strategy. We’ve been pretty clear on it. We’re pretty maniacally focused on it and that’s how we’re going to, ultimately when we believe customer mindshare high in the market.
Just shifting to Security. It feels you’ve been there, but it feels like it’s a much louder voice and you’re having better traction than you maybe even had in the past. Maybe I’m wrong. But I think you said and at RSA, I think you had this putting a $1 billion dollars into this with over 3500 full time employees is a big, big commitment?
Yes, no, and that’s an old stat. And I think those numbers are actually bigger at this point. But you’re right. The last, I would say the last three years, we’ve been working pretty hard on the security space really defining what’s the breadth of the portfolio that we want to be into what are the right markets for us to enter, what are our differentiators going to be? And the team has really, I think, done a nice job of executing and we are in a unique position. It’s in some ways similar to Teams. They are hundreds of security vendors that are on the planet today, many of them are, come from a legacy of building on premises oriented solutions are very singularly vertically oriented.
And that’s been an okay, sort of historical approach. But with the, sophistication of threats today, and the intensity of them, there’s no question that security is moving to the cloud. And, a vendor like us that is, sort of with all the strengths that we have in Microsoft 365, and with Azure, there’s quite an advantage, we think there in terms of the scale.
And so we’ve entered into markets like identity and access management, I think I mentioned, the 345 million people we have on Azure Active Directory, that is a very, very key asset for us. When you think about zero trust, security models, identity is at the core of that, and we have a very, very strong part of that offering, that in many ways, is the umbrella for all the other solutions that we have around threat protection, whether that’s at the endpoint, whether that’s in services like email or Cross Teams are across the application layer itself.
As you know, obviously in this world of bring your own SAS app, CIOs, they need to understand CSOs, they need to understand what end users are using inside of their organization. We’ve made a very intentional push, and we’ve had strength here for years in information protection and compliance. And that’s been a very nice way to round out the value proposition. And again, the CASB space and Cloud App Security, these have all been workloads that we’ve been in, and we have real strength in the market and have built a leadership position.
And it’s, it’s really fantastic. And as I mentioned earlier, it’s been a big, big driver of growth for us being able to attach this to Microsoft 365, but then also have solutions that are independent of Microsoft 365. I’m not sure how familiar you are with Azure Sentinel, to new scene based offering that we launched, I guess about a year ago into general availability, it sounds super, super well in the market. There’s deep integration there with Microsoft 365. So we felt pretty good about where we are in the market and what our outlook looks like here.
In the last six months I think have surprised us all. There’s been, I think a lot of people would never have thought we’d be as productive as we are sitting at home. What’s been most surprising to you and how your customers have acted and a price they’ve adopted? What is there a couple of things you’d call out that were most surprising?
Yes, this is a year where I think many of us will want to forget 2020 for lots of good reasons. But I think it’s also a year where people will look back and go, this was the time, for all the sort of tragedy that’s been associated with it, that the real birth of digital transformation kicked off and went into high mode. Of course digital transformation has been happening over the last couple of years.
But, vendors like us and others, I think have seen, two or three years worth of growth in a period four to six months, in a pretty massive way and it’s, pretty incredible. I think when it all started, I would say the first few months of it was frankly, almost like crisis management, how to companies let people like you and me work from home, how did they enable that to happen, and there was a real scramble, we saw across a breadth of customers, for everything from, getting their VPN and strategy together to making sure their users had, great, great desktops.
And, and those desktops were securely connecting into their, networks. And, there was a pretty massive shift, a pretty massive push to cloud, but also and things like Teams and so forth, but also people upgrading PCs and wanting to layer in security and thinking about information protection and so forth. And so it was it was very, very much a mad dash I guess, I would say.
In the last few months, I think the tenor has changed a bit. Of course, there’s still some companies that are on that journey for sure and catching up and moving fast. But I also think that there are folks now that are looking for the long-term. What’s going to be really durable? How much is — how much of what we’re doing now is going to stick? How much is going to really change? And so they’re thinking, I think a lot more long-term, as opposed to firefighting in terms of what is going to be the durable technology platforms that they’re going to go by.
And, the stress test that many companies went through during this journey, I think has been pretty intense. And the notion of having a platform that is comprehensive, that is broad that is, going to be best of breed in these key workloads, it’s going to enable further digital transformation of these business processes and moving them online, making sure that their employees are engaged and so forth. This stuff’s going to matter a lot. And I think, it really is going to be a catalyst for the next, three, four or five years that we’re going to see.
I know you don’t talk about specifics on the roadmap, but maybe if you could kind of share the vision of how you expect things to look at a high level and we get the questions, is there going to be E7? Is there going to be, so maybe you can just talk to at a high level of the roadmap?
Yes, and no, you’re right. It’s hard to, it’s hard to get too specific on this. I think we’ve talked a little bit about some of these things. We’re super committed to creating great experiences for end users in the productivity and collaboration space. And there’s, we didn’t get a chance to say too much about all the work that Ml and AI is able to enable in terms of creating really interesting scenarios for end users and that’s a big thing that we’re going to focus on.
I think we talked a little bit about security and compliance, that will continue to be a big thrust for us in terms of where we’re pouring our engineers and our R&D and where we see market opportunity. I talked about this unique intersection between systems of record and systems of engagement and this notion of workflow and line of business. I think that’s going to be a big area of investment for us.
And then, I touched on it briefly, but as we’re going through all this digital transformation, there’s a lot of cultural change that organizations have to go through and thinking about what that employee experiences, there’s a lot there and we for example, just a month or a month or two ago announced a new corporate learning application that we’re going to be building into teams. We’ve got a lot of data and analytics that we’re using to help, businesses understand how their employees are being productive, their well being and so forth and we think that’s going to be a big opportunity for us too.
Great. Kirk, thanks for joining us. I really appreciate the insight and congrats on the ongoing success. Thank you very much.
Hey, thank you very much for having me. I appreciate it. Thank you, everyone.