Microsoft FY 4Q17 Earnings Call Notes

Satya Nadella

The core currency of any business is converting data into AI

“The core currency of any business going forward will be the ability to convert their data into AI that drives competitive advantage. It all starts with having support for the comprehensive data estate spanning Azure Database, Cosmos DB, Data Warehouse, Data Lake, combined with SQL Server. Azure Cosmos DB is the industry’s first globally distributed database service. It enables customers to securely and reliably power data-intensive applications at unprecedented scale and performance, from IoT to AI to mobile and much more.”

Examples of AI

“Retailer Jet.com is using Azure Cosmos DB to process trillions of transactions every day. Customers are infusing AI into their products & services using Azure AI infrastructure and services such as Bot Framework and Cognitive Services. Sabre, a leading technology provider to the global travel industry, is piloting AI-powered solutions for travel agencies to better serve customers. And Dixons Carphone is using Azure and our Cognitive Services to boost customer engagement and provide a more consistent, seamless experience across online and in their stores.”

AI at the edge

“If you look at some of the most exciting things that are happening in the cloud, is cloud applications that actively require an edge Azure IOT, or Azure Stack are becoming the runtimes of the edge where you do need not only the ability to do compute and storage, but to run the AI inference and the edge. So to me that’s what we’re building to. It’s actually a big architectural shift from thinking purely as a migration to some public cloud to really thinking of this as a real future distributed computing infrastructure and applications, but I quite frankly feel very, very good about leading and so in that context our server license revenue will fluctuate based on what the macro is and these transitions and mix shifts, but from a forward-looking perspective, I want us to be very, very clear that we anticipate the edge to be actually one of the more exciting parts of what’s happening with our infrastructure.”

Microsoft at JP Morgan Conference Notes

Chris Capossela

We are not focused on trying to be the cool kid

“I would say that for us, the most important thing is to really get people to understand that Microsoft is not really focused on trying to be a cool kid. We are not focused on some of the things that I think our tech competitors focus on. We are really about empowerment. ”

We market what we have instead of any visionary future

“we try to market what we have as opposed to any visionary future. I am never a huge fan of marketing stuff that people can’t that can go use. And so it’s one thing to do a sexy demo or give a speech that you have some far-off vision that people get excited about. But I don’t think you market those things. I think those are used at important moments in time. The marketing has to be about telling how companies can do better than they are doing today using your stuff. So we really try to focus on what’s possible today.”

We know how to deal with enterprise

“I certainly think that the track record that we have in the enterprise plays well to Microsoft’s strength. The account teams that we have calling on large enterprises. The fact that most are running their email through our cloud and email, believe it or not, has become just this incredibly important line of business system and we have many, many CEOs telling me, hey, I can deal with an SAP outage, I can’t deal with an email outage for a second. So you have to have, 99.999%, five nines isn’t enough for your email system. I think having that track record and that relationship where customers trust us, they know there are going to be mistakes made, but they trust us to respond to those mistakes really well”

Customers want balance between MSFT and AWS

“I also speak to lots of companies that are on AWS and they tell me the today 90% of my spend in the cloud is AWS and only 10% of it is on Azure and I already have a goal to make that 50-50. And that has actually nothing to do with, they believe in us more, they literally just want balance of trade. They literally just want the ability to sort of say, hey, it’s going to be better for my company if I use multiple vendors here and obviously a given that Amazon is in the top spot and we are in the same spot, we have a lot of headroom from simply playing balance of trade across the cloud.”

Microsoft FY 3Q17 Earnings Call Notes

Satya Nadella – Microsoft Corp.

What’s happening at the edge is the most exciting part of cloud

“when everyone’s talking about the cloud, the most interesting part is the edge of the cloud. Whether it’s IoT, whether it’s the auto industry, whether it’s what’s happening in retail, essentially compute is going where the data gets generated, and increasingly data is getting generated at the volumes in which it’s drawing compute to it, which is the edge. So if you look even at our announcements over this quarter, a lot of what we have done with IoT is create an IoT edge. Of course, we have an amazing cloud with the SaaS services for IoT, but the edge compute, the ability to run a neural network at the edge, do inferences at the edge is exciting. Azure Stack is going to completely change what hybrid is and the expectations customers have with hybrid.”

Time to move CRM and ERP to the cloud but those are old concepts anyways

“But we do have a huge on-premise base. There is still a need for those on-premise products. That will continue, but our focus is on transitioning to the cloud. And you’ve seen us do this successfully with Office 365. You’ve seen us do that with Azure. And now we’re ready to do that mainstream across what has been traditionally known as CRM and ERP without in fact us thinking and talking about those suites because we think that is a pretty old concept to have suites like that, which is we have now really made the entire Dynamics 365 much more modular, modern, and much more efficient for customers. So that’s what’s happening in Dynamics.”

Microsoft 2Q17 Earnings Call Notes

Satya Nadella

Examples of cloud customers

“A prime example is Mars, a $35 billion business with 60 brands. An early adopter of Office 365, Mars is using Office and Windows 10 to transform how its 80,000-strong global workforce collaborates while staying secure. And more recently, they have begun running mission-critical workloads on Azure with hundreds more on the way, including inventory management using Azure IoT. Swift Transportation, one of the largest trucking companies in the United States, is digitizing work for nearly 20,000 drivers with Office 365 and Skype and is using Azure to harness the data from their sensor-equipped trucks to optimize driver productivity and safety.”

Have reorganized the sales force to be more technical up front

“I would say the overall change that we are going through, and this has been ongoing for I would say the last multiple years, is transforming our field engagement model, where we’re putting a lot more technical depth in the front-line sellers so that they can engage, whether it’s data specialists, cloud specialists, security specialists, or even productivity specialists. Because it’s super-important for us in this phase when people are looking for solutions to help them visually transform, for us to have a very fundamentally different type of capability in terms of our sales, and that’s the transformation. And so we have really reorganized ourselves, both in the headquarters and in the field, to be able to recognize that shift.”

Seeing customers span cloud offerings

For example, in FinServ, some very Tier 1 trading applications now using some of our capabilities in service fabric, which is really a PaaS service, which allows you to manage microservices with low latency and high scale, that’s a place where we are seeing in fact activity, whether it’s game development or trading applications. We are seeing even interesting use cases of Azure functions, which is completely serverless. In fact, you can think of it as a price cut for anybody who cares about being very, very smart about cloud consumption. Going serverless is something that we in fact advocate. So across the board, I feel we have the right mix of IaaS, PaaS, SaaS, and per user SaaS services like Azure Active Directory, which gives us the right mix to be able to even have the right margins long term. We’re not concentrated in any one layer of the stack, which is something we do by design because our vision has always been that we want to of course offer all of these layers, and customers will choose depending on their needs and their scenarios. And we are now seeing even a single customer estate spanning all of these.”

Office as SaaS means always up to date and secure

“But in addition to that, I must say there are two other things that are increasingly becoming fairly relevant in the adoption cycle, which is moving to both Office 365 and Windows 10 and getting essentially to this new frontier for productivity, which is an always up-to-date operating system, which is secure, and an always up-to-date Office experience that is a SaaS service. We’re increasingly seeing that resonate, not just in small business and some of the high-tech industry as it has been in the past, but now even in the regulated parts of the enterprise. So we are very excited about that.”

Amy E. Hood – Microsoft Corp.

Expect continued FX headwinds

“Now let’s turn to the outlook, first FX. We had originally expected FX rates to lessen going into H2. However, given current rates, we expect continued currency headwinds for the rest of the year. For Q3, we now expect about 1 point of negative impact on total revenue. Within the segments, we anticipate about 2 points of negative FX impact in Productivity and Business Processes and Intelligent Cloud, and 1 point in More Personal Computing. “

Microsoft UBS Conference Notes

Microsoft (MSFT) Management on UBS Global Technology

Rajesh Jha – Executive Vice President, Office Product Group

Satya brought a pretty big shift in culture

“So from a culture perspective, I would say perhaps the biggest impact was bringing the mindset, learning mindset, or growth mindset, where it’s about being humble, it’s about being open-minded, about intellectually curious, trying stuff, not being afraid to fail, learn quickly from failure. That was a pretty big shift, you know, it seems really an obvious thing for us to do, but it was a pretty big shift that he brought to the table.”

“And then brought a much sharper perspective on customer obsession, being connected to the customer. And then I would say under his leadership the third aspect I would add is probably more than ever before working as One Microsoft. So building on each other and getting the efficiencies from that.”

The key to AI is having unique data

“It’s huge. I mean look, the first thing when people tell you they do AI, the first thing you’ve got to wonder is do they have unique data, do they have unique signals. In Office we have billions and billions of data points as our users interact with our products. They are signaling us. When I share a document with you, Brent, that’s a signal. If I e-mail if somebody sends me e-mail and I dwell seven or eight minutes on that e-mail versus my typical minute or two, that’s a signal. And all these signals and all the data what we do with Office 365 is we treat them as a customer’s data and customer’s signals. So then what do we do? Now we’ve got lots and lots, billions of endpoints of data and signals. Then we bring in machine learning and AI techniques and natural language processing to give back the end user or the customer unique insights.”

Example of AI use in word

“Let me give you a couple of examples. Let’s say you’re editing a document in Word and you’re preparing a report and then you think maybe I want to reuse a chart from a report I had seen somewhere in my work group and you didn’t quite remember who had shared this with you, but you want to use one of those charts. So what we have today as a feature now in Office 365 is called Word Tap. So you’ll literally one tap onto the ribbon and we use the AI technique to bring all the relevant documents that you’ve seen in the past that may be interesting to the content that you’re writing now, and we auto-bring those things into you right pane. You can scroll in the right pane. You can tap on the chart that you see, and boom, it’s in your Word document. And so instead of going leaving Word, going and doing a search, find the filter you searched on, remember who sent you that thing, the AI signal brings it back into Word.”

24m consumer subs to Office 365

“So one thing we haven’t done a lot is we haven’t talked about Office 365 consumer business. We are quite happy with our consumer business. We have 24 million subscribers today for Office 365 in the consumer space, and the value that our users get there is they get a terabyte of storage in OneDrive, and OneDrive is a great integration as you just mentioned back into the core devices. And then an always up to date client, all the AI features I talked about start to show only for our subscribers.”

Microsoft FY 1Q17 Earnings Call Notes

Microsoft’s (MSFT) CEO Satya Nadella on Q1 2017 Results

85m monthly active users of office 365M

“Monthly active users of Office 365 commercial are now over 85 million, up more than 40% year-over-year. Office 365 commercial seats were also up 40% year-over-year and revenue up 54% in constant currency. Across industries, customers such as eBay, European airline, jet, global pharmaceutical company, Allergan, the Fortune 100 companies like the energy leader Exelon and Liberty Mutual Insurance are choosing Office 365 to help make their employees more productive and secure.”

Vision for distributed computing

“Overall, again I go back to how we think about Azure. We really have a view of distributed computing which is more expansive doing just even our HyperScale cloud. We think about Azure and our servers as one distributed computing fabric that’s building. We also don’t think of Office 365 and Dynamics 365 as independent, we think of them altogether building out our commercial cloud because it takes one of the bigger growth areas we have in Azure, it’s IoT but it’s not just people connecting sensors and collecting data. They collect the data, they store the data, the analyze and do predictions on it but then after you do predictions you got to do something about the predictions. So in many cases they choose to use especially with the new Dynamics 365 field service module automating field service.”

Most excited about companies developing new workloads with cloud capabilities

“We definitely are seeing production workloads that are moving over from on premise, but I think the more interesting thing Heather for us is to see new workloads. When I look at what’s happening with say some of the most innovative work we’ve done around distributed computing which is service fabric and how people are in fact going straight to building out using our past services some of the new HyperScale cloud services using microservices and not only are they doing that but we’re also seeing great growth in our serverless infrastructure which is Azure functions. So I am actually as excited about new cloud growth from new cloud workloads from the same customers so the much interesting thing that I am observing is that it could be the same model customer that was participating with us in the client server area. We are not just building or moving their IT but they are building new digital services for HyperScale and that’s what it is probably unique in terms of what is changed year-over-year for us. It’s not just the Silicon Valley startups anymore, it is the core enterprise that is also becoming a digital company and we are well positioned to serve them and that’s good to see.”

Microsoft (MSFT) at Deutsche Bank Notes

Microsoft’s Azure is in a two-horse race with Amazon’s AWS

“I’d like to joke, each of these little blue dots you can kind of see from space and in many cases they are now massive, massive facilities. This is one in our east U.S. region, you can sort of see the scale that little thing in the bottom right is a very large truck. This is another angle of the build out that’s happening, this is ultimately, this facility is now I think actually built out, it’s about two miles long and this one location will ultimately host about a million servers. And this kind of scale at that global level is something we fundamentally believe, really very few companies in the world are going to be able to provide, and for the most part we see ourselves through the two-horse race today with AWS as that provider” Scott Guthrie – EVP, Cloud and Enterprise

 

Three requirements to become a cloud vendor–vast amounts of CapEx, thousands of engineers, and a lot of time–create a big barrier to entry

“I think to be a hyper skilled cloud vendor which I think increasingly is going to be the thing that any enterprise is going to want to adapt, I think you ultimately would have three things which create kind of a motive you will around the market. And one is, you need to be able to spend vast amounts of money in terms of CapEx, so billions and billions of dollars a year, building out data centers, buying private fiber, building servers; I mean that immediately creates a pretty big barrier to the market.

Secondly, you have is thousands of engineers that can write — distribute systems code; you can’t just buy into this market because none of the servers that we use now are off the shelf servers… And then the third thing you need to have is frankly time; a lot of these things that you learn in the cloud in terms of operating at the scale, there is no book you can go to Barnes & Noble, how do I manage million servers, it’s all pretty new, right… And so the combination of those three things creates a pretty big mode, and when I look at other vendors in the market, I think that’s going to be very difficult for folks to break in.” Scott Guthrie – EVP, Cloud and Enterprise

 

Azure has more than 120,000 new subscriptions every month

“Collectively, all these customers are driving huge amounts of adoption. We’ve got more than 120,000 new customer subscriptions being created every month, about 1.6 million production databases are now being hosted in Azure alone, more than 2 trillion IoT messages each week, more than 5 million organizations that have sung through identity server and integrated their user employee security as part of our cloud, 4 million developers, and the thing we always like to emphasize is as much as we are focused on enterprise, having a cloud is great for enterprises, also makes a lot easier for software vendors to build their solutions, hosted on our cloud and reach those enterprises as well, about 40% of our overall revenue for example with Azure comes from startups and software vendors building solutions on top of us.” Scott Guthrie – EVP, Cloud and Enterprise

 

Cyber threats are significantly greater today than they were a decade ago

“Well, I think in general the threat environment that we all live in now is significantly scarier than it was a decade ago versus two decades ago. And I think the adversaries out there are getting more sophisticated, the types of attacks that are happening are happening more frequently, and that’s just going to be the new normal for us going forward. And the important thing when you think about security is you’ve got to be paranoid and you can’t take anything for granted, and your any vendor who says, use my stuff and you will be perfectly secure, run away from because they — don’t get security or they are lying.” Scott Guthrie – EVP, Cloud and Enterprise

Microsoft FY 4Q16 Earnings Call Notes

Microsoft (MSFT) Satya Nadella on Q4 2016 Results

Why enterprise partners choose Microsoft cloud

” let’s get into the specifics of the Intelligent Cloud, an area of massive opportunity, as we are clearly one of the two enterprise cloud leaders. Companies looking to digitally transform need a trusted cloud partner and turn to Microsoft. As a result, Azure revenue and usage again grew by more than 100% this quarter. We see customers choose Microsoft for three reasons. They want a cloud provider that offers solutions that reflect the realities of today’s world and their enterprise-grade needs. They want higher level services to drive digital transformation, and they want a cloud open to developers of all types.”

350m Windows 10 users

“Now let’s talk about the progress in More Personal Computing. We have increased Windows 10 monthly active devices and are now at more than 350 million. This is the fastest adoption rate of any prior Windows release. While we are proud of these results, given changes to our phone plan, we changed how we will assess progress. ”

Azure customers extending beyond those just in the “classic tech” industry

“pretty much anyone who is a customer of Azure is also in some form an ISV, and that’s no longer just limited to people who are “in the classic tech industry” or the software business. That’s the same case with GE. It’s the same case with Boeing. It’s the same case with Schneider Electric or ABB or any one of the customers we are working with because they all are taking some of their assets and converting them into SaaS applications on Azure. ”

One third of customers are traditional ISVs

“The question you asked is an interesting one, which is if I had to slice it by classic ISVs, it would be one-third or so of our revenue. But the thing that – the first question that Keith asked is probably more indicative of what’s happening, which is every customer is also an ISV. So every customer who starts off consuming Azure is also turning what is their IP in most cases into an ISV solution, which ultimately will even participate in AppSource.”

The cloud is about moving towards services

” I look at what we are doing with Office 365, Dynamics 365, AppSource, LinkedIn as all being part of one strategy. So the move to the cloud for our customers and for us is not just about a new way of delivering the same value just as a SaaS service. It’s really the transformation from having applications that are silos to becoming more services in the cloud where you can reason about the activity and the data underneath these services to benefit the customers who are using these services. So that’s what this notion of a graph represents.”

Amy E. Hood – Chief Financial Officer & Executive Vice President

Expect Commercial Cloud Gross margin will improve materially next FY

“Before discussing our total company gross margin expectations, let me first address Commercial Cloud gross margin. We expect the Commercial Cloud gross margin percentage and dollars to materially improve next fiscal year. We have invested heavily to build share, expand geographically, and ensure world-class support and reliability for our commercial customers. Going forward, we expect those investments to provide benefits of scale. We also anticipate our cloud capital expenditure growth curve will slow. ”

PC market was a little better than we thought

“the PC market was a little bit better than we thought. And particularly in developed markets, the PC growth was better than we thought. And developed markets are where we see the most transactional business with Consumer Office that impacts in quarter. So the strength from that outperformance or better market in consumer PCs in developed markets is a direct correlation to our performance in Office Consumer.”

Microsoft (MSFT) CEO Satya Nadella

Microsoft (MSFT) CEO Satya Nadella explained why he bought Linkedin for $26 billion in a letter to employees

“We are in pursuit of a common mission centered on empowering people and organizations. Along with the new growth in our Office 365 commercial and Dynamics businesses this deal is key to our bold ambition to reinvent productivity and business processes. Think about it: How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world. It requires a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics. ”

Microsoft (MSFT) CEO Satya Nadella is allowing LInkedin to keep their separate brand

“A big part of this deal is accelerating LinkedIn’s growth. To that end, LinkedIn will retain its distinct brand and independence, as well as their culture which is very much aligned with ours.”

 

 

Source: Microsoft/Linkedin Acqusition Announcement

Microsoft (MSFT) X-Box CFO Kevin McCarty

Microsoft (MSFT) X-Box CFO Kevin McCarty discussed how game downloadable extra content is increasing the amount players are spending

“I see the industry having more micro transactions in game, that way there’s no cap as to how much a player could spend in the game.  For example, a player might spend $15 on on buying the physical disc to play the game and then may spend an additional $15 or more to acquire certain in game abilities such as map packs or rec packs.”

Microsoft (MSFT) X-Box CFO Kevin McCarty how he sees virtual reality evolving

“For VR, the big publishers have a chicken or egg problem.  They tend to not make big bets on any platform until it has traction.  So I think with VR you’re going to see a lot more indy developers make games to start out with until the concept is more proven.  I think it’s ultimately going to take a real deep in game experience to launch the VR industry to where it needs to be and draw in the large video game publishers.”

 

 

Source: E3 Gaming Conference, Group analyst meeting at JW Marriott Hotel


SK Additions:

Changed our KPIs from sales volumes to monthly active users

Need to get to 6 teraflops for high res VR

Consumers who buy consoles like the appliance like elements of it

Oculus and HTC vive are both running on Windows….the true spirit of Windows is allowing anybody to run anything on top of it.

There’s a fine line between monetization and annoying

VR is going to be tricky for the publishers. There’s not a big installed base so there going to have to produce things without guaranteed returns. They will probably do micro experiences to experiment in VR. You’ll see a lot more indie development early on. Smaller studios. It will take a breakout experience to get VR really going.

First gate to the digital world is to have some sort of payment instrument on file. You do have bandwidth constraints in some regions.

I don’t want to use the word generation…We’re hoping to move away from a generational approach to a monthly active user base

It’ll take prices coming down and broader content to get mass adoption of VR

We spent the last few years refocusing on the gamer. We had focused on broader entertainment with Kinect etc.

If Sony also says they’re 6 teraflops and they’re $100 cheaper that would be concerning.