Microsoft Corp at UBS Global TMT Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : That makes you interesting to everybody, Corey.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Obviously, not everybody on Scott's team need to do these sessions in a red polo, so I'm glad you've got an exception.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : All right. Look, well, perfect. Corey, maybe before we dive into Azure and some of the individual product areas at Microsoft, let's kind of keep it a little higher level for a little bit and ask just broadly what you're seeing out there in the IT spending environment and sort of the spirit of the question is something that tech investors are trying to grapple with, especially at year-end as they look out to a new year and pick the right stocks and understand what trends might have been terrific in the last 18 months post COVID. But that maybe the mix is shifting and the priorities are changing for the next 18 months, and that's obviously very important for everybody to get right in their stock portfolio. So maybe I'll start there. How do you think the IT spending priorities are changing?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : And Corey, within all those various projects that are part of this digital transformation, were there some in your judgment that were made an immediate priority in the 6, 12 months after the pandemic hit that now might in their life cycle sort of be leveling out? And conversely, where their priorities that were put on hold that were kind of hit hard in the 6, 12 months that are now having their day in the sun and are finally getting funded? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 08, 2021 / 5:00PM, MSFT.OQ - Microsoft Corp at UBS Global TMT Conference (Virtual)

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Let's go back maybe to a point you made earlier in response to my question where you mentioned that you, in fact, partner with a lot of those companies that I mentioned we're doing fireside chats with today. So maybe the broader question is how all of these IT spending changes are changing Microsoft's partner ecosystem. Are you making any shifts, you and the team, on that front?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Okay. Good perspective. Let's maybe use this as a jumping-off point to some of the individual revenue segments within Microsoft. And maybe we'll talk about the one that everybody wants to talk about, which is Azure. Congrats, by the way, amazing success. And it sounds like you got your start in your Microsoft career as an engineer on the Azure VM side, which has turned into a pretty big business. So congrats to you and your team there.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : I wanted to ask you a couple of specific questions on Azure. One is a tough one for us on the outside to figure out, and that is how to model the conversion of these big multiyear Azure commitments to actually usage and therefore Azure revs. I guess the supposition is that it probably takes some time that you sign a contract today and you probably really don't see the usage, the sweet spot of that usage curve, maybe for another 12 to 18 months. But I'd love to ask you, Corey, for your perspective about how that process works so that everybody listening can do a sharper job trying to model Azure revenues going forward.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : And I guess it's those people elements that might be the constraint these days because a hot topic on the street and the media is the fact that there's a labor shortage and such a bid out there for engineers these days. Are you seeing any examples, Corey, where sort of the struggle for talent and the lack of people is constraining the ability of Microsoft's large customers to ramp their use of Azure as fast as they'd like? Or has it not reached that acute level yet?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Corey, another part of the Azure story that's tough for us on the outside to get a handle on is what the mix of services looks like on Azure. I think everybody's impression is that as customers on board, there's probably a pretty heavy use of Azure VM, compute and storage called at the core infrastructure. And then as they become more mature Azure users, they graduate to the premium services. But we really don't have a good sense for what that mix looks like or within the premium services what are the more popular bigger buckets. Can you opine on that a little bit?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Popular premium services. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 08, 2021 / 5:00PM, MSFT.OQ - Microsoft Corp at UBS Global TMT Conference (Virtual)

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : So maybe let's hit right on that actually because that's a hot topic for tech investors. Even today, I've had MongoDB, Informatica fireside chats. Yesterday, I did a fireside with the CEO Ali of Databricks. The day before that with Mike Scarpelli at Snowflake.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : You know all them, too.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Well, in many cases, their products live on Azure.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : All of them seem to be doing fairly well, so it's pretty clear to everybody that something super interesting is happening around the data AI space. But maybe where I can ask you to weigh in a little bit is how Microsoft's own products compete with all these vendors. So on the one hand, you're a partner with all of them, largely because they all want to run on Azure. But on the other hand, you're not just going to sit back and sort of seed that market to all those vendors and merely collect the compute resource consumption. You're going to chase that opportunity, too. So how do you compete actually with all these partners of yours in this big opportunity, Corey?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Well, they did, frankly. Maybe a couple more on Azure. So this is taking you back, Corey, to your early Microsoft days when you were helping to build out the Azure VM suite. But I think if you ask the average tech investor today, they would argue that there's little to differentiate compute resources rented, so to speak, on Azure versus AWS EC2 versus Google Cloud compute. But you were part of the team that actually built that Azure VM suite. So my guess is you would probably disagree with the notion that they're all the same. So maybe what I'd love to ask you is, what's actually different about Azure on that core compute side?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Okay. I'm going to ask you one more Azure question. So when we listen to Amy and Brett, they don't disclose Azure gross margins, but they've just discussed how they have improved over time. And one of the sources of improvement are efficiency gains inside Azure. So you were one of those guys, sleeves rolled up in the weeds, so can you give everybody listening an example of an efficiency gain that's still left in Azure that might sort of squeeze a little bit more margins out of all those servers? It seems impossible that you haven't squeezed the lemon to the maximum yet. But kind of what's left that might be an efficiency gain? Maybe just give us one example, Corey.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Super helpful. Let's leave Azure for a moment and talk about another exciting product area, and that's Teams, Corey. We -- everybody listening is trying to figure this out. There's a number of variables. Collaboration was such a huge priority, as you even said earlier. As we look in the next 18 months, will that fade a little bit? Will it flatten out? That's one thing we're trying to figure out. We're trying to figure out how Microsoft Teams versus Zoom versus WebEx versus Salesforce Slack, how that competitive environment is going to play out. Maybe you could set the framework for us with your views on how usage and adoption of Teams is changing and what you see in the next year or 2.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Let's hit on the most recent Teams announcement, where just last week, I think you announced Teams Essentials. So that's clearly targeted downstream at small midsized businesses. The stated price points, $4 per user per month. Can you describe what the strategy is there? I was hosting Zoom a couple of hours earlier, Corey. I certainly asked them what they thought of Essentials, but I'd love to ask you.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : So Corey, how would you rebut the view that Microsoft is taking Teams, at least for this customer segment, from free to $4 per user per month. Is the difference that that's not the same product, that Essentials is actually a beefed up version of what you would otherwise get for free? Is that correct?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Good color. Let's talk about Office. Obviously, one of the franchises inside Microsoft's portfolio. The bigger news there is that Microsoft has elected to, as of March 1, raise the price points across not all but some important SKUs. So maybe you can help frame that. Why do you think this was the right time for Microsoft to make that move? And Corey, as you've been interfacing with customers, like what's the reaction to the price increase? Is it a little bit of pushback? Is it a shoulder shrug? What's happening in terms of the reaction?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Got it. Perfect. We probably only got 5 more minutes. So let me take a couple of questions. So one that came in, Corey, I'll just read it back to you. And it references a, I think, a customer anecdote you made about wanting to get out of a data center and move on to VMware on Azure. So the question is, why would a customer lift and shift onto VMware on Azure without actually rewriting the underlying code or data to take advantage of what the cloud can offer?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Exactly. Okay. Maybe I'll finish with another question on a subject we haven't hit on, and that's the sort of the core Windows franchise. And the spirit of the question is that Microsoft has done a great job over the last 5, 10 years, taking a lot of its traditional businesses and essentially moving them to the cloud, moving them off of traditional license maintenance models to one that's more ratable subscription and usage based. But a large portion of the core Windows business is still sort of that Windows OEM upfront license sale. So I'd be curious what Microsoft is doing to try to take the Windows business into the cloud and ratable subscription era. And 2 things I've noticed recently that seem to be efforts would be Azure Virtual Desktop as a way to marry Windows and Azure. And then I think Microsoft has recently launched a cloud PC product that might have that same effect. Can you touch on the traction you're seeing so far on those products and who they might be disrupting?

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Yes. Corey, I can talk to you for another hour, but unfortunately, we got to end it here, and I'm sure you've got a day job that you need to get back to, anyway.

Question: Karl Emil Keirstead - UBS Investment Bank, Research Division - Analyst : Thanks for carving out time for us. And thanks, April and Brett, for enabling Corey to attend the conference and tell the Microsoft story to UBS' clients. So thank you all, and happy holidays. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 08, 2021 / 5:00PM, MSFT.OQ - Microsoft Corp at UBS Global TMT Conference (Virtual)