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Wells Fargo Tech Summit
What: Wells Fargo TMT Summit
When: Wednesday, December 4, 2019
(Music.)
PHIL WINSLOW: Good afternoon everyone. We're very excited to have Microsoft here. Bill thank you for coming down. I know this is a busy time of the year, so thanks for making the time for us. I know everybody in the audience appreciates it too. I guess for the benefit of everyone in the room, I wonder if you could give us your background, who you are and what you do at Microsoft.
BILL DUFF: Yes, so I'm Bill Duff. I'm CFO of our Experiences and Devices Group. Experiences and Devices at Microsoft consist of our productivity experiences, and also our consumer experiences, and so it's covering Office, Windows, Surface, all of our hardware products, gaming and search.
PHIL WINSLOW: Let's start with Microsoft 365 then. Perhaps you've all heard of it, but we've also been hearing a lot about Microsoft 365. Can you help us understand how M365 fits into just the larger vision of Microsoft?
BILL DUFF: Yes, so, M365 is our productivity cloud, and so it consists of Office 365, so the productivity cloud services, Windows, specifically Windows Commercial and EMS, which is our management and identity solution. And so, we bundled these together under Microsoft 365 name a couple of years ago, and it was really a marketing bundle at that time. These products had been developed, and they were integrated somewhat, but we really didn't have the deep integration that we felt like we needed.
So, over the last couple of years, what we've really done is taken these different products across Office, Windows and our identity management solutions, integrating them into a holistic solution, and so one that is really seamless across all of these different workloads.
It's seamless from a customer experience standpoint, but one of the advantages of integrating them more deeply is we're able to translate these experiences across Windows, across our Office experiences, and deeply integrate them with identity management as well. It's a super important strategic initiative for us.
When you think about our overall productivity business, our customers who have bought in to Microsoft 365 use more of our services, and so they've actually bought into our full stack, using many more of our services, and they're much more likely to upgrade to premium SKUs, and so it's been a big driver of growth for us, on the productivity side at Microsoft over the last couple of years.
PHIL WINSLOW: Interesting. Yes, to your point, it's sort of the evolution to date of M365. I remember in a press release, though, it was a bundle, and then you started to see that you had different announcements of like deep technical integration here, deep technical integration views, plus they work better together. But, thinking about going forward, how do you imagine M365 to continue to evolve?
BILL DUFF: Yes, M365, really, I have four investment areas for M365, with productivity and collaboration, and you can see this, and we'll talk a little bit later, hopefully, about Teams, but Teams has really been an exciting product for us. We've seen very, very strong growth. It's really the new hub for teamwork for companies and enterprises, and so we have a strong focus on productivity and collaboration.
We also have a strong focus on security, compliance and management, and so you can see us investing pretty heavily in the security space. We're making a ton of progress there. Compliance is also a big opportunity for us, going forward, and then there are two new areas that we're excited about from a growth perspective.
One is around business processes and workflows. So, whether you think about Teams as really a platform for business processes, we think there's a lot of opportunity in vertical spaces, in that specific area, and then the fourth one is really a more forward-looking one, around knowledge.
We announced a project we called Project Cortex, and this is really about how organizations organize and use the data that they have inherent in their organization to have optimized business processes, but also providing new insights into how to run their organization better.
PHIL WINSLOW: Interesting. Where are we, just in terms of commercial penetration across M365?
BILL DUFF: Yes, we still look at it by workload, and so Office 365, we've crossed 200 million now, and so we have a significant number of active users of our Office workloads, and so these are active users. On the EMS side, and so on the management side, we've sold 120 million seats, and so our install base is over 120 million seats right now.
On the Windows side, Windows commercial, we spent the last couple of years really migrating the enterprises to our most modern operating system, Windows 10, and we're more than halfway through that journey. And so, we've got – you know, Office 365 is very strongly penetrated in enterprises, where EMS and Windows are less so, and so what we're seeing is Microsoft 365 pull through those products.
That's been a big driver of growth of ours in the last couple of quarters, in the last couple of years. We also see growth opportunities going forward where it's how do we expand out to – versus the information worker, which is the typical office user?
You know, you can think about Teams going into first-line workers. We think we have big opportunities with SMB, and so we're pretty excited, overall, about the growth. We've made a ton of progress. It shows up in our financials, but we've got a lot of growth yet.
PHIL WINSLOW: Obviously, you just sort of talked about the individual workloads, but maybe help us think about what it is that M365 unlocks that maybe sort of Office, EMS, or your Windows standalone couldn't do before.
BILL DUFF: Yes. I think if we were to think about it, there's a bunch of scenarios that we can talk about, and a couple of them that are pretty interesting, which is around security and compliance.
When you think about all of the different, let's say, threat protection services that we have Microsoft, we have threat protection associated with Windows, threat protection associated with Office, threat protection associated with our cloud and identity management. It's really integrating those together so that if you're a chief security officer, you have one console, one place to look at what's happening across your entire estate.
Also, from a product truth perspective, looking at all of the data and signals that are coming, right, and so we have 900 million Windows 10 devices, active devices out there. We've got a huge install base on the Office side, and really security is about picking up these signals, picking up this data, making connections, but then being able to do something about it, right?
The future of security is about how do you automate these processes, and so once you have these signals how do you automate things like shutting down an endpoint or protecting the overall estate? We think we have world-class technology. We think it's a huge opportunity. That's a specific area where we see big opportunity, going forward, where you need to think of it holistically as a product across M365.
PHIL WINSLOW: Yes, just to reinforce what you've said, we obviously have quite a number of security vendors here and other software companies, and one of the things that actually several of them have said is the strides that Microsoft has said from a security perspective in Windows. I mean, people in the industry are taking note of it, so yes.
BILL DUFF: Yes, and so if you look all of the Gartner Magic Quadrant, and everything, you know Microsoft, let's say three to five years ago, just didn’t even show up in that discussion. Now, we not only see it as a way to protect our products, and we see a real differentiated opportunity for us, but we're thinking more broadly than that. We're thinking about security as an independent market for us that we're really going after.
PHIL WINSLOW: Obviously, Windows commercial is a key part of M365 and obviously opens up the door to monetize Windows in whatever reoccurring earlier mechanism for traditional OEM model, which is great too, it's great revenue, but maybe walk us through what is sort of the value prop of Windows commercial, and going forward how do you think about the growth of this.
BILL DUFF: Yes, Windows commercial is sort of a less known business for us at Microsoft, and so we talk about it publicly when we report our quarterly results, and we talk about it as Windows commercials, but this is a version of Windows and associated services that we sell directly to commercial customers.
So, one of the things that's really important to us is that we sell it as part of Microsoft 365 and so it's part of our standard go-to-market motion that all of our account executives talk about when they sell M365, and so it's part of the M365 suite that we talked about with the integration before.
But it's also a little bit of a different business model for us. It gets us on a recurring business model. And so, when you think about a recurring cashflow from Windows, not only do we have the one-time device sale when our hardware partners sell a Windows device, but we also have this ongoing Windows relationship with our customers.
It was a decent size business, I would say, five or ten years ago, but it's an area where we've grown a lot, and really what we've focused on is what are the features around security, management, and increasingly, virtualization, security and compliance, where we can add into a version of Windows that's really service-based, focused on the corporation and part of the overall M365 value proposition.
So, you've seen significant growth in the Windows commercial business over the last couple of years. As a matter of fact, if you looked at a Window's revenue, let's say seven to ten years ago, versus today, the most significant change in the way that we are capturing revenue on the Windows side has been the growth of Windows commercial. It's been a pretty consistent double-digit grower from a build perspective. For the financial analysts out there, there's some accounting –
PHIL WINSLOW: I was wondering if you could give us a soliloquy on business in Windows commercial. Is that totally cool?
BILL DUFF: Windows commercial –
PHIL WINSLOW: We'll do that at the bar later.
BILL DUFF: Yes, we'll do that at the bar later, but it does show up from a revenue recognition standpoint, where we've seen really strong growth over the last couple of quarters, but that's more of a revenue recognition thing. If you think about the underlying health of that business with the number of new users that we're getting on Windows, and sort of the value prop that we're delivering, it's been a consistent double-digit grower, and so we're excited about it.
PHIL WINSLOW: Now, I'm sure you haven't got this question today, but with Windows 7 nearing its end of life, and I'm sure this is not bad news, and so I'm not putting you on the spot, how should we think about the impact of that on the Windows OEM business?
BILL DUFF: Yes, if you look at our results over the last couple of quarters, we've had very, very strong OEM Pro, and that's how I think about our commercial PC sales, and so OEM Pro has significantly grown. There are a number of factors there. The economy is good. Windows 10 is a great product, and so we're seeing continued demand for Windows 10, but certainly the end of support in the Windows 7 end-of-support cycle has fed into that, and really helped drive the growth of our OEM Pro.
As we look forward, we're seeing very, very strong demand, currently, and over the last couple of quarters. If anything, it's exceeded our expectations. As we go through these refresh cycles, if you're a student of history of Microsoft, you've seen refresh cycles in our OEM business in the past, and so we will see some of the refresh cycles show up in our OEM revenue and in our OEM Pro revenue. But we expect, with the demand we're seeing now and in the number of devices that we still see on Windows 7, out there, particularly in small to medium businesses, you know, we still think we have a ways to go.
PHIL WINSLOW: Got it, and then this is a question I get asked a lot, but is there going to be a Windows 11? Or we going to stay on the perfect 10, forever?
BILL DUFF: The perfect 10, I don't know, but I'm not going to make any news on the naming front. You know, when we launched Windows 10, we really talked about how we changed the overall model. It used to be we invested three years in building a new operating system. We launched it, and then the engineering team went back and worked on the next generation of the operating system.
This is much more about continuous improvement, and it's much more about making sure that we're continuing to move the Windows OS forward. You saw us, recently, where we talked about Surface and our new devices. As part of that launch we talked about some of the investments we're making in Windows and Windows 10X to support some of these new form factors that are coming out.
So, you should expect us to continue to invest in Windows, modernizing the platform, modernizing the OS, supporting new form factors, and really investing where we think there is differentiation in the Windows ecosystem.
PHIL WINSLOW: Let's switch gears a little bit to gaming and because I actually think that we're in a pretty unique time frame, sort of ahead of the next cycle, having some – there have been some pretty secular changes too, and so gaming, how do you think that – I guess, one, just the evolution of the gaming business from the product side perspective and then, two, from the secular trends that we're seeing, as kind of a follow-up to that?
BILL DUFF: Yes, absolutely. Xbox has been a great business for us. It's incredible the fan base of Xbox and the energy that they bring to that overall business. If you look at that business today it's primarily a console business, and we're very strong on the console, and we've been in that business for a long time. We're at the end of that cycle, and so you're seeing us come out with new consoles next year. We're committed to the console business.
You know, the console business is a significant part of the gaming business and has some of the highest-value gamers that are out there. But, when you think about the broader opportunity for gaming, there are two billion gamers in the world, and they play across all sorts of different platforms.
So, they're playing across consoles, and we have a very strong position there, and a very, very engaged user base in console. They play across Windows. Actually, our Windows business is aided by this. Windows is really the best PC platform for gaming, but we don't really participate in the gaming engagement on Windows. We have a smaller business there. And then, our mobile has obviously been the big growth story over the last couple of years.
And so, what we're seeing with these shifts of workloads to the cloud, we see a big opportunity for us to take this great starting position, this highly engaged user base, with these high-value gaming scenarios, and bring them to any endpoint. We really want people to be able to play anywhere, and so that's really our strategy in gaming. We're really sort of thinking about a much, much broader TAM and investing behind that.
Really, our investments are in three areas. One is on the cloud side, and investing in cloud infrastructure, in order to deliver those experiences on those endpoints. Content, you've seen us be very aggressive on the content side.
Over the last 18 months we've doubled our capacity for first-party games, in terms of the acquisitions of studios that we've made. And, on the community side, we have a very, very engaged base with Xbox Live with 65 million users, and we see a big opportunity to expand there.
PHIL WINSLOW: Interesting. So, how do you think about the business model changes too? So, I mean, that was some great background on sort of the industry trends, but how does this impact the gaming business model for Microsoft?
BILL DUFF: Yes, on the gaming business model side, you've seen us make some changes, as well. We've always had Xbox Live as a premium subscription business on the console, but the console is a relatively closed ecosystem.
So, you have to think differently when you think about the business models and much more broadly, in ways that on the PC – you know, and gaming has evolved differently on the PC, and gaming has evolved differently on mobile.
So, we launched Game Pass, a little while ago, and this is our opportunity to bring more people into our gaming platform. It's a great value proposition. You can play many, many different games. You can play where the other players are, and we think that the community is a big part of that. One of the big differences between, let's say video streaming and game streaming, is that gaming is a very social – it's a very social product, and people will go where their friends are, which is a really important element to it.
As we build Game Pass, we're going to not only build great content and have relationships with both our first-party studios, but also third-party studios that have great content in Game Pass, but also making sure we're building a strong community there.
PHIL WINSLOW: Got it, interesting. All right, let's talk about xCloud, where you have some really exciting projects to announce. I mean, give this to us at just a high level, just your vision for video game streaming on the part of Project xCloud, and then how do you think about the next generation Xbox console that you just talked about, and how does that play into this vision?
BILL DUFF: Right. At its simplest, xCloud is about playing the games you want, with who you want, anywhere you want. It's really about extending the Xbox value proposition to any endpoint, and so we are very early in the stages. You've seen other companies invest in this space. We think it's exciting. We think that the cloud opens up new opportunities and new ways of delivering those experiences to endpoints that couldn't necessarily support them in the past.
We love our starting position because we have a great content library that works well. As we talked about, we have a great and highly-engaged user base that's already engaging with our products, and so the initial users might already Xbox users and experiencing it at home, but wanting to experience it when they're on a mobile device, outside of the home, something like that. There are all sorts of scenarios that you can think about.
From an endpoint perspective, it's really about expanding our overall endpoint strategy. Azure is the underlying fabric for that. We've invested heavily in datacenters. You can think of this as a really interesting differentiated workload on top of Azure, and that's a big opportunity for us.
PHIL WINSLOW: Yes, so what does video game streaming mean in the context of the console? This is a question that I get asked a lot, and so I'd love to hear your perspective.
BILL DUFF: Yes, I think on the console, I think things will evolve over time. I mean, we clearly believe that the console is going to be an important place where people play games. There are a lot of advantages to having that processing power, local.
Certainly, if you think about xCloud and the investments in the cloud, it's not only about the investments in the cloud infrastructure, and let's say Azure datacenters, but it's the investments in the network. You can think about 5G as being a significant enabler of these types of scenarios. We're building our solution to work on 4G, but 5G is going to open up entirely new opportunities.
So, you're going to see different parts of, whether it be the processing in the cloud, or the network, but all of those have to evolve, and the console is going to be a very, very important part of that, through that journey. We invested in the next-generation console, and we're really excited about our launch, next holiday. We're bringing in a lot of new technology with our partners, a lot of new content that will leverage that technology. It's an important part of our business and you'll see us continue to invest there.
PHIL WINSLOW: Yes, I feel like the past couple of years have been like the age of the unforeseen partnerships, with Microsoft and Oracle, Microsoft and - it's like the cats and dogs are sleeping together, and I sound like Bill Murray up here, but PlayStation, didn't see that coming. Let's just talk about that, let's talk about that partnership with Sony PlayStation.
BILL DUFF: I mean, you know, you're right, the partnerships – you know, I think one of the things that Satya has done culturally at Microsoft is really opened us up and sort of resetting us on a path of being a platform company.
And so, what does it mean to be a platform company? Certainly, we'll have our first-party experiences, and we've talked about some of those, whether it be on the productivity side, or whether it be on the gaming side, but that doesn't preclude us, particularly from a cloud infrastructure side, in being able to work with companies that we compete with in other areas, and Sony is a perfect example of that. It's a really interesting partnership.
I think what it also says is that it says something about Microsoft and the trust that the ecosystem has in Microsoft and how we're going to work, both in a first-party perspective, and we're going to be aggressive in going after opportunities.
We talked about it with xCloud. We've talked about it with M365, but we're also going to be very, very strong partners to everybody in the ecosystem, and we deeply believe were a platform company. We deeply believe that we have a big opportunity with Azure and our other infrastructure investments, working across all levels of partnerships.
PHIL WINSLOW: Got it, interesting, and so let's switch gears a little bit to Surface and Edge. So, Surface we've obviously seen continues with an uptake in popularity, and it's actually like a family now, a family of devices. I used to think of Surface at that thing, but it's like a family now of devices, but how do you think about this opportunity, going forward, and also provide me some of the answers in the context of some of the announcements we saw in the fall.
BILL DUFF: Yes, in October, we had our last Surface event. We talked about a couple of things. We talked about the products that we offer in our holiday lineup, where we launched the new Surface Pro 7, which is our next generation of Surface Pro. This really started our Surface investment, overall. There's the Surface Laptop 3, and we've introduced a new product called Surface Pro X, which is our first Surface that is based on ARM.
We had a co-development relations with Qualcomm to develop it and tune it for a PC-type of environment, and so it sort of talks to how Surface has evolved within Microsoft. It's a big business. It's over a $5 billion business for us. I mean, this is a significant business. It's important to us. We run it, we want to operate it, and we want to grow it.
One of the interesting things about Surface is we have a very, very high net promoter score, and that's how we think about customers satisfaction, and so it's really important for us to have our experiences being delivered on Surface. We think these are the best Microsoft 365 devices that we have out there, but it's also a very important way for us to innovate.
When you think about the original Surface two-in-one Surface Pro, that is an innovation that eventually got extended out through the ecosystem. You saw many other companies picking it up, really extending Windows in that way.
You're seeing that with Surface Pro X. Surface Pro X on Qualcomm, we think there's something very interesting here. We're willing to put our capital behind it. It's expensive to develop devices, and it's something what we think is important for the future, and so we're willing to invest, we're willing to partner with Qualcomm on this, really pushing that forward.
You see it with Surface Hub, which is our meeting collaboration device, and so we're – you know, the Surface business is great. We're excited about, and it's a big strategic focus of ours in Microsoft 365.
PHIL WINSLOW: Another part of the family, a new part of the family, and back to the future of Neo and Duo, and so I guess at a high level, what was the decision and thought process in sort of getting back into the smartphone business, but also the twist here is on the Android platform.
BILL DUFF: Yes, I think it blew a lot of – and we're not the best at – I shouldn't say it this way, but everything leaked before the Surface event, except for Duo, which was kind of amazing. I think it was a little bit of a head-scratcher, where people were saying, "Well, what is going on here?"
Really, it comes back to our focus on the user. We feel like there is some really interesting innovation that's going on in dual-screen devices. If people missed the announcement, we announced two new devices that are not being shipped until next holiday. Both of these devices, Neo is a little bit of a bigger device. It's a Windows-based device, and you can think of it as a two-screen device that folds out. You can think of it like a tablet.
Duo is the same device, smaller form factor. You can carry it in your pocket, and we built it on Android. But, really, our thought process, across both of them, was the same. We think there are some very interesting things happening in dual-screen devices.
If you look at dual screens and how people use dual screens, and we did a lot of analysis around this, people are significantly more productive when you have two screens, which is because you can think about – you have a work pane, and then you have reference pane, where there are all sorts of interesting scenarios, and you just work differently when you have two monitors, for the desktop, or two screens when you have a device.
And then, simply, to get to the Android question on Duo, we made a pragmatic decision. If we're going to build a mobile phone, mobile phones, the expectations are that the apps are going to be there, and so we needed to make sure that we were able to support the Android app ecosystem. This was something we worked with Google on, and we're continuing to work with Google on this.
So, to get back to your partnership point with strange bedfellows and everything else, this is an example of the new Microsoft.
PHIL WINSLOW: Got it. It is amazing. And so, the last question, we've got two minutes, and so what do you think about emerging opportunities here in personal computing? What excites you? What is Microsoft really thinking about addressing in the future?
BILL DUFF: Yes, it's interesting. We've talked about a lot of them. I would say the one thing that I didn't really mention up front on the M365 thing is the power of data and the power of AI and what they'll bring to productivity scenarios. You're starting to see AI getting infused in our productivity scenarios, just a little bit.
We're doing it in terms of PowerPoint design, presentation coaching. You're seeing AI show up in our security elements, but when you think about a company adopting Microsoft 365, you have an incredible amount of important data that the company needs to use in order to optimize their operations, with an incredible amount of signals coming in, and so using that data to bring new employees up to speed quicker, to find information more quickly, to automate workflows, to connect dots to automate processes.
We had this offering called Workplace Analytics which looks at how the data is used in our company and how communication is used in your company, and so you can think about it as how can you have more effective meetings, how do you break down silos in your organization? How do you increase the effectiveness of your salesforce? There are all of these things that, once you have this data where this data can be reasoned against in a central location, you can think about all sorts of new scenarios around AI that are really productive for organizations. That's one of the most exciting areas that we see.
PHIL WINSLOW: Awesome. All right, time is up. You nailed it within 10 seconds. Good job. Thank you, thank you for coming out and spending time. Like I said, thank you for coming to Vegas. Appreciate it.
BILL DUFF: Thanks a lot.
END
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