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UBS Global TMT Conference
Who: Jared Spataro, CVP, Modern Work
Event: UBS Global TMT Conference
Date: Tuesday, December 6, 2022
Karl Keirstead: Okay, great. Let's continue on. I'm really honored to have Microsoft with us today. We've got Jared Spataro, the CVP of the whole work group at Microsoft. Jared, thank you, and thank you Kendra and April for this morning's breakfast and for encouraging you to come.
Jared Spataro: My pleasure to be here. Thanks for being here.
Karl Keirstead: Yeah. Jared, do you want to maybe, to set the context, describe what the modern work portfolio works like? I think everybody would understand that it leans very heavily M365, Office, Teams, but maybe you could describe that portfolio and it might sharpen our questions a little bit later in the session.
Jared Spataro: You bet. Going into the pandemic, most people thought of the business that I run now essentially as Office, or Office 365. That was the main source of value for us during the pandemic, that changed in a pretty significant way. Not only did we see Teams emerge, I think we'll talk a bit about that becoming a major force in commercial software. But we also saw customers coming to us and asking us for more help in different areas. So today, when you think about this business, you should think about everything that is used to deliver a productive work environment for employees. That starts with the device, into the OS -- for us, Windows, on top of the device -- and a management software on top of that. It's all the apps that come as a part of Microsoft 365. Those would be the things you think of, of Office, Word, Excel, PowerPoint, Outlook. And then it's the services, the cloud services, that work as well.
And then over the course of the pandemic, people have asked us to help them with their meeting rooms, to help them with their office space. We've branched out even more just into personal productivity, and really corporate productivity now, too.
Karl Keirstead: Well, that's a -- if I sum that up, that's a pretty big part of Microsoft right there.
Jared Spataro: It's an exciting place to be. Very exciting place to be.
Karl Keirstead: You mentioned, Jared, the pandemic, so why don't we start there, actually. Because I'd love to understand a little bit better how the pandemic changed that part of the portfolio. I'm sure it had some pressure points, but I can think of several areas where it sort of pulled it along. It obviously created a pretty incredible PC demand acceleration that would have helped Windows OEM. Probably off the seat growth it certainly breathed life into Teams. But maybe you could frame how the COVID crisis affected your portfolio?
Jared Spataro: You bet. You've hit on a lot of the big themes, but let me expand on them for just a moment.
Karl Keirstead: Yep.
Jared Spataro: So let's start first with Teams. Going into the pandemic, we were about 20 million monthly active users. Our most recent public statement on Teams has been over 270 million monthly active users of Teams; we'll talk a bit about how they use Teams and what they do with it. During the early part of the pandemic, what we really saw from our customers was just the need to react quickly, you know. Everybody was sent home from these kind of what we would call information worker jobs, and so they came to us looking for help as to how to think about how to quickly move to Teams, or quickly think about how to rewire their business, is the way I talk about it. There was very, very healthy PC demand, as I would say we saw the resurgence of the big screen. And people up to that point, it's hard to remember now. But at that point, all the momentum in my part of the business had been around smaller screens, and there had been so much talk of phones and tablets and what they would do to essentially kind of take over the world.
Now, I think, during the pandemic, we've seen a moderation of that. We've seen kind of every device find its place. Phones, certainly, are very important. Tablets can be very helpful. But I also feel like we've seen PCs and that PC form factor become very important, and people understanding how important it is.
So, those things and I'd also, Karl, mention one other thing. We've seen a change in patterns, really, of how people actually get their work done. About six months ago we finally saw the number of minutes spent in chat, in Teams, surpass the number of minutes that people spend in Outlook. I need you to pause there for a moment, because we've been trying to unseat Outlook and email as kind of the primary communication medium for decades now. All of us have been. We've all predicted the death of email, so it's a very, very significant milestone to see people starting to tip toward a new way of communicating.
Karl Keirstead: Well, Jared, my team accuses me of being a bit of a luddite in terms of technology, but I am now actively chatting in Teams. So I'm part of that trend finally.
Jared Spataro: If Karl is there, that means the world is there.
Karl Keirstead: And Jared, you touched a little bit on it, but now that we're sort of two and a half years past that pandemic catalyst, how is -- how are things changing and potentially moderating? Is there any -- is there any, what I would loosely call, post-pandemic growth normalization that your portfolio is seeing? I think the most pronounced one that you could point to was probably Amy's guidance for the Windows OEM business, where that's clearly coming off of a little bit of a sugar rush. But are there any other changes, even subtle ones that are happening now, that you would put in the category of incredible, sort of two-year run and how it might be moderating slightly?
Jared Spataro: Well, I get asked two questions by customers today. Question number one, how do I adapt to the new patterns and practices of work? They're just simply trying to figure out, okay, now that this has happened, now that we threw the tools into the business, what's the future look like? And they come to us for a lot of advice there. And then the second thing that's happening is, we would term it, how do I do more with less? So there certainly is the consolidation phase.
Now, that consolidation phase we felt coming anyway. Because there was such an investment, people turned to all sorts of different -- we would call them point solutions. And they want to rationalize those. But with the changing macroeconomic context, we only accelerated that consolidation phase that we've seen. So, whereas pre-probably about six to nine months ago, I was trying to drive consolidation, I was in there saying, hey, did you know that with Teams, you don't need to have some of these other vendors? Today, those customers come to me. We very, very frequently have customers proactively come to me and say, hey, I'm using Zoom, I'm using Slack, but there's no reason for me to double-pay as I think about rationalizing my IT budget -- what can you do for me? And that's, you know, that's music to our years.
Karl Keirstead: Yeah. Maybe unpack that a little bit. Because I think one of the bull cases on Microsoft is that in an economic downturn, Microsoft will probably be a wallet share gainer due to vendor consolidation. So Jared, maybe I'd love to ask you, it sounds like there's tangible evidence of that. So, maybe you could elaborate? And where is your share gaining? You just gave the example of perhaps in the videoconferencing side. Are there other parts of the Microsoft portfolio where the environment is motivating customers to knock out point solutions and consolidate more on Microsoft? So where are you seeing that?
Jared Spataro: Well, start -- at least with my perception of the macroeconomic context when it comes to IT budgets. IT budgets continue to be very important but they're under -- make no mistake, they're under pressure, for sure. So if I go up that stack that I enumerated, we see it on almost every area. We see it as people think about how they're managing devices safety. You've hit that already. We see it as they think about, as an example, management. So, for me, InTune, Microsoft InTune, is a huge part of the business, very important part of the value prop of Microsoft 365. We'll get into that a little bit more. But we see a lot of consolidation there, because remember, the competitors are in a little bit of flux right now, in where it tends to be a competitor. But they're in flux, maybe the customers come to us and say, gosh, we can't tell where this is going; can you help us with our management strategy? That's management of both devices -- so mobile devices as well as PC-oriented devices.
We certainly see it to be very specific with Zoom and Slack. We see people coming to us and saying in video conferencing and in chat that they're interested in consolidation. So, up and down the portfolio, we really see a lot of people digging in and saying, you know, how can we help.
Now, for us, and we'll talk about Microsoft 365, that's one of the things that I really would love to talk with you about. We've got a great story. Our story, we've gone in and done work with our customers and with Forrester Research. We say, you can save more than 60% just on licensing costs alone, let alone streamline IT processes, if you move to Microsoft 365 when compared to point solutions. That message, at this moment, is playing very, very well.
The other places I would say that you might not think that there's opportunity would be in our front-line workers, we'll talk more about that. And SMB, so small and medium-sized businesses. It's not to say these businesses aren't seeing opportunities in the market; it's just that they need to get more efficient than they've ever been.
Karl Keirstead: Jared, I know the cyber security portfolio might not formally be part of your group, but obviously in E5 SKU it's a very important driver. Are you also seeing evidence of this vendor consolidation not just in the maybe opportunities to take out Cisco, WebEx and Zoom, are you seeing it in the cyber security side too? And do you mind elaborating on where, specifically, you might be seeing that?
Jared Spataro: For sure. Yeah. So, think of what we're doing right now in security is essentially taking on a very fragmented space with a consolidation play. That's been our play in security since the beginning. Not only do we secure our own software, so not only do we secure things like email or Teams, but we go beyond that and have great offerings when it comes to identity, when it comes to apps, when it comes to devices and securing those devices. We take a zero-trust approach to it.
So, our play is to come in, it is the part just to put it in context of how we sell it. It's part of Microsoft 365 E5, or ME5, as you'll hear us refer to it. And it is the single biggest driver of ME5 growth is security. Security and then compliance. And then after compliance, we have phone system as well. So, when you start to put together those value props you get something very, very compelling for our customers.
Karl Keirstead: Okay. Let's keep going on these macro changes. That's probably the dominant subject these days, because the environment is so fluid. And most software companies' growth rates are under a little bit of pressure. So, within the modern work portfolio, Jared, could we -- can we pause a little bit and talk about where Microsoft might be seeing some pressure? I think Amy and the IR team have talked about some SMB pressure, but could you elaborate where the pressure points are in your portfolio?
Jared Spataro: Yeah. You bet. So, specifically in earnings, what we said was that we saw moderation in new deal volume outside of E5.
Karl Keirstead: Okay.
Jared Spataro: So, moderation in new deal volume outside of E5.
Karl Keirstead: So E3, let's say?
Jared Spataro: Correct. So let me unpack that, that E3 component. Because I think that's important. Just to give you a sense of what that SKU lineup, maybe you know it already, what it looks like, we have --
[Technical difficulty]
-- compelling E3 level up to E5. And the softening that we saw on that new deal line ends up being at that E3 layer. Now, from my perspective, you can imagine we dig into this when we start to see it. There really are two components to it. There certainly is macro, so when you think about people saying, gosh, all right, am I ready to make this purchase -- that certainly is impacting what we're doing. And you mentioned SMB, but it's not just SMB for us. For us it's moderately sized companies that we typically service, not through our direct sales force but through our partner sales force. This would be through our cloud solution provider channel, is the way that we service these folks. And then there's a portion that's not macro, if I'm totally honest with you. There's a portion that's execution for us. Sometimes we get a little bit high on the E5 train, and we put everything we've got behind E5 and forget that we've got a two-stroke engine in this business; we've got an E3 component; we've got an E5 component.
So as we went to look at what was going on, there was a macro issue that we saw. There also was an execution issue that we're working hard to address this quarter and going forward as well.
Karl Keirstead: Jared, one of the other macro-related issues we're all monitoring is the degree of layoffs across the global economy. It's been a little bit more acute I think on the tech sector. Thankfully, you guys haven't been a big part of that, but others have. So maybe the question I'm getting at is, across Office and broadly M365, what's the sensitivity of this portfolio to head count growth across the economy? Obviously, if it picks up, it's not a good thing. But I presume that there's some measure of minimum seats that clients commit to, so they can't come under too much pressure? So maybe a little color on the sensitivity to layoffs given that that's a hot topic for those listening?
Jared Spataro: We watch it very closely, as everybody does. We watch that jobs report that just came out. We watch the industries that are growing and those that are shrinking right now. Let me just back up for a second before I talk sensitivity, just to remind you.
This business, largely-speaking, is a P times Q business. That's what it is. So it is a price times quantity business. When you think about quantity in the enterprise space, we are largely in a place where we are very well-penetrated. And what we mean by that is, you either have Office 365 or you're moving to Microsoft 365. In that enterprise space, the play for me more than anything else is twofold; number one, it is the price component, so we're trying to drive up our ARPU. And it's a brand new Q in enterprise that is front-line worker. That's brand new for us. It really has taken off. It was accelerated during the pandemic, and that's what you should understand is counter-intuitive.
In fact, three months into the pandemic, I paused everything related to front-line workers, thinking, nobody's going to invest in that given all the tumult. That's not what happened. Ended up restart that thing up in the next 60 days after I told everybody to stop it, because what we saw is digital transformation was accelerated so much for the first time ever, across industries people were putting devices and putting new cloud services into the hands of front-line workers, and they needed help. And that provided a really interesting boost for us.
So as you think about how sensitive are we, well, we are sensitive to head count. But as we see it in the enterprise, I don't feel like there's a big change there. The sensitivity comes in our ability to continue to get front-line workers and SMBs. SMBs typically are where you'll see kind of that immediate impact of a macro crunch. But interestingly enough, we have not seen what I've been waiting for in terms of a SMB slowdown in those seats.
If you look at our recent reporting for Q1, 14% year-over-year growth in seats, you would think, driven largely by FLW and SMB that you would see an immediate slow. We are watching for that slowdown. That's not what happened. So, we keep a hawk eye on it as well. In the jobs report that we always looked at from the US, it looked pretty good, actually. You know.
Karl Keirstead: Maybe that's a reminder not to over-index on the tech-specific headcount cuts we're seeing, given the breadth of the Office suite.
Jared Spataro: You really do have to think that at this point, given the breadth of this business, we are servicing the economy very, very broadly at this point. And that gives us the ability to have puts and takes as we think -- see things go.
Now again, we watch certain sectors like SMB. I'll watch that, and continue to watch that. But so far, you know, it's been mixed signals macroeconomically.
Karl Keirstead: So if those macroeconomic signals turn worse, which I think a lot of investors assume they might, and the Q deteriorates -- I'm not asking you for a prognosis, but let's say it does -- then the P becomes a lot more important. So let's talk about that, actually, because that's a big part of the story here.
Jared Spataro: Yes.
Karl Keirstead: So maybe a couple of elements of that. Obviously, Microsoft announced a fairly material Office 365 price increase. Can you elaborate a little bit on how that's rolling in?
Jared Spataro: You bet. Price increase, and I'll talk a little bit about the value of the M365, too. But I'll start with price increase just for a second.
Karl Keirstead: Okay. Mm-hmm.
Jared Spataro: So the price increase became effective the 1st of March. It was the first price increase we had ever done -- not just like, in a long time -- it was the first we had ever done since we had had Office 365. We felt like we were waiting for the right time, when we had enough value. We'd introduced 25 new apps, introduced over 1400 new capabilities. We had gone through the pandemic; we had done a lot of -- established, we felt like, a lot of goodwill, particularly with our enterprise customers. We issued a lot of free trials during that -- I mean, there was a lot going on. And so, we took the opportunity at that point to say, we think we're delivering value for what we have here, and we increased price.
As you think about this price increase rolling out, however, it's really important to kind of essentially look at the details of the business. First, there is a temporal aspect to this price increase. It does not become effective in any particular account until they renew post-price increase, so post-1 March, their agreement with Microsoft. So we've got a lot of timing to play out in how these agreements are renewing. Those agreements tend to be three years. Sometimes they're up to five years long. So there's a component of staggered pricing that's happening.
There's also a component here of which deals were included. If you were to look in the announcement that we published under my name, we are very specific. I'll give some examples. We didn't increase price on ME5. We actually were driving people to ME5. We also didn't increase price on what we would call kind of our standard tier in the SMB space. We didn't increase price in our standalone.
So there were some places we chose not to increase price. When we did that you can rest assured we tried to be very, very data-driven on what would drive people to the right places in the overall SKU lineup.
And the last thing I'll say as you think about kind of that -- that component, the SKU lineup component, is that there's a kind of a ratable revenue component here where you're going to recognize the revenue over time as well. So when you take a SKU component, when you take the agreement, the renewal component, and you take the ratable revenue component, it's going to play out over time. It will be a big driver for us. That's why we do it. But don't think that it's something that will happen immediately.
Karl Keirstead: Jared, with the team, we spent many days just aggregating that blog post to try to back into what the blended Office 365 price increase was, so I -- I spent a lot of time on that.
Let's talk about another ARPU driver, and you touched on it earlier -- and that's the E5 mix shift. So beyond the straight up price increase, you've got an amazing ARPU growth catalyst in the form of the E5 SKU, which I think Microsoft announced was I think 12% of seats now?
Jared Spataro: That's right.
Karl Keirstead: So where could that 12% go, realistically? It's never going to be 100%, but what's the -- what's the trajectory of that E5 mix, do you think? Even if you want to frame it qualitatively?
Jared Spataro: We think that we're very early in the journey with ME5. So I'll answer the question, and then I'll back out and give you the big picture for a second. So let's pick up on that data point. 12% of the Office 365 install base is ME5 today, 12%. Now, I say it that way because we think that it can go very high. Let me tell you about the drivers of why I think that.
The number one driver for E5 is security, and we've talked about this idea of consolidation and security. Security demand continues to increase for us, and security continues to be more and more complex for companies to administer. So we feel like, man, we've got a real driver there that doesn't feel like it's going to let up in the coming months.
The second driver for us ended up being compliance. That also is a really interesting opportunity for us, particularly as we think about consolidations. The third driver of E5 is phone system. We haven't talked very much about that, but as people are moving their usage of communications onto Teams, a very natural thing for them to do is then move their phone systems from typically an on-prem version of a PDX to a Teams phone system in the cloud.
So, qualitatively, without giving any forward-looking kind of specifics, I would just simply say 12% is very early in the journey here. As we think about where that ME3 base could go, to ME5, I couldn't see a reason why most customers wouldn't want that value, and we'll continue to push it. It isn't something that I feel like only a proportion or a certain percentage of the base would need.
Karl Keirstead: Yeah. So maybe we pivot a little bit to the M365 story. For you, you've been leading it, living and breathing it. But for a lot of investors, we've been delivered Office 365 metrics, and now you can not-so-subtly see Microsoft pivoting the conversation to M365. So it does feel like that M365 bundling story is not only a big success, but is a bigger part of the messaging. So can you talk a little about that shift from O365 to M365 in terms of messaging, not only to investors, but to your customers?
Jared Spataro: It's a very interesting one. Think of this for a moment. With Office, the word, "Office," the brand, Office, we had what I considered to be one of the most successful brands in the history of business. And yet, as you indicate, over the course of the last few months, during this calendar year, what we've opted to do is to shift away from one of the most successful brands in business towards this Microsoft 365 brand. And I think it's very natural for people who are watching to ask, why in the world would you do that?
Here's what we found over the years -- and I've been working particularly in this business for almost 17 years, so I feel like I've got some history here. We have tried for years and years to convince people that we could put more value into Office. But what we found is the brand was so successful that we actually couldn't open people's minds and expand the box, the space, that they had. When we ask people about Office, even what is Office 365, they say, Word, Excel, PowerPoint. I couldn't get them to say -- sometimes, enlightened folks would say Outlook. But beyond that, I couldn't get them to say Teams; I certainly couldn't get them to say security, I couldn't get them to say front-line worker. It was for desk jockeys who needed to use Excel, essentially, is what they thought.
So, a big part of what we're doing here is expanding the box into which we can put value. And what happened during the pandemic is, our customers came to us and said, golly, as we look at what you can do, we would like to partner with you to do more than just kind of information work or productivity. We want to think about the productivity of our entire enterprise, top-to-bottom, from the C-suite to the shop line floor; can you help us think about that?
So, it's -- branding-wise, that's part of what we've done. What that allows us to do, now that we have M365 as a vehicle, is to be very creative then about how we offer that value. We have an E3 SKU, as we talked about. We call that our core SKU. We have an E5 SKU -- that's our premium SKU. But we also have these F SKUs, these front-line worker SKUs, that allow us to go down and literally provide, for instance, the airlines and the airline crew at Delta Airlines with the ability to use a SKU that is having them use our value in a way I couldn't have imagined six years ago. So, it opens the playing field for us in terms of how we interact with our customers. It gives us a new vehicle and it really creates new head space. That's what we're most excited about.
And you mentioned earlier, with only 12% of the Office 365 base penetrated, we really are in the early innings of this growth.
Karl Keirstead: Yes. Jared, maybe one more on Office, per se. You do have another competitor out there, where Google is your employee productivity software rival. On their most recent call, they talked about having 8 million paying customers. We don't know how many users they have. But is any of this, the guidance for 17%, Office 365 growth coming at Google's expense? Is there any market share tailwinds that you've got relative to Google?
Jared Spataro: The answer to that is, absolutely. Absolutely, is how we think of it. Let me again break down the 17 percentage points of growth for us.
So of that 17 percentage points of growth, we've talked a lot about ARPU but remember, this is a P&Q business. 14 points of that growth are actually new seats, are driven by the new seats. And where are those new seats coming from? Just again, to remind you, from front-line workers and from SMB. And those are two places -- SMB has been a place that we have really competed with Google over the years.
Karl Keirstead: Yeah. Exactly.
Jared Spataro: And that's a place that we're making really nice headway right now. And front line workers is a place that we feel like in so many ways, we have them -- I would say outflanked right now.
Now, I have to pause here to say, why in the world would you say you have them outflanked? They don't have a Teams equivalent. For all the machinations over the course of the last couple years that have happened, they have not been able to get their act together when it comes to communication. And it's so important for you to understand how strategic the communications portion of the portfolio is. Communications creates a daily habit that people come back to, whether you're on the front line or you're at a desk. And when we have that daily habit, we can do so much.
So, if you were a customer and I were pitching Teams to you today, I would say, oh, Teams, our solution for meet-call-chat-collaborate, and automate. And it turns out, you want to see how we drive things like Power Platform growth? Well, it's through Teams. You want to see how we get really ensconced into people's business processes? Well, it's through Teams and the automation we're doing.
So, we just have an arsenal now that makes it asymmetric warfare, and this is an opportunity for us to take advantage of that. The other three percentage points, those points come from ARPU growth and lots to talk about there. We haven't hit on Rooms; we haven't -- you know, there's more to do. But it's really important to recognize that we've got this awesome opportunity with seats.
Karl Keirstead: Yeah. So, perfect segue. Let's talk about Teams. Let's talk about that communications piece; enough on Office.
Jared Spataro: Great.
Karl Keirstead: You mentioned that Teams used to have MAUs of something like 20 million, and now --
Jared Spataro: Pre-pandemic, right.
Karl Keirstead: -- it's 270 million.
Jared Spataro: That's right.
Karl Keirstead: That's incredible. That's over 10x. Where can we go from here? Is 270 starting to get a little bit maxed out, Jared, and it'll be a little it more about adding new features to Teams? Or do you see the seat TAMs having potential?
Jared Spataro: I'd break it down by segment, is a way to understand it. In the enterprise segment, man, we're starting to get to the point that we have great penetration. We talked a little bit about consolidation wins that will also continue to grow for us. So, we are seeing people, as an example, move off of Zoom, move off of Slack. We've got some great examples of that. Unisys is a great example. I'll just give it quickly so you can have a little bit of color.
With Unisys they were Skype for Business, pre-pandemic. During the pandemic, like so many companies, they moved to Zoom very quickly. They're like, oh, we can't figure out Teams. But in February of this year, we won them back onto the Teams platform. They went through a three-month deployment and now they've shifted the entire company to Teams, and so we're excited about that. But that's the enterprise segment. I mean, it's largely going to be winning lost ground and driving up ARPU.
But the real opportunity, past that 270, will be SMB and FLW. For us, those are the places that are uncharted territory. As I look to the future, without giving you any details, as I look to the future you should think that my install base will go from being an information worker-dominated install base to over the coming years, we will become FLW/SMB-dominated. The nature of the business will change in really interesting, exciting ways. I get excited about that because when we do the right thing for those folks, it actually accrues up nicely, we would say, to the information worker. Sometimes, we can be overly-complex for the information worker.
But some really great work happening there. With Teams, one more thing I'll say. In the enterprise space, I'm really excited about the fact that we're retaining those users. I won't comment on all of the specifics with Zoom, but you definitely see a pandemic-up and a post-pandemic-down. We're really seeing retention of our users, but we are seeing the shift, where meetings has been the dominant driving workload, we would call it, meaning the shifting out of being the driving workload and chat is shifting to be number one. And that's what we predicted; we thought that real-time collaboration would be dominant during the pandemic, post-pandemic, what we would call something more like asynchronous collaboration, would really be the driver. And we're seeing those usage patterns shift in pretty significant ways.
And on the conference calls, you know, Satya reiterated 20% increase in Teams users who are using more than four aspects of Teams. Talked about over 60% growth in users who are now using third-party or home-grown solutions that are embedded into Teams. We're seeing over 50% growth in phone, PSTN, so just some really, really good opportunities for us as people continue to use Teams more deeply.
Karl Keirstead: Jared, you'll be happy to know that in contrast to Unisys, UBS at least in my department was Skype for the longest time. And we made the direct leap to Teams. We didn't go off-ramp and then back on.
Jared Spataro: I appreciate that.
Karl Keirstead: And I'm very happy to be on Teams.
Jared Spataro: Wonderful. I appreciate that.
Karl Keirstead: Let's talk about what you just said about Teams, how things are changing from meetings being a dominant use case, to more chat and phone. And I'm particularly interested in the phone side. And I think a lot of investors are too, because there's a number of other companies out there that are -- exhume pushing into phone. You've got pure plays like Ring Central, etc. Could you offer any color or stats, whatever would make the case more compelling, about how the Teams phone side is becoming a dominant use case?
Jared Spataro: Phone, what an interesting space. Let me just talk about the phone market as it exists today, and then I'll give you my sense of where trends are taking it in the future.
So, phone today, for many companies, has been based on PSTN or these old ways of calling out through the telco companies, to phone end points at -- and we see companies continue to invest there. What's happening right now, during the pandemic they moved a bunch of communication including meetings to other modalities. And as they've moved those to other modalities, and you talk about this idea of more or less our consolidation phase, phone is number one, it feels like, in the enterprise companies' list of things to consolidate. There's cost savings there and there's end user benefits.
So essentially, what we see happening is companies coming to us and saying, hey, we're a Teams user; we'd now like to actually connect our phone system up to Teams so that we have Teams essentially representing our call control and allowing us to have, to open up new use cases with phones. So, it's an excellent opportunity.
Most of the time, historically, what companies have done is they have assigned a phone number to every employee, at least every information worker employee, and depending on the scenario, every front line worker employee. Front-line workers sometimes will get pooled numbers.
One of the big trends that we're seeing, though, is companies starting to say, well, hold on a second -- do I really need to have a phone number for John, if all of a sudden we moved everything to the cloud? So going forward, we think that there are some really important trends in phone that will shift and blow in the direction of an offering like Teams.
Number one, we think a lot of traffic is -- well, we know a lot of traffic is shifting from that PSTN network to voice-over-IP network. That is already happening en masse within a company; very, very rarely if you're using Teams, are you picking up a phone and using a PSTN line to call your colleague. It's not happening. It's voice-over-IP. Increasingly that's happening between companies, because federation of Teams deployments allow you to no longer have to go through the PSTN network, but again, do voice-over IP. So that's very exciting for us. So, there's a change happening there.
But the other really big change that we see happening is, companies, now that they're starting to move into the cloud, are realizing -- wow, I can get pretty sophisticated about my phone usage, meaning, I can really rethink who I issue phone lines to. I can really rethink how we're using phones. And that is the future of phone, we think, is that it melds together with these other, we'll call them other communication modalities. You open up really, really interesting things to do.
So I'll just give you one example. Imagine being able to call a call center rep, start a call with that person, and have he or she say to you, "You know what, can you just like, video me real quick and show me the problem with your product?" And moving up from that call, that was a voice call, to video. That's what Teams Phone allows you to do is to have that modality together, and so, lots of companies are very interested in that.
Karl Keirstead: Jared, I asked you earlier about vendor consolidation trends. You mentioned you're certainly seeing it on the meeting side. You called out WebEx and Zoom. Are you starting to see that vendor consolidation trend on the phone side too, away from point solutions? Is that a thing that's really kicked in of late?
Jared Spataro: It has. It has. We -- gosh. It wasn't this past quarter, I think. Andrew would have to help me. But just recently, we talked about how many actual phone licenses we have out there, activated phone licenses we have out. And I'm not going to say the number, because I can't remember off the top of my head. But we have talked about that, and we can give you a reference for that. Definitely the consolidation in phone has started to happen for us. We think it'll be more important.
The easiest way for you to think about this, though, is we find the prime candidates are those who are high-MAU, high Monthly Active User upkeeps. They very quickly tipped to phone. That's our easiest route to move to phone.
Karl Keirstead: Got it. I've got a couple more for Jared in our last six, seven minutes. But if any of you in the audience have questions, you've got a QR code in front of you. Just scan it, submit your question, I'll get it on my laptop. And I'll ask it to Jared if we haven't covered it yet.
So while we're collecting those, maybe a couple more for you. So we had one of our team members in Seattle at the Ignite conference, listening for some new announcements. And there was some cool stuff on Teams where you talked a lot about Teams Premium, talked a lot about Microsoft Loop. So when you think about Teams on the new product side, cool stuff that you and your team are excited about, what are the couple that you would encourage investors to watch carefully that could be big growth opportunities over the next five years?
Jared Spataro: Let me just ground you in the ones that are in-market right now, or that we have just announced, and then I'll talk about where we're headed.
So, as you think about monetization of Teams, we've got these great sockets. How do you monetize those? Phone. Rooms. We haven't given much air space to Rooms, but important to recognize if you're a Teams user, you're going to move to -- oftentimes to our Rooms systems. And then, finally, something we call Teams Premium. This was an ability for us to add additional capability, specifically related to meetings. So, how you do premium capabilities of meetings. Those are three in-market growth opportunities. I simply start the answer of a question there, because man, there's still a lot of runway with those three.
Past that, what you're going to see us doing, what we really feel like is the investment area, is AI. I think 2023, you hear so much hype about it and what's happening with Open AI and the GPT3 model, etc. But there really is value here, if you think about taking that AI out of its kind of -- almost like, ivory tower position that it has right now, and applying it directly into the scenarios where people get their work done. So, a lot of what you'll see from us in Teams will be the application of AI to getting your work done, in essence, Teams Premium. A lot of what you would have heard was actually AI capabilities applied in this particular case, to meetings. So, we hope to establish a new work pattern that we would call JOMO, the Joy of Missing Out, when it comes to meetings. We're going to create ways for you to record meetings, and then have AI go in and literally, as an assistant, tell you if you should even bother with this meeting. Did they ever mention your name? Was it anything that you care about? If it was, what portion should you go listen to? There's a lot of value there.
So, we see AI augmenting human capability in that way.
Karl Keirstead: Got it. Jared, one more from me. The Azure story is so central to Microsoft. There's so many cool things to talk about with you that I haven't even uttered the word Azure, yet. But maybe we could address that part of the Microsoft portfolio, and in particular, to what extent are all the things you just talked about with me pulling along Azure consumption? What's the Azure angle to the modern work portfolio?
Jared Spataro: I touched briefly on management, so, EMS, our management suite, actually drives Azure revenue directly. And that's a part of Microsoft 365, so we'll start there just to show you some of the overlap. We also touched on security, and security is super important because our security offerings span the modern work portfolio and then over into the Azure portfolio, the way we think about it. So we typically don't see people just use my portion of security; they'll also move over into things like Azure Sentinel when they move to Microsoft Security Portfolio. So that's the second one.
And the third one is when we didn't get much of a chance to talk about, we're trying to revolutionize end user compute with an offering that we call Windows 365. And that also accrues up to the Azure numbers, and is a big growth area for us. So, those three are the most concrete.
Karl Keirstead: And as everybody models the -- the seat-based, or EMS portion of Azure, Jared, as we look over the next couple of quarters, are there any variables we should keep in mind as we think about the EMS growth? For instance, I think it had a fairly high correlation with the Office 365 go-to-market cadence. So, should we sort of be thoughtful about the O365 cadence, and sort of make a direct correlation to how EMS might trend? Or are there other variables that we should keep in mind?
Jared Spataro: Structurally, I'd do this: EMS is a portion of Microsoft 365 E3, and we have two motions as we think about getting to E3. The first motion is what we would call dark-to-cloud, or dark-to-Office 365. We have lots of opportunities still to move people off their on-prem installs, mostly down market and in developing markets, into the cloud. Sometimes, we move them straight to ME3. But often times, they'll go to OE3. So, watch that.
And then the second component is, we will move them from O to M, and that's where the EMS numbers really come in.
Karl Keirstead: Okay. Got it.
Jared Spataro: So that's the -- structurally, if you understand that, you can be watching our ability -- and again, where's that opportunity, where's that coming from? Well, it's going to be down market. It's going to be in developing nations.
Karl Keirstead: Perfect. Really helpful. Jared, one from the audience. How does LinkedIn, which we haven't talked about yet, fit into the modern work portfolio at Microsoft, and your whole bundled sales strategy?
Jared Spataro: You know, it's -- I would say we're at this point where we scrambled for a couple of years with Modern Work to get ourselves into a new place. Again, you have to think that customers thought that was a purveyor of productivity tools, and there was not much else. So I've been working really hard to reposition myself, and we talked about that repositioning.
Now that we're here, we talked about customer consolidation, customer opportunity. We see a lot of opportunity within Microsoft.
So LinkedIn is the world's largest professional network, but I also think of it as the directory for professionals around the world. That's how we connect and work with each other. There's so much opportunity as we think about that directory of people's profiles, or identities, and what we can do with a communications tool like Teams. So I don't have anything to announce, but we just think that there are great opportunities for us, and now take a step back as we look to the future as well. And LinkedIn is a fantastic asset.
Karl Keirstead: Jared, we're out of time, but that was a really interesting conversation. You've got ownership or some of the more exciting parts of the Microsoft portfolio, so it's been a fun year for you, I'm sure, to see this growth profile play out. Thanks for coming all the way to New York to be at our event, and happy holidays to you and your family.
Jared Spataro: Thank you. Thank you. My pleasure to be here. Thank you, everyone.
Karl Keirstead: Okay. Perfect.
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