PHILLIP WINSLOW: To begin I do have this Safe Harbor statement to read. Microsoft may make some forward-looking statements during this presentation, and that's true whether you're here in person or listening on the web.
Ron, thanks for joining us here in Park City this year and being for the first track as we kick off the sessions.
RON MARKEZICH: Thanks for having us.
PHILLIP WINSLOW: I guess maybe just to kick thing off a little bit for everybody in the room here, maybe you could you introduce yourself, give us some of your background, tenure at Microsoft, et cetera.
RON MARKEZICH: Great. My name is Ron Markezich. I just hit 20 years at Microsoft last Friday.
PHILLIP WINSLOW: Wow, congrats.
RON MARKEZICH: I've been in a number of jobs. I started in IT. I was a customer of Microsoft inside Microsoft for about six years. I became CIO at Microsoft, started what we now call Office 365 14 years ago as CIO, grew that business in incubation for about six years, ran our U.S. Enterprise Sales Force for five years. And now I'm responsible for our Microsoft 365 Commercial business. So Microsoft 365 would include Office 365, Windows and Enterprise Mobility, plus Security Suite.
PHILLIP WINSLOW: Just to get things started, too, I mean, Microsoft has obviously gone through a lot of change over the past few years. From your perspective, obviously having been there 20 years now, can you provide us a little bit of color on this evolution of the company and the culture and the impact Satya and Amy have had on the direction and culture of the company?
RON MARKEZICH: Yeah. I think if I look at when Satya came in, one of the first things he did was get us grounded on a mission that was fresh and new for the company. I think if you look at when Microsoft started and our mission being a PC on every desk and in every home, we largely accomplished that mission. I think there's a period of time there where we didn't have that North Star that we're all marching towards.
And so getting us grounded on a mission to help every person, help every organization on the planet achieve more was something that's super-helpful because it was aspirational. It was focused not on revenue and making money, although that's super important, that's why we're in business, but it's focused on making people's lives better and making organizations more successful and really focusing from inside to outside how our products and solutions help people. That was a big one.
The other one was really a focus on diversity and inclusion in Microsoft. You always hear a lot about that and tech companies are starting to share data. But it was beyond just the data, it's just how do we integrate diversity and inclusion into our products? How do we have a mindset that our job at Microsoft is to make sure everyone can participate in this movement that's happening in this world, this new tech industrial revolution?
And that was core. You might have seen recently something like even the Xbox Adaptive Controller to help people with disabilities use the Xbox, or even if you look inside our products and having core accessibility capabilities, you add a picture into PowerPoint and you have alt-text in there for people that visually can't see the picture. And so that was core for us just in terms of the mindset in the company.
The third one I would say is, you might hear a lot of this Microsoft runs on trust especially as we move to cloud services, which we've been in the process of literally for 14 years. Trust is such a key component because you become part of that organization, the supply chain, delivery chain, part of how they operate. And so things like our Cybersecurity Tech Accord, we've rallied tech companies around getting some policies and principles. The principle that privacy is a fundamental human right. Some of the stances we've taken publicly in the courts have been all part of making sure customers can trust us and that we have the principles and policies in the company that we treat customers' data that it's their data, they own it. We don't monetize the data. We have a business model that's focused on customer success, not our sole success.
So I think those three things would be key.
PHILLIP WINSLOW: Great. Obviously being a veteran at Microsoft, 20 years, maybe you could talk about how your approach has changed to a specific business or a specific market?
RON MARKEZICH: Yeah. I think it's interesting having been a customer of Microsoft early on and now being part of the organization that serves our customers broadly, I think the biggest change at Microsoft in terms of how I've approached it is really round customer signal, customer listening and reaction to customers.
When we were purely a software company with ship cycles at three years it was really hard to get customer signal. When I was CIO we used to sit down with Bill Gates once every other month for two hours just to talk about, as CIO, as a customer of Microsoft products, how could our products get better, which is a horrible signal, you know, customer of one.
Now as we move to cloud services through Azure, through Microsoft 365, you get such great signal from customers across segments, geographies, industries, et cetera. And the change has really been around our ability to be agile in that customer feedback and the way in which Satya has reengineered the engineering organization and improved the agility and the time to respond to feedback is the biggest change I've had where if I looked at ten years ago, I would say, oh, we've got this thing we've got to do. It might show up in our product that ships in three years. Now we're looking at, hey, we need to make sure we support ethical walls for financial services companies in Microsoft Teams, boom, it's on the roadmap and we deliver that very quickly.
PHILLIP WINSLOW: We're going to touch on from a sales perspective with customers, just about the general tone of the relationship between customers and Microsoft, what are you hearing, what's the feedback then from customers?
RON MARKEZICH: First of all, the Microsoft Cloud is something customers will say, if they're not here, it's not a question of whether they'll go there or not, it's a question of when. Certainly our penetration on Office 365 and Azure has been remarkable, especially in our commercial large enterprise segment. And you might see in the past, ten years ago, customers who say, I don't know if I want to sacrifice security by moving to the cloud. Now they say, I've got to move to the cloud to get the secure environment I need. The mindset certainly has changed. We saw that with some of the hacks that happened that were largely publicized five or six years ago. The whole industry shifted to saying, you know what, Microsoft Cloud is more secure. I've got to get there to help my security posture.
We see a lot more in terms of customer tone. How do I invest more in my employees? If you looked is years ago you might have seen customers say, how do I squeeze the turn on people more and get more productivity out of people? How do I take that laptop and instead of a four-year life make it a six-year life, and how do I get a cheaper laptop? That certainly has changed where the expectation of employees is, they have great tools. They have great hardware, great services, and customers, our customers, the industry has to invest in the employees to keep them, retain them, attract those employees, because their expectations for tech is much higher. And so getting them the best and the latest.
The third thing I would say is every company is a tech company. And so they're all searching for how do I avoid disruption? Even companies in what they thought had huge moats are recognizing, I'm going to get disrupted. And it's not going to be the CEO that has all the answers. How do I tap into the ingenuity of the entire organization?
PHILLIP WINSLOW: Got it. One more high-level question before we drill down in O365 and Microsoft 365, but last year you went through a big sales reorg at Microsoft. And we're wondering if you could talk about sort of the core tenets of the change and how has that changed the dialogue with customers particularly in your area of focus, O365, M365?
RON MARKEZICH: Yeah, there were a few things we needed to do. We needed to get deeper technical expertise in our field. As our product portfolio has broadened, you look at Azure, Azure is a compilation of about 50 different services. Microsoft 365 we run from allowing you to run your PBX in the cloud to a set of security components. So we needed to have deeper technical expertise in the field.
We also needed to organize more around industry. So many of our solutions become tailored by industry differently. If you look at our Dynamics business that's certainly different by industry. But even Microsoft 365, there's a number of flavors by industry that customers will want to implement and we need that expertise in the field around that.
We also changed our comp model significantly to comp much more around usage at our customers. So top down there are some people that are 100 percent comp'd on usage. Even our people that are comp'd on revenue have an aspect of usage. We didn't want to -- we wanted to make sure we didn't just sell licenses, that we actually were incenting our people to get customers to use the products that they bought and owned.
And then we did a lot around our partners to better segment our customers so it was it clear where we were hunting and selling with Microsoft employees and where the white space was with partners, and that we had coordination across those.
And the last one we invested, and we've been investing and we'll continue to invest quite heavily on is our inside sales organization to help with our breadth customers and the partner with those partners that sell to those breadth customers.
PHILLIP WINSLOW: All right. We'll circle back to M365 in a second, but let's drill into the commercial side of Office 365, which obviously has been a great success, as you just mentioned, for the company. And if I flashback to the 2017 Financial Analyst Meeting, Amy talked about an 8 percent CAGR for Office Commercial install base from Fiscal '15 to Fiscal '17. Now in my opinion that's a sign of TAM expansion. We were talking about the uni-CAGR. What's really driving that sort of net new user growth that we're seeing because of Office 365, piracy, new users, first line workers, et cetera? What is driving that? How do you think about that going forward?
RON MARKEZICH: Yes, predominantly new customers, new users, and we always get this question when we meet with folks like you, it's like, hey, how can Office 365 grow so much. I thought your penetration was pretty high. And it's amazing how much white space still exists out there for Office 365 and I'd look at it at least on the user's side in a couple of perspectives. One, certainly the first line workers, housekeeping staff here at the hotel, folks that work the slopes up in Deer Valley or Park City, people that pick grapes in Napa Valley. There's a whole set of first line workers that have never had technology, depending on how you measure them it could be 2 billion to 3 billion people in the world that are employees or workers of some sort that really for the most part don't have technology.
We've really focused our engineering efforts on meeting the needs of that population. In the past we had tried to just take what we offered for information workers and made it cheaper and slimmed down for these first line workers and that didn't work at all. What we've done now is we've actually created capabilities in the service specifically targeted to those first line workers, things like shift capability, shift sharing, HoloLens to help people with support in the field so they can tap into an expert back at headquarters, a number of those scenarios. So that's subscriber expansion in a population that, frankly, never subscribed to anything from Microsoft.
Then there's customers. We've made great progress in certain segments, but there's a lot of room to go in other segments, certainly emerging markets, smaller businesses, customers that tend to not move as quickly. We've made great progress just recently in the large banks, the GSifis, where they have been holdouts because of regulatory reasons. We've done some things in the U.S., having private clouds for government, so that we can meet all the U.S. regulations. We've done things like data centers that are local in certain countries, so that governments in most countries are more comfortable moving to the Microsoft Cloud.
We've done things in emerging markets using an app called Kaizala that allows you to essentially communicate with an organization through just cell number. They don't even have to be in the directory, just a phone number, you can reach out to those. So we're doing solutions to meet these segments that haven't yet moved to the cloud to give them a compelling reason to move and then meet their needs, both regulatory, as well as their business process needs.
PHILLIP WINSLOW: Office 365 commercial growth has been outgrowing seat growth, as you guys have been reporting. To me that shows, obviously, the mix up in the SKUs we're seeing. And the questions I get from a lot of investors and I'd like to ask you about, is about how do you think about sort of RPU growth going forward and that migration up to the higher-end SKUs. Where are we? How do you think through that going forward?
RON MARKEZICH: Yeah, we're in early days. We launched Microsoft E5, our E5 SKU, which would be our premium SKU, which has advanced security capabilities, advanced compliance, have a lot of advanced voice capabilities, for instance, like moving your PBX to our cloud with our phone system and then Power BI, as well. In that we've seen great uptake for larger customers and great early days. But the opportunity is still ahead of us on E5, that's certainly helped our RPU growth.
There's a lot of focus on E5, but even if we take it down to E3 we've seen a huge move from customers that kind of bought in at a standalone workload like Exchange Online, or our E1 workload moving to E3. And so what our strategy is, is to help a customer meet their needs by getting into Microsoft 365 at one of our levels and then move them up the chain and we've seen a lot of success at moving up that chain, either from E1 to E3, from standalone to E3, and now E3 to E5. But there's still a lot of room to go getting customers to E3, getting new customers, new users, as well as getting them up to E5.
PHILLIP WINSLOW: Speaking of new features, let's talk about Teams. I'm wondering if you could talk about just the momentum you're seeing there and how do you think about sort of continuing to differentiate Office 365, obviously Teams being a recent addition to the package. But how do you think about continuing to differentiate Office 365, so Teams and then kind of the go forward.
RON MARKEZICH: Yeah, Teams is super-important to us, because it is the hub for teamwork in Microsoft 365. It's the one place to go and it bridges the gaps across generations. So, you know, looking at this room, a lot of us probably start our day in Outlook, look at our e-mail calendar, I can tell you my kids never go to Outlook. I'm sure your kids never go to Outlook. And your kids love probably things like mine, these GIFs and videos and stuff that I think is a waste of time. But that's a large way in which they communicate.
Microsoft Teams bring that together so you have generations working together in a productive way, which is so needed today, because if you look at the workforce the generations that exist are teaming together and they have very different styles in which they use technology. Not only that, it's that hub for teamwork that brings everything together in Microsoft 365, whether that's your OneNote, your online meetings, your one-on-ones, your artifacts from a meeting that go back in time. If you join a team you don't want to -- how many of you have joined a team and said, hey, send me all these e-mails from the past so I can get up to speed on this new team I'm on. Now you join a team, all the content for that team and the history of that team is there available to you.
When you leave a team you no longer have access to all that information on that team, because you lose access to that site in Microsoft Teams. So it's super important as that hub for teamwork, but it's also a new way for people to work. A lot of times you'd say, hey, you know, Office 365 has got Word, Excel, PowerPoint, I'm kind of stuck in my hold habits. Microsoft Teams gets people out of their old habits and helps them work in a modern way.
All of these things combined Microsoft Teams actually less than two years in market actually it's the fastest growing business application in the history of Microsoft. The growth has been phenomenal, the response has been phenomenal. Customers like Accenture, I'll give you an example, they made Microsoft Teams available, didn't advertise it, didn't do any internal marketing, now they have about 145,000 users every month on Microsoft Teams, just organic growth. So we see that quite common.
We've also made a version of Microsoft Teams available for free, because we see it as a great on-ramp into Microsoft 385 for customers that don't yet own Microsoft 365, they can start using Microsoft Teams, getting real value out of that. It's not a trial. There's not an end date. They can stay in there. But we're seeing the conversion rates of subscribers be very high for folks that use the free version.
PHILLIP WINSLOW: Yeah, I actually speak millennial and only communicate with my team in emojis, as they know in the back, animated ones on Skype for Business. I'm a fan of the vanishing ninja, a big fan of that one. But let's transition over to Microsoft 365 and I'll ask some more questions then I'll leave it up to the audience and pause it. Back at Build I thought it was really interesting, because I describe it as almost sort of repositioning Microsoft 365 as not just simply sort of a bundle, Windows 10, O365 and enterprise mobility and security, but rather as a platform for developers, as a web and traditional application environment. So how do you think -- how are you sort of inside of Microsoft how are you thinking about Microsoft 365, how you're sort of positioning it as a platform.
RON MARKEZICH: Yeah, we really -- Microsoft 365, to be fair, we started it a number of years ago as Enterprise Cloud Suite and it was just a packaging thing, you get a 5 percent extra discount if you buy the full thing. The uptake was huge. We were super-surprised at how strong the uptake was, with really no marketing behind it, not a great name. It was confusing what it even was. But then part of this, when l talked before about kind of the outside-in view of the culture at Microsoft we realized the reason customers were buying it as a suite wasn't really for the 5 percent discount, although they'd gladly take that, it was because that's how they used it. Every customer uses Office 365, EMS, and Windows together. They don't like to buy them as separate packages.
Historically we as a company had engineered these as three different products and so then we sold them and licensed them as three different things. But what we started as a license and packaging thing, we actually changed the whole company over a year ago to engineer and organize around Microsoft 365. So we have one engineering leader that owns all the engineering in Microsoft 365, first time we've had Windows and Office together in one engineering organization. And we're really taking kind of that outside-in view.
We prioritized work across Windows, Office and EMS. We ensure when we open up a local data center it supports Windows, Office, and EMS. Our update policies are consistent across the three. And it's all designed the way around customers and how they would take these products and give them to their users and how their users would use them.
PHILLIP WINSLOW: One last question, then I'm going to open it up to the audience. When you talk about M365, how does it fit in with your cloud strategy and the whole strategy around digital transformation? And sort of how does this track? And then in particular one of the questions I get from investors, too, is the end of support of Windows 7 is coming up in 2020. How does this fit in with Microsoft 365?
RON MARKEZICH: Yeah, when we talk to customers we really lead with digital transformation. And we have our cloud, Microsoft 365, Azure and Dynamics as the lead cloud to help customers digital transform. Microsoft 365 is how you can empower your employees and really help them tap into the ingenuity of those employees to help you stay competitive.
The way, if I kind of hit the Windows 7 end of life really quick, one of the parts of Microsoft 365 that we're helping customers do is really take Office and Windows and make them cloud delivered, so allow you to take Office 365 Pro Plus and have it update your clients across whether you're using iPad, iOS, Android, Windows, Mac, give you those updates then so that we can manage those clients on you and make sure you always have the latest and greatest. Windows 10, same thing, allows you to have us manage the client so that you always have the latest and greatest. We see a large shift for customers that are on Windows 7 with that coming up to end of life using that to shift to what we would call the modern device, or modern desktop, so they always have the latest and greatest across Office, Windows, and EMS on those devices and desktops.
PHILLIP WINSLOW: Awesome. I'll pause for a minute to see if there are any questions from our audience. Go ahead and raise your hand, otherwise I'll finish out my Q&A. All right, we're getting people revved up. It's still early here. They're still getting caffeinated.
So I'm going to ask one of my favorite questions about edge. So anybody that's read my stuff knows I'm a big edge guy. We've written obviously a lot about it. But talk about how Microsoft 365 fits into the whole intelligent edge, intelligent cloud strategy?
RON MARKEZICH: Yeah, it is core to both. When you think about Office 365 Pro Plus or Windows 10, or Windows Defender ATP, which gives you security on your client, that is all about edge, getting signal from the edge, making sure you're got the latest capabilities from a productivity perspective, but also ensure we have signal to help customers with their security posture, even help customers with their measuring the productivity and effectiveness in the way they use the tools.
We have a secure score. We give every customer a secure score. It tells them where they can improve their security posture. And we get that by understanding what's happening at the edge and what's happening at the core. That could include AD signals, Windows signals, Office signals, signals in Azure, and so we take that all together and give them a security score.
We'll do the same thing with a productivity score. We'll launch a productivity score for customers so they can see individually how can I be more productive and also as a manager you can see in an anonymous way how can I make my team more productive. You can see as an organization leader how do I make my organization more productive. And that's all signal we're getting from the intelligent cloud and intelligent edge that come together.
PHILLIP WINSLOW: Sticking with the theme intelligent cloud I would say EMS reach I think is 88 million in Q1 in terms of install base. One of the things Amy talked about is like, hey look, that's still tied to humans, so to speak, versus sort of the open-endedness, so to speak, of Azure. But how do you think about sort of just penetration of EMS inside of that O365 install base and sort of like I guess where we are in the lifecycle?
RON MARKEZICH: You should think about EMS E3 and EMS E5. EMS E3 we see super strong attach rates to Office 365. And what we do see is most customers moving into Microsoft 365, because they also want Windows 10 for those users. So great, and Microsoft 365 in a short period of time is actually a multi-billion-dollar business. And so great growth and attach there.
EMS E5 is also critical though, and with EMS E5 we have a lot of security capabilities that expand things like Advanced Threat Analytics that I'd mentioned signals that allow you to anticipate where attacks might be coming to address things before an attack happens. It has Microsoft Cloud App Security, so you can look at all of the cloud apps that are used within an organization, manage those and control those. It's the age-old problem of a CIO, how do I manage all this shadow IT. Well, now shadow IT you don't even need a server, you just sign up for a cloud service and you can use Microsoft Cloud App Security to manage all that shadow IT cloud apps that exist with your environment. And so Azure AD Premium P2 to allow you to have policy for GDPR to set automatic classification on documents is super popular especially as customers look to meet GDPR requirements.
So all of that we think of EMS E3 strong attach to office, certainly per user, but lots of head room with EMS E5 because it's earlier days there.
The last one in terms of per user, we are experimenting with some things that are not per user. For instance we have something called Microsoft Workplace Analytics that allows you to take the Microsoft Graph and understand how your organization works together, the connections, the interrelationships. We actually don't do that as a per user, we do that as more of a value-based pricing.
And so we'll come out with more things that are more value-oriented pricing versus just being tied to per user.
PHILLIP WINSLOW: Cool. Last question for you here, too. Kind of the forward roadmap for Microsoft 365, because there are a lot of areas I can imagine you kind of continue to pivot this suite into, whether it be identity, access management, message security, virtual desktops, et cetera, it seems like multiple areas. How do you think between sort of building something organically, acquiring versus partnering in some of these? Where do you draw the line?
RON MARKEZICH: It's really about I think we do all three. And we would not say one of the three is a priority. They're all important. We've got a number of partners that integrate with Microsoft. If you just look in Teams and look to add-in new apps into Teams, lots of partners out there and continuing to grow. If you look at even security, lots of partners that we work with in the security space that we integrate Microsoft 365 with, but at the same time EMS E5 we made some important acquisitions to build out that product in terms of the security capabilities. And then Microsoft Teams we built organically, and we felt that was a super good decision because we feel really good about how that fits in with strong integration across all of Office 365 from day one. So it's really a balance across all those three, and they're all three very important.
PHILLIP WINSLOW: Our 30 minutes actually just finished up. So it went fast. Thank you everyone for coming, and thank you, Ron, for kicking off the track one.
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July 18, 2019 2:30 PM - PT
Microsoft Fiscal Year 2019 Fourth Quarter Earnings Conference Call