Wells Fargo Tech Summit

Who:  Charles Lamanna, CVP Business Applications and Platform

Event:  Wells Fargo TMT Summit Conference

When:  December 1, 2021

Michael Turrin:  Hey there. Good morning again. Thanks everyone for joining us for day two of the Wells Fargo TMT Summit. I'm Michael Turrin, software analyst here at Wells. Very are excited for our next session. Had the privilege of rolling coverage out on Microsoft here recently. And joining us today from the largest software company on the planet, I think it's been neck and neck for largest company, but haven't had a chance to check lately, Charles Lamanna, CVP of business apps and platform for Microsoft. I'll start off with some questions. I have a list in front of me. But if anyone does have something they'd like to pipe in, you can shoot me an email at [email protected]. I'll do my best to have those in the conversation as well. Charles, thank you for joining us today. Certainly appreciate the time.

Charles Lamanna:  Yeah. Thanks for having Michael. I'm super excited for the discussion. I think we have a lot of good topics on Microsoft to share.

Michael Turrin: I agree. Maybe in just framing the conversation to start with, we obviously admire just how many end markets the company has presence in within these days. Maybe you could help just add some context around your role, responsibilities, key product areas of focus, just to help steer the conversation and we can just dive in from there.

Charles Lamanna:  Absolutely, sounds good. I head up what we call the Business Applications and Platform team, which basically maps to Dynamics 365 and Power Platform as our set of products. I lead the product management as well as the engineering components. Basically, all from design to implementation to servicing of all of those different cloud offerings. I've been in this area for about four years. Before that I worked in Azure for four years and I joined Azure in 2013 when a company I founded was acquired by Microsoft.

Michael Turrin:  Oh.

Charles Lamanna:  Let's say I've slowly moved up stack from infrastructure to past and now SaaS, to Power platform.

Michael Turrin:  The direction we tell our software companies to head eventually. It's great if you can start as an Azure in a question and the time you started at Azure was pretty damn good too. Yeah. I have to say so congrats on that. Let's start with just the evolution of Business Applications at Microsoft. Dynamics has been around for some time, but Dynamics became 365 in a more recent period of time. The growth trajectory of Dynamic 365 has really stood out particularly of late. Can you talk just more around the evolution of what you're doing with Dynamics and maybe what's driving some of the recent strengths?

Charles Lamanna:  Absolutely. As you mentioned, Dynamics has been around for a long time at Microsoft, but we went through a bit of rapid evolution about five years ago. And that's when we really started with this idea of Dynamics 365 and the future of Business Applications at Microsoft. The first and biggest piece of that was really just moving our businesses to the cloud, to be cloud first and really make it so that these are businesses which are delivered as SaaS products with easy signup, easy trials, and easier go-to-market compared to say some legacy on premise, very heavy CRM or ERP offerings. As a first, the most important piece, and we're done with that for quite some time now. The second big thing we did is we started to reimagine what Business Applications mean for the future.

Charles Lamanna:  So not go build BizApps of 2005 or 2010, but build the BizApps of 2020, 2025, 2030. We thought that really required us to focus on three main themes, which fundamentally change how you adopt and use Business Applications. First thing, being data first. It's this idea that every single company has this massive amount of data coming from everything, whether it's their eCommerce websites, mobile applications, the IOT, you name it. There's just a massive amount of data, which is just different from how BizApps were in the past, where most data was just entered by humans, filling out forms. So there's this idea of large amounts of data and leveraging it in a Business Application. Second thing is that once you have all this data, you of course want to go make predictions and use intelligence and AI and natural language understanding and OU to get value from that data.

Charles Lamanna:  And this idea of automation helps with things like reducing cost for delivering customer support by 20 or 25 percent or improving targeting or upsell or cross sale in your e-commerce website by 5 percent, really top and bottom line moving outcomes for AI, which is very different than just a pure AI platform. It's very tied to the business process. The third piece is around collaboration. It's this idea that in the past, BizApp data and BizApp users lived in little islands throughout the company, but a big push we went wanted to go do is how do we reimagine a world where data is shared across the company and people can work together. Just like you don't want silos of data and silos of lines of business, how can you start to reimagine whether not silos of people, either people can come together and work with the right data in the right place at the right time.

Charles Lamanna:  So we move to the cloud, we focused on data AI and collaboration. And then of course the third piece, which was critical was we built a product portfolio that was easy to adopt, and this required us to break down our monolithic CRM and ERP offerings. So gone are the days that people will remember where we had Dynamic CRM and Dynamics F&O or Dynamics AX, two big apps, and that did everything in one. It was very difficult to implement on premise, In the cloud we reimagine that to actually have a bunch of individually adoptable applications, which really span across five main areas for our customers. Area number one is around customer support. How can we help our customers deliver world class customer support? And we do that with things like Dynamics 365 customer service, power, virtual agent, AI builder, as well as some of our new omnichannel and digital voice capabilities.

Charles Lamanna:  Item number two is around supply chain and we have core supply chain execution. We have supply chain insights. We have supply chain sustainability capabilities. All individually adaptable modules where you don't have to go replace your existing ERP system. Item number three is around revenue generation. Sales and marketing and commerce offering. So how do we help our customers generate more revenue, whether it's through digital sales and direct selling or having a dedicated sales force. Next one is around service centric operations, which is helping our customers move to this new way of doing work and providing services as opposed to just products. And the last pillar, number five is the Power Platform. Which really is all about enabling full company digital transformation. So those are really the five main areas where we decompose CRM and ERP to fit into, and then provided a bunch of little adoptable components, which can replace your core apps or can provide value on top of those core apps.

Charles Lamanna:  And that last bit is why we've been able to really accelerate the growth because gone are the days of having to go to customers and convince them to rip and replace stuff. But instead we can provide value right in place. And the data really bears it out as being effective. Like we shared very recently, Dynamics 365 revenue grew 48 percent year over year, 45 percent in constant currency. Over 70 percent of that revenue is now in the cloud. And we have new areas like Power Apps, which are growing at right around 200 percent year over year growth. So a lot of new, exciting, rapidly growing products embracing this idea in the cloud and embracing this idea of data, AI and collaboration. Maybe a little bit longer answer than you wanted, but I think that's a good left to right view.

Michael Turrin:  No. It sets the stage for plenty. We've heard the intelligent applications and Power Platform mantra quite a bit. So it's good to get some more context behind it as well. I want to just go through some of the key pillars that you laid out and start with data in particular. We're hearing a lot around data right now, changing standards, focus on first party data, voice of the customer, Microsoft has customer insights and a position in and around CDP. But can you talk more around customer data and what you're doing from the application side there?

Charles Lamanna:  Yeah, absolutely. I think this is an area which is really interesting right now for so many of our customers, because we have things like IDFA changes from Apple, as well as the move to the cookie list, future and browsers. Which is just basically requiring everybody to rethink and repland how you and track and know your customer and how they engage with your digital surface areas. The good news is basically every company is in some degree of digital transformation, so they actually have a lot of digital touch points directly with their customers. And that's where the value is because that's where the data comes from. So if you have an eCommerce website or mobile app or IOT from your Keurig machine or something like that, that's all information that you can use to start to understand how your customers are using your products as well as what the next best product to offer to them or next best service to offer to them as well as how you can start to do direct marketing through various different channels, like email, text messaging, or just inside your own products.

Charles Lamanna:  So anyway, that's the landscape we're in. And what's great is with Dynamics 365 customer insights, we have a customer data platform or CDP that our customers can leverage to understand their customers by drawing from all the different data sources they have inside of basically their IT landscape and their customer facing landscape. The way customer insights works is it can connect to over 50 different systems out of the box. It can vary rapidly and easily ingest data, whether it's from your marketing system or say web analytics or your backend ERP. We can pull all of that data together in real time to create dedicated profiles of your individual customers. These profiles can then be used to change behavior in terms of how you engage your customer and also can be used across all your different marketing campaigns.

Charles Lamanna:  What's great is this is data that our customers own. It's not data that is owned by an aggregator or a gatekeeper in some form and kept locked behind in advertising infrastructure. It's actually data that our customers own and diminish themselves. So it gives them some degree of independence, which is going to be more and more important as we go through all these fundamental changes and how you can track and what can be provided in the browser or on mobile devices. And if you don't do this, you're not going to be effective. And we can see the impact already. I know over the last couple of quarters, there's been a lot in the news about the impact of the IDFA changes in particular when it comes to B2C companies, as well as companies that provide advertising.

Michael Turrin:  The other area that you mentioned with was automation, and I want to touch on that too. But maybe to start, you can level that with all that Power Platform encompasses. We hear a lot about it. It seems like there are a number of permutations that you can take. So maybe you can just set the stage with where Power Platform currently fits and what the functionality of the platform encompasses today.

Charles Lamanna:  Yeah, absolutely. I like to always start when I talk about the Power Platform, but explaining why it's so important for our customers. Because if there's a lot of great stats out there from IDC and Gartner. We talk about things like over the next five years, there are 500 million new apps that need to be built, and that's more than all the apps built in the last 40 years, longer than I've been alive. That's a huge volume of apps that need to be built. Additionally, something like 50 percent of office work could be automated today with current technology and tools, if there was just somebody to do it, or 85 percent of organizations can't understand their unstructured data. Basically, what that all of that means is there's this huge unmet need to go build solutions to help our customer digitally transform.

Charles Lamanna:  And of course, the way you would normally solve that is by going and hiring an army of developers. But there's also been a study saying there's a 4 million professional developer shortfall over the next few years. You're just going to make that impossible.

Michael Turrin:  It'll be expensive.

Charles Lamanna:  But look at what that means from supply and demand and costly. There's just a lot of challenges that are going to happen. I'd say over the last 20 years, there's been a little bit naive view that we can solve these challenges, this huge demand and insufficient supply by going teaching everybody how to write code. Go teach just random people how to write code, go teach people who work in finance to write code. And we've tried that and it has not been successful at scale. It just hasn't. It gets worse.

Charles Lamanna:  Literally I used to have that stat that there's a million developer shortfall. Now I got the update to this a 4 million developer shortfall, so it grows every year. We think though that there is a way to go solve this. That's through what we call low code development. Low code development is this idea that in a visual interactive way, much like how you use Excel and PowerPoint, you can go develop solutions that actually get the job done. That you can go knock out a huge chunk of those 500 million new apps or that 50 percent of automation and our offering in the low code, no code space is something called the Power Platform. And Power Platform has four main products, Power BI for low code data exploration, visualization, and reporting. Power Apps for code web and mobile application development. Power Automate for low-code workflow automation and robotic process automation, and Power Virtual Agent for low-code conversational agents and chat bots. All four products solve different needs, whether it's analyzing your data, acting on it or automating it.

Charles Lamanna:  But the core idea is the same, super easy to get started and it can be used by everybody in the company. Business users can leverage it, IT professionals can leverage it, and professional developers can leverage it, to either start developing for the first time or start to actually go to code and develop solutions faster than ever. If we look at this space, we have nearly 20 million monthly active users on Power Platform today. It's something that we really started to get go big on over the last three years or so, most of the Power Platform didn't even exist five years ago. We think this opportunity is massive. We think basically everybody on earth could ultimately be a Power Platform user, just like everybody on earth could be a Excel user or Outlook user. And that's how big we think it can really go.

Charles Lamanna:  And what's exciting for us is if we go look across the Power Platform areas, because we've been in this space for a while, we really have strong credibility. Power BI is far and away the leader basically on every access and the Gartner magic quadrant when it comes to self-service BI. Power Apps, Gartner has come out and said, it's the number one low-code app development platform. And we just announced that it's over 10 million monthly active users on Power Apps alone. So very big market leading offerings that we have that we think are going to continue to grow at a very aggressive pace. Like I mentioned earlier, Power Apps is growing at right around 200 percent year over year from a revenue generation perspective as well.

Charles Lamanna:  This kind of all compliments and extends what we have inside Dynamics 365, so you can go buy one of our apps, if we have it, and if you want to do something that app doesn't do out of the box can easily build it a Power Platform. That is a winning combo, and that's actually why Dynamics and Power Platform are together inside of Microsoft. Because we think they go so closely, and so well when you leverage both, because it's all about business process transformation, all about business value, business outcomes. In some cases, an app is great for it off the shelf. Sometimes there is no app for that, got to build it yourself, drop into Power Platform. Tons of energy there. And that's something that I'd say definitely worth tracking over the next couple of years is how that vision continues to accelerate for us.

Michael Turrin:  It makes a lot of sense. One of the areas that I think investors have become more conscious of is RPA, and Power Automate has a great story around automating repetitive tasks as well. And so I'm wondering if you can help characterize where Power Automate fits in that discussion. It is the right way to think about that more Microsoft centric, use cases or is it broader than that? And I'm just wondering you could just help level set the vision around what you're doing with automated.

Charles Lamanna:  Yeah. I would say our view is that Power Automate today is a broad based automation platform. And that today we're a market leader from feature capability and adoption perspective. Of course we're going to have great integration with other Microsoft products. Like that's what's really exciting about being Microsoft. We can build these amazing.

Michael Turrin:  Easy for you to do. Yep.

Charles Lamanna:  Of course. Yeah. Right. It's a lot easier if people are down the hall or across the street to go build those integrations, but absolutely connectivity to all kinds of systems is key. In fact, Power Automate has over 550 data connectors available out of the box to Salesforce, ServiceNow, Workday, SAP, you name it we probably can connect to it for typical enterprise capability. We also recently did integration of a company to even go accelerate that further in the case of Power Automate for more deeper enterprise data connectivity.

Charles Lamanna:  And also we have Power Automate desktop, which supports UI based automation, the classical RPA, right on Windows, it's included Windows 11 and it supports all applications on Windows. And there's lots of ways that we do that with accessibility handles and computer vision and AI, but it supports any type of app. SAP UI is probably the most used Power Automate desktop UI automation step today. Definitely it's a broad based RPA product, and this is a place where we think we really have something unique at Microsoft. The reason I think the uniqueness is important is because RPA is going through a little bit of a change. Internally we call it the move from RPA to cloud RPA or RPA to RPA 2.0 or Gartner calls it hyper automation. It's this idea of automation just being UI macros is a gross simplification of what you really want to do to go deliver business value.

Charles Lamanna:  And instead, when we talk about cloud RPA, it's API connectivity. It's deep and integrated AI capabilities. It's the ability to also do UI automation, but also to even go run, manage VMs in the cloud for unintended bots, so people are deep in RPA. That's a key component. We recently announced Azure virtual desktop integration, so you can basically run everything elastically into scale with no infrastructure and nothing deployed locally with Power Automate. We're the only ones in the market that do that today. We have the most connectors via API of anyone in the market today. So that cloud RPA space is super key and that's really what's unlocked the growth numbers we've seen. We have hundreds of thousands of organizations. Organizations, not people, a lot more people but hundreds of thousands of organizations using Power Automate today doing billions of automation actions every month today.

Charles Lamanna:  And the reason is because the cloud RPA delivery mechanism is so easy to get started. That's why we could put Power Automate desktop inside of Windows 11. That's why anyone in the world can walk up to powerautomate.com and build a bot in less than 60 seconds. No infrastructure required. That is really compelling, fast time to value. And it's not just on the low edge case. It's at the high end, we have great case studies with companies like Coca-Cola where they've used Power Automate to simplify 11 step processes, which cost tens of millions of dollars and to really replace emails and spreadsheets and phone calls and that type of thing.

Charles Lamanna:  They actually have over 4,000 solutions already deployed at Coca-Cola. So you can really go broad it's low code, so it's accessible and it scales all the way up to the complex. And we absolutely think that we're going to be a major player there and maybe look the most recent Gartner MQ. We show up as a strong leader in RPA as well. There's a few great studies I saw like JP Morgan put one out where we're, I think top two consideration for RPA vendors as well today. A lot of great data out there about how Power Automate can be used broadly, as well as narrowly at a lot of our customers.

Michael Turrin:  Those are great stats. A couple of questions have come in from the audience, so I want throw those in. The first one is actually one that I was intending to ask too. You mentioned service and support very early in terms of the number of things that you laid out for us at the start. You talked about virtual agent. We've seen the proliferation of where Teams has gotten to. And so the question is, do you have goals in around the contact center? Is that an area that you could see Microsoft investing in more heavily in the future? Or how do you think about contact center, especially next to something like Teams?

Charles Lamanna:  Yeah. I'd say absolutely that's an area that we look at and I'd say like contact center is a way that you implement customer support as well as how you implement things even like revenue generation, like a lot of companies have contact centers just for sales purposes. But I would say contact center is super exciting for us for a few reasons. Number one, we have a lot of great assets in that space already. Dynamics 365 customer service is an app module. It has a lot of market share out there. It's growing quickly, and it's something that the support agents in a contact center use each and every day to work cases. Similarly, we also have power virtual agent for automating conversational agents across web chat, as well as social channels and very recently voice. And then we also have a lot of other contact center, AI capability use, which also go help basically our customers automate tasks by either coaching assisting the support agents or by automating and driving self-service for the customer themselves.

Charles Lamanna:  What's exciting about all of this is it's a 40 plus billion dollar a year TAM. If you go look across customer CC, CCAS and CCAI, so three big categories over $40 billion TAM. And it has two major disruptions happening right now. The first being it's been a cloud laggard for a while, but not anymore. Everybody now has to get this stuff to the cloud, and the last I saw it's the majority. This is from an analyst, the majority of folks still deploy their core contact center infrastructure on-premise. That's all going to go to the cloud, just like everything is. And that's where Teams are super valuable because we built this amazing call routing, call distribution, points of presence around the globe, inside the Teams infrastructure, and we're able to build on top of that as we go think about moving that to the cloud. So cloud's a major destructive item.

Charles Lamanna:  Second one is AI. AI is a buzzword, you hear all the time. But inside the contact center, it's probably one of the best places where you can map AI back to business value. Because if you can say automate 20 percent of customer support requests, that can be a half billion dollars return on investment over five years for large B2C companies. It's rare where you find places where there's such clear yield. You get one more point of deflection or self-service through AI. An example of that would be you call up an airline to change your flight. Instead of having to talk to an agent, you can actually just do it by talking to a bot, saying, "Hey, I want to change my flight. Here's my flight number. I want to change it to this." If you get one point can be 10 million for our large customers.

Charles Lamanna:  Every time you make AI better, it's another points, another points, another points. I would say that is a really exciting focus for us because you don't usually get those opportunities when it comes to Business Applications. Usually it's a little more amorphous. Move to our us for your customer support agent experience and it'll be better. How do you measure it? What's the return? Here it's very simple. Use our contact center AI capabilities, and we can reduce your cost and we can prove it because your case volume that goes to agents will drop.

Charles Lamanna:  That is a very, very exciting challenge for us and at Microsoft, we have such strong AI assets across what we already built inside of Office inside of Teams, inside of Azure as and previously in Dynamics that we really can deliver on this promise in a meaningful way for our customers. Super bullish in there and Power Virtual Agent is one of the most important examples of the AI automation capabilities that our customers can do. Cause it's a Power Virtual Agent bot, which is going to go service a customer as opposed to a human. That's where we think the future is going very much in that space.

Michael Turrin:  Great. It's amazing how many things you have in your worldview. There's another question that came in. It's more just classification or characterization of the Dynamics 365 growth. And the question is, is there a way to think about how much of that could be coming from just replacement of on-prem Dynamics? Maybe you can just help us understand where you are in the journey of the transition from the two products set to 365, is that mostly complete or just add some more characterization around the growth?

Charles Lamanna:  Yeah. The stat that we shared to really highlight. The first thing I would say is the growth is predominantly coming from net new workloads deployed by our customers, not by just migrating on premise workloads. You can see that really with the two stats that we shared. Number one, over 70 percent of Dynamics 365 revenue comes from the cloud. Overall Dynamics comes from the cloud. That's a super important side. The base is now too small On-prem to really be meaningful to actually go drive that other growth number. Second being just shy at 50 percent year over year growth.

Charles Lamanna:  We also can't really do that just by converting our existing customer install base. So that really it's the migration phase is largely over, it's much more about to keep this growth up, and the growth that we've done over the last 12 months really requires us to be landing cloud workloads that are new with our customers across those five pillars I talked about earlier. And those are really the five areas we focus on. And there's a lot of cloud only workloads there too, like Power Platform, cloud only. If you go look at a lot of our supply chain assets, cloud only. I'd say definitely it's cloud, cloud, cloud all day and that's where our big focus is for sure.

Michael Turrin:  I'm just curious, how do you prioritize internally? Given there are so many directions your applications business could evolve towards, we've talked about some of the most significant technology trends out there. And there's probably a long list of things that are underneath that you could explore too. What is the decision process that informs what makes it to the top versus what might fall farther down? Is it customer feedback? Is it just some of the data that you're able to analyze? Maybe you can just give us a sense because, it's amazing and I can't imagine what it looks like from your perspective.

Charles Lamanna:  Yeah. First and foremost, we live and breathe the customer, both quantitatively and qualitatively. We have a fairly large, a surprisingly large install base. I talked about really it's hundreds of thousands across Power Platform and Dynamics 365 of organizations. So we can do some interesting quantitative analysis based on that population to understand what features are being used, where deep personalization has to happen, that type of thing. Also on the engineering team side, we work very closely with customers. We have things like a customer advisory board, a partner advisory council. We have things like Power champions in our digital communities. So a lot of ways where it's very one to one. So customer is always at the center and is always what informs what we go build. There's another piece which is we choose kind of strategically where we want to go.

Charles Lamanna:  What's the field book like? And those five pillars, we chose those five pillars around customer support, supply chain, service centric operations, revenue, generation, and Power Platform, because those are areas where we already have assets at Microsoft where we think there's a lot of disruption happening in those markets. I was able to talk about contact center, customer support a bit, but if we have the same type of viewpoint across all five pillars, something disruption's happening. And then item number three is something that we think accrues into the broader Microsoft cloud story. Because at the end of the day, we love BizApps, but the most important thing is the Microsoft cloud, the commercial cloud, as we position it, and you can see that in a lot of our announcements and a lot of our positions, but we also always are carefully factoring in how do we contribute back to the overall Microsoft cloud story. So those are the three main levers we use to choose the five investment areas. Then within those areas, you focus on the customer feedback.

Michael Turrin:  You make it sound algorithmic, but it's clearly not.

Charles Lamanna:  Yeah. I just have a framework, I'm a frameworks guy, so I love having this framework. I may or may not have a document internally that we use to talk about this way but-

Michael Turrin:  We would love to see it, but we know we'll get you. That's fantastic. I could spend all day chatting through some of the things you're working on, but your time is valuable and we've actually run up on what we allocated for here today. Charles, this was fantastic. Really appreciate you joining. I wouldn't normally say this, but best of luck to your fighting Irish, given the transition there too, and appreciate the time for sure.

Charles Lamanna:  Awesome. Absolutely. Thanks for having me Michael and thanks everybody for tuning in. Look forward to additional Q and A, and the future offline, so thanks.

Michael Turrin:  Excellent. Thanks everyone for joining. Much appreciated.