Microsoft Corporation (MSFT) Earnings Call Transcript

All right. Well, as you can tell, we're really excited to be here. I'm going to have you advance the slide. There we go. Hi, everyone. Welcome, welcome to Retail Unlocked. It is wonderful to be here with all of you today. NRF for so many of us is sort of like a work family reunion. As I look out into the audience, I see so many people that I worked with for a lot of years, I'm not going to tell you how many, but this is many, many decades of NRFs. And it's because for all of you, as retailers and us as your provider, you have been so busy running your holiday season, making sure your promos get to your customers, they get the orders that they want, that the platform is stable. And this is finally our chance as an industry to come together and really listen, learn and reflect on everything we learned and everything we did. I was at an NRF dinner just last night and I sat next to Aaron from Home Depot, who was telling me about a program where they're training military spouses on cybersecurity while their partners are deployed. And it just reminded me of the ingenuity and the spirit and the community mindedness of this industry. The other thing I think we could say about this industry is, and it's all over the floor, right, is that AI is shaping and really reshaping everything, how we work and what we're going to do. And I mean, come on, what other industry -- you can't spell the word retail without AI. So I mean, you see it up here on the slide but it really is in our blood and where we're going. So with that as a backdrop, of course, getting ready for all of you today, I needed to do what -- I practice what I preach, right? So I asked my trustee, Microsoft Copilot, what should Shelley Bransten talk about at her NRF Big Ideas Session? And here's what it said. All right, I'm going to have you advance. Here we go. All right. So the question is coming in, and I don't think you're going to be surprised. Some possible ideas: how can we help create personalized experiences? Supply chain, innovative and differentiated experiences powered by the Microsoft Cloud, and of course, examples of customers and partners. Check, check and check. With all seriousness though, we have an incredible session lined up for all of you today. Here's the game plan, and I think it sounds great and it's just what my Copilot told me to do. So first, because this industry is changing so fast, we went outside of ourselves. We commissioned with an advisory research firm, Futurum, really wanting to understand how retail is getting reshaped by AI. So we're going to hear what all of you said, it's retailers all over the globe and also actually your consumers on what you're seeing with AI. Two, we're going to make it really real. I have an incredible friend and partner, Dr. Janet Sherlock, who is the Chief Digital Officer and Chief Technology Officer at Ralph Lauren. She's going to share her perspective. And then you're definitely going to want to stick around or while you guys have been busy executing your peak season, our Microsoft engineers have been busy at work. And so we've got 3 product announcements of purpose-built industry solutions, which I'm going to showcase to you. So we got a pretty full session and we're super excited to be here. So those of you who are keeping track, which I hope is very few, will remember that last year at NRF, I came in and I said, wow, what a year, forwards. And I'm going to have you advance. Maybe it's -- can you push the slide forward? There. Back. Thank you. Okay. So forwards, wow, what a year. And last year, as we came into this room, I think the theme from us at Microsoft was resilient retail, right? And it was one of those, we came in -- I mean, ChatGPT had just come into the market, and we were sort of talking about it in conference rooms, but generative AI had not yet taken the main stage. But as I watched this past year and what this industry, all of you executed, I mean, I had to go back to these same 4 words because you all, wow, what a year. I mean, you have woven AI and the new capabilities into everything that you're doing. We commissioned a study with IDC to understand across all industries but in specific to retail, what's the impact that AI is having on this industry? And I don't think you'll be surprised to hear that they found that most retailers are now, from the investment to the outcome, are seeing productivity savings within 9 months. And in addition to that, for every single $1, because retail is about returning, making the cash registers ring and getting that e-commerce checkout done, for every single $1 that you've invested in AI, you're getting $3.48 back, a 3.5x ROI in productivity savings. So the impact is really real, and that's what I saw. But I'll say that it was also a year of 2 halves, right? The first half of last year was about gen AI coming out. I saw -- I sat in meetings with so many customers, and they had -- I had 1 major customer, I had 250 use cases. And that was sort of the first half of the year of just what are the possibilities? What can we do with these capabilities? By the second half of the year, it was like, what are the use cases that matter? And those 250 were down to 9. And you sort of have to step back and say, what's really underneath all this excitement? And I'd just say on the Microsoft side, what we see, this is a platform shift unlike -- I've been at the intersection of retail and technology my entire life. This is a platform shift unlike anything I've ever seen. It is the equivalent of social, mobile and cloud. And the 2 pieces are: one, natural language. Like you don't have to learn lots of new applications anymore. If you can say it, you can program it. And we're moving -- I know we love our keyboards and mouses at Microsoft. You can move beyond the keyboard to speak to your data. That's shift 1. Shift 2 is the new reasoning engine. The ability to reason over vast amounts of data to get the answers that you want. So that was what was behind what we say, wow, what a year. We saw it with our customers. You're going to hear from Ralph Lauren, from Walmart to IKEA, CarMax to Carrefour, and we're going to keep on going. But as I said, we went outside, we wanted to learn, what are your consumers saying? What are all of you saying? There's a ton of findings in this research, and we'll share it with you. But these are the 3 things that I wanted to share today. Okay. So number one, I mean, I think you probably already know this. There has already been a rapid adoption of AI within the retail industry. 87% of you are using AI to make product recommendations, have a faster checkout in your stores, in your contact centers. If there's anybody from Australia out there, the global number is 87%. Australians, that's 94%. So this is in the market. And of course, it's traditional AI, as we call it, and generative AI. Then the second one is pretty interesting and something I think we all have to pay attention to. 74% comfort with AI, but there's some caveats in there that I want to unpack. So our customers are generally comfortable with us as a retail industry using data to personalize their experience, help them save time, help them save money. We did a recent announcement with Walmart. The average American spends 6 hours every week planning for household chores and meals. So we can save time and money because customers are all in with us. But for the 26% that said, uh-uh, here's what they're saying: one, they prefer human interaction; and two, they're concerned about their data and how the retailers are going to use their data. So while that's the minority, I think we as an industry have to continue to pay attention to how we bring the customers along and give them the value equation as we look about at this new era of AI. And then this last stat that I wanted to share is really about the industry normalizing against few high-impact use cases. So the possibilities are really endless. And I think the reason I joined retail so long ago was because this is an industry of dreamers. But you're really starting to say, okay, generative AI, in particular, is about marketing personalization, e-commerce, website experience and, of course, supply chain optimization, demand forecasting, getting the right product in the right place at the right time. And the industry is coming down to these 2 really high-impact use cases in addition to, of course, all the productivity savings that you're going to see. Okay. So you got a sense of how we're seeing the year and, of course, some research. Now I want to make it really real and invite somebody up to the stage that I have known for a long time in this industry, Dr. Janet Sherlock. Janet, thank you so much. Come on up. Yes. Hi. Yes, a hug. And we're both head-to-toe Ralph Lauren, of course. Come on over. All right. I mean, I think that Ralph Lauren is likely a brand that needs no introduction but let me just unpack it a little bit. Global leader in design, marketing and distribution of luxury lifestyle products. And I just love this aspiration statement. For more than 50 years, Ralph Lauren's vision has been to inspire the dream of a better life through authenticity and timeless style. Who doesn't want that? And I mean, I have to say, personally, Ralph Lauren is probably one of the few brands that my parents, myself and my 2 crazy teenage children, we will all shop and be happy and feel great. So thank you for that.

Well, you're welcome. Please keep shopping. And by the way, you're embodying the style right now. You look fabulous.

Right back at you.

So Janet, I think the first part is you're a doctor now.

I'm a doctor. I can't cure anything, but yes, I'm a doctor.

No, I think as I've gotten to learn a little bit about your research really at the intersection across all industries around leadership and organizational change, I can't think of anything more relevant as we're trying to embrace all the capabilities out there. So will you talk a little bit about your research?

And thank you so much for acknowledging that. And yes, I, this past year, completed a doctorate in organizational change and leadership, and it was from the University of Southern California. My specific area of focus was organizational design, which I believe is a lost art. And my dissertation was on the structure of technology leadership because with the trends and the massive changes that have occurred in technology, it's become very confusing as to how to organize yourself. And particularly now with AI and generative AI, there's a lot of angst, a lot of confusion about how to organize. I feel like it was very timely, and I'm excited to have completed the program and my dissertation.

It's so relevant because I can tell you when I'm out talking to customers, they want to understand about the use cases, then they're concerned about responsible AI and then how do you organize for it is probably like would be the top 3.

Very true.

Okay. So now let's talk about AI itself and how you think about it at Ralph Lauren. You've been on your own journey. How are you thinking about it?

Sure. So we've been on an AI journey for quite a long time, like a lot of others. You mentioned earlier that traditional predictive AI. And we've been utilizing that for things like demand and traffic forecasting and allocation. And our marketing teams have been like amazing with customer segmentation and a host of other things. So when we -- when generative AI got into the forefront a little over a year ago, I think that we were pretty well poised to grab the bull by the horns and to adopt it. First off, architecturally, we already had an infrastructure built for AI and ML. And so we were able to add our generative AI practices to that. And so that really helped us be able to implement several use cases pretty quickly and early on. And then the other big thing that we did and you mentioned a little earlier was governance. So that's probably the biggest difference with generative AI versus traditional AI is we had to really increase the governance to include legal and include security. From an IP perspective at Ralph Lauren, we do utilize generative AI for creative purposes as well. So obviously, you've got concerns from an intellectual property standpoint and some other things. So establishing governance early on was really important for us in our early journey with generative AI.

So the data architecture, the governance. How about now let's talk a little bit about the impact? Because I think that sort of gets you ready, of course, and I know it's top of mind for you and many out there is sort of like what are those must-do, must-win scenarios in order to unlock, as we're calling it here, the value of AI?

Right. Well, it's interesting because even when you look at traditional predictive AI, I don't know if everyone remembers the days when we started to do price optimization. And today, it's gotten so much more sophisticated, the models really and the compute abilities have really helped to be able to use and leverage a lot more data in those models. So anybody who's using one of their allocation models or pricing models from years ago, you might want to take another look at it. So that's 1 thing. And I think that we all know in retail, the business cases and the ROI behind those traditional predictive solutions probably they yield a lot of benefit. You mentioned 1 and 2 consumer-facing things, obviously, personalization and recommendations, et cetera, which we've all been doing for a while. But then again, you need to look at those models because they've all gotten a lot more sophisticated. So it is -- if you think about the whole North Star, I'm always asked not just by you but by our CEO, CFO, COO about business cases and payout and ROI. So in our governance process, we do, exactly as you said, try to not just look at all the use cases but look at the most impactful ones. However, it's really important to look at the foundation that you need, like so I really think that where the rubber is really going to hit the road in years to come is when AI and generative AI really intertwined and we get explanatory so why were sales down yesterday and using AI to be able to tell you what to do. If you don't have all the right foundation and all the right capabilities lined up, we won't ever get to that North Star. So that's the 1 thing that when I talk about use cases and ROI, I always think like you need to build certain capabilities first. But as far as the use cases that we do have implemented at Ralph Lauren, early on, we did e-commerce product copy drafting for the copyright team -- copy editors rather. And we've been doing e-mail marketing, both from the content as well as the creative aspects of it. And we have a lot of other -- and you know, you're familiar with a few of our use cases, too.

We're excited to bring them out together. Okay. So the Big Ideas Session is an opportunity for advice from leaders as well. So Janet, I think a lot of people have come today knowing sort of what advice would you give in terms of how to leverage these capabilities?

Yes. So all right. So I have a person in our communications team that says when you speak in public, you only give 3 items. I've got 6 of them, okay? So don't tell him I got 6 of them. So I'd say the first thing is try to manage the hype. You read it in the press. This is being done and that's being done, and you have people in your organization saying, well, when are we going to deliver that? So I think you need to manage that. Then the other side of it, which are the naysayers, which is I think that generative AI is like the metaverse and it's not. We all know that. So it's really trying to balance that. And then as well, I mean, careful out there because there's a lot of AI washing going on. There's thousands upon thousands of companies trying to sell you something, so you really need to be able to have a careful eye looking at it. Item #2 is architecture. It has been foundational for us to think very carefully about how we've architected our AI/ML that looks at the different LLMs and has great APIs into those and then connects directly into some of our existing applications. Because going back to all those providers, if they all have different bespoke applications, how are you going to be able to manage that? And are you actually really going to be able to optimize the AI that you've got? Second, I mean, after architecture, I would say, stay educated and be flexible. So one of the things, like my data and analytics team has probably -- we've changed direction as to how we're looking at things. So because this technology is changing faster than anything else, there's capabilities today that were not available 6 months ago. So I think that nimbleness, while you have to really think about architecture, you have to be really nimble as well. Next would be data. That explanatory type of AI. If your data quality isn't in a good place, you'll never get there. So -- and here's the good news. You can use AI to help you identify and remediate data quality issues, which is the silver lining of all that. I know I got my cheat sheet here. Governance. I mentioned governance before. Like I said, you do need to -- everyone is going to say, what are the highest-yielding use cases? But back to that whole thing of communication, it's so important to look at what core capabilities you need. So if I gave an example from Ralph Lauren, visual attribution is a key capability that we need to build because there's probably hundreds of use cases that build off of that. So having that core capability has to get balanced along with those use cases, the most highest-yielding use cases. And then last but not least, the employees. It's funny because I don't look at myself as the leader of AI and generative AI. That's -- we do have a center of enablement. My team helps support our governance process. And we do manage the technology behind it, but our goal is to make every employee at Ralph Lauren be their own citizen data scientists to whatever level they're comfortable in embracing the technology. It is a huge unlock. And I believe that at Ralph Lauren, we've got the spirit of ingenuity and innovation. And if we give the capabilities to all of our employees, there's no stopping us.

Wow. Okay. Well, I mean, what a great place to end. Every employee at Ralph Lauren to be a citizen data scientist. What a vision, and we are so grateful. Thank you so much for joining me and the Microsoft team on stage today. I know you have a busy NRF, but thank you so much, Janet.

All right. All right. So in retail, we learn to be flexible, right? I've got like 3 minutes and 3 product announcements. I'm going to fly through this, but what I assure you is that everything I'm going to talk about now is going to be out there in our booth. And so I have more reasons, we're about foot traffic, too, to get you out there. Okay. So 3 product announcements. It starts with this clear strategy, which we call retail unlock. It's everything from unlocking the value of your data to your store associates to the supply chain to, of course, new shopping experiences. Click, I've gotten used to being flexible. Okay. So that's what we call retail AI unlock. Let me fly you through the scenarios. The first is, of course, we start with our customers, right? The Copilot template for personalized shopping. Okay. I know all of you shopped this holiday season. The website sort of felt the same as it has felt for 20 years. That's changing now. Conversational commerce, where you can actually say, I am going to Tahoe. I have 2 kids. I have a budget of $250 and I need skis, boots and pulls. And in natural language, you're going to get your results back. That's what we call this Copilot template for personalized shopping. It is an accelerator. It gets you to that idea of personal shopping that much faster. And of course, your products, your inventory and your brand. Now no customer has a great experience if the associate in your stores is not happy in their job. They are your brand ambassadors. Announcement #2, the Copilot template for store operations. Here you see it. How about asking me anything for your store associates? There's a spill on aisle 7. What do I do? A product has come in and it's damaged. What do I do? Somebody's standing in front of me and they want the translation from English to Spanish of the ski boots you're selling. This capability puts those capabilities in the hands of your frontline. 80% of your workforce, how I started in retail, is in the front line, and that's what this is unlocking. Okay. Third announcement. Janet talked about it. It's about data, right? How long have we talked in this industry about being data-rich but sometimes insight-poor? Microsoft Fabric is one of the hottest products we have. But this is -- these are the retail data solutions on Microsoft Fabric, the connectors, the data models, the accelerators. So you can leverage the data that you have. And here's the thing, it is not just the Microsoft data that you have. If I have any of my friends from Sitecore in the room, you can access Sitecore, your orders, your customer, your product data all within the context of Microsoft Fabric. And that's one of the partners but we're going to keep going. We really see this industry, as Janet said, like out there on the floor as an ecosystem, but this is the place, the sort of central place where you can access your data, which it's not data for data itself, of course. It's what you see at the bottom here, which is how you can reimagine your own retail experience with these AI capabilities. Okay. So I'm watching the clock. You've seen some research. We've heard from an expert. I've made 3 product announcements. I'm never going to ever have enough time in these Big Ideas Sessions, but my call to action to you are these 3 things: one, go see us. It's not -- it's pretty hard to miss our booth. So go see our booth. There's tons of customers, partners and experiences out there. The full Microsoft team is here. Go kick the tires with us. We've got 2 more Big Ideas Sessions from our Head of Marketing and our Head of Engineering for retail, so come to that. And then our trusty QR code, if you want access to the research around how AI is reshaping retail, get your phones out, scan the QR code and join us. We're going to have a full session unpacking that research. With that, I want to say thank you. Have a fantastic NRF, and it's wonderful to see all of you again.

Good morning, everyone. Thank you so much for attending today's session. My name is Kathleen Mitford, and I'm the Corporate Vice President of Global Industry at Microsoft. And I work with retail companies, retail companies like Walmart, like Ralph Lauren, and I help them figure out how to use technology such as AI to both grow their business and become more profitable. That's right. You heard me say AI. We can't have a Big Ideas Session without talking about AI. But before we go into technology, how many of you are responsible for retail joy? Hands? Okay. I see some hands out there. How many of you have absolutely no idea what I'm talking about? Maybe a couple there as well. Well, let me start by talking about retail joy. When I was a little girl, I used to love to play with fashion plates. Fashion -- Okay, I see a couple of people nodding and smiling, maybe from my era of playing with fashion plates. And what they are is they're little plates with etched designs on them and you mix and match them to create new ensembles. And I used to get so excited when my mom would take me and my sisters to the toy store and we would buy new plates. For me, that was pure retail joy. And it's also probably why I went on to start my career as a fashion designer. There are other shopping experiences that bring me joy. I have 2 kids. I have an 11-year-old, soon-to-be-12 daughter and an 8-year-old son, and I love it when I can dress them in matching outfits. And I shop at Janie and Jack and they have family moments, and that brings me joy. I love it when I shop at luxury retailers and they give me early access to their experiences. And who doesn't love free coffee on their birthday from Starbucks? But shopping isn't always that easy today. I'm petite. I know you can't tell what this feels, but I often have to shop online instead of in stores because they don't have my sizes in store. I avoid going to new grocery stores because I can never find what I need. And the store associates, they don't -- they're not equipped with the data to help me. And I love the personalized experiences and e-mails that I get from loyalty programs, but they're also not personalized enough for me to really care. I see some nodding and understanding. We need to bring the joy back to retail. But how? How do we do this and why? So the why is easy. That is revenue, because according to McKinsey, generative AI-based solutions can generate more than $600 billion in revenue in retail and consumer goods. And this is something that customers want. 43% of customers believe that generative AI-based solutions will make shopping both more personalized for them and then also more efficient. So we just talked about the why, but how? I told you I'd come back to technology and generative AI. Technology, and specifically, generative AI is the how. How many of you were at CES last week, the Consumer Electronics Show? Okay. I see some people were at Consumer Electronics Show. So I was so proud last week when the Walmart CEO and the Microsoft CEO were on stage together talking about how generative AI can make shopping more personalized. So they shared a demo of generative AI in search, which is available on both walmart.com and then also available on their mobile applications. So let's actually go through this demo. So this is what generative AI is. Let's say you're throwing a Super Bowl party. That's similar to the World Cup. It's a football party. So I'm going to type in, in Walmart that I've thrown a Super Bowl party. And because it's a Super Bowl party, it knows that maybe I need snacks, I need drinks, and maybe even I want to buy a new big-screen TV. So it's very specific to a football party. Now contrast this to my daughter is going to be 12 next week and I'm throwing a birthday party and I'm throwing a unicorn-themed birthday party. I'm still going to need snacks and I'm going to need drinks, but I'm probably going to need unicorn-themed party supplies. She wants unicorn stuffies for her gift bag and maybe even some unicorn-themed clothing. That's really the power of generative AI, that it knows the difference between what I'm doing for a Super Bowl party versus a kid's birthday party. So today, we're going to talk about how we bring the joy back to retail with generative AI and Copilot. How many of you know what a Copilot is? Okay. A good portion of the room knows a Copilot. That's good. So a Copilot is like having an AI-powered assistant or expert with you next to you, helping you on your journey. So today, we're going to talk about Copilots in retail media, in marketing campaigns, and in the shopping experience as well. So let's start with retail media. We recently announced Retail Media Creative Studio. What Retail Media Creative Studio allows you to do is personalize banner ads, the pop-ups that come when you're shopping online. It allows it to make it specific to the end consumer that you're going after. Let's look at the demo. [Presentation]

What I love about Retail Media Creative Studio is how simple and easy it is for marketers to use to create those personalized banner ads. Retail Media Creative Studio will be available in preview later this month. Let's move on now to talk about one of our customers, BJ's. BJ's is one of the first customers to use Retail Media Creative Studio. They have hundreds of brands who want to grow their digital business. And BJ's wants to help them do this with Media Edge so they want to help them promote their products on Media Edge, BJ's retail media program. So BJ's will be one of our first customers to use Creative Media Studio leveraging generative AI. And the point here is that BJ's is providing more value to their brand partners who are buying retail media on bjs.com. Let's talk about other ways that we can deliver joy to customers with retail Copilots now talking about marketing campaigns. Marketing campaigns are critically important to driving your business. Those marketing campaigns need to be created quickly. They need to be on message. They need to be modified in flight, and they need to really drive to a specific call to action. That's why I'm also excited about Copilot capabilities in Microsoft Dynamics 365 Customer Insights, which really allows you to use generative AI to, again, create those personalized marketing campaigns. So let's watch the video. [Presentation]

So 4 key insights I'd like you to take away from the Copilot capabilities in Microsoft Dynamic 365 Customer Insights. First is I hope you noticed how easy it was to create the marketing campaign. You could do this by simply typing in natural language using words that we use every day or you could upload an existing creative brief. Next, you could stay on brand. You can create on-brand and channel-tailored assets, including AI-generated content from Typeface, one of our partners. One thing I really love is you can run simulations based upon different demographics and see how you would need to change that campaign based upon the end user. And then you can also modify it in flight. The AI helps you understand how that campaign is performing and you can make modifications to it very easily. So to help me talk about Dynamics 365 Customer Insights, I'd like to welcome Kevin on stage from Leatherman. How many of you know Leatherman? Leatherman -- good. So people know Leatherman. I hear some clapping. Leatherman makes these great multipurpose tools that you can use for anything from like gardening. I use them when I'm doing my gardening outside. And my husband has a couple of them he leaves around the house for our honey to-do list. So Kevin, thank you so much for joining.

Thank you.

Great.

So Kevin, before we get started talking about technology, can you tell us a little bit about Leatherman?

Sure. Leatherman is the originator and leader of the multipurpose tools category. At Leatherman, we're all about empowering people to help yourself and help others, whether that's through work or through play or everyday fixes or critical life moments, the best tool is the one that you have with you.

That's great. So going into the customer journey, what is the customer journey for Leatherman? And how do you use Dynamics 365 Customer Insights to help with that?