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Dynamics Gets Some Microsoft Earnings Love

Microsoft partners focused on Dynamics have grown accustomed to seeing their product set play second fiddle to the flashier parts of Microsoft's product portfolio -- Office 365, Azure, Surface -- come earnings season.

This year was different. In the year-end earnings call on Tuesday, Microsoft CEO Satya Nadella and CFO Amy Hood bragged on Dynamics so many times in their prepared comments that analysts' ears perked up and they started asking questions.

Talking about his three broad ambitions for Microsoft, Nadella said, "Let me start with reinventing productivity in business processes, including our efforts across Office 365 and Dynamics."

Calling CRM a $20 billion-plus market with a "massive opportunity for reinvention," Nadella said, "Mainstreaming Dynamics into our engineering sales and marketing efforts gives us the ability to participate in this large and growing market in a more meaningful way."

He went on to discuss the acquisition last week of FieldOne Systems to strengthen the Dynamics CRM customer service offering and a 140 percent jump in total paid Dynamics CRM Online seats for the fourth quarter.

"We have more than 8 million paid Dynamics seats across CRM and ERP in total, up 25 percent year over year. This creates a great foundation for future growth in our Dynamics business," Nadella said. Later in the call, he said the Dynamics business was greater than $2 billion in FY 2015.

Added Hood in her prepared remarks, "Dynamics revenue grew 15 percent on a constant currency basis, driven by the strong CRM results Satya talked about and our ERP business, which saw 35 percent growth in customers this quarter."

All that led Walter Pritchard of Citigroup to say during the Q&A, "Satya, you mentioned CRM in your comments, your prepared comments, which we haven't really heard you talk that much about as an area of interest in the past. I'm wondering what changed in your view, or how do you look to bring that into, it sounds like, more the core productivity scenario that you deliver?"

In his response, Nadella noted the shifting category boundaries among collaboration, communications and business process and acknowledged his own efforts in opening up Microsoft to the 800-lb gorilla of the CRM market, Salesforce.com.

But Nadella went on to talk about the unique value Microsoft brings with its own CRM and ERP products. "One of the things that I'm very explicit about is we will have an open platform for other business process applications because it's a very fragmented market the world over, especially if you add SMB. And so we want to be having a platform play, as well as our own business applications play, and both of them should be high-growth for us. And in the last year, we just added more focus and we put more selling capacity around it, more marketing capacity, and now for the mainstream that's across Microsoft because I'm a big believer in this because I think we have something unique to add. As opposed to driving our own top-line/bottom-line growth, I think we can bring real innovation, and that's what is exciting to see. And it's not just CRM. I'm actually excited about our ERP business," Nadella said, according to a Seeking Alpha transcript.

The Dynamics seats are key to some of Microsoft's other ambitions. "When I think about data as the new currency, we have lots of managed seats and a lot of data which all will move to the cloud. And so things like Power BI and Cortana Analytics can help customers transform. So in fact, that's one of the reasons why we have been very optimistic about some of our new data capabilities because we have the attach capability go out even in the install base of Dynamics," Nadella said.

Another analyst, Heather Bellini of Goldman Sachs, asked how Microsoft could compete with "the big SaaS incumbent," presumably Salesforce.com, and whether Microsoft has the assets internally to execute against its long-term goals.

Nadella answered by developing the opportunity-in-fragmentation theme. "I think people like to talk about leaders, and there are clearly leaders when you go to the very top of the enterprise customers and segments. But the way the market splits into verticals and into horizontals and then the platform affects it, there's plenty of opportunity. For sure, you've got to be one of the players. It will be three players, four players, whatever, but in every technology paradigm, you want to be one of them," Nadella said. "So that's my bullishness on our business process prospects."

Jeffrey Goldstein, managing director of New York-based Dynamics partner Queue Associates, said he was very pleasantly surprised by all the Dynamics mentions and financial details when he read through the earnings transcript early Wednesday morning.

"It was good," Goldstein said in a telephone interview. "In the past, we've always asked what the revenue is for Dynamics. Was it growing? They've said that's confidential. This is the very first time we're seeing it broken out specifically."

The Dynamics focus in the earnings call follows a Microsoft Worldwide Partner Conference (WPC) last week in Orlando when Dynamics also took center stage. "This was kind of reinforcement of what we heard at WPC. The messaging at the Worldwide Partner Conference was excellent. Not only Satya, but [COO] Kevin Turner and every one of the keynotes mentioned Dynamics and how it's critical to their overall cloud strategy. That made us feel good and really gave us confidence," Goldstein said.

The status of Dynamics within Microsoft had become uncertain for partners, first with the rumors that Microsoft had considered acquiring Salesforce.com, followed by the June reorganization that saw longtime Dynamics executive Kirill Tatarinov leave the company and shifted the Dynamics business unit into the Cloud and Enterprise Group.

For now, questions of whether Dynamics might get lost in the larger cloud division have been put to rest.

"Satya, coming out of the Dynamics practice and having managed CRM, he understands how it can be leveraged and how it reinforces their strategy," Goldstein said.

Posted by Scott Bekker on July 22, 2015 at 12:20 PM


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