03252009 Dynamics Investor Update Tatarinov
Dynamics Investor Update
Kirill Tatarinov
Todd Setcavage, Microsoft Investor Relations
March 25, 2009
(Operator Direction.)
TODD SETCAVAGE : Thank you. Welcome, everyone, and thanks for joining us today. Before we begin, I'll cover some of the typical details before we start a presentation like this.
This presentation may contain statements that are forward looking. These statements are based on current expectation assumptions that are subject to risks and uncertainties.
Actual results may differ materially because of factors mentioned in this presentation in the management discussion analysis and risk factor sections of the forms 10-K and 10-Q, or in other reports and filings with the Securities and Exchange Commission.
We undertake no duty to update any forward-looking statements. As always, a replay of this Live Meeting, transcript, and a copy of the slide deck will be made available at the
Microsoft Investor Relations site: www.Microsoft.com/MSFT following this event.
I'm pleased today to be joined by Kirill Tatarinov, who is corporate vice president of the
Microsoft Business Solutions. Format-wise, Kirill will walk through a presentation of the
Microsoft Dynamics business and then we'll follow with a short Q & A session. Please note that only those of you participating via Live Meeting will be able to see the presentation slides and submit questions.
We ask that when you submit your questions via Live Meeting, you also include your name and firm. I'll then read the questions for Kirill to answer. We may not have time to answer all questions, so if you have further questions after the call, feel free to contact investor relations or myself directly and we'll be happy to follow up with you.
With that, I'll turn the call over to Kirill.
KIRILL TATARINOV : Thank you, Todd. Welcome, everybody. Thank you for joining us to listen to Microsoft Business Solutions update. As Todd mentioned, I will spend approximately 20 to 25 minutes giving you an update on the state of the business, walking you through our strategy in the space of business applications, and then take your questions.
I'll start with an update on Microsoft Dynamics and our business in ERP and CRM. As we previously discussed with you, in the past two fiscal years, the business grew to over
$1 billion in revenues and grew 21 percent in both fiscal '07 and fiscal '08.

In fiscal '09, our current fiscal year, consistent with our peer group, we experienced impact of the economic contractions. As a result, our growth slowed down in Q1 and we experienced a decrease in our growth in Q2, resulting in 2 percent decrease in billings in the first half of the fiscal year.
With that, the youngest product in Microsoft Dynamics portfolio, Microsoft Dynamics
CRM, actually has experienced strong growth. Today, we have over 18,000 customers who actively use the product, and we have over 900,000 users of Dynamics CRM. And we continue to see very strong demand for the product, which is quite natural in the current economic conditions when our customers clearly understand that the number-one priority for them is to take care of their existing customers.
In the overall portfolio, we're proud to have over 300,000 customers worldwide and most importantly, we rely on over 10,000 business partners that span a broad range of partners working as both resellers and ISVs helping us expand our solution, making it very relevant for specific industry verticals and microverticals and specific geography.
Two weeks in New Orleans, we held our annual customer conference called
Convergence. This year, we had almost 7,000 attendees joining us in New Orleans to listen to our strategy and to discuss our products and to share their experiences. That attendance number is down from last year where many of you had a chance to join us and saw over 9,000 attendees, however 7,000 people joining us to discuss business applications and current economic conditions, in our view, is very positive.
We've also seen over 200 exhibitors in our Expo Hall. And, in fact, our Expo Hall was completely sold out. I had an opportunity to walk the hall and talk to many of our partners who were presenting their solutions, and I've seen a strong level of enthusiasm and optimism even in the current economic times.
The last statistics I would mention in relation to Convergence, we saw almost 500 customers who came to Convergence as prospects to basically discuss the products and to look at closing the transactions that have been in the works for quite some time. Having an opportunity to meet with that group, I also saw a strong amount of enthusiasm and we actually closed deals right at the event, which was very positive news.
Some of the key announcements that were made at Convergence, first of all in the area of
Microsoft Dynamics CRM was introduced update to our online service, which is the second update that we made to the service introduced approximately a year ago. It added capabilities that helped our customers get into the service quicker and also added a broad range of new features, expanding the capabilities of Dynamics CRM online.
We've also introduced a set of accelerators for Dynamics CRM solution that's available for our customers to be deployed on their premises. And we effectively introduced eight feature packs, eight accelerators that helped expand the existing capabilities using the free download, expanding into the areas like helping them build self-service portals and a broad range of others.

Convergence 2009 was the first environmentally friendly event of that scale, and it was only proper for us to also announce environmental sustainability dashboard for Microsoft
Dynamics AX ERP product that was very well received by the industry in the early weeks.
Also at Convergence, predominately targeting our partners and existing customers, we announced a tool called "Unleash Your Potential." And that tool effectively enables our customers to identify how effectively they're using S&P 500 that they already purchased, whether it's fully deployed and whether it's fully addressing their requirements. But it also enables our partners to do this analysis for their customers and to identify new opportunities in the install customer base.
Finally, for our existing and prospect customers attending the event, we announced savings on both ERP and CRM solutions for attendees, which really enabled that prospective event being very positive.
As you see at the top of the slide, the tag line for the event was the power of possibilities.
And that was really the theme that enabled us to talk about current economic environments and talk about the effect of that environment on the businesses who we serve. We also talk about the change in those economic environments as the possibility that our customers both existing and prospect can extract from that environment. In fact, talks about our vision for those businesses, and we call this vision the "Dynamic
Business."
And effectively with that vision, we articulated to our customers the opportunity to take advantage of the economy, take advantage of everything that's going on, be more agile, zoom out from the current view, look at both in the past and in the future and put their infrastructure and put their business applications in states that would help them endure and prevail in the current economy and move into the future.
When we talk about the vision of the dynamic business, we talk about three core pillars:
We talked about people being the lifeblood of their organizations. And we talked about the need for every organization to maximize productivity of their people through investments in the technology. We talked about the process, process being the backbone of any business, the backbone of any enterprise, and we talked about the need for the business process being adaptable. Organizations can adapt their environments and adapt their business process to both growth environments and discoloration environments, environment of investment and environment of de-investment, being able to address the needs of both growing and shrinking work force. And we talked about specific investments that we're making and our commitment to our customers to help them turn their business processes into fully adaptable environments.
The third pillar of dynamic business, which is ecosystem, effectively speaks to the fact that in today's business environment, no business is on the island, and everything is highly interconnected whether you talk about customers, suppliers, business partners, an

ecosystem needs to be highly connected, and there's only technology that can help businesses connect with their suppliers, with their partners, with their broad ecosystem.
We talked about three core pillars. We talked about the specifics of Microsoft commitment in helping our customers maximize their return in all of these three pillars, but we also talked about the fact that for business to be truly dynamic and for business to be able to endure and prevail in current economy, these three pillars need to be highly interconnected. And it's through the investments of people, productivity, adaptability of business process and connectedness of ecosystem businesses put themselves in a position where they can endure and prevail and persevere in current economy and position themselves strongly into the future success.
We also talked about Microsoft Dynamics as being core commitment from Microsoft, helping businesses become dynamic and helping businesses realize the vision of being the dynamic business. And with that, we talked about very concrete examples of how broad range of our customers today realize the promise of making their people productive, making their process adaptive, and making their ecosystem connected. It's our belief that in times like this for customers and for prospect customers, it's very important to see concrete examples of how the strategy, how the vendor, and how the vision of the vendor works with them and how other people can realize the benefits of the solution.
Here, we highlighted just a few examples of the savings and increases in productivity that our customers extract from Microsoft Dynamics today, 50 percent decrease in training,
20-percent cost reduction, 30-percent decrease in customer defections. All of these are very increased proof points that we now put in the hands of our partners and our customers and help them justify their investments in Microsoft Dynamics with ease.
Overall, I would highlight that making our solution much more reference-able and putting significantly bigger stake in the ground Microsoft Dynamics presence, and building those references was one of the bigger achievements that we brought to the ecosystem in the last year.
With that, I want to switch gears and talk about our strategy. And when I talk about strategy, I want to tune it around five pillars. We'll talk about innovation and how we drive investments in our product portfolio. We'll talk about segmentation and how deliberate we are in segmenting and choosing the right segments. We'll talk about industry verticals. We'll talk about software plus services, and we'll talk about partner ecosystem.
Specific to ERP strategy, we're clearly driving and continue to execute on portfolio strategy. Today, we have four major ERP products in our portfolio and we're highly committed to all four products in our portfolio. It's very important for us to make sure that our partners continue to get innovation from Microsoft and our customers who make the investment in those solutions and who made commitments to Microsoft for ERP

products continue to stay the course and continue to extract the value through our innovation.
We remain true to our approach of business-ready customer care that was introduced to the marketplace 18 months ago, and business-ready customer care is effectively a comprehensive set of tools and methodologies that brings confidence to both our partners and customers of how solutions are going to be supported and how one solution is going to be supported, how we're going to take their input in innovation and how we're going to continue to deliver a predictable roadmap in all core products in our portfolio.
We clearly view that strategy working. Having it in place for 18 months, we've received strong feedback from our partners and customers, and we're really happy about the progress that we've made in that particular space.
From the segment point of view, in the ERP space, we view mid-market as the most lucrative and the one that presents the biggest opportunity. We also view that market being the most fragmented, and we see tremendous opportunity for us to grow share and bring more value to our customers.
So we're focusing on mid market. And when we talk about increased focus, that is precisely where we're putting the majority of the emphasis.
Having said that, there are certainly small organizations that still rely on our products, and there are still departments of enterprises and even some large organizations right below Fortune 1,000 who rely on Dynamics ERP products. However, our focus in go-tomarket activities is clearly in mid market.
What makes our solution uniquely positioned for success in that mid market is simplicity and ease of use that has been a priority for our R&D efforts for a number of time now, and which continues to be the high priority for our product groups moving those investments forward.
We're recognized by industry analysts as being the easiest to do the business with in the mid-market ERP segment, and we also recognize a great complicity and quick ROI and low TCO of our implementation. And yet again, that remains to be a very important point in our strategies. From the industry vertical point of view, we're focused on five key industries in both our go-to-market efforts and in our product investments. We focus on manufacturing, which is the biggest segment in the ERP space worldwide, the focus on wholesale and distribution, the focus on retail, the focus on professional services and project-centric accounting industries in that area as well, and finally we focus on public sector with quite significant investment that's going in that space from both go-to-market efforts and product.
We also increased our efforts in recruiting partners who specialize in specific industry verticals, focused on those five industries, but also going beyond. And we're effectively making an effort to make our entire partner ecosystem much more oriented towards

specific industry verticals, helping them grow their expertise and helping them with training and focus in that area.
From the software plus services approach, what we believe in the space of ERP is the partner-hosted model. Effectively, what we find in the ERP space is that the intimate relationship between partner and customer is very important for success of the implementation. What we're finding is that ERP solutions being highly customized, being built around micro verticals and specific geographies truly requires a partner to be in the picture. That's why our number-one strategy here is to continue to make our ERP technologies easier and easier to host and enable our partners to bring those solutions in a hosted fashion to their customers, effectively helping them realize increased TCO of software delivered as a service.
At the same time in the true spirit of software plus services, we're focused in services that enrich implementation of ERP products deployed on premises, effectively giving our customers the ability to work with online auctions, the ability to work with online credit checking and payroll services that are delivered from the cloud by both Microsoft and our partners.
From the ecosystem point of view, we remain deliberately dependent on our partner channel. We're effectively the only mid-market ERP vendor who continues to go to market almost exclusively through partner channel. That is very important commitment to our partners, that is very important part of our strategy and we'll continue to stay true to that strategy and to that commitment.
We also increased our investments in partner ecosystem in the last 12 months, and we've predominately focused on making our best partners even better by investing jointly with them in go-to-market activities and giving them more tools such as staff implementation methodologies, and additional portal technologies through partner source that help them do their business better.
With that, let me switch to our CRM strategy, yet again using the same lens of five pillars for our strategic framework.
From the product point of view in the CRM space, we focus around three strategic areas of innovation: First is sales force automation, which is bread and butter of any CRM product. We see significant growth there, and we see significant opportunity in that space, so we'll continue to make very targeted investment in that area.
Second is customer service. Customer service that effectively represents almost 60 percent of the overall CRM market remains a very important priority for us, and that is the space where we have some very significant wins in the last 12 months.
Last but not least, it's a very exciting opportunity with expandable relationship management where our customers effectively use the Dynamics CRM technology as a platform to build their custom applications leveraging entities and leveraging

relationships that Dynamics CRM as a platform gives them. That platform is tightly integrated with Microsoft SharePoint and provides our larger companies, companies in the enterprise segment, opportunity to build applications to manage their tasks, to manage movement of their work force, to manage their cases in the case of legal organizations.
From the segment point of view in the CRM space, we're focused on both mid-market and enterprise customers. We saw significant demand in the enterprise in addition to our core or mid-market segments, and that's why since the introduction of Dynamics CRM
4.0 approximately a year ago, we've now expanded into enterprise segments, and we have the products that truly scale to the needs of that segment, and we also have the sales force that is capable to deliver to that segment on the CRM space, which is much more horizontal compared to the ERP solution.
Simplicity in time to value, just like in the case of ERP, remains to be a very good differentiator for Dynamics CRM compared to the competition. We'll continue to drive our investment, we'll continue to make it even stronger as we roll out the solution into the future. And yet again, I would highlight the update to the solution that was introduced two weeks ago at convergence, which made the time to value aspect of Dynamics CRM
Online even better.
From the industry point of view, our approach to Dynamics CRM remains more or less horizontal. However, we'll work with our partners to add specific industry vertical solutions, and we have a great broad range of ISVs who expand Dynamics CRM solution to a variety of industries, most importantly, the public sector.
When you look at software plus services, Dynamics CRM is effectively the poster child of what fully multi-tenant products must be. As we explained earlier, Microsoft
Dynamics CRM technology is hosted in Microsoft data centers and delivered to our customers today in North America and Canada through online models. That same technology is delivered to our customers to be able to deploy it on premises in their data centers by their IT organizations.
That same technology as we host in our data centers can be deployed on premise by our customers. That technology can also be deployed by our partners in their data centers, effectively giving the industry, giving the marketplace unprecedented power of choice of deployment model from Microsoft data center hosted by partner, delivered on premises.
From the ecosystem point of view, we're very focused on expanding our channel, expanding our channel in ISVs to deliver expansions to Dynamics CRM, expanding our channel for additional value-added resellers, and also expanding our channel to partners whether would host Dynamics CRM for their customers. In that context, I would highlight the recent announcement made by EDS at Convergence two weeks ago where
EDS effectively is expanding their partnership with Microsoft and Microsoft Dynamics
CRM will be hosting Dynamics CRM solutions from their data centers worldwide, effectively emphasizing the power of choice for our customers in the large enterprise segment.

So that's effectively the CRM strategy and that concludes the strategy section of this presentation.
Undoubtedly, many of you have seen recent the recent advertising campaign that
Microsoft has been executing on a worldwide basis, advertising campaign that is focused on business decision-makers, advertising campaign that is focused on emphasizing the value that Microsoft brings to our business customers.
Dynamics products, Dynamics ERP and CRM are an integral part of that campaign.
Dynamics brings tremendous value to Microsoft as we bring products to our business customers, and that value comes in many different aspects. Dynamics CRM is the proof point, it's the model that effectively helps Microsoft customers in business organizations realize the full value of Microsoft investments from the platform to server to SQL Server to their business applications, effectively getting complete package from Microsoft coming to them.
It's also important to recognize the values that Dynamics bring to the rest of the company.
Significant portion of our customers purchase SQL Server and Windows Server at the same time when they purchase Microsoft Dynamics. Significant percentage of our new customers upgrade to the latest version of Office as they deploy Microsoft Dynamics.
And that value truly emphasizes the importance of Microsoft Dynamics to Microsoft and the importance of our continuous investment in that space.
With that, I would like to conclude my remarks and move to Q & A.
TODD SETCAVAGE : Great. Thanks, Kirill. Just a reminder, you can submit your question by clicking on the Q & A button on the top of your console. We do have quite a few people on the call here, so we probably will not be able to get to all questions.
Again, we'll follow up with you directly afterwards to get your questions answered.
The first one here is really on the macro environment. You mentioned starting us out here that you were seeing a slowdown in H1. Can you give us a sense of what you're seeing in the business app space and how that's affecting Dynamics?
KIRILL TATARINOV : Clearly, we're seeing the impact of global economic environment. And as we see from many surveys, recently published, the impact on business application space is the most severe in the overall package of IT investments that our customers are making. And in fact, ERP is impacted the most.
At the same time as I mentioned earlier, we see strong growth in CRM products, and we clearly see the need for CRM products in our customers' environments.
Overall, I would say that customers continue to recognize significant need in the business applications all up and ERP products and CRM products specifically. We see our

pipeline at an all-time high, and I'm confident that in the future we will see stronger closure rates as well.
TODD SETCAVAGE : The next question here: Stephen Elop was on the road recently in the last few weeks and he really spoke to kind of the process that went through and some of the cost initiatives and really how they looked at the strategy review process in looking at all the businesses. Can you tell us a little bit how Dynamics kind of fits into the MBD portfolio and specifically, then, how you're prioritizing your investments?
KIRILL TATARINOV : Yeah, a couple points that I would highlight and I would emphasize. The fact that we're talking about our strategy in this presentation, the fact that we're emphasizing a very focused strategy approach, to me, is a clear indication of the approach we're taking to the evolution of our business applications and increased focus that we're bringing to the business, MBD all up, and MBS.
As Stephen mentioned to a group of investors when he was on the road three weeks ago,
MBS is considered a growth engine for MBD. And the impact of current economy does not change it. We continue to view it as a growth engine for MBD, we will continue to bring tremendous value to company and to Microsoft Business Division.
We'll continue to pull through additional products, we'll continue to demonstrate the value that our customers have from the complete Microsoft stack. We'll continue to demonstrate to people how moving to the latest version of our Office platform through
Dynamics, using that platform is very important and attractive to them.
TODD SETCAVAGE: Okay, the next question here is around really a compete question, and that is with some of the revenue decelerating in the last two quarters, is it more macro-economic driven or are you seeing competitive shifts?
KARILL TATARINOV: In our view, it's truly macro-economic impact, and in the current economy, people are clearly looking even more than before on quicker return on their investments in the space of business applications. People don't really like to look at long implementation cycles. It doesn't take months, they would rather look at something that would take days or weeks. People are truly looking at the overall total cost of ownership even more than they did before. I would say that competitively those two aspects have been the strength of Dynamics all along, and that's why we'll continue to invest even more in those areas, and that's why we believe that Microsoft Dynamics is positioned quite positively in the current economy through our shortest ROI and through our low TCO values that we bring to our customers.
TODD SETCAVAGE: The next one is on the ERP and CRM slide, you talked to us specifically about software plus services. Can you give us some insight into the roadmap for those two products?
KARILL TATARINOV: I would start with CRM. Clearly CRM's market has evolved to both software as a service model, and for on premises model with vendors such as

ourselves and some of our competitors offering both models. Our approach is power of choice. We believe that giving customers choice of deployment is the most important and the most significant. Having conversations with some of the larger customers who are looking at a broad range of models, we also start to see the emergence of the mixed model, where larger organizations would be deploying some of their departments in the online hosted model, either hosted by Microsoft or their partner of choice, and that some of their departments would be deployed through on premises solutions. And our approach to CRM allows them to implement that mixed model, and allows them to share their customization to horizontal CRM products both in the cloud and on premise, and would view that as a core differentiator for Dynamics CRM, and we view that as being one of the core benefits form the investment that we made in the Dynamics CRM platform being both hosted by us, our partners, and implementable on premises.
On the ERP side of things, I want to stress one more time the importance of partners, and the importance of the intimate relationship between customer and partner. Specifically in mid-market segments where we are playing with the ERP. That's why our model remains to be deliberate partner delivery model of both on premises implementation and in the cloud implementation. Today we have approximately 200 partners that host our solutions for their customers. They host a broad range of products from our portfolio, and they're being very successful in delivering both the customization that the customer requires, continues to maintain the intimacy with their customer, and at the same time take further advantages of the TCO decrease and software as a service model.
TODD SETCAVAGE: Okay. On the topic of software as a service, as well as we see on premise, can you talk about the type of momentum you're seeing from both those, whether it's on premises or software plus services, both for ERP and CRM space? And then, secondarily, can you talk then about the decision on keeping four independent ERP lines up and running, and how you think about that going forward?
KARILL TATARINOV: Let me start with the second part of the question and talk about the four ERP lines. What I want to stress here is the tremendous partner ecosystem that has been developed for a number of years for all of those products, and our commitment to the partner ecosystem today more than ever before remains very strong.
It's very important for us to make sure that those partners stay in business and those partners have sustainable innovation from Microsoft helping them to continue to grow their install bases, and helping them continue to grow successful customer implementations. That's the most important driving factor behind our desire to drive four
ERP product lines, to help our customer bases retain those existing customers, and make them even stronger.
At the same time, we stated in the past we will be sharing more and more technology between our ERP product lines to effectively take advantage of engineering efficiencies amongst the products. That's precisely what we continue to do. In fact, today if you look at the user interfaces of all four of our ERP products you will see that they are remarkably the same. They were effectively designed to the same user experience blueprint, and the same role-tailored model that makes our ERP product so attractive, and

so easy to use, deploy and operate. That same model goes through all four products, and is applicable to all four products. And there are many other examples of how that technology sharing both preserves customer and partner investment, and at the same time allows us to extract all the engineering efficiencies form the code sharing.
TODD SETCAVAGE: The first part of the question was around momentum on services versus on premise.
KIRILL TATARINOV: We actually see significant momentum on both services and on-premise CRM implementation, I assume that the question is predominantly related to the CRM space, given the comments from some of our competitors earlier in the quarter.
We see good growth in the CRM products, we see very strong growth in the CRM products, and that growth comes from both on-premises implementations, given our TCO advantage. And we see growth in our in the cloud offering, but most importantly we see very strong growth in partner-hosted offerings.
Again, from our perspective, power of choice strategy really works here, giving our customers the ability to deploy whichever way they like. But also the trend we're starting to see more and more is customers mixing the models, and going from one to another over time.
TODD SETCAVAGE: Okay, great. You started to talk about competition there, can you talk about pricing, and how in this market are you using pricing as a lever, is it a tool for you to go and compete and win deals?
KIRILL TATARINOV: As I mentioned earlier, deal closing is one aspect of the current macroeconomic environment that is challenging for our partners, and for our sellers. And in that environment bringing tools that help our partners and our sales force close deals is very important.
Pricing flexibility can be one of them. However I would highlight that we are already very competitively priced in both the CRM and ERP space. There are additional tools that we've been introducing and continue to introduce to the marketplace. For example, in November we introduced 0 percent financing, it worked very well for a number of our partners, and a number of our sellers, and clearly reached our objectives from the business point of view.
We concluded the promotion earlier this week. It lasted for approximately six months, and we are now looking to introduce additional tools, and additional promotions into the marketplace. One of them was actually introduced at Convergence, which gave our customers the ability to purchase the tool now and pay in a six-month period. And there's more to come in that space.
TODD SETCAVAGE: Okay. That's about all the time we have for today. So I want to than you Kirill for doing this Live Meeting.

As I mentioned earlier a replay of the live meeting, and copies of the slide deck will be made available on our investor relations Web site, as well as the transcript for your future reference. Again, that's at www.Microsoft.com/msft.
Thank you, again, everyone else, for joining us today.
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