Microsoft Dynamics Revenues: Is More Really Less?

Back in the summer of 2006, Microsoft did something that I confess I became complacent about: The gang from Redmond stopped breaking out separate numbers for the Business Solutions group, which at the time was comprised of its flagship ERP products – Navision, Great Plains, and Axapta – plus the Solomon accounting package and a relatively new CRM product.

The reasons for going silent were not clear, nor were they particularly suspicious. But it turns out there may have been an ulterior motive after all: radio silence about earnings proved a convenient way to hide a serious fall-off in growth over the last 18 months.

At the time I last heard a real number about what is now called Dynamics, in July, 2006, the fiscal year had closed out at $919 million in revenues, a growth rate of 16 percent, a very nice showing for the second smallest business unit at Microsoft.

Later that year, in October 2006, I was given some more color for the new fiscal year from the then-manager of partner relations for Dynamics: the partner win rate was up 32 percent, and deal size was up 26 percent. As Dynamics is exclusively a partner-sold product line, this would seem to have been the definitive word on how the overall business was growing, and the impression was that business was accelerating.

And that basically ended the numbers game from Dynamics: from that point on, MBS/Dynamics’ revenues have been a cipher, with cryptic references to continued growth in billings, whatever they are, (in January 2007, Dynamics told me billings were up 19 percent), but not a real number with a dollar sign to be seen or heard anywhere.

Suddenly, a number with a dollar sign showed up at this week’s Dynamics user conference (For a summary of some of the announcements at the conference, see Ray Wang's blog here). Kirill Tatarinov, the EVP in charge of Dynamics, reiterated in his keynote a number he had told analysts last October: Dynamics was now a $1 billion business. Billings, by the way, were up by 24 percent. (Ah, that mysterious billings number again.)

But instead of something to crow about, $1 billion – a growth rate of 8.8 percent – represents a pretty lousy number for a group that was growing in double digits only a year earlier. It’s even worse when you consider that during roughly the same period SAP grew 18 percent and Oracle grew 30 percent if you include its acquisitions, and an estimated 8.8 percent if you look at pure organic, non-acquisition-based growth. And don’t forget, that 8.8 percent growth includes what everyone at Dynamics calls the hockey puck growth curve for CRM, which, I was told, has been growing at 100 percent per year for the last two years. Which means if you want to understand how non-CRM growth is at Dynamics, it’s safe to either knock a few points off the overall number (7 percent? 6 percent?) or discount the heavy growth in CRM as a largely revenue neutral.

Even more importantly, the fall off in growth from 16 percent to less than 8 percent shows a Dynamics group that obviously hit a wall as fiscal 2006 came to a close, with its growth rate falling by half in a very precipitous manner. And it also highlights the fallacy of believing that a number called “billings” has anything to do with the real fiscal health of group.

While these numbers crave clarification, they may help explain in part the revolving door at virtually all echelons of the Dynamics group. Since the last full disclosure in July, 2006, Dynamics has had three different top managers, three marketing vice presidents, and seen the departure of a passel of mid-level managers (partner managers, marketing managers and the like), all of which more than gives the appearance of a lack of continuity in senior and middle management that cannot make things easy for anyone. I’m not implying these people were fired for some perceived malfeasance. Indeed, it may be more the case of insiders moving on the greener pastures, knowing what the full picture was really like.

The problems with growth may also explain the emphasis on the “commitment” to Dynamics that Steve Ballmer mentioned several times during his keynote, and that Tatarinov emphasized in an interview with a reporter during the conference. Commitment to a struggling business unit is always worth reiterating, otherwise it looks like things aren’t going as well as they may appear. And no one would want to be giving a false impression, would they?