Business Solutions: Strategic Growth Opportunity for Microsoft
2003 Financial Analyst Meeting
July 24, 2003

ANNOUNCER: Ladies and gentlemen, please welcome Senior Vice President, Microsoft Business Solutions, Doug Burgum.

DOUG BURGUM: Good morning. It's great to have an opportunity to be here with you to interact with you throughout the day, to talk about how Microsoft® Business Solutions is going to enhance shareholder value for Microsoft.

Some of you in the room I've had a chance to know as long as 15 years, some of you I haven't met, but I'll be around today throughout the lunch and dinner and I'll look forward to it. I've always valued the interaction with the broad analyst community. I'm sure today will be no different, with all the questions that we'll have after we get a chance to get face-to-face.

The first place I want to start off today is business solutions, or business applications. Is this is a good business for Microsoft to be in? Let's start with the very, very basic question. My answer is a resounding yes, that this is a great business, a very compelling business for Microsoft to be in, for a couple of reasons.

One is obviously it's a very large market. You just heard Orlando talk about tens of millions of customers across the small and medium. We're targeting small, medium and up in the clouds with the solution corporate accounts space, and estimates of that could be as large as a $26 billion market, so whatever numbers you want to use, it's a very large market.

The second point, which Orlando also touched on, is, are we fragmented? This is a space that is needing a transformation in terms of the economics, in terms of how this market has been approached. IDC, when they take a look at how this is served through business applications, if you take the top nine vendors, including all the enterprise players, all the way up to the top, you only get to 30 percent of the whole market. If you take the next group, vendor number 10 through provider 527, you get the next third; from software developers sort of 528 through 3,600 is the bottom third. I mean, this is one of the last really fragmented markets in software again, so that makes it a great opportunity for us to deliver value to customers, for us to enhance the opportunity for partners.

In terms of how we do that, when you think about a solution strategy, again Orlando touched on this. We can't reach all the verticals, all the geographies and all the niches ourselves, so we have to have a strategy where we work through partners and through ISVs to extend and reach all these, and we're going to do that by improving the software development economics for those ISVs.

In terms of our own solutions, you heard Bill talk this morning about integrated innovation. We have a great opportunity in terms of tight integration across business processes and between what were classically sort of business application solutions, and with tighter interconnection with products like Microsoft Office and with all the other technology stock that Microsoft offers.

And so, again, in conclusion on this slide, what that does is not only is this just a great business opportunity to be in by itself, business applications, great business to be in, but if we can be in business applications and actually enhance the economics for developers, and if we can enhance and make the platform more compelling and actually create platform differentiation, meaning there will be great and differentiated applications that run only on the Microsoft platform, that's great for the platform business. So from the strategic standpoint and from a business standpoint, this is a really good business to be in.

In terms of results, you're all big shareholders. You know that Microsoft made a lot of investments both in terms of acquisition of Great Plains® and Navision®. Orlando talked about a lot of the internal investments. You deserve a sort of checkpoint on how we're doing. And I would say in terms of FY03: a big year, a very big year in terms of what we got accomplished in FY03.

Two and a half years ago, Microsoft wasn't in this business. With the Great Plains acquisition and bringing together of bCentral®, we got a foothold in the business but it was still largely a North American presence, with some reach outside of that but only about 15 to 20 percent of the business.

Last year about this time, July 11th last year, we acquired Navision, which brought us strongly into about 32 additional countries with lots more languages behind our core ERP products in the midmarket, so we've really extended the global reach.

In terms of the partner channel, again Orlando touched on this, both Navision and Great Plains had very strong channels for reaching the midmarket, I would say. The envy of the application space in terms of that channel asset, and in the last year we've added over 2,000 new channel partners for solutions like our new retail solutions, which we'll talk a little bit about later, like CRM, and also for our core assets. We're still adding new resellers and new geographies for Navision, for Axapta®, which is one of the product lines that came with Navision, for Great Plains. And again, as we move toward a unified approach with a broader Microsoft channel, we have an opportunity to get that very strong channel made even stronger.

Orlando talked about the power of the field. Last year we ran organizationally inside of Microsoft; the group that I was running included an end-to-end sales and marketing organization. As part of what Orlando just talked about, 1,100 experienced business applications field people will be moving over into Orlando's organization. In addition to that, we're taking a large chunk of what was the Microsoft SMB organization and for the first time ever that group will be comped on and focused on, supporting the partners in the field, the 5,000 or 6,000 that we have out there that are delivering these business solutions.

We've got a field organization. That field organization is nearly tripled because it will be over 3,000 people that will be focusing and be comped on and working with partners in the new org. So again, we've got the power of the unified field and all of that work is done in the last six months, deep work on integration that kicked off on July 1st of the new fiscal year.

In terms of new product releases, we've also had a terrific year this last year in terms of new product releases. You saw Orlando mention the large R&D group. Well, what have they been up to? We've had version one releases in a number of new categories including retail, including CRM, including the Microsoft Business Portal, Microsoft Business Network, and we also had major releases across our core product lines, Navision, Axapta, Solomon®, and Professional Services Automation. So again we've got a great, great year in terms of product releases. We also had the V1 release of the Microsoft Business Framework, which is a key component of our ISV strategy.

In terms of the results of all that activity, how did we come out? Well, as you know, we do report; John Connors reported last week a number for Business Solutions, $567 million, I think, with about 84 percent growth. But of course that number includes the addition of the Navision revenue, which wasn't in the prior year, so it's a bad compare in that sense.

But what I would want to say to this group, and what I'm really pleased and proud of our team, is that we did have a year, from an organic standpoint, where we had solid organic growth this year, year over year, on an apples-to-apples basis—versus the previous year in a year where virtually every application software company that we track had a decline in revenue and substantial declines in license revenue.

So again, we know we gained share, we know that we've accomplished growth in the marketplace. Through a channel strategy, we've preserved the channel asset, we've grown the business, and we've done a huge amount of internal disruption to get the field force aligned for next year. So, to accomplish all that has been great.

How do you get all that done? Of course, you get it done with people, and I just want to talk a little bit about the people asset in this space, which is that I believe that again we've got a very strong R&D team with the core people that have come to us through acquisitions. We've enhanced that with some external hires and some internal transfers, and so we've got again a really, really strong basis for people-building, really exciting next-generation applications as well as enhancing our current pieces.

But there's another aspect on the people side because, again, as part of the new context of the seven P&Ls and the way we're running this, this wasn't all just additive. We ran this as if this was a business. We ran this as a business where we said, "Hey, there's redundancies between Great Plains and Navision. We're going to redo some heads, we're going to take cost out of the business. We think we've got too many sites where we're doing development; we're going to consolidate development sites."

And so again, I think from the fiscal responsibility we also did some great work this year in terms of streamlining the business, taking some costs out, and making sure that we were very effective.

But on the people side, we have had great recruiting across architects, across developers, across the field from all of the leading applications people. They want to work in this business; they can see that this is an exciting space; they can see that Microsoft is really committed and this is going to be the place to be through this decade, in terms of business applications.

I thought it would be helpful again today because it's sometimes challenging to give a really riveting demo of a business process in just a couple minutes. And since we don't have an opportunity to take all of you on a customer visit today, we brought two videos along where we're going to bring the customer to you. And so this gives you a chance—it's not a sales pitch, this is not an external thing. These were just specifically developed to try to help you understand how a customer in their own words would see the value of some of the things we've been talking about.

The first one we want to talk about is the Jacksonville Jaguars. They're an NFL—a National Football League team—and they have two partners that worked with them. One, initially, they've been a customer of ours for quite a few years on the business application side and then this last year, and that was BMI out of New York, was their partner, and then Solanas, a specialist in CRM for professional sports teams. There's a niche. But that's the group that came in and delivered the CRM solution. Let's hear it from the customer what they have to say.

(Video segment.)

It's fun for me to listen to this act. I mean, I love what I do, but it's fun for me to be able to hear the customers say how much it's doing for them. And I love that line which says we can win their heart. I think that really ties back to what we want to be doing as a company for our customers.

If we take a look at sort of what we've got planned going forward, and so there was our customer visit number one. I think you saw there are a couple of key elements: one is in terms of fit, which we could call customization, and the other in terms of integration, and in that video they described how they're integrated with their BackOffice®, their Great Plains, how they're integrated with Outlook®, which again reduces training time and is familiar to customers.

And there isn't even a definition; I mean, there's a definition of solutions, which says it's something that's greater than the sum of the parts. In technology, there's a new definition which is emerging around the solution, which is that it's the value, of course, that a customer receives and the customer specifically defines that value as: Does it work for me, which is customization, and can I lower my cost of making this thing work with everything else, which is the integration point. So in those two dimensions, those are sort of two key design elements that we're thinking about as we drive towards next-gen and as we work with the rest of the Microsoft stack of technology.

As we think about FY04 priorities, again, we're going to continue to drive the core business in the midmarket fort, around Axapta, around Great Plains, around Navision and Solomon. Axapta, again, has got some strong momentum in terms of manufacturing and some larger customers. Great Plains and Navision, again the solid leaders across the midmarket, and in Solomon we are really focusing more towards the Professional Services Automation space.

We've also introduced, again, new solutions around retail, around, as I said, PSA distribution, manufacturing. I want to take a visit with a retail customer coming up. And then on the small-business side, again we continue to focus downwards in our efforts, in terms of reaching even smaller customers and making sure that we've got the right solution for them.

You heard Orlando talk about Business Contact Manager, which is down there below CRM on this slide, which, again, we're going to be shipping that as part of Office 2003 Small Business, and that again brings tremendous value to small-business customers in terms of helping them, if you will, with the type of CRM capability that they would like to have.

We also, as part of our suite of products, have some exciting things going on with the FRx® brand. And FRx is not only the financial reporting products that we use within our solutions but it's also used by about 50 companies across the midmarket. It is the leading market share brand for financial reporting solutions.

But as I said at the outset, it's not just enough for us to have great solutions. If you're trying to reach tens of millions of customers broadly across the world and lots of different geographies, we really need ISVs. I think, again, in things accomplished in FY03, we really got solid around how we are going to approach ISVs and how we are going to approach them from a technology platform; and one of the key things—and you've heard me or perhaps seen this slide before, and I'm going to spend a few minutes on it because there are number of dimensions here.

If you go all the way over on the left-hand side here, which is sort of the world before Microsoft got into the applications, then an ISV would take the core Microsoft platform—I mentioned 3,600 ISVs—virtually every one of those ISVs would then take the platform and start writing their own set of tools on top of it to allow them to more effectively create an application. I call that proprietary middleware; it may be a little bit hard to read. And then they maybe took that into horizontal, which would be sort of core accounting in a country, or into some industry component, or even more narrow, if you think in terms of SIC codes, into a specific vertical.

And then on top of that there was still a gap of functionality left that needed to be solved by customization, and on top of that there's still—you can go to any customer in the world, and they will tell you that they still have a bunch of unmet needs. I love the application space because there's no upper limit to what we can try to tackle in the next 10 or 20 years.

But along comes Microsoft and Microsoft Business Framework, and this goes back to sort of we had a piece of middleware, if you will, that we were planning on sharing with our ISVs. We made a strategic decision. Bill and Steve, Eric Rudder, who is coming up next, participated in this, and we decided to include the Microsoft Business Framework as part of the core platform assets from Microsoft. So this will be broadly available to anyone in the world, whether they are a competitor in the space, etc., and this again is going to enhance value.

And as we showed, from these sort of gold blocks, if someone writes on top of the Microsoft Business Framework, an ISV, it gives them a chance to sort of uplevel. They don't have to work so much in the plumbing stuff. They can write a .NET application faster; they can access Web services more easily; they can take advantage of the capability that we have and then again provide higher value because the higher up on this slide, the more value to the customer.

And as we see over time, customers will pay less and less in some cases for stuff that's lower on the deck and more and more for that specific customization and fit that's higher up.

We show Microsoft Business Solutions in there underneath the ISV and vertical because part of the strategy, which was core to the strategy in Navision and Great Plains, is to have third-party ISVs take our core products, our general ledger if you will, our CRM capability, if you will, and then extend on top of that. We have added in the past year over 300 ISVs who are extending Microsoft CRM. Some of those people that are OEMing CRM, if you will, were some traditional core accounting competitors of Great Plains or Navision. So again, that's another way where we can help uplift the industry with an embedded strategy of delivering our solutions to the market.

So again, this is central to where we are trying to go, going forward. We're very excited about the fact that this group of over 300 developers who have worked on the Microsoft Business Framework are going to be part of Eric Rudder's group and part of the core Microsoft platform.

I said we are going to go on two customer visits today, and so the second customer visit that we want to take you on is in a space that, again, is a new space for Microsoft. It's the retail space, and we think that the retail space is important for two reasons; not because we are trying to drive deeply into a specific vertical, but, again, we talk about tens of millions of small businesses in retail. That space today, which is currently being served in many cases by lots of different disconnected devices from different manufacturers, is going to converge around some new and exciting form factors, including PC-based devices from companies like Epson and like Dell, at very low cost. And so we've got an opportunity for a PC platform to really be the core point-of-sale credit card verification, inventory control device and, again, from a strategic standpoint, that's also a place where some of those devices could end up being a Linux device, and so we see an opportunity to differentiate the platform by having the best, if you will, sort of generic industry point-of-sale capability, which we will then, if you will, OEM that point-of-sale software to people if they want a new fashion vertical point-of-sale, if they want do restaurant or hospitality, they can do that. But they will be able to get point-of-sale capability from Microsoft Business Solutions.

This particular customer, I'm not sure in the room if we have the right demographic for a lot of NASCAR fans, but they've got a very interesting business model in terms of, if I call it mobile retail because they move around race to race—but it's a fun story about what they've been able to accomplish with our new Retail Management solution. Let's take a look.

(Video segment.)

So again, I think it's hard to capture the full experience in sort of a two-and-a-half-minute customer visit, but what you hear them talking about again is speed of transaction, ability to track every inventory item in real time across these different 35 mobile trailer retail stores, if you will. So again, exciting value, great customer value that we're bringing, and we're bringing it again through integration, through customization, through really delivering a solution.

We are investing a substantial amount in next-generation R&D, and we'll be tying in, of course, with the "Longhorn" wave relative to those releases. We'll be building that next-generation, moving towards a single global code base on top of the Microsoft Business Framework, which will be delivered as part of the core Microsoft platform.

CRM, driving that globally, we've had great response to the product to date. In Q1 calendar of '04, so that would be coming up in the beginning of this next calendar year, we are going to have another release of CRM, which is going to take us into eight more languages, and it will be launched in conjunction with the Microsoft field in about 20 more countries. We see again a tremendous demand out there for the Microsoft CRM solution.

We spent some time about amplifying the ISV, the value proposition, by helping improve the economics in this fragmented industry through the Microsoft Business Framework and, again, the work that we are doing to try to build the small-business foundation and in particular there we are highlighting today the work with Jeff Raikes and with the Office team around Business Contact Manager, again to help us really reach millions of businesses with business functionality.

So again, those are the priorities heading into FY04.

I thought I would also add, we've got another important financial goal, which is that we've had this great year in '03, we're laying the direction for '04, and we are planning to drive towards profitability in FY05. I believe that's a very achievable goal for us based on the trajectory that we are on today. I've got a management team that's committed to that, and we're going to hit that profitability in spite of the fact that we know we're investing more aggressively than everyone else in R&D in this space, but that gives me a lot of excitement around where we are going to be in the second half of this decade. But again, we have the business model really coming together in this space in a nice, nice way.

I think the last thing that I want to say on this slide, too, because sometimes it's hard, I'm sure, when you're thinking about your valuation models. But if you think about this as a $567 million today Business Solutions business that's growing when everybody else is shrinking, we've got Bill Gates, Steve Ballmer and Jeff Raikes on our board of directors, and we've got Orlando Ayala as head of sales. I think I'd invest in that company, strongly positioned.

Anyway, let me conclude with just a couple of quick thoughts here about what I would call the power of solutions. Because I think, again, beyond the specific general ledger, inventory, retail management, you want to really think about sort of the core idea here. And the core idea for Microsoft is about solutions, Microsoft Business Solutions, the core idea in terms of what we are trying to do as a business group. Because we have a terrific opportunity, Microsoft being uniquely positioned, being in the tools business, being in the platform business, and having great heritage and strength in that for us to deliver solutions to customers that meet those two value criteria of great ability to customize and the ability to integrate. It also fits beautifully with our partner model.

So if you take an example of a great solution in history, one of the great solutions that occurred just over 100 years ago, December 17, 1903. One of the solutions is an action or process that solves a problem: The problem was human flight. And the problem of human flight had been around since man ever had a chance, since the earliest moments of our imagination of mankind, since anybody ever sat on a rock and looked at a bird and said, "Hey, I wonder if I'll ever be able to do that."

It was defined as sort of the standard of impossibility, couldn't be done, never could happen, okay. And you take the Wright Brothers, who were not aeronautical engineers, but they took twine, they took wood, they took wax, they took muslin cloth, and they took some ingenuity, they took a lot of perseverance over a period of four years working through this whole thing, and they took a lightweight combustion engine—which they helped influence the design of that, and the combustion engine, if you will, was sort of the silicon chip of its day, was propelling lots of new applications. But they took those things and the Wright Flyer, which you're seeing here, this is the historic picture of the very first flight, the very first time humans successfully flew, and this was a 12-second flight that was only 152 feet, but they flew. This had never happened before.

And so, if you think of that, that sort of was the manifestation of their intellectual property. And what did they have to do to achieve that? These guys, they had to invent the wind tunnel, which had never had been done, they had to redesign a propeller, they had to develop the control system, which managed and allowed them to control the pitch and yaw and roll, the three dimensions of flight, which are still used in any aircraft that you would have flown in to get here to this meeting today. So these guys were innovating.

And when I think about Microsoft broadly and I think about the research that's being done at the platform level and the tools level and the server level, I mean the innovations, or Jeff Raikes talked about Watson, this is to me the same kind of exciting level of work that's going on in the industry as is happening right here. And we as the Business Solutions team get to benefit from this huge amount of R&D, and we get a chance to go extend that in a way to really create unique solutions.

And later on in the morning, it was Orville that flew this first flight and he flew this thing in the morning. They flipped a coin every morning to see who got to go first. Wilbur went second, Orville went third, Wilbur went fourth. Wilbur had a chance that morning. He flew 59 seconds, 852 feet. Can you imagine what they must have felt like when they said, "He's not coming down; he's flying, he's going," and they're running down the beach and they shut the engine off and they're standing there at the end of the thing. I don't think at that moment that even Orville and Wilbur could have possibly imagined the amount of potential, human potential, that had been unleashed by breaking through the solution to human flight.

And in the same way here, I think that Microsoft has got an important mission in one of the most important industries in the world. That mission is to help enable people to reach their full potential, and I'm excited with my team to have an opportunity to do that, built on top of the great technologies that come from the rest of Microsoft.

So thank you.

END

Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain inaccuracies.