Microsoft's latest earnings show how one of its fastest-growing cloud software businesses is starting to loosen Salesforce's 'iron grip,' according to analysts

  • Microsoft's Dynamics 365 business, which sells software that tracks customer relationships, finances, and supply chain logistics, grew 38% over the last year, according to its latest quarterly earnings reported Tuesday.
  • Salesforce still remains the dominant player for cloud-based CRM and has the majority of market share, but industry analysts said Microsoft's growth makes it well-positioned to gain ground
  • One thing analysts point to is that Microsoft has worked to integrate Dynamics 365 with its other tools, which has made its CRM offering more appealing to customers, given Microsoft's huge presence in businesses already, analysts said.
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While Salesforce remains the clear leader in customer relationship management software, Microsoft's latest earnings report indicates that it's well-positioned to gain ground and become a stronger competitor, according to three analysts. 

Microsoft's Dynamics 365 software tracks customer relationships, finances, and supply chain logistics, among other things, and analysts say it's starting to encroach on Salesforce's "iron grip" on the customer relationship management market. 

Salesforce held 20% of the $56 billion market for customer relationship management (CRM) software in 2019, according to a recent report from Bloomberg, citing Gartner research, while Dynamics 365 held a meager 2.6%. But Microsoft showed a significant stride in its latest quarterly earnings Tuesday, with Dynamics 365 growing 38% year-over-year. 

Microsoft's strength comes from the fact that it offers a full-stack of technology tools, in addition to its CRM, including cloud productivity tools like Microsoft Teams and its cloud computing platform Azure, said Futurum Research analyst Dan Newman. 

"With strong tailwinds and the strength of its stack and Azure at its disposal, I do think Microsoft has the potential to accelerate the growth of Dynamics 365," he said. "It could see faster gains in market share over the next few quarters, making this an interesting competitive landscape to watch." 

One of Dynamics 365's strengths is that it integrates with all of Microsoft's other tools.

"Obviously Salesforce has the lead on market share, but Microsoft has continued to make advances, both in organic CRM functionality and added value areas like low-code/no-code (with PowerApps) and AI (with Azure)," said Valoir analyst Rebecca Wettemann. Dynamics' 38% growth is in-line with past quarters, though its revenue grew 47% year-over-year in July. Salesforce tends to see roughly 20% to 30% year-over-year growth each quarter. 

Microsoft also stands to benefit as more companies move to the cloud, according to Wedbush Securities analyst Dan Ives: If a business becomes an Azure customer, Microsoft has a chance to sell them on apps like Dynamics 365 as well.

"There's only roughly 30% of workloads on the cloud today," he said. "Microsoft's a huge beneficiary of that and it gives them the opportunity to further mine their install base on the application side as well."

On the product side, Microsoft is also taking strides to catch up to Salesforce's product. For example, Salesforce acquired Mulesoft in 2018 to bring together different sets of external data and uses its Einstein AI tools to make predictions for customers. Earlier this week, Microsoft announced a partnership with Adobe and C3.ai, which is founded by CRM software pioneer Tom Siebel, that combines C3's AI technology with the customer management tools in Dynamics 365 and the digital marketing tools in Adobe in order to predict what customers want. Ives said the partnership is an indication of how important the Dynamics 365 business is to Microsoft overall. 

While Ives is optimistic that Dynamics 365 will continue to see strong growth, he said that Microsoft's strides may take a while to have any kind of meaningful impact on Salesforce's market share, and given that the market is growing overall, there's "significant opportunity" for both. 

"2021 is going to be a telling year," Ives said, "To see if [Microsoft] could get some incremental share gains versus the likes of Salesforce."

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