Earnings Call Transcript - MSTR Q3 2023

Shirish Jajodia, Vice President of Investor Relations and Treasury

Hello, everyone, and good evening. I'm Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. I'll be your moderator for MicroStrategy's 2023 Third Quarter Earnings Webinar. Before we proceed, I will read the Safe Harbor statement. Some of the information we provide during today's call regarding our future expectations, plans and prospects may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements due to various important factors, including the risk factors discussed in our most recent 10-Q filed with the SEC. We assume no obligation to update these forward-looking statements, which speak only as of today. Also, during today's call, we will refer to certain non-GAAP financial measures. Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at microstrategy.com. I would like to welcome you all to today's webinar and let you know that we will be taking questions using the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar, and Michael, Phong or Andrew will answer questions at the end of the session. Please be sure to provide your name and your company's name when submitting your questions. Now, I will walk you through the agenda for today's call. First, Phong Le will cover the business results for the third quarter of 2023. Second, Andrew Kang will cover the financial results for the third quarter of 2023. Then, Michael Saylor will provide a strategic review and discuss the recent bitcoin market updates. And lastly, we will open up to Q&A. With that, I'll turn the call over to Phong Le, President and CEO of MicroStrategy.

Phong Le, President and CEO

Thank you, Shirish. Hello, everyone. I'd like to welcome all of you to today's earnings webinar. I'll start with the highlights of our software business. Total revenue was $129.5 million, representing an increase of 3% year-over-year, total software licenses revenues which consists of total product licenses and subscription services revenues. And our consolidated statement of operations were $45 million, representing an increase of 16% year-over-year. Total software licenses revenues performance benefited from both increased adoption of our cloud platform and growth in product license revenues. Total subscription services revenue was $21 million and increased at 28% year-over-year. Our Q3 subscription billings growth was 17% year-over-year. We achieved good revenue results in Q3 with year-over-year growth driven by our cloud business and a strong international license revenue quarter. We plan to continue to drive growth in our recurring revenue model, and to transition our business strategy and product offerings to a cloud-native model. Our focus will be on innovation at the intersection of artificial intelligence and business intelligence, using our first-to-market advantage in the enterprise-scale integration of AI and BI to grow revenue in the cloud. I'm excited about the work we're doing in these areas and to share some updates with you and our progress. We're at a major period of innovation in the technology industry. We believe the next innovation is to change how the world does business or digital money, with the continuing development of the Bitcoin ecosystem in digital intelligence through AI. The technological leaps that occurred in the past year in generative AI are real, and we expect to be at the forefront of integrating AI with BI. MicroStrategy is well positioned to gain competitive leverage in winning both of these areas of growth. MicroStrategy's mission for the past 30-plus years has been to enable intelligence everywhere for our customers. And with this mission ingrained in our corporate DNA through each major tech innovation, we have moved closer to accomplishing this goal. Whether this was OLAP technologies on relational databases, implementing client-based desktop BI tools, introducing the semantic layer, rolling out web BI, or making the shift to mobile and then cloud, each step has successfully enabled making BI a more ubiquitous component of business decision-making. We believe generative AI is the next big innovation that will bring us closer to intelligence everywhere. Before diving into the integration of Gen AI and our platform, it's important to distinguish why MicroStrategy is poised to drive value in the AI space beyond the generic applications and hype built up in the broader market. Hyperscalers and mega software companies are investing billions amassing GPUs in legions of data scientists to build the best large language models or LLM in the world. Much like we have done with cloud hyperscalers, we plan to openly partner with and leverage the technology investments in these companies rather than invest heavily to build our own models. Hundreds of smaller AI companies are taking a similar approach to us. But we're already differentiating as we have done for decades in BI across four major areas. Our 30 years of enterprise software services and sales capabilities. Our trusted, secure scalable reusable data layer, what we call our semantic layer. The ability to quickly build and deploy actual applications utilizing this data through technologies like mobile, embedding and microservices. And an open multi-cloud architecture, which in this case, we will use to easily integrate multiple different LLMs. We believe this uniquely positions us to win at the intersection of artificial intelligence and business intelligence. In addition, we believe the combination of AI and BI to be critical for enterprises looking to integrate AI into their day-to-day decision-making. Let me explain. BI is precise, using trusted calculations from secured sources of structured data to make informed decisions. But on the other hand, BI can be rigid and difficult to engage with at all levels to personas and business users. AI is smart, leveraging natural language generation reasoning and unstructured data to answer freeform questions and ideas. However, results can be untrustworthy in producing determinate answers that are reliable and consistent enough to make informed business decisions. This is where MicroStrategy delivers value, bridging precise BI and smart AI. Right now many enterprise AI solutions are focused on efficiency and cost gains, building applications to help marketers write better, corporate teams process more efficiently and engineers code faster. There's even more value to be unlocked when AI helps analysts make better business decisions to drive top line growth and achieve true strategic advantage. This can be done with generative AI on top of enterprise data. But in doing so, combining AI and BI and the challenges with scale, governance and trust with AI are amplified and security and access control are paramount. We expect to see increased customer demand as our platform tackles the primary hurdles customers face with AI adoption. The main customer concerns of enterprise AI are data access and security, integration of large language models, natural language processing, and prompt engineering solutions and the ability of distributed AI solutions at scale. Typical AI and BI combinations that do not have a semantic layer have unreliable intelligence. The BI tool acts as a simple repository that provides data to the generative AI engine. There's no intelligence in the LLM results, producing false or inaccurate responses commonly referred to as hallucination. MicroStrategy ONE and MicroStrategy AI leverage the semantic layer to define all data objects within a customer configuration. Our BI architecture provides a framework and structure to the AI solution. The AI and MicroStrategy engineers collaborate to generate higher-quality queries by enhancing and tagging user prompts to pull more tailored results from customer data. MicroStrategy AI is designed to generate answers that are secure, accurate, scalable, and reliable. In September, we introduced our first set of MicroStrategy AI features to the market, which leverages our advanced BI system, fully embedding Microsoft Azure open AI. This release marks one of the most exciting product innovations in the history of the company. These new AI features are cloud-native and only available through MicroStrategy ONE. We've implemented four features to address the needs of different business users. One, Auto SQL streamlines the database interaction process. This feature is intended to enhance the technical user experience on MicroStrategy. Our AI application can translate natural language into SQL queries, explain the SQL statements in natural language, and review SQL code with suggested optimizations. Two, Auto Dashboard provides automatic dashboard creation, transforming complex data into interactive and beautiful visual insights. MicroStrategy AI processes the data and can produce beautiful and viable dashboards. Auto Expert is the automated support tool. It's like having a MicroStrategy employee guide you through the BI platform to answer user base questions such as how do I build an advanced metric? Auto Expert is available for free to all registered users on our website. And Auto Answer is my personal favorite; it transforms self-service analytics. The user engages in natural language conversation, asking the AI system questions related to their data. For example, what is the forecast of revenue for Q1 2025? What are the drivers of revenue growth? MicroStrategy AI processes the request, we contextualize data to rapidly provide answers with a deep level of understanding, rapidly increasing the data exploration capabilities of a basic user. MicroStrategy AI is the first to market with a fully integrated AI/BI platform and delivers BI features that enable enterprise-grade AI deployment, shortening customers' time to value and enhancing the ability to optimize and automate. Furthermore, the cloud-native solution drives new business to the cloud while incentivizing current customers to migrate and expand their footprint. Its offering is also our first entry into consumption-based pricing. Customers will consume the AI product question-by-question. Our initial starter package is $20,000 for 20,000 questions or simply $1 a question. We expect this pricing mechanism to drive adoption and grow the subscription revenue stream while providing a relatively low cost of entry for customers to onboard next-generation AI applications. We're already seeing this product driving existing on-premise customers to move to the cloud or set up a new environment in the cloud to adopt MicroStrategy AI. Our vision for intelligence everywhere continues to inform our roadmap. We believe that AI/BI best empowers customers when it is modular and can be embedded into existing workflows. We also believe that the data that feeds AI/BI, the platforms in which it runs, and the LLM and machine learning models used must be flexible and open to fit our customers' needs. Therefore, our roadmap includes the ability to build analytic bots on the platform, as the customers' choice to choose AWS, Azure, Google Cloud, or private cloud and leverage a variety of LLMs. The customers' choice to build your own bot tool, and the MicroStrategy platform harnesses advanced capabilities in enterprise security, such as governance, integration with third-party tools, and system auditability to allow customers to easily deploy chatbots for broad use on trusted data. This feature is standalone and customizable for deployment by any user, and the use cases are myriad. For example, internal users can deploy an FP&A chatbot to answer questions related to budget, or users can develop a product Q&A chatbot for customers on their website. We currently expect to build your own bot capability to be available in December of this year. We're excited about our initial AI offerings to the market and for the future as we continue to tap into the potential of AI/BI solutions in our product roadmap. Now, moving to developments on our cloud offer. We continue to build modern, scalable, resilient and cloud native applications that can transition customers from monolithic BI configurations to a microservices architecture that embraces flexibility, agility, and technological diversity. Microservices architecture and containerized structure enable applications to be deployed and scaled independently. These design features are necessary to meet the technological demands of AI, and to maintain the highest level of platform functionality. MicroStrategy Cloud architecture is designed in the cloud for multi-cloud. In Q4, we plan to deploy our Google Cloud implementation, increase your functionality to all three primary hyperscalers, and further drive integration of AI and BI to every part of a customer's business. This is a fully containerized microservices-based solution, which is the base modern cloud architecture for our MicroStrategy platform. MicroStrategy is now also available on both Azure and AWS marketplaces, firming up our partnership with these hyperscalers. We're also innovating the way we sell our product via partner sales channels with a strategic focus aimed at unlocking growth, enhancing customer success, and deepening market penetration in a rapidly evolving AI and BI market. We've announced recent partnerships with Microsoft Azure, including with OpenAI, AWS, and Snowflake. Key highlights of our Expanded Partner program include a newly launched streamlined partner portal that centralizes MicroStrategy sales marketing technical assets to facilitate increased partner engagement, expanded training resources to empower partners and the necessary tools to excel, and increase incentives and sales motions to grow synergy between MicroStrategy's and its partners' growth objectives. I'm very excited about our product and the direction of the company. Our goal is to be the innovation leader in AI and BI in the cloud. And we believe we're delivering on this objective. In Q4, we're continuing to work through plans to transform our sales organization to be cloud-focused and capitalize on our innovation and the strength of our cloud platform. We're also creating a customer success organization focused on better supporting customers as they attempt to innovate and maximize value for the organization and customers. I look forward to sharing more details on these initiatives and our next earnings call. I'll now turn the call over to Andrew to discuss the updates on our Bitcoin holdings and our financials for the quarter in further detail.

Andrew Kang, CFO

Thank you, Phong. I'll start with our third quarter operating results, which reflected year-over-year total revenue growth. And while macroeconomic headwinds have persisted over the past year, our Q3 results demonstrate both the depth of our customer base and our ability to generate revenue despite longer sales cycles and tighter customer spend. GAAP total revenues for the quarter were $129.5 million, up $4.1 million or 3% year-over-year, or up 1% year-over-year at constant currency. Total software license revenues, which consist of product license revenues and subscription services revenues, were $45 million, up 16% year-over-year, or up 14% at constant currency. Product licensed revenues were $24 million for the quarter, which was up 8% year-over-year, or up 6% at constant currency. The growth in product license revenue in Q3 was primarily attributable to the execution of several large international deals during the quarter, and partially offset by lower domestic license revenues. We continue to expect our mix of revenue will continue to shift from product license to subscription services over time as we continue to transition to the cloud. However, this past quarter demonstrates that demand for our software remains strong across all platforms. Subscription services revenues, which reflect recurring revenues from our cloud business, were $21 million, an increase of 28% year-over-year or 25% at constant currency. Product support revenues were $66.9 million, up 1% year-over-year, or down 2% at constant currency. Customer renewal rates remain high at 94% for the quarter, and have been consistently above 90% in the last seven consecutive quarters, illustrating the durability of our customers even in spite of the ongoing challenges in the macroeconomic environment. Finally, other services revenues were $17.6 million, which was a 15% decrease year-over-year, or 17% lower at constant currency. While we are seeing higher average consulting build rates worldwide, lower customer demand for consulting projects in the current macroeconomic environment remain a headwind to customer spend on professional services. On Slide 13, total current software license billings were $42.7 million in the third quarter, an increase of 17% year-over-year, and current subscription billings were $16.8 million, an increase of 17% year-over-year, marking our 14th consecutive quarter of double-digit growth. Transitioning customers to MicroStrategy Cloud remains one of our highest priorities, focusing on both new customer wins as well as migrating existing customers. As Phong mentioned earlier, we are well positioned to capitalize on first-to-market AI integrated features already available on MicroStrategy's platform. And our go-to-market strategy will be highly focused on driving cloud growth, AI/BI adoption and increasing partner-enabled deployments and driving further marketplace integration with hyperscalers. We believe this will translate to new logos, faster migrations and accelerated cloud transition in the coming year. Shifting to costs on Slide 14, total non-GAAP expenses were $138 million in the third quarter, compared to approximately $102 million in the third quarter of 2022. $34 million of the expenses were due to the Q3 Bitcoin impairment charge, compared to $1 million in Q3 of last year. Non-GAAP cost of revenues was $25 million in the third quarter, which was an increase of $1.2 million or 5% year-over-year, primarily driven by higher cloud hosting costs as we grow our cloud business. However, as a percentage of total revenues, non-GAAP cost of revenues remained flat year-over-year. Non-GAAP sales and marketing expenses increased $1.9 million, or 6% year-over-year to $32.4 million. As a percentage of total revenues, non-GAAP sales and marketing costs were just 1% higher year-over-year. Non-GAAP research and development expenses were $26 million, a slight 1% decrease year-over-year, and non-GAAP G&A costs were $20 million in Q3, which was flat year-over-year. Spending on cloud growth and investing in sales and marketing activities are directly targeted towards growing revenue and acquiring new customers while focusing on strategic spend. We also successfully launched our AI product in Q3 while carefully managing product development costs through global delivery center efficiencies and speed of execution. Our priority and results are rooted in the active management of costs in order to drive margin and profitable growth. Turning to Slide 15, we reported a total non-GAAP operating loss in the third quarter of $8 million, of which the non-cash digital asset impairment charge was $34 million for the quarter. For the third quarter, we reported a GAAP net loss of $143 million, which included a $110 million tax provision expense. This non-cash tax expense was related to the reestablishment of our valuation allowance on our deferred tax asset, directly related to our Bitcoin holdings. The expense was recognized because the market value of Bitcoin on the reporting date of September 30 was below our aggregate cost basis. At the end of Q4, we will reevaluate the fair value of Bitcoin again at 12/31. If the price of Bitcoin on that date is above our aggregate cost of holdings, we would readjust the valuation allowance at the end of Q4 and see a corresponding non-cash tax benefit. Turning now to our Bitcoin strategy, we again increased our total Bitcoin holdings and acquired 5,912 Bitcoins in the third quarter. After the end of the quarter, we purchased an additional 155 Bitcoins using cash from operations. As of October 31, 2023, the company held a total of 158,400 Bitcoins, acquired for an aggregate cost of $4.7 billion or $29,586 per Bitcoin. Bitcoins purchased by MicroStrategy through cash generated by the software business are held at the MicroStrategy entity and as a result, those Bitcoins are pledged against our 2028 Senior Secured Notes. Bitcoins purchased through proceeds from capital markets activities, including equity and debt issuances, are held at MicroStrategy, a wholly-owned subsidiary of MicroStrategy. These Bitcoins are not pledged to our Senior Secured Notes and are fully unencumbered. In Q3, we purchased 5,445 Bitcoins for $147 million using net proceeds from our at-the-market equity program. As noted a moment ago, these Bitcoins are held at MicroStrategy. We also purchased an additional 467 Bitcoins for $14.4 million using excess cash from operations, which are held at MicroStrategy. Subsequent to the end of the quarter, in October, we used additional excess cash from operations to purchase an additional 155 Bitcoins for $5.3 million, also held at MicroStrategy. Our Bitcoin strategy remains unchanged, which is to acquire and hold Bitcoin, and we plan to accumulate more Bitcoin over time using both excess cash from operations and proceeds from the capital markets. Bitcoin has outperformed much of the market this year, and while we still see price volatility, as the asset class continues to mature, Bitcoin prices have stabilized over a narrower range compared to prior years. MicroStrategy is the largest publicly traded corporate holder of Bitcoin in the world. We remain committed to our Bitcoin acquisition strategy with the highest conviction, long-term focus, and a strong risk-managed approach. As of September 30, 2023, the carrying value of our Bitcoin holdings was approximately $2.5 billion, compared to approximately $4.3 billion in market value based on the Bitcoin price as of the last day of the quarter. As of market close on Tuesday, October 31, the market value of our 158,400 Bitcoins was approximately $5.5 billion. Our Bitcoin remains subject to the current indefinite-lived intangible asset accounting rules under which we must record an impairment when there's any decrease in the fair value below our carrying value at any time during the quarter, which occurred in Q3 when Bitcoin price fell to $24,900. We remain optimistic that FASB will finalize the change in accounting rules for certain digital assets, including Bitcoin to fair value accounting in the near term. Now, turning to Slide 19. In Q3, we continued to execute our at-the-market equity offering and raised approximately $147.3 million in aggregate net proceeds through the sale of Class A common stock. In the current ATM program, we have issued 403,000 shares and have approximately $602 million of remaining ATM capacity. As with prior programs, we may use the proceeds for general corporate purposes, which include the purchase of Bitcoin as well as the repurchase or repayment of our outstanding debt. The incremental ATM capacity will allow us to benefit from institutional demand for Bitcoin exposure and will allow us to opportunistically raise capital to continue creating value for our shareholders. Our outstanding debt and convertible notes remain unchanged at a total of $2.2 billion with a blended weighted average interest rate of approximately 1.6%. Also, at the end of the third quarter, we had $45 million in cash on our balance sheet and sufficient overall liquidity to manage our ongoing operating needs and our outstanding debt. Since the third quarter of 2021, we have raised a total of approximately $1.9 billion in gross proceeds through our ATM programs, with the average price over all issuances being approximately $419 per share. The primary use of historical ATM proceeds to date has been to acquire additional Bitcoin and we also used the proceeds to repay our $205 million Bitcoin back loan at a discount. Our capital allocation strategy continues to be focused on improving our overall capital structure by strengthening our balance sheet through additional Bitcoin holdings and managing our debt very carefully. On Slide 21, as of October 31, we now hold a total of 158,400 Bitcoins, of which 15,886 Bitcoins are held at MicroStrategy the parent and are pledged as collateral securing our 2028 notes. The remaining 142,514 Bitcoins are held at MicroStrategy, all of which are unpledged and unencumbered as of quarter end, representing 90% of our total Bitcoin holdings with a current market value of $4.9 billion. The earliest of our debt maturities is not until December 2025 for the 2025 convertible notes, which is eight quarters away from today. Within that period of time, we also expect the Bitcoin halving to occur in Q2 of 2024. We actively monitor our capital structure and are constantly evaluating liability management opportunities to manage and prepare for all upcoming debt. Overall, we believe the positive position in our cloud business along with our license sales in combination with the release of our first-to-market enterprise-scale integrated AI/BI product produces positive catalysts heading into the fourth quarter. That being said, we maintain the stance of cautious optimism due to the ongoing presence of macroeconomic headwinds. We anticipate total revenue this year to be in line with last year; we continue to focus on product innovation in AI and cloud. We will continue to grow cloud subscription revenues and strengthen the quality of our recurring revenue as we transform our platform. We will remain disciplined and continue to manage to drive margin expansion, and we will continue to acquire and hold Bitcoin. Thank you for your time today and for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks.

Michael Saylor, CEO

Thank you. Thanks for joining us today. I thought I would start with a quick performance review of MicroStrategy since we adopted our Bitcoin strategy. It's now approximately 37 months, so just slightly more than three years since we adopted our Bitcoin strategy. We benchmark ourselves against all major asset classes and against big tech stocks, and also against enterprise software companies, our peers. I'm happy to report to you that our performance over this time period is plus 242%, which exceeds the Bitcoin performance in the same period of 192%. MicroStrategy is outperforming the Bitcoin asset index. The S&P is up 25% over that time period, so we've almost 10x the S&P performance. The NASDAQ is up 17%. As you recall, we had to choose between gold and digital gold in August of 2020, and we chose digital gold, which is Bitcoin. The actual gold is down 2%. So 192% versus minus 2% is the difference between choosing the right asset and the wrong asset. This totally makes sense because we're living in an age of digital transformation, and there's just a growing awareness that Bitcoin is the digital gold of the 21st century. Silver is down 18% in that time period, and of course, bonds, which we were holding on our balance sheet, are down 24%. We had a concern about holding bonds because of the interest rate environment; that's why we wanted to buy some other tangible asset. As you can see, Bitcoin is almost the opposite of bonds, being the accreting asset while bonds have been diluted to balance sheets. So we're holding them. MicroStrategy has outperformed all the big tech companies. You can see here that Google, Microsoft, Apple, Meta and some of the big techs haven't even had a positive return in that time period. MicroStrategy has almost 3x the next best competitor in the enterprise software space. Based upon this over this time period, our Bitcoin strategy is working. In essence, we have transformed a company with a $500 million enterprise software business into a new kind of firm that has both a $500 million software business as well as a now a $5 billion plus digital assets business. We're able to get benefits from both the business intelligence part of our business and the Bitcoin part of our business. We can go to the next slide now. One of the things that's coming is more different options for institutional investors to get Bitcoin exposure. Oftentimes, people ask us what's the difference between MicroStrategy and just buying the Bitcoin outright? Or buying a Bitcoin futures ETF or buying Grayscale or buying a potential spot Bitcoin ETF if and when they're available. This chart is both useful to explain what makes MicroStrategy different, and you can also see in this chart the structural reasons why we are able to outperform Bitcoin itself over this last three-year time period. If you're an investor and you're looking for accessibility to Bitcoin as an asset class, MicroStrategy is a ticker on NASDAQ MSTR. Buying Bitcoin itself as the commodity requires setting up new relationships with a crypto exchange and a crypto custodian, and oftentimes investors just don't have those exchange and custody relationships. So it's not so easy to buy the underlying Bitcoin, and in some cases, it's just not practical or not possible at all, as they may not be allowed to do it or wouldn't have the mandate to do it. The futures ETF does provide that accessibility. The spot ETFs have not been available up until now, and of course, GBTC has been an over-the-counter product, and there are many institutional investors that struggle with the over-the-counter aspects of access. So that's been a benefit to us. The second differentiator has been our operating company structure. We are an operating company that is providing Bitcoin exposure. We're not a finance company, which means we have options. One option is we don't charge a fee. So if you're an investor in MicroStrategy, you don't pay an annual fee or custody fee in order to be invested in our company. We cover the cost of custody using our operating cash flows and other cash flows from the operating business. If you were to buy Bitcoin itself, you normally have to place it with a custodian or with an institutional investor, and so all institutional custodians charge a fee. There is also an annual fee to invest in futures ETFs. There will be fees to invest in spot ETFs, and there has been a fee to invest in GBTC. The ability to get Bitcoin exposure and not get charged a fee is another plus for us, a differentiator. The third differentiator is that as an operating company, we can acquire Bitcoin with cash flows, and we can organically accrete more Bitcoin. We can do this with accretive financings of different sorts, either accretive debt or accretive equity financings, which is a plus. These options don't allow you to organically accrete Bitcoin. So that's another advantage for institutional investors. The fourth differentiator is that as an operating company, we can use intelligent leverage. We can do asset-backed financing. We can do convertible financing. We can set up credit lines. A lot of things an operating company can do that an ETP can't do. If you're just holding the underlying Bitcoin with a custodian, that Bitcoin is not going to leverage itself, and you don't have those types of debt financing you can do against Bitcoin, a commodity right now, as an institutional investor. So that has been a nice differentiator for us, and we have used that in order to create a product that is not just a straight Bitcoin investment. The $2.2 billion of debt with a 1.6% blended interest rate is an example of intelligent leverage. The fifth differentiator is that we have a non-Bitcoin business that we operate, our enterprise software business. We've been in that business for 30 years, so we're not just a pure Bitcoin play; we provide some downside protection because we can rely on cash flows and operating income from the enterprise software corporation. As a NASDAQ-listed stock, with healthy spot volume, we have derivatives options. Stock options trade against MicroStrategy, and you can use them for risk management if you want to buy, sell, trade volatility, or hedge; you're able to do that. MicroStrategy is where we've created a unique investment vehicle. It's certainly not the only appropriate investment vehicle, and there are other investment vehicles that might be more appropriate for different classes of investors. As we look forward to potential spot ETFs, we think that's going to grow the market dramatically and provide another great investment option for a different class of institutional investors that'll benefit everyone. But we are committed to our Bitcoin operating model, being a hybrid enterprise software company and Bitcoin company, taking advantage of our intelligent options when they present themselves in order to provide our investors with a unique opportunity to get long Bitcoin exposure in an intelligent fashion. With that, I will say just a few last words on the Bitcoin market outlook. There's a lot of discussion about spot ETPs, and if and when they are approved, we believe they're beneficial to the entire asset class. They will represent an on-ramp for capital on Wall Street to come into the Bitcoin ecosystem and will dramatically increase the availability of Bitcoin as an asset to both retail investors as well as institutional investors, corporate investors, and trust and endowments and the like. Many types of investors will benefit from that product. Two other things it does is it provides comfort to institutional investors because when they see offerings from companies like BlackRock, Fidelity, or Invesco that they're familiar with, it's going to catalyze them to do research and educate themselves. We've already seen an improvement and expansion in analytical coverage from Wall Street of the Bitcoin asset class. I think we'll see more and more analyst coverage from traditional Wall Street banks as these ETPs make Bitcoin exposure available. More coverage means more education, more awareness, which results in more interest—and more on-ramps will facilitate that interest. Because Bitcoin has a fixed supply, as demand increases, we think that's bullish for the entire asset. The second significant factor we think in the market outlook is the halving. The halving is forecasted to take place sometime in late April 2024. Much of the organic selling demand or the organic supply available for the sale of Bitcoin comes from Bitcoin miners. After the halving, that natural supply available for sale will be cut in half, at least from the Bitcoin miners, who represent a substantial part of all the natural sellers in the market. Therefore, the halving should have a dramatic impact on the supply available for sale at the same time that demand for the asset increases via spot Bitcoin ETPs, which we think will be bullish for the asset class. The third dynamic will be FASB's initiative towards fair value accounting. That will help educate the market, clarify the asset, and create more transparency that solves challenges for corporations when considering large amounts of Bitcoin exposure. While this isn't a near-term driver, it's a critical long-term factor. A fourth interesting driver in the market, which is positive, is the entire crypto regulation developments and their progress. As the entire crypto industry continues to be regulated, I believe this is creating more clarity and comfort for institutional investors to participate in this space. We expect to see positive regulatory initiatives resulting in more clarity and consistency throughout the coming 12 months. Another material driver in the coming 12 months is macroeconomics. The continued global inflation is driving interest in Bitcoin and increasing awareness. The current macroeconomic environment, with the Fed slowing down on tightening, is positive. Certainly, over the past year and a half, with interest rates rising significantly, there have been headwinds. We don't expect the same types of macroeconomic headwinds moving forward. To pause on Federal Reserve activity, the last two Fed announcements have been positive for the Bitcoin asset outlook. Bitcoin technology integration efforts continue, which is another bullish trend. The development of Lightning and the activity of corporations integrating the Bitcoin protocol and the base layer of Bitcoin, as well as integration with Lightning, are positive and encouraging. Over time, we will see more technology initiatives that will enhance utility for Bitcoin throughout both the retail and business communities. I'll conclude with noting that mainstream awareness seems to be at new heights for Bitcoin. We have figures like Larry Fink referring to it as a Flight to Quality. There's Druckenmiller noting that it's a legitimate asset embraced by a new generation, lamenting about not owning more of it. Mohammed El-Erian has remarked that Bitcoin is being viewed as a safe haven asset. There's increasing coverage of Bitcoin on networks and mainstream media, which should continue to grow. As that coverage increases, along with expanding Wall Street analyst coverage and new perspectives emerging—such as Fidelity's analysis of Bitcoin—these developments will drive education among a new generation of investors. I expect to see even more of this interest in the coming 12 months. All of these factors create a virtuous cycle, driving Bitcoin awareness, which should lead to Bitcoin investment, increased news coverage, and further awareness, catalyzing individuals and firms to support and invest in Bitcoin. With that, I'll go ahead and end my review, and we can move on to Q&A.

Shirish Jajodia, Vice President of Investor Relations and Treasury

Thank you, Michael. We are now going to jump right into questions. And the first question is for Michael. The 10-Q discloses that Michael entered into a 10B51 plan to exercise MicroStrategy stock options. Can you please provide further color on the plan and the thought process?

Michael Saylor, CEO

Sure, yes. Thanks for that question. I was granted a stock option in 2014 with respect to 400,000 shares, which is going to expire next April if I don't exercise it by then. For almost a decade now, at my request, the company has only paid me a $1 salary and I've chosen not to be eligible for any cash bonuses. Exercising this option will allow me to address some financial obligations as well as acquire additional Bitcoin for my personal account. Under my trading plan, I plan to exercise and sell 5,000 shares on each trading day beginning on January 2, 2024 and ending on April 25, subject to a minimum price condition. This means the sale will take place over almost four months. If you'd like more details about the plan, I would refer you to the 10-Q. I continue to be optimistic about MicroStrategy's prospects and should note that my equity stake in the company after these sales will remain very significant.

Shirish Jajodia, Vice President of Investor Relations and Treasury

Thanks, Michael. The next question is also for Michael. What is management's view on the impacts to the Bitcoin ecosystem at large if a spot Bitcoin ETF is approved? And what is management's view on the potential impact to MicroStrategy?

Michael Saylor, CEO

I think that it's a catalytic event, a big milestone in the institutional adoption of Bitcoin as an asset class. So I think it will be very auspicious for the asset. I think it will usher in a new generation of analysts. It'll usher in a lot more Bitcoin awareness. It will simplify the process of acquiring and holding Bitcoin and allocating to Bitcoin by an order of magnitude. I think it will create constructive competition because all these various ETF vendors will compete for asset share. And as they do it, it'll be in their best interest to communicate and educate all of their clients on Bitcoin. So I think it's very good for the ecosystem. I think it's complimentary as a way to participate in many other ways. There are already participants in the ecosystem that take different strategies. For example, Block has taken a technology-focused strategy and they're very interested in integrating it into their products like Cash App. MicroStrategy has adopted a Bitcoin strategy that consists of acquiring and holding the underlying asset. I think many others have offered options-type strategies and trading strategies. There will be a class of investors that will welcome the ability to hold the spot product through an ETF wrapper. Overall, I think it's generally good for the ecosystem. As for MicroStrategy, I think that it's good for our company and our shareholders because it will expand the overall ecosystem. None of these ETF companies will be operating companies themselves, so they're not pursuing our strategy of intelligent leverage as an operating company. They'll be pursuing their ETF and ETP type strategies. Overall that means that it should expand the entire asset class to the benefit of all participants.

Andrew Kang, CFO

Thanks, Michael. I think Shirish had a connection issue, so I'll read the next question we have. This one is for Phong. How should we be thinking about the AI partnerships with Microsoft and their monetization? Can you shed some color on the impact of AI offerings on margin?

Phong Le, President and CEO

Yes, thanks, Andrew. One of the ways we were able to be first to market with our AI BI offering is we fully embedded Microsoft Azure's OpenAI product through a partnership with Microsoft. It provides several benefits to prospects and customers. One is they don't need to bring their own LLM, which if you're a large enterprise, you may not know exactly where to go, and how to go do that. So we've integrated it fully. The second is as of now, Azure OpenAI which drives technologies like ChatGPT is the superior LLM in the market, and it’s something that people are familiar with and know how to work with. The third, we carry with it a lot of the privacy and security capabilities of Azure OpenAI too. That's our first entry into the market. Over time, we plan to integrate other LLMs from hyperscalers, such as Google or AWS, and allow our customers to bring their own LLM or utilize a private LLM. You'll see that as we enter into 2024. As for monetization, we're pricing this at $20,000 for 20,000 questions; it's consumption-based. Obviously, the customer has to use our current BI technology. If they're not, they’ll need to get MicroStrategy BI and the pricing associated with that before adding on AI. As we get into 2024, we expect to see some material revenue come from this new product. We're already seeing some strong pipeline with MicroStrategy AI, and as I mentioned earlier, it’s causing customers to want to move to our cloud because it's only available in the cloud. So that's another nice tailwind created by our new AI offering.

Shirish Jajodia, Vice President of Investor Relations and Treasury

Thanks, Phong. I can ask the next question; it's for Andrew. How does MicroStrategy think about the balance between investing in core business while utilizing excess cash flow to acquire more Bitcoin?

Andrew Kang, CFO

Thanks, Shirish. I'd say, if you recall, when we launched our Bitcoin strategy, we converted our cash reserves as well as our investment holdings into Bitcoin, which has served MicroStrategy to be extremely accretive. Michael shared some of those statistics earlier. As part of our overall liquidity management, we ensure we have adequate working capital to manage all of our operations. We also ensure we have adequate capital to invest in product development and service our debt. Using excess cash from operations allows us to organically create more Bitcoin. Again, that has served us very well and has driven a lot of value for our shareholders. I'd expect us to continue along that strategy.

Shirish Jajodia, Vice President of Investor Relations and Treasury

Thanks, Andrew. The next question is for Andrew as well. Can you please provide thoughts if you have an expected timeline for FASB's fair value accounting rule implementation and how the street should think about its impact on MicroStrategy's future Bitcoin acquisitions and the impact on core business?

Andrew Kang, CFO

I'd say from conversations we've had with various folks related to FASB's progress, it seems that they're on track with a timeline that I would call normal to finalize this accounting rule. I obviously can't predict when that'll occur, but I believe it is likely to happen later this year or early next year. So I would say fairly in the near term. Overall, I think Michael talked about it well, but the change will help other institutions evaluate holding Bitcoin on corporate balance sheets more effectively and provide additional transparency for broader adoption of Bitcoin.

Shirish Jajodia, Vice President of Investor Relations and Treasury

Thanks, Andrew. Next question is for Michael. How does the recent move up in the price of Bitcoin impact the company's ongoing strategy to acquire more Bitcoin? Should we think of MicroStrategy as an average cost buyer adding to its Bitcoin stores as permitted by the capital markets and cash flow regardless of the price?

Michael Saylor, CEO

We have a laser focus on Bitcoin acquisition. The volatility and price movement has had one primary impact, which is that it has brought worldwide awareness to Bitcoin and got everybody focused on it. I think it's accelerating education. Because Bitcoin is a novel asset class, education is critical for adoption. Generally, I think this is long-term bullish. We try not to get too caught up in the volatility. When we have excess cash flows from operations that we don't need as working capital, we generally acquire Bitcoin because we view it as accretive. When the capital markets offer us opportunities to do financing that is accretive to our shareholders, we will avail ourselves of that. Those circumstances change month by month, quarter by quarter. We have good models that we use to keep track of all these changes, and we're always monitoring opportunities to ensure we take advantage of them when they come our way.

Shirish Jajodia, Vice President of Investor Relations and Treasury

Thanks, Michael. And we'll take one last question here, just for Phong. What are your thoughts on the remainder of the year and outlook for 2024, and main drivers of growth and challenges to keep an eye on? What are some of the levers that can be pulled to increase profitability in the future?

Phong Le, President and CEO

Yes, thanks, Shirish. A few things. As we look into 2024, the two big drivers of growth will be AI and cloud, and they're related. Migrating more customers to the cloud, getting them to adopt our cloud-native platform, and encouraging AI adoption will be essential. This, in turn, will lead customers to move more into the prospect space, as I think our AI and cloud offerings are quite prospect-friendly. Those will be the big drivers of growth. Concerns might center around macroeconomic headwinds. We saw that in the first half of this year, and it could arise again. We have a lot of uncertainty right now regarding the macroeconomic environment. As for cash flows and margins, I believe we can do everything mentioned while still being disciplined about our margins, which we've been able to accrete in the last few quarters. I think we can continue to do that.

Shirish Jajodia, Vice President of Investor Relations and Treasury

With that, I'm going to close this call. I want to thank everyone for being with us today, and we appreciate your support. We're enthusiastic as ever about our enterprise software strategy as well as our Bitcoin strategy. I think we've seen positive momentum in both of those areas in the third quarter. We wish you all a good quarter and look forward to seeing you again in 12 weeks in 2024. Thanks all.