Earnings Call Transcript - MSTR Q2 2024

Shirish Jajodia, Investor Relations and Treasury

I'll be your moderator for MicroStrategy's 2024 Second 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'll walk you through the agenda for today's call. First, Phong Le will cover the business and operational results for the second quarter of 2024. Second, Andrew Kang will cover the financial results for the second quarter of 2024. And then, Michael Saylor will provide a strategic review and discuss recent bitcoin market updates. And lastly, we will open up to Q&A. With that, I will 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 webinar. As we discussed in the last two quarters, MicroStrategy considers itself to be the world's first bitcoin development company. We're a publicly traded operating company committed to the continued development of the bitcoin network through our activities in the financial markets, advocacy, and technology innovation. As an operating business, we're able to use cash flows, as well as proceeds from equity and debt financings to accumulate bitcoin, which serves as our primary treasury reserve asset. We believe that the combination of our operating structure, bitcoin strategy, and focus on technology innovation provides a unique opportunity for value creation. Being an operating company, our Software Technology business remains our core revenue and cash flow generator. In addition, it also enables us to acquire bitcoin through the use of excess cash or proceeds from equity capital raises or corporate debt capital raises. These capital market levers allow us to deploy intelligent leverage to increase our bitcoin holdings in a manner which we believe has created shareholder value. Since our adoption of our bitcoin strategy, we have used three primary mechanisms to acquire more bitcoin. Cash flows from software operations; since August 2020, we've invested $836 million of total cash in our balance sheet. Equity issuances; we have issued $3.2 billion in equity in a manner that we believe to be accretive to existing shareholders; and debt financing, we had $3.8 billion in debt outstanding through the issuance of both Senior Secured Notes and Convertible Notes. We've used the proceeds from these issuances, principally, to purchase bitcoin. The blended cost of our outstanding debt is fixed at 1.6% annually. Turning to the bitcoin highlights for Q2 2024, MicroStrategy remains the largest corporate holder of bitcoin in the world, now holding 226,500 bitcoins, with a total bitcoin market value at $15 billion as of yesterday. Since March 31, 2024, we acquired an additional 12,222 bitcoin for a total purchase cost of $805 million, an average price of $65,882. Year-to-date 2024, the price of bitcoin has appreciated, spurred notably by the approval of the Spot Bitcoin Exchange Traded Products, or ETPs, which has drawn considerable institutional attention. We believe the introduction and initial success of the Spot Bitcoin ETPs evidences the maturation of bitcoin as an institutional-grade asset class with broader regulatory recognition and institutional adoption. We attended the Bitcoin 2024 Conference in Nashville last week, and we saw tremendous support for the bitcoin ecosystem from policymakers, bipartisan politicians, institutions, businesses, and individuals. It's very encouraging to see high-profile institutions and individuals showing interest in bitcoin and starting to appreciate the importance of this asset class as a part of their portfolios. MicroStrategy remains highly committed to our bitcoin strategy with a long-term focus. Michael will further elaborate later with his thoughts and takeaways from the Bitcoin 2024 Conference. On the capital markets front, we made significant progress towards the advancement of our bitcoin development company strategy. In June, we raised $800 million through 2032 maturity convertible notes, called for our $650 million 2025 convertible notes, announced a 10:1 stock split, and announced a $2 billion at-the-market equity offering program. Andrew will further provide details on our capital markets and bitcoin purchase activity for this quarter. As a bitcoin development company, we have the unique ability to access the capital markets to create intelligent leverage. During the first and second quarter of 2024, our total bitcoin holdings increased by 13.3% and 5.6%, respectively. During the same periods, our assumed diluted shares outstanding increased by only 4.8% and 1.8%, respectively. When we refer to assumed diluted shares outstanding, we're assuming all outstanding convertible notes are fully converted at the respective conversion prices. All outstanding options are fully exercised and all restricted stock units and performance stock units fully vest, in each case without regard to exercise or conversion price or vesting or other contractual conditions. Our opportunistic use of leverage and excess cash to acquire bitcoin, as well as our strategic execution of our capital markets financings resulted in incremental value creation for our shareholders. Our objective is to accumulate bitcoin holdings at a faster rate than we issue shares, and we believe we have a demonstrated track record of doing so. To assess our performance in achieving this strategic objective, we're introducing a new key performance indicator which we refer to as BTC Yield. We define BTC Yield as the period-to-period percentage change in the ratio of our total bitcoin holdings to our assumed diluted shares outstanding. We use this KPI to help assess the achievement of our strategic objective and for evaluating capital allocation decisions. If we increase our total bitcoin holding over a given period at a faster pace than we increased our assumed diluted shares outstanding, we achieve a positive bitcoin yield. I should note here that bitcoin yield is not equivalent to yield in the traditional financial context. It's simply just a measure of the percentage change, period-to-period, in the ratio of our bitcoin holdings to our assumed diluted shares outstanding. In addition, when we use Bitcoin Yield, we consider the various limitations of this metric, including that it assumes that all indebtedness will be refinanced or, in the case of our convertible notes, converted into shares of common stock at their respective conversion prices. And it does not take into account debt and other liabilities. Although bitcoin yield is not actually a yield in the traditional finance context, we internally think about this metric as some might think about a bond yield or a yield on another financial instrument. It's obviously an imperfect analogy, but we look to the metric to help us assess how we are doing on using our capital most efficiently to increase our bitcoin holdings over time. The historical performance of this KPI is shown on this slide. We achieved an annual bitcoin yield of 47.3% in 2021, 1.8% in 2023, and 7.3% in 2023. We've achieved quarterly bitcoin yield of 8.1% in Q1 and 3.7% in Q2, surpassing the annual bitcoin yield in 2023 as of year-to-date 2024. We're able to achieve this through the acquisition of bitcoin using our excess cash flows and proceeds from debt and equity financings, which we believe were accretive to shareholders. Management uses Bitcoin Yield to evaluate capital allocation decisions, and to measure the achievement of our bitcoin strategy. Our strategy of acquiring bitcoin in a manner we believe to be accretive to shareholders, thereby achieving bitcoin yield, sets us apart from institutional bitcoin investment options that charge a management fee, and we therefore achieve a negative bitcoin yield as we measure it. Building on our previous discussion, we have a clear strategy to enhance our bitcoin holdings and deliver a positive annual bitcoin yield. Today, we are announcing our target to achieve a bitcoin yield of 4% to 8% per year for the next three years in 2025, 2026, and 2027. Our approach includes accumulating more bitcoin holdings by 1, using the organic excess cash flows generated by our software business, 2, using proceeds from equity offerings when we believe are accretive, and 3, responsibly using the Intelligent Leverage Framework with a risk-managed approach. We will continue to use the full spectrum of financing options and also explore creative capital market transactions and untapped pools of capital to execute this strategy effectively and prudently. By sharing our three-year KPI targets, we are reinforcing our goal of achieving consistent positive bitcoin yield over time. We pride ourselves on being at the forefront of institutional bitcoin adoption, and as we look into the future, we anticipate that our ability to consistently achieve positive bitcoin yield will become a crucial benchmark for investors to assess our execution of our strategy. Turning to the software business, MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. In the second quarter of 2024, we continued our shift towards our cloud offering, resulting in subscription services revenue of $24 million, an increase of 21% year-over-year. The strong growth in our subscription services revenue was driven by both existing customer migrations to the cloud and new customer wins. Our customer renewal rates continue to remain high and our non-GAAP subscription billings remain strong. Overall, we see strong demand for our cloud platform and Q2 was a particularly strong quarter for customers migrating to the cloud. Our objective continues to be growing cloud revenue by migrating customers to cloud while maintaining profitability. At our MicroStrategy World User Conference held in Las Vegas in May 2024, we showcased how MicroStrategy ONE with AI can create more innovative, competitive, high-performing organizations. In our keynote address, we highlighted how some of the biggest brands in the world, including organizations like Lori, Bayer, and the U.S. Department of State, leverage our platform to successfully utilize their data and combat the big data stupor and application sprawl. We unveiled Auto Express to offer an easy and insightful way to engage with MicroStrategy AI, allowing users to build their own standalone AI BI bot without a single line of code. Earlier this year, MicroStrategy ONE became available on the Google Cloud Marketplace, in addition to prior deployments on Azure and AWS, allowing enterprises to easily find and deploy this cloud-native platform. Customers can benefit from a wide range of innovative, first-to-market AI-powered functionality, powered by the Azure OpenAI LLM. Transitioning our customer base to the technology of the future remains a key focus, and our hyperscaler partners are a key part of this migration. As customers and prospects move to the cloud to empower their AI-driven digital transformations, we expect to continue to see a decrease in product license revenues and support revenues, which will in part be offset by increases in subscription services revenues. This will be most pronounced in the balance of 2024. This may result in a decrease in total recognized revenue in the short term, but in the long run, we expect it to be more than offset by increases in subscription services revenue. I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Andrew Kang, CFO

Thank you, Phong. I'll continue with the recap of our software financial results, and then I'll move on to our bitcoin strategy. Total revenues for the second quarter were $111.4 million, down 7% year-over-year. Consistent with recent quarters, the overall revenue trend reflects the transition of our business from on-premise to cloud. As we migrate customers to the cloud, we shift upfront product license revenues to subscription services revenues, which are recognized readily over the life of a contract. As a result, we fully expect product license revenues, along with support revenues to decline, both of which were down 40% and down 7% respectively year-over-year. What isn't immediately seen through reported revenue is that we are building up stronger, more durable cloud recurring revenue that comes in over time, which is consistent for any on-prem to cloud transition. And more robust or faster cloud migrations will have a larger, but temporary reduction in upfront revenues, which is what we saw in last quarter's results. The cloud contracts booked in Q2 were the strongest single quarter bookings we have seen to date, more than double Q1 or any prior quarter for that matter. This acceleration last quarter makes up for the lower than expected cloud contracts we closed in Q1, meets and beats last year's quarters targets, and directly reflects the transition starting to take shape. While we'll see the initial benefits of last quarter's strong cloud migrations float through revenue beginning next quarter, the lower product license bookings in 2024 will result in lower than expected recognized revenue for the full year by somewhere between 4% and 5%. Overall total annual revenues have been generally flat in the past couple of years, but with our transition beginning to take shape in the first half of this year, we expect to see similar patterns in total revenue going forward as we execute on our transformation. This year and potentially in 2025 should reflect the transition point in our long-term strategy, and exiting the next 12 to 18 months we should start seeing total revenues begin to grow again. Non-GAAP subscription billings, which represent cloud revenues in the quarter along with just the next 12 months of deferred subscription services revenues, grew by 45% last quarter to $33.4 million, our fourth straight year of quarterly double-digit growth. Q2 subscription services revenues increased 21% year-over-year, which represents the recognized revenue from previously booked cloud contracts, now make up approximately 22% of total revenues. Subscription services revenues are now larger than our product license revenues and will continue to grow each quarter while product license will decline further from here on out. In Q1, we enhanced our reported numbers to break out our quarterly results into two categories. First, the software business category reflects income or loss from operations related specifically to our BI business. The corporate and other category represents the non-software-related areas associated with our digital asset holdings, which include impairment charges and other related third-party costs. While we continue to operate under one reportable operating segment, we believe the breakout of our operating results into these two categories provides more transparency with respect to the performance of our software business while isolating the impacts related to changes in bitcoin price. In Q2, software business revenues were $111 million that I mentioned a moment ago, while cost of revenues were $31 million, up 14% compared to Q2 of last year. The increase was in part due to higher cloud hosting costs, which is a direct result of our growing cloud business, as well as costs associated with setting up enhancing customer success functions. Software business operating expenses were $99 million, up 4% compared to Q2 of last year. Higher G&A this quarter was related to higher stock-based comp, legal, consulting, and other advisory costs, as well as higher employer payroll taxes in connection with employee stock option exercises in the second quarter. However, overall operating expenses were also offset by lower costs in sales and marketing, consistent with recent quarters, as we maintain strong discipline in expense and cost management. Non-cash stock-based compensation expense in Q2 was $20.6 million, up 33% year-over-year, and overall non-GAAP operating income or profit from the software business category was $1.9 million. Lastly, the corporate and other operating expense category for the quarter was $182 million compared to $25 million in Q2 of last year, $180 million of which was due to bitcoin impairment in the last quarter. Now, turning to our bitcoin strategy, we had another extremely successful quarter of adding more bitcoin to our balance sheet, as we acquired 12,053 bitcoins in the second quarter, and as of July 31st, the company held a total of 226,500 bitcoins, acquired for an aggregate cost of $8.3 billion or approximately $36,800 per coin. Currently, we hold 175,721 unencumbered bitcoins at MacroStrategy, the wholly-owned subsidiary of MicroStrategy, which represents 78% of our total holdings or $11.4 billion in current market value, all of which are currently unrestricted and unencumbered. The bitcoin we acquired using proceeds from our convertible notes offering in Q2 are held at MicroStrategy, the parent, and serve as collateral securing our 2028 senior secured notes. During Q2, we added 11,931 bitcoins to MicroStrategy's holdings at an aggregate purchase price of $786 million using net proceeds from our convertible note issuance. Additionally, bitcoins purchased using excess cash from the software business are also held at MicroStrategy, the parent, which also serve to collateralize our 2028 senior secured notes. During Q2, we added 122 bitcoins to MicroStrategy's holdings at an aggregate purchase price of $8 million from excess cash. Since the end of Q2, we added an additional 169 bitcoins to MicroStrategy holdings at an aggregate purchase price of $11 million, also using proceeds from excess cash. As of July 31st, 50,779 bitcoins are held at MicroStrategy or $3.3 billion in current market value. The commitment to our bitcoin strategy remains stronger than ever. We have added bitcoin to our treasury in every quarter since August 2020, and as a result, MicroStrategy remains the largest corporate holder of bitcoin in the world. As we continue to champion bitcoin as a strategic treasury reserve asset, we are deeply encouraged by the growing number of both public and private companies that are adopting the bitcoin standard to help grow shareholder value. As of June 30, 2024, the market value of our bitcoin holdings was $14 billion, and an aggregate cost of $8.3 billion equal to an average purchase price of approximately $36,800. This is in contrast to the carrying value of our bitcoin holdings of $5.7 billion as of the last day of the quarter. We fully plan to adopt the new FASB accounting rule, which requires fair value treatment for bitcoin holdings by Q1 of next year when the rule takes effect, at which time we will realize the benefit of the significant difference between the market value and the carrying value of our balance sheet. Now, turning to our capital markets activities, since the inception of our bitcoin strategy, we have issued $4.4 billion of debt through senior secured notes and convertible notes. We now have $3.8 billion of outstanding debt with a very low blended interest rate of approximately 1.6%, with staggered maturities over several years starting in February 2027 through June 2032. Intelligent leverage remains a key component of our active capital allocation strategy, which when deployed in a thoughtful manner enables us to add more bitcoin to our treasury reserve at an attractive cost and with a disciplined approach to maximizing BTC yield. Continuing with the momentum from the two convertible note financings in March, our recent convert in June was upsized and well-received by the market. We issued $800 million of convertible notes due June 2032 at an annual interest rate of 2.25%, with a conversion premium of 35% and a conversion price of approximately $2,043 per share. As in the past, the net proceeds from the new convert were used to acquire additional bitcoin into our treasury reserve. We will continue to actively manage our existing liabilities and to that end, we called for redemption of our $650 million 2025 convertible notes. As the notes were substantially in the money, holders of those notes converted substantially all of the notes into shares of our Class A common stock prior to the redemption date. Our 2025 notes traded up over 300% from time of issuance, resulting in an extremely successful investment for our bond investors and partners. In addition to raising debt, we continue to demonstrate a solid track record of issuing equity in a manner that is accretive to shareholders. Today we announced that we filed a new shelf registration for $2 billion At-The-Market or ATM equity offering. We will remain extremely disciplined in the use of both the ATM and other capital markets activities executing on them when we believe that will achieve the most bitcoin yield. Our overall capital allocation strategy continues to be focused on increasing our total bitcoins at a rate faster than we issue new shares, which results in higher BTC yield. As Phong mentioned earlier, we are targeting an annual BTC yield of 4% to 8% in each of 2025, 2026, and 2027. Having exceeded that already in 2024, we believe those targets are achievable and also provide transparency in enforcing our goal of consistent, positive BTC yield over time, further differentiating MicroStrategy's value proposition. Lastly, we also announced a 10-for-1 stock split of MicroStrategy's Class A common stock and Class B common stock effected as a stock dividend. This will lead to better accessibility for our investors and employees and create liquidity in our stock as well as in our options activity. The shares are expected to be distributed after the close of trading on August 7, 2024, and trading is expected to commence on its split adjusted basis at the market open on August 8, 2024. The stock dividend will not have any impact on the voting and other rights of stockholders. The next slide lays out our debt maturity profile. As you can see, the conversion of the convertible notes due 2025 has moved the nearest debt maturity out to 2027. We actively monitor the capital markets and evaluate liability management opportunities to manage our debt and interest expense, as well as opportunities to raise additional future financings. MicroStrategy has demonstrated a strong track record of applying a disciplined approach to navigate through volatile times in the bitcoin market, and we believe we have established significant credibility to execute on our strategic goal of generating value for our shareholders. As Phong said earlier, we believe that the combination of our operating structure, bitcoin strategy, and focus on technology innovation provides a unique value proposition for shareholders when compared to other forms of bitcoin exposure.

Michael Saylor, Executive Chairman

Thank you, Andrew, and thank you to all our shareholders who are with us today. I want to share some thoughts on bitcoin, the macro environment, and MicroStrategy's operations. I’ll begin with the Bitcoin Conference 2024, which was extraordinary. It was evident that bitcoin has entered the political conversation, with attendance from governors, senators, house members, and presidential candidates. A Lummis bill was presented at the conference, and Robert F. Kennedy and Donald Trump made significant commitments. Just four years ago, none of this seemed possible, showing how far we've come since then. Bitcoin has also become a topic in corporate discussions; during the conference, Marathon announced their full hurdle strategy and acquisition of additional bitcoin, stating they wouldn't sell any from their mining activities. Scientific participants were also present, including companies like Metaplanet that are adopting a bitcoin standard. There was extensive engagement from various sectors at the conference, highlighting a growing consensus that digital, private property is a right and the right to self-custody is gaining traction. Enthusiasm is building around creating a strategic bitcoin reserve at various levels, with the Lummis bill aiming to establish such a reserve for the U.S. government, which was presented at the conference. Trump's speech marked a milestone as he reaffirmed the right to self-custody and indicated his policy would involve not selling bitcoin, elevating it as a premier asset for the nation. When considering the federal government's potential portfolio, it would sell other valuable assets but not national parks and bitcoin, which underlines bitcoin's significance. Bitcoin is entering the global geopolitical conversation, and the Bitcoin Nashville conference highlighted this shift. Moving on to the macro outlook, we are in the early days of bitcoin, which has grown to a $1.3 trillion asset class, making it one of the ten most valuable assets globally in just 15 years without any marketing or corporate sponsorship. This is remarkable, and awareness of this reality is increasing. There is a trend of institutional adoption on the bitcoin side, with nearly 40 bitcoin spot ETFs emerging, addressing issues like compliance, capital controls, and custody across various regions including Australia, Hong Kong, Switzerland, Brazil, the U.S., and Canada. These ETFs play a crucial role as custodians and compliance managers of bitcoin, significantly impacting the market. Additionally, the digital transformation is noticeable in the investment community, reflected in stock performances of major tech companies. AI is set to drive considerable productivity gains and lead to the creation of innovative products, such as self-driving cars and autonomous robots. The impact on capital creation is evident, with big tech firms poised to benefit significantly from AI advancements. The macro conditions favor equities, particularly in the tech sector, and digital capital, which bitcoin represents. Over the 20th century, tech companies are expected to require fewer material assets, focusing instead on high-speed digital assets. More companies will likely reach trillion-dollar valuations, generating capital rapidly and seeking places to invest. Bitcoin has emerged as the leading global digital capital asset, and the ongoing trends are encouraging. As for MicroStrategy's performance, we’re pleased to track our progress. This chart represents market close data from yesterday, showing a trend since August 10, 2020, to July 31, 2024. Traditional financial assets, such as bonds, are underperforming, with bonds down 18%. Silver and gold are lagging, while the S&P and NASDAQ are up 60% and 64%, respectively. In comparison, bitcoin has significantly outperformed, climbing 442% in the same period. Initially, our goal was to escape the rut of being a non-big tech company, which evolved into tracking the bitcoin index and ultimately outperforming it. We are proud to report a 1,206% return for our shareholders, contrasting with bitcoin's 442% in that timeframe. This achievement stems from intelligent leverage and operational flexibility. Phong and Andrew provided metrics on our BTC Yield, showcasing our capacity to outperform bitcoin by harnessing intelligent leverage. Our performance isn't only compared to main asset classes but also against big tech stocks, which are struggling more due to their labor and capital intensity. Major stocks like Amazon have seen modest gains, while companies like Meta, Apple, Microsoft, Google, and Tesla have performed well, outpacing the NASDAQ. Nvidia stands out as it captured much of the excitement surrounding AI productivity, and many companies are eager to replicate its success, yet it remains a challenge. MicroStrategy, however, has outperformed Nvidia over the last four years, achieving a return of 12.06% versus Nvidia's 9.48%. Our message is clear; while copying Nvidia is complex, replicating MicroStrategy's success is more straightforward. We've shared our corporate playbook and are pleased that some companies are starting to follow our approach. We believe our bitcoin strategy is the right path forward, capitalizing on digital capital while companies like Nvidia benefit from digital intelligence. Every company is considering how to enhance operations with digital intelligence integrated into their P&L, and it's essential to look at the potential of incorporating digital capital into balance sheets. Many companies are capitalized on bonds, which have seen declines, while those capitalized on bitcoin, which is experiencing growth, would see transformative results. Our performance underscores this potential. For healthy businesses, digital capital will enhance what they already do well. For companies struggling to grow like big tech and FAANG stocks, bitcoin can be the game changer they need. We will maintain our bitcoin strategy and continue monitoring our results each quarter. Moving forward, MicroStrategy is a bitcoin development company. We will leverage our advantageous corporate structure as an operating company, which allows for permanent bitcoin capital and operational flexibility. Our objective remains to outperform bitcoin ETPs, which lack permanent capital and flexibility. To achieve this, we will responsibly utilize our capital and operational advantages. We are committed to developing software to generate cash flows that enhance our brand and support bitcoin's success. We will use revenue from our operations to acquire bitcoin, and capital markets will play a crucial role in our strategy. This past quarter, we combined debt issuance with convertible issuance and cash purchases to create BTC Yield and acquire bitcoin. There are many bitcoin investors and especially bitcoin maxi investors who are eager to find ways to outperform bitcoin spot ETFs and acquire more bitcoin per share. We've created the KPI BTC Yield and prioritize it in our operations. If a deal does not generate BTC Yield, we view it as unfavorable; conversely, if it offers substantial BTC Yield, we pursue it. To date, we have achieved a 12.2% BTC Yield this year and intend to continue generating consistent ongoing BTC Yield. With our operating flexibility, bitcoin capital, credible standing in the capital markets, and experience, we will keep evaluating options and act when compelling opportunities arise. If the market does not present us with enticing prospects, we will exercise patience. Thank you for your support, and I believe we can now move on to the Q&A.

Shirish Jajodia, Investor Relations and Treasury

Thank you, Michael. We are now going to jump into questions. And the first question is for Michael. MicroStrategy's equity premium to its bitcoin holdings has remained healthy over the past few months despite the bitcoin price swings and Board directions. Would you attribute this to your ability to achieve a positive BTC Yield?

Michael Saylor, Executive Chairman

Yes, I think that long-term bitcoin holders and bitcoin really is the longest duration asset. People that believe in bitcoin are thinking this is apex property, that you do not sell your bitcoin. So, when you have an investment in bitcoin, you're not thinking about holding it for a short period of time and flipping it. Now, when you think about holding something for 30 years, or 40 years, and if you have a vehicle like a closed-in fund that charges 250 basis points as a fee; that looks like a negative BTC Yield of 2.5%. We have experience with those sort of things, and we've seen they trade at a discount to net asset value. Closed-in funds with a long fee on an asset you're going to hold forever, they start to look like a multiple of the negative BTC Yield. And on the other hand, if we can get away from that and we can create the opposite, but a positive BTC Yield, we expect that, over time, investors are going to say, 'How much does it cost me, or how much do I benefit from holding my capital in that closed-in fund versus that ETF versus that operating company?' All things equal, I'd rather have a company that generates a plus-250 basis points a year instead of minus-250 basis points a year. The market is going to value our equity based upon their assumptions about the risk and their assumptions about the bitcoin market, and their holding period. And they'll make assumptions about what kind of BTC Yield we can generate and how important that is. And then, they'll put a multiple on it. But I know that, in the debt, our fixed income market, if you have a 30-year swap and interest, or a long-dated treasury bond; and interest rates move up, then the bond can trade down and the interest rates move down, the bond can trade up. And, normally, you'll multiply the interest rate change and basis points by a duration number. And it can be long. It can get to 10 to 20 depending upon the bond. And in the equity business, people will look at earnings per share per year or they'll look at whatever accretion they'll get each year, and they'll put a multiple on it. If they're enthusiastic, they'll put a high multiple, or if they're skeptical they'll put a low multiple. So, I think that we're trading at a premium to net asset value based upon our shareholders' belief that we can outperform the ETFs that don't have any operating flexibility. And they've been pleased with our capital markets activity, and they've been pleased with our strategy of acquiring bitcoin via various methods. And that represents a differentiated investment for them. So, I think that the BTC Yield is a useful metric to consider. I think that the investors will end up deciding what they over the next decade. But a bitcoin development company should be able to outperform Spot Bitcoin ETF in the form of a trust if the management team is prudent in their measures.

Shirish Jajodia, Investor Relations and Treasury

Thank you, Michael. Next question is for Phong. On the software side, how did you feel about the Q2 cloud conversions relative to your expectations? And how should we think about the rest of the year with respect to your cloud migrations and the AI-related partnerships?

Phong Le, President and CEO

Thanks, Shirish. We had in Q2, the largest cloud bookings quarter, including conversions that we've had in the history of the company, and by about twofold, a little bit more than twofold. So, the conversions are accelerating, which is great. It's going to help our long-term ARR and our long-term recognized revenue. But as Andrew mentioned, it depresses short-term recognized revenue because it doesn't show up and get recognized in a quarter. It gets recognized readily over the course of the year. So, we had a really good quarter in terms of Cloud conversions. Of course, that helps with the overall health of the business. But the other thing it does is it accelerates the adoption of AI, because our AI products are only available in the cloud. And so, we also saw a big uptick in the purchase and the use of AI in the second quarter. And I think that's going to start to accelerate also. And so, we'll see nice adoption and usage of our first-to-market AI products. So, both of those are positive trends in the business and bode well overall.

Shirish Jajodia, Investor Relations and Treasury

Thanks, Phong. Next question is again for Michael. How does management decide between raising proceeds from debt or equity issuances and whether to use the convertible debt or ATM equity issuances? And how do we think about different options?

Michael Saylor, Executive Chairman

Well, we have lots of options. We have options including cash purchases, straight debt, convertible debt, equity, or other types of operational measures that might generate income that we can use to acquire bitcoin. We're continually evaluating the capital markets and the relationship between the options market, the futures market, the bitcoin spot market, our equity market, and then developments in our business and then opportunities we have from various counterparties all go into the mix. This year we did acquire bitcoin with equity issuance, and we thought that that was extremely accretive. Then we did a debt offering and a convertible debt offering. That was extremely accretive. It turns out that the next week, the bitcoin market surged and the convertible market surged and the equity market surged, and we could do another convert offering. That was literally a decision-making process that took place over a matter of days. And so, sometimes in days we'll move when the market offers an opportunity. Then we went ahead and redeemed the 2025 note that was in response to the capital markets. The next debt deal in Q2 was a response to the capital markets. We're always going to consider things like the duration of the deal. We consider the nature of the pricing of the deal. We didn't really choose to pursue equity so much in Q2 as we did in Q4 of last year or early Q1 just because the markets are shifting. And the relationship between bitcoin, the options market, the convertible debt market, the fixed income market, and the equity market, those are all changing. They literally change. To say they change every quarter is a reasonable statement, but sometimes they change week-by-week and month-by-month. So, I think the great situation we're in is that we don't have to do anything quarter-by-quarter. We can afford to take a quarter off, but we can also, like in Q1, we can do an ATM deal, a convertible debt deal, a second convertible debt deal, and a cash purchase and we can use all four different things and we can do that in a hurry. So, we tend to let the capital markets drive our decision-making by keeping an open mind and being flexible. And what we wanted to do was give our shareholders a useful KPI that helps them understand how we think about a deal that's a good deal to do. We think if we can generate BTC Yield and a substantial BTC Yield, then probably we'll entertain it. If the market is offering us a proposition that looks like a de minimis yield or no yield or negative yield, obviously, we just pass on that.

Shirish Jajodia, Investor Relations and Treasury

Thank you, Michael. I think we have time for one last question, and this is for Andrew. How do you think about the incremental leverage capacity and interest expense capacity given the increased overall interest expense related to the operating cash flows from the software business?

Andrew Kang, CFO

Thanks, Shirish, for the question. I guess I'd start by saying we actively manage and forecast our cash. And at the moment we forecast adequate cash to service our existing debt based on the overall software revenues, which continue to remain durable. And as we mentioned before, we're building stronger ARR as we transition to the cloud. We also manage our cash after taking into account a fully funded software business as well as our debt service needs. So, we take the full picture when we're thinking about incremental debt and interest expense. And I just would say we manage it extremely carefully. And keep in mind too, we also have additional sources of liquidity available to us, as Michael mentioned, via the capital markets if needed. And we continually assess various liability management opportunities across the debt stack. That kind of gives us a profile of our needs as well as our capacity. So, overall, I'd say we feel very comfortable with our ability to service the debt. And we'll continue to be active in ways that will continue to generate that BTC Yield KPI that we announced earlier today.

Shirish Jajodia, Investor Relations and Treasury

Great. Thanks, Andrew. So, thank you, everyone, for your questions. And this concludes the Q&A portion of the webinar. I will now hand over the call to Phong for final closing remarks.

Phong Le, President and CEO

I want to thank everyone for their time today and appreciate all of your support and I look forward to seeing everybody again next quarter. Thanks.