Earnings Call Transcript - MSTR Q3 2021

Jeremy Price, Senior Vice President of Financial Planning and Analysis and Head of Investor Relations

Good evening, everyone. I'm Jeremy Price, MicroStrategy's Senior Vice President of Financial Planning and Analysis and Head of Investor Relations. I'll be your moderator for MicroStrategy's 2021 third quarter earnings webinar. Before we proceed, I will read the safe harbor statement. Some of the information we provide in this presentation 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 in this presentation we will refer to certain non-GAAP financial measures. Reconciliations showing the GAAP versus non-GAAP results are available in our earnings release and the appendix of this presentation, which were issued today and are available on our website at www.microstrategy.com. We 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 or Phong will answer your questions at the end of the session. Please be sure to provide your name and your company's name when submitting your questions. And with that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy.

Michael Saylor, Chairman and CEO

Thank you, Jeremy. I'm Michael Saylor, the Chairman and CEO of MicroStrategy. I'd like to welcome all of you to today's webinar regarding our third quarter 2021 financial results. I'm here with Phong Le, our President and Chief Financial Officer. First, I'd like to pass the floor to Phong, who's going to provide an update on our operations and our financials for the quarter.

Phong Le, President and Chief Financial Officer

Thank you, Michael. We're pleased with the performance in the third quarter across both of our strategic priorities. For the fifth straight quarter we posted strong financial and operational results with our software business and made investments in Bitcoin. Our enterprise analytics business delivered another strong quarter, and we are seeing growing adoption of the MicroStrategy platform, especially in the cloud by new and existing customers. We also had another active and successful quarter with our Bitcoin acquisition strategy, executing on our fourth successful capital raise in the past year and expanding our digital asset holdings. Our results in the third quarter are indicative of the multiple ways MicroStrategy is able to create meaningful and unique value for our shareholders. Total revenue in the quarter grew slightly year-over-year to $128 million. This is a strong performance against an incredibly difficult comparison in the third quarter of 2020. As you might recall, in Q3 2020 we signed several deals that were delayed from the first half of 2020 due to COVID-19 and signed a large expansion transaction with a major financial institution. Comparing against 2019, which adjusts for these impacts, total revenue grew 7% versus the third quarter of 2019. We think this is a good proxy for the underlying growth of the business. License revenue was down 13% year-over-year but up 36% versus the third quarter of 2019. Subscription revenue in the quarter was up 31% compared to Q3 of 2020. Current subscription billings grew 23%, our sixth straight quarter of double-digit growth. Finally, we had another strong quarter of profitability with a non-GAAP operating income of $27.7 million and margin of 22%. MicroStrategy Cloud continues to become a growing mix of our business, while our on-prem product continues to perform well. We're committed to meeting the needs of our customers, regardless of how they would like to deploy MicroStrategy, some of whom operate in highly regulated industries or countries where a cloud deployment is not feasible. When you look at the overall growth of our subscription and license businesses, it is clear that underlying demand for our platform has demonstrated signs of strength. I'd like to highlight the three emerging trends in the data and analytics industry, acting as tailwinds for MicroStrategy. These trends are converging to create an enterprise analytics super cycle, which is likely to widen the gap between organizations that are able to maximize their investments in data analytics and those that cannot. First, the demand for enterprise analytics has grown and has been accelerated due to the structural changes as a result of the pandemic. Enterprises are striving to stay ahead of changes in market trends, customer demand, supply chains, and employee availability. The capacity to rapidly develop and deploy business and productivity applications to users at any location is now essential. To get there, the data-driven organizations are rushing to modernize their analytics as well as need data and business applications to the cloud. This market shift is putting pressure on legacy mega vendors who are prioritizing moving their ERP and infrastructure customers to the cloud versus investing in their own BI applications. As enterprises now evaluate options to modernize their analytics and BI solutions, MicroStrategy has emerged as a logical vendor of choice because of its full-scale enterprise capabilities. A conclusion is substantiated by an accelerated replacement of legacy vendor BI platforms. Examples this quarter include our license deal, we won with the largest hotel brands worldwide to replace Cognos for their entire property fleet as well as a big consulting deal with a leading media and entertainment company to migrate their legacy reports from business objects to MicroStrategy. The second trend is that proven solutions are replacing experimental initiatives. And enterprises are turning to trusted partners that deliver concrete results. According to a growing number of industry analysts, there is a notable reduction in organizations' willingness to experiment with niche technologies in times of macroeconomic uncertainty. In the short term, this leads to a focus on customers. During this year, enterprises have prioritized the use of a unified platform that can deliver a broad set of use cases and are typically seeing significant cost savings through vendor consolidation. An example is a major win in a large insurance company to replace their suite of point experimental unproven BI solutions. The third trend is that enterprises are now buying and not building analytics. To meet this demand, a growing number of OEMs are supporting enterprises by developing solutions which require partnering with an open enterprise-scale technology vendor. MicroStrategy is well positioned to benefit from this growing trend in the embedded analytics and OEM marketplace. We are #1 in the market in our embedded OEM business. We have seen increased interest from new and existing customers that want to leverage our innovative business analytics platform as a core part of their technology solution. We believe our extensive investment in an open architecture driven by open APIs and SDKs provides OEMs with the best solution in the market. We experienced notable growth in both the number and size of OEM opportunities, including a deal with a multinational consumer credit reporting company and a deal with a video analytics company. Continuing with market sentiment, I'm also pleased to share that MicroStrategy was recognized with the Customers' Choice distinction in Gartner's latest Voice of the Customer report, which summarizes customer feedback on their BI platforms. We're now more than a year into our virtual wave strategy, and we have seen that this approach can drive faster growth and greater productivity on a sustained basis. We're particularly pleased with our profitability performance with a non-GAAP operating margin above 20%. This is the eighth straight quarter with an improvement in our year-over-year non-GAAP operating margin. To provide some context around our increase in sales productivity, our sales and marketing and G&A expenses on a trailing twelve-month basis are down $34 million or 12% from fiscal year 2019 levels, while our product license revenue has grown 36% since Q3 2019, and subscription services revenue has grown 37% over that time. This translates to an increase in our sales productivity of 31% in the last year and 72% in the last three years. As a result, we repurposed some of those savings into R&D investments in areas like cloud, security, OEMs, and new innovations to enhance our value proposition and lay the foundation for long-term durable growth. This is a virtuous cycle that we believe we can continue delivering on going forward. It's important to note that our pace of innovation is as impressive as it has been in many years, with the company now producing quarterly and monthly software updates. Our team is working on a robust set of product features and enhancements that we believe will expand the value we provide customers and represent future incremental growth opportunities. To summarize our priorities, our focus going forward remains on moving to Cloud, expanding our OEM market share, modernizing our customer base and using our innovative offerings like HyperIntelligence to attract new prospects. Overall, I'm very pleased with the way our analytics business is performing. We are on the path of consistent growth, and we're confident in our ability to achieve our long-term growth and profitability targets. Turning now to our Bitcoin strategy. We had another active and successful quarter. We raised approximately $400 million in capital through the sale of Class A common shares as part of our aftermarket offering during the quarter. We used the proceeds from this offering and excess cash to purchase an additional approximately 8,957 Bitcoins at an average price of $46,876 per Bitcoin, net of fees and expenses. This is the fourth successful capital raise we've done in the past year, having raised $2.6 billion in new debt and equity capital that we deployed in support of our Bitcoin acquisition strategy. We have approximately $600 million remaining in our existing ATM facility, and we'll continue to be opportunistic in executing against it. Today, MicroStrategy owns approximately 114,042 Bitcoins that we acquired for a total cost of $3.2 billion or $27,713 per Bitcoin. The market value for our Bitcoin holdings was approximately $5 billion at September 30, 2021, reflecting $1.8 billion of unrealized gains or approximately 57% depreciation when compared to the cost basis of our Bitcoin at September 30, 2021. The book value of our Bitcoin holdings is $2.4 billion. As of yesterday, October 27, 2021, at 4:00 p.m. Eastern Time, the market price at one Bitcoin in our principal market was approximately $59,111, which equates to a market value of roughly $6.7 billion of Bitcoin, representing more than 110% depreciation. MicroStrategy has pioneered the use of digital assets as a core component of enterprise treasury policies, created billions of dollars of incremental value for our shareholders, and in doing so, established itself as one of the world's largest owners of Bitcoin. We will continue to evaluate opportunities to raise additional capital to execute on our Bitcoin acquisition strategy, which has the potential to offer asymmetric upside to our shareholders. Before I turn to a more detailed review of this quarter's financial results, I want to reiterate how pleased we are with the execution of both of our strategic priorities. As a result of our strong financial performance, year-to-date, the company is reaffirming our 2021 estimate of non-GAAP operating income of $80 million to $100 million. We also expect further acceleration of our cloud billings in Q4 2021 and going into 2022. We are excited to provide an update on our strategy later this quarter when we hold our 2021 Investor Day on December 2, 2021. We're looking forward to providing a deep dive into the future path of our enterprise analytics business and digital asset holdings, and how it will benefit shareholders over time. Turning to our third quarter 2021 financial results in more detail. GAAP revenues for the quarter were $128 million, up slightly year-over-year and up 7% from the third quarter of 2019. Product license revenues were $25.8 million in the third quarter of 2021, down 13% year-over-year and up 36% from the third quarter of 2019. As mentioned earlier in the call, comparison with the third quarter of 2019 is a good proxy for the underlying growth of the business due to the effects of COVID-19 and a large expansion transaction we signed with a major financial institution in the third quarter of 2020. Subscription services revenue in the third quarter of 2021 was $10.9 million, an increase of 31% year-over-year. The growth in subscription services revenue reflects a growing portion of our product bookings that are related to our cloud-managed platform. Our current subscription billings in the third quarter of 2021 were $8 million, an increase of 23% year-over-year. We're pleased with the performance of our cloud business in the third quarter, and we'll look for growth to continue to accelerate. Product support revenues were $70.4 million in the third quarter of 2021, a decrease of 1% year-over-year, primarily driven by certain existing customers converting from perpetual product licenses to our subscription services or term license offerings. As we see more on-premise conversions to our cloud offering, we would anticipate product support revenue will experience a modest decline over time. Finally, other services revenue, which largely reflects our consulting services, was $20.9 million in the third quarter of 2021, an increase of 15% year-over-year. Improvements in consulting revenues is an indication of continued engagement from our customers to modernize and expand the deployment of their MicroStrategy platform. Total GAAP expenses were $177.7 million in the third quarter of 2021, which includes the digital asset impairment charge of $65.2 million. Our Bitcoin holdings are considered indefinite-lived intangible assets under applicable accounting rules, meaning that any decrease in our fair value below our book value for such assets at any time subsequent to their acquisition requires us to recognize impairment charges. Total non-GAAP expenses were $100.3 million in the third quarter of 2021, a 1% decrease year-over-year. Total GAAP operating loss was $49.7 million in the third quarter of 2021, inclusive of an impairment charge related to Bitcoin of $65.2 million and stock-based compensation expense of $12.2 million. Total non-GAAP operating income was $27.7 million in the third quarter of 2021, a $1.1 million increase year-over-year. Turning to the balance sheet. We ended the quarter with $57 million in cash. The carrying value of our Bitcoin holdings as of September 30, 2021, was $2.4 billion, which reflects approximately $755 million in cumulative impairment charges that have also been reflected as a loss on our GAAP income statement in the period incurred. We exclude the quarterly impact of Bitcoin impairment charges from our non-GAAP operating income, non-GAAP net income, and non-GAAP diluted earnings per share calculation. Bitcoin prices experienced relatively less dollar volatility in this quarter compared to the purchase prices, resulting in lower GAAP noncash impairment charge of approximately $65 million versus $425 million last quarter. As one of the leading advocates for digital assets, we've been working with peer companies and various policy-setting agencies in the U.S. to try to determine a more appropriate accounting framework for digital assets. We recently wrote to the Financial Accounting Standards Board (FASB) that the disconnect between an entity's financial statements and the economic reality of its financial condition and results of operations, serves to provide investors, analysts, and the general public with the information they need to make an informed assessment of an entity's current and future prospects. Currently, companies that aren't investment companies report Bitcoin as intangible assets. This means that Bitcoin gets initially reported on the balance sheet at its historic cost and then is deemed impaired if the market value ever dips. However, the carrying value can never conversely be revised upwards if the price of Bitcoin increases. As the largest publicly traded corporate holder of Bitcoin in the world, we believe we have a responsibility to share what we've learned since embarking on this strategy to make it easier for other companies to diversify their balance sheet with this new asset class. Going forward, you should continue to expect that we may purchase additional Bitcoin when our cash, cash equivalents, and short-term investments exceed current working capital requirements, and we may, from time to time, subject to market conditions, continue to issue debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase Bitcoin. Finally, we continue to be actively engaged in our search for the company's next CFO. They have a strong and stable executive team in place, with an average tenure in MicroStrategy of greater than 13 years and believe adding a dedicated CFO will help us in the pursuit of both of our strategies. I look forward to having more time to focus on my role as President, running the day-to-day business of MicroStrategy, as well as strategically planning for our long-term growth.

Michael Saylor, Chairman and CEO

Thank you, Phong. I'll make a few comments on MicroStrategy and its business intelligence business, our macro strategy and our Bitcoin acquisition plans, and then on the outlook for Bitcoin in general. So why don't we start with MicroStrategy. As Phong has pointed out, the business is running very, very well operationally. Every quarter for the last eight quarters we've gotten more operationally efficient. We're profitable. We're generating a very healthy operating margin. And I'm very pleased with the stability and the maturity of that business. The three key themes that we would focus on will be the shift to modern analytics from the legacy BI vendors. We're benefiting by having made large investments to modernize our platform, and we offer an upgrade path that has a future for large enterprises that made their BI decisions back in the 2000 to 2010 time frame. Many of them are running on architectures that have languished for the past 5 to 10 years, and they're looking for something which is fresh, vital, and modern. So we do win a lot of business there, and I think that trend will continue. It probably will be even more of an important trend in the next few years. The shift to enterprise cloud continues. As Phong had pointed out, in some cases companies can't, but we think that there'll be a steady progression of motion from on-premises installations to cloud installations. And as that happens, we're able to add value and improve the overall value proposition of MicroStrategy. Also, that just improves the operational efficiency of our company and it improves the operational efficiency of our customers. Everyone in the world is looking for more operational efficiencies. How do I get newer technology that runs more efficiently within my enterprise? The third theme that we continue to see is the increased prevalence of embedded analytics. Our customers are looking to OEM our analytics or embed our analytics into their applications that are facing their customers and their constituencies. MicroStrategy has made huge investments in a broad-based set of investments and initiatives in order to provide powerful SDKs and APIs and embedding capability. So that's helped us as well. I think the business will continue to be driven by those three dynamics, and we're very optimistic about where they'll take us. Shifting subjects to our macro strategy to acquire and to hold Bitcoin. Most of you have followed that journey. Following our Dutch auction, which ended in September of last year, we acquired more Bitcoin. Then following our first convert, we were able to acquire more Bitcoin. Then a second convert to acquire more Bitcoin, then a senior secured debt offering to acquire more Bitcoin. And then an at-the-market equity offering to acquire more Bitcoin. Along the way, we used operating cash flows and other free cash flows from the business to acquire more Bitcoin. There is no one answer to how we go about acquiring Bitcoin. We are committed to continue to acquire Bitcoin. We don't have a plan to sell Bitcoin. We're going to keep the Bitcoin. For those of you who follow me on Twitter, I've pointed out that you should not sell your Bitcoin. We believe that Bitcoin represents a great long-term investment for the shareholders. So we're constantly evaluating the Bitcoin market and the market for our equity and the debt markets, both the convertible debt markets and the senior debt markets and other options, just to consider whether there is an opportunity for a capital raise that makes sense. We had a $1 billion ATM, but as many of you will notice, we didn't execute the entire $1 billion in the quarter. We felt that the $400 million that we did execute was accretive to the shareholders. The timing of it was opportunistic. We felt that it was a wise management decision to sell the equity and to buy Bitcoin at the time we did. There'll be other windows where we'll think something different. At times we thought the most accretive action was a convertible debt issuance. But back in the second quarter, we decided that a senior secured note was more accretive. It's impossible for us to know exactly what the right activity is going to be going forward because the markets are continually changing. We keep our options open. We work to make sure that we can move with alacrity if we need to, in order to seize an opportunity. Looking forward, we're open to partnerships that allow us to acquire more Bitcoin. We're open to credit lines that might allow us to acquire more Bitcoin. We're open to asset-backed financing that might allow us to acquire more Bitcoin. And we will just continually evaluate these options. With regard to Bitcoin, well, Bitcoin is a pretty hot topic right now across the political media, across the financial media, across cyber space. I think that the things that are worth focusing on are the institutional maturity of the asset class has taken place over the past three months. We came into the year with two existential risks: Will the Chinese be able to control Bitcoin or will a government ban Bitcoin? And it turns out that the China exodus resulted in the United States, North American Bitcoin miners becoming leaders in the Bitcoin mining business. A big question about whether China could control or wanted to control Bitcoin was taken off the table. The second question is, would it be banned? As I've met with institutional investors and all interested figures, the most common question is, well, it seems to be so good in every respect, it's so perfect that surely there's a catch. I guess the government may want to regulate it or ban it. Over the last 12 weeks, we've seen instrumental developments putting that fear to rest. For instance, when the Chinese cracked down on Bitcoin mining, they didn't ban the ownership of Bitcoin, and that was an interesting nuance. We had senatorial hearings and congressional hearings where we saw a broad array of senators express support for Bitcoin. We've seen people ask point-blank at Treasury, at the SEC, at CFTC, do you have any intention to ban cryptocurrencies? The answer is no. Specifically concerning Bitcoin, I think it's quite clear that within Treasury, within the CFTC, within SEC, and with the EU Central Bank, there is no intention to block institutions from owning this asset. It's been referred to as a scarce speculative digital asset, or a store of value asset. The clarity that has come into the marketplace suggests it should not be treated as a medium of exchange or a currency. That clarity has provided institutional investors a better understanding of Bitcoin. So, what we see right now is the emergence of the digital gold asset class. When we first bought Bitcoin, we stated we bought Bitcoin because we view it as digital gold. It's harder, smarter, faster, and stronger than gold. Many may have been skeptical, but today, Bitcoin has shown considerable appreciation while gold has not. So we feel everything is evolving according to plan. We believe this emerging asset class will be essential to the future economy. We're extremely optimistic about our business strategy and plan to continue executing on our two fronts: enterprise analytics and Bitcoin acquisition.

Jeremy Price, Senior Vice President of Financial Planning and Analysis and Head of Investor Relations

All right. Thank you, Michael. We do have a lot of good questions. So we're going to try and get through as many as we can. And with no further ado, here we go. For Phong, 'Non-GAAP operating margin in Q3 came in above expectations for 18% to 19%. Could you walk us through the main drivers of the margin outperformance? Thank you and congratulations.'

Phong Le, President and Chief Financial Officer

Thank you, Jeremy. I would say it's one major outperformance driver. We had a tough compare going into this quarter, so I think folks thought that our revenues were going to be down a little bit. In fact, our total revenues were up. Our software revenues were up substantially versus 2019. We had good consulting results. So if I were to net it out, revenue growth is good, our software business is doing well, and there is incremental customer demand for the MicroStrategy platform. That all creates good momentum for us as a business. Of course, we've been able to keep our costs in order as much as we can too. So that's what's driving the margin outperformance right now.

Jeremy Price, Senior Vice President of Financial Planning and Analysis and Head of Investor Relations

All right. Thanks, Phong Le. Michael, 'Some Bitcoin miners are getting interest from asset managers who are evaluating financing their own mining operation inside larger miners with capacity. They believe that the returns on self-mining over five years might be greater than buying. What are your views here?'

Michael Saylor, Chairman and CEO

Please repeat your question. I'm interested in hearing my thoughts on the comparison.

Jeremy Price, Senior Vice President of Financial Planning and Analysis and Head of Investor Relations

Bitcoin miners are getting interest from asset managers who are evaluating financing their own mining operations inside larger miners with capacity. They think that the returns on self-mining over five years might be greater than buying spot. What are your views here?

Michael Saylor, Chairman and CEO

I believe the Bitcoin mining industry is strong. It's a solid business model. There is a natural limit on the amount of hash power that can be produced due to two main factors: the availability of miners and the time required to construct a mining facility. If someone wanted to start a Bitcoin mining operation today, they might have to wait 12 to 24 months to acquire the necessary mining rigs, and then an additional 12 to 24 months to set up the facility. Therefore, it will take time for that hash power to become operational. If you own a mining operation with substantial hash power, you are in a favorable position. The situation was further improved for miners by the exit of operations from China, which reduced the overall hash power. In my opinion, mining remains a robust business.

Jeremy Price, Senior Vice President of Financial Planning and Analysis and Head of Investor Relations

Thanks, Michael. Phong, it's great to see the consistent strong R&D expenditure. Can you share more details on the specific areas where you are directing these investments? How do you envision the evolution of MicroStrategy's platform in the upcoming years? Are any of your R&D funds allocated towards Bitcoin and blockchain-related research?

Phong Le, President and Chief Financial Officer

Yes. So first of all, we're going to continue to grow R&D spend. It's the right place to invest. We'll find synergies and be able to reduce costs in other areas like sales and marketing and G&A, and invest that in R&D to grow our margins. If you look at the last year versus this year, we've tripled the amount of money we spent in R&D and Cloud. Building out a full multi-tenant containerized cloud platform has been a big focus for us, and we're seeing good momentum there. We're improving security. We're the most secure enterprise-grade BI platform in the world. A lot is changing in that area, and we want to continue investing there.