Earnings Call Transcript - MSTR Q2 2022

Shirish Jajodia, Head of Investor Relations and Treasury

Hello, everyone, and good evening. I am Shirish Jajodia, Head of Investor Relations and Treasury at MicroStrategy. I will be your moderator for MicroStrategy's 2022 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 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, Michael Saylor will provide a strategic review and discuss our recently announced executive transition. Second, Phong Le will cover the operational results for the second quarter of 2022. Then Andrew Kang will cover the financial results for the second quarter of 2022. And lastly, we will open up to Q&A. With that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy.

Michael Saylor, Chairman and CEO

Thank you, Shirish. I'm Michael Saylor. I'm the Chairman and CEO of MicroStrategy. I'd like to welcome all of you to today's webinar regarding our 2022 second quarter financial results. First, I'd like to provide a strategic review. As you know, MicroStrategy has two corporate strategies. The first is to operate and grow our enterprise analytics business. The second is to acquire a whole Bitcoin. We've made great strides in both areas over the past two years. We've digitally transformed our sales, marketing, and services. We've upgraded our enterprise BI platform and we've migrated many of our customers to our integrated cloud intelligence offering. We've also established a trusted network of digital asset service providers. We've developed a set of corporate procedures for acquiring and holding Bitcoin in custody and executed multiple equity debt and convertible debt offerings in order to expand our balance sheet. We are now the largest independent publicly traded business intelligence company, as well as the largest public holder of Bitcoin. MicroStrategy represents a new kind of firm, which generates cash flow based on enterprise software products and cloud intelligence services and has a balance sheet based on Bitcoin, a digital commodity that we believe is superior to traditional physical commodities, like energy, metals, or agricultural products. This hybrid corporate strategy represents a paradigm shift. What started as a defensive strategy intended to protect our balance sheet quickly evolved into an opportunistic strategy as we sought to create shareholder value during the pandemic crisis. We no longer view Bitcoin acquisition as merely opportunistic; it is simply our second corporate strategy. Our future now depends on how we manage and develop our intellectual property, that is software, as well as how we manage and develop our digital property, which is Bitcoin. I'd like to talk a bit about our performance in these two strategies. It's now over two years since we embarked on our Bitcoin acquisition strategy. While I think a minimum holding period for a long-term investment would be four years, it seems fitting that we should do a midterm review of results so far. Since August 11, 2020, our stock has outperformed Bitcoin as well as every major asset class, along with every major big tech stock. Now, why do we choose August 11, 2020? That was the day we announced our Bitcoin strategy, and we've coupled it with the Dutch auction where we offered to buy back $250 million of our shares. So we embarked upon this strategy on August 11. When we looked back at where did MicroStrategy close the day before? It's up 123% since we embarked on that strategy. Where is Bitcoin gone? Bitcoin is up 94% since we announced our Bitcoin strategy. So MicroStrategy has actually outperformed it quite. We've captured more than 100% of the alpha of Bitcoin. From a standing start, the S&P index is up 23% in that same time frame. NASDAQ is up 13%. So as you can see, we've outperformed by a factor of 10 NASDAQ stocks in general. We've outperformed the entire S&P by a factor of 5. The option that we had when we chose Bitcoin was gold. We said digital gold or gold. Gold is down 13% since that fateful day. So Bitcoin up 94%, gold down 13%; MicroStrategy up 123%. We could have held our $500 million+ of treasury assets and bonds. The conventional view is to hold bonds. We could have held short-dated bonds that generated 0% interest or we could have bought midrange bonds. If we look at the PIMCO BOND Index, that index is down 14% since August 11, 2020. And for those who believe in silver instead of gold, silver is down 29%. So when we're choosing a treasury reserve asset, Bitcoin has outperformed all other reasonable treasury reserve assets. We considered MicroStrategy's performance and Bitcoin's performance against big tech too. I have been a big advocate of big tech digital monopolies like Google, Apple, Amazon, Facebook. You can see Google in this time period is up 54%. MicroStrategy more than doubled it. Apple, up 43%; Microsoft, up 34%. So we managed to beat those three digital monopolies. Half of big tech is down in that same period. Amazon has lost 14% of its value, Meta Group or Facebook down 39%, and Netflix down 53%. When we announced our strategy, we said we were considering all possible treasury reserve options. We've managed to choose the single one, Bitcoin that's plus 94% to beat everything. MicroStrategy executed on that. We started by buying $250 million of Bitcoin to capture more than 100% of the Bitcoin return for our shareholders in that timeframe. During this period, we've successfully raised $2.4 billion in debt and $1 billion in equity. We expanded our enterprise valuation from approximately $666 million to $5.6 billion, an increase of approximately $5 billion or over 730% in those two years. These results likely come as a surprise to many, since there's a tendency to focus on the short-term volatility of Bitcoin and its related impact on our share price. As a publicly traded operating business that holds digital property, MicroStrategy is unlike any other enterprise software company. With our deep knowledge of business intelligence, rich enterprise analytics software platform and a distributed network of loyal global customers providing us with a stream of revenues and cash flow, we're unlike any conventional holder of digital assets. This means we need to think differently about how we manage our firm and maximize shareholder value over time. For an analyst considering how to value a hybrid software and digital asset firm such as MicroStrategy, it makes sense to consider the value of each component of the business and then calculate the sum of the parts. The software business can be valued as a multiple of revenue or earnings with consideration given to the likely growth rate, customer loyalty, and the quality of those recurring revenues. The digital asset business can be valued at net asset value with a premium based on an assessment of, A, the ability of the management team to execute effectively; and B, the prospects of the digital asset. Adopting this framework, we've organized our firm in order to maximize the performance of both elements of our business, while using finance to identify and capitalize on synergies that come from pairing a stable enterprise software business with a large, potentially high-growth admittedly volatile digital asset holding. Now I'd like to talk about the outlook. We are still early in the adoption cycle of digital assets and Bitcoin in general. There is clearly a strong demand around the world for several things. First of all, A, a digital property to serve as a long-term store of value asset; B, a digital commodity to serve as a trading alternative to energy, metals, and other physical commodities. C, a digital payments network that's open, neutral, fast and free for all to use. D, a digital currency that can serve as a medium of exchange for those unable to access dollars via the traditional banking system or for those who wish to trade at the speed of light, friction-free on mobile phones and websites. Stable coins like USDC are examples of such a currency. E, a digital exchange that allows anyone to trade all currencies and all assets 24/7, 365. These five things are the clear innovations and there's extraordinary excitement and enthusiasm around those ideas. Global consensus has built over the past two years that the world would benefit from these technologies, and we need these digital assets to build the economy of the 21st century. Bitcoin serves as the ethical, technical, and economic foundation of this emerging digital economy due to its unique conception, recognition as a commodity without an issuer, global brand recognition, and worldwide network of mining operators with tens of billions in special-purpose hardware and energy contracts that provide unmatched security and network integrity. The current wave of crypto rationalization, regulation and innovation is healthy for this industry over the mid and long-term. We expect Bitcoin will be the prime beneficiary of all these trends. While there is market turmoil, innovation and adoption are ongoing in the digital asset space. The Bitcoin network has settled more than 17 trillion transactions this year, and the Lightning Network continues to expand at a rapid pace, reaching record levels of liquidity and scale each quarter. Every week, new banks announce Bitcoin custody services, new derivative products are coming to market, and new financial service providers continue to enter the space, offering trading, analysis, and banking services to the growing population of investors. The increasing interest in Bitcoin from banks such as Goldman Sachs, Citigroup, JPMorgan, and Santander, as well as Fidelity's initiatives to offer 401(k) services that include Bitcoin, are indicative of this trend. Macroeconomic trends continue to favor and drive the adoption of digital assets as well. In the past two years, numerous currencies in South America, Africa, and Asia have collapsed. Even traditional strong economies are suffering from currency weakness. The Great British pound, the Korean won, the South African rand are all down 12% in the last 12 months. The euro is down 14% against the dollar. The Polish zloty and the Japanese yen are down 17% against the dollar, and the Turkish lira is down 54%. The strengthening dollar has created demand around the world for digital currency. Many people outside the US prefer to trade their local currency for US dollars. Moreover, people outside the traditional banking system can install a digital bank on their mobile phone in minutes and enter the global economy using the US dollar as a medium of exchange and Bitcoin as a store of value. We believe that Bitcoin should be the primary beneficiary of these trends. Since it remains a small fraction of the market capitalization of gold commodities, property, currency, bonds, and commercial real estate. Continued inflation will create a need for a non-sovereign store value asset that is neutral and globally available. Technology will make it easier and more functional to use, and ongoing education and regulatory efforts will introduce more investors to this new asset class each year and make them more comfortable holding wealth in the form of digital property. MicroStrategy has ambitious plans to grow both parts of our business. There's a continuing need for enterprise analytics everywhere, and we are well-positioned to grow with our best-in-class integrated business intelligence platform. We expect to accelerate our transition to cloud-based intelligent services and exploit our increasing brand awareness and global reach to gain new customers and deepen our relationships with existing clients. We also have a unique opportunity to continue growing our Bitcoin holdings via more acquisitions financed by cash flows, debt, and equity. We're one of the few operating companies in the world that has the technical capability and the corporate mandate to acquire and own Bitcoin as well as issue Bitcoin-backed financings. We're also uniquely positioned to develop enterprise software that leverages the Bitcoin network. We expect more opportunities will come our way, and we intend to be ready to take advantage of our leadership position in the bitcoin industry when the time is right. Given this dramatic increase in the scope of our ambitious plans and the scale of our balance sheet assets, we've decided that the firm would be best served by expanding and reorganizing the management team. Andrew Kang recently joined our team as Chief Financial Officer, assuming responsibilities that were previously handled by Phong Le. Many of you will be hearing from Andrew for the first time on our earnings review call today, and we're delighted to have him aboard. For the past two years, Phong Le has served as our President and CFO. Now, we feel it is the right time to elevate him to the role of President and CEO responsible for all of our corporate operations. Phong's the ideal candidate to take the CEO role. He joined our firm in 2015 as CFO, progressively assuming responsibility for Human Resources, Facilities, and Information Systems. He later expanded his scope to manage sales and services as our Chief Operating Officer. Two years ago, he assumed responsibility for Marketing and Technology as well when he was elevated to President. In all of these roles, he's been successful, gaining the respect of the Board as well as the respect of our employees, customers, partners, and vendors. So, the progression to CEO is both natural and well-deserved. Phong will also join our Board of Directors as a member of the Board. I will assume a new full-time role as Executive Chairman of MicroStrategy. I will remain an Executive Officer and Employee of the company and Chairman of the Board of Directors, as well as assuming the role of Chair of our Investments Committee, where I will continue to provide oversight for our Bitcoin acquisition strategy. My focus will be on our corporate strategy, our innovation efforts, our Bitcoin strategy, and related Bitcoin advocacy and education initiatives, such as my work with the Bitcoin Mining Council. I will continue to act as an enthusiastic spokesperson for MicroStrategy and as our envoy to the Global Bitcoin community. As global adoption of digital assets accelerates, this is becoming an ever more expansive job, and I'm comforted increasing the scope of my advocacy efforts knowing that the execution of the MicroStrategy business plan rests in the capable hands of Phong, Andrew, and the rest of our executive team. These changes will take place as of August 8, 2022. At that time, the company will have a dedicated Chief Financial Officer, Andrew Kang; a dedicated President and CEO, Phong Le; and a dedicated Executive Chairman, myself. This represents a welcome strengthening of our management team as we prepare for the next phase of corporate growth at MicroStrategy. I'm personally excited about this news. The three of us make a great team. We work together well and possess mutually complementary skills and experience. This will benefit our shareholders, customers, employees, partners, as well as the broader community as we continue to lead the way in Business Intelligence and Bitcoin corporate adoption. Now I would like to pass the floor to Phong Le, our President and soon-to-be CEO, to provide an operational review of our business results.

Phong Le, President and soon-to-be CEO

Thank you, Michael. I'm honored and looking forward to leading this truly innovative organization in my new role as President and CEO. MicroStrategy was founded 33 years ago as a technology innovator with a vision of intelligence everywhere. Since then, we've become a global leader in business intelligence serving the largest, most respected enterprises and government organizations in the world. We've also been a technology pioneer in the fields of relational, web, mobile, and cloud analytics. Our employees and executives are the foundation upon which our strength in enterprise analytics was built, and I'm enthusiastic to work with them to continue to grow this business going forward. More recently, MicroStrategy has pioneered the use of digital assets as a core component of corporation's treasury policy. We believe it's still early and further adoption of Bitcoin globally can have a positive effect on the Bitcoin price, which has the potential to offer upside to our shareholders. Bitcoin is the right long-term store of value for MicroStrategy, enterprises, institutions, individuals, and the world. Our history of innovation has allowed MicroStrategy to be successful for a sustained period of time. I plan to continue to build a culture and a company where innovation thrives. In addition, our ecosystem of customers, partners, shareholders, and employees are essential to our success. Our commitment and focus on this group will strengthen under my leadership. I look forward to leading the organization for the long-term health and growth of our enterprise software and Bitcoin acquisition strategies. I'd also like to thank Michael Saylor. Following Mike's footsteps, our founder and a pioneer in enterprise analytics Bitcoin for institutions and CEO of MicroStrategy for 33 years, is a great honor and a great responsibility. I've learned a tremendous amount from Mike over the last seven years, and I'm honored to build upon his foundation at MicroStrategy. I look forward to continuing to work with him in my new role as President and Chief Executive Officer; and as a member of the Board and his new role as Executive Chairman. Now I'll focus on the Q2 2022 business results. Overall, we are pleased with our results in Q2. Despite a challenging macroeconomic environment due to high inflation, weakening foreign currencies, and the ongoing war in Ukraine, we achieved total revenue growth at constant currency on the strength of our cloud business. We had strong growth in our subscription revenue and billings driven by both existing customer migrations to the cloud and new customer wins. Our customer revenue renewal rates continue to be among the highest we've ever experienced. To summarize our second quarter software results, revenues increased 2% year-over-year on a constant currency basis. Total software license revenues, which we consider to consist of total product licenses and subscription services revenues in our consolidated statement of operations increased 8% year-over-year on a constant currency basis. We benefited from the increased adoption of our cloud platform, partially offset by a decrease in product license revenues. Over time, we expect our revenue profile to continue to shift towards recurring subscription revenue. Subscription revenue increased 40% year-over-year on a constant currency basis. Current subscription billings grew 51% year-over-year, our ninth straight quarter of double-digit growth and our second-best quarter ever. We're also seeing growing adoption of our cloud platform in our international customers with several major wins in Q2. We continue to focus on three key areas of growth that represent core MicroStrategy differentiators; enterprise analytics, embedded analytics, and the cloud. Our customers depend on these differentiating capabilities to build mission-critical applications to run their field forces, store operations, risk analysis groups, corporate operations, and much more. For our first growth area, I'm pleased to share that MicroStrategy ranked number one in the enterprise analytics use case in Gartner's 2022 Critical Capabilities report for the second year in a row. We found that during volatile economic times, organizations rely heavily on their analytics and look to enhance how they get that information in the hands of their end users effectively. The ability to deliver data analytics at scale with high performance and security remains a critical success factor for our thousands of customers worldwide. We're proud to receive this designation once again. Moving on to enterprise analytics, we continue to see growth with customers who build MicroStrategy into the software solutions that they sell to end users, leveraging our open embedded analytics capabilities. Our focus on innovation and research and development has enabled us to continue to modernize our platform with improved immersive interactive user interfaces, simple no-code and low-code application development with open APIs and innovative capabilities like mobile and HyperIntelligence. Finally, as MicroStrategy Cloud continues to be a growing part of our business mix, we expect to accelerate growth through increased cloud adoption by both new and existing customers. New customers are increasingly cloud-first and choose to deploy directly on MicroStrategy Cloud. At the same time, more and more existing on-premise customers are migrating to the cloud and expanding their MicroStrategy usage to new departments and user groups. We also expect to launch in Q3 this year, MicroStrategy Cloud for government, our new cloud offering with FedRAMP authorization. This product is our first generally available release of our cloud platform that relies on a modern cloud-native architecture utilizing containers and microservices. It also continues to deliver the enterprise-grade security, stability, and scalability that our customers have grown to expect. This combination of FedRAMP authorization, enterprise-grade capabilities, and managed service delivery will help us further differentiate our solutions with government, large enterprises, and embedded analytics customers worldwide. Our combined focus on enterprise analytics, embedded analytics, and cloud services has resulted in more customers relying on us for an end-to-end business intelligence strategy. Off a decommissioning and consolidating legacy platforms in favor of an enterprise-wide adoption of MicroStrategy. This has led to increasing revenue renewal rates every year in the last three years. In summary, our outlook for the software business remains positive with our continued transition to the cloud and our expectation of further increases in subscription billings. Overall, we're very pleased with the pace of product innovation. We feel confident in our ability to achieve our long-term sales growth and profitability targets. Turning to our Bitcoin acquisition strategy, we purchased 481 Bitcoins for $10 million in Q2, at an average purchase price of $20,790 per Bitcoin, net of fees and expenses. We've not sold any Bitcoin to date. To reiterate our strategy, we seek to acquire and hold Bitcoin long-term, and we do not plan to engage in sales of Bitcoin currently. As of June 30, 2022, the company owned approximately 129,699 Bitcoins that we acquired for a total cost of $4 billion or approximately $30,664 per Bitcoin net of fees and expenses. We have a long-term time horizon and the core business is not impacted by the near-term price fluctuations of Bitcoin. As I mentioned earlier, we're a technology company with more than 30 years of history of innovation and are going to remain laser-focused on technology innovation. We prudently manage our capital allocation strategy and people strategy. Many software and crypto-exposed companies have had to adjust periods of rapid cost and headcount growth by rightsizing their teams or freezing hiring. In contrast, we have the benefit of a long history with our product and our customers, a stable, experienced executive team, and a long-term focus. We're in a strong position from a people and product perspective, and will strategically hire and invest in our people while being cognizant of the current macroeconomic environment and careful in managing our costs. Finally, I'd like to introduce our CFO, Andrew Kang. He joined the company in May. I'm thrilled to see Andrew step into this critical leadership role, where he will be able to contribute from his 20-plus years of experience in banking finance, treasury, and capital markets. I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Andrew Kang, Chief Financial Officer

Thank you, Phong. I am delighted to be with everyone today and would like to start by turning to our second quarter 2022 financial results in more detail. GAAP revenues for the quarter were $122 million, down 3% year-over-year. While weakening foreign currencies impacted our revenues this quarter, when isolating FX impacts, total revenue increased 2% on a constant currency basis. Total software license revenues, which consist of both product license revenues and subscription services revenues were in total $34 million, up 5% year-over-year or up 8% year-over-year on a constant currency basis. The growth in total software license revenues this past quarter reflects our strategic focus on the migration of our platform to the cloud, which Phong highlighted earlier. In the second quarter, cloud subscription service revenues were $14 million, an increase of 36% year-over-year or up 40% on a constant currency basis. Total product license revenues were $20 million, a decrease of 9% year-over-year or a decrease of 6% on a constant currency basis. Product support revenues were $66.5 million, a decrease of 6% year-over-year or 2% lower on a constant currency basis. Both product license and product support revenues are impacted when new and existing customers convert to our cloud model. As a result, we expect those revenues to modestly decline alongside a corresponding increase in cloud subscription revenues and billings. It is important to note that even in light of this transition, our on-prem customers continue to reflect the durability of our business as demonstrated with a Q2 support renewal rate of 95% among the highest we've ever experienced. Finally, other services revenues, which largely reflect our consulting business, were $21.4 million this quarter, a decrease of 2% year-over-year but an increase of 4% on a constant currency basis. We continue to see positive trends in our consulting business through increased billable rates and our worldwide, while optimizing costs through a global and highly skilled technology-consulting workforce. The 4% constant currency growth year-over-year is a strong indication of the desire from our customers to modernize and grow their deployment of MicroStrategy. Moving to billings. Our current total software license billings were $39.9 million, an increase of 12% year-over-year. In the second quarter, current subscription billings were $20.1 million, an increase of 51% year-over-year, reflecting the same strong growth momentum we saw at the end of last year. This increase was driven by solid results in both subscription service revenues as well as current deferred subscription service revenues. Also worth noting, our largest cloud billings in Q2 were sold as multiyear contracts with an average term of over 24 months, of which only 12 months are reflected on our balance sheet. We believe the demand to migrate MicroStrategy to the cloud remains very strong, with additional pipeline being added from both our domestic and international customers. Shifting to costs. Total non-GAAP expenses, which exclude share-based compensation, were $1.02 billion in the second quarter compared to $529 million in the second quarter of 2021. Aside from the Bitcoin impairment expense that I will discuss in a moment, our costs this quarter reflect modest increase in areas specific to building out our cloud platform, retaining and attracting talent while focusing on efficiencies and corporate cost areas. Starting from the left of the chart, non-GAAP cost of revenues were $24 million in the second quarter of an increase of $1.6 million or 7% year-over-year. As a percentage of the total revenues, these costs, which are still scaling up to support the build-out of cloud reflect an increase of 2%, which was largely attributed to higher hosting fees and investments in technology talent. Non-GAAP sales and marketing expense was $32 million, a decrease of $4.6 million or 13% year-over-year. As a percentage of total software license revenues, the second quarter decrease of 19% year-over-year continues to reflect improvements in the productivity of our sales and marketing teams, along with an increase in capitalized commissions compared to last year. Non-GAAP R&D expense was $29 million, which was an increase of $2.6 million or 10% year-over-year. This was an increase of 3% as a percentage of total revenues, driven by the ongoing competitive environment for talent across the tech sector. We anticipate that this trend will continue in the near term. However, as we prioritize overall spend in the second half and into next year, we will continue to be strategic and opportunistic in investing in R&D to attract and retain engineering talent and to drive innovation that creates demand for our products. Non-GAAP G&A expense was $22 million, an increase of $3.8 million or 20% year-over-year. As a percentage of total revenue, this reflects an increase of 3%. The overall macroeconomic environment and inflation challenges continue to create headwinds for our bottom line. The fact is, though, our business is operating well and our cost structure is stable. However, in the coming quarters, we will be intentional in prioritizing spend while focusing on areas that drive profitability while continuing to promote a strong workplace culture. The largest non-GAAP expense for the quarter was the Bitcoin impairment charge of $918 million. You will recall that the GAAP treatment of Bitcoin impairment charges treats our Bitcoin holdings as indefinite wealth intangible assets under the applicable accounting rules, which means that any decrease in the fair value below our carrying value at any time subsequent to acquisition requires us to recognize an impairment charge. Due to the Bitcoin price volatility in Q2, the impairment on our Bitcoin holdings was measured against a low watermark Bitcoin price of approximately $17,600. If the future Bitcoin prices remain above the low watermark, under the current accounting rules, we would not recognize any additional impairment against a substantial portion of our June 30, 2022 Bitcoin holdings. On Slide 18, total non-GAAP operating loss in the second quarter of 2022 was $903 million, which includes the $918 million Bitcoin impairment charge I just spoke about. I'd like to highlight that since the adoption of our Bitcoin strategy in Q3 2020, the digital asset impairment charges we have incurred in every quarter since inception have always been greater than our non-GAAP operating losses. While our Bitcoin holdings are impaired when the price drops below the carrying value under current accounting rules, conversely, when the price increases, accounting rules do not allow the carrying value to be revised upward. We feel optimistic that the Financial Accounting Standards Board recently unanimously agreed to review the accounting rules for exchange-traded digital assets and commodities as part of their upcoming technical agenda, which could lead to a change in how digital assets are accounted for in the future. As of June 30, 2022, the carrying value of our Bitcoin holdings was approximately $2 billion, reflecting approximately $2 billion in cumulative impairment charges. As you can see in the chart, the market value of our Bitcoin holdings at each quarter end has always been greater than the carrying value under the current rules. The capital markets have enabled us to be agile and access both the equity and debt markets efficiently to grow our enterprise value. As you can see on Slide 20, the earliest of our debt maturities are not due until March 2025 and the blended interest rate of our total $2.4 billion in debt is only 1.9%. As of quarter end, we had $69 million in cash on our balance sheet, and we expect cash flows from operations will be sufficient to cover our ongoing interest expense needs. Going forward, subject to market conditions, we will continue to evaluate opportunities that we believe will be accretive to our shareholders that further our Bitcoin strategy or optimize our existing capital structure. As of June 30, 2022, we held a total of 129,699 Bitcoins, of which 14,589 Bitcoins were held directly at MicroStrategy, the parent, all of which secure our 2028 notes. The remaining approximately 115,000 Bitcoins are held at our subsidiary macro strategy. Of the Bitcoins held at the sub, approximately 30,000 bitcoins are pledged as collateral to the Silvergate loan and just over 85,000 Bitcoins remain unpledged and available for use. This unencumbered Bitcoin is equivalent to approximately $2 billion, assuming a market price of about $23,000 per Bitcoin. Our Bitcoin strategy remains simple: buy and hold for the long term, and that is it. In Q2, the amount of Bitcoin pledged at macro strategy increased by 10,585 Bitcoins to support the Silvergate loan as Bitcoin prices fell to the Q2 lows. Our $205 million Bitcoin-backed loan requires us to maintain a loan-to-value ratio of 50% or less, and we have the ability to contribute additional Bitcoin to meet the requirement as needed, which we did in Q2. If the price of Bitcoin appreciates and the LTV ratio is less than 25% at any time, we can withdraw any of the excess collateral at that time. With approximately 85,000 available unpledged Bitcoin, we have more than sufficient collateral to meet the ongoing requirements of the loan through any foreseeable price volatility. Finally, before I open up the call for Q&A, I want to express that I'm honored to be part of the MicroStrategy team and excited to be working with Mike and Phong in their new roles, where we are all aligned on executing the corporate strategies of operating and growing our enterprise analytics business and acquiring and holding Bitcoin for the long term. I believe MicroStrategy is truly in a category of one, having successfully combined a long-standing software business with a successful track record and deep customer base with a pioneering corporate treasury strategy to acquire Bitcoin as a store of value, becoming the largest corporate holder of Bitcoin in the world. Thank you for your time today. And with that, I'll now turn the call over to Shirish for Q&A.

Shirish Jajodia, Head of Investor Relations and Treasury

Thank you, Andrew. We have received several good questions, so we are going to jump right into the questions. The first question is for Michael. Is the CEO succession a recent development, or is that something that had been in work for a while?

Michael Saylor, Chairman and CEO

Okay. Can you hear me? Yes. The matter of CEO succession has been carefully considered and planned for at the Board level for many years. We believe in proactively developing our leadership team, and we realize the future of the firm is dependent upon our ability to cultivate successive generations of executives and promote from within. I had seven years of closely working with Phong on a day-to-day basis on IT projects, sales activities, technology, marketing, services, and finance initiatives. The Board had seven years of experience with him because he was the CFO throughout that time and was closely involved with the Board every single quarter. When Phong was promoted to President of the company two years ago, I think it was pretty clear to company watchers that he was my heir apparent. In summary, this is a decision seven years in the making when we finally got to the point that seemed right. It was an easy one to execute on.

Shirish Jajodia, Head of Investor Relations and Treasury

Thank you, Michael. Next question is for Phong. What changes do you plan to make as a CEO?

Phong Le, President and soon-to-be CEO

Well, I think Mike stated, we've been working together for seven years now in my capacity as CFO on and off, two years as President. I think we're fairly aligned in how to run both an enterprise software company and very aligned, having worked closely in the last two years in our Bitcoin acquisition strategy. I see this as a business-as-usual transition, where we clarify our roles in the organization with our employees, customers, partners, shareholders, and the media. I don't have any significant changes planned. Probably the biggest changes we've observed are Andrew's arrival two months ago, and him now running the finance organization very credibly and professionally. This gives me more time to run the company and allows Mike to focus more on corporate strategy, innovation, and the Bitcoin strategy.

Shirish Jajodia, Head of Investor Relations and Treasury

Thanks, Phong. Next question is for Andrew. Do you anticipate any further capital markets activity, and what is your long-term debt strategy?

Andrew Kang, Chief Financial Officer

Thank you for the question, Shirish. I believe the company has executed so far in a very prudent and well-thought-out capital structure framework. Since 2020, it has been extremely successful, as evidenced earlier when Mike explained our stock performance over the last year compared to our comps. Our approach to debt and equity will remain the same as it has. We will continue to evaluate access to the markets that are most accretive and look to obtain the most premium for dollars generated. Right now, in the current market, we are evaluating opportunities and have the luxury of continuing to be thoughtful on any future balance sheet execution. So, for the moment, we will evaluate and wait and see, but I assure you that whatever we do in the future, we will do so prudently and safely.

Shirish Jajodia, Head of Investor Relations and Treasury

Thanks, Andrew. Next question is for Phong. Congratulations on your promotion to CEO. Can you talk about your growth outlook for the software business for the second half of this year? There are significant macro crosswinds flowing; how do you expect this to impact the growth rate of your license and subscription billings in the second half?

Phong Le, President and soon-to-be CEO

Thanks, Shirish. It's a good question. We were able to withstand some of these macroeconomic challenges in the second quarter, primarily by growing in the cloud. I think the second half will see more macroeconomic changes and challenges, including the strong dollar and the unpredictability of the war in Ukraine, etc. So, I think there will be more challenges. Our intent is to try to continue to grow. I think cloud will help us. As you all know, growing in the cloud does have a short-term negative impact on product license revenue and total revenue. So that will cause more distraction in our revenues than the macroeconomic challenges. But we will be able to continue to grow. I'm optimistic about it. That said, we will be prudent and thoughtful. We will not get out ahead of our skis on cost. As for our performance, we have been doing well in regard to enterprise analytics and embedded analytics in the cloud, and we will be cautious yet optimistic in the second half.

Shirish Jajodia, Head of Investor Relations and Treasury

Next question is for Michael. Has the recent Bitcoin price volatility accompanied by large accounting adjustments impacted your view on your Bitcoin strategy going forward?

Michael Saylor, Chairman and CEO

Yes, it's a great question. We anticipated Bitcoin volatility and understood the accounting implications when we embarked on our Bitcoin strategy. I view both of these as competitive advantages for our firm. The volatility means that A, Bitcoin is more interesting than less volatile assets. B, MicroStrategy is more intriguing than companies holding less volatile assets. The phrase that comes to mind is volatility is vitality. We believe one of the reasons Bitcoin is the best-performing asset class of the last decade is that the volatility attracts interest, and capital trading creates opportunities. Our firm visibility has increased since we started our Bitcoin strategy. The interest in our securities has also significantly increased. We don't have to convince companies to cover our stock; they hear from various channels that we're unique, and the fact that Bitcoin is volatile means that it attracts attention and capital, making our company much more interesting. It helps us sell to the market, recruit, retain employees, and find shareholders. I see those as all positives. The accounting treatment also benefits our firm because we decided to adopt the Bitcoin standard. The indefinite and intangible accounting treatment makes it easier to define our commitment. Most other firms would find this a daunting corporate transition; they wouldn't manage to transform their balance sheet like we've done. Because of the fear surrounding volatility and the accounting challenges, we have managed to develop an edge in the digital asset space as the first and the largest public operating company on a Bitcoin standard, giving us a sustainable competitive edge and a differentiator to build shareholder value going forward.

Shirish Jajodia, Head of Investor Relations and Treasury

And Phong, would you like to add any further color?

Phong Le, President and soon-to-be CEO

No, I think Mike said it very well.

Shirish Jajodia, Head of Investor Relations and Treasury

Great. Next question is also for Michael. How should investors evaluate the new executive work structure? Are there any tangible benefits from it that will become evident over time, for example, further development of the digital asset strategy beyond Bitcoin holding?

Michael Saylor, Chairman and CEO

I think the executive structure is going to benefit all of us. First of all, we're actually expanding the management team with the addition of Andrew. That gives us a full-time finance executive. Our balance sheet has grown with our debt offerings and our equity issuance. The explosion of our enterprise value from $666 million to $5.5 billion means that the finance function has become a full-time job in its own right. Andrew's arrival has brought new skills, which also allows us to promote Phong to President and CEO. Phong is an incredibly gifted executive, and with the support of Andrew and the unambiguous power that comes with the CEO role, Pyoung will be more effective and able to move more efficiently and drive the corporate mission. I'm comfortable with Phong and Andrew in place, along with the rest of our excellent CXO team. This new structure allows me to focus even more on communications and strategy, Bitcoin advocacy, and evangelism, knowing that operations is in capable hands. The world of Bitcoin is exploding, and my role is growing in scope. I feel this is a win-win-win.

Shirish Jajodia, Head of Investor Relations and Treasury

Thanks, Michael. Next question is for Phong. Given the macroeconomic risk, can you update us on how you think about balancing revenue growth versus margin expansion?

Phong Le, President and soon-to-be CEO

We're focused on growing the revenue. I think we have the right cost structure in place to achieve it. Therefore, I don't believe we need to sacrifice revenue growth by reducing costs. We can continue to grow at the current cost structure. I believe that will also begin to result in margin expansion. They are not direct trade-offs in my opinion.

Shirish Jajodia, Head of Investor Relations and Treasury

Another one for Phong. It's good to see growth in core software; can you give us an idea of where we stand now in the mix between license and SaaS? When might we expect to see SaaS growth begin to move the growth needle more materially?

Phong Le, President and soon-to-be CEO

On a recognized revenue basis, our cloud subscription revenue is about 15% of our recurring revenue. On a billings basis, it's about 20%. We haven't reached that inflection point where our SaaS business exceeds 40%. While we continue to grow, it is fully accretive to revenue in the short-term, but not quite in the long-term. I think we have some time left. Many of you have seen companies transition from a perpetual license to a subscription revenue model in the past; you're familiar with the short-term dip in product license revenue, and its impact on overall revenue, and how that normally turns into an acceleration of revenue. We're going through that process right now. There's high demand for cloud, which is exciting. Our customers understand the value proposition. Our marketers know how to explain it. Our salespeople understand how to sell it. We are becoming better at operating at scale. It is full speed ahead with the cloud transition.

Shirish Jajodia, Head of Investor Relations and Treasury

Thank you. Next question is for Andrew. Would you like to elaborate further on managing expenses in the second half of 2022?

Andrew Kang, Chief Financial Officer

Certainly. As Phong mentioned earlier, our cost structure is very stable. That's the benefit of being a long-standing company in business for over 30 years. We haven't experienced massive headcount growth. Headcount has been very stable, and we haven't overhired, which many in the market have done recently. From a cost perspective, we will focus on areas that are accretive to profitability. We'll look to be opportunistic in bringing in new talent around tech, cloud, and sales. We’ll scrutinize other costs where we can be more efficient. I have the benefit of coming in and asking a lot of new questions regarding certain expenses. I think that will be helpful in understanding where we can be more efficient. Nevertheless, we will be opportunistic and spend in areas that will help our business grow.

Shirish Jajodia, Head of Investor Relations and Treasury

Thanks, Andrew. We'll take one last question for Phong here. On the demand environment, what are you seeing in the demand environment for BI software? Given the uncertainty in macro, what is your demand outlook for the rest of 2022? Have any deal cycles elongated, or do you have any insight from customers on their spending?

Phong Le, President and soon-to-be CEO

Thanks, Shirish. I do think we're seeing choppier demand, elongated deal cycles, and more challenges in our selling environment, especially internationally. All that said, as I mentioned before, if we can push through and execute, leveraging our expertise in enterprise analytics, especially in turbulent times, we can grow in the second half and in the future. There is more volatility, which requires better execution. We have to be precise in managing our pipeline, sales cycles, opportunities, customer engagements, and conversations. It requires a lot more focus, but we are built for this sort of work.

Shirish Jajodia, Head of Investor Relations and Treasury

Great. We are at the end of time for today's call. Thank you, everyone, for the questions. This concludes the Q&A portion of the webinar. I will now turn the call over to Michael for closing remarks.

Michael Saylor, Chairman and CEO

I want to thank everybody for your support, and Phong, Andrew, Shirish, and I will all look forward to seeing you again in 12 weeks, and we wish you a happy summer. Have a good day.