MicroStrategy Incorporated

Okay, we'll get started. Hello, everyone, and good evening. I'm Siris Dajodhia, MicroStrategy's Senior Director of Treasury and Head of Investor Relations. I'll be your moderator for MicroStrategy's 2022 First 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 risk factors discussed in our most recent 10Q 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 or Fong 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. With that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy.

Thank you, Sharish. 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 first quarter financial results. I'm here with Fong Lee, our President and Chief Financial Officer. First, I'd like to pass the floor to Fong, who's going to provide an update on our operations and our financials for the quarter.

Thank you, Michael. We continue to be pleased across both our corporate strategies in the first quarter of 2022. Here is a summary of our first quarter software results. Revenues declined 3% year-over-year and were flat on a constant currency basis. We saw some revenue headwinds in Q1. This included a more challenging macroeconomic environment due to war in Ukraine, a tough comparison in Q1 2021, where we saw licensed revenue grow 69% and total revenue grow 10% year-over-year, and ongoing cloud growth, which has a short-term negative impact on product license and total revenue. Our cloud business continues its momentum, with subscription revenue growing 28% year over year and current subscription billings growing 18% year over year, our eighth straight quarter of double-digit growth. We had several large cloud deals split from Q1 due to macroeconomic uncertainty, which caused billings growth to decline sequentially. Turning now to our Bitcoin strategy, we had another active and successful quarter. We purchased $215 million of Bitcoin and the average purchase price of $44,645 per Bitcoin, net of fees and expenses. We have not sold any Bitcoin to date. These purchases were funded by excess cash in our business as well as through a $205 million first-ever public company Bitcoin-backed term loan. I will discuss the terms of the loan in more detail in our financial section. In total, we have raised an aggregate of $3.4 billion in new debt and equity capital that we've deployed in support of our Bitcoin acquisition strategy. To reiterate our strategy, we seek to acquire and hold Bitcoin long-term. We view our Bitcoin holdings as long-term holdings, and we do not currently plan to engage in sales of Bitcoin. As of March 31st, 2022, The company owned an aggregate of 129,218 Bitcoins that we acquired for a total cost of $3.97 billion, or $30,700 per Bitcoin, net of fees and expenses. The market value of our Bitcoin holdings was $5.9 billion at March 31, 2022, reflecting $1.9 billion of unrealized gains, or nearly 50% appreciation, when compared to the original cost basis of our Bitcoin March 31st, 2022. The carrying value of our Bitcoin holdings as of March 31st, 2022 was roughly $2.9 billion, reflecting $1.1 billion in cumulative impairment charges. We continue to see opportunities for MicroStrategy to target a multi-billion dollar software market that is at an early stage of moving off of legacy tech into the cloud. We're well positioned to meet the demands of enterprise customers with our modern analytics platform. As we discussed in detail in our last earnings call, we see three key areas of growth for us. Enterprise analytics, embedded analytics, and cloud, where we will seek to grow by developing our pipeline, making our customers successful, and continuing to innovate, automate, and simplify our technology stack. Next, I would like to provide you an update on the product enhancements in our latest platform release, which expands the value provided to our customers and represents future incremental growth opportunities. In particular, the product now includes an impressive, differentiated set of new capabilities that enable organizations to build seamless, scalable business intelligence applications at a faster pace, either deployed standalone or embedded directly into other products. With a fully modern, immersive, and interactive design, Eve introduced a simple, no-code application development option built on the foundation of MicroStrategy Library. Built to empower developers to deploy powerful, customized data portals for multiple user groups at enterprise scale and a rapid speed to market, MicroStrategy applications bring a competitive edge to our customers. Developers can build one app for employees using iPads on the sales floor and another for finance executives and headquarters, all based on the same highly governed single version of the truth. This delivers greater trust, less hassle, and lower maintenance costs, all qualities that make MicroStrategy the ideal partner for enterprises and independent software providers. Applications also provide enhanced, tolerable security controls to grant limited access access and login, as well as sophisticated embedding functionality for extended flexibility and customization. Speaking of security, MicroStrategy also separated itself from the competition recently by way of our fast, transparent, and effective response to the high-profile Log4J and Spring4Shell vulnerabilities. Our customers benefited from rapid mitigation and remediation of these issues, solidifying the peace of mind they have come to expect from our partnership. Most customers in MicroStrategy Cloud had zero-day fixes installed over the weekend and updates and patches installed in a week. MicroStrategy Cloud continues to be a growing part of the mix of our business. We're on track to accelerate the subscription billions momentum in 2022. We expect to grow by migrating on-prem customers to the cloud, expanding the footprint for existing cloud customers, and defaulting deployment of as many new customers as possible to the cloud. We also expect to have our MicroStrategy FedRAM compliant version of our software available in Q3 this year. For those customers that are not yet ready to move to cloud, such as those in highly regulated industries or countries, we remain committed to supporting them also. Our underlying cloud architecture is also improving, leveraging containers and microservices. This architecture is built to deliver highly scalable, multi-tenant SaaS solutions across tens of thousands of users and provide developers with a streamlined experience to leverage continuous integration and continuous development. Overall, I'm very pleased with the pace of product innovation, and we are confident in our ability to achieve our long-term growth targets while maintaining profitability. Finally, our annual user conference, MicroStrategy World, was another tremendous success. World 22 was our second virtual world event and enabled us to reach a bigger, broader audience with customer success stories, product presentations, thought leadership keynotes, and a hugely popular Bitcoin for Corporations event held in tandem. Our content was available to all for free via an online event platform. The keynotes, including the Michael Saylor, Jack Dorsey keynote, were simulcast live on YouTube. All in all, we had nearly 14,000 registrants on the event platform and over 180,000 viewers of the content across all mediums. Replays for the sessions are available on our website. Turning to our first quarter 2022 financial results in more detail, Revenues for the quarter are $119.3 million, down 3% year-over-year, and we're almost flat on a constant currency basis. On a trailing 12-month basis, total revenues are up 3% year-over-year. Product license revenues are $16.5 million, down 22% year-over-year, and down 20% on a constant currency basis. The decline is mainly due to a large transaction included in of the year-over-year differential. On a trailing 12-month basis, product license revenues are up 2% year-over-year. Subscription services revenues are $12.8 million, an increase of 28% year-over-year. We're up 30% on a constant currency basis. The growth in subscription services revenues reflects the increased portion of our product bookings that are related to our managed cloud platform. Our current subscription billings in the first quarter of 2021 were $11.4 million, an increase of 18% year over year. The growth was slower than expected for the first quarter, as some deals slipped out of the first quarter, in part caused by the ongoing war in Ukraine, impacting the purchasing patterns of customers in Europe and worldwide. We see strong demand and pipeline for our cloud licenses and the potential for our future for further growth going forward. Product support revenues were $67.2 million in the quarter, a decrease of 5% year-over-year, or 3% on a constant currency basis. The decline was partially driven by certain existing customers converting from perpetual product licenses to our subscription services or term licenses offerings, and partially by an impact from unfavorable foreign currency exchanges. As we see more on-premise conversions to our cloud offering, we would anticipate product support revenues will experience a modest decline over time. That said, our in-quarter product support renewal rates for Q1 continue to be among the highest we've ever experienced. Finally, other services revenues, which largely reflect our consulting services, were $22.8 million in this quarter, an increase of 9% year over year, or 13% on a constant currency basis, primarily driven by an increase in billable hours worldwide, partially offset by an unfavorable foreign currency exchange impact and a decrease in average billing rates. We believe that growth to consulting revenues is an indication of continued engagement from our customers to modernize, retain, and grow their deployment of the MicroStrategy platform. Shifting to our cost. Total non-GAAP expenses, which include share-based compensation expenses, were $275 million, which exclude share-based compensation expenses, were $275 million in the first quarter of 2022 as compared to $298 million in the first quarter of 2021. Of this amount, $170 million were Bitcoin impairment charges in Q1 2022 and $194 million in Q1 2021. As a reminder on the treatment of Bitcoin impairment charges, our Bitcoin holdings are considered indefinite lived intangible assets under applicable accounting rules, meaning that any decrease in their fair value below our carrying value for such assets at any time subsequent to their acquisition requires us to recognize impairment charges. During the first quarter, we incurred digital asset impairment charges of $170 million. As discussed on the last earnings call, on a go-forward basis, any non-GAAP financial measures we may present in future filings will retain the impact from Bitcoin impairment charges. This change in the presentation of our non-GAAP financial measures does not impact our strategy, operations, or GAAP financial statements or previous SBC filings. We'll continue to report the Bitcoin impairment charges separately. Now, starting from the bottom of the chart and moving up, Non-GAAP costs of revenues are $25 million in the first quarter of 2022, an increase of $2.4 million, or 11% year-over-year. As a percentage of total revenues, this reflects an increase of 2.6%, driven by increases in cloud customer hosting fees and personnel costs from additional headcount. As we continue to accelerate our shift to cloud, we expect increases in infrastructure costs and headcounts for additional customers. And over time, for our cloud business to scale, decreasing costs is a percentage of total revenue. Non-GAAP sales and marketing expense is $29 million, a decrease of $6.9 million, or 19% year-over-year. The decline is primarily driven by a decrease in variable compensation, mainly due to higher capitalized finishes, and decreases in bonus and personnel costs. As a percentage of product license and subscription revenue, the charge reflects a decrease, the change reflects a decrease of 16%, which in part reflects improved productivity of our sales and marketing teams. Non-GAAP research and development expense was $30 million, an increase of $2.8 million, a 10% year-over-year. As a percentage of total revenue, this reflects an increase of 3%, driven by headcount increases, cost of hiring, and wage inflation. The technology sector has experienced significant wage inflation and competition for resources, and we anticipate that trend will continue in 2022 and that we'll continue to invest in R&D to retain our talented engineers and develop sophisticated, innovative products. We're also shifting some headcount to lower-cost regions, which we expect will result in some cost efficiencies over time. Non-GAAP general administrative expense was $21 million, an increase of $2.1 million, or 11% year-over-year, as a percentage of total revenue. This reflects an increase of 2.3%. Overall, we feel comfortable with our cost structure and our ability to generate cash flow sustainably. Total non-GAAP operating loss in the first quarter of 2022 was $155.6 million, inclusive impairment charge related to Bitcoin, and $170.1 million. The carrying value of our Bitcoin holdings as of March 31, 2022, was $2.9 billion, which reflects $1.1 billion in cumulative impairment charges. They have also been reflected as losses on our GAAP income statements in the periods incurred. Our non-cash Bitcoin impairment charges will remain subject to market volatility of Bitcoin market prices. 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 develop an alternative accounting framework for digital assets. Currently, companies that aren't investment companies report Bitcoin as intangible assets. This means Bitcoin is initially recorded on balance sheets at its historic cost and then is deemed impaired if the market price of the company's principal exchange for Bitcoin drops below the carrying value at any time. However, the carrying value can never conversely be revised upward as the price of Bitcoin increases. In the fourth quarter of 2021, the Financial Accounting Standards Board, or FASB, announced that it had added a project to their research agenda to explore accounting for exchange-traded digital assets. 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 its new asset class. Next, I'll discuss the terms of our first ever Bitcoin-backed term loan with Silvergate Bank. We raised $205 million as an interest-only loan for a term of three years, which is collateralized by Bitcoins. The loan matures on March 23, 2025. It bears monthly interest at a floating rate equal to the secured overnight financing rate, or SOFR, 30-day average, as published by the Federal Reserve Bank of New York's website, plus 3.70%, with a floor of 3.75%. The loan may be prepaid at any time, subject to modest prepayment premiums. The loan has initial loan to collateral value. of 25%, which was thus collateralized closing by Bitcoin with a value of approximately $820 million. While the loan is outstanding, we are required to maintain an LTV ratio of 50% or less, which essentially allows for an approximately 50% drop of Bitcoin prices for the time of transaction closing, before we are required to close on an incremental collateral. We're also allowed to proactively manage the LTV ratio by posting any desired value of additional collateral if we choose to. If Bitcoin appreciates in price and the LTV ratio is less than 25% at any time, we're entitled to a return of excess collateral so long as the LTV ratio will not exceed 25% after such return. Additionally, we have established a $5 million cash reserve account with SilverGain. for the loan that can be used towards the interest payments for the last six months of the loan term. Also, we have held back approximately $9 million from the loan proceeds as cash and macro strategy that can be used towards general corporate purposes, including paying interest for this loan or buying additional Bitcoin. This loan is not guaranteed by any party. The agreement does not restrict us from incurring additional debt. permits additional liens so long as such liens are not on the asset serving as collateral for the loan, and permits us to sell assets so long as they are not serving as collateral for the loan. There are no restrictions on utilizing Bitcoin that is not a part of the collateral for this loan. Thus, this loan would be accretive to shareholders as long as Bitcoin appreciates more than the issuance expense and cumulative interest expense to be incurred over the term of the loan. MicroStrategy has pioneered the use of digital assets as a core component of an enterprise's treasury policy, which has generated incremental value for our shareholders. As a snapshot into our current Bitcoin holdings by entities, as of March 31st, 2022, of the total of 129,218 Bitcoins held by the company, roughly 14,100 Bitcoins are held at the MicroStrategy entity, all of which are held as collateral securing our 2028 secured notes. The remaining approximately 115,100 Bitcoins are held at the macro strategy subsidiary. Of the macro strategy Bitcoins, approximately 19,500 Bitcoins are pledged as collateral towards the Bitcoin-backed term loan, and over 95,600 Bitcoins remain unpledged and unencumbered. We may consider additional opportunities to utilize the strategic asset in the future. For example, subject to market conditions, we may enter into additional Bitcoin-backed financings or seek to lend our Bitcoin to third parties to generate yield. We will continue to closely monitor market conditions and determine whether to engage in any such transactions and may ultimately decide not to pursue any of these transactions. Next, I would like to emphasize the strength of our robust capital structure. From a balance sheet and liquidity perspective, we're insulated from the near-term market volatility of Bitcoin prices, since we currently do not have any debt principal maturities coming due until March 2025. The total annualized interest expense today is approximately $44 million, which equates to a blended interest rate of approximately 1.82% on our entire debt obligations of $2.4 billion. We expect cash flows generated from our software business to be sufficient to cover interest obligations as they become payable. Additionally, we maintain a certain minimum amount of cash balance to fund our regular working capital needs. As of the first quarter, we had $95 million in cash on our balance sheet. Going forward, we'll continue to evaluate debt or equity capital raising. and other financing opportunities that we believe will be accretive to shareholders, subject to market conditions, and that further our Bitcoin acquisition strategy or optimize our capital structure is needed. We believe that the further adoption of Bitcoin globally will have a positive effect on Bitcoin prices, which has the potential to offer asymmetric upside to our shareholders. Our 2022 outlook remains positive with our continued transition to cloud and our expectation of a sustained increase in subscription billings. Our cloud transition will result in increased subscription revenue and billings. With the continued growth of our subscription billings, it is possible that our product license revenue and total revenue growth will decelerate in the near term, even as our overall software business expands. This will depend largely on the mix of new sales between cloud and on-premise licenses. This is because a new cloud contract, which may have a higher total contract value than an on-premise license, still results in lower recognized revenue in the first year. Overall, we feel we are well positioned to achieve our long-term sales growth target of greater than 10% and increase free cash flows over time. Finally, I'd like to share an update with you regarding the appointment of our new CFO. I'd like to welcome Andrew Kang, who will be joining MicroStrategy as our new CFO, effective on a start date, which we expect to be on around May 9th. I'm thrilled to see him step into this new critical leadership role, where he will be able to contribute from his wealth of experience. Andrew has over 20 years of experience in banking and consumer finance, and most recently served as CFO for Greenstein Incorporated, a publicly traded fintech company. Prior to Green Sky, Andrew served as the Corporate Treasurer for Santander Holdings, USA, the $150 billion U.S. bank holding company under Banco Santander, USA. Andrew has also held leadership positions in capital markets, finance, and treasury at Santander Consumer, USA, HSBC Finance, and Capital One. Following Andrew's appointment, I look forward to having more time to focus on my role as president, running the day-to-day operations of MicroStrategy, as well as strategically planning for our long-term health and growth for both BI and Bitcoin strategies. I'll now turn the call over to Michael to discuss observations for the MicroStrategy World event, comments on our Bitcoin acquisition strategy, as well as regulatory outlook for the digital asset spaces.

Thank you, Phuong. And I want to thank everybody for being with us here today. I thought I'd start with a few observations of global developments. In Q1, we saw some fairly seminal events, the trucker crisis in Canada, the Ukrainian war, Russian sanctions, continued inflation, supply chain chaos, concerns about food and energy shortages. All of those things have been combined with a weakening currency environment. The Chinese currency, the Japanese currency, South America and African currencies, and a lot of Asian currencies are all collapsing against the dollar. In fact, just about every currency in the world except for two, I think, are collapsing against the dollar right now. This is creating a very challenging macroeconomic environment. It's going to continue to create uncertainty and challenges for all businesses. I think that it has had the impact of increasing awareness of and the understanding of the need for a digital asset like Bitcoin. And so the silver lining is that hundreds of millions, if not billions of people are now becoming aware of the need for non-sovereign store of value digital assets like Bitcoin. The negative is it creates a very challenging operating environment. Over the last few months in the world of Bitcoin, the interesting developments worth highlighting are the executive order coming out of the Biden White House on March 9th, which was really a first, as long as anyone can remember, the first time that we had the executive branch of the United States, in essence, highlighting and endorsing an asset class as being critical to the future of the nation. And so I thought that that was extraordinarily auspicious. Janet Yellen gave a speech on April 7th at American University, equally auspicious. We had the Secretary of the Treasury of the United States laying out the case for decentralized networks, the theory of digital property, talking about the need for digital currencies, about the innovations in the crypto economy. and suggesting that the administration is going to enthusiastically move forward to provide responsible regulations to allow this economy to grow. I thought that was very critical, too. I think if you put all of these macroeconomic developments together with the regulator signal, what you have is, is a world that's a bit insecure about currencies and insecure about property rights and insecure about 20th century banking systems and 20th century payment systems and aware that they need to find a solution. But you also have another big development, which is that – the deniers of Bitcoin and digital assets in general are now being silenced by the administration of the United States. one of the early crippling criticisms was this is just a Ponzi scheme or this is intangible or there's nothing here. And I think that with now the head of the SEC, the head of Treasury, the President of the United States acknowledging that there is something here and it's an important priority for the entire government, I think that that that really isolates the deniers and if not making them look silly at this point because it's pretty clear that 250 million people know that there is something here and it's growing like wildfire. And it's pretty clear that the government recognizes this. So we have another classification of Bitcoin investors after deniers, and that would be the skeptics. The skeptics acknowledge that it exists. They acknowledge that it's good. They may even acknowledge that it's better than gold and it's better than other sorts of money or property. And then they follow up with the observation that since it's so good, the politicians will ban it or the government will ban it. And that's been articulated by a number of fairly well-known, credible sources over the past two years. But, of course, with the March 9th executive order and the Yellen speech of April 7th, it gets increasingly difficult to maintain the skeptical stance because you would have to, in essence, put yourself in opposition to the White House. It's not the policy of the United States to ban Bitcoin. So, in fact, it's not the policy of anyone in the Western world to ban Bitcoin. So the deniers and the skeptics are being silenced. And now the entire Bitcoin market is evolving to be controlled by the traders, the technocrats, and the maximalists. And clearly the volatility in the market right now is driven by the fact that the traders are trading Bitcoin as a correlated asset to the NASDAQ. And technology investors that are NASDAQ heavy are selling or shorting technology assets as a risk off trade as the Federal Reserve raises interest rates. So I would say that if we look at the last three months, although the macroeconomic environment is difficult and macroeconomic winds are blowing in the face of all risk assets and all operating companies, I would say the fundamental developments, the political developments and the market awareness of Bitcoin has made enormous strides. And if you compare where we were today or where we are today versus two years ago, the asset class has matured dramatically. Awareness has matured dramatically and the risk of holding the asset class has decreased And specifically, I think the skeptics in the past 24 months are increasingly disappearing and everyone is migrating to either a trader or a technocrat or a maximalist. I had a chance to attend the Bitcoin conference in Miami Beach this April. I noted a massive surge of interest in Bitcoin among politicians, among media. and among investors. And there are a lot of politicians that hadn't heard of it and weren't interested in it a year ago, both international and domestic, and now it's on their radar and they realize they need to pay attention to it. It's probably not uncorrelated to the executive order of March 9th. I think there's a lot more media coverage and we've seen a change in the media tone I think the media tone two years ago was non-existent. In fact, people used to lament that Bitcoin was not being covered by mainstream media at all. It wasn't until February 2021, after Tesla bought Bitcoin, that Bitcoin got onto the radar of mainstream media. But I think that over the past few months, the tone has evolved from skeptical people or amused to respectful. And in fact, I almost noticed now that mainstream journalists across the major papers and the major cable news networks are all much, much more aware of the entire crypto economy, much, much more aware of Bitcoin and its value proposition, and much less skeptical, much more interested and engaged. And I think the environment has moved from disinterested through skeptical to now neutrally intrigued or even I would say intrigued. Intrigued would be the right word in the media. Also seen a bunch of investors, credible investors that are well respected in the space, speaking much more freely about Bitcoin in the marketplace and actually becoming much more vocal and much more supportive in their words. And I think that that's a big move forward over the past 12 months. Examples of that we see are Carlos Salinas, Plagio becoming much more vocal, Peter Thiel becoming much more vocal. Paul Tudor Jones becoming much more vocal. And, you know, Orlando Bravo becoming much more vocal. So I think you'll continue to see this develop over the next 12 months. I think advances in the Lightning Network are pretty relevant. Maybe one of the bigger developments in the past 12 months is Lightning is maturing, and Lightning is the open, permissionless, non-custodial Layer 2 network. In essence, if Bitcoin represents protocol for sound money, Lightning represents a protocol for transaction and money transfer that's open permissionless. And since it could in theory scale to hundreds of millions or billions of transactions an hour, this is in essence the internet of money. Two years ago, the Lightning Network was really just developmental. In the past year, it's come to life. And so we're now entering into early part of year two of the Internet for money coming to life. Major milestones there, block integrating Lightning into the cash app was a major milestone. The release of specifications for the Terra protocol on top of Lightning is a major milestone. What it means is that Lightning will in time not just move Satoshis back and forth at the speed of light to billions of people. Lightning will also move other digital assets like stable coins, a tether or a circle or any other digital currency or any other digital token or an NFT token. or another asset can move over the Lightning network at extraordinary high speeds, extremely scalable, while taking advantage of the security assurances of Bitcoin network. So that's pretty compelling. Kraken also incorporated Lightning into their exchange. And that's a very compelling breakthrough. I think in time, all the competitive digital assets exchanges and all the competitive applications of money transfer and the like are going to have to build lightning as a protocol into their applications. And we've got a number of years of development there. But the significance of Lightning is it takes Bitcoin from being viewed just as an asset and as a low-frequency, high-value settlement network, and it takes it to the next level, which becomes a high-frequency, high-volume, very, very functionally rich, scalable transaction network. And there'll be, I think, an explosion of applications on top of the Bitcoin network that are empowered by Lightning. Another big development in Bitcoin this last quarter is the launch of Fidelity's 401k offering. We're very enthusiastic about that. And of course, we're an early anchor partner with them on that launch. Bitcoin is better than gold. You know, to call it digital gold is an understatement. It really is the hardest money in the history of the world. But if you're thinking about generational wealth and if you wanted to leave something for your grandchildren or if you wanted a retirement fund, it's obviously a very, very compelling element of a 401k. We just saw just on television today, one of the world's great macro investors, Paul Tudor Jones said, in the current economic environment, I certainly wouldn't be owning stocks and bonds. I mean, people are very skeptical of owning equities and owning bonds in an environment where you have hyperinflation and macroeconomic winds. So if I can't own stocks and I can't own bonds, then what am I supposed to put in a 401k? And this is where Bitcoin comes in. What if I wanted to hold some kind of commodity money that's better than a commodity because no one can make any more of it? And Bitcoin is that thing. So I do think that... The world is evolving rapidly. It's probably evolving faster than regulators and the mainstream media can keep up with it. Kind of like a shockwave, you know, when you start moving through the civilization at a faster rate than people can educate themselves on the consequences, you'll see sparks. But the 401k launch was kind of the shot heard around the world here because it what's going on here is people are going to have to stop and think about this. And either this is the least risky thing you can put in a retirement portfolio, or it's too risky to put in a retirement portfolio. And of course, as soon as you think about it and study it, you'll realize that it's the least risky thing you can put in a retirement portfolio. At least that's the opinion of people that have studied Bitcoin for a while. So, The 401k offering from Fidelity is a massive educational event. It's going to put this front and center, you know, on the table for financial advisors, retirement planners, the entire big finance industry. And I think ultimately it's going to introduce Bitcoin to an entirely new class of investors and broaden the ability asset class. So I'd like to move on to talk about our Bitcoin strategy. We're going to continue to pursue a strategy which offers our investors spot exposure with leverage to Bitcoin. So if you want to buy a security and you would like that security to own Bitcoin, and you think it would be a reasonable idea to borrow money at 1.8% interest and buy Bitcoin, then MicroStrategy looks like a rational company to invest in. You know, we're going to work to increase our Bitcoin holdings over time and in a creative fashion. So we're not trading Bitcoin. We're not selling Bitcoin. We're holding Bitcoin. And from time to time when we can, we'll buy more Bitcoin. If we focus upon this strategy, then we believe that we can offer a security to the market and be an operating company that in essence is superior to the security that you would get if you were to buy a spot ETF. We won't be an ETF. We're an operating company and we have the software business, but But for an investor that's thinking about buying an ETF that holds spot Bitcoin, they'll think about that. It'll probably have no leverage and they'll probably pay a fee. And our goal will be to offer them the same Bitcoin holding but without charging that fee and to use intelligent leverage from time to time when the opportunity presents itself. I was very, very pleased with the Bitcoin-backed loan that we were able to acquire this quarter. We'll obviously use that mechanism sparingly because generally we're not going to want to develop a large set of obligations where we might have to post additional collateral on a price fluctuation of Bitcoin. So managing our balance sheet versus the risk and the volatility of Bitcoin is primary concern we're always thinking about. We will slow down our Bitcoin acquisitions when market conditions don't present us with any good opportunities. And when the market presents us with lots of good opportunities, we may speed up. And you'll just have to tune in quarter by quarter to see what we do there. We have the option to do nothing. And if the market doesn't give us a good option, or we have the option to do things. You can see at this point, we've now bought Bitcoin with a senior secured debt. We bought Bitcoin with a tender offer. We bought Bitcoin with cash flows from the core business. We bought Bitcoin with convertible debt. We bought Bitcoin with at-the-market equity issuance. And we bought Bitcoin with an asset-backed financing. And we pursued each of those initiatives at the time we did it because we thought that they would be accretive to our common stock shareholders and beneficial to our long-term strategy. My last points I'll make before we take questions are we will continue to pursue a mission of education and advocacy on behalf of Bitcoin to the general market. As the largest public holder of Bitcoin, it makes sense for us to educate regulators. It makes sense for us to educate other corporations. It makes sense for us to educate anyone in the media or any politicians that are interested in what this means to the world and why it's good for the world, why it's good for the United States, why it's good for their corporation, their institution. and then how they can benefit and plug Bitcoin into their P&L or plug it into their balance sheet. You know, if you don't follow me on Twitter, please do. I now just crossed 2.4 million followers. And I try to share thoughts about the current environment on a pretty routine basis. I'm pleased to say that by the end of the day today or tomorrow, a podcast I did with Lex Friedman on YouTube will have crossed 2 million views. So I sat down with Lex in my study at my home in Miami Beach, and we talked for four hours about digital transformation and the Bitcoin imperative and our strategy and how and, of course, macroeconomics and geopolitics. And it's not easy to put two million people into your living room, but two million people listening for four hours is a lot of education, and we'll continue to do more of it. I feel that there's an enormous thirst for knowledge about digital assets. There's enormous thirst for knowledge about the implications of of Bitcoin to the world and the entire crypto economy. There's a lot of education to do. We're nowhere near done. We're really just starting. But we have established a platform to do that. And we will get more and more opportunities to communicate this message and educate the world. I'll continue with our efforts working with Bitcoin miners through the Bitcoin Mining Council and the entire Bitcoin community to address misperceptions about mining, to explain the benefits of Bitcoin, the benefits of Bitcoin mining. We just had another quarterly release of Bitcoin mining information where we were able to show the world that for the fourth quarter in a row, Bitcoin mining is running on more than 50% sustainable energy. In fact, 58%. 58% sustainable energy usage makes the Bitcoin mining industry the cleanest, most sustainable industry in the world of all industries. And that was a surprise to many people. It continues to be a surprise to many people, but it's a delightful surprise. Bitcoin mining in general is 63% more efficient year over year. And a lot of people don't realize that the Bitcoin network is secured not just by energy but by technology, and that technology is getting exponentially more efficient over time. So I'm really pleased that we're able to educate the world on the efficiencies of the Bitcoin network and the benefits of Bitcoin and Bitcoin mining. I think that there's a lot more education to do. Our leadership role in acquiring and holding Bitcoin as a publicly traded company has afforded us a platform to do a lot of that education, and we'll continue to do that in the coming year. So with that, I want to thank everybody for your support, and we'll go ahead and answer questions.

Thank you, Michael. We're going to jump right into questions. We have received a lot of good questions, and we'll try to cover as many as we can. So the first question is for Phong. On the software business, clearly you have been through a few economic cycles over the years. How discretionary is BI software, and do you see the current macro just pushing deal cycles out, or do you think there are certain deals that will be put on hold for a while?

Yeah, thanks for the question, Joe. The short answer is there is a portion of BI spend that's discretionary, and I'll call that speculative, trying out new things without necessarily a concrete use case or operational outcome. And then there's a portion that's required, and that's the piece that is required to operate and run an enterprise. And Fortunately, micro-strategy falls more into the latter than the former. So that kind of spending might get pushed out one quarter when there's uncertain macroeconomic conditions like we had in Q1, but it isn't permanently shelved for the whole year or multiple years. So generally speaking, I feel good about our ability to weather macroeconomic downturns better than we've seen some of our newer competitors who have joined the market recently.

Thank you, Phuong. The next question is for Michael. When you purchase Bitcoin, how much do you consider dollar cost averaging into the purchase during the quarter versus more all at once purchase strategy?

Yeah, we try to be thoughtful about the way that we acquire Bitcoin and we do it in such a way that we wouldn't impact the market and we'll spread it over a a time period, sometimes a long time period, sometimes a shorter time period, depending upon our perception of the market and the volatility. As a practical matter, because we purchased Bitcoin on many, many different occasions over the past two years, we are dollar cost averaging as we acquire more capital. And I guess that's what I would say to that.

And one more question for Michael. Are you comfortable with the leverage level, and what is your long-term debt strategy?

Yeah, I think we're comfortable with our leverage level, and our long-term debt strategy is not to take on more debt than we can reasonably manage.

I can add to that a little bit. You saw us share a little bit earlier. Right now, our interest expenses are around $44 million annually, which compared to last year's earnings before interest tax depreciation, if you were to adjust out the Bitcoin rate, Depreciation is about half of that. And so I think we have plenty of earnings and cash flow to cover our interest expense. So we're in a pretty comfortable place right now with our leverage.

Thank you. Next question is for Fong. How far does Bitcoin have to fall for MicroStrategy to receive a margin call on the Silvergate loan? And was this loan needed for cash flow purposes?

I think the second part first, no, the loan was not needed for cash flow purposes. We took out the loan primarily so that we could continue to invest more in Bitcoin and also really to create a market for a Bitcoin-backed term loan. So being the first company to do that in public markets is consistent with what Mike said, which is really us being a leader in the Bitcoin space in general. As far as where Bitcoin needs to fall, You know, we took out the loan at a 25% LTV. The margin call occurs at 50% LTV. So essentially, Bitcoin needs to cut in half or around $21,000 before we'd have a margin call. That said, before it gets to 50%, we could contribute more Bitcoin to the collateral package so it never gets there, so we don't ever get into a situation of margin call also.

I'll continue with the next question for Kong as well. Are there any risks of Bitcoin collateral being liquidated due to extreme market volatility regarding the Silvergate loan?

It sort of relates to just that last question. Now, you know, the risks really are that we would have to contribute more Bitcoin. As you can see, we mentioned previously, we have quite a bit of uncollateralized Bitcoin. So we have 95,643 encumbered Bitcoin. So we have more that we could contribute in the case that we have a lot of downward volatility. But again, we're talking about $21,000 before we get to a point where there needs to be more margin or more collateral contributed. So I think we're in a pretty comfortable place where we are right now.

Next question is for Michael. What would be the company's strategy if the price of Bitcoin stays flat for a prolonged amount of time?

We'll continue with our strategy. We'll keep generating cash flow in the core business. And from time to time, we'll acquire more Bitcoins.

And I'll follow up one more for Michael. Can MicroStrategy provide any details on exploring the yield generation opportunities on unencumbered MicroStrategy Bitcoins? No. Is there anything else? No.

Yeah, I mean, we're looking at a lot of different things out there. It's sort of part of our role that we've been playing as a leader in the market. But what we're going to do, when we're going to do it, you know, and with yield generation, there's a lot more to it in terms of accounting implications, et cetera. So they're all things we look at from time to time.

Next question is for Fong. How did you get comfortable including Bitcoin in your 401k program? Can you please provide some details on the plan and whether it's already active?

Yeah, you know, it's similar to the question of how do we get comfortable with Bitcoin in general, right? And Mike talked about this a little bit. First of all, I think it's great what Fidelity is doing as a leader in the market. You know, it's one of the leading retirement savings plans providers. You know, it's great to see what they're doing from a leadership perspective. We got comfortable because the executive team, the board, leadership, employees have spent the last two years learning about, studying, understanding details about Bitcoin, especially as a store of value, especially as an investment. And so, you know, the idea that it's a great long-term store of value, which is why we put so much of our investment into Bitcoin is It makes sense for a certain number of employees. It doesn't make sense for everyone, and ultimately, it'll be something that's voluntary. We have not rolled this out yet. It's something we plan on doing in the second half of the year, and we're still working through details exactly how we're going to go about it.

Thank you, Phuong. I'll ask one more question for Phuong. How much longer do you expect product license revenue to face headwinds? How large will the segment be by the time it stabilizes?

Yeah, so as we go through this transition to cloud, product license revenues start to decline as we replace that with faster-growing subscription revenues. I can imagine last year was a pretty big increase from the previous year and that we wouldn't expect to see that level of growth on a go-forward basis, on a year-over-year basis for product license revenue. As we replace that with cloud and subscription revenues over time, that will be the engine of growth in the organization and our revenue line.

Thank you, Phuong. Next question is for Michael. Can you provide any thoughts into if it's better to buy microstrategy stock or a comparison of buying microstrategy stock versus buying Bitcoin directly?

I think that there are some companies and some situations where people literally can't buy the Bitcoin, like either legally or by charter. They can't buy the Bitcoin, but they can buy securities. There are other situations where people can't or don't wish to buy securities, but they wish to buy property. So they're very different things. One of them is digital property. The other is a security that happens to hold on its balance sheet digital property. So, you know, I think that those are the primary issues. For those people that prefer to own securities in their portfolio but want Bitcoin exposure, then will be one of their options. And for those that prefer to own property then Bitcoin is digital property. And I think that's the right way to think of it.

Thank you, Michael. I think one last question for Fong. Is the top line missed this quarter driven by a faster than expected migration to the cloud? Or is it a reflection of weaker demand due to macroeconomic risk?

I think it's more of the latter. And You know, I think that is primarily, you know, manifested in slippages of both cloud and perpetual deals into the second quarter. So I don't think this is a permanent, you know, change or, you know, or impact. We do have a little bit of the impact coming from stronger cloud, but I think it's more in the macroeconomic side in the war in Ukraine.

Great. So I think we are at the top of the time now. So thank you everyone for your questions. This concludes the Q&A portion of the webinar. I will now turn the call over to Michael for any closing remarks.

I want to thank everybody for being with us today and thanks for your support. We wouldn't be here without you. So we'll continue with our strategy and we'll look forward to speaking with you again in 12 weeks. Wishing you the best.

Thank you.