Strategy Inc

Hello, everyone, and good evening. I am Shreej Yajodhya, Vice President of Investor Relations and Treasury at MicroStrategy. I'll be your moderator for MicroStrategy's 2022 Fourth 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 TEN-Q file 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 through the Q&A feature at the bottom of your screen. can submit questions throughout the webinar and michael fong or andrew will answer questions at the end of the session please be sure to provide your name and your company's name when submitting your questions now i'll walk you through the agenda for today's call first Fong Lee will cover the business results for the full year 2022. Second, Andrew Kang will cover the financial results for the fourth quarter of 2022. Then, Michael Saylor will provide a strategic review and discuss recent Bitcoin and Lightning network market updates. And lastly, we will open up to Q&A. With that, I'll turn the call over to Fong Lee, President and CEO of MicroStrategy.

Thank you, Sharish. I'd like to welcome all of you to today's webinar regarding our 2022 fourth quarter and full year financial results. I want to start by recapping our strategy and underscoring our key highlights for the full year 2022. We have two corporate strategies. First, an operating strategy, and second, a balance sheet strategy. The business intelligence operating strategy is how we generate revenues and where most of our operating costs are incurred and generates our cash flows. MicroStrategy at this point is the largest independent publicly traded business intelligence company in the world. Our goal is to remain a leader in this space by being modern, open and enterprise oriented. Substantially all our employees in the company, over 2100 people are focused on our software business. Our Bitcoin acquisition strategy is a balance sheet strategy. As of today, we're the largest publicly traded corporate holder of Bitcoin in the world. We're the first public company to adopt Bitcoin as a primary treasury reserve asset. Our strategy is to acquire and hold Bitcoin for the long term. We purchase Bitcoin using our excess cash and with the net proceeds of capital raising transactions. I'll address our Bitcoin acquisition strategy first. In the fourth quarter, we purchased 3,204 Bitcoins at an average purchase price of $17,616 per Bitcoin, and we sold 704 Bitcoins for the first time at an average sale price of approximately $16,786 per Bitcoin, resulting in a net increase in our Bitcoin holdings of approximately 2,500. for a net aggregate purchase amount of $45 million, or approximately $17,850 per Bitcoin, inclusive of fees and expenses. Andrew will discuss our Bitcoin transactions in the fourth quarter later on this call. As of December 31st, 2022, we held a total of 132,500 Bitcoins acquired at an aggregate cost of $4 billion, or average cost of approximately $30,100 per Bitcoin. We remain committed to our Bitcoin acquisition strategy for the long term. In the fourth quarter, the broader crypto and digital assets markets witnessed significant financial distress. In addition, various prominent participants in the digital assets industry filed for bankruptcy, such as FTX, Voyager, Celsius, and Genesis, and we do not have direct exposure to any of those companies. In addition, we conducted further diligence of our custodians and execution partners to assess their exposure to these companies and understand that their exposure was minimal. Since the adoption of our Bitcoin acquisition strategy, we've taken a simple approach from day one, which is to buy and hold Bitcoin. We've taken steps along the way to minimize risk, particularly with counterparties. We buy only Bitcoin in US-based markets. We custody Bitcoin with institutional grade, US-based, regulated custodians and cold storage. And we have not lended our Bitcoin to third parties for yield or any other purposes. As a result, we've been able to avoid transacting with bad actors in the space. To summarize our view on Bitcoin, first, we continue to have a high-level conviction in the value proposition of Bitcoin. We're very supportive of the Bitcoin network on a go-forward basis. Second, we continue to follow a risk-managed approach to executing our Bitcoin acquisition strategy. And third, we're long-term focused. We plan to continue to accumulate Bitcoin over time. Our core business is not impacted by near-term Bitcoin price fluctuations. With that, I will now turn to our software strategy highlights from 2022. We achieved constant currency total revenue growth for 2022 on the strength of our cloud business, despite a challenging macroeconomic environment last year with high inflation, weakening foreign currencies, and the ongoing war in Ukraine. Total revenue for 2022 was $499.3 million, which increased 2% year over year on a constant currency basis. Total software licenses, which consists of total product licenses and subscription services revenues, and our consolidated statement of operations were $147.2 million, which increased 6% year over year on a constant currency basis. We also made important progress in our shift towards our cloud offering, resulting in annual subscription revenues of $60.7 million, an increase of 46% year-over-year on a constant currency basis. Annual subscription billings were $77 million, growing 39% year-over-year. The strong growth in our subscription revenue billings was 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. Overall, we continue to see further global adoption of our cloud platform among our international customers. We're also seeing the benefits of being the single analytics platform in the industry that is both enterprise-grade and easy to use. As an enterprise-grade platform, we're benefiting from the trend of BI modernization and consolidation from enterprise tools like SAP BusinessObjects and IBM Cognos. As an easy to use platform for governed ad hoc data discovery, we are the tool of choice for corporations that have outgrown Microsoft Power BI and Salesforce Tableau or no longer want to be locked into a single vendor ecosystem. On the cost side, we believe in a thoughtful approach to cost management on an ongoing quarterly basis rather than annual surges in hiring followed by mass layoffs. We continue to invest in R&D to innovate our product while being thoughtful about sales and marketing and general and administrative costs. As a result, we saw relatively flat operating costs from 2021 to 2022. Next, I would like to discuss our key focus areas for 2023. First, we aim to launch something called MicroStrategy One, which will serve as our core analytics platform designed to meet all of an organization's analytics needs. It'll be easy to use, powerful, comprehensive, and cutting edge. It's intended to be a one-stop shop for all of our business intelligence customers and prospects. You should expect to hear more about this from us throughout the first half of 2023, culminating in our MicroStrategy World event on May 1st through 4th in Orlando, Florida. Core differentiators for MicroStrategy continue to be our enterprise analytics, embedded analytics, and cloud offerings. Our focus on these three areas has resulted in more customers choosing to decommission and consolidate 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. Our customers depend on these differentiating capabilities to build mission critical applications to run their fuel forces, store operations, bank branches, risk analysis groups, corporate operations, and much more. As such, it's worthwhile to highlight the resiliency of our business, even in the tough macro conditions that existed in 2022. We're the only remaining publicly traded independent enterprise BI company, and the stickiness of our products and the longstanding tenure of our top customers are testament to our resiliency. Our continued investment in research and development has enabled us to modernize our platform and enable our customers to transform how they do business through innovative analytics tools and techniques. These include personalized applications, immersive interactive visualizations, simple no-code and low-code application development with open APIs, flexibility of consumption for mobile interfaces, and innovative capabilities like hyperintelligence. We continue to see growth of customers who build MicroStrategy into the software solutions that they sell to end users, leveraging our open embedded analytics capabilities. Second, not new, but even more in our focus is growth. We're going to focus on simplifying our processes, growing our pipeline, and growing our revenues. We plan to get back in the market and in front of our prospects through in-person field events, field marketing, aggressive account-based marketing, and a revitalized partner program. Third, cloud is at front and center when we talk about focus on growth. As MicroStrategy Cloud continues to be a growing part of our business mix, we're seeking to accelerate growth through increased cloud adoption by both new and existing customers. New customers are increasingly cloud-first and immediately reap the benefits of our managed service offering. That includes business agility, enterprise security, regular updates and upgrades, and cost savings. At the same time, more and more existing on-premises customers are migrating to the cloud and expanding their MicroStrategy usage to new departments and user groups. Intentional in our approach to cloud is our belief in cloud agility and independence. The power of multi-cloud, hybrid, and the portability between private and public clouds resonates with our customers who do not want to be locked into a single technology stack. We seek to take advantage of the best that each major cloud provider has to offer, optimizing our platform to run on and across each. We'll continue to invest in this area to support our customers' need for flexibility, scalability, and security. In Q4, MicroStrategy Cloud for Government, or MCG, is our new cloud offering received authorization to operate under FedRAMP guidelines. MCG is a managed software as a service solution and our first generally available release of our cloud platform that is built on a modern high performance cloud native architecture that also utilizes containers and microservices. It delivers on sophisticated security and data privacy requirements across the public and private sectors. It opens up the possibility of migrating a large part of our business, federal government customers to the cloud. Our fourth area focuses on our employees. Our employees are our key assets, and we will continue to develop and promote people internally and seek to improve employee engagement. Our employee engagement survey results indicate that we have made great improvements to employees' mental wellbeing, loyalty, and belief in the company's two corporate strategies. We're also continuing to develop technical training and certifications to keep our employees up to date on the latest MicroStrategy software enhancements and soft skills training to keep our managers engaged and employees motivated. And the last thing is that we'll focus more on innovation, both on business intelligence as well as on our Bitcoin acquisition strategy. On the BI innovation side, MicroStrategy Insights is our first set of products released in the area of artificial intelligence and machine learning to augment more traditional reporting capabilities and provide contextual and immediate insights. The Insights feature accelerates decision-making and uncovers data patterns with automated alerting and library applications. The alerts are based on machine learning models working behind the scenes to proactively detect data trends, outliers, and anomalies, equipping users with the timely insights that drive action. This is the basis on which we're combining MicroStrategy's semantic layer, hyperintelligence, and open architecture to provide the data tracking, alerts, forecasting, recommendations, and ultimately artificial intelligence that will be key for the future of analytics and intelligence. We believe this is something MicroStrategy is uniquely positioned to provide, and we expect to release more functionality in this area every quarter. And the Bitcoin innovation side is indicated in our last earnings call. Today, I'm delighted to share a preview of MicroStrategy Lightning, our new product that we are developing, which utilizes the Lightning Network, a second layer network that sits atop the Bitcoin network. We envision MicroStrategy Lightning as an enterprise platform designed to leverage the power of the Bitcoin Lightning Network to enable new e-commerce use cases and tackle modern cybersecurity challenges. The first component of MicroStrategy Lightning platform is Lightning Rewards. Lightning Rewards is intended to allow any enterprise to reward their employees, customers, partners, and prospects for their engagement. Companies spend vast amounts of time and money in digital marketing. driving engagement with their brand and their customers, and for some, monetizing online content. We believe a platform like MicroStrategy Lightning can enable them to drive that engagement, rewarding their customers for that engagement directly, rather than lining the pockets of online ad giants. We expect future capabilities of the Lightning platform will provide opportunities for new business models to monetize online content or minimize threats and the nuisance of bots and other malicious actors. While we envision MicroStrategy Lightning as an independent product offering, it builds on our core strengths and deep experience building highly available, easy to use enterprise software delivered in the cloud. We're taking a very disciplined investment approach such that our Lightning development efforts currently occupy less than 1% of our R&D capacity. We're currently in the initial pilot stage of the product with our early pre-release version rolled out internally to MicroStrategy employees. While our core focus remains on BI innovation, we believe we're uniquely positioned to bring value here. Mike will elaborate further on this topic. Last but not least, I'm thrilled to share again that our next MicroStrategy World will be in person from May 1st to 4th in Orlando, Florida. Our customers have expressed willingness and desire for meaningful, rich in-person connections alongside virtual meetings. So we are bringing back World 23 as a bigger scale event with multiple tracks. The business intelligence track on May 1st through 4th will be a working event designed to help modernize analytics for innovative organizations looking to transform with data. We're excited to showcase how some of the world's best brands use modern experiences to break through and achieve extraordinary results. The Bitcoin track on May 3rd through 4th will include our third annual Bitcoin for Corporations on May 3rd and a dedicated Lightning for Corporations day on May 4th. It'll be a first-of-its-kind gathering of corporations looking to integrate Bitcoin and Lightning as a part of their corporate treasury or product offerings. The conference will also include dedicated networking opportunities, workshops, and training. And finally, MicroStrategy World will be incomplete without an epic party. We're hosting a theme park conference party at Universal Studios Florida featuring roller coasters and an evening of unforgettable fun and excitement. We look forward to your participation at the conference. Registrations are open and additional details can be found on our event website at microstrategy.com slash world 23. Now I'll turn the call over to Andrew to discuss our financials for the quarter in further detail.

Thank you, Fong. Before jumping into the quarterly results, I'd like to quickly reemphasize MicroStrategy's revenue priorities. Our three-decade-long history of providing data analytics solutions to large and small corporations has established a long-tenured and diverse customer base, where our platform has proven to be a critical component in running our customers' businesses day to day. Our platform has demonstrated durability through tough economic cycles and has been strategic during times of growth. An important foundation to our revenue is through supporting our existing customers as their businesses evolve. We continue to deliver for our customers as seen in our consistently high renewal rates, over 90% for the last five consecutive quarters and as high as 95% in Q4 of last year. Second, growing cloud revenue, which for us means migrating existing customers into a fully hosted and managed cloud subscription model, which Phuong talked about earlier. Winning new logos into the cloud is important and uplifting services for existing cloud customers is also critical. We are very pleased with our performance in all of these areas this past year. But keep in mind, as we migrate to the cloud, we inherently experience some offsets in areas like product license and support revenues. However, the transition to a subscription model will establish high quality annual recurring revenues that will allow us to scale even stronger growth in the future. In Q4 of last year, approximately 64% of our total revenue was recurring compared to approximately 60% in the same quarter of the prior year, a trend that we expect will continue in 2023. Lastly, our consulting business, which has been and continues to be essential in providing expert support and solutions to our customers. They not only champion solutions, but they also drive modernization and also impact growth through partner opportunities. Okay, turning to the results. Total revenues for the fourth quarter were $132.6 million, down $2 million for approximately 1% year-over-year. However, at constant currency, Q4 total revenues were up 4% year-over-year, similar to the trend we saw in Q3. Total software license revenues were $45 million, up 1% year-over-year and up 8% at constant currency. When we look at product license revenues and subscription service revenues together, year-over-year growth on both a GAAP basis and at constant currency continue to show the overall growth momentum of our cloud transition. Subscription service revenues were $17.5 million, an increase of 47% year-over-year and up 54% at constant currency, while product license revenues were $27.6 million for the quarter, down 15% year-over-year, and product support revenues were $66.8 million, down $2.3 million year-over-year, but up 1% at constant currency. These trends are consistent with revenue themes that I mentioned earlier. Finally, other services revenues were $20.7 million, a slight 1% decrease year over year, but an increase of 5% in constant currency. Our worldwide consulting business, which makes up the majority of our other services revenues, saw higher bill rates globally in Q4, with particularly strong performance among our European and Argentinian consultants. To add to that, we're also seeing early success and momentum in the build out of our India workforce, where we plan to grow strategically in future quarters. Turning to slide 14, we continue to see growth in our software license and subscription billings driven by the continued strong momentum in cloud. Total current software license billings increased to $61 million in the fourth quarter, which was an increase of 10% year over year. Current subscription billings were $31 million, an increase of 28% year-over-year, our 11th straight quarter of double-digit growth. And full-year 2022 annual subscription billings were 39% compared to the prior 12 months, with both subscription service revenue and current deferred subscription revenue growing over 40% each year for the full year 2022 compared to 2021. We are extremely pleased with cloud growth in 2022, which has exceeded expectations in the timeline for transforming and modernizing our VRA platform. 2023 will provide to be a pivotal year as well, as we begin to see the benefits of the scaling up of our cloud business and the adoption from our customers from the past two years. Turning to costs, total non-GAAP expenses, which exclude share-based compensation costs, were $309 million in the fourth quarter, or $50 million higher year-over-year. $51 million of the year-over-year increase was attributed to Bitcoin impairment charges in the quarter, as a result of the price volatility we saw in Q4. This was driven largely by the collapse of FTX and its impact to the broader digital asset market. The price of Bitcoin fell to a low of approximately $15,460 during the quarter, which drove the additional impairment to our Bitcoin holdings under the current accounting rules. Non-GAAP cost of revenues were $26 million in the fourth quarter, an increase of $2.5 million, or 11% year over year. As a percentage of total revenues, non-GAAP cost of revenues increased 2% year-over-year, related in part to the growth of our thought business, similar to what we've seen in recent quarters. Non-GAAP sales and marketing expense decreased $3 million, or 8% year-over-year, to $37 million, or as a percentage of total revenues, lower by 2% year-over-year. This was due in part to a combination of higher net capitalized commissions this quarter, plus some favorable FX impacts compared to the same quarter in the prior year. Non-GAAP R&D expenses were $28 million in Q4, a slight increase of $300,000 compared to the prior year. In this area, we continued to prioritize spend, as Phong mentioned, and increased our talent and resources on average for the year. but we did so intentionally and in a way that kept expenses flat by leveraging our more cost-efficient global delivery centers. Our non-GAAP G&A costs were $21 million, pretty much flat, a decrease of about $400,000 or 2% year over year. As Phuong mentioned earlier, our focus on lowering costs has been ongoing and frequent with a strict discipline in managing efficient personnel and non-personal costs. It's not something that we just started thinking about in the second half of last year. In fact, we were fortunate to add this focus even prior to this past year when we did see higher wages and expenses, revenue headwinds due to weaker foreign currencies, and we also saw the negative impacts from the war in Ukraine. Aside from our Bitcoin impairment related expenses, we kept our costs flat year over year. Looking forward, we plan to remain cost conscious while continuing to invest in higher end growth areas like cloud, optimizing our talent and resources across our growing global footprint, focusing on lower cost markets. On slide 16, total non-GAAP operating loss in the fourth quarter was $177 million, while the digital asset impairment charge for the quarter was $198 million. As I have said in past quarters, since the adoption of our Bitcoin strategy in Q3 of 2020, the digital asset impairment charges we have incurred each quarter have always been greater. than our non-GAAP operating losses, showing the significant impact it has had on our reported income. On slide 17, as of December 31st, 2022, the carrying value of our Bitcoin holdings was approximately $1.8 billion, compared to approximately $2.2 billion based on the price of $16,556 as of the last day of the year. So far this year, Bitcoin prices have rallied significantly along with the market value of our Bitcoins increasing to approximately $3.1 billion at the close of markets yesterday and trending even higher since then. To touch on the regulatory perspective, we continue to be optimistic with the progress that the Financial Accounting Standards Board has made in its steps update how companies measure certain digital assets including Bitcoin on balance sheets. Since announcing this as an agenda item last year, the FASB has moved expeditiously and voted and agreed on how crypto assets should be presented in financial statements and what disclosures should be required under expected fair value accounting standards. We recognize that what has been completed thus far are just the initial steps in the standard setting process, but we are encouraged that the progress up till now has been aligned with standard fair value practices. We continue to remain committed and supportive of FASB's decisions and the focus on improved investor transparency for digital assets. On slide 18, as of December 31st, 2022, we held a total 132,500 Bitcoins, of which 14,890 Bitcoins were held directly by MicroStrategy, the parent. with the remaining 117,610 Bitcoins held at the macro strategy subsidiary. Of the Bitcoins held at the sub, approximately 34,600 Bitcoins are pledged as collateral to the Silvergate loan, and just over 82,900 Bitcoins, or 63% of our total Bitcoin holdings, equivalent to approximately $2 billion at the current approximate market value of $23,800, remain unplugged and unencumbered. Regarding the Silvergate loan, we remain fully in compliance with the loan value requirements, and as we have detailed in the past, we continue to have sufficient unencumbered collateral to address any foreseeable volatility in Bitcoin prices in the near term. It is worth highlighting again, too, that if the Bitcoin prices increase and the loan to value ratio is less than 25%, we are able to release any excess collateral from being pledged to the loan. Our current LTV on this loan is now very close, if not at that level. As Fong mentioned earlier, for the first time in the fourth quarter, we sold approximately 704 Bitcoins that carried a higher tax cost basis compared to the market price of the Bitcoin at the time of the sale. The transactions generated capital losses of approximately $34 million, which we expect to carry back against previous capital gains. And to the extent such carrybacks are available, we expect to generate a tax benefit. Even with the aforementioned sale, we increased our net holdings by 2,500 Bitcoins during the quarter. And we continually explore opportunities to use our Bitcoin to generate shareholder value, and we may consider pursuing additional transactions that may take advantage of the volatility in Bitcoin prices or other market dislocations that are consistent with our long-term Bitcoin strategy. We will thoughtfully consider any other opportunities in the future, and if we choose to pursue anything, we will carefully assess any potential risks and do so in a prudent manner as we have done in the past. Turning to slide 19, our debt capital structure remains unchanged with a total $2.4 billion of outstanding debt and convertible instruments, which carry a blended interest rate of approximately 2.1%. The convertible senior notes carry an extremely low cost of funds with the earliest debt maturity not until March 2025. These convertible notes are very attractive in terms of cost and with over two years remaining until the earlier of the maturities, that outstanding long-term capital remains very valuable. In Q4, we activated a $500 million at-the-market or ATM equity offering, and issued an aggregate 218,575,000 shares of Class A common stock at an average gross price per share of approximately $213.16. We raised approximately $46.6 million in gross proceeds, which leaves us with approximately $453 million of outstanding ATM capacity available under our program. We will continue to evaluate and sell equity under this existing program when we believe there is an embedded valuation premium in our stock compared to the market value of our Bitcoin holdings and our estimated value of our software business. Use of those proceeds will be for general corporate purposes, including for the purchase of Bitcoin or for other general corporate liquidity needs. As we execute under the program, we will do so with a disciplined focus on growing shareholder value optimizing our capital structure and maintaining adequate liquidity to run and grow our business. The overall liquidity from both our operating and financing activities remains more than sufficient to manage our ongoing working capital needs, grow our business, as well as manage our debt expense. Our outlook for 2023 remains cautious but optimistic. We are planning for the recent trends in macro and market volatility to likely persist in the near term. However, we are encouraged that even in this environment of constant change, businesses need actionable data and analytics to succeed, an open architecture to be agile, and cloud capabilities to be cost efficient and effective. MicroStrategy delivers all of this. In 2023, we will target modest constant currency total revenue growth, We will continue to grow cloud subscription buildings as a percentage of total revenue, and we will continue to strengthen the quality of our recurring revenue as we continue to transform our platform to the cloud. We will remain disciplined and scrutinize costs while investing in growth areas, and we will continue to execute on our dual strategy of growing our business intelligence and acquiring and holding Bitcoin. Thank you for your time today and for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks.