MicroStrategy Incorporated

Hello, everyone, and good evening. I'm Shrija Jodhia, Vice President of Investor Relations and Treasury at MicroStrategy. I will be your moderator for MicroStrategy's 2023 Third 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, Phuong, 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, Fong Lee will cover the business results for the third quarter of 2023. Second, Andrew Kang will cover the financial results for the third quarter of 2023. Then, Michael Saylor will provide a strategic review and discuss recent Bitcoin market updates. And lastly, we will open up to Q&A. With that, I will turn the call over to Fong Lee, President and CEO at MicroStrategy. Fong?

Thank you, Suresh. Hello, everyone. I'd like to welcome all of you to today's earnings webinar. I'll start with highlights of our software business. Total revenue was $129.5 million, representing an increase of 3% year-over-year. Total software licenses revenues, which consists of total product licenses and subscription services revenues in our consolidated statement of operations, were $45 million, representing an increase of 16% year-over-year. Total software licenses revenues performance benefited from both increased adoption of our cloud platform and growth in product license revenues. Total subscription services revenue was $21 million, an increase of 28% year-over-year. Our Q3 subscription billings growth was 17% year-over-year. We achieved good revenue results in Q3 with year-over-year growth driven by our cloud business and a strong international license revenue quarter. We plan to continue to drive growth in our recurring revenue model and to transition our business strategy and product offerings to a cloud-native model. Our focus will be on innovation at the intersection of artificial intelligence and business intelligence, using our first-to-market advantage in the enterprise-scale integration of AI and BI to grow revenue in the cloud. I'm excited about the work we're doing in these areas and to share some updates with you in our progress. We're at a major period of innovation in the technology industry. We believe the next innovations to change how the world does business are digital money with a continuing development of the Bitcoin ecosystem and digital intelligence through AI. The technological leaps that have occurred in the past year in generative AI are real, and we expect to be at the forefront of integrating AI with BI. MicroStrategy is well positioned to gain competitive leverage and win in both of these areas of growth. MicroStrategy's mission for the past 30 plus years has been to enable intelligence everywhere for our customers. And with this mission ingrained in our corporate DNA through each major tech innovation, we have moved closer to accomplishing this goal. Whether this was OLAP technologies on relational databases, implementing client-based desktop BI tools, introducing the semantic layer, rolling out web BI, or making the shift to mobile and then cloud, each step has successfully enabled to making BI a more ubiquitous component of business decision-making. We believe generative AI is the next big innovation that will bring us closer to intelligence everywhere. Before diving into the integration of Gen AI in our platform, it's important to distinguish why MicroStrategy is poised to drive value in the AI space beyond the generic applications and hype built up in the broader market. Hyperscalers and mega software companies are investing billions amassing GPUs and legions of data scientists to build the best large language models or LLMs in the world. much like we have done with cloud hyperscalers who plan to openly partner with and leverage the technology investments of these companies rather than invest heavily to build our own models. Hundreds of smaller AI companies are taking a similar approach to us, but we're already differentiating as we have done for decades in BI across four major areas. Number one, our 30 years of enterprise software services and sales capabilities Number two, our trusted, secure, scalable, reusable data layer, what we call our semantic layer. Number three, the ability to quickly build and deploy actionable applications utilizing this data through technologies like mobile, embedding, and microservices. And number four, an open multi-cloud architecture, which in this case we'll use to easily integrate multiple different LLMs. We believe this uniquely positions us to win at the intersection of artificial intelligence and business intelligence. In addition, we believe the combination of AI and BI to be critical for enterprises looking to integrate AI into their day-to-day decision-making. Let me explain. BI is precise. You use trusted calculations from secured sources of structured data to make informed decisions. But on the other hand, BI can be rigid and difficult to engage with all levels of personas and business users. AI is smart, leveraging natural language generation, reasoning, and unstructured data to answer free-form questions and ideas. However, results can be untrustworthy in producing determinate answers that are reliable and consistent enough to make informed business decisions. This is where MicroStrategy One delivers value, bridging precise BI and smart AI. Right now, many enterprise AI solutions are focused on efficiency and cost gains, building applications to help marketers write better, corporate teams process more efficiently, and engineers code faster. There's even more value to be unlocked when AI helps analysts make better business decisions to drive top-line growth and achieve true strategic advantage. This can be done with generative AI on top of enterprise data. But in doing so, combining AI and BI, the challenges with scale, governance, and trust with AI are amplified, and security and access control are paramount. We expect to see increased customer demand as our platform tackles the primary hurdles customers face with AI adoption. The main customer concerns of Enterprise AI are, one, data access and security, two, integration of large language models, natural language processing, and prompt engineering solutions. And three, the ability to distribute AI solutions at scale. Typical AI and BI combinations that do not have a semantic layer have unreliable intelligence. The BI tool acts as a simple repository that provides data to the generative AI engine. There's no intelligence in the LLM results, producing false or inaccurate responses commonly referred to as hallucinations. MicroStrategy One and MicroStrategy AI leverage the semantic layer to define all data objects within a customer configuration. Our BI architecture provides a framework and structure to the AI solution. The AI and MicroStrategy engines collaborate to generate higher quality queries by enhancing and tagging user prompts to pull more tailored results from customer data. MicroStrategy AI is designed to generate answers that are secure, accurate, scalable, and reliable. In September, we introduced our first set of MicroStrategy AI features to the market, which leverages our advanced BI system, fully embedding Microsoft Azure OpenAI. This release marks one of the most exciting product innovations in the history of the company. These new AI features are cloud-native and only available through MicroStrategy One. We've implemented four features to address the needs of different business users. One, AutoSQL, streamlines the database interaction process. This feature is intended to enhance the technical user experience of MicroStrategy. Our AI application can translate natural language into SQL queries, explain SQL statements in natural language, and review SQL code with suggested optimizations. Two, Auto Dashboard provides automatic dashboard creation, transforming complex data into interactive and beautiful visual insights. MicroStrategy AI processes the data and can produce a beautiful and viable dashboard. AutoExpert is the automated support tool. It's like having a MicroStrategy employee guide you through the BI platform to answer user-based questions, such as, how do I build an advanced metric? AutoExpert is available for free to all registered users on our website. And AutoAnswers, my personal favorite, transforms self-service analytics. The user engages in natural language conversation, asking the AI-assisted questions related to their data. For example, what is the forecasted revenue for Q1 2025? What are drivers of revenue growth? MicroStrategy AI processes the request with contextualized data to rapidly provide answers with a deep level of understanding, vastly increasing the data exploration capabilities of a basic user. MicroStrategy AI is the first to market with a fully integrated AI BI platform. and delivers BI features that enable enterprise-grade AI deployment, which shortens our customers' time to value and enhances the ability to optimize and automate. Furthermore, cloud-native solution drives net new business to the cloud, while incentivizing current customers to migrate and expand their footprint. This offering is also our first entry into consumption-based pricing. Customers will consume the AI product question by question. Our initial starter package is $20,000 to 20,000 questions, or simply a dollar a question. We expect this pricing mechanism to drive adoption and grow the subscription revenue stream while providing a relatively low cost of entry for customers to onboard next generation AI applications. We're already seeing this product driving existing on-premise customers to move to the cloud or set up a new environment in the cloud to adopt MicroStrategy AI. Our vision for intelligence everywhere continues to inform our roadmap. We believe that AI BI best empowers customers when it is modular and can be embedded into existing workflows. We also believe that the data that feeds AI BI, the platforms in which it runs, and the LLM and machine learning models used must be flexible and open to fit our customers' needs. Therefore, our roadmap includes the ability to build analytic bots on the platform of the customer's choice, AWS, Azure, Google Cloud, or private cloud, and leverage a variety of LLMs of the customer's choice. The Build Your Own Bot tool on the MicroStrategy platform harnesses advanced capabilities in enterprise security, such as governance, integration with third-party tools, and system auditability to allow customers to easily deploy chatbots for broad use, untrusted data. This feature is standalone and customizable for deployment by any user, and the use cases are myriad. For example, internal users can deploy an FP&A chatbot to answer questions related to budget, or users can develop a product Q&A chatbot for customers on their website. We currently expect the build-your-own-bot capability to be available in December of this year. We're excited about our initial AI offering to the market and for the future as we continue to tap into the potential of AI BI solutions in our product roadmap. Now, moving to developments on our cloud offering, we continue to build modern, scalable, resilient, and cloud native applications that can transition customers from monolithic BI configurations to a microservices architecture that embraces flexibility, agility, and technological diversity. Microservices architecture and containerized structure enable applications to be deployed and scaled independently. These design features are necessary to meet the technological demands of AI and to maintain the highest level of platform functionality. MicroStrategy Cloud Architecture is designed in the cloud for multi-cloud. In Q4, we plan to deploy our Google Cloud implementation, increasing our functionality to all three primary hyperscalers and further driving integration of AI and BI to every part of a customer's business. This is a fully containerized microservices-based solution, which is the base modern cloud architecture for our MicroStrategy platform. MicroStrategy is now also available on both Azure and AWS marketplaces, firming up our partnership with these hyperscalers. We're also innovating the way we sell our product via partner sales channels with strategic focus aimed to unlock growth, enhance customer success, and deepen market penetration in a rapidly evolving AI and BI market. We've announced recent partnerships with Microsoft Azure, including with OpenAI, AWS, and Snowflake. Key highlights of our expanded partner program include a newly launched streamlined partner portal that centralizes MicroStrategy sales, marketing, and technical assets to facilitate increased partner engagement. expanded training resources to empower partners with the necessary tools to excel, and increased incentives and sales motions to promote synergy between MicroStrategy's and its partners' growth objectives. I'm very excited about our product and the direction of the company. Our goal is to be the innovation leader in AI and BI, and BI in the cloud, and we believe we are delivering on this objective. In Q4, we're continuing to work through plans to transform our sales organization to be cloud-focused and capitalize on our innovation and the strength of our cloud platform. We're also creating customer success organization that will be focused on better supporting customers as they attempt to innovate and maximize value for their organization and customers. I look forward to sharing more details on these initiatives and our next earnings call. I'll now turn the call over to Andrew to discuss the updates on our Bitcoin holdings and our financials for the quarter in further detail.

Thank you, Fong. I'll start with our third quarter operating results, which reflected year-over-year total revenue growth. And while macroeconomic headwinds have persisted over the past year, our Q3 results demonstrate both the depth of our customer base and our ability to generate revenue despite longer sales cycles and tighter customer spend. GAAP total revenues for the quarter were $129.5 million, up $4.1 million, or 3% year-over-year, or up 1% year-over-year at constant currency. Total software license revenues, which consist of product license revenues and subscription services revenues, were $45 million, up 16% year-over-year, or up 14% at constant currency. Product license revenues were $24 million for the quarter, up 8% year-over-year, or up 6% at constant currency. The growth in product license revenue in Q3 was primarily attributable to the execution of several large international deals during the quarter and partially offset by lower domestic license revenues. We continue to expect our mix of revenue will continue to shift from product license to subscription services over time as we continue to transition to the cloud. However, this past quarter demonstrates that demand for our software remains strong across all platforms. Subscription services revenues, which reflect recurring revenues from our cloud business, were $21 million, an increase of 28% year-over-year or 25% at constant currency. Product support revenues were $66.9 million, up 1% year-over-year or down 1% at constant currency. Customer renewal rates remain high at 94% for the quarter and have been consistently above 90% in the seven most consecutive quarters, illustrating the durability of our customers even in spite of the ongoing challenges in the macroeconomic environment. Finally, other services revenues were $17.6 million, which was a 15% decrease year-over-year or 17% lower at constant currency. While we are seeing higher average consulting build rates worldwide, lower customer demand for consulting projects in the current macroeconomic environment remain a headwind to customer spend on professional services. On slide 13, total current software license billings were $42.7 million in the third quarter, an increase of 17% year over year. And current subscription billings were $16.8 million, an increase of 17% year over year, our 14th straight quarter of double-digit growth. Transitioning customers to MicroStrategy Cloud remains one of our highest priorities, focusing on both new customer wins as well as migrating existing customers. As Fong mentioned earlier, we are well positioned to capitalize on first-to-market AI-integrated features already available on MicroStrategy's platform. And our go-to-market strategy will be highly focused on driving cloud growth, AI BI adoption, and increasing partner-enabled deployments and driving further marketplace integration with hyperscalers. We believe this will translate to new logos, faster migrations, and accelerated cloud transition in the coming year. Shifting to costs on slide 14, total non-GAAP expenses were $138 million in the third quarter compared to approximately $102 million in the third quarter of 2022. $34 million of the expenses were due to the Q3 Bitcoin impairment charge compared to $1 million in Q3 of last year. Non-gap cost of revenues was $25 million in the third quarter, which was an increase of $1.2 million or 5% year over year, primarily driven by higher cloud hosting costs as we grow our cloud business. However, as a percentage of total revenues, non-gap cost of revenues remained flat year over year. Non-GAAP sales and marketing expenses increased $1.9 million or 6% year-over-year to $32.4 million. As a percentage of total revenues, non-GAAP sales and marketing costs were just 1% higher year-over-year. Non-GAAP research and development expenses were $26 million, a slight 1% decrease year-over-year, and non-GAAP G&A costs were $20 million in Q3, which was flat year-over-year. Spending on cloud growth and investing in sales and marketing activities are directly targeted towards growing revenue and acquiring new customers. While focusing on strategic spend, we also successfully launched our AI product in Q3 while carefully managing product development costs through global delivery center efficiencies and speed of execution. Our priority and results are rooted in the active management of costs in order to drive margin and profitable growth. Turning to slide 15, we reported a total non-GAAP operating loss in the third quarter of $8 million, of which the non-cash digital asset impairment charge was $34 million for the quarter. For the third quarter, we reported a GAAP net loss of $143 million, which included a $110 million tax provision expense. This non-cash tax expense was related to the re-establishment of our valuation allowance on our deferred tax asset directly related to our Bitcoin holdings. The expense was recognized because the market value of Bitcoin on the reporting date of September 30th was below our aggregate cost basis. At the end of Q4, we will re-evaluate the fair value of Bitcoin again at 1231 And if the price of Bitcoin on that date is above our aggregate cost of holdings, we would readjust the valuation allowance at the end of Q4 and see a corresponding non-cash tax benefit. Turning now to our Bitcoin strategy. We again increased our total Bitcoin holdings and acquired 5,912 Bitcoins in the third quarter. After the end of the quarter, we purchased an additional 155 Bitcoins using cash from operations. As of October 31st, 2023, the company held a total of 158,400 Bitcoins acquired for an aggregate cost of $4.7 billion or $29,586 per Bitcoin. Bitcoins purchased by MicroStrategy through cash generated by the software business are held at the MicroStrategy entity, and as a result, those Bitcoins are pledged against our 2028 senior secured notes. Bitcoins purchased through proceeds from capital markets activities, including equity and debt issuances, are held at MacroStrategy, a wholly owned subsidiary of MicroStrategy. These Bitcoins are not pledged to our senior secured notes and are fully unencumbered. In Q3, we purchased 5,445 Bitcoins for $147 million using net proceeds from our at-the-market equity program. And as noted a moment ago, these Bitcoins are held at macro strategy. We also purchased an additional 467 Bitcoins for $14.4 million using excess cash from operations, which are held at micro strategy. And subsequent to the end of the quarter, in October, we used additional excess cash from operations to purchase the additional 155 Bitcoins for $5.3 million, also held at MicroStrategy. Our Bitcoin strategy remains unchanged, which is to acquire and hold Bitcoin, and we plan to accumulate more Bitcoin over time using both excess cash from operations and proceeds from the capital markets. Bitcoin has outperformed much of the markets this year, and while we still see price volatility, as the asset class continues to mature, Bitcoin prices have stabilized over a narrower range compared to prior years. MicroStrategy is the largest publicly traded corporate holder of Bitcoin in the world, and we remain committed to our Bitcoin acquisition strategy with the highest conviction, long term focus, and with a strong risk managed approach. As of September 30, 2023, the carrying value of our Bitcoin holdings was approximately $2.5 billion, compared to approximately $4.3 billion in market value based on the Bitcoin price as of the last day of the quarter. As of market close on Tuesday, October 31st, the market value of our 158,400 Bitcoins was approximately $5.5 billion. Our Bitcoin remains subject to the current indefinite lived intangible asset accounting rules under which we must record an impairment when there is any decrease in the fair value below our carrying value at any time during the quarter, which occurred in Q3 when Bitcoin price fell to $24,900. We remain optimistic that FASB will finalize the change in accounting rules for certain digital assets, including Bitcoin, to fair value accounting in the near term. Now turning to slide 19, in Q3, we continued to execute our at-the-market or ATM equity offering and raised approximately $147.3 million in aggregate net proceeds through the sale of Class A common stock. In the current ATM program, we have issued 403,000 shares and have approximately $602 million of remaining ATM capacity. As with prior programs, we may use the proceeds for general corporate purposes, which include the purchase of Bitcoin as well as the repurchase or repayment of our outstanding debt. The incremental ATM capacity will allow us to benefit from institutional demand for Bitcoin exposure and will allow us to opportunistically raise capital to continue accruing value for our shareholders. Our outstanding debt and convertible notes remain unchanged at a total $2.2 billion, with a blended weighted average interest rate of approximately 1.6%. Also, at the end of the third quarter, we had $45 million in cash on our balance sheet and sufficient overall liquidity to manage our ongoing operating needs and our outstanding debt. Since the third quarter of 2021, we have raised a total of approximately $1.9 billion in gross proceeds through our ATM programs, the average price over all issuances of approximately $419 per share. The primary use of historical ATM proceeds to date has been to acquire additional Bitcoin, and we also used the proceeds to repay our $205 million Bitcoin-backed loan at a discount. Our capital allocation strategy continues to be focused on improving our overall capital structure by strengthening our balance sheet through additional Bitcoin holdings and managing our debt very carefully. On slide 21, as of October 31st, we now hold a total of 158,400 Bitcoins, of which 15,886 Bitcoins are held at MicroStrategy, the parent, and are pledged as collateral securing our 2028 notes. The remaining 142,514 Bitcoins are held at macro strategy, all of which are unpledged and unencumbered as of quarter end, representing 90% of our total Bitcoin holdings, or $4.9 billion in current market value. The earliest of our debt maturities is not until December 2025 for the 2025 convertible nodes, which is eight quarters away from today. Within that period of time, we also expect the Bitcoin halving to occur in Q2 of 2024. We actively monitor our capital structure and are constantly evaluating liability management opportunities to manage and prepare for all upcoming debt. Overall, we believe the positive position in our cloud business, along with a real We gain license sales in combination with the release of our first to market enterprise scale integrated AI BI product produces positive catalysts heading into the fourth quarter. That being said, we maintain the stance of cautious optimism due to the ongoing presence of macroeconomic headwinds. We anticipate total revenue this year to be in line with last year. We continue to focus on product innovation in AI and cloud. We will continue to grow cloud subscription revenues and strengthen the quality of our recurring revenue as we transform our platform. We will remain disciplined and continue to manage to drive margin expansion, and we will continue to acquire and hold 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.

Thank you. Thanks for joining us today. I thought I would start with a quick performance review of MicroStrategy since we adopted our Bitcoin strategy. It's now approximately 37 months, so just slightly more than three years since we adopted our Bitcoin strategy. And we benchmark ourself against all major asset classes and against big tech stocks and also against enterprise software companies that are our enterprise software peers. And I'm happy to report to you that our performance over this time period is phenomenal. plus 242 percent and uh that exceeds the bitcoin performance in the same period uh of 192 percent so microstrategy is outperforming the bitcoin asset index um The S&P is up 25% over that time period. So we've almost 10x the S&P performance. The NASDAQ is up 17%. As you recall, we had to choose between gold and digital gold in August of 2020, and we chose digital gold. That is Bitcoin. The actual gold is down 2%. So 192% versus minus 2% is the difference between choosing the right asset and the wrong asset. This totally makes sense because we're living in an age of digital transformation and there's just a growing awareness that Bitcoin is the digital gold of the 21st century. Silver's down 18% in that time period. And of course, bonds, which we were holding on our balance sheet, are down 24%. And we had a concern about holding bonds because of the interest rate environment. That's why we wanted to buy some other tangible asset. As you can see, Bitcoin is almost the opposite of bonds. Bitcoin being, you know, the accreting asset and bonds have been diluted to balance sheets. So we're holding them. MicroStrategy has outperformed all the big tech companies. And you can see here, Google, Microsoft, Apple, Meta. And some of the big techs haven't even had a positive return in that time period. And MicroStrategy has almost 3x the next best competitor in the enterprise software space. So... I would say based upon this over this time period that our Bitcoin strategy is working. In essence, we have transformed the company with a $500 million enterprise software company. into a new kind of firm that has both a $500 million software business, as well as, and now a $5 billion plus digital assets business. And we're able to get benefits from both the business intelligence part of our business, as well as the Bitcoin part of our business. We can go to the next slide now. One of the things that's coming is more different options for institutional investors to get Bitcoin exposure. And oftentimes people ask us, so what's the difference between a micro strategy and just buying the Bitcoin outright or buying a Bitcoin futures ETF or buying Grayscale or buying a potential spot Bitcoin ETF if and when they're available? And so I think this chart is both useful to explain what makes MicroStrategy different. And you can also see in this chart the structural reasons why we are able to outperform Bitcoin itself over this last three-year time period. If you're an investor and you're looking for accessibility to Bitcoin as an asset class, MicroStrategy is a ticker on NASDAQ, MSTR. Whereas buying the Bitcoin itself as the commodity requires that you set up a new relationships with a crypto exchange and a crypto custodian. And oftentimes investors just don't have those exchange and custody relationships. So it's not so easy to buy the underlying Bitcoin. And in some cases, it's just not practical or not possible at all. They wouldn't be allowed to do it or they wouldn't have the mandate to do it. The futures ETF does provide that accessibility. The spot ETFs have not been available up until now. And of course, GBTC has been an over-the-counter product. And there are many institutional investors that struggle with over-the-counter aspects of access. So that's been a benefit to us. The second differentiator has been our operating company structure. We are an operating company that is providing Bitcoin exposure. We're not a finance company. And that means we have some options. One option is we don't charge a fee. So if you're an investor in MicroStrategy, you don't get charged an annual fee or some sort of custody fee in order to be invested in our company. Right. We cover the cost of custody using our operating cash flows and other cash flows from the operating business. If you were to buy Bitcoin itself, you normally have to place it with a custodian of your institutional investor. And so all institutional custodians charge a fee. There is an annual fee to invest in a futures ETF as well. There will be fees to invest in spot ETFs, and there has been a fee to invest in GBTC. So the ability to get Bitcoin exposure and not get charged a fee is another plus for us, a differentiator. The third differentiator is as an operating company, we can acquire Bitcoin with cash flows and we can organically accrete more Bitcoin. And we can do the cash flows, or we can do it with accretive financings of different sort, either accretive debt or accretive equity financings. And that's a plus. And these other options don't allow you to organically accrete Bitcoin. So that's another plus for institutional investors that are Bitcoin bulls. The fourth differentiator is that as an operating company, we can use intelligent leverage. We can do asset-backed financing. We can do convertible financing. We can do senior secured debt financing. We could set up credit lines. So a lot of things an operating company can do that an ETP can't do. And of course, If you're just holding the underlying Bitcoin in a custodian, the Bitcoin is not going to leverage itself. And there really isn't. You don't have those sort of types of debt financing you can do against Bitcoin, a commodity right now as an institutional investor. So that has been a nice differentiator for us. And we have used that in order to create a product which is not just a straight Bitcoin investment. You know, the $2.2 billion of debt with a 1.6% blended interest rate is an example of intelligent leverage. The fifth differentiator is that we have a non-Bitcoin business that we operate, our enterprise software business. And we've been in that business for 30 years. And so we're not just a pure Bitcoin play, but we provide some downside protection because we're able to rely upon cash flows and operating income from the enterprise software corporation. And of course, as a NASDAQ listed stock with a healthy spot volume, we have derivatives options. There are stock options that trade against micro strategy, and you can use them for risk management. If you want to buy, sell, trade volatility or hedge, you're able to do that. And those are options available to institutional investors on exchanges they understand and And those options aren't easily available to them with many of the other choices they have. So micro strategies where we've created a unique investment vehicle. It's certainly not the only appropriate investment vehicle and there are there are other investment vehicles that will be more appropriate for different class of investors and And as we look forward to potential spot ETFs coming along, we think that's going to actually grow the market dramatically. And it's going to be another great investment option for a different class of institutional investors. It'll be beneficial to all. But we're committed to our Bitcoin operating model and being a hybrid enterprise software company and Bitcoin company, taking advantage of our intelligent options when they present themselves in order to provide our investors with a unique opportunity to get long Bitcoin exposure in an intelligent fashion. So with that, I think I'll say just a few last words on the Bitcoin market outlook. First of all, there's a lot of discussion of spot ETPs. If and when they are approved, we certainly think that they're beneficial to the entire asset class. They will represent... an on-ramp for capital on Wall Street to come into the Bitcoin ecosystem. And they'll dramatically increase the availability of Bitcoin as an asset to both retail investors, as well as institutional investors, corporate investors. and trusts and endowments and the like. So we think that there are many, many types of investors that will benefit from that product. I think that two other things that it does is it provides comfort to institutional investors because when they see offerings from companies like BlackRock or Fidelity or Invesco that they're familiar with, then that's going to actually catalyze them to do research and to educate themselves. And we've already seen an improvement and an expansion and analytical coverage from Wall Street of the Bitcoin asset class. I think we'll see more and more analyst coverage. from traditional Wall Street banks as these ETPs make Bitcoin exposure available. And so more coverage means more education, means more awareness. And and that results in more interest and more on ramps will facilitate that interest. And because Bitcoin is got a fixed supply as the demand increases, then we think that'll be bullish for the entire asset. The second major factor we think in the market outlook is going to be the halving. The halving is coming right now. It's forecast to be sometime in late April of 2024. Much of the organic selling demand or the organic supply available for sale of Bitcoin is or natural sellers are Bitcoin miners. And after the halving, that natural supply available for sale will be cut in half. at least from the Bitcoin miners. And the Bitcoin miners are a substantial part of all the natural sellers in the market. So the halving should have a pretty dramatic material effect on the supply available for sale at the same time that the demand for the asset increases via spot Bitcoin ETPs. So we think that's bullish for the asset class. The third dynamic is going to be FASB's initiative toward fair value accounting. That can only be helpful in educating the market, clarifying the asset and creating more transparency that solves problems that corporations would have if they were to take on large material amounts of Bitcoin exposure. And this is not a near term, but more of a long term driver. But it's material as a long term driver. A fourth interesting driver in the market, which is positive, is the entire crypto regulation developments and the progression of them as the entire crypto industry continues to be regulated. I think that's creating more clarity and more comfort for institutional investors to be able to participate in this space. And so I think we'll see positive regulatory initiatives that will create more clarity and more consistency and more comfort during the coming 12 months. I think another driver, which is material in the coming 12 months, is macroeconomics. Both macroeconomic environment in the United States, as well as global macroeconomics. There is continued global inflation and everywhere that pops up its head, it's driving interest in Bitcoin and it's catalyzing awareness. And I think the current macroeconomic environment with the Fed slowing down on tightening as it has is positive. Certainly over the past year and a half with the interest rates going from almost nothing to more than 500 basis points, that's been a headwind. And now in the current environment, I don't think we expect similar types of macroeconomic headwinds. And just a pause on Federal Reserve activity that we've seen in the past two Fed announcements have been positive, I think, for the outlook for the Bitcoin asset class. Bitcoin technology integration efforts continue. I think it's another bullish trend. The development of lightning continues and the activity of corporations to integrate the Bitcoin protocol and the base layer of Bitcoin, as well as integrate with lightning, are positive and auspicious trends. And they continue. And I think that as time goes on, we're just going to see more and more technology initiatives that will be beneficial in creating utility for Bitcoin throughout the entire retail community and business community. And then I will end my thoughts with the observation that mainstream awareness seems to be reaching new heights for Bitcoin. We have the likes of Larry Fink referring to it as a flight to quality. We have... Druckenmiller noting that it's a legitimate asset embraced by an entire generation and lamenting that he doesn't own more of it or own it. We have Mohammed El-Erian on television noting that Bitcoin is being viewed now as a safe haven asset. We have a lot of coverage of Bitcoin on television networks, news networks, and also through mainstream media that should continue to grow. As that coverage increases, that combined with increasing availability of Wall Street analyst coverage and new voices emerging in the community, like Fidelity with their analysis of Bitcoin, all of those new voices and new interest is driving education of a new generation of investors I think we can expect more of that during the coming 12 months. And all of these things together just create a virtual cycle. And as they drive Bitcoin awareness, they should drive Bitcoin investment, and that should drive more news, and that should drive more awareness, and that should catalyze more and more firms to take an interest in supporting Bitcoin or investing in Bitcoin. And so with that, I will go ahead and end my review and we can move on to Q&A.

Thank you, Michael. We are now going to jump right into questions. And the first question is for Michael. The 10-Q discloses that Michael entered into a 10-B-5-1 plan to exercise MicroStrategy stock options. Can you please provide further color on the plan and the thought process?

Sure. Yeah, thanks for that question. I was granted a stock option in 2014 with respect to 400,000 shares, which is going to expire next April if I don't exercise it by then. For almost a decade now, at my request, the company has only paid me a $1 salary and I've chosen not to be eligible for any cash bonuses. Exercising this option will allow me to address some financial obligations as well as to acquire additional Bitcoin for my personal account. Under my trading plan, I plan to exercise and sell 5000 shares on each trading day beginning on January 2nd, 2024 and ending on April 25th, subject to a minimum price condition. This means the sale will take place over almost four months. If you'd like more details about the plan, I would refer you to the 10Q. I continue to be optimistic about MicroStrategy's prospects and should note that my equity stake in the company after these sales will remain very significant.

Thanks, Michael. The next question is also for Michael. What is management's view on the impacts to the Bitcoin ecosystem at large if a spot Bitcoin ETF is approved? And what is management's view on the potential impact to MicroStrategy?

I think that it's a catalytic event, a big milestone in the institutional adoption of Bitcoin as an asset class. So I think it's going to be very, very auspicious for the asset. I think it will usher in a new generation of analysts. It'll usher in a lot more Bitcoin awareness. It will simplify the process of acquiring assets and holding Bitcoin and allocating to Bitcoin by an order of magnitude. And I think it will create a constructive competition because all of these various ETF vendors will all be competing for asset share. And as they do it, it'll be in their best interest to communicate and educate all of their clients on Bitcoin. So I think it's very good for the ecosystem. I think it's complimentary as a way to participate. There are many other ways. There are already participants in the ecosystem that take different strategies. For example, Block has taken a very technology focused strategy and they're very interested in integrating into their products like Cash App. MicroStrategy has assumed a Bitcoin strategy, which consists of acquiring and holding the underlying asset. I think other companies have offered options type strategies and trading strategies. There are going to be a class of investors that will welcome the ability to hold the spot product through an ETP wrapper. And so I think it's generally good for the ecosystem. As for MicroStrategy, I think it's going to be good for our company as well as our shareholders because it will expand the overall ecosystem. None of these ETP companies will be operating companies themselves. So they're not really pursuing our strategy of intelligent leverage as an operating company. They'll be pursuing various ETF and ETP type strategies. And overall, that means that it should expand the entire asset class to the benefit of all participants.

Thanks, Michael. I think Sharish had a connection issue, so I'll read the next question we have. This one is for Phuong. How should we be thinking about the AI partnerships with Microsoft and their monetization? Can you shed some color on the impact of AI offerings on margin?

Yeah, thanks, Andrew. So one of the ways we were able to be first to market with our AI BI offering is we fully embedded Microsoft Azure's OpenAI product through a partnership with Microsoft. And it provides several benefits to prospects and customers. One is they don't need to bring their own LLM, which if you're a large enterprise provider, You may not know exactly where to go, how to go do that. And so we've integrated it fully. The second is, as of now, Azure OpenAI, which drives technologies like ChatGPT, is the superior LLM in the market. And so it's something that people are familiar with and know how to work with. And the third, we carry with it a lot of the privacy and security capabilities of Azure OpenAI too. That's our sort of first entree into the market. Over time, we do plan to integrate other LLMs from the hyperscalers, so whether it be Google or AWS, and allow our customers to bring their own LLM or utilize a private LLM. So you'll be seeing that as we enter into 2024. As far as monetization, we're today, as I mentioned, pricing this at $20,000 for 20,000 questions. It's consumption-based. Obviously, the customer has to be using our current BI technology. And if they're not, They'll get MicroStrategy BI and the pricing associated with that, and then add on AI on top of that. And I think as we get into 2024, we'll see some material revenue come out of this new product. We're already seeing some pretty strong pipeline with MicroStrategy AI. As I mentioned earlier, it's causing customers to want to move to our cloud because it's only available in the cloud. So that's another nice tailwind that's created by our new AI offering.

Thanks, Fong. I can ask the next question. It's for Andrew. How does MicroStrategy think about the balance between investing in core business while utilizing excess cash flow to acquire more Bitcoin?

Thanks, Sharish. I'd say if you recall, when we launched our Bitcoin strategy, we converted our cash reserves as well as our investment holdings into Bitcoin. which I think has served MicroStrategy to be extremely accretive. And Michael shared some of those statistics earlier. As part of our overall liquidity management, we ensure working capital, adequate working capital to manage all of our operations. We also ensure we have adequate capital to invest in product development, And as well as service our debt, I'd say using excess cash from operations allows us to have the ability to organically create more Bitcoin. Again, that's served us very well and has driven a lot of value for our shareholders. So I'd expect us to continue along that strategy.

Thanks, Andrew. The next question is for Andrew as well. Can you please provide thoughts if you have an expected timeline for FASB's fair value accounting rule implementation and how the street should think about its impact on micro strategies, future Bitcoin acquisitions, and the impact on core business?

I'd say from conversations we've had with various folks related that are kind of aware of the FASB progress. It seems that they are, the FASB is pretty much on track with what I would call maybe a normal timeline to finalize this accounting rule. I obviously can't predict when that'll occur, but I think we believe it is likely to happen based on that normal timeline, either later this year or early next year. So I would say fairly in the near term. Overall, I think Michael talked about it as well, but the change, I believe, will help other institutions effectively, more effectively evaluate holding Bitcoin on corporate balance sheets and hopefully will provide additional transparency for more adoption of Bitcoin as well.

Thanks, Andrew. Next question is for Michael. How does the recent move up in the price of Bitcoin impact the company's ongoing strategy to acquire more Bitcoin? Should we think of MicroStrategy as an average cost buyer adding to its Bitcoin stores as permitted by the capital markets and cash flow, regardless of the price?

We have a laser focus on Bitcoin acquisition. And so we will the volatility and the price movement has had one primary impact, which is it has brought worldwide awareness to Bitcoin and it has gotten everybody focused on Bitcoin. So I think it's it's accelerating education. And because Bitcoin is a novel asset class, education is critical for adoption. So I think generally it's long term bullish. We try not to get too caught up in the volatility. So when we have excess cash flows from operations that that we don't need as working capital, then we will generally acquire Bitcoin with it because we view it as a creative alternative. And then when the capital markets offer us opportunities to do financings that are accretive to our shareholders so that we can buy Bitcoin, you know, we will avail ourselves of that. Those circumstances change month by month, quarter by quarter. And we have, you know, We have a good set of models that we use to keep track of all these changes and we're always monitoring opportunity so as to make sure that we take advantage of it when it comes our way.

Thanks, Michael. And we'll take one last question here, which is for Fong. What are your thoughts on the remainder of the year and outlook for 2024 and main drivers of growth and challenges to keep an eye on? And what are some of the levers that can be pulled to increase profitability in the future?

Yeah, thanks, Sharish. I guess a few things. One is we look into 2024. The two big drivers of growth will be AI and cloud, and they're related. Migrating more customers to the cloud, getting them to adopt our cloud-native platform approach. uh and getting customers to adopt ai which in turn will get customers to adopt cloud and moving more into the prospect space because i think our ai and cloud offerings are quite uh prospect friendly so i think those would be the big drivers of growth uh concerns that we might have uh macroeconomic headwinds you know we saw that in the first half of this year uh could rear back up right we have a lot of uncertainty right now what's happening uh thing in the macroeconomic environment And so those are the things that I think about. And as far as cash flows and margins go, I do think we can do everything that we mentioned while still being pretty disciplined about our margins, which I think you've seen us able to accrete margins in the last few quarters. And I think we can continue to do that. So I think with that, I'm going to close this call. I want to thank everyone for being with us today. And we appreciate your support. We're enthusiastic as ever about our enterprise software strategy, as well as our Bitcoin strategy. I think we've seen positive momentum in both of those areas in the third quarter. And we wish you all a good quarter. Look forward to seeing you get in 12 weeks in 2024. Thanks all.