Strategy Inc

Hello, everyone, and good evening. I am Shri Jajodhya, Vice President of Investor Relations and Treasury at MicroStrategy. I'll be your moderator for MicroStrategy's 2023 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 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, 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 and the key pillars of our business strategy. Second, Andrew Kang will cover the financial results for the fourth quarter and full year 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 of MicroStrategy.

Thank you, Suresh. Hello, everyone. I'd like to welcome all of you to today's webinar. I want to start by providing an update on the state of the company and achievements over the past year. Today, MicroStrategy is the largest corporate holder of Bitcoin in the world, holding 190,000 Bitcoins with a total Bitcoin market value of $8.1 billion as of yesterday. In 2023, we acquired 56,650 Bitcoins for a total purchase cost of $1.9 billion, an average price of $33,580. In 2024 so far, we've acquired an additional 850 Bitcoins for a total purchase cost of $37 million. Over the past year, we've seen Bitcoin mature further as an institutional grade asset class with broader regulatory recognition and institutional adoption. We remain highly committed to our Bitcoin strategy with a long-term focus. Andrew will provide further details in our Bitcoin purchase activity for this quarter later. MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. Our objective is to grow in AI and cloud-powered BI software. We have over 1,900 employees focused on our software business, devoted to achieving our vision of intelligence everywhere. The past year has marked the most transformative in our 25-year history of being a public company, as we released MicroStrategy One, MicroStrategy AI, MicroStrategy Cloud for Azure AWS, and now the Google Cloud Platform. and continue to focus on growth in both cloud and AI plus BI. In 2023, we made important progress in our shift towards our cloud offering, resulting in annual subscription services revenue of $81.2 million, an increase of 34% year over year. The strong growth in our subscription services revenue was driven by both existing customer migrations to the cloud and new customer wins. Our customer renewal rates continue to be among the highest we've ever experienced, and our subscription billings remain strong. Overall, we've continued to see further global adoption of our cloud platform as a result of transitioning our business strategy and product offerings from an on-prem perpetual licensed software company to a cloud-native organization. Further, we've transformed the way we function as an organization. We've reorganized and invested in our go-to-market approach to help develop sales opportunities, convert more customers to our cloud offering. We've created a customer success function to focus on the customer experience, including onboarding, adoption, retention, migration, and upsell. This enables our sales teams to focus on selling to new customers in the cloud. We've revised our sales compensation plans to prioritize new business and cloud transactions. We've rebuilt our marketing leadership team and have invested in product marketing, field enablement, brand development, and demand generation. We have expanded our partner sales channel with strategic partnerships with Microsoft, AWS, Google, and Snowflake, harnessing thousands of eager sellers ready to deploy MicroStrategy on their platforms. I believe MicroStrategy is entering 2024 stronger than ever and will continue to provide a unique value proposition for our shareholders. With our Bitcoin strategy being so significant to our overall business value, while we also continue to pursue growth in our enterprise analytics business, some may ask, what kind of a company is MicroStrategy now? It's a fair question and a question that takes on even more significance with the approval of spot Bitcoin ETPs in the United States. We consider MicroStrategy to be unique. We consider MicroStrategy to be the world's first Bitcoin development company. Let me explain what we mean. We are a publicly traded operating company committed to the continued development of the Bitcoin network through activities in the financial markets, advocacy, and technology innovation. As an operating business, we're able to use cash flows as well as proceeds from equity and debt financings to accumulate Bitcoin, which serve as our primary treasury reserve asset. We also develop and provide industry-leading AI-powered enterprise analytics software that promotes our vision of intelligence everywhere and are also using our software development capabilities to develop Bitcoin applications. We believe that the combination of our operating structure, Bitcoin strategy, and focus on technology innovation provides a unique opportunity for value creation. Being an operating company, our software business remains our core revenue and cash flow generator. In addition, it also enables us to acquire Bitcoin through the use of excess cash or proceeds from equity capital raises or corporate debt capital raises and to pursue software innovations that leverage the Bitcoin blockchain. We've deployed these levers to increase our Bitcoin holdings in a manner which we believe has created shareholder value. Bitcoin development includes our Bitcoin acquisition strategy and Bitcoin advocacy initiatives. Our software development includes BI, AI, cloud, or Bitcoin and Lightning-related software development. Let me elaborate on our 2024 software strategic focus. In 2024, we will continue our transformation focus to win and grow in AI plus BI while accelerating our transition to a cloud-centric operating model. Our key strategic goals are to grow cloud, innovate with AI, and increase profitability. So first, let me cover growing with cloud. MicroStrategy Cloud is a key area of our research and development efforts as we expand our platform's flexibility, scalability, and security. In December, we successfully deployed our Google Cloud Platform integration, furthering our multi-cloud capabilities, providing greater optionality to our customers. This offering is microservices and container-based and uses our most recent cloud innovations. As of today, MicroStrategy can be deployed and fully hosted on Azure, AWS, and GCP. Additionally, we'll provide the ability to automate deployment of MicroStrategy with many of the same benefits of a public cloud, but in a private cloud later this year. This distinguishes us from other BI platforms with the flexibility and automation that enterprise customers require. We believe such investment and capability will encourage current on-premise customers to embrace the benefits of MicroStrategy Cloud, such as containerized architecture, proactive cloud management from experts, seamless backups, and single-click updates. Transitioning our customer base to the technology of the future remains a key focus and our resource deployment underscores our commitment to the cloud-first approach. As customers and prospects move to the cloud to empower their AI-driven digital transformations, we expect a decrease in product license revenues. This will in part be offset by increases in subscription services revenues in the same year and will be more than offset with higher recurring revenues in the following years. This will be most pronounced in 2024 as we expect to increase the pace of cloud adoption. Besides more healthy recurring revenues, additional benefits in moving customers and prospects to cloud include more engaged and happy customers using our latest software, resulting in higher retention rates. The second area of focus for our software business is to innovate with AI. We will continue to focus on product innovation and AI-powered BI in the cloud. In September, MicroStrategy released its most innovative product to date, MicroStrategy AI. Our innovative first-to-market AI solution offers capabilities designed to deliver an exceptional user experience on trusted data, featuring out-of-the-box resources that streamline adoption on our multi-cloud platform. The initial reception from customers has been positive. Our platform's AI BI capabilities enable customers to automate their BI workflows, including building data wrangling, dashboard creation, and data exploration. This elevates the role of data throughout the organization, allowing companies to make better database decisions and take actions. We believe that our continued thought leadership and innovation focus in the AI plus BI intersection will serve as a growth catalyst for MicroStrategy into the future. As business continues to search for efficiencies to reduce cost, increase productivity, and increase revenues, AI solutions and trusted data will continue to gain prevalence as a necessity. In addition, in December, we released our standalone bot feature as an extension of our MicroStrategy AI capabilities. With the release of Build Your Own Bot, MicroStrategy has entered the adjacent bot market with the capabilities and pedigree of our BI product to address a wide range of use cases. When considering the services currently offered in the bot market, we noticed customer demand for a bot builder that addresses Gen-I resource constraints, improved structured data processing, and solving for the lack of enterprise trust provided by current LLM solutions. The current landscape of bot offerings, such as domain-specific bots, LLM customizations, and flexible build bots either lack the flexibility to address broad use cases or face limitations with structured data. MicroStrategy bots are one of the easiest to use products we've ever developed. Combining our structured data horsepower with our open AI integrated LLM capabilities, we've created an AI bot flexible enough to support any industry vertical or departmental scenario with trusted analytics. Leveraging the MicroStrategy platform's advanced capabilities in the enterprise, such as security, governance, integration with third-party tools, and system auditability, we enable customers to easily deploy chatbots for broad use on trusted data. The third area of focus for our software business is to increase profitability. We will continue to optimize our internal organizational structure in 2024. This means being mindful of financial objectives when choosing investment areas, collapse in organizational layers to improve internal velocity, reducing our dependence on low-margin consulting in favor of external partners, and leverage our leadership team to guide both strategy and execution to deliver increased profitability. For 2024, operating goals for our software business are to increase overall top-line revenue compared to 2023 and target non-GAAP operating income, excluding impairment losses of $70 to $90 million. Increased profitability would further enable us to increase our Bitcoin holdings. As a Bitcoin development company, we're focused on generating value for our stockholders by using various capital markets and technology levers. As an operating company, we can make use of intelligent leverage. Since our adoption of our Bitcoin strategy, we've used three primary mechanisms to acquire more Bitcoin. One, cash flow from software operations. Since August 2020, we've invested $726 million of total cash on our balance sheet in Bitcoin. Two, equity issuances. We have issued $3.1 billion in equity in a manner that we believe to be accretive to existing shareholders to acquire Bitcoin. And three, debt financing. We've obtained $2.2 billion in corporate debt proceeds through the issuance of both senior secured notes and convertible notes that we use to purchase Bitcoin. The blended cost of our debt is fixed at 1.6% annually. We believe each of these techniques and our unique positioning as the world's first Bitcoin development company have enabled us to generate tremendous value for our shareholders. I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Thank you, Phuong, and thank you all for joining. I'll first start with our software financial results total revenues for the fourth quarter were 124.5 million dollars down six percent year over year for the full year total revenues were 496.3 million dollars down slightly one percent year over year our fourth quarter operating results were mixed with a decline in year-over-year revenues in part due to the ongoing revenue shift to cloud and the lingering macroeconomic headwinds impacting overall customer spend. Product license revenues were $18.4 million, which was down 33% year-over-year in Q4, and $75.4 million down about 13% year-over-year for the full year. However, as we transition our business to the cloud, we fully anticipate lower product license revenues as we migrate both existing and new customers to the cloud. More importantly, we continue to grow subscription services revenues, which reflect the recurring revenues from our expanding cloud business. In Q4, subscription services revenues were $21.5 million, which is an increase of 23% year-over-year, and $81.2 million for the full year, an increase of 34% year-over-year. Current subscription billings, which reflect new cloud bookings, grew 33% in the fourth quarter to $41.3 million and $94.8 million for the full year, a 23% increase year over year, which was our 15th straight quarter of double-digit growth in cloud bookings. Q4 was an important milestone for us, where for the first time in both Q4 and for the full year, our subscription services revenues were higher than our product license revenues. This was a significant achievement to show the continued progress in our transition to stronger recurring revenues in the cloud. As I mentioned before, we expect the mix of revenue will continue to shift from product license to subscription services revenues in 2024 as we focus on delivering AI-based products to our customers in the cloud. Moving to costs, total non-GAAP expenses were $148 million in the fourth quarter, 52% lower compared to the fourth quarter of 2022. Bitcoin impairment charges for the quarter were $39 million compared to $198 million in Q4 of last year. Total non-GAAP expenses excluding Bitcoin impairment were $108 million in the fourth quarter, down 3% year over year. While we're spending more on cloud hosting costs as we grow our cloud business, we have been able to offset those increases with cost reductions in corporate overhead and while optimizing headcount, which was down 10% year over year. We reported a total non-gap operating loss in the fourth quarter of $23 million, of which the loss on the Bitcoin impairment was $39 million in the quarter. For the fourth quarter, we reported gap net income of $89 million, which included a $150 million tax benefit, primarily due to changes in the valuation allowance on our deferred tax asset, directly related to our Bitcoin holdings. And at the end of Q4, fair market value of Bitcoin as of December 31st was above our aggregate cost basis, resulting in a release of the previously established valuation allowance and a corresponding non-cash tax provision benefit. Turning to our Bitcoin strategy, we had an extremely successful Q4, adding more Bitcoin to our holdings, acquiring 30,905 Bitcoins in the quarter, the largest single quarter Bitcoin holdings increase since Q4 of 2020. After the end of the quarter, we purchased an additional 850 Bitcoins using $37 million of excess cash. And as of February 5th, 2024, the company held a total of 190,000 Bitcoins, acquired for an aggregate cost of $5.93 billion, or $31,224 per Bitcoin. Bitcoins purchased through excess cash from the software business are held at MicroStrategy, the parent entity, and are secured under our 2028 secured notes. As of yesterday, there were 16,931 Bitcoins held at MicroStrategy. Bitcoins acquired through proceeds from capital markets activities after the issuance of our senior secured notes, which include equity and debt issuances, are held at MacroStrategy, which is a wholly owned subsidiary of MicroStrategy. We hold 173,069 Bitcoins, representing 91% of our total Bitcoin holdings or over $7.3 billion in current market value at the MacroStrategy level. all of which are currently unrestricted and unencumbered, providing us with optionality to potentially leverage this strategic asset in the future. In Q4, we purchased a total of 30,555 Bitcoins for $1.2 billion using net proceeds from our ATM program. As noted a moment ago, these Bitcoins are held at macro strategy and remain unencumbered. In Q4, we also purchased an additional 350 Bitcoins for $13.4 million using excess cash from operations, which are held at MicroStrategy. And subsequently, in January 2024, we used additional excess cash from operations to purchase an additional 850 Bitcoins for $37 million, which are also held at MicroStrategy. Our commitment to our Bitcoin strategy remains unchanged and unwavering, and we plan to add more Bitcoin over time using our excess cash from operations, as well as proceeds from any capital markets activities. MicroStrategy is the largest corporate holder of Bitcoin in the world, and we have remained committed to our Bitcoin acquisition strategy with the highest conviction, with a consistent track record along a strong risk-managed approach to acquiring and holding more Bitcoin on our balance sheet. Turning to slide 15, we saw Bitcoin outperform the U.S. equity markets in 2023. As of December 31st, 2023, the carrying value of our Bitcoin holdings is approximately $3.6 billion compared to approximately $8 billion in market value based on the Bitcoin price as of the last day of the quarter. Year-to-date, the market value of our Bitcoin holdings is approximately $8.1 billion, which is significantly above our average purchase price of approximately $31,200. In late December, FASB approved a change in accounting rules for certain digital assets, including Bitcoin, to be measured using fair value accounting. We are delighted by FASB's expeditious move to create more transparent reporting, and we are encouraged by the continuing maturity of the regulatory environment surrounding Bitcoin, and we hope these enhanced accounting rules will serve as a positive on-ramp for other corporates to adopt with Bitcoin as a treasury reserve. The new accounting rule requires companies holding digital assets, including Bitcoin, to adopt fair value accounting treatment by Q1 of 2025. And while we have not yet elected to early adopt the new accounting standard, which was only just finalized late in the fourth quarter, we continue to evaluate the timing along with the accounting and tax impacts of adoption. If we elect to adopt the new accounting standard in 2024, we estimate that our 2024 beginning Bitcoin holdings value would be marked up to a fair value of approximately $8 billion as of January 1st, 2024. As Fong mentioned earlier, we have effectively used excess cash flows to grow our Bitcoin holdings. At the inception of our Bitcoin balance sheet strategy in 2020, we allocated a substantial portion of our cash reserves generated over many previous years into Bitcoin, acquiring over 43,000 Bitcoin for $595 million. Beyond that initial acquisition, we have continued to acquire an average of $40 million of Bitcoin each year with excess cash on our balance sheet, totaling approximately 3,500 Bitcoin since 2022. Our ability to leverage cash from operations enables us to increase our Bitcoin holdings in a manner that we believe is accretive to our shareholders. And in total, we have issued approximately $726 million of excess cash to acquire more Bitcoin, accounting for approximately 48,000 Bitcoin added to our balance sheet, or about 25% of our total Bitcoin holdings. Now, turning to our capital markets activities. Also, since the inception of our Bitcoin strategy, we have raised $2.2 billion of debt. through senior secured notes and convertible notes with an attractive blended interest rate of approximately 1.6%, with the earliest maturity not until 2025. Leverage remains a key component of our active capital management strategy, which when intelligently deployed enables us to accrete more Bitcoin on our balance sheet at an attractive cost. We will continue to actively monitor the capital markets, evaluating liability management opportunities to manage our debt maturities, as well as opportunities to raise additional debt in the future. In addition to raising debt, we have demonstrated a solid track record of issuing permanent equity capital in a manner that we believe has been accretive to our shareholders. Since the third quarter of 2021, we have raised a total of $3.1 billion in proceeds to our at-the-market or ATM programs with the average price of approximately $457 per share across total equity raised. In Q4 of last year, we accelerated the execution of our current ATM program and raised $1.2 billion in aggregate net proceeds. And in Q4 alone, we issued approximately 2.27 million shares class A common stock at approximately $138 million of capacity remaining under our current program. As we have done in the past, we will continue to carefully evaluate the most secretive use of proceeds from the sale of equity to increase incremental value for our shareholders. The primary use of proceeds from the sale of equity to date has been to acquire additional Bitcoins. But we also used proceeds of our ATM program to prepay the $250 million Bitcoin back loan in Q1 of 2023, which generated a $45 million gain on extinguishment. Our capital allocation strategy continues to be focused on increasing the value generated from our balance sheet through the addition of more Bitcoin while managing our debt very carefully. Also at the end of the fourth quarter, we had $46.8 million in cash on our balance sheet, which is sufficient overall liquidity to manage our ongoing operations. 2023 was an extremely successful year for us where we generated approximately $5.8 billion of incremental value from both the increase in the price of Bitcoin of our existing holdings as well as through our strategic use of equity capital markets activities. We began the year with 132,500 Bitcoins on our balance sheet with a market value of approximately $2.2 billion. As Bitcoin prices increased from approximately $16,500 to approximately $42,500 by the end of the year, it resulted in an increase of over $3.4 billion in value based on our Bitcoin holdings at the start of the year. In addition to the price appreciation of Bitcoin we held as of the beginning of the year, MicroStrategy's issuance of additional equity and use of excess cash from operations to purchase even more Bitcoin in 2023 led to an increase of an additional $1.9 billion in value of our Bitcoin holdings. In total, we add an additional 56,650 Bitcoins to our balance sheet at an average price of $33,580, which generated an approximately $500 million of value from the increase in the price of Bitcoin after those purchases were made. Again, overall, 2023 was a tremendously successful year. And taking into account our purchases and appreciation of our holdings, we increased the value of our Bitcoin holdings by 267% to $8 billion over the course of the year. While the overall market benefited from the increase in Bitcoin prices, well, we believe our intelligent use of leverage and excess cash to acquire more Bitcoin, as well as our equity capital market strategy, contributed $2.4 billion of incremental value for our balance sheet, demonstrating our track record of generating value for our shareholders. This slide shows an illustrative example of how responsible and intelligent leverage can be used to boost returns when Bitcoin prices are increasing. The baseline returns of any long Bitcoin strategy benefit from spot Bitcoin price appreciation. Bitcoin ETPs also benefit from this, offset, of course, by the management fees that are charged for those products. Leverage provides us the opportunity to generate higher returns if price increases. In this illustration, assuming Bitcoin price reaches $250,000, keeping Bitcoin count constant, spot Bitcoin without leverage would return approximately 480%. In this example, adding leverage to acquire more Bitcoin would return between 660% to 740%, depending on the amount of leverage for the boosting returns compared to simply holding spots. If the market value of our Bitcoin increases, we believe this would create more opportunities to manage our leverage targets. With the opportunity to take on more leverage in a prudent, risk-managed fashion, the value generated from our increasing Bitcoin holdings would be expected to outperform even further if Bitcoin prices continue to rise. MicroStrategy's value proposition is clear when compared to other forms of exposure to Bitcoin. And as Fong said earlier, we believe that the combination of our operating structure, Bitcoin strategy, and focus on technology innovation provides a unique opportunity for shareholder value creation. The management team has demonstrated a track record of disciplined approach to navigate through volatile times in the Bitcoin market and establish credibility in achieving our goal of generating more value for our shareholders. Thank you for your time today, and thank you for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks.