Strategy Inc

investor relations and treasury at MicroStrategy. I'll be your moderator for MicroStrategy's 2024 second quarter earnings webinar. Before we proceed, I will read the safe harbor statement. Some of the information we provide during today's call regarding our future expectations, plans, and prospects may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements due to various important factors, including the risk factors discussed in our most recent 10Q filed with the SEC. We assume no obligation to update these forward-looking statements which speak only as of today. Also, during today's call, we will refer to certain non-GAAP financial measures. Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at microstrategy.com. I would like to welcome you all to today's webinar and let you know that we will be taking questions using the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar, and Michael, 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 will walk you through the agenda for today's call. First, Fong Lee will cover the business and operational results for the second quarter of 2024. Second, Andrew Kang will cover the financial results for the second quarter of 2024. And 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, Sharish. Hello, everyone. I'd like to welcome all of you to today's webinar. As we discussed in the last two quarters, MicroStrategy considers itself to be the world's first Bitcoin development company. We're a publicly traded operating company committed to the continued development of the Bitcoin network through our 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 serves as our primary treasury reserve asset. 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 technology 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. These capital market levers allow us to deploy intelligent leverage to increase our Bitcoin holdings in a manner which we believe has created shareholder value. Since our adoption of our Bitcoin strategy, we've used three primary mechanisms to acquire more Bitcoin. Cash flows from software operations. Since August 2020, we've invested $836 million of total cash in our balance sheet. Equity issuances. We have issued $3.2 billion in equity in a manner that we believe to be accretive to existing shareholders. And debt financing. We have $3.8 billion in debt outstanding through the issuance of both senior secured notes and convertible notes. We've used the proceeds from these issuances principally to purchase Bitcoin. The blended cost of our outstanding debt is fixed at 1.6% annually. Turning to the Bitcoin highlights for Q2 2024, MicroStrategy remains the largest corporate holder of Bitcoin in the world, now holding 226,500 Bitcoins with a total Bitcoin market value of $15 billion as of yesterday. Since March 31, 2024, we acquired an additional 12,222 Bitcoin for a total purchase cost of $805 million and an average price of $65,882. Year-to-date 2024, the price of Bitcoin has appreciated, spurred notably by the approval of the Spot Bitcoin Exchange Traded Products, or ETPs, which has drawn considerable institutional attention. We believe the introduction and initial success of the spot Bitcoin ETPs evidences the maturation of Bitcoin as an institution-grade asset class with broader regulatory recognition and institutional adoption. We attended the Bitcoin 2024 conference in Nashville last week, and we saw tremendous support for the Bitcoin ecosystem from policymakers, bipartisan politicians, institutions, businesses, and individuals. It's very encouraging to see high-profile institutions and individuals showing interest in Bitcoin and starting to appreciate the importance of this asset class as a part of their portfolios. MicroStrategy remains highly committed to our Bitcoin strategy with a long-term focus. Michael will further elaborate later with his thoughts and takeaways from the Bitcoin 2024 conference. On the capital markets front, we made significant progress towards the advancement of our Bitcoin development company strategy. In June, we raised $800 million through 2032 maturity convertible notes, called for redemption our $650 million 2025 convertible notes, announced a 10 to 1 stock split, and announced a $2 billion at the market or ATM equity offering program. Andrew will further provide details on our capital markets and Bitcoin purchase activity for this quarter. As a Bitcoin development company, we have the unique ability to access the capital markets to create intelligent leverage. During the first and second quarter of 2024, our total Bitcoin holdings increased by 13.3% and 5.6% respectively. During the same periods, our assumed diluted shares outstanding increased by only 4.8% and 1.8% respectively. When we refer to assume diluted shares outstanding, we're assuming all outstanding convertible notes are fully converted at their respective conversion prices, all outstanding options are fully exercised, and all restricted stock units and performance stock units fully vest, in each case without regard to exercise or conversion price or vesting or other contractual conditions. Our opportunistic use of leverage and excess cash to acquire Bitcoin, as well as our strategic execution of our capital markets, financings, resulted in an incremental value creation for our shareholders. Our objective is to accumulate Bitcoin holdings at a faster rate than we issue shares, and we believe we have a demonstrated track record of doing so. To assess our performance in achieving this strategic objective, we're introducing a new key performance indicator, which we refer to as BTC yield. We define BTC yield as the period-to-period percentage change in the ratio of our total Bitcoin holdings to our assumed diluted shares outstanding. We use this KPI to help assess the achievement of our strategic objective and for evaluating capital allocation decisions. If we increase our total Bitcoin holdings over a given period at a faster pace than we increase our assumed diluted shares outstanding, we achieve a positive Bitcoin yield. I should note here that Bitcoin yield is not equivalent to yield in the traditional financial context. It's simply just a measure of the percentage change period to period in the ratio of our Bitcoin holdings to our assumed diluted shares outstanding. In addition, when we use Bitcoin yield, we consider the various limitations of this metric, including that it assumes that all indebtedness will be refinanced or, in the case of our convertible notes, converted into shares of common stock at their respective conversion prices, and it does not take into account debt and other liabilities. Although Bitcoin yield is not actually a yield in the traditional finance context, we internally think about this metric as some might think about a bond yield or yield on another financial instrument. It's obviously an imperfect analogy, but we look to the metric to help us assess how we are doing on using our capital most efficiently to increase our Bitcoin holdings over time. The historical performance of this KPI is shown on this slide. We achieved an annual Bitcoin yield of 47.3% in 2021, 1.8% in 2022, and 7.3% in 2023. We've achieved quarterly Bitcoin yield of 8.1% in Q1 and 3.7% in Q2, surpassing the annual Bitcoin yield in 2023 as of the year to date, 2024. We're able to achieve this through the acquisition of Bitcoin using our excess cash flows and proceeds from debt and equity financings, which we believe were accretive to shareholders. Management uses Bitcoin yield to evaluate capital allocation decisions and to measure the achievement of our Bitcoin strategy. Our strategy of acquiring Bitcoin in a manner we believe to be accretive to shareholders, thereby achieving Bitcoin yield, sets us apart from institutional Bitcoin investment options that charge a management fee and would therefore achieve a negative Bitcoin yield as we measure it. Building on our previous discussion, we have a clear strategy to enhance our Bitcoin holdings and deliver a positive annual Bitcoin yield. Today, we are announcing our target to achieve a Bitcoin yield of 4% to 8% per year for the next three years in 2025, 2026, and 2027. Our approach includes accumulating more Bitcoin holdings by, one, using the organic excess cash flows generated by our software business, two, using proceeds from equity offerings when we believe accretive, and three, responsibly using the intelligent leverage framework with a risk-managed approach. We will continue to use the full spectrum of financing options and also explore creative capital market transactions and untapped pools of capital to execute the strategy effectively and prudently. By sharing our three-year KPI targets, we're reinforcing our goal of achieving consistent, positive Bitcoin yield over time. We pride ourselves on being at the forefront of institutional Bitcoin adoption. As we look into the future, we anticipate that our ability to consistently achieve positive Bitcoin yield will become a crucial benchmark for investors to assess our execution of our strategy. Turning to the software business, MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. In the second quarter of 2024, we continued our shift towards our cloud offering, resulting in subscription services revenue of $24 million, an increase of 21% year-over-year. A 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 remain high, and our non-GAAP subscription billings remain strong. Overall, we see strong demand for our cloud platform and Q2 was a particularly strong quarter for customers migrating to cloud. Our objective continues to be growing cloud revenue by migrating customers to cloud while maintaining profitability. At our MicroStrategy World User Conference held in Las Vegas in May, 2024, we showcased how MicroStrategy One with AI can create more innovative, competitive, high-performing organizations. In our keynote address, we highlighted how some of the biggest brands in the world, including organizations like Glory, Bayer, and the U.S. Department of State, leverage our platform to successfully utilize their data and combat the big data stupor and application sprawl. We unveiled Auto Express to offer an easy and insightful way to engage with MicroStrategy AI, allowing users to build their own standalone AI BI bot without a single line of code. Earlier this year, MicroStrategy One became available on the Google Cloud Marketplace, in addition to prior deployments on Azure and AWS, allowing enterprises to easily find and deploy this cloud native platform. Customers can benefit from a wide range of innovative, first-to-market AI-powered functionality, powered by the Azure OpenAI LLM. Transitioning our customer base to the technology of the future remains a key focus, and our hyperscaler partners are a key part of this migration. As customers and prospects move to the cloud to empower their AI-driven digital transformations, we expect to continue to see a decrease in product license revenues and support revenues, which will in part be offset by increases in subscription services revenues. This will be most pronounced in the balance of 2024. This may result in a decrease in total recognized revenue in the short term, but in the long run, we expect it to be more than offset by increases in subscription services revenue. Additional benefits include more engaged customers using our very latest software, higher retention rates, and ultimately growing recurring and overall revenues. I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Thank you, Phuong. I'll continue with the recap of our software financial results, and then I'll move on to our Bitcoin strategy. Total revenues for the second quarter were $111.4 million, down 7% year over year. Consistent with recent quarters, the overall revenue trend reflects the transition of our business from on-premise to cloud. As we migrate customers to the cloud, we shift upfront product license revenues to subscription services revenues, which are recognized radically over the life of a contract. As a result, we fully expect product license revenues along with support revenues to decline, both of which were down 40% and down 7% respectively year over year. What isn't immediately seen through reported revenue is that we are building up stronger, more durable cloud recurring revenue that comes in over time, which is consistent for any on-prem to cloud transition. And more robust or faster cloud migrations will have a larger but temporary reduction in upfront revenues, which is what we saw in last quarter's results. The cloud contracts booked in Q2 were the strongest single quarter bookings we have seen to date. more than double Q1 or any prior quarter for that matter. This acceleration last quarter makes up for the lower than expected cloud contracts we closed in Q1, meets and beats last year's quarter's targets, and directly reflects the transition starting to take shape. While we'll see the initial benefits of last quarter's strong cloud migrations flow through revenue beginning next quarter, the lower product license bookings in 2024 will result in lower than expected recognized revenue for the full year by somewhere between 4% and 5%. Overall total annual revenues have been generally flat in the past couple of years, but with our transition beginning to take shape in the first half of this year, we expect to see similar patterns in total revenue going forward as we execute on our transformation. this year and potentially in 2025 should reflect the transition point in our long-term strategy and exiting the next 12 to 18 months we should start seeing total revenues begin to grow again non-graph non-gap subscription billings which represent cloud revenues in the quarter along with just the next 12 months of deferred subscription services revenues grew by 45% last quarter to $33.4 million, our fourth straight year of quarterly double-digit growth. Q2 subscription services revenues increased 21% year over year, which represents the recognized revenue from previously booked cloud contracts, now make up approximately 22% of total revenues. Subscription services revenues are now larger than our product license revenues and will continue to grow each quarter, while product license will decline further from here on out. In Q1, we enhanced our reported numbers to break out our quarterly results into two categories. First, the software business category reflects income or loss from operations related specifically to our BI business. The corporate and other category represents the non-software related areas associated with our digital asset holdings, which include impairment charges and other related third-party costs. While we continue to operate under one reportable operating segment, we believe the breakout of our operating results into these two categories provides more transparency with respect to the performance of our software business while isolating the impacts related to changes in Bitcoin price. In Q2, software business revenues were $111 million that I mentioned a moment ago, while cost of revenues were $31 million, up 14% compared to Q2 of last year. The increase was in part due to higher cloud hosting costs, which is a direct result of our growing cloud business, as well as costs associated with setting up enhancing customer success functions. Software business operating expenses were $99 million, up 4% compared to Q2 of last year. Higher G&A this quarter was related to higher stock base comp, legal, consulting, and other advisory costs, as well as higher employer paid payroll taxes in connection with employee stock option exercises in the second quarter. However, overall operating expenses were also offset by lower costs in sales and marketing, consistent with recent quarters as we maintain strong discipline in expense and cost management. Non-cash stock-based compensation expense in Q2 was $20.6 million, up 33% year-over-year. And overall non-GAAP operating income or profit from the software business category was $1.9 million. Lastly, the corporate and other operating expense category for the quarter was $182 million compared to $25 million in Q2 of last year. $180 million of which was due to Bitcoin impairment in the last quarter. Now, turning to our Bitcoin strategy. We had another extremely successful quarter of adding more Bitcoin to our balance sheet as we acquired 12,053 Bitcoins in the second quarter. And as of July 31st, the company held a total of 226,500 Bitcoins acquired for an aggregate cost of $8.3 billion or approximately $36,800 per coin. Currently, we hold 175,721 unencumbered Bitcoins at MacroStrategy. the wholly owned subsidiary of MicroStrategy, which represents 78% of our total holdings or $11.4 billion in current market value, all of which are currently unrestricted and unencumbered. The Bitcoin we acquired using proceeds from our convertible notes offering in Q2 are held at MicroStrategy, the parent, and serve as collateral securing our 2028 senior secured notes. During Q2, we added 11,931 Bitcoins to MicroStrategy's holdings at an aggregate purchase price of $786 million using net proceeds from our convertible note issuance. Additionally, Bitcoins purchased using excess cash from the software business are also held at MicroStrategy, the parent, which also serve to collateralize our 2028 senior secured notes. During Q2, we added 122 bitcoins to MicroStrategy's holdings at an aggregate purchase price of $8 million from excess cash. Since the end of Q2, we added an additional 169 bitcoins to MicroStrategy holdings at an aggregate purchase price of $11 million, also using proceeds from excess cash. As of July 31st, 50,779 Bitcoins are held at MicroStrategy, or $3.3 billion in current market value. The commitment to our Bitcoin strategy remains stronger than ever. We have added Bitcoin to our treasury in every quarter since August 2020, and as a result, MicroStrategy remains the largest corporate folder of Bitcoin in the world. As we continue to champion Bitcoin as a strategic treasury reserve asset, we are deeply encouraged by the growing number of both public and private companies that are adopting the Bitcoin standard to help grow shareholder value. As of June 30th, 2024, the market value of our Bitcoin holdings was $14 billion and an aggregate cost of $8.3 billion equal to an average purchase price of approximately $36,800. This is in contrast to the carrying value of our Bitcoin holdings of $5.7 billion as of the last day of the quarter. We fully plan to adopt the new FASB accounting rule, which requires fair value treatment for Bitcoin holdings by Q1 of next year, when the rule takes effect, at which time we will realize the benefit of the significant difference between the market value and the carrying value of our balance sheet. Now, turning to our capital markets activities. Since the inception of our Bitcoin strategy, we have issued $4.4 billion of debt through senior secured notes and convertible notes. We now have $3.8 billion of outstanding debt with a very low blended interest rate of approximately 1.6%, with staggered maturities over several years starting in February 2027 through June 2032. Intelligent leverage remains a key component of our active capital allocation strategy, which when deployed in a thoughtful manner, enables us to add more Bitcoin to our treasury reserve at an attractive cost and with a disciplined approach to maximizing BTC yield. Continuing with the momentum from the two convertible note financings in March, our recent convert in June was upsized and well received by the market. We issued $800 million of convertible notes due June 2032 at an annual interest rate of 2.25%, with a conversion premium of 35% and a conversion price of approximately $2,043 per share. As in the past, the net proceeds from the new convert were used to acquire additional Bitcoin into our treasury reserves. We will continue to actively manage our existing liabilities. And to that end, we called for redemption of our $650 million 2025 convertible notes. As the notes were substantially in the money, holders of those notes converted substantially all of the notes into shares of our Class A common stock prior to the redemption date. Our 2025 notes traded up over 300% from time of issuance resulting in extremely successful investment for our bond investors and partners. In addition to raising debt, we continue to demonstrate a solid track record of issuing equity in a manner that is accretive to shareholders. Today, we announced that we filed a new shelf registration for a $2 billion at-the-market, or ATM, equity offering. We will remain extremely disciplined in the use of both the ATM and other capital markets activities, executing on them when we believe it will achieve the most Bitcoin yield. Our overall capital allocation strategy continues to be focused on increasing our total Bitcoins at a rate faster than we issue new shares, which results in higher BTC yields. As Fong mentioned earlier, we are targeting an annual BTC yield of 4% to 8% in each of 2025, 2026, and 2027. Having exceeded that already in 2024, we believe those targets are achievable and also provide transparency in reinforcing our goal of consistent, positive BTC yield over time, further differentiating MicroStrategy's value proposition. Lastly, we also announced a 10-for-1 stock split of MicroStrategy's Class A common stock and Class B common stock, affected as a stock dividend. This will lead to better accessibility for our investors and employees and greater liquidity in our stock as well as in our options activity. The shares are expected to be distributed after the close of trading on August 7, 2024, And trading is expected to commence on a split adjusted basis at the market open on August 8, 2024. The stock dividend will not have any impact on the voting and other rights of stockholders. The next slide lays out our debt maturity profile. As you can see, the conversion of the convertible notes to 2025 has moved the nearest debt maturity out to 2027. We actively monitor the capital markets and evaluate liability management opportunities to manage our debt and interest expense, as well as opportunities to raise additional future financings. MicroStrategy has demonstrated a strong track record of applying a disciplined approach to navigate through volatile times in the Bitcoin market, and we believe we have established significant credibility to execute on our strategic goal of generating value for our shareholders. As Fong said earlier, we believe that the combination of our operating structure, Bitcoin strategy, and focus on technology innovation provides a unique value proposition for shareholders when compared to other forms of Bitcoin exposure. 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.