Strategy Inc

Hello, everyone, and good evening. I am Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. I will be your moderator for MicroStrategy's 2024 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 10Q file with the SEC. We assume no obligation to update these forward-looking statements which speak only as of today. Also, during today's call, we will refer to certain non-GAAP financial measures, reconciliations, showing gap versus non-gap results are available in our earnings release and presentation, which were issued today and are available on our website at microstrategy.com. I would now 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 and operational results for the third quarter of 2024. Second, Andrew Kang will cover the financial results for the third quarter of 2024. Then Michael Saylor will provide a strategic review and the vision and discuss the recent Bitcoin market updates. And lastly, we'll open up to the Q&A. With that, I will now 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. Starting with the Bitcoin highlights for Q3 2024, MicroStrategy remains the largest corporate holder of Bitcoin in the world, now holding 252,220 Bitcoins with a total Bitcoin market value of $18 billion as of yesterday. Since June 30th, 2024, we acquired an additional 25,889 Bitcoin for a total purchase cost of $1.6 billion, an average price of $60,839. 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 to the asset class. 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. On the capital markets front, we made significant progress towards the advancement of our Bitcoin strategy. In September, we raised $1.1 billion net proceeds through our At The Market, or ATM, equity offering program, and raised $1.01 billion through the issuance of our 2028 convertible notes. Using part of the proceeds from the 2028 convertible notes, we also redeemed our $500 million senior secured notes due 2028 in full. As a result, all of our Bitcoin holdings are now unencumbered. Andrew will provide further details on our capital markets and Bitcoin purchase activity for this quarter. As we continue to focus on acquiring more Bitcoin through our capital market activities, we believe that the value proposition in the company centers increasingly on our Bitcoin treasury strategy. As a result, we've developed a new descriptor for what we are, which is the world's first and largest Bitcoin treasury company, the acronym being coincidentally BTC. So what does this mean? We are a publicly traded company that has adopted Bitcoin as our primary treasury reserve asset. By using proceeds from equity and debt financings, as well as cash flows from our operations, we strategically accumulate Bitcoin and advocate for its role as digital capital. Our treasury strategy is designed to provide investors varying degrees of economic exposure to Bitcoin by offering a range of securities, including equity and fixed income instruments. In addition, we provide industry-leading AI-powered enterprise analytics software, advancing our vision of intelligence everywhere. We leverage our development capabilities to explore innovation in Bitcoin applications, integrating analytics expertise with our commitment to digital asset growth. We believe our combination of operational excellence, a strategic Bitcoin reserve, and our focus on technological innovation positions us as a leader in both the digital asset and enterprise analytics sectors, offering a unique opportunity for long-term value creation. Michael will further elaborate on our vision as a Bitcoin treasury company. Since our adoption of our Bitcoin strategy, we've used three primary mechanisms to acquire more Bitcoin. One, debt financing. We have $4.3 billion in principal amount of convertible debt outstanding and an attractive blended cost of debt fixed at 0.8% annually. Two, equity issuances. We've issued $4.3 billion in equity in a manner that we believe to be accretive to existing shareholders. And three, cash flows from our software operations. Since August 2020, we've invested $836 million of total cash on our balance sheet. 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. So where do we go next from here? For those who are familiar with the Hitchhiker's Guide to the Galaxy by Douglas Adams, they would know what is the answer to the ultimate question of life, the universe, and everything. In this science fiction series, an enormous supercomputer named Deep Thought calculated the answer to this question over a period of 7.5 million years. And of course, the answer to the ultimate question of life, the universe, and everything is the number 42. We also think it's the answer to an important question. And we spent about four years thinking about this question. We believe it's a unique number with some special characteristics. It's the sum of 21 plus 21. And we all know that 21 is a magic, a magical number in the world of Bitcoin. There can only ever be a maximum of 21 million Bitcoins in circulation. MicroStrategy owns about 1.2% of this Bitcoin today. Today, MicroStrategy is announcing its ambitious capital market strategic plan for the next three years. From the years 2025 to 2027, the company is targeting to raise $42 billion of capital, comprised of $21 billion of equity capital and $21 billion of fixed income capital, primarily for the purpose of acquiring Bitcoin. Today, we have filed a prospectus supplement for a new $21 billion ATM equity program. This is the largest ATM in the history of capital markets. Fixed income capital can consist of various debt and debt-like instruments, including convertible debt, preferred equity, hybrid capital, or other similar instruments. So I'd like to provide more detail on our capital raising targets over the next three years. For the year 2025, we target raising $10 billion total, comprised of approximately $5 billion each of equity capital and fixed income capital. For the year 2026, we target raising $14 billion, comprised of approximately $7 billion each of equity capital and fixed income capital. And for the year 2027, we target raising $18 billion, comprised of approximately $9 billion each of equity capital and fixed income capital. We plan to address increased interest costs from any incremental fixed income capital raise through efficient management of our overall capital raising plan, including alternating between equity raises and debt raises as appropriate to maintain our overall intelligent leverage. By managing our treasury strategy in this way, so long as we've continued access to equity capital in favorable terms, we believe we will not be limited by the cash flows from our software business to scale up our Bitcoin capital markets initiatives. Turning to the software business, MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. In the third quarter of 2024, we continued our shift towards our cloud offering. Non-GAAP subscription billings, which represent cloud revenues in the quarter, along with just the next 12 months of deferred subscription services revenues, grew by 93% in Q3 to $32.4 million, our fourth straight year of quarterly double-digit growth. The strong growth in our subscription billings was driven by both existing customer migrations to the cloud and new customer wins. Our customer renewal rates continue to remain high and our subscription services revenues remain strong. Overall, we see strong demand for our cloud platform and Q3 was a particularly strong quarter for customers migrating to the cloud. Our objective continues to be to increase cloud revenue by migrating customers to cloud while maintaining profitability. MicroStrategy One is now available on Azure, AWS, and Google Cloud marketplaces, allowing enterprises to easily find and deploy this cloud-native platform. Customers can benefit from a range of innovative, first-to-market AI-powered functionality powered by the Azure OpenAI LLM, which also creates demand for our cloud platform. 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. We expect this trend to continue 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 revenues. 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 first quarter in further detail.

Thank you, Phuong. First, I'll take a few minutes to expand upon the software business results. Moving to slide 12, earlier this year, 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 assets 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 Q3, software business revenues were $116 million, down 10% year-over-year. Consistent with recent quarters, the overall revenue trend reflects the ongoing transition of our business from on-premise to cloud. As part of that transition, we fully expect product license along with support revenues to decline, impacting total revenues consistent with this quarter's results. We are building up stronger, more durable cloud recurring revenues that come in over time, which is consistent for any on-prem to cloud transition. Q3 cloud bookings was strong in line with the prior quarter. And if you recall, Q2 was the strongest single quarter cloud bookings to date. This increase last quarter helps offset the lower than expected product license contracts we closed this quarter and reflects the transition taking shape. As Phuong mentioned earlier, non-GAAP subscription billings, which represent cloud revenues in the quarter along with the next 12 months of deferred subscription services revenues, grew by 93% in Q3 year-over-year to $32.4 million, reflecting double-digit growth in every quarter for the last four straight years since launching our cloud transition. Q3 subscription services revenues increased 32% year-over-year and now make up approximately 24% of total revenues. Subscription services revenues are now larger than our product license revenues and will continue to grow while product license revenue will continue to decline further going forward. While we will 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 recognized revenue below our target for the full year, but in line with the revised target we discussed last quarter. We expect this year and next year will reflect the transition point in our long-term strategy, after which we expect total revenues will begin to grow again. Cost of revenues were $34 million, which was up 29% compared to Q3 of last year. The increase was due in part to higher cloud hosting costs, a direct result of our growing cloud, which we expect to continue in future periods. Software business operating expenses were $100 million, up 7% compared to Q3 of last year. While overall personnel costs were down year over year, the increase that I just described year over year was in part largely attributed to higher stock-based compensation and higher custody fees related to our increased Bitcoin holdings, but also offset by savings and other G&A categories. In Q3, we also recognized close to $14 million in severance costs related to workforce optimization in the quarter. which will result in approximately $30 million in lower salary costs next year. This strategic planning across all departments in the company is focused on right-sizing overall staffing levels, optimizing organizational structures, and focusing on a disciplined performance management culture. As a result, annual staffing costs are expected to be approximately 13% lower next year, which will further benefit our margin profile in 2025. Overall non-GAAP operating income or profit from the software business category was $0.9 million. Lastly, the corporate and other operating expense category for the quarter was $414 million, the majority of which was due to the Bitcoin impairment in Q3. Now, turning to our Bitcoin strategy, we had another very successful quarter in adding more Bitcoin to our treasury reserves as we acquired 25,889 Bitcoins in the third quarter for approximately $1.6 billion at an average price of $60,839 per Bitcoin. As of September 30, the company held a total of 252,200 Bitcoins acquired for an aggregate cost of $9.9 billion, or approximately $39,000 per Bitcoin. I will speak to our overall treasury operations for the quarter in a moment, but a significant result of redeeming our 2028 senior secured notes in Q3 was to release all Bitcoin that was held at the MicroStrategy entity. And now 100% of our Bitcoin holdings are fully unencumbered, including now all Bitcoins held at both macro strategy and micro strategy entities. We have added Bitcoin to our treasury balance sheet in every quarter since August 2020. And as we continue to champion Bitcoin as a strategic treasury reserve asset, we are encouraged by the number of both public and private companies that are adopting the Bitcoin treasury standard to help impact shareholder value. As of September 30, 2024, the market value of our Bitcoin holdings was $16 billion at an aggregate cost of $9.9 billion and an average purchase price of $39,000. This is in contrast to the carrying value of our Bitcoin holdings of $6.9 billion as of the last day of the quarter. We will adopt the new FASB fair counting rule accounting rule, which will require fair value treatment for Bitcoin holdings when the rule takes effect in Q1 2025. As of January 1st, 2025, we will recognize a cumulative adjustment to the opening balance of our retained earnings, reflecting in large part the significant difference between the market value and carrying value of our Bitcoin holdings. Now turning to our treasury operations. We had one of our most impactful quarters from a capital markets execution perspective. Following the two convertible note financings we completed earlier in March and in June of this year, we executed a new convertible note financing in September, which was upsized and well received by the market. We issued $1.01 billion of convertible senior notes due September, 2028, at an annual interest rate of 0.625%, with a conversion premium of 40% and a conversion price of approximately $183 per share. The net proceeds from the new convert were used to redeem the 2028 senior secured notes and to acquire additional Bitcoin. We redeemed in full the $500 million 2028 senior secured notes at a redemption price equal to 103.063% of the principal amount of the 2028 secured notes, plus accrued and unpaid interest. We achieved multiple benefits through early redemption. All restrictive covenants in connection with the secured notes were eliminated. All of our Bitcoin holdings became fully unencumbered. and we realized a net annualized interest expense savings of $24 million for the next four years, equaling close to $100 million in total future debt expense savings. In Q3, we also issued $1.1 billion worth of common equity under our at-the-market ATM program. Under the existing ATM program, approximately $891 million of common equity remains available for issuance. As Fong mentioned earlier today, as part of our new 21-21 three-year strategic capital plan, we filed a new prospectus supplement for a $21 billion ATM program. This will be the single largest ATM program filed in the U.S. across all sectors. Under our current capital structure, we now have $4.3 billion of unsecured convertible debt outstanding in with a sub-1% blended interest rate of approximately 0.81%, with staggered maturities over several years starting in February 2027 through June 2032, all which are currently trading above par. Year-to-date 2024, we are the number one issuer of convertible notes in the U.S. by aggregate principal raised. Intelligent leverage remains a key component of our active capital allocation strategy, which, when deployed in a thoughtful and disciplined manner, enables us to add more Bitcoin to our treasury reserve at an attractive cost and in a manner that achieves BTC yield. I'll elaborate on the intelligent leverage and BTC yield concepts in the next few slides. This slide lays out our debt maturity profile. And as you can see, the nearest debt maturity is more than two years away and not until early 2027. The remainder of our debt maturities are evenly spread over several years out to 2032 with an weighted average debt maturity of approximately five years. We actively monitor the capital markets and will continuously evaluate liability management opportunities to manage our debt and interest expense, as well as opportunities to raise additional financings in the future. Year-to-date in 2024, our total Bitcoin holdings increased by 33.3%. During the same period, our assumed diluted shares outstanding increased by only 13.2%. When we refer to assumed diluted shares outstanding, we are 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 any other contractual conditions. As a Bitcoin treasury company, based on market conditions, we intend to continue to access equity capital markets and to explore various opportunities in the debt and fixed income capital markets to effectively manage our overall leverage. Our track record of using equity debt and excess cash to acquire Bitcoin as part of our treasury operations has resulted in value creation for our shareholders and establishes the foundation to execute on our 21-21 capital plan. Our objective continues to be to accumulate Bitcoin holdings at a faster rate than we issue shares, and we have demonstrated a solid track record of doing so. To assess our performance in achieving this strategic objective, we introduced a new key performance indicator last quarter, which we refer to as BTC Yield. To reiterate again, 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 to evaluate 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 BTC yield. I should note here that BTC yield is not equivalent to yield in the traditional financial context. It is simply 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 BTC yield, we assume 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 that it does not take into account debt and or other liabilities. Although BTC yield is not actually a yield in the traditional sense, we internally think about this metric as some might think about a bond yield or a yield of another financial instrument. We view this metric as helping us and our shareholders assess whether we're 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 BTC yield of 43.3% in 2021, 1.8% in 2022, and 7.3% in 2023. as we have achieved quarterly BTC yield of 8.1% in Q1, 3.7% in Q2, and 5.1% in Q3. Management uses BTC yield to evaluate capital allocation decisions and to measure the achievement of our strategy. Achieving BTC yield sets us apart from spot Bitcoin ETPs and other Bitcoin investment vehicles that charge a management fee and would therefore reflect a negative BTC yield as we measure it. Building on the 21-21 plan Fong discussed, we have a clear strategy to increase our Bitcoin holdings and deliver a positive annual BTC yield. Our year-to-date 2024 BTC yield of 17.8% has surpassed the annual BTC yield in 2023. Last quarter, we laid out our target to achieve a BTC yield of 4% to 8% annually for the next three years through 2027. Today, we are revising our target up to achieve BTC yield of 6% to 10% per year for each of the next three years. To do this, we will seek to accumulate more Bitcoin holdings by responsibly using intelligent leverage with a risk managed approach, using proceeds from equity when we believe accretive and using the excess cash generated by our software business. We will continue to consider 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. we will remain disciplined in the use of both the ATM and other capital raising alternatives and financings, doing so in a manner to achieve BTC yield in line with our targets. By providing a three-year KPI, we are reinforcing our goal of achieving consistent, positive BTC yield over time. We pride ourselves on being at the forefront of institutional Bitcoin adoption. And as we look to the future, we anticipate that our ability to consistently achieve BTC yield will become a crucial benchmark for investors. 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 the credibility to execute on our strategic goal of adding value for our shareholders. 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.