Strategy Inc

Good evening, everyone. I'm Jeremy Price, MicroStrategy's Senior Vice President of Financial Planning and Analysis and Head of Investor Relations. I'll be your moderator for MicroStrategy's 2021 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 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 www.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 or Fong will answer them at the end of the session. Please be sure to provide your name and your company's name when submitting your questions. With that, I will turn the call over to Michael Saylor, chairman and CEO of MicroStrategy.

Thank you, Jeremy. I'm Michael Saylor. I'm the chairman and the CEO of MicroStrategy. I'd like to welcome all of you to today's webinar regarding our 2021 second quarter financial results. I'm here with Fong Lee, our president and chief financial officer. First, I'd like to pass the floor to Fong, who's going to provide an update on our operations and finance for the quarter.

Thank you, Michael. I'll start with some highlights from our second quarter performance. MicroStrategy performed well across the board, demonstrating continued momentum in our business analytics software business, while also completing another successful capital raise that expanded our digital asset holdings. We built upon our strong first quarter performance and have now delivered two of the strongest quarters of operational performance in years. We're pleased with the strength and consistency of our execution as we continue to benefit from the numerous product introductions we've made since 2019 and the operational changes we undertook in the first half of 2020. Total revenue in the quarter grew 13% year over year, or 10% on a constant currency basis, and it was up 6% versus Q2 of 2019, which is our strongest Q2 quarterly performance in six years. Our cloud offerings continue to gain traction with both new and existing customers. While we once again got some benefit from a favorable comparison against the COVID-19 impacts during Q2 2020, our performance shows clear momentum across our entire business. License revenue grew 50% year over year, but more impressively grew 10% versus the second quarter of 2019. Subscription revenue in the quarter was up 29% compared to Q2 2020. Current subscription billings grew 13%, our fifth straight quarter of double-digit growth. Our Q2 subscription billings were impacted by a decrease in short-term deferred subscription revenue as we no longer include contract values that are invoiced in the future. Without this decrease, Q2 subscription billings would have grown 42%. We're another strong quarter of profitability with a non-gap operating margin of 17%, up 10% year over year. Our performance is being driven by broadening adoption of the MicroStrategy platform. Existing customers have long recognized the value of MicroStrategy, looking for more areas to deploy our best-in-class BI platform. New customers are also attracted to our solutions, recognizing the need for more robust capabilities than those offered by lightweight dashboarding tools from unproven competitors. Customers are well aware that legacy vendors like IBM and SAP have deprioritized BI in favor of their respective cloud transitions. And thus, as enterprises look to rebuild applications for the modern world, MicroStrategy's modern, open, enterprise-grade platform better meets their needs. We were pleased with the market reception of HyperIntelligence and Hyper.Now. We signed several dozen HyperIntelligence customers in the quarter as its modern intuitive design puts actionable insights into workers' hands instantaneously. Let's look at a few key wins in more detail. We signed a net new win with a German freight company where we beat Tableau and Power BI to displace a legacy solution. We signed a new win with a leading cloud communications vendor for a seven-figure OEM transaction where we beat Tableau and Microsoft Power BI. And finally, we signed a new license deal with one of the leading cryptocurrency exchanges. We also saw an increase in migrations of existing on-premise customers to our cloud solution, which also included an expanded deployment of MicroStrategy as part of the migration process. We had several wins in the quarter where ARR from that customer more than doubled from its prior run rate, providing value both to the customer and MicroStrategy. Some exciting conversions during the quarter included, one, a leading clothing retailer in the U.S. who nearly doubled the size of their annual commitment to us and is now approaching $1 million in ARR. Two, a sizable expansion from one of the world's largest beverage producers, extending its MicroStrategy deployment to now include collaboration and federated analytics features as part of its migration to the cloud. And three, one of Europe's largest grocers signed a multimillion-dollar expansion to further expand MicroStrategy as its enterprise standard BI platform. Another exciting area of strength for us is our embedded OEM business, where we are number one in the marketplace. We have seen increased interest from new and existing customers that want to leverage our best-in-class analytics platforms as a core part of their solution. We experienced notable growth in both the number and size of OEM opportunities. We believe our extensive investment in open architecture driven by open APIs and SDKs provides OEMs with the best solution in the market. Our success in the market has been driven in large part by the investments we've made and continue to make in our solutions. Even as we significantly enhance the overall profitability of the company, in 2021, we expect our R&D investment to be the highest on an absolute dollar basis since 2014. And as we look into the future, we expect R&D spend in 2022 and beyond to be even higher. Our investments in cloud, OEM, security, in modernizing our UI through workstation, dossier, library, and hyperintelligence are a reflection of our commitment to offer our customers the most complete business analytics platform in the world. A key part of our strategy is to leverage the virtual wave to drive greater efficiency in our go-to-market efforts, which enhances our overall profitability and provides additional resources to invest in R&D. For example, product license revenue grew 10% since Q2 2019, and subscription revenue has grown 46% over that time, while we reduced sales and marketing expense by $8 million, or 16% over that same time. Our performance over the last year has validated our decision to move to a fully virtualized go-to-market model at the beginning of COVID-19. We believe we can continue to generate additional leverage from our sales and marketing spend over time while continue to generate consistent top-line growth. Turning now to our digital asset strategy, we had several exciting developments in the second quarter. First, we surpassed the 100,000 Bitcoin mark, ending the quarter with approximately 105,085 Bitcoins purchased at an average price of approximately $26,080. During the second quarter, we acquired an additional 13,759 Bitcoins for $529 million, or approximately $38,467 per Bitcoin. The capital used for our latest Bitcoin purchase included proceeds from our successful $500 million upsized senior secure note offering that we priced during the quarter. This is our third successful capital raise with total gross proceeds of $2.2 billion. It is important to note that during the quarter, we created a new subsidiary, MacroStrategy LLC, that was formed to hold the approximately 92,079 bitcoins we owned prior to the senior notes offering. Additionally, we recently put in place an at-the-market shelf registration to sell up to $1 billion of Class A common shares. We've not executed on the shelf and intend to be opportunistic going forward. We will continue to evaluate opportunities to raise additional funds across the capital structure to execute our Bitcoin acquisition strategy. Bitcoin prices were volatile in the quarter, resulting in a gap non-cash impairment charge of $484.8 million. Our calculation of the non-GAAP market value of our Bitcoin holdings as of June 30th was approximately $3.7 billion, compared to a cost basis of $2.7 billion and book value of $2.1 billion. As of July 28th, 2021, at 4 p.m. Eastern Time, the market price of one Bitcoin on our principal market was approximately $40,416. which equates to a non-GAAP market value roughly $4.2 billion for 105,085 Bitcoins, a 56% appreciation over our cost basis. We intend to continue to deploy additional capital into our digital asset strategy. As one of the leading advocates for digital assets, we've been working with peer companies and various policy-setting agencies in the U.S. to try to determine a more appropriate accounting framework for digital assets. As the largest corporate holder of digital assets in the world, we believe we have a responsibility to share what we've learned since embarking on this strategy to make it easier for other companies to diversify their balance sheet with this new asset class. Before going into a more detailed review of our financial performance, let me just finish by saying how pleased we are with our performance in the second quarter, the first half of 2021, and the last four quarters since the primary impacts of the pandemic. We are delivering on both of our strategic priorities. Operationally, we are realizing the benefits of the investments in the enterprise analytics software business, which is leading to both improved revenue, growth, and increased profitability. Our operational success leaves us well positioned to deliver on the long-term financial targets laid out in our investor day last November. At the same time, our digital asset strategy has generated substantial value for shareholders and elevated MicroStrategy to a global leader in the Bitcoin market. The increased visibility of the company due to our digital asset strategy is also helping to initiate sales cycles we would have been unlikely to participate in otherwise. We believe we are in the early stages of each of these trends and that there continues to be meaningful opportunities for further improvement in both of our strategic focus areas. Turning to our second quarter 2021 financial results in more detail, gap revenues for the quarter were $125.4 million, up 13% year-over-year and up 6% from the second quarter of 2019. Product license revenues were $22.2 million in the second quarter of 2021, up 50% year-over-year and up 10% from the second quarter of 2019. Subscription services revenues in the second quarter of 2021 were We're $10.3 million, an increase of 29% year over year, and up 46% from the second quarter of 2019. The growth in subscription services revenue reflects the growing portion of our product bookings that are related to our managed cloud platform. Our current subscription billings are $10.6 million, an increase of 13% from the second quarter of 2020. We're pleased with the performance of our cloud business in the quarter. Product support revenues for $71.0 million in the second quarter of 2021, a 1% increase year over year. The year over year increase was primarily driven by favorable impact of foreign currency translations, partially offset by certain existing customers converting from perpetual licenses to our subscription services or term license offerings. Product support revenues were down 2% year over year on a constant currency basis. As we see more on-premise conversions to our cloud offering, we would anticipate product support revenue will experience a modest decline over time. Finally, other services revenue, which largely reflects our consulting services, were $21.8 million in the second quarter of 2021, an increase 23% year over year. Improvements in consulting revenues is an indication of continued engagement from our customers to modernize and expand deployment of their MicroStrategy platform. Total deferred revenue on June 30th, 2021 was $190.1 million. This is up 10% year over year, primarily due to a 48% increase in deferred subscription services revenues and a 6% increase in deferred product support revenues. As we see more existing customers converge to our managed cloud platform, there is a shift from deferred product support revenues to deferred subscription services revenues. Total gap expenses were $539.6 million in the second quarter of 2021, which includes a digital asset impairment charge of $424.8 million. Our Bitcoin holdings are considered indefinite, lived, intangible assets under applicable accounting rules, meaning that any decrease in their fair value below our book value for such assets at any time subsequent to their acquisition requires us to recognize impairment charges. Total non-GAAP expenses were $103.7 million in the second quarter of 2021, a 2% increase year over year. The year over year cost increase is mainly driven by better sales performance, which resulted in higher variable compensation for sales and marketing. Total gap operating loss was $414.2 million in the second quarter of 2021, inclusive of impairment related to Bitcoin of $424.8 million and stock-based compensation expense of $11.1 million. Total non-gap operating income was $21.6 million in the second quarter of 2021, a $13.1 million increase year over year. Turning to the balance sheet, we ended the quarter with $56.4 million in cash. We issued $500 million in aggregate principal amount of senior secured notes, bearing an interest rate of 6.125%. The net proceeds from the sale of the notes were approximately $487 million after deducting the initial purchaser's discounts and commissions and customary offering expenses. In accordance with the company's corporate strategy of acquiring Bitcoin, we use the net proceeds from the sales of the notes to purchase Bitcoin. Carrying value of our Bitcoin holdings as of June 30th, 2021, was $2.1 billion, which reflects a $689.6 million cumulative impairment charge. It is also reflected as a loss on our GAAP income statement and in the period incurred. We exclude the quarterly impact of Bitcoin impairment charges from our non-GAAP operating income and non-GAAP diluted earnings per share calculations. We estimate the non-GAAP market value of our Bitcoin holdings was $3.7 billion at June 30th, 2021, reflecting $1.6 billion of unrealized gains when compared to the carrying value of our Bitcoin at June 30th, 2021. We're pleased with the execution of our two corporate strategies over the last four quarters. On a trailing 12-month basis, we've generated revenue of approximately $507 million, which represents 7% growth year over year. Our software business has generated non-GAAP operating income of $90 million on a trailing 12-month basis, which equates to a non-GAAP operating margin of 13%. As a result of our strong financial performance, the company is raising our estimate of 2021 non-GAAP operating income to $80 to $100 million. Additionally, over the last four quarters, the company has acquired over 105,000 Bitcoins with estimated appreciation of approximately 33% over the acquisition cost. Going forward, you should expect that we may purchase additional Bitcoin when our cash, cash equivalents, and short-term investments exceed current working capital requirements. And we may, from time to time, subject to market conditions, issue debt or equity securities in capital-raising transactions with the objective of using the proceeds to purchase Bitcoin. Finally, we plan to engage in a search for the company's next CFO, With the management team focused on two corporate strategies, growing our enterprise analytics software business and acquiring and holding Bitcoin, and with the increase in our public profile and operational complexity, we plan to engage in a search for a CFO to complement the management team and allow me to focus on my role as president running the day-to-day business of MicroStrategy. I'll now turn the call over to Michael for comments on our Bitcoin acquisition strategy, as well as market trends for business intelligence software and our executive team.