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 Third Quarter Earnings webinar. Before we proceed, I will read the Safe Harbor Statement. Some of the information we provide in this presentation 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 in this presentation, we will refer to certain non-GAAP financial measures. Reconciliations showing the GAAP versus non-GAAP results are available in our earnings release and the appendix of this presentation, which were issued today and are available on our website, at www.microstrategy.com. We 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 your questions at the end of the session. Please be sure to provide your name and your company's name when submitting your questions. And with that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy.

Thank you, Jeremy. I'm Michael Saylor, the Chairman and the CEO of MicroStrategy. I'd like to welcome all of you to today's webinar regarding our third quarter 2021 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 our financials for the quarter.

Thank you, Michael. We're pleased with the performance in the third quarter across both of our strategic priorities. For the fifth straight quarter, we posted strong financial and operational results with our software business and made investments in Bitcoin. Our enterprise analytics business delivered another strong quarter, and we are seeing grown adoption of the MicroStrategy platform, especially in the cloud, by new and existing customers. We also had another active and successful quarter with our Bitcoin acquisition strategy. executing on our fourth successful capital raise in the past year and expanding our digital asset holdings. Our results in the third quarter are indicative of the multiple ways MicroStrategy is able to create meaningful and unique value for our shareholders. Total revenue in the quarter grew slightly year over year to $128.0 million. This is a strong performance against an incredibly difficult comp in the third quarter of 2020. As you might recall, in Q3 2020, we signed several deals that were delayed from the first half of 2020 due to COVID-19 and signed a large expansion transaction with a major financial institution. Comparing against 2019, which adjusted these impacts, total revenue grew 7% versus the third quarter of 2019. We think this is a good proxy for the underlying growth of the business. White's revenue was down 13% year-over-year, but up 36% versus the third quarter of 2019. Subscription revenue in the quarter was up 31% compared to Q3 of 2020. Current subscription billings grew 23%, our sixth straight quarter of double-digit growth. Finally, we had another strong quarter of profitability with a non-GAAP operating income of $27.7 million and margin of 22%. MicroStrategy Cloud continues to become a growing mix of our business, while our on-prem product continues to perform well. We're committed to meeting the needs of our customers, regardless of how they would like to deploy MicroStrategy, some of whom operate in highly regulated industries or countries where a cloud deployment is not feasible. When you look at the overall growth of our subscription and licensed businesses, it is clear that underlying demand for our platform has demonstrated signs of strength. I'd like to highlight the three emerging trends in the data and analytics industry acting as tailwinds for MicroStrategy. These trends are converging to create an enterprise analytics super cycle, which is likely to widen the gap between organizations that are able to maximize their investments in data analytics and those that cannot. First, the demand for enterprise analytics has grown and has been accelerated due to the structural changes as a result of the pandemic. Enterprises are striving to stay ahead of changes in market trends, customer demands, supply chains, and employee availability. The capacity to rapidly develop and deploy business and productivity applications to users at any location is now essential. To get there, the data-driven organizations are rushing to modernize their analytics as well as move data and business apps to the cloud. This market shift is putting pressure on legacy mega vendors, who are prioritizing moving their ERP and infrastructure customers to cloud versus investing in their own BI applications. As enterprises now evaluate options to modernize their analytics and BI solutions, MicroStrategy has emerged as a logical vendor of choice because of its full-scale enterprise capabilities. A conclusion substantiated by an accelerated replacement of legacy mega vendor BI platform. Examples this quarter are a licensed dealer with one of the largest hotel brands worldwide to replace Cognos for their entire property fleet, as well as a big consulting deal with a leading media and entertainment company to migrate their legacy reports from business objects to microstrategy. The second trend is that proven solutions are replacing experimental initiatives and enterprises are turning to trusted partners that deliver concrete results. According to a growing number of industry analysts, There is a notable reduction of organizations' willingness to experiment with niche technologies in the times of macroeconomic uncertainty. In the short term, it leads to focus on customers. During this year, enterprises have prioritized the use of a unified platform that can deliver a broad set of use cases and are typically seeing significant cost savings through vendor consolidations. An example is a major win in a large insurance company to replace their suite of point experimental unproven BI solutions. The third trend is that the enterprises are now buying and not building analytics. To meet this demand, a growing number of OEMs are supporting enterprises by developing solutions which require partnering with an open enterprise scale technology vendor. MicroStrategy is well positioned to benefit from this growing trend in the embedded analytics and OEM marketplace. We are number one in the market in our embedded OEM business. You'll see an increased interest from new and existing customers that want to leverage our innovative business analytics platform as a core part of their technology solution. We believe our extensive investment in an open architecture driven by open APIs and SDKs provides OEMs with the best solution in the market. We've experienced notable growth in both the number and size of OEM opportunities. including a deal with a multinational consumer credit reporting company and a deal with a video analytics company. Continuing the market sentiment, I'm also pleased to share that MicroStrategy was recognized with a customer's choice distinction in Gartner's latest voice to the customer report, which summarizes customer feedback on their BI platforms. We're now more than a year into our virtual wave strategy. And we are seeing this approach to drive faster growth and greater productivity on a sustained basis. We're particularly pleased with our profitability performance with non-GAAP operating margin above 20%. This is the eighth straight quarter with an improvement in our year-over-year non-GAAP operating margin. To provide some context around our increase in sales productivity, our sales and marketing and G&A expenses On a 12-month basis, we're down $34 million, or 12% from fiscal year 2019 levels, while our product license revenue has grown 36% since Q3 2019, and subscription services revenue has grown 37% over that time. This translates to an increase in our sales productivity of 31% in the last year and 72% in the last three years. As a result, we repurposed some of those savings into R&D investments in areas like cloud, security, OEM, and new innovations to enhance our value proposition and lay the foundation for long-term, durable growth. This is a virtuous cycle that we believe we can continue delivering on going forward. It's important to note that our pace of innovation is as impressive as it has been in many years, with the company now producing quarterly and monthly software updates. Our team is working on a robust set of product features and enhancements that we believe will expand the value we provide customers and represent future incremental growth opportunities. To summarize our priorities, our focus going forward remains on moving to cloud, expanding our OEM market share, modernizing our customer base, and using our innovative offerings like hyperintelligence to expand new prospects. Overall, I'm very pleased with the way our analytics business is performing. We are on the path of consistent growth, and we're confident in our ability to achieve our long-term growth and profitability targets. Turning now to our Bitcoin strategy, we had another active and successful quarter. We raised approximately $400 million in capital through the sale of Class A common shares as part of our at-the-market offering during the quarter. We used the proceeds of this offering and excess cash to purchase an additional approximately 8,957 Bitcoins at an average price of $46,876 per Bitcoin, net of fees and expenses. This is the fourth successful capital raise we've done in the past year. Having raised $2.6 billion in new debt and equity capital, they were deployed in support of our Bitcoin acquisition strategy. We have approximately $600 million remaining at our existing ATM facility and will continue to be opportunistic in executing against it. Today, MicroStrategy owns approximately 114,042 Bitcoins that we acquired for a total cost of $3.2 billion, or $27,713 per Bitcoin. The market value of our Bitcoin holdings was approximately $5 billion at September 30th, 2021, reflecting $1.8 billion of unrealized gains, or approximately 57% appreciation. When compared to the cost basis of our Bitcoin at September 30th, 2021, the book value of our Bitcoin holdings is $2.4 billion. As of yesterday, October 27th, 2021, at 4 p.m. Eastern Time, the market price of one Bitcoin in our principal market was approximately $59,111. which equates to a market value of roughly $6.7 billion of Bitcoin, representing more than 110% depreciation. MicroStrategy has pioneered the use of digital assets as a core component of an enterprise's treasury policies, created billions of dollars of incremental value for our shareholders, and in doing so, established itself as one of the world's largest owners of Bitcoin. We will continue to evaluate opportunities to raise additional capital to execute on our Bitcoin acquisition strategy, which has the potential to offer asymmetric upside to our shareholders. Before I turn to a more detailed review of this quarter's financial results, I want to reiterate how pleased we are with the execution of both of our strategic priorities. As a result of our strong financial performance, year-to-date, the company is reaffirming our 2021 estimate of non-GAAP operating income of $80 to $100 million. We also expect further acceleration of our cloud billing since June 4, 2021 and going into 2022. We are excited to provide an update on our strategy later this quarter when we hold our 2021 Investor Day on December 2, 2021. We're looking forward to providing a deep dive of the future path of our enterprise analytics business and digital asset holdings, and how it will benefit shareholders over time. Turning to our third quarter 2021 financial results in more detail. Gap revenues for the quarter were $128.0 million, up slightly year over year, and up 7% from the third quarter of 2019. Product license revenues were $25.8 million in the third quarter of 2021. down 13% year over year, and up 36% from the third quarter of 2019. As mentioned earlier in the call, a comparison with third quarter of 2019 is a good proxy for the underlying growth of the business due to the effects of COVID-19 and a large expansion of the transaction we signed with a major financial institution in the third quarter of 2020. Subscription services revenue in the third quarter of 2019 were $10.9 million, an increase of 31% year over year. 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 in the third quarter of 2021 were $8.0 million, an increase of 23% year over year. We're pleased with the performance of our cloud business in the third quarter, and we'll look for growth to continue to accelerate. Product support revenues were $70.4 million in the third quarter of 2021, A decrease of 1% year over year, primarily driven by certain existing customers converting from perpetual product licenses to our subscription services or term license offerings. 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, for $20.9 million in the third quarter of 2021. an increase of 15% 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 GAAP expenses were $177.7 million in the third quarter of 2021, which includes the digital asset impairment charge of $65.2 million, Our Bitcoin holdings are considered indefinite lived intangible assets under applicable accounting rules, meaning that any decrease in a 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 $100.3 million in the third quarter of 2021, a 1% decrease year over year. Total GAAP operating loss, was $49.7 million in the third quarter of 2021, inclusive of an impairment charge related to Bitcoin of $65.2 million and stock-based compensation expense of $12.2 million. Total non-GAAP operating income was $27.7 million in the third quarter of 2021, a $1.1 million increase year over year. Turning to the balance sheet, we ended the quarter with $57 million in cash, The carrying value of our Bitcoin holdings as of September 30th, 2021 was $2.4 billion, which reflects an approximately $755 million in cumulative impairment charges that has also been reflected as a loss on our GAAP income statement in the period incurred. We exclude the quarterly impact of Bitcoin impairment charges from our non-GAAP operating income, non-GAAP net income, and non-GAAP diluted earnings per share calculations. Bitcoin prices experienced relatively less downward volatility in this quarter compared to the purchase prices, resulting in a lower gap non-cash impairment charge for approximately $65 million versus $425 million last quarter. 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. We recently wrote to the Financial Accounting Standards Board that the disconnect between an entity's financial statements and the economic reality of its financial condition and results of operations fails to provide investors, analysts, and the general public with the information they need to make an informed assessment of an entity's current and future prospects. Currently, companies that aren't investment companies that report Bitcoin as intangible assets. This means Bitcoin gets initially recorded on balance sheets at its historic cost and then is deemed impaired if the market value ever dips. However, the carrying value can never conversely be revised upwards if the price of Bitcoin increases. As the largest publicly traded corporate holder of Bitcoin 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. Going forward, you should continue to expect that we may purchase additional Bitcoin when our cash-to-cash equivalents and short-term investments exceed current working capital requirements, and we may, from time to time, subject to market conditions, continue to issue debt or equity securities and capital raising transactions with the objective of using the proceeds to purchase Bitcoin. Finally, we continue to be actively engaged in a search for the company's next CFO. They have a strong and stable executive team in place with an average tenure at MicroStrategy of greater than 13 years. I believe adding a dedicated CFO will help us in the pursuit of both of our strategies. I look forward to having more time to focus on my role as president, running the day-to-day business in MicroStrategy, as well as strategically planning for our long-term health and growth. 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.