Strategy Inc

We'll get started. Hello, everyone, and good evening. I am Shireesh Jagodiya, MicroStrategy's Senior Director of Treasury and Head of Investor Relations. I'll be your moderator for MicroStrategy's 2021 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 horrible-looking statements. Actual results may differ materially from these forward-looking statements due to various factors, important factors including the risk factors discussed in our most recent Thank You file with the SEC. We assume no obligation to update these forward-looking statements with 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 questions 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. Michael?

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

Thank you, Michael. I'd like to start off with an update on our successful day one of our MicroStrategy World 2022 event today. We had two parallel tracks. The first was the Enterprise Analytics track featuring discussions with industry leaders, including Nice, Sainsbury's, and the Schwartz Group, about why the MicroStrategy platform is their tool of choice for the enterprise, for cloud-powered analytics, and for OEMs. And the second track was Bitcoin for Corporations, featuring Jack Dorsey, CEO, Chairman, and Co-Founder of Block as the keynote speaker. This is our second annual Bitcoin for Corporations event, where we present our playbook to other corporates who are looking to explore how Bitcoin can provide an innovative treasury and product strategy. We had an amazing turnout with over 28,000 attendees viewing the event live worldwide. Replays for today's sessions will be available on our website. As a reminder, MicroStrategy World 2022 is 100% virtual and free of cost. So, please feel free to register and tune in to the second and final day of the event tomorrow. Now, turning to our results. The fourth quarter was a good finish to what was an exciting and transformational year for MicroStrategy. Before I review our fourth quarter results in detail, I want to underscore the key highlights from 2021 for the company. First, we had a solid sales year, returning the positive year-over-year revenue growth for the first time since 2014. Total revenue for 2021 was $510.8 million, up 6.2% versus 2020. Product license revenues for the year was up 17%. growing for the first time since 2013, and subscription revenue was up 30% versus the full year 2020. The focus on term license sales contributed to the material growth in license revenue and subscription revenue. We also made important progress in our shift towards our cloud offerings. which drove annual subscription billings up 39% year over year to $55.4 million as of year end 2021, which is the highest level in our history. Second, on our balance sheet, our pioneering decision to make Bitcoin our primary treasury reserve asset has made MicroStrategy a thought leader in the cryptocurrency market and generated great interest in MicroStrategy as a corporation. In 2021, we added a total of 53,922 Bitcoins to our balance sheet at an average price of $48,710 per Bitcoin, net of fees and expenses. We believe that our brand value has benefited significantly because of our investment in Bitcoin. We believe that such market attention, when captured correctly, has helped to create software pipeline growth and sales growth. Thus, we believe Our two corporate strategies are synergistic to each other, creating a virtuous flywheel. Our performance in 2021 is indicative of the multiple ways MicroStrategy is able to create meaningful value for our shareholders. Moreover, our strategy has also benefited our employees and increased general pride in our organization. As a result, we have seen improvement in our employee retention rates and ability to attract and retain top talent. Turning to our fourth quarter results, we're pleased with our performance in this quarter across both of our corporate strategies. For the sixth straight quarter, we posted strong financial and operational results for our software business and made incremental investments in Bitcoin. Our enterprise analytics business delivered another strong quarter, and we've seen increased adoption of the MicroStrategy platform, especially in the cloud, by new and existing customers. We had another active quarter with our Bitcoin acquisition strategy. executing on another successful capital raise through our at-the-market offering under our open market sale agreement and expanding our digital asset holdings. Total revenue in the quarter grew 2.4% year over year, or 4.4% on a constant currency basis, to $134.5 million. Product license revenues was up 9% year over year, or 13% on a constant currency basis, Subscription revenue was up 35% year-over-year, also 35% on a constant currency basis. And current subscription billings grew 53% year-over-year, our seventh straight quarter of double-digit growth, to $24.3 million. Before turning to our financial results in greater detail, I'd like to reiterate some of the key takeaways from the investor day we held in December. We are as excited as we have ever been about the opportunities that lie ahead for MicroStrategy. We're targeting a multibillion-dollar market opportunity that is at an early stage of moving off of legacy technology and to the cloud. We're well-positioned to meet the demands of enterprise customers with our modern analytics platform, and we're targeting three key areas of growth. First, enterprise analytics. Our platform is expressly designed to address the needs of large corporations, looking for analytics to unlock the power of their data and create value for their internal users and external stakeholders. We're replacing and consolidating legacy and departmental analytics use cases because of our full-scale enterprise capabilities. A great example of enterprise analytics in action is at the Schwartz Group, the fourth largest retailer in the world with worldwide brands including Lidl and Kauffman's. As we discussed at our MicroStrategy World Event today, they have tens of thousands of users leveraging MicroStrategy reports on web and mobile in more than 30 countries. They've also adapted dossier for self-service BI, and hundreds of reports have been created by their power users to serve data analytics needs across their business, all based on that same single version of the truth they've established at MicroStrategy. These solutions are used by team members in individual stores all the way up to their international board of directors. Second, OEM. We're number one in the market in our embedded OEM business. MicroStrategy is well positioned to further benefit from the trend in the embedded analytics and OEM marketplace where enterprises are now buying and not building analytics. We offer streamlined and differentiated developer-focused solutions for OEMs and technology companies. We believe our extensive investment in an open architecture driven by open APIs and SDKs provides OEMs with the best solution in the market. And we believe by targeting this market, we can grow our market share. Nice is the world's leading provider of cloud-native customer experience management and optimization software and a major OEM customer. They embed MicroStrategy into their entire solution suite, because they like the scalability and sophistication it provides, and they recognize we're a reliable partner. As they shared at World Today, such adoption allowed them to get to market faster and to operate at the global scale they need, serving 125,000 organizations over 150 countries. They also discuss why they chose MicroStrategy in a competitive field. We align with their native cloud architecture, their data model, their modern user experience, and we share the same approach to our technology as they do in terms of velocity, openness, and innovation. Beyond the technical benefits, they also value our partnership, and they've heard from their customers that the data and analytics visualization achieved within CX1 using MicroStrategy is out of this world. The third focus area is cloud. We offer an innovative enterprise analytics solution in the cloud, combining app parity capabilities with our leading on-premise solution with strong security and cloud practices, reducing operational complexity and costs for our customers. We expect to grow by migrating on-premise customers, expanding existing cloud customers, and defaulting new customers to the cloud. Sainsbury's, one of the largest retail chains in the UK, replaced various legacy analytics tools with MicroStrategy Cloud as the enterprise standard. Today, they have a suite of over 30 applications delivering data-driven insights to 12,000-plus users across their organization. In every one of their over 1,400 stores, their colleagues leverage several applications on mobile devices, for various functions so that they can maximize the time they spend on the store serving floor customers, on the store floor serving customers. And that spans across all aspects of their organization, right up to the C-suite. This is all built on three complementary cloud technologies, AWS, Snowflake, and MicroStrategy as the analytics delivery mechanism for their entire business. MicroStrategy Cloud has continued to perform to become a growing mix of our business while our on-prem product has continued to perform well. We had great subscription billings momentum in Q4 2021, and we seek to accelerate this momentum in 2022. 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 cloud deployment is not feasible. When you look at the overall growth of our subscription and license business, it is clear that underlying demand for our platform has demonstrated signs of strength. We believe that our pace of innovation is as impressive now as it has been in many years, with the company now producing quarterly and monthly software updates. Our team has rolled out a robust set of product features and enhancements that we believe will expand the value we provide customers and represent future incremental growth opportunities. We recently released our most secure, performant, and innovative platform version ever, purpose-built to meet the most challenging and sophisticated needs of our user base. We've delivered low-code, no-code technologies that permit users to implement fully functional analytics applications with a fantastic UI UX, lowering the learning curve to deploy compelling interactive analytics solutions across the enterprise. We've also continued to invest in hyperintelligence, our zero-click analytics product designed to deliver in-context insights to anyone, anywhere. Finally, this year, we rolled out a fully modernized reference architecture based on containers and microservices. This architecture is built to deliver scalable, multi-tenant SaaS solutions across tens of thousands of users and provide developers with a streamlined experience to leverage continuous integration and continuous deployment. Overall, I'm very pleased with the pace of product innovation and the way our analytics business is performing. We have shown consistent growth, and we're confident in our ability to achieve long-term growth targets while maintaining profitability. Turning now to our Bitcoin acquisition strategies. We're another active and successful quarter. We raised approximately $596 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 net proceeds from this offering to purchase an additional 10,349 Bitcoins at an average price of $57,113 for Bitcoin net of fees and expenses. This is the fourth successful capital raise we've done the past year, having raised $2.6 billion of new debt and equity capital that we've deployed in support of our Bitcoin acquisition strategy. As of December 31st, 2021, we've reached the maximum program amount of $1 billion under our existing ATM facility, which we used in Q3 and Q4 to issue around 1.4 million shares at a weighted average stock price of approximately $707 to purchase a total of 18,863 Bitcoin. As of December 31st, 2021, MicroStrategy owned 124,391 Bitcoins. that we acquired for a total of $3.75 billion, or $30,159 per Bitcoin, net of fees and expenses. The market value of our Bitcoin holdings was $5.7 billion at December 31st, 2021, reflecting approximately $2 billion of unrealized gains, or approximately 50% appreciation, when compared to the original cost basis of our Bitcoin at December 31st, 2021. The book value of our Bitcoin holdings was roughly $2.9 billion. This morning, we announced that we acquired an additional 660 Bitcoins for $25 million using our excess cash at an average price of approximately $3,765 per Bitcoin, net of fees and expenses. As of yesterday, January 31st, 2022, we hold approximately 125,051 Bitcoins. They were acquired at an aggregate purchase price of $3.78 billion and an average purchase price of $30,200 per Bitcoin, inclusive of fees and expenses. As of 4 p.m. Eastern time yesterday, the market price of one Bitcoin in our principal market was $38,450, which equates to a market value of roughly $4.8 billion. MicroStrategy has pioneered the use of digital assets as a core component of an enterprise's treasury policies. generating incremental value to our shareholders, and in doing so, established itself as the largest publicly traded corporate holder of Bitcoin in the world. Currently, our macro strategy subsidiary holds over 110,000 Bitcoins that are not pledged as collateral under our senior secured notes. We may consider additional opportunities to utilize this strategic asset to acquire more capital to deploy towards our Bitcoin acquisition strategy. This may include vehicles such as Bitcoin-backed bonds or loaning out of Bitcoin to seek to generate yield. We have not targeted any specific course of action at this point and may ultimately decide not to pursue any of these paths. Turning to our fourth quarter 2021 financial results in more detail. GAAP revenues for the quarter were $134.5 million. up 2%, 2.4% year-over-year, or 4.4% on a constant currency basis. Product license revenues were $32.5 million in the fourth quarter of 2021, up 9% year-over-year, or 13% on a constant currency basis. Description services revenues in the fourth quarter of 2021 were $11.8 million, an increase of 35% year-over-year, also 35% on a constant currency basis. The growth in subscription services revenues reflects the increased portion of our product bookings that were related to our managed cloud platform. The current subscription billings in the fourth quarter of 2021 were $24.3 million, an increase of 53% year-over-year. We're pleased with the performance of our cloud business in the fourth quarter and will look for growth to continue to accelerate. Product support revenues were $69.1 million, in the fourth quarter of 2021, a decrease of 4% year-over-year, or 3% on a constant currency basis, 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, our other services revenue, which largely reflects our consulting services, were $21.0 million in the fourth quarter of 2021, staying largely flat with a modest increase of 0.5% year-over-year, or 2% on a constant currency basis. We believe that stability of consulting revenues is an indication of continued engagement from our customers to modernize and retain deployment of their micro-strategy platforms. Now I'll elaborate on our recent responses on the SEC comment letter dated December 16th, 2021. As required by the Sarbanes-Oxley Act, the SEC undertakes some level of review of each reporting company at least once every three years and reviews a significant number of companies more frequently. The SEC staff frequently provides comments where the staff believes a company can enhance its disclosures. As part of a recent review by the FCC, MicroStrategy engaged in a routine exchange of comments and response letters with the FCC staff. In that exchange, we discussed with them whether to include adjustments related to Bitcoin impairment losses in our presentation of non-GAAP financial measures. We agreed with them that, on a going-forward basis, any non-GAAP financial measures we may present in future filings should retain the impact from Bitcoin impairment losses. This change in the presentation of our non-GAAP financial measures does not impact our strategy, operations, or GAAP financial statements or previous SEC filings. As something of a pioneer in the Bitcoin space, we have faced some uncertainty regarding the disclosure requirements and non-GAAP presentation as they relate to Bitcoin and appreciate the clarity that engaging in that comment process with the SEC staff has provided us. As a reminder, our Bitcoin holdings are considered indefinite lived intangible assets under applicable accounting rules, meaning that any decrease in their fair value below a book value for such assets at any time subsequent to their acquisition requires us to recognize impairment charges. During the fourth quarter of 2021, we incurred digital asset impairment charges of $147 million. Shifting to our costs, total non-GAAP expenses, which exclude share-based compensation expenses, were $259 million in the fourth quarter of 2021. Non-GAAP costs of revenue, this was $23 million in the fourth quarter of 2021, an increase of $2.4 million, 12% year-over-year. As a percentage of total revenue, this reflects an increase of 1.4%, driven by increases in cloud customer hosting fees and personnel costs from additional headcount. As we continue to accelerate our shift to cloud, we expect increases in infrastructure costs and headcount to support additional customers. Over time, we expect our cloud business to scale, decreasing costs as a percentage of total revenue. Non-GAAP sales and marketing expense is $40 million, an increase of $1.3 million, or 3% year-over-year, driven primarily by an increase in sales compensation from improved bookings performance. However, as a percentage of product license and subscription revenue, this reflects a decrease of 10%, indicating improved productivity of our sales and marketing teams. Non-GAAP R&D expense was $28 million, an increase of $3.6 million, or 15% year-over-year. As a percentage of total revenue, this reflects an increase of 2.3%, driven by headcount increases, cost of hiring, and wage inflation. The technology sector has experienced significant wage inflation and competition for resources, and we anticipate that trend will continue in 2022, and that we will continue to invest in additional R&D headcount and work to retain our talented engineers and continue to provide a best-in-class product. Non-GAAP G&A expense was $22 million, an increase of $3.8 million, or 21% year-over-year. As a percentage of total revenue, this reflects an increase of 2.5%. driven primarily by an increase in Bitcoin-related fees, including custody, legal, audit, and other consulting fees related to executing our Bitcoin strategy. Overall, we feel comfortable with our cost structure and our ability to generate cash flows sustainably. Total non-GAAP operating loss in the fourth quarter of 2021 was $124.3 million, inclusive of an impairment charge related to Bitcoin of $146.6 million. As discussed going forward, we will no longer adjust for the impairment charges related to Bitcoin in our non-GAAP metrics. We will continue to report the Bitcoin impairment charges separately. Turning to the balance sheet, we ended the quarter with $63 million in cash. The carrying value of our Bitcoin holdings as of December 31st, 2021 was $2.9 billion, which reflects $901 million in cumulative impairment charges that have also been reflected as losses on our GAAP income statements in the period it's occurred. Our non-cash Bitcoin impairment charges will remain subject to market volatility of Bitcoin prices. Given the significant drop in the market price of Bitcoin in January 2022, we will recognize significant impairment charges again in the first quarter of 2022. 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. In Q3 2021, we wrote to the Financial Accounting Standards Board, FASB, 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 report Bitcoin as a tangible asset. 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 upward if the price of Bitcoin increases. In Q4, the FASB announced that they have added a project to their research agenda to explore accounting for exchange-traded digital assets. 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. Next, I would like to emphasize the strength of our robust capital structure. From a balance sheet and liquidity perspective, we're insulated from the near-term volatility of Bitcoin prices, since we currently do not have any debt principal maturities coming due until December 2025. Our 0.75% senior convertible notes due 2025 are convertible into our Class A shares at an initial conversion price of $398 per share and mature in December 2025. Our 0% senior convertible notes are convertible into our Class A shares at an initial conversion price of $1,432 per share and mature in February 2027. Our 6.125% senior secured notes currently mature in June 2028, subject to a spring maturity feature. Regarding the interest payments on these instruments, we have comfortable levels of excess cash flows generated through our software business to cover the interest as it becomes accrued and are payable. Additionally, we maintain a certain minimum amount of cash balance to fund our regular working capital needs. Moving to our cash flow trajectory, if we consider non-GAAP free cash flow, which is defined as our GAAP net cash provided by operating activities, less capital expenditures related to investing activities, our annual non-GAAP free cash flow has grown over the last three years to $91 million in 2021. Correspondingly, our non-GAAP free cash flow margin has also improved over the last three years, reaching approximately 18% in 2021. We've benefited from improving revenues, from ongoing product innovations, improved sales and marketing execution, as well as an improved cost structure, benefiting from our early embrace of the virtual wave. Our 2022 outlook remains positive with our continued transition to cloud and our expectation of a sustained increase in subscription billings. Our cloud transition will result in increased cloud billings and subscription billings. With the growth of our subscription billings in Q4 2021, It's possible that a product license revenue and total revenue growth in 2021 will decelerate, even as our overall software business expands. This will depend largely on the mix of new sales between cloud and on-premise licenses. This is because a new cloud contract, which may have a higher total contract value than an on-premise license, still results in lower recognized revenue in the first year. The lower revenue may also cause a short-term decline in profitability due to the revenue J curve, which will more than normalize in the long term. Overall, we feel we're well-positioned to achieve our long-term growth sales target of greater than 10% and increased free cash flow targets over time. Finally, in my role as president of MicroStrategy, I've held the head of worldwide sales role for the past one and a half years and a CFO role for nearly all of the past six years. To support our growth and allow me time to focus more on corporate strategy and day-to-day operations, we announced that we're looking to hire a full-time CFO. We're still in the process of that search. In addition, we've also been looking for a dedicated leader in worldwide sales and have found that person. We're excited to announce the recent internal promotion of Kevin Atkinson to our Senior Executive Vice President and Chief Revenue Officer position. Kevin joined MicroStrategy in October 2016 as a sales leader in our central business and has been promoted several times since then due to his outstanding sales results, as well as his ability to hire, develop, and inspire a high-performing team. Kevin is known for his track record of success, and is instrumental in our transition to the cloud. I look forward to having more time to focus on my role as president, running the day-to-day business of MicroStrategy, as well as strategically planning for our long-term health and growth. I'll now turn over the call to Michael for comments on our Bitcoin acquisition strategy, as well as market trends for business intelligence software.