Strategy Inc

Okay, we'll get started. Hello, everyone, and good evening. I'm Siris Dajodhia, MicroStrategy's Senior Director of Treasury and Head of Investor Relations. I'll be your moderator for MicroStrategy's 2022 First 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 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.

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 2022 first 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 our financials for the quarter.

Thank you, Michael. We continue to be pleased across both our corporate strategies in the first quarter of 2022. Here is a summary of our first quarter software results. Revenues declined 3% year-over-year and were flat on a constant currency basis. We saw some revenue headwinds in Q1. This included a more challenging macroeconomic environment due to war in Ukraine, a tough comparison in Q1 2021, where we saw licensed revenue grow 69% and total revenue grow 10% year-over-year, and ongoing cloud growth, which has a short-term negative impact on product license and total revenue. Our cloud business continues its momentum, with subscription revenue growing 28% year over year and current subscription billings growing 18% year over year, our eighth straight quarter of double-digit growth. We had several large cloud deals split from Q1 due to macroeconomic uncertainty, which caused billings growth to decline sequentially. Turning now to our Bitcoin strategy, we had another active and successful quarter. We purchased $215 million of Bitcoin and the average purchase price of $44,645 per Bitcoin, net of fees and expenses. We have not sold any Bitcoin to date. These purchases were funded by excess cash in our business as well as through a $205 million first-ever public company Bitcoin-backed term loan. I will discuss the terms of the loan in more detail in our financial section. In total, we have raised an aggregate of $3.4 billion in new debt and equity capital that we've deployed in support of our Bitcoin acquisition strategy. To reiterate our strategy, we seek to acquire and hold Bitcoin long-term. We view our Bitcoin holdings as long-term holdings, and we do not currently plan to engage in sales of Bitcoin. As of March 31st, 2022, The company owned an aggregate of 129,218 Bitcoins that we acquired for a total cost of $3.97 billion, or $30,700 per Bitcoin, net of fees and expenses. The market value of our Bitcoin holdings was $5.9 billion at March 31, 2022, reflecting $1.9 billion of unrealized gains, or nearly 50% appreciation, when compared to the original cost basis of our Bitcoin March 31st, 2022. The carrying value of our Bitcoin holdings as of March 31st, 2022 was roughly $2.9 billion, reflecting $1.1 billion in cumulative impairment charges. We continue to see opportunities for MicroStrategy to target a multi-billion dollar software market that is at an early stage of moving off of legacy tech into the cloud. We're well positioned to meet the demands of enterprise customers with our modern analytics platform. As we discussed in detail in our last earnings call, we see three key areas of growth for us. Enterprise analytics, embedded analytics, and cloud, where we will seek to grow by developing our pipeline, making our customers successful, and continuing to innovate, automate, and simplify our technology stack. Next, I would like to provide you an update on the product enhancements in our latest platform release, which expands the value provided to our customers and represents future incremental growth opportunities. In particular, the product now includes an impressive, differentiated set of new capabilities that enable organizations to build seamless, scalable business intelligence applications at a faster pace, either deployed standalone or embedded directly into other products. With a fully modern, immersive, and interactive design, Eve introduced a simple, no-code application development option built on the foundation of MicroStrategy Library. Built to empower developers to deploy powerful, customized data portals for multiple user groups at enterprise scale and a rapid speed to market, MicroStrategy applications bring a competitive edge to our customers. Developers can build one app for employees using iPads on the sales floor and another for finance executives and headquarters, all based on the same highly governed single version of the truth. This delivers greater trust, less hassle, and lower maintenance costs, all qualities that make MicroStrategy the ideal partner for enterprises and independent software providers. Applications also provide enhanced, tolerable security controls to grant limited access access and login, as well as sophisticated embedding functionality for extended flexibility and customization. Speaking of security, MicroStrategy also separated itself from the competition recently by way of our fast, transparent, and effective response to the high-profile Log4J and Spring4Shell vulnerabilities. Our customers benefited from rapid mitigation and remediation of these issues, solidifying the peace of mind they have come to expect from our partnership. Most customers in MicroStrategy Cloud had zero-day fixes installed over the weekend and updates and patches installed in a week. MicroStrategy Cloud continues to be a growing part of the mix of our business. We're on track to accelerate the subscription billions momentum in 2022. We expect to grow by migrating on-prem customers to the cloud, expanding the footprint for existing cloud customers, and defaulting deployment of as many new customers as possible to the cloud. We also expect to have our MicroStrategy FedRAM compliant version of our software available in Q3 this year. For those customers that are not yet ready to move to cloud, such as those in highly regulated industries or countries, we remain committed to supporting them also. Our underlying cloud architecture is also improving, leveraging containers and microservices. This architecture is built to deliver highly scalable, multi-tenant SaaS solutions across tens of thousands of users and provide developers with a streamlined experience to leverage continuous integration and continuous development. Overall, I'm very pleased with the pace of product innovation, and we are confident in our ability to achieve our long-term growth targets while maintaining profitability. Finally, our annual user conference, MicroStrategy World, was another tremendous success. World 22 was our second virtual world event and enabled us to reach a bigger, broader audience with customer success stories, product presentations, thought leadership keynotes, and a hugely popular Bitcoin for Corporations event held in tandem. Our content was available to all for free via an online event platform. The keynotes, including the Michael Saylor, Jack Dorsey keynote, were simulcast live on YouTube. All in all, we had nearly 14,000 registrants on the event platform and over 180,000 viewers of the content across all mediums. Replays for the sessions are available on our website. Turning to our first quarter 2022 financial results in more detail, Revenues for the quarter are $119.3 million, down 3% year-over-year, and we're almost flat on a constant currency basis. On a trailing 12-month basis, total revenues are up 3% year-over-year. Product license revenues are $16.5 million, down 22% year-over-year, and down 20% on a constant currency basis. The decline is mainly due to a large transaction included in of the year-over-year differential. On a trailing 12-month basis, product license revenues are up 2% year-over-year. Subscription services revenues are $12.8 million, an increase of 28% year-over-year. We're up 30% on a constant currency basis. The growth in subscription services revenues reflects the increased portion of our product bookings that are related to our managed cloud platform. Our current subscription billings in the first quarter of 2021 were $11.4 million, an increase of 18% year over year. The growth was slower than expected for the first quarter, as some deals slipped out of the first quarter, in part caused by the ongoing war in Ukraine, impacting the purchasing patterns of customers in Europe and worldwide. We see strong demand and pipeline for our cloud licenses and the potential for our future for further growth going forward. Product support revenues were $67.2 million in the quarter, a decrease of 5% year-over-year, or 3% on a constant currency basis. The decline was partially driven by certain existing customers converting from perpetual product licenses to our subscription services or term licenses offerings, and partially by an impact from unfavorable foreign currency exchanges. As we see more on-premise conversions to our cloud offering, we would anticipate product support revenues will experience a modest decline over time. That said, our in-quarter product support renewal rates for Q1 continue to be among the highest we've ever experienced. Finally, other services revenues, which largely reflect our consulting services, were $22.8 million in this quarter, an increase of 9% year over year, or 13% on a constant currency basis, primarily driven by an increase in billable hours worldwide, partially offset by an unfavorable foreign currency exchange impact and a decrease in average billing rates. We believe that growth to consulting revenues is an indication of continued engagement from our customers to modernize, retain, and grow their deployment of the MicroStrategy platform. Shifting to our cost. Total non-GAAP expenses, which include share-based compensation expenses, were $275 million, which exclude share-based compensation expenses, were $275 million in the first quarter of 2022 as compared to $298 million in the first quarter of 2021. Of this amount, $170 million were Bitcoin impairment charges in Q1 2022 and $194 million in Q1 2021. As a reminder on the treatment of Bitcoin impairment charges, our Bitcoin holdings are considered indefinite lived intangible assets under applicable accounting rules, meaning that any decrease in their fair value below our carrying value for such assets at any time subsequent to their acquisition requires us to recognize impairment charges. During the first quarter, we incurred digital asset impairment charges of $170 million. As discussed on the last earnings call, on a go-forward basis, any non-GAAP financial measures we may present in future filings will retain the impact from Bitcoin impairment charges. This change in the presentation of our non-GAAP financial measures does not impact our strategy, operations, or GAAP financial statements or previous SBC filings. We'll continue to report the Bitcoin impairment charges separately. Now, starting from the bottom of the chart and moving up, Non-GAAP costs of revenues are $25 million in the first quarter of 2022, an increase of $2.4 million, or 11% year-over-year. As a percentage of total revenues, this reflects an increase of 2.6%, 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 headcounts for additional customers. And over time, for our cloud business to scale, decreasing costs is a percentage of total revenue. Non-GAAP sales and marketing expense is $29 million, a decrease of $6.9 million, or 19% year-over-year. The decline is primarily driven by a decrease in variable compensation, mainly due to higher capitalized finishes, and decreases in bonus and personnel costs. As a percentage of product license and subscription revenue, the charge reflects a decrease, the change reflects a decrease of 16%, which in part reflects improved productivity of our sales and marketing teams. Non-GAAP research and development expense was $30 million, an increase of $2.8 million, a 10% year-over-year. As a percentage of total revenue, this reflects an increase of 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'll continue to invest in R&D to retain our talented engineers and develop sophisticated, innovative products. We're also shifting some headcount to lower-cost regions, which we expect will result in some cost efficiencies over time. Non-GAAP general administrative expense was $21 million, an increase of $2.1 million, or 11% year-over-year, as a percentage of total revenue. This reflects an increase of 2.3%. Overall, we feel comfortable with our cost structure and our ability to generate cash flow sustainably. Total non-GAAP operating loss in the first quarter of 2022 was $155.6 million, inclusive impairment charge related to Bitcoin, and $170.1 million. The carrying value of our Bitcoin holdings as of March 31, 2022, was $2.9 billion, which reflects $1.1 billion in cumulative impairment charges. They have also been reflected as losses on our GAAP income statements in the periods incurred. Our non-cash Bitcoin impairment charges will remain subject to market volatility of Bitcoin market prices. 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 develop an alternative accounting framework for digital assets. Currently, companies that aren't investment companies report Bitcoin as intangible assets. This means Bitcoin is initially recorded on balance sheets at its historic cost and then is deemed impaired if the market price of the company's principal exchange for Bitcoin drops below the carrying value at any time. However, the carrying value can never conversely be revised upward as the price of Bitcoin increases. In the fourth quarter of 2021, the Financial Accounting Standards Board, or FASB, announced that it had 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 its new asset class. Next, I'll discuss the terms of our first ever Bitcoin-backed term loan with Silvergate Bank. We raised $205 million as an interest-only loan for a term of three years, which is collateralized by Bitcoins. The loan matures on March 23, 2025. It bears monthly interest at a floating rate equal to the secured overnight financing rate, or SOFR, 30-day average, as published by the Federal Reserve Bank of New York's website, plus 3.70%, with a floor of 3.75%. The loan may be prepaid at any time, subject to modest prepayment premiums. The loan has initial loan to collateral value. of 25%, which was thus collateralized closing by Bitcoin with a value of approximately $820 million. While the loan is outstanding, we are required to maintain an LTV ratio of 50% or less, which essentially allows for an approximately 50% drop of Bitcoin prices for the time of transaction closing, before we are required to close on an incremental collateral. We're also allowed to proactively manage the LTV ratio by posting any desired value of additional collateral if we choose to. If Bitcoin appreciates in price and the LTV ratio is less than 25% at any time, we're entitled to a return of excess collateral so long as the LTV ratio will not exceed 25% after such return. Additionally, we have established a $5 million cash reserve account with SilverGain. for the loan that can be used towards the interest payments for the last six months of the loan term. Also, we have held back approximately $9 million from the loan proceeds as cash and macro strategy that can be used towards general corporate purposes, including paying interest for this loan or buying additional Bitcoin. This loan is not guaranteed by any party. The agreement does not restrict us from incurring additional debt. permits additional liens so long as such liens are not on the asset serving as collateral for the loan, and permits us to sell assets so long as they are not serving as collateral for the loan. There are no restrictions on utilizing Bitcoin that is not a part of the collateral for this loan. Thus, this loan would be accretive to shareholders as long as Bitcoin appreciates more than the issuance expense and cumulative interest expense to be incurred over the term of the loan. MicroStrategy has pioneered the use of digital assets as a core component of an enterprise's treasury policy, which has generated incremental value for our shareholders. As a snapshot into our current Bitcoin holdings by entities, as of March 31st, 2022, of the total of 129,218 Bitcoins held by the company, roughly 14,100 Bitcoins are held at the MicroStrategy entity, all of which are held as collateral securing our 2028 secured notes. The remaining approximately 115,100 Bitcoins are held at the macro strategy subsidiary. Of the macro strategy Bitcoins, approximately 19,500 Bitcoins are pledged as collateral towards the Bitcoin-backed term loan, and over 95,600 Bitcoins remain unpledged and unencumbered. We may consider additional opportunities to utilize the strategic asset in the future. For example, subject to market conditions, we may enter into additional Bitcoin-backed financings or seek to lend our Bitcoin to third parties to generate yield. We will continue to closely monitor market conditions and determine whether to engage in any such transactions and may ultimately decide not to pursue any of these transactions. 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 market volatility of Bitcoin prices, since we currently do not have any debt principal maturities coming due until March 2025. The total annualized interest expense today is approximately $44 million, which equates to a blended interest rate of approximately 1.82% on our entire debt obligations of $2.4 billion. We expect cash flows generated from our software business to be sufficient to cover interest obligations as they become payable. Additionally, we maintain a certain minimum amount of cash balance to fund our regular working capital needs. As of the first quarter, we had $95 million in cash on our balance sheet. Going forward, we'll continue to evaluate debt or equity capital raising. and other financing opportunities that we believe will be accretive to shareholders, subject to market conditions, and that further our Bitcoin acquisition strategy or optimize our capital structure is needed. We believe that the further adoption of Bitcoin globally will have a positive effect on Bitcoin prices, which has the potential to offer asymmetric upside to our shareholders. 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 subscription revenue and billings. With the continued growth of our subscription billings, it is possible that our product license revenue and total revenue growth will decelerate in the near term, 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. Overall, we feel we are well positioned to achieve our long-term sales growth target of greater than 10% and increase free cash flows over time. Finally, I'd like to share an update with you regarding the appointment of our new CFO. I'd like to welcome Andrew Kang, who will be joining MicroStrategy as our new CFO, effective on a start date, which we expect to be on around May 9th. I'm thrilled to see him step into this new critical leadership role, where he will be able to contribute from his wealth of experience. Andrew has over 20 years of experience in banking and consumer finance, and most recently served as CFO for Greenstein Incorporated, a publicly traded fintech company. Prior to Green Sky, Andrew served as the Corporate Treasurer for Santander Holdings, USA, the $150 billion U.S. bank holding company under Banco Santander, USA. Andrew has also held leadership positions in capital markets, finance, and treasury at Santander Consumer, USA, HSBC Finance, and Capital One. Following Andrew's appointment, I look forward to having more time to focus on my role as president, running the day-to-day operations of MicroStrategy, as well as strategically planning for our long-term health and growth for both BI and Bitcoin strategies. I'll now turn the call over to Michael to discuss observations for the MicroStrategy World event, comments on our Bitcoin acquisition strategy, as well as regulatory outlook for the digital asset spaces.