Strategy Inc

Good evening, everyone, and good evening. I am Shireesh Rajodhya, Head of Investor Relations and Treasury at MicroStrategy. I will be your moderator for MicroStrategy's 2022 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 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, 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, Phuong, 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 will walk you through the agenda for today's call. First, Michael Thaler will provide a strategic review and discuss our recently announced executive transition. Second, Fong Le will cover the operational results for second quarter 2022. Then, Andrew Kong will cover the financial reserves for second quarter 2022. And lastly, we will open up to Q&A. With that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy. Michael?

Thank you, Sharif. 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 second quarter financial results. First, I'd like to provide a strategic review. As you know, MicroStrategy has two corporate strategies. The first is to operate and grow our enterprise analytics business. The second is to acquire and hold Bitcoin. We've made great strides in both areas over the past two years. We've digitally transformed our sales, marketing, and services. We've upgraded our enterprise BI platform. We've migrated many of our customers or integrated cloud intelligence offering. We've also established a trusted network of digital asset service providers. We've developed a set of corporate procedures for acquiring and holding Bitcoin in custody and executed multiple equity debt and convertible debt offerings in order to expand our balance sheet. We are now the largest independent publicly traded business intelligence company. as well as the largest public holder of Bitcoin. MicroStrategy represents a new kind of firm, which generates cash flow based on enterprise software products and cloud intelligence services, and has a balance sheet based on Bitcoin, a digital commodity that we believe is superior to traditional physical commodities, like energy, metals, or agricultural products. This hybrid corporate strategy represents Paradigm Shift, What started as a defensive strategy intended to protect our balance sheet rapidly evolved into an opportunistic strategy as we sought to create shareholder value during the pandemic crisis. We no longer view Bitcoin acquisition as opportunistic. It is simply our second corporate strategy. Our future now depends on how we manage and develop our intellectual property, that is, software. as well as how we manage and develop our digital property, that is Bitcoin. I'd like to talk a bit about our performance in these two strategies. It's now over two years, about two years since we embarked on our Bitcoin acquisition strategy. And while I think a minimum holding period for a long-term investment would be four years, it seems fitting that we should do a midterm review of results so far. Since August 11th of 2020, our stock has outperformed Bitcoin as well as every major asset class along with every major big tech stock. Now, why do we choose August 11, 2020? That was the day we announced our Bitcoin strategy, and we coupled it with the Dutch auction where we offered to buy back $250 million of our shares. So we embarked upon this strategy on August 11. We went, we looked back at where did MicroStrategy close the day before? It's up 123% since we embarked on that strategy. Where has Bitcoin gone? Bitcoin is up 94% since we announced our Bitcoin strategy. So MicroStrategy has actually outperformed Bitcoin. We've captured more than 100% of the alpha of Bitcoin from a standing start. The S&P index is up 23% in that same time frame. NASDAQ is up 13%. So as you can see, we've outperformed by a factor of 10 NASDAQ stocks in general. We've outperformed the entire S&P by a factor of five. The option that we had when we chose Bitcoin was gold. We said digital gold or gold. Gold is down 13% since that fateful day. So Bitcoin plus 94, gold down minus 13, MicroStrategy up 123. We could have held... are $500 million-plus of Treasury assets in bonds. And the conventional view is to hold bonds. Well, we could have held short-dated bonds that generated 0% interest, or we could have bought mid-range bonds. And if we look at the PIMCO bond index, B-O-N-D, that index is down 14% since August 11, 2020. And, of course, for those who believe in silver instead of gold, silver is down 29%. So as you can see, when we're choosing a treasury reserve asset, Bitcoin outperformed all other reasonable treasury reserve assets. Now, we actually considered microstrategy performance and Bitcoin's performance against big tech, too. For those of you who know me, you know I wrote The Mobile Wave, and I've been a big advocate of big tech digital monopolies like Google, Apple, Amazon, Facebook. You can see Google in this time period is up 54%. MicroStrategy more than doubled it. Apple up 43%. Microsoft up 34%. So... We managed to beat those three digital monopolies. But the other interesting thing is that half of big tech is down in that same period. Amazon has lost 14% of its value. Metagroup or Facebook down 39%. And Netflix down 53%. So... If we look at all these numbers, and if you recall, when we announced our strategy, we said we were considering all possible Treasury Reserve options. We managed to choose the single one, Bitcoin, that's plus 94% to beat everything. And MicroStrategy executed on that. We basically started by buying $250 million of Bitcoin. We executed on that so as to not just capture a fraction of the Bitcoin return, but actually more than 100% of the Bitcoin return for our shareholders in that time period. During this period, we've successfully raised $2.4 billion in debt and $1 billion in equity. And we expanded our enterprise valuation from approximately $666 million to to $5.6 billion, an increase of approximately $5 billion, or over 730% in those two years. These results probably come as a surprise to many, since there's a tendency to focus on short-term volatility of Bitcoin and its related impact on our share price. As a publicly traded operating business that holds digital property, MicroStrategy is unlike any other enterprise software company. With our deep knowledge of business intelligence, rich enterprise analytics software platform, and distributed network of loyal global providers, sorry, loyal global customers providing us with a stream of revenues and cash flow, we're unlike any conventional holder of digital assets. That means we need to think differently about how we manage our firm and maximize shareholder value over time. For an analyst considering how to value a hybrid software digital asset firm such as MicroStrategy, it makes sense to consider the value of each of the components of the business and then calculate the sum of the parts. The software business can be valued as a multiple of revenue or earnings with consideration given to the likely growth rate, the customer loyalty, and the quality of those recurring revenues. The digital asset business can be valued at net asset value with a premium based on an assessment of, A, the ability of the management team to execute effectively, and B, the prospects of the digital asset. Adopting this framework, we've organized our firm in order to maximize the performance of both elements of our business while using finesse to identify and capitalize on synergies that come from pairing a stable enterprise software business with a large, potentially high-growth, admittedly volatile digital asset holdings. Now I'd like to talk about the outlook. We are still early in the adoption cycle of digital assets and Bitcoin in general. There is clearly a strong demand around the world for a number of things. First of all, A, a digital property to serve as a long-term store of value asset. B, a A digital commodity to serve as a trading alternative to energy, metals, and other physical commodities. C. A digital payments network that's open, neutral, fast, and free for all to use. D. A digital currency. that can serve as a medium of exchange for those unable to access dollars via the traditional banking system or for those who wish to trade at the speed of light, friction-free, on mobile phones and websites. Stablecoins like USDC are examples of such a currency. E, a digital exchange that allows anyone to trade all currencies and all assets 24-7 online. 365. These five things are the clear innovations, and there's extraordinary excitement and enthusiasm around those ideas. Global consensus has built over the past two years that the world would benefit from these technologies, and we need these digital assets to build the economy of the 21st century. Bitcoin serves as the ethical, technical, and economic foundation of this emerging digital economy due to its immaculate conception, its recognition as a commodity without an issuer, global brand recognition, and worldwide network of mining operators with tens of billions in special purpose hardware and energy contracts that provide unmatched security and network integrity. The current wave of crypto rationalization, regulation, and innovation is healthy for this industry over the mid and the long time frame. And we expect Bitcoin will be the prime beneficiary of all these trends. The demise of Celsius, Voyager, and Three Eras has removed unhealthy business practices and dangerous leverage from the system. educating millions of market participants on the merits of holding an asset like Bitcoin without counterparty risk and taking self-custody or placing that asset in cold storage. Regulators have been catalyzed by the crypto market meltdown and accelerated plans for regulating exchanges, crypto securities, and stable coins. We should see regulatory clarity come earlier than we would otherwise expect it, And it is clear from communications from Congress and regulatory bodies that more focus is going to be placed on the digital assets industry and the rules and related initiatives will be fast-tracked. Many large institutional investors have yet to make substantial allocations of capital to this new asset class because they're waiting for this regulatory clarity. So the focus the regulators are placing on the crypto industry is welcome news to us, and we believe a net positive for Bitcoin. Even while there is market turmoil, innovation and adoption continue in the digital assets space. The Bitcoin network has settled more than 17 trillion transactions this year, and the Lightning Network continues to expand at a rapid pace, reaching record levels of liquidity and scale each quarter. Every week, new banks announce Bitcoin custody services, new derivative products are coming to market, and new financial service providers continue to enter the space, offering trading, analysis, and banking services to the swelling population of investors. The growing interest in Bitcoin from banks such as Goldman Sachs, Citigroup, J.P. Morgan, Santander, as well as Fidelity's initiatives to offer 401k services that include Bitcoin are indicative of this trend. Macroeconomic trends continue to favor and drive the adoption of digital assets as well. In the past two years, numerous currencies in South America, Africa, and Asia have collapsed. And even traditional strong economies are suffering from currency weakness. The Great British Pound, the Korean Won, the South African Rand are all down 12% in the last 12 months. The Euro is down 14% against the dollar. The Polish Zloty and the Japanese Yen are down 17% against the dollar. And the Turkish Lira is down 54%. The strengthening dollar has created a demand around the world for digital currency, since many people outside the U.S. would prefer to trade their local currency for U.S. dollars, and many people outside the traditional banking system can install a digital bank on their mobile phone in a few minutes and enter the global economy using the U.S. dollar as a medium of exchange and Bitcoin as a store of value. We believe Bitcoin should be the primary beneficiary of these trends since it is still a small fraction of the market capitalization of gold, commodities, property, currency, bonds, and commercial real estate. Continued inflation will create a need for a non-sovereign store of value asset that is neutral and globally available. Technology will make it easier and more functional to use. and ongoing education and regulation efforts will introduce more investors to this new asset class each year and make them more comfortable holding wealth in the form of digital property. MicroStrategy has ambitious plans to grow both parts of our business. There's continuing need for enterprise analytics everywhere, and we're well-positioned to grow with our best-in-class integrated business intelligence platform. We expect to accelerate our transition to cloud-based intelligence services and exploit our increasing brand awareness and global reach to gain new customers and deepen our relationships with existing clients. We also have a unique opportunity to continue growing our Bitcoin holdings via more acquisitions financed by cash flows, debt, and equity. We're one of the few operating companies in the world that has the technical capability and the corporate mandate to acquire and own Bitcoin, as well as issue Bitcoin-backed financings. We're also uniquely positioned to develop enterprise software that leverages the Bitcoin network. We expect more opportunities will come our way, and we intend to be ready to take advantage of our leadership position in the Bitcoin industry when the time is right. Given this dramatic increase in the scope of our ambitious plans and the scale of our balance sheet assets, we've decided that the firm would be best served by expanding and reorganizing the management team. Andrew Kang recently joined our team as chief financial officer, assuming responsibilities that were previously handled by Fong Lee. Many of you will be hearing from Andrew for the first time on our earnings review call today, and we're delighted to have him aboard. For the past two years, Fong Lee has served as our president and CFO. Now, we feel it is the right time to elevate him to the role of president and CEO, responsible for all of our corporate operations. Fong's the ideal candidate to take the CEO role. He joined our firm in 2015 as CFO, progressively assuming responsibility for human resources, facilities, and information systems, and later expanded his scope to manage sales and services as our chief operating officer. Two years ago, he assumed responsibility for marketing and technology as well when he was elevated to president. In all of these roles, he's been successful, and he's gained the respect of the board, as well as the respect of our employees, customers, partners, and vendors. So the progression to CEO is both natural and well-deserved. Fong will also join our board of directors as a member of the board. I will assume a new full-time role as executive chairman of MicroStrategy. I will remain an executive officer and employee of the company and chairman of the board of directors, as well as assuming the role of chair of our investments committee, where I will continue to provide oversight for our Bitcoin acquisition strategy. My focus will be on our corporate strategy, our innovation efforts, our Bitcoin strategy, and related Bitcoin advocacy and education initiatives, such as my work with the Bitcoin Mining Council. I will continue to act as an enthusiastic spokesperson for MicroStrategy and as our envoy to the global Bitcoin community. As global adoption of digital assets accelerates, this is becoming an ever more expansive job and I'm comforted increasing the scope of my advocacy efforts, knowing that the execution of the MicroStrategy business plan rests in the capable hands of Fong, Andrew, and the rest of our executive team. These changes will take place as of August 8th, 2022. At that time, the company will have a dedicated chief financial officer in Andrew Kang, a dedicated president and CEO in Fong Lee, and a dedicated executive chairman in myself. This represents a welcome strengthening of our management team as we prepare for the next phase of corporate growth at MicroStrategy. I'm personally excited about this news. The three of us make a great team. We work together well and possess mutually complementary skills and experience. This will be a benefit to our shareholders, customers, employees, partners, as well as to the broader community as we continue to lead the way in business intelligence and Bitcoin corporate adoption. Now, I would like to pass the floor to Fong Lee, our president and soon-to-be CEO, to provide an operational review of our business results.

Thank you, Michael. I'm honored and looking forward to leading this truly innovative organization in my new role as president and CEO. MicroStrategy was founded 33 years ago as a technology innovator with a vision of intelligence everywhere. Since then, we've become a global leader in business intelligence, serving the largest, most respected enterprises and government organizations in the world. We've also been a technology pioneer in the fields of relational, web, mobile, and cloud analytics. Our employees and executives are the foundation upon which our strength in enterprise analytics is built, and I'm enthusiastic to work with them to continue to grow this business going forward. More recently, MicroStrategy has pioneered the use of digital assets as a core component of corporations' treasury policy. We believe it's still early, and further adoption of Bitcoin globally can have a positive effect on Bitcoin price, which has the potential to offer upside to our shareholders. Bitcoin is the right long-term store of value for microstrategy, enterprises, institutions, individuals, and the world. Our history of innovation has allowed microstrategy to be successful for a sustained period of time. I plan to continue to build a culture and a company where innovation thrives. In addition, our ecosystem of customers, partners, shareholders, and employees are essential to our success. Our commitment and focus on this group will strengthen under my leadership. I look forward to leading the organization for the long-term health and growth of our enterprise software and Bitcoin acquisition strategies. I'd also like to thank Michael Saylor. Following in Mike's footsteps, our founder and a pioneer in enterprise analytics, Bitcoin for institutions, and CEO of MicroStrategy for 33 years is a great honor and a great responsibility. I've learned a tremendous amount from Mike over the last seven years, and I'm honored to build upon his foundation at MicroStrategy. I look forward to continuing to work with him in my new role as president and chief executive officer and as a member of the board. and his new role as executive chairman. I'll now focus on the Q2 2022 business results. Overall, we were pleased with our results in Q2. Despite a challenging macroeconomic environment due to high inflation, weakening foreign currencies, and the ongoing war in Ukraine, we achieved total revenue growth and constant currency on the strength of our cloud business. With strong growth in our subscription revenue and billings, driven by both existing customer migrations to the cloud and new customer wins, our customer revenue renewal rates continue to be among the highest we've ever experienced. To summarize our second quarter software results, revenues increased 2% year-over-year on a constant currency basis. Total software license revenues, which we consider to consist of total product licenses and subscription services revenues, in our consolidated statement of operations, increased 8% year-over-year on a constant currency basis. We benefited from the increased adoption of our cloud platform, partially offset by a decrease in product license revenues. Over time, we expect our revenue profile to continue to shift towards recurring subscription revenues. Subscription revenue increased 40% year-over-year on a constant currency basis. Current subscription billings grew 51% year-over-year, our ninth straight quarter of double-digit growth and our second best quarter ever. We're also seeing growing adoption of our cloud platform in our international customers with several major wins in Q2. We continue to focus on three key areas of growth that represent core microstrategy differentiators. enterprise analytics, embedded analytics, and the cloud. Our customers depend on these differentiating capabilities to build mission-critical applications to run their field forces, store operations, risk analysis groups, corporate operations, and much more. For our first growth area, I'm pleased to share that MicroStrategy ranked number one in the enterprise analytics use case in Gartner's 2022 critical capabilities report for the second year in a row. We found that during volatile economic times, organizations rely heavily on their analytics and look to enhance how they get that information in the hands of their end users effectively. The ability to deliver Data analytics at scale with high performance and security remains a critical success factor for our thousands of customers worldwide. So we're proud to receive this designation once again. Moving on to enterprise analytics, we continue to see growth of customers who build microstrategy into the software solutions that they sell to end users, leveraging our open embedded analytics capabilities. Our focus on innovation and research and development has enabled us to continue to modernize our platform with improved, immersive, interactive user interfaces. Simple no-code and low-code application development with open APIs and innovative capabilities like mobile and hyperintelligence. Finally, as MicroStrategy Cloud continues to be a growing part of our business mix, We expect to accelerate growth through increased cloud adoption by both new and existing customers. New customers are increasingly cloud-first and choose to deploy directly on MicroStrategy Cloud. At the same time, more and more existing on-premise customers are migrating to the cloud and expanding their MicroStrategy usage to new departments and user groups. We also expect to launch in Q3 this year MicroStrategy Cloud for Governance. our new cloud offering with FedRAMP authorization. This product is our first generally available release of our cloud platform that relies on a modern cloud-native architecture utilizing containers and microservices. It also continues to deliver the enterprise-grade security, stability, and scalability that our customers have grown to expect. This combination of FedRAMP authorization, enterprise-grade capabilities, and managed service delivery will help us further differentiate our solutions with government, large enterprises, and embedded analytics customers worldwide. Our combined focus on enterprise analytics, embedded analytics, and cloud services has resulted in more customers relying on us for an end-to-end business intelligence strategy, often decommissioning and consolidating legacy platforms in favor of an enterprise-wide adoption of MicroStrategy. This has led to increasing revenue renewal rates every year in the last three years. In summary, our outlook for the software business remains positive, with our continued transition to cloud and our expectation of further increases in subscription billings. Overall, we're very pleased with the pace of product innovation, and we feel confident in our ability to achieve our long-term sales growth and profitability targets. Turning to our Bitcoin acquisition strategy, We purchased 481 Bitcoins for $10 million in Q2, an average purchase price of $20,790 per Bitcoin, net of fees and expenses. We've not sold any Bitcoin to date. To reiterate our strategy, we seek to acquire and hold Bitcoin long-term, and we do not currently plan to engage in sales of Bitcoin. As of June 30th, 2022, the company owned an aggregate of approximately 129,699 Bitcoins that we acquired for a total cost of $4 billion or $30,664 per Bitcoin net fees and expenses. We have a long-term time horizon and the core business is not impacted by the near-term price fluctuations of Bitcoin. As I mentioned earlier, we're a technology company with more than 30 years of history of innovation. They're going to remain laser-focused on technology innovation. We prudently manage our capital allocation strategy and people strategy. As seen in the current markets, many software and crypto-exposed companies have had to adjust to periods of rapid costs and headcount growth by right-sizing their teams or freezing hiring. In contrast, we have the benefit of a long history with our product and our customers, a stable, experienced executive team, and a long-term focus. We're in a strong position from a people and product perspective and will strategically hire and invest in our people, while at the same time being cognizant of the current macroeconomic environment and careful in managing our costs. Finally, I'd like to introduce our CFO, Andrew Kang. He joined the company in May. I'm thrilled to see Andrew step into this critical leadership role where he will be able to contribute from his 20-plus years of experience in banking, finance, treasury, and capital markets. I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.