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HomeInvestmentMicroStrategy (MSTR) Q2 2022 Earnings Name Transcript

MicroStrategy (MSTR) Q2 2022 Earnings Name Transcript


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MicroStrategy (MSTR 0.91%)
Q2 2022 Earnings Name
Aug 02, 2022, 5:00 p.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Individuals

Ready Remarks:

Shirish Jajodia

Howdy, everybody, and good night. I’m Shirish Jajodia, head of investor relations and treasury at Microstrategy. I can be your moderator for MicroStrategy’s 2022 second quarter earnings webinar. Earlier than we proceed, I’ll learn the Secure Harbor assertion.

Among the data we offer throughout right this moment’s name relating to our future expectations, plans and prospects could represent forward-looking statements. Precise outcomes could differ materially from these forward-looking statements on account of varied vital elements, together with the chance elements mentioned in our most up-to-date 10-Q filed with the SEC. We assume no obligation to replace these forward-looking statements, which communicate solely as of right this moment. Additionally, throughout right this moment’s name, we’ll check with sure non-GAAP monetary measures.

Reconciliations displaying GAAP versus non-GAAP outcomes can be found in our earnings launch and presentation, which had been issued right this moment and can be found on our web site microstrategy.com. I wish to welcome you all to right this moment’s webinar and allow you to know that we’ll taking questions utilizing the Q&A function on the backside of your display. You may submit questions all through the webinar, and Michael, Phong or Andrew will reply questions on the finish of the session. Please you’ll want to present your identify and your organization’s identify when submitting your questions.

Now I’ll stroll you thru the agenda for right this moment’s name. First, Michael Saylor will present a strategic evaluate and focus on our lately introduced govt transition. Second, Phong Le, we’ll cowl the operational outcomes for second quarter 2022. Then Andrew Kang will cowl the monetary outcomes for second quarter 2022.

And lastly, we’ll speak in confidence to Q&A. With that, I’ll flip the decision over to Michael Saylor, chairman and CEO of MicroStrategy. Michael?

Mike SaylorChairman and Chief Government Officer

Thanks, Shirish. I am Michael Saylor. I am the chairman and CEO of MicroStrategy. I might prefer to welcome all of you to right this moment’s webinar relating to our 2022 second quarter monetary outcomes.

First, I might like to supply a strategic evaluate. As , MicroStrategy has two company methods. The primary is to function and develop our enterprise analytics enterprise. The second is to accumulate an entire Bitcoin.

We have made nice strides in each areas over the previous two years. We have digitally reworked our gross sales, advertising and companies. We have upgraded our enterprise BI platform and we have migrated a lot of our prospects to our built-in cloud intelligence providing. We have additionally established a trusted community of digital asset service suppliers.

We have developed a set of company procedures for buying and holding Bitcoin in custody and executed a number of fairness debt and convertible debt choices in an effort to develop our steadiness sheet. We at the moment are the biggest impartial publicly traded enterprise intelligence firm, in addition to the biggest public holder of Bitcoin. MicroStrategy represents a brand new type of agency. which generates money circulate primarily based on enterprise software program merchandise and cloud intelligence companies and has a steadiness sheet primarily based on Bitcoin, a digital commodity that we consider is superior to conventional bodily commodities, like vitality, metals or agricultural merchandise.

This hybrid company technique represents a paradigm shift. What began as a defensive technique and supposed to guard our steadiness sheet quickly developed into an opportunistic technique as we sought to create shareholder worth throughout the pandemic disaster. We now not view Bitcoin acquisition is opportunistic. It’s merely our second company technique.

Our future now is determined by how we handle and develop our mental property, that’s software program, in addition to how we handle and develop our digital property that’s Bitcoin. I might like to speak a bit about our efficiency in these two methods. It is now over two years — about two years since we launched into our Bitcoin acquisition technique. And whereas I feel a minimal holding interval for a long-term funding can be 4 years, it appears becoming that we should always do a midterm evaluate of outcomes thus far.

Since August 11, 2020, our inventory has outperformed Bitcoin in addition to each main asset class, together with each main huge tech inventory. Now why will we select August 11, 2020? That was the day we introduced our Bitcoin technique, and we have coupled it with the Dutch public sale the place we supplied to purchase again $250 million of our shares. So we embarked upon this technique on August 11. After we seemed again at the place did MicroStrategy shut the day earlier than? It is up 123% since we launched into that technique.

The place is Bitcoin gone? Bitcoin is up 94% since we introduced our Bitcoin technique. So MicroStrategy has truly outperformed it fairly. We have captured greater than 100% of the alpha of Bitcoin. From a standing begin, the S&P index is up 23% in that very same time-frame.

NASDAQ is up 13%. In order you may see, we have outperformed by an element of 10 NASDAQ shares usually. We have outperformed the complete S&P by an element of 5. The choice that we had after we selected Bitcoin was gold.

We stated digital gold or gold. Gold is down 13% since that fateful day. So Bitcoin plus 94%, gold down minus 13%; MicroStrategy up 123%. We might have held our $500 million plus of treasury property and bonds.

And the standard view is to carry bonds. Properly, we might have held short-dated bonds that generated 0% curiosity or we might have purchased midrange bonds. And if we take a look at the PIMCO BOND Index, B-O-N-D, that index is down 14% since August 11, 2020. And naturally, for many who consider in silver as a substitute of gold, silver is down 29%.

In order you may see, after we’re selecting a treasury reserve asset, Bitcoin outperformed all different cheap treasury reserve property. Now we truly thought-about MicroStrategy efficiency and Bitcoin’s efficiency in opposition to huge tech, too. For these of you who know me, I wrote the cell wave and I have been an enormous advocate of huge tech digital monopolies like Google, Apple, Amazon, Fb. You may see Google on this time interval is up 54%.

MicroStrategy greater than doubled it. Apple, up 43%; Microsoft, up 34%. So we managed to beat these three digital monopolies. However the different attention-grabbing factor is that half of huge tech is down in that very same interval.

Amazon has misplaced 14% of its worth, Meta Group or Fb down 39%, and Netflix down 53%. So if we take a look at all these numbers, and when you recall, after we introduced our technique, we stated we had been contemplating all attainable treasury reserve choices. We managed to decide on the only one, bitcoin that is plus 94% to beat all the pieces. And MicroStrategy executed on that.

We principally began by shopping for $250 million of bitcoin. We executed on that, in order to not simply seize a fraction of the Bitcoin return, however truly greater than 100% of the bitcoin return for our shareholders in that point interval. Throughout this era, we have efficiently raised $2.4 billion in debt and $1 billion in fairness. And we expanded our enterprise valuation from roughly $666 million to $5.6 billion, a rise of roughly $5 billion or over 730% in these two years.

These outcomes in all probability come as a shock to many, since there is a tendency to concentrate on short-term volatility of bitcoin and its associated influence on our share value. As a publicly traded working enterprise that holds digital property, MicroStrategy in contrast to every other enterprise software program firm. With our deep data of enterprise intelligence, wealthy enterprise analytics software program platform and distributed community of loyal international suppliers — sorry, loyal international prospects offering us with a stream of revenues and money circulate, we’re in contrast to any standard holder of digital property. Which means we have to assume otherwise about how we handle our agency and maximize shareholder worth additional time.

For an analyst, contemplating the best way to worth a hybrid software program digital asset agency resembling MicroStrategy, it is sensible to think about the worth of every of the elements of the enterprise after which calculate the sum of the components. The software program enterprise will be valued as a income – as a a number of of income or earnings with consideration given to the probably progress price, the client loyalty and the standard of these recurring revenues. The digital asset enterprise will be valued at internet asset worth with a premium primarily based on an evaluation of, A, the power of the administration group to execute successfully; and B, the prospects of the digital asset. Adopting this framework, we have organized our agency in an effort to maximize the efficiency of each parts of our enterprise, whereas utilizing finance to determine and capitalize on synergies that come from pairing, a secure enterprise software program enterprise with a big, probably high-growth admittedly risky digital asset holding.

Now I might like to speak concerning the outlook. We’re nonetheless early within the adoption cycle of digital property and Bitcoin usually. There’s clearly a robust demand all over the world for plenty of issues. To start with, A, a digital property to function a long-term retailer of worth asset; B, a digital commodity to service a buying and selling different to vitality, metals and different bodily commodities.

C, a digital funds community that is open, impartial, quick and free for all to make use of. D, a digital forex that may function a medium of trade for these unable to entry {dollars} by way of the standard banking system or for many who want to commerce on the velocity of sunshine, friction-free on cell phones and web sites. Secure cash like US DC are examples of such a forex. E, digital trade that permits anybody to commerce all currencies and all property 24/7, 365.

These 5 issues are the clear improvements and there is extraordinary pleasure and enthusiasm round these concepts. International consensus has constructed over the previous two years that the world would profit from these applied sciences, and we want these digital property to construct the economic system of the twenty first century. Bitcoin serves as the moral, technical and financial basis of this rising digital economic system on account of its macular conception, it is recognition as a commodity with out an issuer, international model recognition and worldwide community of mining operators with tens of billions in particular goal {hardware} and vitality contracts that present unmatched safety and community integrity. The present wave of crypto rationalization, regulation and innovation is wholesome for this trade over the mid and the lengthy time-frame.

And we anticipate Bitcoin would be the prime beneficiary of all these developments. The demise of Celsius, Voyager and three eras has eliminated unhealthy enterprise practices and harmful leverage from the system, educating hundreds of thousands of market individuals on the deserves of holding an asset like Bitcoin with out counterparty danger and taking self-custody or putting that asset in chilly storage. Regulators have been catalyzed by the crypto market meltdown and accelerated plans for regulating exchanges, cryptosecurities and secure cash. We must always see regulatory readability come sooner than we’d in any other case anticipated, and it’s clear from communications, from Congress and regulatory our bodies, the extra focus goes to be positioned on the digital property trade and the principles and associated initiatives can be quick tracked.

Many giant institutional buyers have but to make substantial allocations of capital to this new asset class as a result of they’re ready for this regulatory readability. So the main focus that regulators are putting on the crypto trade is welcome information to us, and we consider a internet optimistic for Bitcoin. Even whereas there’s market turmoil, innovation and adoption proceed within the digital asset house. The Bitcoin community has settled greater than 17 trillion transactions this yr, and the Lightning Community continues to develop at a speedy tempo, reaching document ranges of liquidity and scale every quarter.

Each week, new banks introduced Bitcoin custody companies, no by-product merchandise are coming to market, and new monetary service suppliers proceed to enter the house, providing buying and selling, evaluation and banking companies to the swelling inhabitants of buyers. The rising curiosity in Bitcoin from banks, resembling Goldman Sachs, Citigroup, JPMorgan, Santander, in addition to Constancy’s initiatives to supply 401k companies that embrace Bitcoin are indicative of this pattern. Macroeconomic developments proceed to favor and drive the adoption of digital property as nicely. Prior to now two years, quite a few currencies in South America, Africa and Asia have collapsed.

And even conventional sturdy economies are affected by forex weak point. The Nice British pound, the Korean gained, the South African rand are all down 12% within the final 12 months. The euro is down 14% in opposition to the greenback. The Polish zloty and the Japanese yen are down 17% in opposition to the greenback, and the Turkish lira is down 54%.

The strengthening greenback has created a requirement all over the world for digital forex. Since many individuals exterior the US would like to commerce their native forex for US {dollars} and many individuals exterior the standard banking system can set up a digital financial institution on their cell phone in a couple of minutes and enter the worldwide economic system utilizing the US greenback as a medium of trade and Bitcoin as a retailer of worth. We consider that Bitcoin needs to be the first beneficiary of those developments. Since it’s nonetheless a small fraction of the market capitalization of gold commodities, property, forex, bonds and industrial actual property.

Continued inflation will create a necessity for a non-sovereign retailer worth asset that’s impartial and globally obtainable. Expertise will make it simpler and extra useful to make use of, and ongoing schooling and regulation efforts will introduce extra buyers to this new asset class every year and make them extra snug holding wealth within the type of digital property. MicroStrategy has bold plans to develop each components of our enterprise. There is a persevering with want for enterprise analytics all over the place, and we’re well-positioned to develop with our best-in-class built-in enterprise intelligence platform.

We anticipate to speed up our transition to cloud-based clever companies and exploit our growing model consciousness and international attain to achieve new prospects and deepen {our relationships} with current shoppers. We even have a novel alternative to proceed rising our Bitcoin holdings by way of extra acquisitions financed by money flows, debt, and fairness. We’re one of many few working corporations on this planet that has the technical functionality and the company mandate to accumulate and personal Bitcoin in addition to difficulty Bitcoin-backed financings. We’re additionally uniquely positioned to develop enterprise software program that leverages the Bitcoin community.

We anticipate extra alternatives will come our means and we intend to be able to reap the benefits of our management place within the bitcoin trade when the time is correct. Given this dramatic improve within the scope of our bold plans and the size of our steadiness sheet property. We have determined that the agency can be finest served by increasing and reorganizing the administration group. Andrew Kang lately joined our group as chief monetary officer, assuming obligations that had been beforehand dealt with by Phong Le.

Lots of you may be listening to from Andrew for the primary time on our earnings evaluate name right this moment and we’re delighted to have him aboard. For the previous two years, Phong Le has served as our president and CFO. Now, we really feel it’s the proper time to raise him to the function of President and CEO accountable for all of our company operations. Phong’s the perfect candidate to take the CEO function.

He joined our agency in 2015 as CFO, progressively assuming duty for human assets, amenities and data programs. And later expanded his scope to handle gross sales and companies as our chief working officer. Two years in the past, he assumed duty for advertising and expertise as nicely when he was elevated to president. In all of those roles, he is been profitable and he is gained the respect of the Board in addition to the respect of our staff, prospects, companions, and distributors.

So, the development to CEO is each pure and well-deserved. Phong may also be part of our board of administrators as a member of the board. I’ll assume a brand new full-time function as govt chairman of Microstrategy. I’ll stay an govt officer and worker of the corporate and chairman of the board of administrators, in addition to assuming the function of chair of our investments committee, the place I’ll proceed to supply oversight for our Bitcoin acquisition technique.

My focus can be on our company technique, our innovation efforts, our Bitcoin technique and associated Bitcoin advocacy and schooling initiatives, resembling my work with the Bitcoin Mining Council. I’ll proceed to behave as an enthusiastic spokesperson for MicroStrategy and as our envoy to the International Bitcoin neighborhood. As international adoption of digital property accelerates, that is changing into an ever extra expansive job, and I am comforted growing the scope of my advocacy efforts figuring out that the execution of the MicroStrategy marketing strategy rests within the succesful palms of Phong, Andrew and the remainder of our govt group. These adjustments will happen as of August 8, 2022.

At the moment, the corporate could have a devoted chief monetary officer, Andrew Kang; a devoted president and CEO, Phong Le; and a devoted govt chairman and myself. This represents a welcome strengthening of our administration group as we put together for the subsequent part of company progress at MicroStrategy. I am personally enthusiastic about this information. The three of us make an amazing group.

We work collectively nicely and possess mutually complementary abilities and expertise. This can be a profit to our shareholders, prospects, staff, companions in addition to to the broader neighborhood as we proceed to cleared the path in Enterprise Intelligence and Bitcoin company adoption. Now I wish to go the ground to Phong Le, our president and soon-to-be CEO to supply an operational evaluate of our enterprise outcomes.

Phong LePresident and Chief Government Officer

Thanks, Michael. I am honored and looking out ahead to main this really modern group in my new function as president and CEO. MicroStrategy has based 33 years in the past as a expertise innovator with a imaginative and prescient of intelligence all over the place. Since then, we have turn out to be a world chief in enterprise intelligence serving the biggest, most revered enterprises and authorities organizations on this planet.

We have additionally been a expertise pioneer within the fields of relational, internet, cell and cloud analytics. Our staff and executives are the muse upon which our power in enterprise analytics was constructed, and I am enthusiastic to work with them to proceed to develop this enterprise going ahead. Extra lately, MicroStrategy has pioneered the usage of digital property as a core element of company’s treasury coverage. We consider it is nonetheless early and additional adoption of Bitcoin globally can have a optimistic impact on the Bitcoin value, which has the potential to supply upside to our shareholders.

Bitcoin is the fitting long-term retailer worth for MicroStrategy, enterprises, establishments, people and the world. Our historical past of innovation has allowed MicroStrategy to achieve success for a sustained time period. I plan to proceed to construct a tradition and an organization the place innovation thrives. As well as, our ecosystem of shoppers, companions, shareholders and staff are important to our success.

Our dedication and concentrate on this group will strengthen underneath my management. I look ahead to main the group for the long-term well being and progress of our enterprise software program and Bitcoin acquisition methods. I might additionally prefer to thank Michael Saylor. Following Mike’s footsteps, our founder and a pioneer in enterprise analytics Bitcoin for establishments and CEO of MicroStrategy for 33 years is a good honor and an amazing duty.

I’ve realized an amazing quantity for Mike over the past seven years, and I am honored to construct upon his basis at MicroStrategy. I look ahead to persevering with to work with him in my new function as president and chief govt officer; and as a member of the board and his new function as govt chairman. I will now concentrate on the Q2 2022 enterprise outcomes. General, we’re happy with our leads to Q2.

Regardless of a difficult macroeconomic setting on account of excessive inflation, weakening foreign exchange and the continued struggle in Ukraine, we achieved whole income progress at fixed forex on the power of our cloud enterprise. We had sturdy progress in our subscription income and billings pushed by each current buyer migrations to the cloud and new buyer wins. Our buyer income renewal charges proceed to be among the many highest we have ever skilled. To summarize our second quarter software program outcomes.

Revenues elevated 2% yr over yr on a continuing forex foundation. Complete software program license revenues, which we think about to encompass whole product licenses and subscription companies revenues and our consolidated assertion of operations elevated 8% yr over yr on a continuing forex foundation. We benefited from the elevated adoption of our cloud platform, partially offset by a lower in product license revenues. Over time, we anticipate our income profile to proceed to shift towards recurring subscription income.

Subscription income elevated 40% yr over yr on a continuing forex foundation. Present subscription billings grew 51% yr over yr, our ninth straight quarter of double-digit progress and our second finest quarter ever. We’re additionally seeing rising adoption of our cloud platform in our worldwide prospects with a number of main wins in Q2. We proceed to concentrate on three key areas of progress that signify core MicroStrategy differentiators; enterprise analytics, embedded analytics and the cloud.

Our prospects rely upon these differentiating capabilities to construct mission-critical purposes to run their discipline forces, retailer operations, danger evaluation teams, company operations and far more. For our first progress space, I am happy to share the MicroStrategy ranked primary within the enterprise analytics use case in Gartner’s 2022 Essential Capabilities report for the second yr in a row. We discovered that in risky financial occasions, organizations rely closely on their analytics and look to boost how they get that data within the palms of their finish customers successfully. The power to ship knowledge analytics at scale with excessive efficiency and safety stays a essential success issue for our 1000’s of shoppers worldwide.

So we’re proud to obtain this designation as soon as once more. Shifting on to enterprise analytics. We proceed to see progress with prospects who construct MicroStrategy into the software program options that they promote to finish customers, leveraging our open embedded analytics capabilities. Our concentrate on innovation and analysis and growth has enabled us to proceed to modernize our platform with improved immersive interactive consumer interfaces, easy no-code and low-code software growth with open APIs and modern capabilities like cell and HyperIntelligence.

Lastly, as MicroStrategy Cloud continues to be a rising a part of our enterprise combine, we anticipate to speed up progress by means of elevated cloud adoption by each new and current prospects. New prospects are more and more cloud first and select to deploy instantly on MicroStrategy Cloud. On the similar time, increasingly more current on-premise prospects are migrating to the cloud, and increasing their MicroStrategy utilization to new departments and consumer teams. We additionally anticipate to launch in Q3 this yr, MicroStrategy Cloud for presidency, our new cloud providing with FedRAMP authorization.

This product is our first usually obtainable launch of our cloud platform that depends on a contemporary cloud-native structure using containers and microservices. It additionally continues to ship the enterprise-grade safety, stability and scalability that our prospects have grown to anticipate. This mix of FedRAMP authorization, enterprise-grade capabilities and managed service supply will assist us additional differentiate our options with authorities, giant enterprises and embedded analytics prospects worldwide. Our mixed concentrate on enterprise analytics, embedded analytics and cloud companies has resulted in additional prospects counting on us for an end-to-end enterprise intelligence technique.

Off a decommissioning and consolidating legacy platforms in favor of an enterprisewide adoption of MicroStrategy. This has led to growing income renewal charges yearly within the final three years. In abstract, our outlook for the software program enterprise stays optimistic with our continued transition to cloud and our expectation of additional will increase in subscription billings. General, we’re more than happy with the tempo of product innovation.

And we really feel assured in our potential to realize our long-term gross sales progress and profitability targets. Turning to our Bitcoin acquisition technique, we bought 481 Bitcoins for $10 million in Q2, and a mean buy value of $20,790 per Bitcoin, internet of charges and bills. We have not bought any Bitcoin thus far. To reiterate, our technique, we search to accumulate and maintain Bitcoin long run, and we don’t presently plan to interact in gross sales of Bitcoin.

As of June 30, 2022, the corporate owned an mixture of roughly 129,699 Bitcoins that we acquired for a complete price of $4 billion or $30,000 and 30,664 per bitcoin internet of charges and bills. We’ve got a long-term time horizon and the core enterprise just isn’t impacted by the near-term value fluctuations of Bitcoin. As I discussed earlier, we’re a expertise firm with greater than 30 years of historical past of innovation and are going to stay laser-focused on expertise innovation. We prudently handle our capital allocation technique and folks technique.

As seen within the present markets, many software program and crypto uncovered corporations have needed to modify a durations of speedy price and headcount progress by rightsizing their teenagers or freezing hiring. In distinction, we benefit from an extended historical past with our product and our prospects, a secure, skilled govt group, and a long-term focus. We’re in a robust place from a individuals and product perspective, and can strategically rent and spend money on our individuals, whereas on the similar time being cognizant of the present macroeconomic setting and cautious in managing our prices. Lastly, I might prefer to introduce our CFO, Andrew Kang.

He joined the corporate in Could. I am thrilled to see Andrew step into this essential management function, the place he’ll be capable to contribute from his 20-plus years of expertise in banking finance, treasury and capital markets. I will now flip the decision over to Andrew to debate our financials for the quarter in additional element.

Andrew KangSenior Government Vice President and Chief Monetary Officer

Thanks, Phong. I’m delighted to be with everybody right this moment and wish to begin by turning to our second quarter 2022 monetary leads to extra element. GAAP revenues for the quarter had been $122 million, down 3% yr over yr. Whereas weakening foreign exchange impacted our revenues this quarter when isolating FX impacts, whole income elevated 2% on a continuing forex foundation.

Complete software program license revenues, which encompass each product license revenues and subscription companies revenues had been in whole $34 million, up 5% yr over yr or up 8% yr over yr on a continuing forex foundation. The expansion in whole software program license revenues this previous quarter displays our strategic concentrate on the migration of our platform to the cloud, which Phong highlighted earlier. Within the second quarter, cloud subscription service revenues had been $14 million, a rise of 36% yr over yr or up 40% on a continuing forex foundation. Complete product license revenues had been $20 million, a lower of 9% yr over yr or a lower of 6% on a continuing forex foundation.

And product assist revenues had been $66.5 million, a lower of 6% yr over yr or 2% decrease on a continuing forex foundation. Each product license and product assist revenues are impacted when new and current prospects convert to our cloud mannequin. And consequently, we anticipate these revenues to modestly decline alongside a corresponding improve in cloud subscription revenues and billings. You will need to be aware that even in mild of this transition, our on-prem prospects proceed to mirror the sturdiness of our enterprise as demonstrated with a Q2 assist renewal price of 95% among the many highest we have ever skilled.

Lastly, different companies revenues, which largely mirror our consulting enterprise, had been $21.4 million this quarter, a lower of two% yr over yr however a rise of 4% on a continuing forex foundation. We proceed to see optimistic developments in our consulting enterprise by means of elevated billable charges and our worldwide whereas optimizing prices by means of a world and extremely expert technology-consulting workforce. The 4% fixed forex progress yr over yr is a robust indication of the need from our prospects to modernize and develop their deployment of MicroStrategy. Shifting to billings.

Our present whole software program license billings had been $39.9 million, a rise of 12% yr over yr. Within the second quarter, present subscription billings had been $20.1 million, a rise of 51% yr over yr, reflecting the identical sturdy progress momentum we noticed on the finish of final yr. This improve was pushed by strong leads to each subscription service revenues in addition to present deferred subscription service revenues. Additionally value noting, our largest cloud billings in Q2 had been bought as multiyear contracts with a mean time period of over 24 months of which solely 12 months are mirrored on our steadiness sheet.

We consider the demand emigrate MicroStrategy to the cloud stays very sturdy with further pipeline being added from each our home and worldwide prospects. Shifting to prices. Complete non-GAAP bills, which exclude share-based comp, had been $1.02 billion within the second quarter in comparison with $529 million within the second quarter of 2021. Other than the bitcoin impairment expense that I’ll focus on in a second, our prices this quarter mirror modest improve in areas particular to constructing out our cloud platform, retaining and attracting expertise whereas specializing in efficiencies and company price areas.

Ranging from the left of the chart, non-GAAP price of revenues had been $24 million within the second quarter of a rise of $1.6 million or 7% yr over yr. As a share of the entire revenues, these prices, that are nonetheless scaling as much as assist the build-out of cloud mirror a rise of two%, which was largely attributed to increased internet hosting charges and investments in expertise expertise. Non-GAAP gross sales and advertising expense was $32 million, a lower of $4.6 million or 13% yr over yr. As a share of whole software program license revenues, the second quarter lower of 19% yr over yr continues to mirror enhancements within the productiveness of our gross sales and advertising groups, together with a rise in capitalized commissions in comparison with final yr.

Non-GAAP R&D expense was $29 million, which was a rise of $2.6 million or 10% yr over yr. This was a rise of three% as a share of whole revenues pushed by the continued aggressive setting for expertise throughout the tech sector. We’re anticipating that this pattern will proceed within the close to time period. Nevertheless, as we prioritize total spend within the second half and into subsequent yr, we’ll proceed to be strategic and opportunistic in investing in R&D to draw and retain engineering expertise and to drive innovation that creates demand for our merchandise.

Non-GAAP G&A expense was $22 million, a rise of $3.8 million or 20% yr over yr. As a share of whole income, this displays a rise of three%. The general macroeconomic setting and inflation challenges proceed to create headwinds for our backside line. The very fact is, although, our enterprise is working nicely and our price construction is secure.

Nevertheless, within the coming quarters, we can be intentional in prioritizing spend whereas specializing in areas that drive profitability, whereas persevering with to advertise a robust office tradition. The biggest non-GAAP expense for the quarter was the Bitcoin impairment cost of $918 million. You’ll recall that the GAAP therapy of Bitcoin impairment costs treats our Bitcoin holdings as indefinite wealth intangible property underneath the relevant accounting guidelines, which signifies that any lower within the honest worth under our carrying worth at any time subsequent to acquisition, requires us to acknowledge an impairment cost. Because of the bitcoin value volatility in Q2, the impairment on our Bitcoin holdings was measured in opposition to a low watermark Bitcoin value of roughly $17,600, if the way forward for Bitcoin costs stay above the low watermark, underneath the present accounting guidelines, we’d not acknowledge any further impairment in opposition to a considerable portion of our June 30, 2022 Bitcoin holdings.

On Slide 18, whole non-GAAP working loss within the second quarter of 2022 was $903 million, which incorporates the $918 million Bitcoin impairment cost I simply spoke about. I might like to focus on that for the reason that adoption of our Bitcoin technique in Q3 2020, the digital asset impairment costs we’ve got incurred in each quarter since inception have at all times been better than our non-GAAP working losses. Whereas our Bitcoin holdings are impaired when the value drops under the carrying worth underneath present accounting guidelines, conversely, when the value will increase, accounting guidelines don’t permit the carrying worth to be revised upward. We really feel optimistic that the monetary accounting requirements board lately unanimously agreed to evaluate the accounting guidelines for exchange-traded digital property and commodities as a part of their upcoming technical agenda, which might result in a change in how digital property are accounted for sooner or later.

As of June 30, 2022, the carrying worth of our Bitcoin holdings was roughly $2 billion, which displays roughly $2 billion in cumulative impairment costs. As you may see within the chart, the market worth of our Bitcoin holdings as of every quarter finish has at all times been better than the carrying worth underneath the present guidelines. The capital markets have established us — enabled us to be agile and entry each the fairness and debt markets in an environment friendly method to develop our enterprise worth. As you may see on Slide 20, the earliest of our debt maturities will not be due till March 2025 and the blended rate of interest of our whole $2.4 billion in debt is just one.9%.

As of quarter finish, we had $69 million in money on our steadiness sheet, and we anticipate money flows from operations can be adequate to cowl our ongoing curiosity expense wants. Going ahead, topic to market situations, we’ll proceed to guage alternatives that we consider can be accretive to our shareholders that additional our Bitcoin technique or optimize our current capital construction. As of June 30, 2022, we held a complete of 129,699 Bitcoins, of which 14,589 Bitcoins had been held instantly at MicroStrategy, the guardian, all of which safe our 2028 notes. The remaining roughly 115,000 Bitcoins are held at our subsidiary macro technique.

Of the Bitcoins held on the sub, roughly 30,000 bitcoins are pledged as collateral to the Silvergate mortgage and simply over 85,000 Bitcoins stay unpledged and obtainable to be used. These unencumbered Bitcoin is equal to roughly $2 billion, assuming a market value of about 23,000 per Bitcoins. Our Bitcoin technique stays easy, purchase and maintain for the long run, and that’s it. In Q2, the quantity of Bitcoin pledge of macro technique elevated by 10,585 Bitcoins to assist the Silvergate mortgage as Bitcoin costs fell to the Q2 lows.

Our $205 million Bitcoin again mortgage requires us to take care of a loan-to-value or LTV of fifty% or much less, and we’ve got the power to contribute further Bitcoin to fulfill the requirement as wanted, which we did in Q2. If the value of Bitcoin appreciates and the LTV ratio is lower than 25% at any time, we’re additionally then in a position to withdraw any of the surplus collateral at the moment. With roughly 85,000 obtainable unpledged Bitcoin, we’ve got greater than adequate collateral to fulfill the continued necessities of the mortgage by means of any foreseeable value volatility. Lastly, earlier than I open up the decision for Q&A, I wish to say that I am extraordinarily honored to be a part of the MicroStrategy group and excited to be working with Mike and Phong of their new roles, the place we’re all aligned on executing on the company methods of working and rising our enterprise analytics enterprise and buying and holding Bitcoin for the long-term.

I consider MicroStrategy is really in a class of 1; having efficiently mixed a long-standing software program enterprise with a profitable monitor document and deep buyer base with a pioneering company treasury technique to accumulate Bitcoin as a retailer of worth to turn out to be the biggest company holder of the Bitcoin on this planet. Thanks to your time right this moment. And with that, I will now flip the decision over to Shirish for Q&A.

Shirish Jajodia

Thanks, Andrew. We’ve got acquired a number of good questions, so we’re going to soar proper into the questions. The primary query is for Michael. Is the CEO succession a latest growth, or that’s one thing that had been in works for some time?

Mike SaylorChairman and Chief Government Officer

OK. Are you able to hear me? Sure. The matter of CEO succession has been fastidiously thought-about and deliberate for on the board degree for a few years. We consider in proactively growing our management group, and we notice the way forward for the agency relies upon our potential to domesticate successive generations of executives and promote from inside.

I had seven years of intently working with Phong on a day-to-day foundation on IT initiatives, gross sales actions, on expertise, on advertising, on companies, on amenities, on finance initiatives. And the Board had seven years of expertise with him as a result of he was the CFO all through that point, and he was intently concerned with the Board each single quarter. When Phong was promoted to president of the corporate two years in the past, I feel it was fairly clear to firm watchers that he was my period guardian. So in abstract, it is a resolution seven years within the making after we lastly bought to the purpose that appeared proper.

It was a straightforward one to execute on.

Shirish Jajodia

Thanks, Michael. Subsequent query is for Phong. What adjustments do you propose to make as a CEO?

Phong LePresident and Chief Government Officer

Properly, I feel Mike said, we have been working collectively for seven years now in my capability as CFO on and off, two years as president. I feel we’re pretty aligned in the best way to run each an enterprise software program firm and really aligned, working very intently collectively within the final two years in our Bitcoin acquisition technique. So, I’d kind of see this as a business-as-usual transition, the place we get to even additional make clear our roles within the group, with our staff, with prospects, with companions, with shareholders within the media, and I haven’t got any vital adjustments deliberate. In all probability the largest adjustments that we have noticed is de facto Andrew’s arrival two months in the past and him now operating the finance group very credibly.

And professionally, it offers me extra time to run the corporate and provides Mike extra time to concentrate on company technique, innovation and the Bitcoin technique.

Shirish Jajodia

Thanks, Phong. Subsequent query is for Andrew. Do you anticipate any additional capital markets exercise and what’s your long-term debt technique?

Andrew KangSenior Government Vice President and Chief Monetary Officer

Thanks for the query, Shirish. I consider the corporate has executed thus far in a really prudent and nicely thought out capital construction framework. Actually since 2020 and it has been extraordinarily profitable, as evidenced earlier, when Mike defined our inventory efficiency over the past yr in comparison with our comps. Our strategy to debt or fairness will stay the identical because it has.

We are going to proceed to guage entry to the markets which might be most accretive, and we’ll look to acquire essentially the most premium for {dollars} generated. That being stated, proper now within the present market, we’re persevering with to guage all the assorted alternatives and actually have the luxurious of continuous to be considerate on any future steadiness sheet execution. So, for the second we’re a little bit of consider wait and see, however I can guarantee you that no matter we do sooner or later, we’ll proceed to take action in a prudent and protected method.

Shirish Jajodia

Thanks, Andrew. Subsequent query is for Phong. Phong congratulations in your promotion to CEO. Are you able to discuss your progress outlook for the software program enterprise for the second half of this yr? There are vital macro crosswinds flowing, how do you anticipate this to influence the expansion price of your license and subscription billings within the second half?

Phong LePresident and Chief Government Officer

Thanks, Shirish. It is a good query. We had been in a position to — in my view stand up to a few of these macroeconomic challenges within the second quarter, as you noticed, primarily by rising within the cloud. I feel the second half, we’ll see extra macroeconomic adjustments, challenges, the sturdy greenback, unpredictability the Struggle in Ukraine, and many others.

So, I feel there can be extra challenges. Our intent is to attempt to proceed to develop. I feel cloud will assist us. As you all know, and as I and Andrew defined, rising within the cloud does have a short-term unfavorable influence on product license income and in addition has a short-term unfavorable influence on whole income.

So that may create in all probability extra distraction in our revenues than the macroeconomic challenges. However I feel we’ll be capable to proceed to develop. I am optimistic about it. That stated, we’ll be prudent and considerate.

We’re not going to get out forward of our skis on price. And we’ll see how the enterprise continues. However issues have been going pretty nicely after we see macroeconomic challenges, given our kind of — given our power in enterprise analytics and embedded analytics within the cloud and we’ll be cautious however optimistic within the second half.

Shirish Jajodia

Subsequent query is for Michael. Has the latest Bitcoin value volatility accompanied with giant accounting adjustment impacted your view in your Bitcoin technique going ahead?

Mike SaylorChairman and Chief Government Officer

Sure, it is an amazing query. We anticipated bitcoin volatility and we understood the accounting implications after we launched into our Bitcoin technique. I view each of those as aggressive benefits for our agency. The volatility signifies that, A, bitcoin is extra attention-grabbing than much less risky property.

And B, MicroStrategy is extra attention-grabbing than corporations holding much less risky property. The phrase that involves thoughts is volatility is vitality. We consider one of many causes Bitcoin is the best-performing asset class of the final decade is as a result of the volatility attracts curiosity, capital buying and selling, it creates alternatives — it’s totally particular. Our agency visibility has been elevated by one to 2 orders of magnitude since we launched into our Bitcoin technique.

And curiosity in our securities has additionally elevated by one to 2 orders of magnitude. We do not have to attempt to persuade corporations to wish to cowl our inventory and clarify why we’re distinctive? They’re listening to from heaps and plenty of different channels that had been distinctive and the truth that Bitcoin is risky signifies that, on the weekend, Bitcoin spikes up 20% or 10% then our inventory could be mispriced and swiftly, there’s somebody that is fascinated about it and obsessing about what to do on Monday morning and perhaps the alternative. And the truth that they’re obsessing means they’ve to find us, and so they discover us. And once they discover us, they began asking questions, what does MicroStrategy do? Oh, software program, Inform me extra about that.

So, each CFO, CEO, CXOs, the C-suite, they’ve heard of us, the media they’ve heard of us. Merchants have an financial incentive to spend money on MicroStrategy. And I used to joke with individuals. Should you like Bitcoin, then you definately’ll like us.

However when you hate Bitcoin, you may nonetheless like us, as a result of those that hate Bitcoin, they wish to commerce our inventory and folks do like Bitcoin wish to commerce our inventory and everyone’s bought to have an opinion on it. So, the volatility simply attracts consideration and attracts capital, and it makes the corporate far more attention-grabbing. As for — and the curiosity is vital, as a result of the factor you do not need is to be irrelevant to the world. When no person is aware of you and no person cares whether or not you succeed or do not, and nobody is aware of what you do, that is the kiss of loss of life.

And so, our firm has actually emerged on this world scene, and it has helped us to promote to market, to recruit, to retain staff to seek out shareholders, and many others. And so, I see these as all positives. I feel the accounting therapy additionally advantages our agency, as a result of we determined to undertake the Bitcoin commonplace. So, in an accounting therapy, that is indefinite and intangible, it is type of difficult to be 3% dedicated or 2% dedicated or 18% dedicated.

However whenever you’re all in, all dedicated and folks know they will multiply the value of bitcoin occasions 129,699 in any given day after which add in what they assume the software program enterprise is value, it truly — it makes issues straightforward, and we had been ready to do that as a result of we launched that Dutch public sale on August 11, 2020. Most different companies would discover this a really daunting company transition and so they would not be capable to kind of utterly rework the company steadiness sheet with the assist of the shareholders and the way in which that we did it with that transformational deal. So, because of that, as a result of individuals are afraid of volatility and typically, they’re off put by the accounting, we’ve got been in a position to develop a lead within the digital asset house as the primary and the biggest public working firm on a Bitcoin commonplace, and I feel that has given us a sustainable aggressive edge and a differentiator that we are able to use to proceed to construct shareholder worth going ahead.

Shirish Jajodia

And Phong, would you want so as to add any additional coloration?

Phong LePresident and Chief Government Officer

No, I feel Mike stated it very nicely.

Shirish Jajodia

Nice. Subsequent query can be for Michael. How ought to buyers consider the brand new govt work construction? Are there any tangible advantages from it that may turn out to be evident over time, for instance, an additional growth of the digital asset technique past Bitcoin holding?

Mike SaylorChairman and Chief Government Officer

Properly, I feel the chief construction goes to be a profit to all of us. To start with, we’re truly increasing the administration group with the addition of Andrew. And that offers us a full-time finance govt, and as , our steadiness sheet has grown with our debt choices and our potential to difficulty fairness and the explosion of our enterprise worth from $666 million to $5.5 billion, signifies that the finance operate has turn out to be a full-time job in its personal. And so Andrew has arrived and introduced some new abilities with him, but in addition Andrew has made it attainable for us to advertise Phong to president and chief govt officer, and Phong is simply an extremely gifted working govt and with the assist of Andrew and with the CEO function and the unambiguous energy that comes with it, Phong can be more practical and in a position to transfer extra effectively and drive the company mission.

And I really feel snug with Phong and Andrew in place in addition to with the — we have not talked about the remainder of the chief group, however we’ve got an superior CXO group, proper, our head of expertise, our head of IT, our head of consulting, our head of gross sales, proper? And our head of selling, they’re the unsung heroes that are not on this name proper now. However that group is simply very completed, very secure. And this new govt construction signifies that I can much more enthusiastically focus upon communications and technique and Bitcoin advocacy and evangelism figuring out that I am not ignoring the nuts and bolts day-to-day operations of the enterprise, of which there’s 100,000 issues you must do nicely yearly in a software program firm, and they should get achieved, and they’re going to get achieved. However the world of Bitcoin is exploding.

And all over the place on this planet, individuals are concerned with how they plug into this community, and the way can MicroStrategy combine with them? And in order that’s a job that is truly rising in scope. So I really feel like I will be more practical, Phong can be more practical. Andrew’s welcome addition. It is only a win-win-win.

Shirish Jajodia

Thanks, Michael. Subsequent query is for Phong. Given the macroeconomic danger, are you able to replace us on how you concentrate on balancing income progress versus margin growth?

Phong LePresident and Chief Government Officer

We’re centered on rising the income. I feel we’ve got the fitting price construction in place to do it. So I do not consider we have to sacrifice income progress by lowering if we had been to scale back our prices, I feel we are able to proceed to develop on the present price construction. And I feel that may also begin to end in margin growth.

So they are not direct trade-offs in my view.

Shirish Jajodia

One other one for Phong. So good to see progress in core software program, are you able to give us an thought on the place we stand now in combine between license and SaaS? When would possibly we anticipate to see SaaS progress start to maneuver the expansion needle extra materially?

Phong LePresident and Chief Government Officer

Yeah. On a acknowledged income foundation, our cloud subscription income is about 15% of our recurring income. On a billings foundation, it is about 20%. So we have not reached that an inflection level the place our SaaS enterprise will get to, I’d say, north of 40%, whereas we proceed to develop, it is absolutely accretive to income within the short-term.

Proper now it is accretive to income within the long-term, however not fairly the short-term. So I feel we’ve got a while left. Clearly, all of you — a lot of you might have seen corporations go from a perpetual license to a subscription income transition up to now. And I feel you are acquainted with that short-term dip in product license income and its influence on whole income, and the way that comes out on the opposite finish with an acceleration of income.

So we’re going by means of proper now — there’s excessive demand for cloud, which is thrilling. Our prospects perceive the worth proposition. Our entrepreneurs perceive the best way to clarify. Our salespeople perceive the best way to promote it.

And we’re studying better-and-better the best way to function at scale. So it is, I’d say, full velocity forward with the cloud transition.

Shirish Jajodia

Thanks. Subsequent query is for Andrew. Would you prefer to elaborate additional on managing bills within the second half of 2022?

Andrew KangSenior Government Vice President and Chief Monetary Officer

Certain. I feel tagging on to what Phong stated earlier, our price construction could be very secure. And I feel that is the advantage of being a long-standing firm in enterprise for over 30 years. And we have not had this huge progress in head rely.

Head rely has been very secure. We have not over employed as we have seen many available in the market do lately. So I feel from a price perspective, we’ll proceed to concentrate on areas which might be accretive to profitability. We’ll look to be opportunistic the place we are able to on bringing in new expertise, in reality, round key areas like tech and cloud and gross sales.

And we’ll actually scrutinize the opposite prices that we predict we will be extra environment friendly. And I’ve bought the advantage of coming in and attending to ask a number of new questions on sure bills and prices. And so I feel that can be useful and understanding the place we will be extra environment friendly. However in the end, I feel we’ll be opportunistic and spend in areas that may assist our enterprise develop.

Shirish Jajodia

Thanks, Andrew. We’ll simply take one final query for Phong right here. On the demand setting, what are you seeing within the demand setting for BI software program, on the uncertainty on macro? And what’s your demand outlook for the remainder of 2022? And have any deal cycles elongated, or any view from prospects on their, spend?

Phong LePresident and Chief Government Officer

Yeah. Thanks, Shirish. I do assume we’re seeing choppier demand, elongated deal cycles extra challenges in our promoting setting, particularly in worldwide. All that stated, as I discussed earlier than, if we are able to push by means of and execute, leverage our experience in enterprise analytics, the truth that we construct purposes that giant enterprises depend on, particularly in turbulent occasions and leverage our cloud transition, I feel we are able to work by means of this and develop within the second half and sooner or later.

However there is definitely extra volatility, we’ve got to be higher at execution. We’ve got to be extra exact in managing our pipeline, and our gross sales cycles, and our alternatives, and our buyer engagements, and our conversations. So look, it requires higher execution in a lot of these occasions. And that is what we’re good at.

We’re an organization that has nice product, nice technique and nice execution. So it is laborious, however we’ll work by means of it.

Shirish Jajodia

Nice. So we’re on the finish of time for right this moment’s name. Thanks, everybody, for the questions. This concludes the Q&A portion of the webinar.

I’ll now flip the decision over to Michael for closing remarks.

Mike SaylorChairman and Chief Government Officer

I wish to thank everyone to your assist, and Phong, Andrew, Shirish and I’ll all look ahead to seeing you once more in 12 weeks, and we want you a cheerful summer season. Have a great day.

Period: 0 minutes

Name individuals:

Shirish Jajodia

Mike SaylorChairman and Chief Government Officer

Phong LePresident and Chief Government Officer

Andrew KangSenior Government Vice President and Chief Monetary Officer

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