MicroStrategy Incorporated
Q1 2022 Earnings Call Transcript

Published: 3 May 2022

[Shirish Jajodia:]

We'll get started. Hello, everyone, and good evening. I am Shirish Jajodia, 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 the risk factors discussed in our most recent 10-Q 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 taking questions using the Q&A feature at the bottom of your screen. With that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy. Michael?

[Michael Saylor:]

Thank you, Shirish. 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 Phong Le, our President and Chief Financial Officer. First, I'd like to pass the floor to Phong, who's going to provide an update on our operations and the financials for the quarter.

[Phong Le:]

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 license 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 slipped 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 at an 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 back term loan. I'll 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 31, 2022, the company own 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 at March 31, 2022. The carrying value of our Bitcoin holdings as of March 31, 2022, was roughly $2.9 billion, reflecting $1.1 billion in cumulative impairment charges. We continue to see opportunities for MicroStrategy to target a multibillion-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 on our last earnings call, we see three key areas of growth for us

[Michael Saylor:]

Thank you, Phong and I want to thank everybody for being with us at here today. I thought I'd start with a few observations of global developments. In Q1, we saw some fairly seminal events, the trucker crisis in Canada, the Ukrainian war, Russian sanctions, continued inflation, supply chain chaos, concerns about food and energy shortages, all of those things have been combined with a weakening currency environment, the Chinese currency, the Japanese currency, South Africa -- South America and African currencies, and a lot of Asian currencies were all collapsing against the dollar. In fact, just about every currency in the world, except for two, I think, are collapsing against the dollar right now. This is creating a very challenging macroeconomic environment. It's going to continue to create uncertainty and challenges for all businesses. I think that it has had the impact of increasing awareness of and the understanding of the need for a digital asset like Bitcoin and so the silver-lining is that hundreds of millions, if not billions of people are now becoming aware of the need for non-sovereign store value digital asset like Bitcoin. The negative is it creates a very challenging operating environment. Over the last few months in the world of Bitcoin, the interesting developments worth highlighting are the Executive Order coming out of the Biden White House on March 9th, which was really a first as long as anyone can remember, the first time that we had the executive branch in the United States in essence highlighting and endorsing an asset class as being critical to the future of the nation. And so I thought that, that was extraordinarily auspicious. Janet Yellen gave a speech on April 7th at American University, equally auspicious. We had the Secretary of the Treasury of the United States, laying out the case for decentralized networks, the theory of digital property, talking about the need for digital currencies. What the innovations in the crypto economy and suggesting that the administration is going to do enthusiastically move forward to provide responsible regulations to allow this economy to grow. I thought that was very critical, too. I think if you put all of these macroeconomic developments together with the regulator signal, what you have is a world that's a bit insecure about currencies and insecure about property rights and then, secure about 20th century banking systems and 20th century payment systems and aware that they need to find a solution. But you also have another big development, which is that the Deniers of Bitcoin and Digital Assets in general are now being silenced by the administration of the United States. One of the early crippling criticism was this is just a panty scheme, where this is intangible or there's nothing here. And I think that, with now the Head of the SEC, the Head of Treasury, the President of the United States acknowledging that there is something here. And it's an important priority for the entire government. I think that, that really isolates the Deniers and if not making them look silly at this point, because, it's pretty clear that 250 million people know that there is something here. And it's growing like wildfire. And it's pretty clear that the government recognizes this. So, we have another classification of Bitcoin investors after Deniers that will be the Skeptics. The Skeptics acknowledge that it exists. They acknowledge that it's good. They may even acknowledge that, it's better than gold and it's better than other sorts of money or property and then they follow-up with the observation that since it's so good the politicians will ban it or the government will ban it. And that was -- that's been articulated by a number of fairly well-known credible sources over the past two years. But of course, with the March 9th Executive Order and the Ellen speech of April 7th, it gets increasingly difficult to maintain the skeptical stance, because you would have to, in essence, put yourself in opposition to the White House, right? It's not the policy of the United States demand Bitcoin. So in fact, it's not the policy of anyone in the Western world to band Bitcoin. So the Deniers and the Skeptics are being silenced, and now the entire Bitcoin market is evolving to be controlled by the traders, the technocrats and the maximal list. And clearly, the volatility of the market right now is driven by the fact that the traders are trading Bitcoin as a correlated asset to the NASDAQ. And technology investors that are NASDAQ heavy are selling or shorting technology assets as a risk off trade, as the Federal Reserve raises interest rates. So I would say that, if we look at the last three months, although the macroeconomic environment is difficult and macroeconomic winds are blowing in the face of all risk assets and all operating companies. I would say the fundamental developments, the political developments and the market awareness of Bitcoin has made enormous strides – and if you compare where we were today on where we are today versus two years ago, the asset class has matured dramatically, awareness has matured dramatically and the risk of holding the asset class has decreased. And specifically, I think the skeptics in the past 24 months are increasingly disappearing and everyone is migrating to either a trader or a technocrat or a maximus. I had a chance to attend the Bitcoin Conference in Miami Beach this April. I noted a massive surge of interest in bitcoin among politicians, among media and among investors. And there are a lot of politicians that hadn't heard of it and weren't interested in it a year ago, both international and domestic, and now it's on their radar, and they realize they need to pay attention to it. It's probably not uncorrelated to the executive order of March 9. I think there's a lot more media coverage and we've seen a change in the media tone. I think the media tone two years ago was nonexistent. In fact, people used to lament that Bitcoin was not being covered by mainstream media at all. It wasn't until February of 2021 after Tesla bought Bitcoin that Bitcoin got on to the radar of mainstream media. But I think that over the past few months, the tone has evolved from skeptical or amused to respectful. And in fact, I almost noticed now that that mainstream journalists across the major papers and the major cable news networks are all much, much more aware of the entire crypto economy, much, much more aware of bitcoin in its value proposition and much less skeptical, much more interested in engage. And I think the environment has moved from disinterested, through skeptical to now neutrally intrigued or even, I would say, intrigued, intrigued would be the right word in the media. -- also seen a bunch of investors, credible investors that are well respected in the space, speaking much more freely about bitcoin in the marketplace. And actually, becoming much more vocal and much more supportive in their words. And I think that, that's a big move forward over the past 12 months. Examples of that, we see our Carlos, Salinas, Piaggio becoming much more vocal, becoming much more vocal. Paul Tudor Jones becoming much more vocal. And Orlando Bravo becoming much more vocal. So, I think you'll continue to see this develop over the next 12 months. I think advances in the Lightning Network are pretty relevant, maybe one of the bigger developments in the past 12 months is lightening is maturing. And Lightning is the open permissionless non-custodial Layer 2 network. In essence, if Bitcoin represents protocol for sound money, Lightning represents a protocol for transaction and money transfer that's open permissionless. And since it's -- it could, in theory, scale to hundreds of millions or billions of transactions an hour. This is, in essence, the Internet of money. Two years ago, the Lightning network was really just developmental. In the past year, it's come to life. And so we're now entering into early part of the year two of the Internet for money coming to life. Major milestones there, block integrating, lightning into the Cash App was a major milestone. The release of specifications for the Taro protocol on top of Lightning is a major milestone. What it means is that Lightning will in time not just move Satoshis back and forth at the speed of light to billions of people, Lightning will also move other digital assets like stable coins, Tether or a circle or any other digital currency or any other digital token could or an NFC or another asset could move over the Lightning network at extraordinary high speeds, extremely scalable, while taking advantage of the security assurances of the Bitcoin network. So that's pretty compelling. Kraken also incorporated Lightning into their exchange, and that's a very compelling breakthrough. So I think in time, all the competitive digital assets, exchanges and all the competitive applications of money transfer and the like are going to have to build Lightening as a protocol into their applications. And we've got a number of years of development there, but the significance of Lightning is it takes Bitcoin from being viewed just as an asset and as a low frequency, high volume -- a low-frequency, high-value settlement network and it takes it to the next level, which is becoming a high frequency, high volume, very, very functionally rich, scalable transaction network. And there will be, I think, an explosion of applications on top of the Bitcoin network that are empowered by Lightning. Another big development in Bitcoin this last quarter is the launch of Fidelity's 401(k) offering. We're very enthusiastic about that. And of course, we're an early anchor partner with them on that launch. Bitcoin is better than gold. To call it digital gold is an understatement. It really is the hardest money in the history of the world. But if you're thinking about generational wealth and if you wanted to leave something for your grandchildren or if you wanted a retirement fund, it's obviously a very, very compelling element of a 401(k). We just saw just on television today, one of the world's great macro investors, Paul Tudor Jones said, in the current economic environment, I certainly wouldn't be owning stocks and bonds. I mean, people are very skeptical of owning equities and owning bonds in an environment where you have hyperinflation and macroeconomic wins. So if I can't on stocks, and I can't own bonds, and what am I supposed to put in a 401(k)? And this is where Bitcoin comes. What have I wanted to hold some kind of commodity money that's better than a commodity because no one can make any more of it. And Bitcoin is that thing. So I do think that -- the world is evolving rapidly. It's probably evolving faster than regulators and the mainstream media can keep up with it kind of like a shock wave. When you start moving through the civilization at a faster rate than people can educate themselves on the consequences, you'll see sparks, but the 401(k) launch was kind of the shot heard around the world here because what's going on here is people are going to have to stop and think about this and either this is the least risky thing you can put in a retirement portfolio or it's too risky to put in a retirement portfolio. And of course, as soon as you think about it and study it, you'll realize that it's the least risky thing you could put in a retirement portfolio. At least that's the opinion of people that have studied Bitcoin for a while. So the 401(k) offering from Fidelity is a massive educational event. It's going to put this front and center on the table for financial advisers, retirement planners, the entire big finance industry and I think, ultimately, it's going to introduce Bitcoin to an entirely new class of investors and broaden fill the asset class. So, I'd like to move on to talk about our Bitcoin strategy. We're going to continue to pursue a strategy which offers our investors spot exposure with leverage to Bitcoin. So if you want to buy a security and you would like that security to own Bitcoin. And then you would like to -- and you think it would be a reasonable idea to borrow money at 1.8% interest and buy that Bitcoin then MicroStrategy looks like a rational company to invest in. We're going to work to increase our Bitcoin holdings over time in an accretive fashion. So we're not trading Bitcoin, we're not selling Bitcoin we're holding Bitcoin. And from time to time, when we can, we'll buy more Bitcoin. If we focus upon the strategy, then we believe that we can offer a security to the market and be an operating company that, in essence, is superior to the security that you would get if you were to buy a spot ETF. We won't be an ETF. We're an operating company, and we have the software business. But for an investor that's thinking about buying an ETF that holds spot Bitcoin, they'll think about that. It will probably have no leverage, they'll probably pay a fee. And our goal will be to offer them the same Bitcoin holding, but without charging that fee and to use intelligent leverage from time to time when the opportunity presents itself. I was very, very pleased with the Bitcoin backed loan that we were able to acquire this quarter. We'll obviously use that mechanism sparingly because generally, we're not going to want to develop a large set of obligations where we might have to post additional collateral on a price fluctuation of Bitcoin. So managing our balance sheet versus the risk in the volatility of Bitcoin is primary concern. We're always thinking about. We will slow down our Bitcoin acquisitions when market conditions don't present us with any good opportunities. And when the market presents us with lots of good opportunities, we may speed up. And you'll just have to tune in quarter-by-quarter to see what we do there. We have the option to do nothing. And if the market doesn't give us a good option or we have the option to do things. You can see at this point, we've now bought Bitcoin with senior secured debt. We bought Bitcoin with a tender offer. We bought Bitcoin with cash flows from the core business. We bought Bitcoin with convertible debt. We bought Bitcoin with at-the-market equity issuance and we bought Bitcoin with an asset-backed financing. And we pursued each of those initiatives at the time we did it because we thought that they would be accretive to our common stock shareholders and beneficial to our long-term strategy. My last point I'll make before we take questions are; we will continue to pursue a mission of education and advocacy on behalf of Bitcoin to the general market. As the largest public holder of bitcoin, it makes sense for us to educate regulators. It makes sense for us to educate other corporations, it makes sense for us to educate anyone in the media or any politicians that are interested and what this means to the world, and why it's good for the world, why it's good for the United States, why it's good for their corporation, their institution and then how they can benefit and plug Bitcoin into their P&L or plug it into their balance sheet. If you don't follow me on Twitter, please do. I now just cross 2.4 million followers. And I try to share thoughts about the current environment on a pretty routine basis. I'm pleased to say that by the end of the day today or tomorrow, a podcast I did with Lex Friedman on YouTube will have crossed 2 million views. So I sat down with Lex in my study at my home in Miami Beach, and we talked for four hours about digital transformation and the bitcoin imperative. And our strategy and, of course, macroeconomics and geopolitics. And it's not easy to put 2 million people into your living room. But 2 million people listening for 4 hours is a lot of education, and we'll continue to do more of it. I feel that where there's an enormous thirst for knowledge about digital assets. There's enormous thirst for knowledge about the implications of Bitcoin to the world and the entire crypto economy. There's a lot of education to do. We're nowhere near done. We're really just starting, but we have established a platform to do that and we will get more and more opportunities to communicate this message and educate the world. I'll continue with our efforts working with Bitcoin miners through the Bitcoin Mining Council and the entire Bitcoin community to address misperceptions about mining to explain the benefits of Bitcoin, the benefits of coin mining. We just had another quarterly release of Bitcoin mining information where we were able to show the world for the fourth quarter in a row, Bitcoin mining is running on more than 50% sustainable energy, in fact, 58%. 58% sustainable energy usage makes the Bitcoin mining industry, the cleanest, most sustainable industry in the world of all industries. And that was a surprise to many people. It continues to be a surprise to many people, but it's a delightful surprise. Bitcoin mining in general, is 63% more efficient year-over-year. And a lot of people don't realize that the Bitcoin network is secured, not just by energy, but by technology and that technology is getting exponentially more efficient overtime. So, I'm really pleased that we're able to educate the world on the efficiencies of the Bitcoin network and the benefits of Bitcoin and Bitcoin mining. I think that there is a lot more education to do. Our leadership role in acquiring and holding bitcoin as a publicly traded company. It's afforded us a platform to do a lot of that education and we'll continue to do that in the coming year. So with that, I want to thank everybody for your support, and we'll go ahead and answer questions.

[A - Shirish Jajodia:]

Thank you, Michael. We're going to jump right into questions. We have received a lot of good questions, and we'll try to cover as many as we can. So the first question is for fun. On the software business, clearly, you have been through a few economic cycles over the years, how discretionary is BI software? And do you see the current macro, just pushing deal cycles out or do you think there are certain deals that will be put on hold for a while?

[Phong Le:]

Yes. Thanks for the question, Jo. The short answer is, there is a portion of BI spend as discretionary and I'll call that speculative, try out new things without necessarily a concrete use case or operational outcome. And then there's a portion that's required and that's the piece that is required to operate and run an enterprise. And fortunately, MicroStrategy falls more into the latter than the former. So that kind of spending might get pushed out one quarter when there's uncertain macroeconomic conditions like we had in Q1, but it isn't permanently shelved for the whole year or multiple years. So generally speaking, I feel good about our ability to weather macroeconomic downturns better than we've seen in some of our newer competitors who've joined the market recently

[Shirish Jajodia:]

Thank you, Fang. The next question is for Michael. When you purchase Bitcoin, how much do you consider dollar cost averaging into the purchase during the quarter versus a more OLED once purchase strategy?

[Michael Saylor:]

Yes. We try to be thoughtful about the way that we acquire Bitcoin, and we do it in such a way that we wouldn't impact the market, and we'll spread it over a time period, sometimes a long time period, sometimes a shorter time period, depending upon our perception of the market and the volatility, as a practical matter because we purchased Bitcoin on many, many different occasions over the past two years, we are dollar cost averaging as we acquire more capital. And I guess I -- that's what I would say to that.

[Shirish Jajodia:]

And one more question for Michael. Are you comfortable with the leverage level? And what is your long-term debt strategy?

[Michael Saylor:]

Yeah. I think we're comfortable with our leverage level and our long-term debt strategy is not to take on more debt than we can reasonably manage.

[Phong Le:]

I can add to that a little bit. You saw us share a little bit earlier. Right now, our interest expenses are around $44 million annually, which compared to last year's earnings before interest, tax, depreciation, if you were to adjust out the Bitcoin depreciation is about half of that. And so I think we have plenty of earnings and cash flow to cover our interest expense. So we're in a pretty comfortable place right now with our leverage.

[Shirish Jajodia:]

Thank you. Next question is for Phong. How far does Bitcoin have to fall for MicroStrategy to receive a margin call on the Silver Gate done? And was this loan needed for cash flow purposes.

[Phong Le:]

I'll take the second part first. No, the loan was not needed for cash flow purposes. We took out the loan primarily so that we could continue to invest more in Bitcoin and also really to create a market for a Bitcoin-backed term loan. So being the first company to do that in the public markets is consistent with what Mike said, which is really us being a leader in the Bitcoin space in general. As far as where Bitcoin needs to fall, we took out the loan at a 25% LTV, the margin call occurs 50% LTV. So essentially, Bitcoin needs to cut in half or around $21,000 before we'd have a margin call. That said, before it gets to 50%, we could contribute more Bitcoin to the collateral package, so it never gets there, so we don't ever get into a situation of March call also.

[Shirish Jajodia:]

And continue with the next question for Phong as well. Are there any risks of bitcoin collateral being liquidated due to extreme market volatility regarding the Silvergate loan?

[Phong Le:]

It sort of related to just that last question. The risk of really are that we would have to contribute more bitcoin. As you can see, we mentioned previously, we have quite a bit of uncollateralized bitcoin. So we have 95,643encumbered bitcoin. So we have more that we could contribute in the case that we have a lot of downward volatility. But again, we're talking about $21,000 before we get to a point where there needs to be more margin or more collateral contributors. So I think we're in a pretty comfortable place where we are right now.

[Shirish Jajodia:]

Next question is for Michael. What would be the company's strategy, if the price of Bitcoin stays flat for a prolonged amount of time?

[Phong Le:]

We'll continue with our strategy. We'll keep generating cash flow in the core business and from time to time, we'll acquire more Bitcoin.

[Shirish Jajodia:]

And I'll follow up one more for Michael. Can MicroStrategy provide any details on exploring the yield generation opportunities on unencumbered macro strategy Bitcoins?

[Phong Le:]

No.

[Shirish Jajodia:]

Is there anything else on that?

[Phong Le:]

Yes. I mean we're looking at a lot of different things out there. It's sort of part of our role that we've been playing as a as a leader in the market. But what we're going to do, when we're going to do it, the -- and with deal generation, there is a lot more to it in terms of accounting implications, et cetera. So they are all things we look at from time to time.

[Shirish Jajodia:]

Next question is perform. How did you get comfortable including Bitcoin in your 401(k) program? Can you please provide some details on the plan and whether it's already active?

[Phong Le:]

Yes. It's similar to the question of how do we get comfortable with Bitcoin in general, right? And Mike talked about this a little bit. First of all, I think it's great what Fidelity is doing as a leader in the market. As one of the leading retirement savings plan providers, it's great to see what they're doing from a leadership perspective. We got comfortable because the executive team, the Board, leadership, employees has spent the last two years learning about studying, understanding details about Bitcoin, especially as a store value, especially as an investment. And so the idea that it's a great long-term historic value, which is why we put so much of our investment into Bitcoin, would make sense for a certain number of employees. It doesn't make sense for everyone and ultimately, it will be something that's voluntary. We have not rolled this out yet. It's something we plan on doing in the second half of the year. And we're still working through details as exactly how we're going to go about it.

[Shirish Jajodia:]

Thank you, Phong. I'll ask one more question for Phong. How much longer do you expect product license revenue to face headwinds, how large will be the segment – will the segment be by the time it stabilizes?

[Phong Le:]

Yes. So as we go through this transition to cloud, product license revenues start to decline as we replace that with faster-growing subscription revenues. I can imagine last year was a pretty big increase from the previous year and that we wouldn't expect to see that level of growth on a go-forward basis on a year-over-year basis for product license revenue. As we replace that with cloud and subscription revenues over time, that will be the engine of growth in the organization and our revenue line.

[Shirish Jajodia:]

Thank you, Phong. Next question is for Michael. Can you provide any thoughts into if it's better to buy MicroStrategy stock or the comparison of buying MicroStrategy stock versus buying Bitcoin direct?

[Michael Saylor:]

I think that there are some companies in some situations where people literally can't buy the Bitcoin like either legally or by charter, they can't buy the Bitcoin, but they can buy securities. There are other situations where people can't or don't wish to buy securities, but they wish to buy property. So there are very different things. One of them is digital property. The other is a security that happens to hold on its balance sheet digital property. So I think that those are the primary issues. For those people that prefer to own securities and their portfolio but want Bitcoin exposure, then will be one of their options. And for those that prefer to own property than Bitcoin's digital property, and I think that's the right way to think of it.

[Shirish Jajodia:]

Thank you, Michael. I think one last question for Phong, is the top-line miss this quarter driven by a faster-than-expected migration to the cloud, or is it a reflection of weaker demand due to macroeconomic risk.

[Phong Le:]

I think it's more of the latter. And I think that is primarily manifested in slippages of both cloud and perpetual deals into the second quarter. So I don't think this is a permanent change or impact. We do have a little bit of the impact coming from stronger cloud, but I think it's more on the macroeconomic side in the war in Ukraine.

[Shirish Jajodia:]

Great. So I think we are at the top of the time now. So thank you, everyone, for your questions. This concludes the Q&A portion of the webinar. I will now turn the call over to Michael for any closing remarks.

[Michael Saylor:]

I want to thank everybody for being with us today, and thanks for your support. We wouldn't be here without you. So we'll continue with our strategy, and we look forward to speaking with you again in 12 weeks. Wishing you the best.

[Shirish Jajodia:]

Thank you.