MicroStrategy Incorporated
Q1 2024 Earnings Call Transcript

Published: 29 Apr 2024

[Operator:]

Hello everyone and good afternoon. I am Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. I'll be your moderator for MicroStrategy's 2024 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-K filed with the SEC. We assume no obligation to update these forward-looking statements, which speak only as of today. Also, during today's call, we will refer to certain non-GAAP financial measures, reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at microstrategy.com. I would like to welcome you all to today's webinar and let you know that we will be taking questions using the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar and Michael, Phong, 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'll walk you through the agenda for today's call. First, Phong Le will cover the business results and the key pillars of our strategy. Second, Andrew Kang will cover the financial results for the Q1 of 2024. Then Michael Saylor will provide a strategic review and discuss our recent Bitcoin market updates. And lastly, we will open up to Q&A. With that, I will turn the call over to Phong Le, President and CEO of MicroStrategy.

[Phong Le:]

Thanks, Shirish. Hello, everyone. I'd like to welcome all of you to today's webinar. We're excited to be reporting live from MicroStrategy World 2024 in Las Vegas, Nevada. We have a packed agenda lined up for the next three days and we're excited to see our customers, partners, analysts, shareholders, and employees all in person to share our passion for BI, AI, Bitcoin, and Innovation. The business intelligence track tomorrow will feature my keynote presentation titled Let The Data Lifeblood Flow, and we'll explore how to create more innovative, competitive, high performing organizations by using AI and BI to make smart data more accessible to the frontline employees. Our Chief Product Officer, Saurabh Abhyankar will share the latest MicroStrategy technologies for delivering convenient, flexible and reliable data within operational workflows, not just in dashboards, to everyone who needs it. The keynote presentation will feature guest speakers from Microsoft, Amazon Web Services, Bayer Pharmaceuticals, the U. S. Department of State, and Vuori. Throughout MicroStrategy World, more than 30 top brands, including MassMutual, Pfizer, Fannie Mae, Victoria's Secret, and NBCUniversal, will present how they use the MicroStrategy platform, Gen AI, and the cloud to become truly data-driven businesses. The Bitcoin for corporations track on Wednesday and Thursday will feature notable institutions and industry luminaries highlighting the advantages of integrating Bitcoin as a part of their corporate treasury and product offerings. It will be a unique gathering of corporations that are already adopting or looking to adopt Bitcoin strategies, and we are very excited to host this event. Also, for the first time, we will livestream our World Keynote, as well as all the Bitcoin for Corporation sessions. For those of you attending the conference here in Las Vegas, we look forward to seeing you in person. Turning to the business highlights for Q1 2024. MicroStrategy remains the largest corporate holder of Bitcoin in the world, now holding 214,400 Bitcoin with a total Bitcoin market value of $14 billion as of yesterday. Since December 31, 2023, we acquired an additional 25,250 Bitcoin for a total purchase cost of $1.6 billion at an average price of $65,232. This past quarter, the price of Bitcoin appreciated significantly, spurred notably by the approval of the spot Bitcoin exchange traded products or ETPs, which has drawn considerable institutional attention. We believe the introduction of spot Bitcoin ETPs further evidences the maturation of Bitcoin as an institutional grade asset class with broader regulatory recognition and institutional adoption. We remain highly committed to our Bitcoin strategy with a long-term focus. Andrew will provide further details on our Bitcoin purchase activity for this quarter. MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. Our objective to grow in AI, our objective is to grow in AI and cloud powered BI software. We have over 1,800 employees focused on our software business, devoted to achieving our vision of intelligence everywhere. In the first quarter of 2024, we continued our shift towards our cloud offering, resulting in subscription services revenues of $23 million, an increase of 22% year-over-year. A strong growth in our subscription services revenue was driven by both existing customer migrations to the cloud and new customer wins. Our customer renewal rate continues to remain high and our subscription billings remain strong. Overall, we continue to see further global adoption of our cloud platform as a result of transitioning our business strategy and product offerings from an on-prem perpetual licensed software company to a cloud native profitability. Our key strategic goals in 2024 are to grow cloud, innovate with AI, and increase profitability. Customers can benefit from a range of innovative first to market AI powered functionality, powered by the Azure, OpenAI, LLM. Capabilities include Auto SQL, which allows users to generate SQL using natural language, auto dashboard, which allows natural language generation of new visualizations. Auto Answers, which allows customers to ask questions of their datasets and dashboards, Auto Expert which allows users to ask questions of our MicroStrategy knowledge base and log support tickets on our website and our custom Auto Bot, which enables end users to access BI insights from within a custom bot, stand alone or embedded in any application. We also just launched Auto Express, which offers a simple way to trial our AI capabilities in minutes. In April, MicroStrategy one became available on Google Cloud Marketplace in addition to prior deployments on Azure and AWS, allowing enterprises to easily find and deploy this cloud native platform. Additionally, we expect to provide the ability to deploy MicroStrategy in a private cloud later this year. This will distinguish us from other BI platforms with the flexibility and automation that enterprise customers desire. We believe such investment and capability will encourage current on-prem customers to embrace the benefits of MicroStrategy. Cloud, such as containerized architecture, proactive cloud management from experts, seamless backups and single click updates. Transitioning our customer base to the technology of the future remains a key focus, and our resource deployment underscores our commitment to the cloud first approach. As customers and prospects move to the cloud to empower their AI-driven digital transformations, we expect to see a continued decrease in product license revenues, which will in part be offset by increases in subscription services revenues. This will be most pronounced in the balance of 2024. This may result in a decrease in total recognized revenue in the short-term, but in the long run, we expect it to be more than offset by increases in subscription services revenue. Additional benefits include more engaged customer is using our very latest software, higher retention rates, and ultimately more recurring revenue. As we discussed last quarter, MicroStrategy considers itself to be the world's first Bitcoin development company. We are a publicly traded operating company committed to the continued development of the Bitcoin network throughout our activities in the financial markets, advocacy and technology innovation. As an operating business, we are able to use cash flows, as well as proceeds from equity and debt financing in this to accumulate Bitcoin, which serves as our primary treasury reserve asset. We also bring our enterprise analytics software development capabilities to develop Bitcoin applications. We believe that the combination of our operating structure, Bitcoin strategy, and focus on technology innovation provides a unique opportunity for value creation. Being an operating company, our software technology business remains our core revenue and cash flow generator. In addition, it also enables us to acquire Bitcoin through the use of excess cash or proceeds from equity capital raises or corporate debt capital raises. These capital market levers allow us to deploy intelligent leverage to increase our Bitcoin holdings in a manner, which we believe has created shareholder value. Since our adoption of our Bitcoin strategy, we've used three primary mechanisms to acquire more Bitcoin

[Andrew Kang:]

Thank you, Phong. I'll, start with first, a recap of our software financial results. For the Q1, total revenues were a $115.2 million, which was down about 5% year-over-year. Consistent with prior recent quarters, the slight decline remains in part due to our ongoing shift, of revenue from on-prem to cloud. Q1 on-prem product license revenues, which make up about 11% of total revenue, were about $12.900 million, which is down 26% year-over-year. As I mentioned in prior calls, we continue to transition our business to the cloud, and we fully anticipate lower product license revenues to continue as we migrate existing customers off on-prem licenses and bring them on to the cloud. More importantly, as Phong mentioned earlier, we continue to grow subscription services revenues, which reflects stronger, more durable recurring software revenue. In Q1, subscription services revenues, which now make up about 20% of total revenues, were $23 million, which reflects an increase of 22% year-over-year. Non-GAAP subscription billings, which represent new cloud bookings in the quarter, also grew by 30% in the Q1 to $17.7 million, which was our fourth straight year of quarterly double-digit growth in cloud bookings. Q4 last year was an important milestone for us in the progress toward cloud transition, where for the first time, our subscription services revenues were higher than our product license revenues. This successful trend continued in the first quarter of 2024, which reflects the ongoing progress towards converting our revenue to recurring subscription services. The mix of revenue will continue to shift from on-premise product license to subscription services throughout 2024, as we focus on delivering meaningful AI-based products to our customers, which is only available in the cloud. We are pleased with the progress we have made from the adoption from our customers to our cloud platform worldwide, and we still have more to do, and we'll continue to focus on new products and innovation to drive more demand in that space. Beginning with the first quarter of 2024, we modified our reported financials to break out our quarterly results into two categories

[Michael Saylor:]

Thank you, Andrew. And thank you for everybody for being with us here today. I'd just like to add a few comments on our strategy and Bitcoin in general following up on the words of Phong and Andrew. I'll start with, our performance scorecard, we like to keep score every quarter and evaluate ourself against all the relevant benchmarks. So I think this slide is very instructive. What you can see here in a nutshell is all of the enterprise software companies that we compete against in the business intelligence business and their performance since we embarked on our Bitcoin strategy in the summer of 2020. And you can see we're approximately 10 times to 30 times more in performance than any of those companies. You can see all the big tech stocks over the last three and three quarters of years. The strongest one is Google. And, you know, we've outperformed them anywhere by a factor of eight to 80, and we're very pleased with that. But, of course, our primary strategy is a Bitcoin strategy. And so I think to understand why is MicroStrategy able to return 937% in a period when the S&P returned 52%. And, I think, we just have to start with the idea of what's the right treasury strategy or how do you capitalize the company? And you can see if you capitalize the company on bonds, bonds have a negative 21% return over this time frame. Bonds have a negative real yield. They're not returning the cost of capital. The best surrogate for the cost of capital, I think, is the S&P Index, the 52%. And so if you were able to capitalize your company on the S&P Index, you could maybe keep up with the cost of capital. What you can see here is that, gold and silver don't really work. As the money supply expands, the S&P Index tracks it and gold, silver and bonds underperform. NASDAQ is pretty close statistically. Why is Bitcoin better? Because MicroStrategy's performance is really based on Bitcoin performance to start. And I think Bitcoin illustrates a couple of principles. One is, digital is better than analog. Bitcoin is digital property, and it's digital. So Bitcoin is performing, because it's digital in a world of digital transformation. I think the second thing it illustrates is a commodity is better than a security. And Bitcoin is an asset without an issuer, which makes it a global asset, and a security will never be a global asset because security has an issuer, an issuer is a company, and a company has a nexus and a country and has an operation. So Bitcoin's perform well because it's digital, because it's commodity. And, the third thing this illustrates is that a scarcity is better than a commodity. So the fact is, you know, Bitcoin is commodity, but it's hard capped at $21 million and gold is not hard capped and silver is not hard capped. So commodities generally make very, very poor investments. The world has learned to invest in market baskets of securities like the S&P Index, but it would be the wrong lesson to say that therefore securities are better than commodities. Securities have their own risk factors. The right lesson to take away is that something digital is better than something analog. Something, scarce is better than something abundant, and something global is better than something local. And Bitcoin represents all of those things. And the last four years, it has emerged in the Western world as that global digital scarce commodity, i.e., digital property. Now MicroStrategy, if it had just simply adopted Bitcoin purely, perhaps it would have had the same performance as Bitcoin. But how do we actually outperform Bitcoin? I think the key here is volatility is a benefit to us. And so we have harnessed volatility, and we've also harnessed our unique ability to issue securities such as convertible bonds. And the fact that we embrace the securitization of Bitcoin and we embrace the volatility of the asset class has given us the ability to raise capital, right? As you as you recall, we've raised billions of dollars of equity capital and billions of dollars of debt capital. We wouldn't have been able to raise as much capital without volatility, from and you could see with our convertible bonds, we managed to raise $3 billion in convertible bonds at substantially less than 1% interest. I mean, really about 50 basis points, 0.5% interest. So MicroStrategy's performance is being driven by two things. First, we're raising $3 billion at 0.5%, instead of paying a non-volatile interest rate. Non-volatile, you know, could be 8% to 10%. So instead of paying 8% to 10% interest, we're paying 0.5%. So clearly, that's a big performance boost to us. And the second is if we were non-volatile and we didn't have an asset rich strategy, we couldn't raise the $3 billion at all because, a lot of times senior debt would be capped at some EBITDA multiple of some sort. So we would be -- we would have access to a small amount of capital at a high cost of capital. So MicroStrategy has got a very low cost of capital and access to a lot of capital because of our particular strategy, but we're capitalizing on what clearly is the best capital asset, Bitcoin, in the world over this period. And the combination of those two things is what catapulted us to that 937% performance. Let me go to the next slide now. I would say this quarter, the first quarter of 2024, it's the end of the Crypto Childhood or the Crypto Cowboy era where you had had 15-years of lots of confusion, chaos, and jockeying of 1,000s and 1,000s of crypto assets. Well, Bitcoin is the winner and it is the one emergent institutional asset that has come out of that 15-years. Bitcoin, Spot ETFs were approved in January of this quarter, and that was a very big milestone. And as we go into this next quarter, it's pretty clear that Bitcoin is the only Crypto asset that's going to be approved for sale in the form of a Spot ETF in the United States. And so Bitcoin is very unique. It is the one Crypto asset that has been embraced as an institutional asset. It's the one Crypto asset that a publicly traded company can hold on its balance sheet, can capitalize upon. It's the one Crypto asset that Wall Street firms are going to be able to sell on a spot ETF basis. The entire modern institutional asset economy, the options market, the securities market, the money manager system, the institutional mutual funds, the institutional ETFs, they're all going to be centered around Bitcoin as the digital property going forward. And so while we're at the end of the beginning, you know, we're now, I would say, at the beginning of the middle. We're at the beginning of the stage of rapid institutional adoption of digital property in the form of Bitcoin. This chart shows that at the end of the first stage, Bitcoin is a bit more than a $1 trillion asset. And from this stage forward, it won't really compete against other Crypto assets. It will compete against gold, art, equities, real estate, bonds, you know, and other types of store of value money, in wealth creation, wealth preservation and the capital markets. And, as you can see, if you look at this chart, you know, probably some number between 10% and 50% of all this wealth is really just pure capital. The use case is store of value. Many people buy equities, real estate, bonds, and arts, and other monetary instruments as a store of value, just like they buy gold as a store of value. Bitcoin has digital property is a store of value, but it's the emergent high performance, high volatility, high functionality, high utility store of value, and it's global. So we actually think that it's going to continue to grow from here. And this is kind of the second quarter of about a 40 quarter, Bitcoin gold rush where we are going to see Bitcoin embraced by more and more banks, more and more money managers, more and more nations. You'll see more Bitcoin ETFs in Hong Kong and Australia. You'll see more derivative products and other types of related products built on top of it, or you'll see it built into more things. And so the next decade we think is auspicious. We can go to the next slide. The halving just took place in a week ago, a couple of weeks ago and April 19, I guess, specifically. And when you consider the impact of the halving, it's pretty profound. First of all, it reminds us that Bitcoin is a scarcity and not a digital commodity-only, because Bitcoin supply is asymptotically approaching $21 million. As of now, Bitcoin has the highest stock flow ratio in the world, so it is the hardest investment asset in the world and the most scarce or certain. In the first quarter, about 2,600 Bitcoin a day were acquired by the Spot ETFs that were launched. And during that time frame, we had about 900, bitcoin per day sold by miners. But then following the halving on the 19 April, we moved to 450 Bitcoin a day from available from natural sellers, the miners. This is pretty critical. And you can see there is an imbalance between organic demand and organic supply, I don't think, that the halving is priced in. I don't think that the market fully appreciates just how profound this is. But this the chart on the right gives you a way to think of it, which is if a large investor, a sovereign wealth fund or a mega institutional investor decided that they wanted to buy 450 Bitcoin per day, and they were going to buy it at the market price of Bitcoin every day for the next four years. Assuming the price of Bitcoin stayed constant at 60,000, they would have to invest $39.4 billion of capital. But if Bitcoin's price moved up at a 100,000, it's a $65 billion commitment at a 150,000, it's a $98 billion commitment. And if the average price of Bitcoin in that time frame is 250,000, that's the same as a $164 billion of capital being put into this network. So the network was chopping along at 900 BTC a day, before the halving. But after the halving, you just have a very reflexive protocol change that is going to remove 450 Bitcoin a day for sale at any price for the next four years. And, of course, there'll be another halving four years from now. They'll remove another 225 Bitcoin a day from the supply, and there will be another halving four years after that to move another 112 Bitcoin per day out of the supply. This is unique to Bitcoin. You won't see it in any other commodity in the world. You're not going to see it in any analog commodity because it's impossible. But you won't see it in any other digital commodity in the world because Bitcoin is the winner. Bitcoin is going to be, in all likelihood, the only digital commodity that is made institutional grade by a Spot ETF in the American Capital Markets. So this is a profound insight, and we view this as being very bullish for the asset class. We can go to the next slide. MicroStrategy's approach is the same as it has been. But I think we're getting a little bit better at it, and I think we're starting to understand our unique advantages, as time goes on. We are a Bitcoin development company in the same way that you might have a real estate development company. If you are able to create or create a company and then take it public and then issue securities in that capital markets in order to buy and develop commercial real estate, you would have an advantage over private companies, doing the same thing, because public companies always have an advantage in financing. You would have the option to raise financing, not just from banks, but also from the public capital markets. So we are a public company and an operating company, and that gives us a flexible, you know, control or active control over our capital structure. And the second thing that we have is the ability to innovate with, with software development. And we'll be showing some innovations at our conference this week that we're very excited about. We're also unique because we can generate cash from operations. And, as Phong and Andrew pointed out, we've been able to invest $825,000 in cash, to-date in order to acquire Bitcoin. And we're able to leverage the capital markets. And I think we take a very balanced view toward capital markets. When we think it's appropriate for us to issue equity or raise permanent equity capital via shelf registration, we do that. And we've done that, to raise $3.2 billion in equity capital. And when we think the markets are more supportive of us, issuing debt or especially convertible debt, then we do that. As Andrew pointed out, this strategy was very accretive in Q1 and the effective difference between, the accretion of Bitcoin and the dilution of our share count was more than 8%. So if we're able to generate an 8% yield in a single quarter, then we believe that's going to support a premium to our underlying net asset value going forward. And it's going to allow us to find more accretive capital markets opportunities in the future that we will avail ourselves of to the benefit of our shareholders. And so in summary, Bitcoin's crossed the chasm to institutional adoption. Bitcoin is unique and is being uniquely recognized as the one institutional Crypto asset. And MicroStrategy has now developed a very balanced strategy of acquiring Bitcoin with cash flows with equity, with debt. And we're providing a useful set of public securities, both equity as well as options, as well as debt instruments that institutional investors can use in order to tailor their portfolio as they invest, whether it's long or short or hedged in the macro economy and the Crypto economy doing it on exchanges and in a way that's compliant with all of their operating charters. And that, in a nutshell, I think, explains the MicroStrategy value proposition and our opportunity going forward. And with that, I'll go ahead and pass the floor back to Shirish.

[Operator:]

[A - Shirish Jajodia:]

Thank you, Michael. Now we will begin our Q&A's and the first question is for Phong. Can you elaborate on the company's new positioning as the Bitcoin development company? And are there any new developments that you would like to highlight?

[Phong Le:]

Yes. Thanks, Shirish. I guess we talked quite extensively during our prepared remarks about the Bitcoin development company. I think perhaps the question is more specific about the development portion and whether we're doing any software development in the Bitcoin area. For those who are attending Bitcoin for corporations on Wednesday, we'll have about a half day talking about the technology ecosystem associated with Bitcoin. And we’ll also share some new developments in an area of Bitcoin security that we're working on. And I think people will be excited to see some of the things we're doing in that space. We continue to experiment and continue to advocate for Bitcoin development, and so there's more work going on in that area that we'll share, in a couple of days.

[Shirish Jajodia:]

Great. Thanks, Phong. Next question is for Michael. MicroStrategy's equity premium towards Bitcoin Holdings has expanded materially over the past few months. And, despite the recent Bitcoin pullback, the premium remains healthy? How do you think about the premium and what do you attribute this to?

[Michael Saylor:]

I think that if we had no leverage and we generated no accretion, then we would start to look like a Spot Bitcoin ETF. But the fact -- if we have leverage, then the leverage will justify a premium. If the leverage was if we just had a $1 billion of leverage and we were paying 10% interest, it would be a small premium. We would be basically levering a $1 billion at 10% interest that's yielding where Bitcoin is appreciating at 40% or more. So there would be definitely a premium, but it would be the difference between the leverage and the yield of Bitcoin or the depreciated Bitcoin on a small amount of money on a $1 billion. But if we have more leverage and if the cost of the capital is lower, then that justifies a higher premium. So when you get to $3 billion of converts and when the converts are 50 basis points, then you've got more leverage and you've got a lower cost to capital. So I think that justifies a higher premium. When you're able to issue billions of dollars of equity at that premium, then that justifies in turn an even higher premium. And it also strengthens the capital structure, providing us with unpledged assets that, that we can use for future financings are used to leverage future corporate opportunities. And then, of course, when we're able to do, convertible issuances and then convert it into Bitcoin and capture, not just the premium upfront, but the benefits over the next six years of Bitcoin appreciation, that justifies another premium. So you could imagine if you could, if you thought you could generate an 8% accretion per year, there's no reason why you couldn't justify a 100% or more premium in that asset value. If you could generate, an 8% accretion more often than once a year, if you could do it from quarter-to-quarter or every other quarter or do anything, consistently over time, then, it's quite possible to come to any number of different premium calculations. Ultimately, you know, the company's premium is a function of our ability to execute over a long period of time and also, you know, the market's view as to whether or not they appreciate that. And of course, that's a shifting sentiment, and there's uncertainty into the future. So there will continue to be uncertainty about what the right premium ought to be, and I think that's what makes the market.

[Shirish Jajodia:]

Thank you, Michael. The next question is regarding Michael's 10B51 plan. Has the plan, to exercise MicroStrategy stock options completed already? And can you please provide further color on the executed plan and the thought process behind the stock sales?

[Phong Le:]

Yes, Shirish, let me take that one. So I guess, first off, Michael's option exercises were planned and actually fully disclosed. I believe it was in our Q3 filing of last year. And as most know, as officers and directors of the company, we have to put in place a 10B51 plan, which discloses that upfront. The plan was, related to, 400,000 options, which, Michael received back in 2014, which were set to expire, this April. So, you know, the sales were programmatic. Michael sold 5,000 shares, on each trading day between Jan 2 and April 25 at market prices. And, again, the sales were executed under the plan. It was completed on the 25, as disclosed, and he does not have any additional 10B51 plan in place at the time. So it's worth noting also, that, obviously, Michael still holds a significant ownership stake in the company. And I know there's been a lot of some questions and chatter around on the sales, but it's really as simple as, they were put in place, disclosed and programmatic, to do so before, his options expired.

[Shirish Jajodia:]

Thanks, Andrew. We're coming to the end of the time. We'll take one last question here. This one is for Phong. Can you please elaborate on the progress of converting software clients to Cloud from license and the AI related partnerships?

[Phong Le:]

Yeah. So, you know, they're one and the same. A lot of our AI and cloud partnerships are with the large hyperscalers, especially Microsoft, AWS, and Google Cloud. We're being pretty aggressive working with our hyperscalers and our partners this year to get as many customers to cloud as possible. We have some pretty ambitious plans. You'll note, and Andrew noted, that, that does have a short-term impact of product license revenue because the product license revenue represents the incremental revenue of on-prem customers, and we're trying to -- as we move customers to cloud. You'll see that offset, overtime. So moving fast using our partners, AI is only available in the cloud, so it's another impetus for customers to move to cloud, but it'll have some short-term disruption in our product license revenue and our total revenue. Many companies have gone through this transition. We're well equipped to do the same, and I'm excited about the prospects of what that means for us, in the long-term.

[Shirish Jajodia:]

Thank you, Phong. And thank you everyone for your questions. We received a lot of great questions and we tried to address in the prepared remarks and the Q&A afterwards. So this concludes the Q&A portion of the webinar today. I will now turn the call over to Phong for the final closing remarks.

[Phong Le:]

Thanks, everyone. I really want to thank everyone for being with us today. We appreciate your support. We're also excited to host MicroStrategy World in Las Vegas over the next three days and looking forward to seeing customers, prospects, partners, analysts, and shareholders alike at this one of a kind event. For those who aren't able to be here in person, we're also live streaming our keynotes from MicroStrategy World, which starts at 9