MicroStrategy Incorporated
Q2 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the MicroStrategy Q2 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to your host, Mr. Michael Saylor, Chairman, President and CEO. Sir, you may now begin your conference.

[Michael Saylor:]

Hello. This is Michael Saylor. I'm the Chairman, President and CEO of MicroStrategy. I'd like to welcome all of you today to today's conference call regarding our 2019 second quarter financial results. I'm here with our Chief Operating Officer and CFO, Phong Le. First, I'd like to pass the floor to Phong, who's going to read the Safe Harbor statement and make some comments on our results for the second quarter.

[Phong Le:]

Thank you, Michael, and good evening, everyone. Various remarks that we may make about our future expectations, plans and prospects may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent quarterly report on Form 10-Q filed with the SEC.These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may cause the company's views to change. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so.Also during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliation schedule showing GAAP versus non-GAAP results are available in the Form 10-Q we filed with the SEC after the close of market today and in our press release that was also issued today, which is located on our website at www.microstrategy.com.We are generally pleased with our performance in the second quarter, which demonstrate continued progress executing on our strategic objectives. MicroStrategy 2019 is driving demand for our software, a redesigned and repackage MicroStrategy Cloud Enterprise product that's showing initial signs of success and our proactive enterprise support offering is increasing customer engagement.Internally our executive team, employees and departments are as tightly aligned as we've ever been. The consolidation our competitive environment needs will be the largest independent business intelligence platform company in the world. We believe this is an advantage for customers who want open BI platforms that are not tied to a particular enterprise software stack.As a reminder, MicroStrategy 2019 has a modern, open enterprise platform that provides customers who want the most powerful flexible enterprise analytics and mobility platform on the market. New innovations in MicroStrategy 2019 like Federated Analytics and HyperIntelligence, address some of the most pressing analytics problems facing enterprises. For example, HyperIntelligence solves the key problems faced in many enterprises. How to get actionable insights into the hands of knowledge workers with minimal friction, with the productivity tools they already use to do their jobs.HyperIntelligence card on the web, in mobile, and on Microsoft Outlook provides real-time answers with existing workflows. HyperIntelligence allows entire workforces to access curated secure government data in seconds and make actionable trusted decisions with this data. We saw strong demand for HyperIntelligence during the quarter, highlighted by 50 HyperIntelligence deals. As a reminder, purchasing HyperIntelligence and Federated Analytics requires upgrading the MicroStrategy 2019. Through the end of the second quarter more than 400 customers have already upgraded to MicroStrategy 2019 and we have a targeted program in place to upgrade most remaining customers over the next 6 to 12 months.Before I review our financial performance in detail, I'd like to provide some high-level takeaways for investors. One, total revenues increased 0.4% year-over-year on a constant currency basis. This is our first constant currency total revenues increase in nine quarters. Two, we delivered 7.5% year-over-year product license revenue growth on a constant currency basis against a challenging comp. This is the third consecutive quarter of year-over-year constant currency product license growth and reflects the momentum in our business and the positive impact of MicroStrategy 2019.We are pleased with our product license performance and believe that we are on track to achieve our goal of product license growth for the full year of 2019. Product support revenues increased 1.9% year-over-year on a constant currency basis. We continue to have industry-leading maintenance renewal rates and we're finding that our efforts to upgrade our customers and provide them proactive enterprise support are increasing customer engagement and satisfaction.Other services revenues declined 9.5% year-over-year on a constant currency basis. This is a less strategic lower-margin business for us. It will typically lag product license revenue performance by several quarters. Looking ahead, we are optimistic that other services revenue performance will improve in the second half of the year.We're delivering on our target of leveraging our operating cost structure, which was essentially flat year-over-year. We're pleased with the cost discipline and productivity improvements we are driving across the business even as we continue to make targeted investments to drive future growth.Finally, the recently announced changes to our senior management team are designed to deliver even better performance over time. As you can see from our second quarter performance, the changes were not made in reaction to our financial results for the quarter, which were solid. Rather, we believe a flat and more streamlined go-to-market leadership will enable us to be more responsive to market trends and drive further productivity improvements across our sales organization.I've been intimately involved in the day-to-day operations of the go-to-market team as COO over the past year. I'm looking forward to focusing on that role in bringing the sales and services closer together full-time going forward. We've begun a national search process for a new CFO.Our priority in the CFO is one that has experience in a finance leadership role in a public B2B company, a proven track record of driving profitable growth as a hands-on business partner that is equally comfortable with employees, customers and investors. While that search is ongoing, I will continue to serve as CFO.Turning to our financial results in more detail. Total product licenses revenue were $20.1 million in Q2 2019, a $0.8 million or a 4.3% increase year-over-year. Foreign currency effects negatively impacted product licenses revenue by $0.6 million or 3.0%. Product support revenues were $73.0 million in Q2 2019, a 0.9% decrease year-over-year with foreign currency effects negatively impacting such revenues by $2.1 million or 2.8%.Overall, we continue to see strong customer renewal rates which reflect the value customers generate from MicroStrategy products. We continue to anticipate product support revenues to generate growth for the full year on a constant currency basis.Deferred revenues at June 30, 2019 were $181.0 million. This is essentially flat year-over-year and it’s a best deferred revenue performance in five quarters. As expected, we have resolved the previously discussed issues related to the move to a new quoting system.Other services revenues were $17.5 million in Q2 2019, a 12.5% decrease year-over-year with foreign currency effects negatively impacting such revenues by $0.6 million or 3.3%. As mentioned earlier, we would expect improved performance from other services revenue over time due to consistent growth in product license revenues and focus on engaging our customers.Turning to costs. Total operating expenses of $97.2 million were essentially flat year-over-year and down 2.4% quarter-over-quarter. While we continue to make material investments in our product development efforts, we are driving meaningful efficiency improvements in our sales and marketing spend. We believe there are additional opportunities to drive further leverage, which will be a key focus in the second half of 2019.Our operating loss for Q2 2019 was $4.8 million compared to $1.8 million in the prior year period. We had net income of $20.4 million in Q2 2019 and diluted income per share of $1.98 with net interest income of $3.0 million and other income net of $29.4 million.Net income was positively impacted by the sale of the Voice.com domain name for $30 million in cash, which results in a $21.8 million gain, net of tax and minor transaction costs. This was an opportunistic transaction to monetize a long-held non-core asset. We have more than a dozen of buckactive and powerful domain names and are open to leveraging these domain names in equity or other strategic transactions with well-funded parties to generate value for shareholders. Excluding the impact from the gain on the Voice.com domain name sale, non-GAAP net loss was $1.4 million or $0.14 per share.During the quarter we did not repurchase any shares under our existing buyback authorization. In the prior two quarters, we repurchased approximately $160 million of stock. This is well in excess of what we had anticipated being able to repurchase in such a short period of time.We believe buybacks can be a useful way to opportunistically generate value for shareholders. However, it is just one component as we evaluate our broader long-term capital allocation strategy. And we continue to believe keeping a substantial cash balance on the balance sheet is prudent. To be clear it's our intention to consistently be profitable and generate cash flow on an annual basis.Before I turn the call back to Michael Saylor, I want to finish by reiterating that we're generally pleased with the performance of the business in the first half of 2019. Customer interest in MicroStrategy 2019 has been strong and we're excited about our opportunity to continue driving product license revenue growth. With our increased focus on generating leverage from our cost structure, we're optimistic about our ability to deliver improved profitability increase cash flow over time.Now, I'd like to turn it back to Michael Saylor.

[Michael Saylor:]

Thank you, Phong. I'd like to touch on a few areas of interest. I'm incredibly excited about where we are as we move into the second half of 2019. On the marketing front, our HyperIntelligence and our federated analytics messaging and messages are resonating really well with customers and partners and prospects.I feel like they have repositioned the company from being a legacy enterprise platform vendor to being a modern analytics and intelligence architecture. And so they're helping us a lot with new business development as well as recruiting morale. It's really been a big shot in the arm for our existing customers as they work to build excitement for MicroStrategy deployments within their enterprises. And they allow us to work really, really effectively with other tools like PowerBI and Tableau and Excel and the like as well as a lot of the data science platforms like Jupiter and SDKs like Xcode and Swift et cetera.So activating the analyst community, the data scientist community and the software application developer community is a big part of MicroStrategy's enterprise platform strategy. And MicroStrategy 2019 really dramatically upgraded our ability to do this.We really started hammering on these messages the beginning of the year. We've now got enough feedback from the market to have a high comfort level that they are working and they are the right decisions.Following the Tableau acquisition by Salesforce, there are now five major full stack vendors in the business intelligence space

[Operator:]

[Operator Instructions] Your first question comes from the line of Hamed Khorsand from BWS Financial. Your line is now open.

[Hamed Khorsand:]

Could you first-off talk about the headcount reduction in sales and marketing and how that actually does not impact any kind of future revenue growth potential?

[Phong Le:]

Hi Hamed, it's Phong. It's a good question. As you probably noted over the last couple of years, we added quite a few headcount to sales and marketing. In some cases, these were overlay folks in the sales teams. In some cases, these are adding to regions that were sort of growth regions in the second and third world countries. And in some cases, these were marketing heads to further some of our digital marketing work and some of our business development.And I think what we observed over the last year or so is that they were not adding the level of revenue or productivity that we expected or needed. And so we're able to reduce them while still increasing revenue and overall productivity. And we looked at each of those very closely and worked very closely with our field teams to make sure we're making the right decisions. But ultimately for the kind of growth we need, there's still a lot of room in the headcount we have. And so, I don't think headcount is really the lever to grow. I think its more productivity out of our existing high-performance reps.

[Hamed Khorsand:]

Okay. And then, could you just talk about this, HyperIntelligence? I mean last quarter you were talking about having in dozens now you're talking about 50. How fast can you get these customers upgraded this year, as far as those 500 that you're targeting?

[Phong Le:]

Yeah. So, there's a couple of sort of things in that question there. First just in terms of our upgrade activity, we've had pretty good traction. We had entered the year knowing that we wanted to upgrade the vast majority of our enterprise customers, by the middle of 2020. And we're on pace for that.Upgrading the customers is going to result in potential upsell. And as you mentioned, we did about 30 revenue-generating HyperIntelligence deals in Q1. And we saw about 50 this quarter. And we expect to continue to accelerate that.And the nice thing is, as customers take 2019. They tend to get a demo or proof-of-concept of HyperIntelligence. And we find everyone that does that demo of proof-of-concept is instantly, enamored with the product.And then, it's a matter of them figuring out, what are the right use cases for HyperIntelligence. And so there's a bit of a snowball effect, as we see certain customers have certain use cases, where we will share it with other prospects and customers. And we continue to see a lot of good traction.The other nice thing about HyperIntelligence that Mike talked about a little bit is, it's really a new product widget and it positions us as an innovative BI Company again. So our sales people get excited about it, our customers get excited about it. It creates this aura of innovation in the company.And then our marketing folks get excited about it. And our prospects get excited about it. So, it still continues to go really well. And we add product features every quarter, right?We launched HyperIntelligence in Q4, as a web-based product. In Q1, we added a mobile capability. And now in Q2 we've added an, Outlook-based capabilities. So we're able to continue to add, feature functionality every quarter.

[Hamed Khorsand:]

Okay. And then, as far as the customers that have upgraded so far this year .What are you seeing as far as incremental revenue coming from them? Are they broadening the usage within the work force?

[Phong Le:]

Yeah. I think when we see customers upgrade, they tend to do so with the expectation, that they're either going to increase their footprint of MicroStrategy at the current enterprise that they're in.Or they increase the usage of additional tools, like our mobility tools, Library and Dossier or HyperIntelligence or Federated Analytics. We haven't published. And we're not going to report on sort of the incremental revenue that comes from customers upgrading.But we're seeing a positive trend there. And of course you can imagine its not immediate revenue right like a customer may upgrade to MicroStrategy 2019 in Q1, which then initiates the sales cycle, which are typical sales cycles six to 12 months.

[Hamed Khorsand:]

Okay, thank you.

[Operator:]

Your second question comes from the line of Tyler Radke. Your line is now open.

[Tyler Radke:]

Thank you. Good afternoon. Did you talk about the contribution from HyperIntelligence in the quarter? I know you talked about 50 deals that included that. But just give us a sense on the magnitude of the revenue contribution?

[Phong Le:]

Yeah Tyler it's a good question. We're not yet prepared to break out revenue associated with HyperIntelligence. I would say it's not a significantly material amount or product license revenue yet.It's a noticeable contribution. And more so than just a specific, set of revenue coming from HyperIntelligence is the fact that a customer is interested in, buying more overall licenses of MicroStrategy at which they attach HyperIntelligence.So HyperIntelligence is creating, like as I mentioned, sort of an aura of innovation and confidence in MicroStrategy the product overall. Also, I'm not sure we'll ever really be able to break out product-specific revenue on things like HyperIntelligence or Frederated Analytics.As you probably know we tend to sell the products together. And then discount them together. So it's hard to break out product revenue contribution from any particular product.

[Tyler Radke:]

Great and then maybe a question for Michael, You talked about how the acquisition of Tableau by Sales force is kind of creating an opportunity. Have you seen any signs thus far either changes in win rates or just anything competitively, that gives you that confidence, or any other color that you've seen along the competitive front that gives you more confidence there would be great?

[Michael Saylor:]

Recently, as recently as about a year and half ago, the usual suspects were Tableau and Click and they were the hot cool newcomers spending huge amounts of money with new technology. And as soon as Click got taken private, we noticed that they lost a step. And a year after that privatization, the consensus across our entire sales organization is Click is not nearly so competitive or aggressive, anymore nor are they being taken seriously. They've got an enormous brain drain of sales, marketing and technology talent and kind of the energy has fled out of it.Tableau's acquisition with Salesforce is a newer thing and it won't – it's not even yet closed, I assume. So if we look out a year from now, I think that we'll be in a position to give you some concrete takeaways from that. But it's already having an impact on analyst perceptions and customer perceptions. Everybody's got to just go through the calculation of what does this mean for support for the Salesforce Cloud versus the AWS Cloud versus the Azure Cloud. And they are different very different culture. Salesforce of course famous – has been very successful, with a very famous slogan that they ran for 20 years in advertising, and it was no software like they don't ship it, you can't buy it, you can't download it. There is none. And Tableau is almost diametrically opposed success, which is they created a very nice piece of software running on a PC workstation for an analyst, who is fatigued from Excel and wanted to download something, pay for it with a credit card and build something cooler. So there is two different technical strategies there. And then how is that going to morph into the future, nobody knows but a lot of uncertainty.We don't have so much uncertainty about what generally happens with acquisitions, because I've now seen about 100 of them and I've seen what happened to Essbase and Brio and Information Advantage and STG and Cognos and Excelsior and Crystal Reports and BusinessObjects. And the general thing that happens is that the very, very passionate committed founding executive team typically goes off somewhere else to do the next thing, whatever that next thing might be, and the organization starts getting run in a more corporate fashion and that – there are some examples where that works well. But in the event, where there are conflicting tools that do the same thing, and Oracle ended up buying nine conflicting BI tools and IBM had a host of conflicting BI tools et cetera.When that happens, they have to pick who they're going to invest in, who they're not going to invest in, and then they start to emphasize fusion-type projects and integration projects. And all of that complete – creates a lot of uncertainty for the customer, and a lot of conflicts across the sales organization. And the result is that normally, the momentum of the particular platform slows down, and they get more drag and turbulence. So I think after seeing the entire story play out about 100 times, you can reasonably predict how this one will play out. By the way, like one could argue SAP made some money off of BusinessObjects by merchandising BusinessObjects to their installed base. And then IBM for a while, merchandised Cognos. And Oracle for a while merchandised OBIE. And so for a while there's a good financial impact. But then, once you get past that initial push which is good for financially for the organization, you tend to have a lot of drag and then a lot of the innovation leaves the platform.The one thing that's essential I think to stay viable and vital in this business is you have to be able to shed your skin every five to seven years and re-architect and rebuild. And for a while that was you have to support three-tier windows. And then, it was you have to rebuild for Linux. And then it was you have to throw away the desktop and support the web. And then it was you have to throw -- you have to build a new skin for mobile. And after that, it was now you have to rebuild the platform for AWS and then it became you have to rebuild a platform for AWS and Azure. And next it will be Docker, right? And these things go on.If you have the ability to direct a huge amount of capital into your R&D function and if you don't have any religious constraints that prevent you from pursuing a certain idea like -- a religious constraint for example is IBM is in no way shape or form interested and supporting a competing company's AI platform. They want to support Watson or Oracle doesn't want to support Amazon's AWS. So when you have those kind of constraints religiously and then are dogmatically and then you have capital constraints, you tend to not want to rearchitect the product, you tend to get run as a cash cow.And if you get run as a cash cow, then whatever you evolve to be at the point of the acquisition is pretty much what you're locked into for the next 20 years. If you're lucky enough to be a perfect complete product at the point of acquisition and maybe are okay. But if the market is evolving dynamically, then the success rate of those things is less.I think it's quite possible and likely that Salesforce will turn this into a success for Salesforce, while at the same time it won't be an ideal situation for a customer of Tableau that wanted an independent enterprise intelligence tool. So that's what I think about this in particular. And my forecast is really based upon observing how all of the similar companies in this space performed in the years following the acquisitions.

[Tyler Radke:]

Great. I appreciate the perspective. And if I could just ask one more for Phong. Maybe talk a little bit more about your expectations for the back half of this year. I think obviously nice to see kind of the first quarter of growth on growth in a while here. Comps are easier in the second half of this year. What are you thinking in terms of overall license revenue or license revenue growth and overall revenue growth as we get to the second half? Thank you.

[Phong Le:]

Yes. Thanks, Tyler. As I mentioned in my prepared remarks, I think we saw a reasonably good product license revenue growth on a constant currency basis in the first half of the year and we'd like to see that continued trend in the second half of the year. I think our support business has been chugging along and it's been consistently growing in that 1% to 2% range on a constant currency basis. And I think that's a good run rate for that business given our product license revenue growth.I think on a services basis that's been an area of decline as we refocused that business. And I think with some of the actions that Mike had mentioned around more competitive rates and some consolidating and rebranding and repackaging of our services business, we should start to see that business turn around. And our goal as I mentioned before is to continue to streamline the business and cut some costs and generate some positive operating margin. So my expectation is the second half of the year is more of the same with the first half if not better.

[Tyler Radke:]

Thank you.

[Operator:]

[Operator Instructions] We have a follow-up question from Hamed Khorsand. Your line is now open.

[Hamed Khorsand:]

Hey, just want to understand your -- as far as your confidence here in the business, what are you seeing in the pipeline of bookings that's giving you this kind of confidence? And you're talking about Click and Tableau, but are you picking any of the people from there, or are you taking advantage of the sales flip-up? And could you just provide a little bit more of a granular color towards that commentary you're making on the call?

[Phong Le:]

Yes, Hamed. I mean first of all just from a pure pipeline perspective, I think Marge has been here for about a year now half of which she has been able to leverage the success in the 2019 platform and a lot of the operational changes she's put in place to the marketing team and the business development team. And so, we are seeing a material increase in our pipeline and further increase quality of the pipeline and in our ability of the sales team to convert the pipeline.As far as our observation, vis-à-vis competitors like Click, I think it's less so that we're seeing more and more wins against some of our competitors, but we are seeing fewer of those competitors in the marketplace and so that gives us some more strength. That said, PowerBI and Tableau continued to be very strong competitors and we go give them more and more. So the competitive environment, I wouldn't say is getting stronger or weaker. It's about the same. And as far as Mike's comments about the consolidation in the marketplace, I think those are more longer-term views into where this business may go over time.

[Hamed Khorsand:]

Okay. My last question is this voice.com sale, was this just a onetime event? Are you looking to liquidate your entire portfolio now, or is it just purely from a solicitation standpoint of someone coming to you?

[Michael Saylor:]

We're opportunistic on these sorts of transactions. We certainly would never be in a rush. We held some of these domains for 20 years and we're prepared to hold them for many more years until we find someone that values them more than we value them. So, I think we're willing to enter into strategic transactions if we find the right partner, if we think it's a worthwhile endeavor but we're in no hurry.

[Hamed Khorsand:]

All right. Thank you

[Operator:]

Ladies and gentlemen, I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Michael Saylor. Sir, you may proceed.

[Michael Saylor:]

Well I'd like to thank everybody for their support. We appreciate it. We're looking forward to the third quarter and we'll speak to you all again in 12 weeks. Enjoy the rest of your summer.

[Operator:]

This concludes today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.