Strategy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 4 speakers on the call.

Operator

Also during this 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, 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 and A feature at the bottom of your screen. You can submit questions throughout the webinar and Michael, Fong 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.

Operator

Now, I will walk you through the agenda for today's call. First, Fong Li will cover the business results for the Q3 of 2023. 2nd, Andrew Kang will cover the financial results for the Q3 of 2023. Then Michael Sandler will provide a strategic review and discuss recent Bitcoin market updates and lastly, we will open up to Q and A. With that, I will turn the call over to Phong Li, President and CEO at MicroStrategy.

Operator

Phong?

Speaker 1

Thank you, Suresh. Hello, everyone. I'd like to welcome all of you to today's earnings webinar. I'll start with highlights of our software business. Total revenue was $129,500,000 representing an increase of 3% year over year.

Speaker 1

Total software licenses revenues, which consists of total product licenses and subscription services revenues in our consolidated statement of operations were $45,000,000 representing an increase of 16% year over year. Total software licenses revenues performance benefited from both increased adoption of our cloud platform and growth in product license revenues. Total subscription services revenue was $21,000,000 an increase of 28% year over year. Our Q3 subscription billings growth was 17% year over year. We achieved good revenue results in Q3 with year over year growth driven by our cloud business and a strong international license revenue quarter.

Speaker 1

We plan to continue to drive growth in our recurring revenue model and to transition our business strategy and product offerings to a cloud native model. Our focus will be on innovation at the intersection of artificial intelligence and business intelligence using our first to market advantage in the enterprise scale integration of AI and BI to grow revenue in the cloud. I'm very excited about the work we're doing in these is serious and to share some updates with you and our progress. We're in a major period of innovation in the technology industry. We believe the next innovation is to change how the world does business, our digital money, with a continued development of Bitcoin Ecosystem and digital intelligence through AI.

Speaker 1

The technological leaps that have occurred in the past year in generative AI are real, and we expect to be at the forefront of integrating AI with BPI. MicroStrategy is well positioned to gain competitive leverage and win in both of these areas of growth. MicroStrategy's mission for the past 30 plus years has been to enable intelligence everywhere for our customers. And with this mission ingrained in our corporate DNA through each major tech innovation, We have moved closer to accomplishing this goal. Whether this was OLAP Technologies on relational databases, implementing client based desktop API tools, introducing a semantic layer, We're rolling out web AI or making a shift to mobile and then cloud.

Speaker 1

Each step has successfully enabled to making BI a more ubiquitous component of business decision making. We believe generative AI is the next big innovation that will bring us closer to intelligence everywhere. Before I dive into the integration of Gen AI in our platform, it's important to distinguish why MicroStrategy is poised to drive value in the AI space beyond the generic applications and hype built up in the broader market. Hyperscalers and megasoftware companies are investing billions, Amassing GPUs and legions of data scientists to build the best large language models or LLMs in the world. Much like we have done with cloud hyperscalers who plan to openly partner with and leverage the technology investments of these companies rather than invest heavily to build our own models.

Speaker 1

100 of smaller AI companies are taking a similar approach to this, but we are already differentiating as we have done for decades at BI across 4 major areas. Our 30 years of Number 1, our 30 years of enterprise software services and sales capabilities. Number 2, our trusted, secure, Scalable reusable data layer, what we call our semantic layer. Number 3, the ability to quickly build and deploy actual applications utilizing this data through technologies like mobile embedding and microservices and number 4, an open multi cloud architecture, which in this case we'll use to easily integrate multiple different LLMs. We believe this uniquely positions us to win at the intersection of artificial intelligence and business intelligence.

Speaker 1

In addition, we believe the combination of AI and BI to be critical for enterprises looking to integrate AI into their day to day decision making. Let me explain. BI is precise, used trusted calculations from secured sources of structured data to make informed decisions. Natural language generation reasoning and unstructured data to answer free form questions and ideas. However, results can be untrustworthy and producing determinant answers that are reliable and consistent enough to make informed business decisions.

Speaker 1

This is where MicroStrategy 1 delivers value, bridging precise BI and smart AI. Right now, many enterprise AI solutions are focused on efficiency and cost gains, building applications to help marketers write better, corporate teams process more efficiently and engineers code faster. There's even more value to be unlocked when AI helps analysts make better business decisions to drive top line growth and achieve true strategic advantage. This can be done with generative AI on top of enterprise data. But in doing so, combining AI and BI and the challenges with scale, governance and trust with AI are amplified and security and access control are paramount.

Speaker 1

We expect to see increased customer demand as our platform tackles the The main customer concerns of enterprise AI are 1, data access and security 2, integration of large language models, natural language processing and prompt engineering solutions and 3, the ability to distribute AI solutions of scale. Typical AI and BI combinations that do not have a semantic layer have unreliable intelligence. The BI tool acts as a simple repository that provides data to the generative AI engine. There's no intelligence in the LLM results. Producing false or inaccurate responses commonly referred to as hallucinations.

Speaker 1

MicroStrategy 1 and MicroStrategy AI leveraged The semantic layer to define all data objects within a customer configuration. Our BI architecture provides a framework and structure to the AI solution. The AI and MicroStrategy engines collaborated to generate higher quality queries by enhancing and tagging user prompts to pull more tailored results from customer data. MicroStrategy AI is designed to generate answers that are secure, accurate, scalable and reliable. In September, we introduced our 1st set of MicroStrategy AI features to the market, which leverages our advanced BI system, Fully embedding Microsoft Azure OpenAI.

Speaker 1

This release marks one of the most exciting product innovations in the history of the company. These new AI features are cloud native and only available through MicroStrategy 1. We've implemented 4 features to address the needs of different business users. 1, Auto SQL, streamlines the database interaction process. This feature is intended to enhance the technical user experience of MicroStrategy.

Speaker 1

Our AI application can translate natural language into SQL queries, explain the SQL statements in natural language and review SQL code with suggested optimizations. 2, auto dashboard provides automatic dashboard creation, transforming complex data into interactive and beautiful visual insights. MicroStrategy AI processes the data and can produce a beautiful and viable dashboard. AutoXpert is the automated support tool. It's like having a MicroStrategy employee guide you through the The I platform to answer user based questions such as how do I build an advanced metric?

Speaker 1

Auto Expert is available for free to all registered users on our website. And auto answers, my personal favorite, transforms self-service analytics. The user engages the natural language conversation asking the AI assistant questions related to their data. For example, What is the forecasted revenue for Q1 2025? What are drivers of revenue growth?

Speaker 1

MicroStrategy AI processes the request with contextualized data to rapidly provide answers with a deep level of understanding, vastly increasing the data exploration capabilities of a basic user. MicroStrategy AI is the 1st to market with a fully integrated AI BI platform and delivers BI features that enable enterprise grade AI deployment, which shortens our customers' time to value and enhances the ability to optimize and automate. Furthermore, cloud native solution drives net new business to the cloud, while incentivizing current customers to migrate and expand their footprint. And is offering us also our first entry into consumption based pricing. Customers will consume the AI product question by question.

Speaker 1

Our initial starter package is $20,000 to 20,000 questions or simply $1 a question. We expect this pricing mechanism to drive adoption and grow the subscription revenue stream while providing a relatively low cost of entry for customers to onboard next generation AI applications. We're already seeing this product driving existing on premise customers to move to the cloud Our vision for intelligence everywhere continues to inform our roadmap. We believe that AIBI best empowers customers when it's modular and can be embedded into existing workflows. We also believe that the data that feeds AIBI, the platforms in which it runs and the LLM and machine learning models used to must be flexible and open to fit our customers' needs.

Speaker 1

Therefore, our roadmap includes the ability to build analytic bots on the platform as a customer's choice, AWS, Azure, Google Cloud or Private Cloud and leverage a variety of LLMs with the customer's choice. The build your own bot tool on the MicroStrategy platform harnesses advanced capabilities in enterprise security, such as KARNOS' advanced capabilities in enterprise security, such as governance, integration with third party tools and system auditability to allow customers to easily deploy chatbots for broad use on trusted data. This feature is standalone and customizable for deployment by any user And use cases are myriad of. For example, internal users can deploy an FP and A chatbot to answer the questions Related to budget, where users can develop a product Q and A chatbot for customers on their website. We currently expect the Build Your Own Bot capability to be available in December of this We're excited about our initial AI offering to the market and for the future as we continue to tap into the potential of AI BI solutions in our product roadmap.

Speaker 2

Now moving to developments on

Speaker 1

our cloud offering. We continue to build modern, scalable, resilient and cloud native applications that transition customers from monolithic BI configurations to a microservices architecture that embraces flexibility, agility and technological diversity. Microservices architecture and containerized structure enable applications to be deployed and scaled independently. These design features are necessary to meet the technological demands of AI and to maintain the highest level of platform functionality. MicroStrategy cloud architecture is designed in the cloud for multi cloud.

Speaker 1

In Q4, we plan to deploy our Google Cloud implementation, increasing our functionality to all 3 primary hyperscalers and further driving integration of AI and BI to every part of a customer's business. This is a fully containerized microservices based solution, which is the base modern cloud architecture for our MicroStrategy platform. MicroStrategy is now also available on both the Azure and AWS marketplaces, firming up our partnership with these hyperscalers. We're also innovating the way we sell our products via partner sales channels with strategic focus aimed to unlock growth, enhance customer success and deepened market penetration in a rapidly evolving AI and BI market. We have announced recent partnerships with Microsoft Azure, including with OpenAI, AWS and Snowflake.

Speaker 1

Key highlights of our expanded partner program include a newly launched streamlined partner portal that centralized MicroStrategy sales, marketing technical assets to facilitate increased partner engagement expanded training resources to empower partners and the necessary tools to excel and increase incentives and sales motions to promote synergy between MicroStrategy's and its partners' growth objectives. I'm very excited about our product and the direction of the company. Our goal is to be the innovation leader in AI and And we believe we're delivering on We're also creating a customer success organization that will be focused on better supporting customers as they attempt to innovate and maximize value for their organizational customers. I look forward to sharing more details on these initiatives at our next earnings call. I'll now turn the call over to Andrew to discuss the updates on our Bitcoin holdings and our financials for the quarter in further detail.

Speaker 2

Thank you, Kong. I'll start with our 3rd quarter operating results, which Year over year total revenue growth over the past Here, our Q2 results demonstrate both despite longer sales cycles and tighter customer spend. GAAP total revenues for the quarter were $129,500,000 up $4,100,000 or 3% year over year were up 1% year over year at constant currency. Total software license revenues, which consist of product license revenues and Subscription services revenues were $45,000,000 up 16% year over year or up 14% at constant currency. Product license revenues were $24,000,000 for the quarter, up 8% year over year or up 6% at constant currency.

Speaker 2

The growth in product license revenue in Q3 was primarily attributable to the execution of several large international deals during the quarter and partially offset by lower domestic license revenues. We continue to expect our mix of revenue will continue to shift from product license to subscription services over time as we continue to transition to the cloud. However, this past quarter demonstrates that demand for our software remains strong across all platforms. Subscription services revenues, which reflect recurring revenues from our cloud business, were $21,000,000 an increase of 28% year over year or 25% at constant currency. Product support revenues were $66,900,000 up 1% year over year or down 1% at constant currency.

Speaker 2

Customer renewal rates remain high at 94% for the quarter and have been consistently above 90% in the 7 most consecutive quarters, illustrating the durability of our customers even in in spite of the ongoing challenges in the macroeconomic environment. Finally, other services revenues were $17,600,000 which was a 15% decrease year over year or 17% lower at constant currency. While we are seeing higher average consulting build rates worldwide, lower customer demand for consulting projects in the current macroeconomic environment remain a headwind to customer spend on professional services. On Slide 13, total current software license billings were $42,700,000 in the 3rd quarter, an increase of 17% year over year and current subscription billings were $16,800,000 an increase of 17% year over year, our 14th straight quarter of double digit growth. Transitioning customers to MicroStrategy Cloud remains one of our highest priorities, focusing on both new customer wins as well as migrating existing customers.

Speaker 2

As Fang mentioned earlier, we are well positioned to capitalize on first to market AI integrated features already available on MicroStrategy's platform. And our go to market strategy will be highly focused on driving cloud growth, AI BI adoption and increasing partner enabled deployments and driving further marketplace integration with hyperscalers. We believe this will translate to new logos, faster migrations and accelerated cloud transition in the coming year. Shifting to costs on Slide 14, total non GAAP expenses were $138,000,000 in the 3rd quarter compared to approximately $102,000,000 in the Q3 of 2022. Dollars 34,000,000 of The expenses were due to the Q3 Bitcoin impairment charge compared to $1,000,000 $1,000,000 in Q3 of last year.

Speaker 2

Non GAAP cost of revenues was $25,000,000 in the 3rd quarter, which was an increase of $1,200,000 or 5% year over year, primarily driven by higher cloud hosting costs as we grow our cloud business. However, as a percentage of total revenues, non GAAP cost of revenues remained flat year over year. Non GAAP sales and marketing expenses increased $1,900,000 or 6% year over year to $32,400,000 As a percentage of total revenues, non GAAP sales and marketing costs were just 1% higher year over year. Non GAAP research and development expenses were $26,000,000 a slight 1% decrease year over year and non GAAP G and A costs were $20,000,000 in Q3, which was flat year over year. Spending on cloud growth and investing in sales and marketing activities are directly targeted towards growing revenue and acquiring new customers.

Speaker 2

While focusing on strategic spend, we also successfully launched our AI product in Q3, while carefully managing product development costs through global delivery center efficiencies and speed of execution. Our priority and results are rooted in the active management of costs in order to drive margin and profitable growth. Turning to Slide 15, We reported a total non GAAP operating loss in the Q3 of $8,000,000 of which the non cash Digital asset impairment charge was $34,000,000 for the quarter. For the Q3, we reported a GAAP net loss of $143,000,000 which included a $110,000,000 tax provision expense. This non cash tax expense was related to the reestablishment of our valuation allowance on our deferred tax asset directly related to our Bitcoin holdings.

Speaker 2

The expense was recognized because the market value of Bitcoin on the reporting date of September 30 was below our aggregate cost basis. At the end of Q4, we will reevaluate the fair value of Bitcoin again at twelvethirty one and if the price of bitcoin on that date is above our aggregate cost of holdings, we would readjust the valuation allowance at the end of Q4 and see a corresponding non cash tax benefit. Turning now to our Bitcoin strategy. We again increased our total Bitcoin holdings and acquired 5,912 bitcoins in the 3rd quarter. After the end of the quarter, we purchased an additional 155 bitcoins using cash from operations.

Speaker 2

As of October 31, 2023, the company held a total of 158,400 bitcoins acquired for an aggregate cost of $4,700,000,000 or $29,586 per Bitcoin. Bitcoins purchased by MicroStrategy through cash generated by the software business are held at the MicroStrategy entity and as a result those bitcoins are pledged against our 20 28 senior secured notes. Bitcoins purchased through proceeds from capital markets activities, including equity and debt issuances, are held at MacroStrategy, a wholly owned subsidiary of MicroStrategy. These bitcoins are not pledged to our senior secured notes and are fully unencumbered. In Q3, we purchased 5,445 bitcoins for $147,000,000 using net proceeds from our at the market equity program.

Speaker 2

And as noted a moment ago, these bitcoins are held at macro strategy. We also purchased an additional 467 bitcoins for $14,400,000 using excess cash from operations, which are held at MicroStrategy. And subsequent to the end of the quarter, in October, we used Additional excess cash from operations to purchase the additional 155 bitcoins for $5,300,000 also held at MicroStrategy. Our Bitcoin strategy remains unchanged, which is to acquire and hold Bitcoin and we plan to accumulate more Bitcoin over time using both excess cash from operations and proceeds from the capital markets. Bitcoin has outperformed much of the markets this year and while we still see price volatility as the asset class continues to mature, Bitcoin prices have stabilized over a narrower range compared to prior years.

Speaker 2

MicroStrategy is the largest publicly traded corporate holder of And we remain committed to our Bitcoin acquisition strategy with the highest conviction, long term focus and with a strong risk managed approach. As of September 30, 2023, the carrying value of our As of market close on Tuesday, October 31, the market value of our 158,400 bitcoins was of approximately $5,500,000,000 Our Bitcoin remains subject to the current indefinite lived intangible asset accounting rules under which we must record an impairment when there is any decrease in the fair value below our carrying value at any time during the quarter, which occurred in Q3 when Bitcoin price fell to 24 of $1900. We remain optimistic that FASB will finalize the change in accounting rules for certain digital assets including Bitcoin to fair value accounting in the near term. Now turning to Slide 19, in Q3, We continue to execute our at the market or ATM equity offering and raised approximately $147,300,000 in aggregate net proceeds through the sale of Class A common stock. In the current ATM program, we have issued 403,000 shares and have approximately $602,000,000 of remaining ATM capacity.

Speaker 2

As of prior programs, we may use the proceeds for general corporate purposes, which include the purchase of Bitcoin as well as the repurchase or repayment of our outstanding debt. The incremental ATM capacity will allow us benefit from institutional demand for Bitcoin exposure and will allow us to opportunistically raise capital to continue creating value for our shareholders. Our outstanding debt and convertible notes remain unchanged at a total $2,200,000,000 with a blended weighted average interest rate of approximately 1.6%. Also as of the end of the 3rd quarter, we had $45,000,000 in cash on our balance sheet and sufficient overall liquidity to manage our ongoing operating needs and our outstanding debt. Since the Q3 of 2021, we have raised a total of approximately $1,900,000,000 in gross proceeds through our ATM programs, the average price over all issuances of approximately $4.19 per share.

Speaker 2

The primary use of historical ATM to date has been to acquire additional Bitcoin and we also used the proceeds to repay our $205,000,000 Bitcoin back loan at a discount. Our capital allocation strategy continues to be focused on improving our overall capital structure by strengthening our balance sheet through additional Bitcoin holdings and managing our debt very carefully. On Slide 21, as of October 31, we now hold A total of 158,400 bitcoins, of which 15,886 bitcoins are held at MicroStrategy, the parent, and are pledged as collateral securing our 2028 notes. The remaining 142,514 bitcoins are held at macro strategy, all of which are unpledged and unencumbered as of quarter end, representing 90% of our total Bitcoin holdings or $4,900,000,000 in current market value. The earliest of our debt maturities is not until December 2025 for the 2025 convertible notes, which is 8 quarters away from today.

Speaker 2

Within that period of time, we also expect the Bitcoin halving to occur in Q2 of 2024. We actively monitor our capital structure and constantly evaluating liability management opportunities to manage and prepare for all upcoming debt. Overall, we believe the position the positive position in our cloud business along with a eGain license sales in combination with the release of our first to market enterprise scale integrated AI BI product produces positive catalysts heading into the Q4. That being said, we maintain a stance of cautious optimism due to the ongoing presence of macroeconomic headwinds. We anticipate total revenue this year to be in line with last year.

Speaker 2

We continue to focus on product innovation in AI and cloud. We will continue to grow cloud subscription revenues and strengthen the quality of our recurring revenue as we transform our platform. We will remain disciplined and continue to manage to drive margin expansion and we will continue to acquire and hold Bitcoin. Thank you for your time today and for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks.

Speaker 3

Thank you. Thanks for joining us today. I thought I would start With a quick performance review of MicroStrategy since we adopted our Bitcoin strategy. It's now approximately 37 months, so just slightly more than 3 years since We adopted our Bitcoin strategy. And we benchmark ourselves against all major asset classes And against big tech stocks and also against enterprise software companies that are enterprise software peers.

Speaker 3

And I'm happy to report to you that our performance over this time period is plus 242%, and that exceeds the Bitcoin performance in the same period of 192%. So MicroStrategy is outperforming the Bitcoin asset index. The S and P is up 25% over that time period. So, we've almost 10xed the S and P Performance, the NASDAQ is up 17%. As you recall, we had to choose Between gold and digital gold in August of 2020, and we chose digital gold, That is Bitcoin.

Speaker 3

The actual gold is down 2%. So, 192% versus minus 2% is the difference Between choosing the right asset and the wrong asset. This totally makes sense because we're living in an age of digital transformation And there's just a growing awareness that bitcoin is the digital gold of the 21st century. Silver is down 18% And that time period and of course bonds, which we were holding on our balance sheet, are down 24%. And we had a concern about holding bonds because of the interest rate environment.

Speaker 3

That's why we wanted to buy some other tangible asset. Coin is almost the opposite of bonds, bitcoin being the accreting asset and bonds have been diluted to balance sheets, so We're holding them. MicroStrategy has outperformed all the big tech companies, and you can see here, Google, Microsoft, Apple, Meta. And some of the big techs haven't even had a positive return in that time period. And MicroStrategy has Almost 3x the next best competitor in the enterprise software space.

Speaker 3

So, I would say based upon this over this time period that our Bitcoin strategy is working. In essence, we have transformed a company with a $500,000,000 enterprise software company Into a new kind of firm that has both a $500,000,000 software business as well as And now a $5,000,000,000 plus digital assets business. And we're able to get benefits for both the business intelligence part of our business as well as the Bitcoin part of our business. We can go to the next slide now. One of the things that's coming is more different options for institutional investors to get Bitcoin exposure.

Speaker 3

And oftentimes, People ask us, so what's the difference between MicroStrategy and just buying the Bitcoin outright or buying a Bitcoin futures ETF or buying grayscale or buying a potential spot Bitcoin ETF, if and when they're available. And so I think this chart is both Useful to explain what makes MicroStrategy different. And you can also see in this chart the structural Reasons why we are able to outperform Bitcoin itself over this last 3 year time period. If you're an investor and you're looking for accessibility to Bitcoin as an asset class, MicroStrategy is a ticker on NASDAQ MSTR. Whereas buying the Bitcoin itself as the commodity requires that you set up a new relationships with a crypto exchange and a crypto custodian.

Speaker 3

And oftentimes, investors just don't have those Exchange and custody relationships. So, it's not so easy to buy the underlying Bitcoin. And in some cases, It's just not practical or not possible at all. They wouldn't be allowed to do it or they wouldn't have the mandate to do it. The futures ETF does provide that accessibility.

Speaker 3

The spot ETFs have not been available up until now. And of course, GBTC has been an over the counter product and there are many institutional investors that struggle with over the counter aspects Of AXA. So, that's been a benefit to us. The second differentiator has been our operating Company structure. We are an operating company that is providing Bitcoin exposure.

Speaker 3

We're not a finance company. And that means we have some options. One option is we don't charge a fee. So if you're an investor in MicroStrategy, You don't get charged an annual fee or some sort of custody fee in order to be invested in our company. We cover the cost of custody using our operating cash flows and other cash flows from the operating business.

Speaker 3

If you were to buy bitcoin itself, you normally have to place it with a custodian of your institutional investor and so all institutional custodians charge a fee. There is an annual fee to invest in a futures ETF as well. There will be fees to invest in spot ETFs and there has been a fee to invest in GBTC. So, the ability to get Bitcoin exposure and not get charged a fee is another plus for us, a differentiator. The 3rd differentiator is as an operating company, we can acquire Bitcoin with cash flows and we can organically accrete More Bitcoin.

Speaker 3

And we can do the cash flows or we can do it with accretive financings of different sort of either accretive debt or accretive equity financings. And that's a plus and these other options don't allow you to organically accrete Bitcoin. So that's another plus for institutional investors that are Bitcoin bulls. The 4th differentiator is That as an operating company, we can use intelligent leverage. We can do asset backed financing.

Speaker 3

We can do convertible financing. We could do senior secured debt financing. We could set up credit lines. So, there are a lot of things that an operating company can do that an ETP Can't do. And of course, if you're just holding the underlying Bitcoin and the custodian, the Bitcoin is not going to leverage itself and there really isn't You don't have those sort of types of debt financing you can do against Bitcoin, a commodity right now as an institutional investor.

Speaker 3

So that has been a nice differentiator for us and we have used that in order to create a product which is not just a Straight Bitcoin investment, the $2,200,000,000 of debt with a 1.6% blended interest rate is an example of intelligent leverage. The 5th differentiator is that we have a non Bitcoin business that we operate, our enterprise software business, and We've been in that business for 30 years. And so we're not just a pure Bitcoin play, but we provide some downside protection because we're Able to rely upon cash flows and operating income from the Enterprise Software Corporation. And of course, As a NASDAQ listed stock with a healthy spot volume, we have derivatives options or stock options that Trade against micro strategy and you can use them for risk management if you want to buy sell trade volatility or hedge, You're able to do that. And those are options available to institutional investors on exchanges they understand.

Speaker 3

And those options aren't easily available to them with many of the other choices they have. So MicroStrategy is where we've created a unique investment vehicle. It's certainly not the only appropriate investment vehicle and There are other investment vehicles that will be more appropriate for different class of investors. And as we look forward to potential spot ETFs Coming along, we think that's going to actually grow the market dramatically and it's going to be another great option for a different class of institutional investors. It will be beneficial to all.

Speaker 3

But we're committed to our Bitcoin operating model and being a hybrid enterprise software company And Bitcoin Company taking advantage of our intelligent options when they present themselves in order to provide Our investors with a unique opportunity to get long bitcoin exposure in an intelligent fashion. So, with that, I think I'll say just a few last words on the Bitcoin market outlook. First of all, there's a lot of discussion of spot ETPs. If and when they are approved, We certainly think that they're beneficial to the entire asset class. They will represent An on ramp for capital on Wall Street to come into the Bitcoin ecosystem And they'll dramatically increase the availability of Bitcoin as an asset to both retail investors as well as institutional investors, corporate investors and trust and endowments and the like.

Speaker 3

So we think that there are many, many types of That will benefit from that product. I think that 2 other things that it does is, is it provides comfort To institutional investors because when they see offerings from companies like BlackRock or Fidelity or So that they're familiar with, then that's going to actually catalyze them to do research and to educate themselves. And we've already seen an improvement and an expansion and analytical coverage from Wall Street of the Bitcoin asset class. I think we'll see more and more analyst coverage from traditional Wall Street Banks As these ETPs make Bitcoin exposure available and so more coverage means more education means more awareness And that results in more interest and more on ramps will facilitate that interest. And Because bitcoin has got a fixed supply as the demand increases, then we think that will be bullish for the entire asset.

Speaker 3

The second major factor we think in the market outlook is going to be the halving. The halving is coming right now. It's forecast to be sometime in late April of 2024. Much of the organic selling Demand or the organic supply available for sale of Bitcoin or natural sellers are Bitcoin miners. And after the halving that natural supply available for sale will be cut in half, Lease from the Bitcoin miners and the Bitcoin miners are a substantial part of all the natural sellers in the market.

Speaker 3

So the having all should have a Pretty dramatic material effect on the supply available for sale at the same time that the demand And for the asset increases via spot Bitcoin ETPs. So, we think that's bullish for the asset class. The 3rd dynamic is going to be FASB's initiative toward fair value accounting. That can only be helpful in educating the market, clarifying the asset And creating more transparency that solves problems that corporations would have if they were to take on large material amounts of bitcoin exposure. And this is not a near term, but more of a long term driver, but it's material as a long term driver.

Speaker 3

A 4th interesting driver in the market, which is positive, is The entire crypto regulation developments and the progression of them. As the entire crypto industry continues to be regulated, I think that's creating more clarity and More comfort for institutional investors to be able to participate in this space. And so I think we'll see positive Regulatory initiatives that will create more clarity and more consistency and more comfort during the coming 12 months. I think another driver, which is material in the coming 12 months is macroeconomics. Both macroeconomic environment in the United States as well as global macroeconomics, There is continued global inflation and everywhere that pops up its head, It's driving interest in Bitcoin and it's catalyzing awareness.

Speaker 3

And I think the current macroeconomic environment with the Fed slowing down or tightening As it has, it is positive. Certainly, over the past year and a half with the interest rates going from Almost nothing to more than 500 basis points. That's been a headwind. And now in the current environment, I don't think we expect Similar types of macroeconomic headwinds and just a pause on Federal Reserve activity that we've seen in the past to Fed announcements have been positive, I think, for the outlook for the Bitcoin asset class. Bitcoin technology integration efforts continue.

Speaker 3

I think it's another bullish trend. The development of Lightning continues and the activity of corporations to integrate the Bitcoin protocol And the base layer of Bitcoin as well as integrate with Lightning are positive and auspicious And they continue. And I think that as time goes on, we're just going to see more and more technology initiatives that will be beneficial in creating utility for Bitcoin throughout the entire Retail community and business community. And then, I will end my thoughts with The observation that mainstream awareness seems to be reaching new heights for Bitcoin. We have the likes of Larry Fink referring to it as Flight Quality.

Speaker 3

We have Druckenmiller noting that it's a legitimate asset embraced by an entire generation And lamenting that he doesn't own more of it or own it. We have Mohammed El Erian on television noting that Bitcoin is being viewed now as a safe haven asset. We have a lot of coverage of Bitcoin In television on television networks, news networks and also through mainstream media, that should continue to grow. As that coverage increases, that combined with increasing availability of Wall Street analyst coverage and New voices emerging in the community like Fidelity with their analysis of Bitcoin. All of those new voices and new interest is driving education of A new generation of investors, I think we can expect more of that during the coming 12 months.

Speaker 3

And all of these things together just create a virtual cycle. And as they drive bitcoin awareness, they should drive bitcoin investment and that should drive more news and that should drive more awareness And that should catalyze more and more firms to take an interest in supporting Bitcoin or investing in Bitcoin. And so with that, I will go ahead and end my review, and we can move on to Q and A.

Operator

Thank you, Michael. We are now going to jump right into questions. And the first question is for Michael. The 10 Q discloses that Michael entered into a 10b5-1 plan to exercise MicroStrategy stock options. Can you please provide further color on the plan and the thought process?

Operator

Sure.

Speaker 3

Yes, thanks for that question. I was granted a stock option in 2014 with respect to 400,000 shares, which is going to expire next April, if I don't exercise it by then. For almost a decade now at my request, the company has only paid me a $1 salary and I've chosen not to be eligible for cash bonuses. Exercising this option will allow me to address some financial obligations as well as to acquire additional Bitcoin from my personal account. Under my trading plan, I plan to exercise and sell 5,000 shares on each trading day beginning on January 2, 2024 and ending on April 25th, subject to a minimum price condition.

Speaker 3

This means the sale will take place over almost 4 months. If you'd like more details about the plan, I would refer you to the 10 Q. I continue to be optimistic about MicroStrategy's prospects and should note that my equity stake in the company after these sales will remain very significant.

Operator

Thanks, Michael. The next question is also for Michael. What is management's view on the impacts to the Bitcoin ecosystem at large if a spot Bitcoin ETF is approved

Speaker 3

Catalytic events, a big milestone in the institutional adoption of Bitcoin as an asset class. I think it's so I think it's going to be very, very auspicious for the asset. I think it will usher in a new generation of Analysts, it will usher in a lot more Bitcoin awareness. It will simplify the process of acquiring And holding bitcoin and allocating to bitcoin by an order of magnitude. And I think it will create A constructive competition, because all of these various ETF vendors will all be competing for asset share and As they do it, it will be in their best interest to communicate and educate all of their clients on Bitcoin.

Speaker 3

So, I think it's very good for the ecosystem. I think it's complementary as a way to participate There are already participants in the ecosystem that take different strategies. For example, Block has taken a very technology focused strategy and they're very interested in integrating into their products like Cash App. MicroStrategy has assumed a Bitcoin strategy, which consists of acquiring and holding the underlying asset. I think other companies have offered options type strategies and trading strategies.

Speaker 3

There are going to be a class of investors that will welcome the ability to hold the spot product through an ETP wrapper. And so I think it's generally good for the ecosystem. As for MicroStrategy, I think it's going to be good for our Company as well as our shareholders because it will expand the overall ecosystem. None of these ETP companies will be Operating companies themselves, they're not really pursuing our strategy of intelligent leverage as an operating company. They'll be pursuing various ETF and ETP type strategies.

Speaker 3

And Overall, that means that it should expand the entire asset class to the benefit of all participants.

Speaker 2

Thanks, Michael. I think, Suresh had a connection issue. So I'll Read the next question we have. This one is for Fang. How should we be thinking about the AI partnerships With Microsoft and their monetization, can you shed some color on the impact of AI offerings on margin?

Speaker 1

Thanks, Andrew. So one of the ways we were able to be first to market with our AI BI offering is we fully embedded Microsoft Azure's OpenAI product through a partnership with Microsoft. And it provides Several benefits to prospects and customers. One is they don't need to bring their own LLM, which if you're a large enterprise, You may not know exactly where to go, how to go do that. And so we've integrated it fully.

Speaker 1

The second is as of now Azure Open AI, which drives technologies like ChatGBT is the superior LLM in the market. And so it's something that people are familiar with and know how to work with. And the third, we carry with it a lot of The privacy and security capabilities of Azure OpenAI too. That's our sort of first Entree into the market, over time, we do plan to integrate other LLMs from the hyperscalers, so whether it be Google or AWS And allow our customers to bring their own LLM or use utilize a private LLM. So you'll be seeing that as we enter into 2024.

Speaker 1

As far as monetization, we're today, as I mentioned, pricing this at $20,000 for 20,000 questions, it's consumption based. Obviously, customer has to be using our current BI technology. And if they're not, they'll get MicroStrategy BI and the pricing associated with that Then add on AI on top of that. And I think as we get into 2024, we'll see some material revenue come out of this new product. We're already seeing some pretty strong pipeline with MicroStrategy AI.

Speaker 1

And as I mentioned earlier, it's causing customers to want to move to our cloud because it's only available in the cloud. So that's another nice tailwind that's created by our new AI offering.

Operator

Thanks, Phong. I can ask the next question. It's for Andrew. How does MicroStrategy think about the balance between investing in core business, while utilizing excess cash flow to acquire more Bitcoin.

Speaker 2

Thanks, Harish. I'd say, if you recall, when we launched our Bitcoin strategy, We converted our cash reserves as well as our investment holdings into Bitcoin, which I think has served And MicroStrategy to be extremely accretive, and Michael shared some of those statistics earlier. As part of Our overall liquidity management, we ensure working capital adequate working capital to manage All of our operations, we also ensure we have adequate capital to invest in product development and as well as service our debt. I'd say using excess cash from operations allows us to have the ability to organically accrete more Bitcoin. Again, that's served us very well and has driven a lot of value for our shareholders.

Speaker 2

So I'd expect us to continue along that strategy.

Operator

Thanks, Andrew. The next question is for Andrew as well. Can you please provide thoughts if you have an expected timeline for FASB's fair value accounting rule implementation and how the Street should think about its impact on MicroStrategy's future Bitcoin acquisitions and the impact on core business?

Speaker 2

I'd say from conversations we've had with various folks related That are kind of aware of the FASB progress. It seems that they are the FASB is pretty much on track with what I would call maybe a normal timeline to finalize this accounting rule. I obviously can't predict when that will occur, but I think we believe it is likely to happen based on that normal timeline either later this year or early next year. So, I would say fairly in the near term. Overall, I think Michael talked about it as well, but the change, I believe will help other institutions effectively more effectively evaluate Holding Bitcoin on corporate balance sheets and hopefully will provide additional transparency for more adoption of Bitcoin as well.

Operator

Thanks, Andrew. Next question is for Michael. How does the recent move up in the price of Bitcoin impact the company's ongoing strategy to acquire more Bitcoin? Should we think of MicroStrategy as an average cost buyer adding to its Bitcoin stores as permitted by the capital markets and cash flow regardless of the price?

Speaker 3

We have a laser focus on Bitcoin acquisition. And so, we will the volatility and the price movement has had One primary impact, which is it has brought worldwide awareness to bitcoin and it has gotten everybody focused on bitcoin. So, I think it's Tolerating education and because bitcoin is a novel asset class, education is critical for adoption. So, I think Generally, it's long term bullish. We try not to get too caught up in the volatility.

Speaker 3

So, When we have excess cash flows from operations that we don't need as working capital, then we will generally acquire Bitcoin with it because we view it as Accretive. And then when the capital markets offer us opportunities to do financings that are accretive to our shareholders, so that we can buy Bitcoin, we will avail ourselves of that. Those circumstances change month by month, quarter by quarter. And we have A good set of models that we use to keep track of all these changes and we're always monitoring opportunities so as to make sure that We take advantage of it when it comes our way.

Operator

Thanks, Michael. And we'll take one last question here, which is for Fang. What are your thoughts on the remainder of the year and outlook for 2024 and main drivers of growth and challenges to keep an eye on? And what are some of the levers that can be pulled to increase profitability in the future?

Speaker 1

Yes. Thanks, Harish. I I guess a few things. One is we look into 2024, the 2 big drivers of growth will be AI and cloud and they're related, By agreeing more customers to cloud, getting them to adopt our cloud native platform and getting customers to adopt AI, which in turn will get customers to adopt cloud and moving more into the prospect space because I think our AI and cloud offerings are quite prospect friendly. So I think those would be the big drivers of growth.

Speaker 1

Concerns that we might have, macroeconomic headwinds, we saw that in the first half of this year could rear back up, right. We have a lot of uncertainty right now what's happening in the macroeconomic environment. And so those are the things that I think about. And as far as cash flows and margins go, I do think we can do everything that mentioned while still being pretty disciplined about our margins, which I think you've seen us able to accrete margins in the last And I think we can continue to do that. So I think with that, I'm going to close this call.

Speaker 1

I want to thank everyone for being with us today and we appreciate your support. We're enthusiastic as ever about our enterprise software strategy as well as our Bitcoin strategy. I think we've seen positive momentum in both of those areas in the Q3. And we wish you all a good quarter and look forward to seeing you getting 12 weeks in 2024. Thanks all.

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Earnings Conference Call
Strategy Q3 2023
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