Strategy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 4 speakers on the call.

Operator

I'll be your moderator for MicroStrategy's 2023 4th 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 our most recent 10 Q filed with the SEC.

Operator

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 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.

Operator

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, Song Li will cover the business results and the key pillars of our business strategy. 2nd, Andrew Kang will cover the financial results for the Q4 full year of 2023. Then Michael Saylor will provide a strategic review and discuss recent Bitcoin market updates.

Operator

And lastly, we will open up to Q and A. With that, I will turn the call over to Phong Li, President and CEO of MicroStrategy.

Speaker 1

Thank you, Suresh. Hello, everyone. I'd like to welcome all of you to today's webinar. I want to start by providing an update on the state of the company and achievements over the past year. Today, MicroStrategy is the largest corporate holder of Bitcoin in the world, holding 190,000 Bitcoins with a total Bitcoin market value of $8,100,000,000 as of yesterday.

Speaker 1

In 2023, we acquired 56,650 Bitcoins for a total purchase cost At $1,900,000,000 an average price of $33,580 In 2024 so far, We've acquired an additional 850 bitcoins for a total purchase cost of $37,000,000 Over the past year, we've seen Bitcoin mature further 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 Quarter later. MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. Our objective is to grow in AI and cloud powered BI software.

Speaker 1

We have over 1900 employees focused on our software business, Devoted to achieving our vision of intelligence everywhere. The past year has marked the most transformative in our 25 year history Being a public company, as we released MicroStrategy 1, MicroStrategy AI, MicroStrategy Cloud for Azure, AWS and now the Google Cloud Platform and continue to focus on growth in both cloud and AI plus BI. In 2023, we made important progress in our shift towards our cloud offering, resulting in annual subscription services revenue of $81,200,000 an increase of 34% year over year. The strong growth in our subscription services revenue was driven by both existing customer migrations to the cloud and new customer wins. Our customer renewal rates continue to be among the highest we have ever And our subscription billings remain strong.

Speaker 1

Overall, we continue to see further global adoption of our cloud As a result of transitioning our business strategy and product offerings from an on prem perpetual licensed software company to a cloud native organization. Further, we've transformed the way we function as an organization. We've reorganized and invested in our go to market approach to help develop sales opportunities convert more customers to our cloud offering. We created a customer success function to focus on the customer experience, including onboarding, adoption, retention, migration and upsell. This enables our sales teams to focus We've revised our sales compensation plans to prioritize new business and cloud transactions.

Speaker 1

We've rebuilt our marketing leadership team and have invested in product marketing, field enablement, brand development and demand generation. We have expanded our partner sales channel with strategic partnerships with Microsoft, AWS, Google and Snowflake, harnessing thousands of eager sellers Ready to deploy MicroStrategy on their platforms. I believe MicroStrategy is entering 2024 Stronger than ever, it will continue to provide a unique value proposition for our shareholders. With our Bitcoin strategy being so significant to our overall business Value. While we also continue to pursue growth in our enterprise analytics business, some may ask, what kind of a company is MicroStrategy now?

Speaker 1

It's a fair question and a question that takes on even more significance with the approval of spot Bitcoin ETPs in the United States. We consider MicroStrategy to be unique. We consider MicroStrategy to be the world's 1st Bitcoin development company. Let me explain what we mean. We are a publicly traded operating company committed to the continued development of the Bitcoin network through activities in the financial markets, Advocacy and Technology Innovation.

Speaker 1

As an operating business, we're able to use cash flows as well as proceeds From equity and debt financings to accumulate Bitcoin, which serve as our primary treasury reserve asset. We also develop and provide industry leading AI powered enterprise analytics software that promotes our vision of intelligence everywhere And are also using our 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 business remains our core revenue and cash flow generator. In addition, it also enables us to acquire through the use of excess cash or proceeds from equity capital raises or corporate debt capital raises and to pursue software innovations that leveraged the Bitcoin blockchain.

Speaker 1

We've deployed these levers to increase our Bitcoin holdings in a manner which we believe has created shareholder value. Bitcoin development includes our Bitcoin acquisition strategy and Bitcoin advocacy initiatives. Our software development includes BI, AI, Cloud, or Bitcoin and Lightning Related Software Development. Let me elaborate on our 2024 software strategic focus. In 2024, we will continue our transformation focus to win and grow in AI plus BI while Accelerating our transition to a cloud centric operating model.

Speaker 1

Our key strategic goals are to grow cloud, Innovate with AI and increase profitability. So first, let me cover growing with cloud. MicroStrategy Cloud is a key area of our research and development efforts as we expand our platform's flexibility, scalability and security. In December, we successfully deployed our Google Cloud Platform integration, furthering our multi cloud capabilities, providing greater optionality to our customers. This offering is microservices and container based and uses our most recent cloud innovations.

Speaker 1

As of today, MicroStrategy can be and fully hosted on Azure, AWS and GCP. Additionally, we will provide the ability to automate deployment of MicroStrategy with many of the same benefits of a public cloud but in a private cloud later this year. This distinguishes us from other BI platforms with the flexibility and automation that enterprise customers require. We believe such investment and capability will encourage Current on premise 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.

Speaker 1

As customers and prospects move to the cloud to empower their AI driven digital transformations, we expect a decrease in product license revenues. This will in part be offset by increases in subscription services revenues in the same year and will be more than offset with Higher recurring revenues in the following years. This will be most pronounced in 2024 as we expect to increase the pace of cloud adoption. Besides more healthy recurring revenues, additional benefits in moving customers and prospects to cloud include more engaged and happy customers using our latest software, resulting in higher retention rates. The second area of focus for our software business is to innovate with AI.

Speaker 1

We will continue to focus on product innovation and AI powered BI in the cloud. In September, MicroStrategy released its most innovative product to date, MicroStrategy AI. Our innovative first to market AI solution offers capabilities designed To deliver an exceptional user experience on trusted data, featuring out of the box resources that streamline adoption on our multi cloud platform. The initial reception from customers has been positive. Our platform's AI BI capabilities enable customers to automate their BI workflows, including building data wrangling, dashboard creation, and data exploration.

Speaker 1

This elevates the role of data throughout the organization, allowing companies to make better database decisions and take actions. We believe that our continued thought leadership and innovation Focus in the AI plus BI intersection will serve as a growth catalyst for MicroStrategy into the future. As business continues to search for efficiencies to reduce cost, increase productivity and increase revenues, AI solutions and trusted data will continue to gain prevalence as a necessity. In addition, in December, we released our standalone bot feature as an extension of our MicroStrategy AI capabilities. With the release of build your own bot, MicroStrategy has entered the adjacent bot market with the capabilities and pedigree of our BI product to address a wide range of use cases.

Speaker 1

When considering the services currently offered in the bot market, we noticed customer demand for a bot builder that addresses Gen I resource constraints, Improved structured data processing and solving for the lack of enterprise trust provided by current LLM solutions. The current landscape of bot offerings such as domain specific bots, LLM customizations and flexible build bots either lack the flexibility to address broad use cases or face limitations with structured data. MicroStrategy bots are one of the easiest to use products we've ever developed. Combining our structured data horsepower with our open AI integrated LLM capabilities, we've created an AI bot flexible enough to support any industry vertical or departmental scenario with trusted analytics. Leveraging the MicroStrategy platform's advanced capabilities in the enterprise such as security, governance, integration with third party tools In system auditability, we enable customers to easily deploy chatbots for broad use and trusted data.

Speaker 1

The 3rd area of focus for our software business is to increase profitability. We will continue to optimize our internal organizational structure in 2024. This means being mindful of financial objectives when choosing investment areas, collapsing organizational layers to improve internal velocity, reducing our dependence on low margin consulting in favor of external partners and leverage our leadership team to guide both strategy and execution to deliver increased profitability. For 2024, operating goals for our software business are to increase overall top line revenue compared to 2023 And target non GAAP operating income, excluding impairment losses of $70,000,000 to $90,000,000 Increased profitability would further enable us to increase our Bitcoin holdings. As a Bitcoin development company, We're focused on generating value for our stockholders by using various capital markets and technology levers.

Speaker 1

As an operating company, we can make use of intelligent leverage. Since our adoption of our Bitcoin strategy, we've used Three primary mechanisms to acquire more Bitcoin. 1, cash flow from software operations. Since August 2020, we've invested $726,000,000 of total cash on our balance sheet in Bitcoin. 2 equity issuances.

Speaker 1

We have issued $3,100,000,000 in equity in a manner that we believe To be accretive to existing shareholders to acquire Bitcoin. And 3, debt financing. We've obtained 2 point $2,000,000,000 in corporate debt proceeds through the issuance of both senior secured notes and convertible notes that we use to purchase Bitcoin. The blended cost of our debt is fixed at 1.6% annually. We believe each of these techniques and our unique positioning as the world's 1st Bitcoin development company have enabled us to generate tremendous value for our shareholders.

Speaker 1

I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Speaker 2

Thank you, Fong, and thank you all for joining. I'll first start with our software financial results. Total revenues for the 4th quarter were $124,500,000 down 6% year over year. For the full year, Total revenues were $496,300,000 down slightly 1% year over year. Our Q4 operating results were mixed with a decline in year over year revenues in part due to the ongoing revenue shift to cloud And the lingering macroeconomic headwinds impacting overall customer spend.

Speaker 2

Product license revenues were $18,400,000 which was down 33% year over year in Q4 $75,400,000 down about 13% year over year for the full year. However, as we transition our business to the cloud, we fully anticipate lower product license revenues as we migrate both existing and new customers to the cloud. More importantly, we continue to grow subscription services revenues, which reflect the recurring revenues from our expanding cloud business. In Q4, subscription services revenues were $21,500,000 which is an increase of 23% year over year and $81,200,000 for the full year, an increase of 34% year over year. Current subscription billings, which reflect new cloud bookings, grew 33% in the 4th quarter to $41,300,000 And $94,800,000 for the full year, a 23% increase year over year, which was our 15th straight quarter of double digit growth in cloud bookings.

Speaker 2

Q4 was an important milestone for us, For the first time in both Q4 and for the full year, our subscription services revenues were higher than our product license revenues. This was a significant achievement to show the continued progress in our transition to stronger recurring revenues in the cloud. As I mentioned before, we expect the mix of revenue will continue to shift from product license to subscription services revenues in 2024 as we focus on delivering AI based products to our customers in the cloud. Moving to costs, Total non GAAP expenses were $148,000,000 in the 4th quarter, 52% lower compared to the Q4 of 2022. Bitcoin impairment charges for the quarter were $39,000,000 compared to $198,000,000 in Q4 of last year.

Speaker 2

Total non GAAP expenses excluding Bitcoin impairment were $108,000,000 in the 4th quarter, down 3% year over year. While we're spending more on cloud hosting costs as we grow our cloud business, we have been able to offset those increases with cost reductions in corporate overhead and while optimizing headcount, which was down 10% year over year. We reported a total non GAAP operating loss in the Q4 of $23,000,000 of which the loss on the Bitcoin impairment was $39,000,000 in the quarter. For the Q4, we reported GAAP net income of $89,000,000 which included a $150,000,000 tax benefit, Primarily due to changes in the valuation allowance on our deferred tax asset directly related to our Bitcoin holdings. At the end of Q4, fair market value of Bitcoin as of December 31 was above our aggregate cost basis, resulting in a release of the previously established valuation allowance and a corresponding non cash tax provision benefit.

Speaker 2

Turning to our Bitcoin strategy, we had an extremely successful Q4 adding more Bitcoin to our holdings, Acquiring 30,905 bitcoins in the quarter, the largest single quarter Bitcoin holdings increase since Q4 of 2020. After the end of the quarter, we purchased an additional 850 bitcoins using $37,000,000 of excess cash. And as of February 5, 2024, the company held a total of 190,000 Bitcoins acquired for an aggregate cost of 5.9 $3,000,000,000 or $31,224 per Bitcoin. Bitcoins purchased through excess cash from the software business are held at MicroStrategy, the parent entity, and are secured under our 20 28 secondured notes. As of yesterday, there were 16,931 Bitcoins held at MicroStrategy.

Speaker 2

Bitcoins acquired through proceeds from capital markets activities after the issuance of our senior secured notes, which include equity and debt issuances, are held at MacroStrategy, which is a wholly owned subsidiary of MicroStrategy. We hold 173,069 bit Representing 91 percent of our total Bitcoin holdings are over $7,300,000,000 in current market value at the macro strategy level, all of which are currently unrestricted and unencumbered, providing us with optionality to potentially leverage this Strategic asset in the future. In Q4, we purchased a total of 30,555 Bitcoins for $1,200,000,000 using net proceeds from our ATM program. As noted a moment ago, these bitcoins are held at MacroStrategy and remain unencumbered. In Q4, we also purchased an additional 350 bitcoins or $13,400,000 using excess cash from operations, which are held at MicroStrategy.

Speaker 2

And subsequently in January 2024, we used additional excess cash from operations To purchase an additional 850 bitcoins for $37,000,000 which are also held at MicroStrategy. Our commitment to our Bitcoin strategy remains unchanged and unwavering, and we plan to add more Bitcoin over I'm using our excess cash from operations as well as proceeds from any capital markets activities. MicroStrategy is the largest holder of Bitcoin in the world and we have remained committed to our Bitcoin acquisition strategy with the highest conviction With a consistent track record, long term focus and a strong risk managed approach to acquiring and holding more Bitcoin on our balance sheet. Turning to Slide 15, we saw Bitcoin outperform the U. S.

Speaker 2

Equity markets in 2023. As of December 31, 2023, the carrying value of our Bitcoin holdings is approximately $3,600,000,000 Compared to approximately $8,000,000,000 in market value based on the Bitcoin price as of the last day of the quarter. Year to date, the market value of our Bitcoin holdings is approximately $8,100,000,000 which is significantly above our average purchase price To be measured using fair value accounting, we are delighted by FASB's expeditious move to create more transparent reporting, And we are encouraged by the continuing maturity of the regulatory environment surrounding Bitcoin, and we hope these enhanced accounting rules will serve as a positive on ramp for other corporates to adopt Bitcoin as a treasury reserve. The new accounting rule requires companies holding digital assets, to adopt fair value accounting treatment by Q1 of 2025. And while we have not yet elected to early adopt the new accounting standard, Which was only just finalized late in Q4, we continue to evaluate the timing along with the accounting and tax impacts of adoption.

Speaker 2

If we elect to adopt the new accounting standard in 2024, we estimate that our 2024 beginning Bitcoin Holdings value would be marked up to a fair value of approximately $8,000,000,000 as of January 1, 2024. As Fang mentioned earlier, we have effectively used excess cash flows to grow our Bitcoin holdings. At the inception of our Bitcoin balance sheet strategy in 2020, we allocated a substantial portion of our cash reserves generated Over many previous years into Bitcoin, acquiring over 43,000 Bitcoin for $595,000,000 Beyond that initial acquisition, we have continued to acquire an average of $40,000,000 of Bitcoin each year with excess cash on our balance sheet, Totaling approximately 3,500 Bitcoins since 2022. Our ability to leverage cash from operations Enables us to increase our Bitcoin holdings in a manner that we believe is accretive to our shareholders. And in total, we have issued $626,000,000 of excess cash to acquire more Bitcoin, accounting for approximately 48,000 BigPoint added to our balance sheet for about 25% of our total Bitcoin holdings.

Speaker 2

Now turning to our capital markets activities. Also since the inception of our Bitcoin strategy, we have raised $2,200,000,000 of debt through senior secured notes and convertible notes was an attractive blended interest rate of approximately 1.6%, For the earliest maturity, not until 2025. Leverage remains a key component of our active capital management strategy, Which when intelligently deployed enables us to create more Bitcoin on our balance sheet at an attractive cost. We will continue to actively monitor the capital markets, evaluating liability management opportunities to manage our debt maturities as well as In addition to raising debt, we have demonstrated a solid track record of issuing permanent equity capital in a manner that we believe has been accretive to our shareholders. Since the Q3 of 2021, we have raised a total of $3,100,000,000 in proceeds Through our at the market or ATM programs with the average price of approximately $4.57 per share across total equity raised.

Speaker 2

In Q4 of last year, we accelerated the execution of our current ATM program and raised $1,200,000,000 in aggregate net proceeds. And in Q4 alone, we issued approximately 2,270,000 shares of Class A common stock and approximately $138,000,000 of capacity remaining under our current program. As we have done in the past, we will continue to carefully evaluate the most accretive use of proceeds From the sale of equity to incremental value for our shareholders. The primary use of proceeds from the sale of equity to date has been to acquire additional Bitcoin, We also used proceeds of our ATM program to prepay the $250,000,000 Bitcoin Back Loan In Q1 of 2023, which generated a $45,000,000 gain on extinguishment. Our capital allocation strategy continues to be focused on increasing the value generated from our balance sheet through the addition of more Bitcoin while managing our debt very carefully.

Speaker 2

Also at the end of the Q4, we had $46,800,000 in cash on our balance sheet, which is sufficient overall liquidity to manage our ongoing operating needs. 2023 was an extremely successful year for us where we generated approximately $5,800,000,000 of incremental value from both the increase in the price of Bitcoin of our existing holdings as well as through our strategic use of equity capital markets activities. We began the year with 132,500 Bitcoins on our balance sheet with a market value of approximately $2,200,000,000 As Bitcoin prices increased from approximately $16,500 to approximately $42,500 by the end of the year, It resulted in an increase of over $3,400,000,000 in value based on our Bitcoin holdings at the start of the year. In addition to the price appreciation of Bitcoin we held as of the beginning of the year, MicroStrategy's issuance additional equity And use of excess cash from operations to purchase even more Bitcoin in 2023 led to an increase of an additional $1,900,000,000 in value of our Bitcoin holdings. In total, we add an additional 56,650 Points to our balance sheet at an average price of $33,580 which generated an approximately $500,000,000 of value from the increase in the price of Bitcoin after those purchases were made.

Speaker 2

Again, overall, 2023 was a tremendously successful year and taking into account our purchases And appreciation of our holdings, we increased the value of our Bitcoin holdings by 2 67% to $8,000,000,000 over the course of the year. While the overall market benefited from the increase in Bitcoin price as well, We believe our intelligent use of leverage and excess cash to acquire more Bitcoin as well as our equity capital market strategy contributed $2,400,000,000 of incremental value for our balance sheet, demonstrating our track record of generating value for our shareholders. This slide shows an illustrative example of how responsible and intelligent leverage can be used to boost returns When Bitcoin prices are increasing. The baseline returns of any long Bitcoin strategy benefit from spot Bitcoin price appreciation. Bitcoin ETPs also benefit from this offset, of course, by the management fees that are charged with those products.

Speaker 2

Leverage provides us the opportunity to generate high returns if price increases. In this illustration, assuming Bitcoin price reaches $250,000 keeping Bitcoin count constant, Spot Bitcoin without leverage would return approximately 4 80%. In this example, adding leverage to acquire more Bitcoin would return between 6 60 percent to 7 40 percent depending on the amount of leverage further boosting returns If the market value of our Bitcoin increases, we believe this would create more opportunities to manage our leverage targets. With the opportunity to take on more leverage in a prudent risk managed fashion, the value generated from our increasing Bitcoin holdings Would be expected to outperform even further if Bitcoin prices continue to rise. MicroStrategy's value proposition is Clear when compared to other forms of exposure to Bitcoin.

Speaker 2

And as Phong said earlier, we believe that the combination of our operating structure, Bitcoin strategy and focus on technology innovation provides a unique opportunity for shareholder value creation. The management team has demonstrated a track record of disciplined approach to navigate through volatile times in the Bitcoin market And establish credibility in achieving our goal of generating more value for our shareholders. Thank you for your time today and thank you for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks.

Speaker 3

Thank you, Andrew. I'm Michael Saylor, the Executive Chairman of MicroStrategy. First, I'd like to go over a few performance statistics with you. Since August 10th or August 11th, when we adopted our Bitcoin strategy, Our stock has outperformed Bitcoin as well as every major asset class along with every major big tech stock As well as every major enterprise software stock. We're very proud of this.

Speaker 3

And for those of you who have followed us on this journey, it's been a number of steps every single quarter that got us here. But I think that this is a very useful chart to illustrate and discuss some key elements And our strategy and in our business outlook. First of all, with regard to Bitcoin, 2024 is the year of birth of Bitcoin as an institutional grade asset class. Bitcoin is being increasingly referred to as a new as an asset class and as a new asset class. And in fact, it's the 1st new asset class of the modern era.

Speaker 3

It's difficult to really name another asset class. Gold, when it was Converted ETFs wasn't a new asset. Commodities were never a new asset. 30 years ago, the S and P index was converted into an ETF, the SPYDER. That wasn't a new asset then, but it was certainly a revolution in finance.

Speaker 3

And so Bitcoin represents many things, but one thing it represents is the 1st institutional grade digital asset. And so we've now completed the 1st 15 years of the Bitcoin lifecycle. And in that first 15 years, it was largely unregulated retail asset misunderstood. The next 15 years, I would expect, will be a regulated institutional High growth period of bitcoin, very, very different in many ways from the last 15 years. Bitcoin itself is performing well for a number of reasons.

Speaker 3

But one reason is because it represents the digital Transformation of capital. If we look at some of these other great performers on the chart, like Microsoft and Google and Meta And Apple, they're all digital transformation plays. They represent the digital transformation of devices and the digital transformation of relationships And the digital transformation of information and books and libraries and entertainment and education and the digital transformation of corporate process Yes, say Microsoft. Well, Bitcoin is a very profound idea. It's what if we actually transformed capital From its analog form, capital in the form of land or buildings or capital in the form of Shares in an actual physical company or bushels of corn or diamonds or bars of gold Or capital in the form of fiat currency or bonds.

Speaker 3

And what if we could actually make that into a digital asset That's created in order to address all of the historic perceived shortcomings of analog assets. What if we had had, all the benefits of gold, but none of the liabilities of gold? What if we had the benefits of a share of stock, but none of the liabilities of a Share of stock. What if we had the benefits of a building but not the liabilities of the building? A synthetic digital asset.

Speaker 3

And so increasingly investors are recognizing this. That's why Bitcoin is up 2 60% since we embarked on our Bitcoin strategy. That's why it's Forming the S and P and the NASDAQ, that's why it's outperforming gold, silver and bonds. Bitcoin isn't a company and it's kind of it's profoundly important To understand that it's not a company, it's an asset class. And as such, Based on a commodity, it has spawned an entire universe of companies, products and services built on that asset class.

Speaker 3

So part of the driver of Bitcoin's performance is not just its protocol and superior fundamental characteristics, but Another driver is the industry of Bitcoin Miners that secure the network and Bitcoin custodians And a set of Bitcoin exchanges, so we see lots of public companies that are Bitcoin miners now. We see many, many companies that are entering into Bitcoin custody like Anchorage, like Bitco, like Fidelity, like Coinbase. We see Bitcoin exchanges, like Block acting as an exchange like Fidelity, like Coinbase, like Gemini, etcetera. We're going to see more exchanges. We see an explosion in Bitcoin wallets, different Software applications for mobile phones or devices in order to move bitcoin around.

Speaker 3

We've got bitcoin devices themselves for signing and securing the network. There's a whole host of companies in the Lightning ecosystem and other Bitcoin L2s That are scaling the network. And now, of course, this year, we have Bitcoin ETPs, spot ETPs and Even derivatives of those ETPs, companies that are going to trade the volatility of the underlying spot ETPs are starting to Pop up in application form. And of course, these ETPs aren't just local or aren't just United States based, but they're global. And that's significant because every single company everywhere in the world is meeting a different set of compliance requirements.

Speaker 3

A Bitcoin ETP in Hong Kong will serve a different need, meet different compliance requirements and meet the needs of different types of investors from a Bitcoin ETP in Canada or in France or in the UK or in the United States. And so all of these various actors are scaling the Bitcoin network with increasing enthusiasm. MicroStrategy, as we've noted, is unique as of now as the first Bitcoin development company, But hopefully not for long. We've published our playbook, and we're showing other companies how to do it. And there's a lot of real estate development companies In the world, companies that issue securities and develop real estate.

Speaker 3

There are a lot of oil or petroleum exploration and development companies in the world. There are natural gas development companies in the world. There are software development companies in the world. So we believe that As awareness builds Bitcoin as a commodity, as a global commodity, as a unique asset class, I think we're going to see more entrepreneurs enter the space and start to work in these various areas to add value to the ecosystem. It's worthwhile to note, people are in the early days, they thought of Bitcoin's Currency and a medium exchange, and it creates a lot of misunderstandings and a lot of inappropriate or irrelevant criticisms.

Speaker 3

With the advent of these new ETPs from BlackRock and from Fidelity, awareness of Bitcoin can you please go back? Yes. Yes, let's stay on the slide. Awareness of Bitcoin as a store of value asset is growing. And people are starting to see Bitcoin not as digital currency, but as digital property or digital gold, A digital store of value, you could think of it as gold or you could think of it as property or think of it as another kind of digital store of value.

Speaker 3

But In that regard, you kind of have to compare it against other liquid stores of value that people are using. So for right now, The most common alternative to Bitcoin for a tech enthusiast would be to invest in big tech, like the Magnificent Seven, The Microsoft, the Google, the Metas. But as you can see, when the market cap of a big tech company doubles, You have a company doing a lot of work, generating a lot of cash flow to support the market cap. And the work that they have to do doubles. And if they want to double their market cap, their value again, they have to keep generating they have to keep doing more work, generating more cash because traditional finance technique is I dividend out my cash flows or I buy the stock back.

Speaker 3

2 very famous examples of this traditional approach are Apple and Meta, We're both engaging in monstrous capital return programs. So a stock is returning its capital And its value or store of value promise is based upon being able to grow its cash flows Faster than the rate of inflation. So they're working increasingly hard. If you want to make it 10 times more valuable, eventually you've got to come up with a way to get 10 times more cash flows. And that's very different than the Bitcoin because Bitcoin is the asset.

Speaker 3

So whereas Big Tech is asset poor, cash flow rich, Bitcoin is asset rich and the strategy with Bitcoin becomes Asset Rich. Now we're moving into a macroeconomic environment where we're going to see increasing monetary inflation to pay off the debt. That's well understood. That was even acknowledged by Jerome Powell in a 60 Minutes interview this weekend where he expressed concern. And so As the monetary supply expands, if your strategy is to generate more Cash flows, you're going to have to grow your cash flows faster than the rate of monetary inflation.

Speaker 3

And that means that a big tech strategy Becomes increasingly difficult. And so you could almost say a big tech company It becomes more difficult, it gets harder, right, as the value increases. But bitcoin gets more compelling As the value of Bitcoin increases because the liquidity increases and the network of holders increases. So we're in the 1st year of Bitcoin being viewed seriously as a possible institutional grade store of value. And I believe that over time, it's going to appeal to technology investors as they understand it as Digital capital and the digital transformation of capital.

Speaker 3

And there's a reason that we believe we can outperform Other strategies and why we believe a commodity like Bitcoin is a better long term store of value than just buying a portfolio of stocks Because it isn't a cash derivative. I think that it's worthwhile to point out That the arrival of the ETFs have been a catalytic moment because if you believe Bitcoin is only valuable as a medium of Change, that's very easy to say, well, it's slow, it's not a good medium exchange, it's not the dollar. There are lots of tax problems and liabilities where there are lots of KYC Problems there, a lot of pricing problems, accounting problems, and you just dismiss it. But of course, if we look at all the wealth in the world, only a small percentage of the wealth The stored in a checking account as a medium of exchange. Most of the wealth is really store of value or it's useful capital.

Speaker 3

And so as that narrative shifts from digital currency to digital property and from medium of exchange to store of value, Past credit systems are becoming irrelevant. And now if you look at Bitcoin as a digital gold, as gold, it could be 10x It's what it is. And as property, it could be 100x what it is. And we don't need to address any of the traditional Currency criticisms or medium of exchange criticisms. In fact, one could say simply as a Store of value, there's no reason why Bitcoin can't continue to outperform and can't become 100x what it is.

Speaker 3

And these ETPs that have been released are doing a tremendous job of scaling Bitcoin as a store of value Because they're putting it within the grasp, you can buy $100 worth of it in 1,000,000 or tens of 1,000,000 or 100,000,000 of accounts With oneone hundredth of the friction, perhaps 1one thousandth of the friction that traditional investors faced Just a few years ago, when they had to go set up a crypto account on a crypto exchange, and then they had to figure out who their Coin custodian is going to be or whether they're going to do self custody. And there are large classes of investors and institutional investors that either can't or won't Do that. So we're living through a very exciting period. Now we can go to the next slide. The question is what's MicroStrategy going to do in order to support The Bitcoin Network in order to benefit our shareholders from these trends.

Speaker 3

Well, as you can see and as we've said, We view ourselves as a Bitcoin development company. And what does that mean? Well, that means we're going to do everything we can to grow the Bitcoin network. We're going to do everything we can To acquire more Bitcoin and we're going to do everything we can to benefit our shareholders and do this in an accretive fashion. And When we consider our options and our unique strengths, we boil it down to 4.

Speaker 3

1st of all, our company structure. We are unique as an operating company, and that means we have active control over our capital structure. And we can do things operating companies can do that trust companies like, say, Spot, Bitcoin and ETPs they can't do. And that's a wide range of things. One of those things is we can develop software.

Speaker 3

And of course, we'll continue to develop business intelligence software. There's extraordinary opportunities to blend artificial intelligence with our traditional business intelligence customer base to create value. And we will also continue to pursue Bitcoin development opportunities. So develop applications that Trade value from the Bitcoin network either working on the base layer or working with L2 protocols like the Lightning Protocol in order to do this. And We're very enthusiastic about that.

Speaker 3

And as we develop this software, we will release it either to the benefit of the Bitcoin network or we'll release To generate more revenue and work to generate more cash flow so that we can buy more Bitcoin. Another thing that we can do uniquely as an operating company is We can generate cash from operations. There are lots and lots of ways to generate cash from operations, too many for me To enumerate right now, as Andrew has pointed out, we reinvested $726,000,000 in cash to date in the Bitcoin network. We expect to continue to be able to reinvest cash into Bitcoin acquisitions. And when we do this, This is, we believe, very accretive to our shareholders.

Speaker 3

And the last point that I would want to make is We're very fortunate to be able to leverage the capital markets. There really There are no companies that have to the extent that we have been able to leverage the capital markets to acquire Bitcoin. We have acquired Bitcoin with senior secured debt issuance. We've acquired Bitcoin with convertible debt issuance. We've acquired Bitcoin with equity issuance.

Speaker 3

And those are just three ways we've done it in the past. And As we look forward, we're going to consider all possible capital market opportunities. So Perhaps preferred equity would be a route for us to acquire Bitcoin with leverage that's beneficial to our shareholders. Perhaps other types of equity would be or continued equity like we have with our ATMs, perhaps convertible debt, perhaps structured notes, Perhaps secured debt or perhaps unsecured debt. We try to evaluate all options.

Speaker 3

We keep Keep our options open and we ask ourselves the question, is this prudent? And then also, is this accretive? Is this going to be good for our shareholders? And of course, with any discussion of leverage, we don't want too much. We want to just pick just the right amount of leverage, the leverage that allows us to benefit our shareholders without creating undue uncertainty.

Speaker 3

So this is an ongoing, opportunistic exercise of ours quarter by quarter. And of course, every single quarter we expect the Bitcoin market, the capital markets, the debt markets will evolve. And so we pride ourselves on being nimble and being able to take advantage of opportunities as they present themselves, As we did in Q4 with our equity issuance, sometimes it's appropriate to go fast, Sometimes it's appropriate to go slow, sometimes it's appropriate to do nothing and wait for better opportunities to present themselves. The nice thing about our situation right now is that we have all these options and we believe We're structured very, very well to take advantage of opportunities as they present themselves in the Bitcoin era Of institutional adoption that we see over the coming 15 years. It won't be like the 1st 15 years, But we believe it will be a healthy growth period, presenting many, many opportunities for corporations such as ours.

Speaker 3

As more and more institutional investors and retail investors become aware of Bitcoin And as regulatory clarity spreads everywhere in the world. And with that, I guess I'd like to pass the floor to Sherish for

Operator

questions. Thank you, Michael. We're going to jump into the questions. And the first question is for Phong. Phong, if you can elaborate on the company's new positioning as the Bitcoin development company and does this mean Any different allocation of R and D and will you be allocating more R and D into Lightning and Layer 2 applications?

Operator

If you can elaborate a little more on that.

Speaker 1

Thanks, Suresh, and thanks for the question. I think our press release and our prepared remarks and Mike actually did a really nice job of Explaining our positioning as a Bitcoin development company. We thought long and hard about the positioning and the right words to describe Our unique value proposition. I suggest everyone take a quick look or a long look at that. On the R and D Peace, we will invest more in R and D into Bitcoin software development.

Speaker 1

It will not be at the expense of our business intelligence and AI and cloud based software development. Some of the things that we've been doing, you've seen at our Bitcoin and Lightning for Corporations MicroStrategy World event last Here, where we implemented a Lightning Rewards program on the Layer 2 network. We're also looking at some things that will leverage The native Bitcoin blockchain technology, some security applications that we'll reveal at our next MicroStrategy World Conference. So we're excited about Bitcoin overall, but very excited about some of the software development capabilities that we'll be able to Great coming out of it. Great.

Speaker 1

The next question is for Andrew. You

Operator

talked about excess cash and leverage, highlighting the value proposition for MicroStrategy. How do you plan to acquire more Bitcoin in 2024?

Speaker 2

Thanks for the question. I think Michael summed it up really well in the last few minutes of his remarks. I believe we have all options available to us, which includes excess cash, but also All the different forms of capital that we could issue through debt and equity markets. I think as we've Done in the past. Those are the levers that we use to acquire more Bitcoin.

Speaker 2

I think 2024 will offer some opportunities for us to do so. I think as our market value increases with the increasing price of Bitcoin, I think there will be additional opportunities to access the capital markets. And similar to what we've always said, right, we We'll look to assess which is the most accretive. We've issued debt in certain markets. We've issued equity in different types of markets.

Speaker 2

I think we've demonstrated the track record of our ability to think through those complex ideas. And so As Mike alluded to, I think we have all of those options available to us to acquire more Bitcoin in 2023.

Operator

Thank you. The next question is for Phong regarding cloud. So can you please elaborate on the progress of converting software clients to cloud from license? And how is the timing of transition looking overall?

Speaker 1

Yeah. 2023 is a pretty pivotal year for us. 1, our Subscription services revenue has now surpassed our product license revenue. And 2, our subscription services revenue has surpassed our other services revenue. And so that was a pretty big transition.

Speaker 1

It's now the 2nd biggest revenue line item The high end product support, which represents the maintenance that on prem customers pay us. Another data point I'll give you is we are Near exceeding the $100,000,000 of ARR in the cloud, which is a pretty major milestone for any software And a very major milestone for us as we're transitioning from on prem to the cloud. That said, We still have less than 25 percent of our recurring revenue in the cloud. So there's still a pretty major opportunity on prem revenue that we need to move. I think 2024 is going to be an acceleration year In terms of moving existing customers to the cloud and getting more new customers move to cloud, Reasons for that I talked about.

Speaker 1

1 is our partnerships with our hyperscalers, including Microsoft Azure, Amazon, AWS and Google, GCP, another reason is the maturity of our technology offering, container based, microservices based And the fact that we're going to roll out a private cloud offering this year. So, a lot of progress, but more to move to the cloud and I would say 2024 will be probably the most important year for our transition we've seen in the history of the company terms of moving to the cloud and we have the entire organization aligned behind it and we have our customers ready to roll.

Operator

Thank you. The next question is also for Phong. How's the initial reception of the AI product And what do you think this will contribute to product mix or profit margins?

Speaker 1

I think it's like a lot of AI products That are actually in the market. First, I'll remind everyone, we went GA with our AI plus BI product in September. So essentially 4 months ago, end of September, 4 months ago. And we were the 1st in the BI space to have done so. And we have a lot of customers who are starting to kick the tires, playing around with it, getting excited about it.

Speaker 1

And what we're really doing is trying to understand what are the production use cases that are going to drive further growth in AI plus BI. The exciting side effect, if you will, It's because our AI product is built cloud native and therefore only available in the cloud, it's accelerating our cloud migration even further. So while the revenue impact of AI directly may not be extremely significant in 2024, It could be, but we're not positive yet. What will be significant is how it's driving our customers to migrate to the cloud. And back to the previous question, that'll show up in our revenues and our transition to subscription services revenue and our increase in cloud ARR.

Speaker 1

And we're seeing that happen already. We're seeing CIOs, CEOs, COOs saying this gives us a real important reason to want to move MicroStrategy and all of our workloads to the cloud.

Operator

Thanks, Pham. The next question is for Andrew regarding the debt maturity. So how do you plan to address your upcoming 2025 convert maturity? And what are the different ways the company can Prashu?

Speaker 2

Thanks, Harish. I guess, first to note, right, we still have A good amount of time before that maturity arises in December of 2025. We've always managed Our maturities from a timing perspective that gives us ample time to figure out these types of questions. But that being said, You know, I think we are getting closer and we're continually evaluating the market opportunities in regards to 2025s. We could of course, they could equitize the conversion price, that's clearly one option.

Speaker 2

I think other options out there exist and potentially being able to refinance those converts, Which could allow us to even send out maturities further. Of course, all that would be based on market conditions, but the point is, I think we're evaluating everything. And I think it's something that we'll keep Very close consideration in the coming

Operator

months. Thanks, Andrew. And I'll ask one last question for Michael here, given that we are coming to the end of the time. How important is the SEC acceptance of spot Bitcoin ETPs in terms of eventual mainstreaming of Bitcoin as a legitimate form of money?

Speaker 3

Yeah. I think it's tremendously important. I think the approval of the spot ETTPs marked an inflection point In the history of Bitcoin. And it demarcates the era of retail offshore unregulated Crypto adoption versus the error of onshore regulated Institutional Bitcoin adoption by the mainstream investors and investment community. We can already see these, ETPs have been a screaming success as a launch.

Speaker 3

They're sucking all the oxygen Out of the room, getting all the attention in the ETF industry. They've already marched up the leaderboard amongst the top commodity TFs in the world very rapidly. It's pretty clear that Bitcoin is now on a path to eat Gold, to assume gold's monetary value. And of course, it's a fairly easy trade for someone now to sell their gold ETF And buy a Bitcoin ETF. Just takes a matter of 32nd phone call.

Speaker 3

And so the Amount of the frequency with which people are comparing Bitcoin to gold is dramatically increasing. The frequency of Bitcoin in a conversation with a registered financial advisor is going up by orders of magnitude. So this has catalyzed the adoption and the normalization of Bitcoin throughout the traditional finance industry. I think the implication is Bitcoin will become everybody's favorite commodity investment because the other investments like gold, silver, Basic commodities, natural gas, oil, they have not been terribly successful strategies. And Bitcoin has an order of magnitude more enthusiasm behind it.

Speaker 3

So first, Bitcoin takes over commodities, but Then Bitcoin spreads throughout the entire traditional finance industry in the US. And as it's doing that, It's entering with legitimacy into the political conversation, the regulatory conversations in the mainstream media. It's coming on to college campuses and and education institutions, and it's And it's beginning to be talked about much more frequently in technology organizations, startups and big tech companies. So in general, this is just a massive catalytic event for Bitcoin throughout the United States. And That leads to global acceptance and a surge in global interest.

Speaker 3

We're already seeing A lot more talk about Bitcoin outside of the US. And many other countries take their lead from US Regulators, so we already have seen discussions of Bitcoin spot ETFs in Hong Kong. But I think you'll see Any resistance to a similar product in South America, Africa, Europe, Asia is going to decrease dramatically in the aftermath of the SEC approval. There used to be a little A structure of Bitcoin investors, and there were 5 classes. There were the deniers that thought it was tulip bulbs and it was not legitimate.

Speaker 3

And then the skeptics that thought, oh, it's too good to be true. It's going to be banned. And then you've got the traders That they recognize as an asset and they just trade it for the volatility because it's fun to trade. And then you've got the investors to think, well, maybe it's something like the next big tech And then you've got the maximalist, and the maximalist think it's an instrument of economic empowerment. It's a way to spread global freedom and sovereignty, and And it's a way to make the world a better place.

Speaker 3

And, of course, the maximalist we can find on Twitter. But the significance of this SEC approval is that the deniers have been discredited And the skeptics are being silenced. That is to say, if you think it's not a legitimate asset, well, there's no way that the SEC would have approved an ETP on fake counterfeit tulip bulbs or something Random and ridiculous. So the deniers don't really have a lot of credibility anymore. And the skeptics, The ones that said, I get it, but it's too good to be true, and it's, you know, it's too threatening to the establishment, so it'll be banned.

Speaker 3

Well, they typically, they were the ones that thought of it as a medium of exchange and a currency and a competition for the dollar. And now they're beginning to realize that the establishment views this as a store of value, maybe a speculative asset, Maybe they're not going to endorse the asset, but it's an asset. It's not a currency substitute. And as such, no, it's not going to be banned. If BlackRock can sell it to you, if Fidelity can sell it to you, it's not being banned.

Speaker 3

So the deniers are out of the picture. The skeptics are increasingly looking out of touch and the entire investment community has shifted right toward either being a trader, An investor or a maximalist. And this is profoundly positive And auspicious for Bitcoin as an asset class. You put these things together and awareness is spreading and support is spreading everywhere in the world. Now you're probably not going to get fired if you're working at a bank or a financial institution and you say, hey, maybe we should look at this and maybe write a Piece about it or do some research on it or consider whether we can trade it or custody it or build a product on it.

Speaker 3

And that wasn't really something that was easy to consider 2, 3, 4 years ago. In fact, we've even shifted the point where now there's a lot of mainstream and even political lobbying To say revoke, you know, staff accounting bulletin 121, that makes it difficult for banks to custody Bitcoin. So there's a lot of political pressure To normalize the asset, to embrace the asset, to allow companies to do business with this asset. And so I think that this ETP launch really was The beginning of the next stage of growth of the entire Bitcoin network. And It was really the catalytic event necessary for institutions everywhere in the world to begin to invest material amounts Of capital or material amounts of time or energy or to risk their brands and their reputations to do business With and support Bitcoin.

Speaker 3

And so we're only like three and a half weeks into it. And so it's hard To see all of the positive developments that are being catalyzed by this, But I do believe we will see them manifest themselves over time. And quarter by quarter and year by year, we're going See many, many positive developments that bring Bitcoin to many, many more investors and many more organizations, many more companies, many more Countries and increasingly bring utility to the world.

Operator

Great. Thank you so much, Michael. We received so many great questions that we couldn't answer, but we would like to thank you everyone for attending and asking the questions. We will try to cover these in our future remarks, but this concludes the Q and A portion of the webinar. I will now turn the call over to Phong for closing remarks.

Speaker 1

I want to thank everyone for being with us today, for your continued support of MicroStrategy. Before we wrap up, I'm pleased to share that our next in person MicroStrategy World Conference will be held from April 29th to May 2nd in Las Vegas, Nevada, there will be a business intelligence track and a Bitcoin for corporations track. And you can expect that we'll further expand on a lot of the discussion we had today at that MicroStrategy World event and it's It's a great way for you to interact with us live and in person. Registrations are open and additional details can be Found on our event website page, microstrategy.com/world24. We're excited and looking forward to seeing customers, prospects and shareholders at this one of a kind event.

Speaker 1

We're as enthusiastic as ever with both our enterprise software strategy As well as our Bitcoin strategy. We wish you a good quarter and look forward to seeing you again, if not at MicroStrategy World and again in 12 weeks. Thank you

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Earnings Conference Call
Strategy Q4 2023
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