MicroStrategy Incorporated (NASDAQ:MSTR) Q3 2023 Earnings Call Transcript

MicroStrategy Incorporated (NASDAQ:MSTR) Q3 2023 Earnings Call Transcript November 1, 2023

MicroStrategy Incorporated misses on earnings expectations. Reported EPS is $-10.08656 EPS, expectations were $0.74.

Shirish Jajodia: Hello, everyone, and good evening. I’m Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. I’ll be your moderator for MicroStrategy’s 2023 Third Quarter Earnings Webinar. Before we proceed, I will read the Safe Harbor statement. Some of the information we provide during today’s call regarding our future expectations, plans and prospects may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements due to various important factors, including the risk factors discussed in our most recent 10-Q filed with the SEC. We assume no obligation to update these forward-looking statements, which speak only as of today. Also, during today’s call, we will refer to certain non-GAAP financial measures.

A computer programmer typing code in front of a 3D printed object, emphasizing new ways of product development.

Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at microstrategy.com. I would like to welcome you all to today’s webinar and let you know that we will be taking questions using the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar, and Michael, Phong or Andrew will answer questions at the end of the session. Please be sure to provide your name and your company’s name when submitting your questions. Now, I will walk you through the agenda for today’s call. First, Phong Le will cover the business results for the third quarter of 2023. Second, Andrew Kang will cover the financial results for the third quarter of 2023.

Then, Michael Saylor will provide a strategic review and discuss the recent bitcoin market updates. And lastly, we will open up to Q&A. With that, I’ll turn the call over to Phong Le, President and CEO of MicroStrategy. Phong?

Phong Le: Thank you, Shirish. Hello, everyone. I’d like to welcome all of you to today’s earnings webinar. I’ll start with the highlights of our software business. Total revenue was $129.5 million, representing an increase of 3% year-over-year, total software licenses revenues which consists of total product licenses and subscription services revenues. And our consolidated statement of operations were $45 million, representing an increase of 16% year-over-year. Total software licenses revenues performance benefited for both increased adoption of our cloud platform and growth in product license revenues. Total subscription services revenue was $21 million and increase at 28% year-over-year. Our Q3 subscription billings growth was 17% year-over-year.

We achieve good revenue results in Q3 with year-over-year growth driven by our cloud business and a strong international license revenue quarter. 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 excited about the work we’re doing in these areas and to share some updates with you and our progress. We’re at a major period of innovation in the technology industry. We believe the next innovation is to change how the world does business or digital money, with the continuing development of the Bitcoin ecosystem in digital intelligence through AI.

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Q&A Session

The technological leaps that occurred in the past year in generative AI are real, and we expect to be at the forefront of integrating AI with BI. MicroStrategy is well positioned to gain competitive leverage in winning 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 D&A 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 BI tools, introducing the semantic layer, rolling out web BI, or making the shift to mobile and then cloud, 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 diving into the integration of Gen AI and 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 mega software companies are investing billions amassing GPUs in legions of data scientists, to build the best large language models or LLM in the world. Much like we have done with cloud hyperscalers, we plan to openly partner with and leverage the technology investments in these companies. Rather than invest heavily to build our own models. Hundreds of smaller AI companies are taking a similar approach to us.

But we’re already differentiating as we have done for decades in BI across four major areas. Our 30 years of – number one, our 30 years of enterprise software services and sales capabilities. Number two, our trusted, secure scalable reusable data layer, what we call our semantic layer. Number three, the ability to quickly build and deploy actual applications utilizing this data through technologies like mobile, embedding and microservices. And number four, an open multi-cloud architecture, which in this case, we will use to easily integrate multiple different LLS. We believe this uniquely positions us to win at the intersection of artificial intelligence, and business intelligence. 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, use trusted calculations from secured sources of structured data to make informed decisions. But on the other hand, BI can be rigid and difficult to engage with all levels to personas and business users. AI is smart, leveraging natural language generation reasoning and unstructured data to answer freeform questions and ideas. However, results can be untrustworthy in producing determinate answers that, are reliable and consistent enough to make informed business decisions. This is where MicroStrategy one delivers value bridging and 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. We expect to see increased customer demand as our platform tackles the primary hurdles customers face with AI adoption. The main customer concerns of enterprise AI or one, data access and security. Two, integration of large language models, natural language processing, and prompt engineering solutions. And three, the ability of distributed AI solutions of scale. Typical AI and BI combinations did 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 hallucination. MicroStrategy ONE 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 engineers collaborate 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 first set of MicroStrategy AI features to the market, which leverages our advanced BI system, fully embedding Microsoft Azure open AI.

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 One. We’ve implemented four features to address, the needs of different business users. One, Auto SQL streamlines the database interaction process. This feature is intended to enhance the technical user experience on MicroStrategy. Our AI application can translate natural language into SQL queries, explain the SQL statements and natural language and review SQL code with suggested optimizations. Two, Auto Dashboard provides automatic dashboard creation, transforming complex data into interactive and beautiful visual insights. MicroStrategy AI processes, the data and can produce it beautiful and viable dashboard.

Auto Expert is the automated support tool. It’s like having a MicroStrategy employee guide you through the BI platform to answer user base questions such as how do I build an advanced metric? Auto Expert is available for free to all registered users on our website. And Auto Answer is my personal favorite transform self-service analytics, the user engages in natural language conversation, asking the AI system questions related to their data. For example, what is the forecast of revenue for Q1, 2025? What are the drivers of revenue growth? MicroStrategy AI processes the request, we contextualize data to provide rapidly – to rapidly provide answers with a deep level of understanding fastly increasing the data exploration capabilities of a basic user.

MicroStrategy AI is the first to market with a fully integrated AI/BI platform and delivers BI features that enable enterprise grade AI deployment. With short as the 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 its offering is also our first entry into consumption-based pricing. Customers will consume the AI product question-by-question. 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, or set up a new environment in the cloud to adopt MicroStrategy AI. Our vision for intelligence everywhere continues to inform our roadmap. We believe that AI/BI best empowers customers when it is modular and can be embedded into existing workflows. We also believe that the data that feeds AI/BI the platforms in which it runs and the LLM and machine learning models used – must be flexible and open to fit our customers’ needs. Therefore, our roadmap includes the ability to build analytic bots on the platform, as the customers’ choice, AWS, Azure, Google Cloud, or private cloud and leverage a variety of LLM are the customers’ choice. To build your own bot tool and the MicroStrategy platform harnesses 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 untrusted data.