MicroStrategy Incorporated (NASDAQ:MSTR) Q4 2023 Earnings Call Transcript

MicroStrategy Incorporated (NASDAQ:MSTR) Q4 2023 Earnings Call Transcript February 6, 2024

MicroStrategy Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 Fourth 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.

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 and the key pillars of our business strategy. Second, Andrew Kang will cover the financial results for the fourth quarter and full year of 2023.

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

Phong Le: Thank you, Shirish. 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 $8.1 billion as of yesterday. In 2023, we acquired 56,650 bitcoins for a total purchase cost of $1.9 billion, an average price of $33,580. In 2024 so far, we’ve acquired an additional 850 bitcoins for a total purchase cost of $37 million. 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 this 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. We have over 1,900 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 of being a public company as we released MicroStrategy ONE, 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 $81.2 million, an increase of 34% year-over-year.

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Q&A Session

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’ve ever experienced, and our subscription billings remain strong. Overall, we continue to see further global adoption of our cloud platform as a result of transitioning our business strategy and product offerings from an on-prem perpetual license 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’ve 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 on selling to new customers in the cloud. We’ve revised our sales compensation plans to prioritize new business and cloud transactions. 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 and 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?

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 first 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. As an operating business, we’re able to use cash flows as well as proceeds from equity and debt financing 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 bitcoin through the use of excess cash or proceeds from equity capital raises or corporate debt capital raises and to pursue software innovations that leverage the bitcoin blockchain. 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 wane and grow in AI plus BI, while accelerating our transition to a cloud-centric operating model. 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. As of today, MicroStrategy can be deployed and fully hosted on Azure, AWS, and GCP.

Additionally, we’ll 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. 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 of 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. 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. 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. When considering the services currently offered in the bot market, we noticed customer demand for a bot builder that addresses [GenAI] (ph) resource constraints, improves 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, and system auditability, we enable customers to easily deploy chatbots for broad use on trusted data. The third 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, collapse in 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 million to $90 million. 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. 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. One, cash flow from software operations. Since August 2020, we’ve invested $726 million of total cash on our balance sheet in bitcoin. Two, equity issuances.

We have issued $3.1 billion in equity in a manner that we believe to be accretive to existing shareholders to acquire bitcoin. And three, debt financing. We’ve obtained $2.2 billion 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 first bitcoin development company have enabled us to generate tremendous value for our shareholders. I’ll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Andrew Kang: Thank you, Phong. And thank you all for joining. I’ll first start with our software financial results. Total revenues for the fourth quarter were $124.5 million, down 6% year-over-year. For the full year, total revenues were $496.3 million, down slightly 1% year-over-year. Our fourth quarter 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. Product license revenues were $18.4 million, which was down 33% year-over-year in Q4, and $75.4 million, 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.