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Edited Transcript of MSTR earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 MicroStrategy Inc Earnings Call

VIENNA Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of MicroStrategy Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael J. Saylor

MicroStrategy Incorporated - Chairman of the Board, CEO and President

* Phong Q. Le

MicroStrategy Incorporated - CFO and Senior EVP

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Conference Call Participants

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* Abhey Lamba

Mizuho Securities USA Inc., Research Division - Analyst

* Gregory Ryan McDowell

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Karl Emil Keirstead

Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst

* Tyler Maverick Radke

Citigroup Inc, Research Division - Senior Research Associate

* Yun Suk Kim

The Benchmark Company, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the MicroStrategy First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Michael Saylor, Chairman, President and CEO. Sir, you may begin.

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [2]

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Thank you. Hello, this is Michael Saylor. I'm the Chairman, President and CEO of MicroStrategy. I'd like to welcome all of you to today's conference call regarding our 2017 first quarter financial results. I'm here with our CFO, Phong Le. First, I'd like to pass the floor to Phong, who is going to read the safe harbor statement and make some comments on our results for the first quarter.

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [3]

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Thank you, Michael, and good evening, everyone. Various remarks that we may make about our future expectations, plans and prospects may constitute forward-looking statements for purposes of the safe harbor provision on the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent quarterly report on Form 10-Q filed with the SEC. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may cause the company's views to change. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. Also during the course of today's call, we'll refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today, which is located on our website at www.microstrategy.com.

Now on to our financial results for Q1. Overall, our Q1 financial results were generally in line with our expectations. We saw year-over-year growth in total revenue in depth, our product support business continues to grow, while we started to see a turnaround in our services business. Product license revenue declined year-over-year but we're within our range of expectations given the seasonal volatility in Q1. Cost remains stable with continued investments in sales and marketing as well as research and development. Last week, we hosted our 20th Annual MicroStrategy World Conference in Washington, D.C. We've had nearly 2,900 attendees, a greater than 35% jump from last year. The energy from our customers, partners and employees was excellent and sentiment about the future of our MicroStrategy was the strongest we've seen in years.

Let's start with more detail on revenues. Total revenue for Q1 2017 was $121 million, a $1.6 million or 1% increase year-over-year. We experienced foreign currency headwinds in Q1 2017, which negatively impacted our revenues by $1.1 million or 1%. Product license revenue was $21 million in Q1 2017, a $1.4 million or 6% decrease year-over-year. Our Q1 2017 product license deferral rate was lower than the same period a year ago, while runoffs were higher than the same period a year ago. Our North American business represented 57% of our total product license revenue compared to 56% from the same period in 2016.

Our subscription services revenue, primarily driven by our Cloud customers, with $8 million into Q1 2017, a 6% increase over Q1 2016. We continue to see enthusiasm for our Cloud offering as we evolve our product to enable customers to quickly deploy the self-serve with MicroStrategy on AWS. Our support revenue was $70 million in Q1 2017, a 3% increase year-over-year, with foreign currency exchange negatively impacting such revenue by $0.7 million or 1%. We continue to be pleased with the results of our support business, driven by improving product license bookings, maintenance renewal rates and customer satisfaction. Our services revenue is $21 million in Q1 2017, a 3% increase year-over-year. This represents the first year-over-year increase in services revenue since 2014, and was a result of improvements in utilization average build rate in our consulting business. We saw evidence in Q1 2017 that our shift in expert services consulting model is beginning to take hold as it provides customers value-added analytics-focused solutions.

Turning to cost. We continue to closely manage our cost structure while strategically investing in our business. Q1 cost of revenue is worth $23 million, a 1% increase year-over-year. The most notable increase was in our product support organization, where we increased costs $1 million or 32% year-over-year as we focus on improving our customers’ success organization.

Q1 operating expense is at $78 million, a 2% increase year-over-year. Sales and marketing expenses increased 8% year-over-year, with a 17% increase in headcount. Research and development expenses increased 5% year-over-year, with a 5% increase in headcount. General and administrative expenses decreased 9% year-over-year, with a 3% decrease in headcount.

Our primary focus continues to be on improving the quality and output of our sales and marketing team, while investing in developing a top-quality business intelligent solution and improving the efficiency of our general and administrative team. We had income from operations of $19 million in Q1 2017 and an operating margin of 16%. This represents a $0.4 million, a 2% decrease in operating income for the same period a year ago.

Our net income was $15 million in Q1 2017, an increase of 4% from the same period a year ago. Diluted earnings per share was $1.28 in Q1 2017, up from $1.24 in the same period a year ago. We had cash, cash equivalents and short-term investments of $618 million at the end of Q1 2017 and continue to have no debt. Net cash provided by operating activities for the 3 months ended March 31, 2017, was $27 million.

Finally, as it relates to our people, our recruiting, employee performance and employee development activities continue to increase. We ended Q1 2017 with 2,162 people. We continue to add top-quality talent across our organization and continue to experience low voluntary turnover rate. Our employee engagement and communications are improving as we focus on our key corporate values: engaged, precise, agile, transparent, cheerful.

For the rest of 2017, we believe we'll be able to continue to grow revenue. In the third year of our turnaround, we're starting to see the benefits of our investment in people, process and product, however, there is much more work to do as we continue to improve our sales and marketing activities, our relationships with our customers and our products.

Now I'd like to turn it back to Michael Saylor.

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [4]

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Thanks, Phong. I guess I'd like to make a few high-level comments. First of all, I thought we started off the year with a solid quarter. I mean, our revenues are up. Our EPS is up. We thought our cash flow is solid. The support in the services business performed well. We've got some really nice software wins, with some very promising enterprises. We have focused our marketing message and focused our enterprise message on the MicroStrategy enterprise Analytics and Mobility platform, and that is resonating extraordinarily well with customers and partners. In my recent symposium series, I took that message to the road to thousands of our customers and our partners, and we've communicated and showed great examples of how they can deploy enterprise Analytics, Mobility, Custom Apps, Cloud apps and IoT apps on top of the MicroStrategy platform. I've also met with many, many customers and got enough feedback from them to ascertain that we've hit a resonating sweet spot in the market. Lots of our customers want to deploy new analytics apps, lots of our customers want to deploy mobility apps, lots of our customers are very enthusiastic about our embedded analytics capability. Our cloud offering has been revitalizing, given a shot in the arm, with the MicroStrategy for AWS platform that we're bringing to market. And there's a lot of enthusiasm for deploying applications to the enterprise out of the AWS cloud, especially with the continued success of Amazon and the AWS offering.

I'm also pleased to say that we've integrated our Usher digital identity offering right into our platform, and it's resonating very well as an IoT solution. And we see lots of customers everywhere in the world that have enthusiasm for deploying IoT apps that have real-time telemetry and digital identity associated with them. So that has given us some -- a lot of energy and a lot of focus, and it's helping to guide our sales and marketing efforts.

I just came off of a very successful symposium series, where I spent a week in Europe and Madrid, Paris, Brussels, London, and Stockholm. And we saw a pretty uniform interest in all of these things in all of those places. We also did a 1-week tour of the Middle East, then I was in Dubai, Abu Dhabi, Bangalore, Doha, and Riyadh, and I have to say that in the entire history of the company, I felt it like it was the most successful set of marketing events that we've ever put on. We had hundreds of very enthusiastic customers and prospects in Riyadh. We had hundreds in these other cities. It was very, very exciting to see such an interest there as well as the groundswell of support that we've got in India, at Bangalore, from our partner community.

I followed up those 2 weeks with a third week at MicroStrategy World here. And MicroStrategy World 2017, I believe, was one of our strongest, if not our strongest MicroStrategy World event in the last 20 years. We had great partner turnout. We had great customer turnout. We had the richest content program that we've been able to put on in a MicroStrategy World, with more than 200 sessions. And it was very enthusiastically received, and we've heard very, very good feedback from our partners and our customers, both about the event, but more importantly, about the MicroStrategy product, direction and the platform capabilities. And the thing -- the innovative things we're doing with our APIs and embedded analytics and with the cloud and AWS and with IoT and Usher, those things are generating, I think, a huge amount of goodwill and excitement in our customer base and our prospect base.

We've had a program to spread the MicroStrategy gospel via a free desktop offering that we've put in place late last year. We've now crossed the 200,000-download threshold, and we're very excited about that milestone. So we are actually spreading our technology far and wide and the program is working out well. We're going to continue it. We think it's going to be very helpful in building our brand. We also rolled out a new upgraded version of the MicroStrategy community at MicroStrategy World, and that community is much richer, much more powerful than the previous version, and I think it's going to be very helpful for us to empower all of these new MicroStrategy practitioners.

If I look at the competitive environment, we just saw the example of Burst getting bought. I think Burst's bubble has burst. It appears to me to be a fighter sale. They were bought for $100 million, and it raised $130 million of capital or more. So that's -- that's really a busted transaction from most people's point of view. And what it indicates is the Burst product never really worked and the company didn't really work. And they throw in the towel. That's great for us. And it's just the latest in a long string of stumbles by some of the new upstarts in the BI and analytics space, like Click and Tableau. I think following Click's purchase, their credibility has been undermined in the marketplace, and there's a lot of question about the long-term plan for that company. I think with Tableau, with the new CEO, and that stumble and the rumors about their acquisition interest that was spread last year in the marketplace, it's undermined their effectiveness in the market. And so we're pleased to see that.

I think on the other side, with regard to incumbents, so they're part of the conglomerates like Oracle, Cognos, BusinessObjects, they appear to have lost momentum in 2017. And my discussions with customers, and even more importantly, with all of the partners that I met at MicroStrategy World, I heard a refrain pretty often, which is lots of people are looking to migrate off of Cognos to MicroStrategy, lots of people are looking to migrate off of BusinessObjects.

Cognos has thrown a lot of their -- sorry, IBM has thrown a lot of their weight behind Lawson Analytics, and that's to the detriment of the Cognos product line. Oracle has thrown a lot of their weight behind Oracle cloud applications and OBIEE is being lost in the shuffle. SAP has shifted a lot of their focus to HANA, and to the detriment of the BusinessObjects product line. So these companies, they're suffering from lack of support from their parent companies, but also from weak positions in the marketplace because the market is a very enthusiastic about AWS, and of course, it's really impossible for the BI business unit of Oracle or IBM to embrace AWS wholeheartedly. And so they're struggling because they're out of position. The market's also very enthusiastic about big data technologies like Hadoop. And it's very problematic for companies like Oracle and, even to a certain extent, IBM, to embrace these big data technologies because they're indirectly or directly competitive with their cash counts. And of course, the market is pretty enthusiastic about building analytic applications on top of Salesforce.com. And on top of Oracle, it is very difficult and problematic for SAP's BI unit to embrace Oracle and Salesforce.com in those solutions.

So the incumbents that are part of the conglomerates struggle with getting the attention of the CEO and the funding, and also with the ability to pursue these new dimensions of enterprise analytics mobility, which the marketplace is enthusiastic about, and which you would ignore at your own peril. So our plan, looking forward, is to continue to improve our corporate systems and our programs, to continue to improve our product with consistent quarterly product releases, to continue to improve our services with more and refined expert services to help our customers get the most out of the MicroStrategy platform and to partner with our partners for system integration and cloud hosting services where appropriate, and then finally, to continue to improve our sales and marketing, upgrading on tools, our techniques and our programs. So as we look at the market, going forward, I think the upstarts will continue to fail. The incumbents, BI tools that are part of the conglomerates, they're going to continue to rust. And we will continue to innovate. And I want to thank everybody for your support. And with that, I'm happy to answer any questions that we might have from the analysts on the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Greg McDowell with JMP Securities.

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Gregory Ryan McDowell, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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Michael, first question for you. Certainly, this discussion for the last couple of minutes on the competitive environment, it feels you're getting a little more aggressive in how you're talking about the competitive dynamics. And I do appreciate you being blunt with your opinions, whether some of us agree with you or not. I do appreciate the sort of frankness with which you echo your opinion. But I guess, a few questions there. Burst, we try to take a cloud approach to the analytics market. So I guess, number one, what are some of the lessons we can pull away from that story with respect to the cloud? And how analytics is going to sort of move to the cloud environment? And then I have 1 or 2 follow-ups.

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [3]

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I think the most important point here is that cloud -- supporting the cloud and having a liquid elastic on-demand capability is important to growing in the marketplace, but cloud itself is just a buzzword. So you have to deliver the full range of platform functionality onto the cloud and an industrial-strength enterprise instance of the cloud. I think Burst failed as a business because it was delivering a subset of the functionality enterprise needed in a limited cloud offering that wasn't flexible enough. And what you find when you deal with the enterprises is that they don't want to sacrifice anything in particular. They want all the functionality they could have on premise, they want all the control and they want to be able to do it out of the cloud. So if you end up taking shortcuts in order to implement something in the cloud, you give people a one-size-fits-all, you're going to fail. And even if Burst had, had the perfect cloud implementation, and theirs was defective in many ways, if they had the perfect cloud implementation, they still didn't have the full range of enterprise analytics and mobility capabilities that you need in order to deploy compelling applications in the enterprise. And so it doesn't help you to have the defective application that runs perfectly in the cloud, you have to have a great application that runs in a cost-effective, secure, elastic enterprise instance out of the cloud. And I think a lot of people learn that, sometimes the hard way.

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Gregory Ryan McDowell, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Yes, and we did enjoy learning about the cloud last week at your conference, and thank you for having us, and we did note the increased attendance there. Phong or Michael, maybe a couple model-related questions, one around services growth. Great to see a return to growth on the services line. I was just wondering how sustainable that return to growth is going to be in your opinion based on sort of continued high utilization rates? And part B of sort of the model question is, just building out our product bookings proxy and recognizing that you had a really tough compare from a year ago, but maybe you can walk us through some of the dynamics for why deferred product license was down sequentially, and why deferred product subscription went down, and how we should maybe think about that product bookings proxy for the rest of the year. Then I'll get back in the queue.

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [5]

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On the first question around services, if you go all the way back to 2014, we really, at that point in time, started, after post restructuring to change our strategy with services, which was to go towards a higher bill rate expert services strategy. And as a result, we started to strip away a lot of our low bill rate, low value-add work. And that really took all of 18 to 24 months to accomplish. And as a result, revenue started to decline over that 2-year period. I think we have seen it start to bottom out, really starting in the second half of last year, and are hoping that it'll start to accelerate now into increased bill rates, increased margins. And so I think, Q1, we hope to be an indication of things to come. But we're still going through a lot of changes in that organization. And so we'll sort of see how it flows through the rest of the year. On your question on the deferred product license and deferred subscription services revenue, we did see a decrease in the deferred product license. 2 things really result in that: One is, we had what we called revenue runoff from deals that occurred in Q4, and that really is a result of the nature of certain deals we do. In certain quarters, we see that number go up, in certain quarters, we see that number go down. Fortunately, we're able to run off some revenue. And unlike -- if you take us back to Q1 of last year, we had a couple of OEM deal that occurred, which are very large bookings deals, but we were unable to recognize revenue, and those add up in the overall deferred product license revenue line. Some of those started to runoff, too, and so those show up in revenue. And we had fewer of those deals this quarter, Q1, specifically. So overall, a lot of those things are playing in our favor, but I wouldn't necessarily say that, that creates a trend. It really just depends on the nature of what deals occur in any particular quarter.

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Operator [6]

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Our next question comes from Karl Keirstead with Deutsche Bank.

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Karl Emil Keirstead, Deutsche Bank AG, Research Division - Director and Senior Equity Research Analyst [7]

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I got one for Michael and one for Phong. Michael, on the cloud front, I think most people on the line would agree that enterprise interest in AWS and all things cloud-related seems to be up into the right. A number of your incumbent rivals, Teradata and Tableau, are all making bigger pushes to the cloud and subscription models. But in terms of your cloud or subscription revenue line, it's been in the $7.5 million to $8 million per quarter range for a little while. And I'm wondering what it'll take to break out of that. And if we're close to the point where you want to press your customers a little bit more towards that subscription model. So that was the question for you, Michael. And then, Phong, I just wanted to take your temperature on the prior loose target of sort of mid-20s operating margin for 2017. First half, you're running a little bit closer to 20%. Do you feel good about that full year goal?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [8]

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Yes. So regarding the cloud question, MicroStrategy for AWS is what we think is a fairly exciting offering because it represents the MicroStrategy platform deployable and AWS as a cloud offering by our partners and by our customers. The cloud business that we have had in the last few years represents business where we actually provided the support agreement and the hosting and managed it for the customers, and that, inherently, is not nearly as scalable as the cloud business if we have dozens of partners or dozens or hundreds of customers that are able to operate their own instances out of the cloud. So we feel that looking forward, in the coming year, we'll be able to grow that business more effectively by putting our technology in the hands of more customers and more partners, and getting out of the way. And so we're not on the critical path of the hosting agreement or critical path of the support agreement or so. So that is our strategy for growing the cloud business. Phong?

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [9]

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Yes, Karl, on the question around our operating margins, I think you're referring to non-GAAP numbers. I think, last year, we did about 23% non-GAAP operating margins. First quarter, we're at 19%. As you know, first quarter is historically our lowest revenue quarter and also, therefore, our lowest operating margin quarter. And that would be our expectation with this year, too, is that the first quarter is typically a low watermark. All that said, I think looking at mid-20s would be a reasonable estimate. However, one thing that, also I mentioned, we talked about is, we are starting to invest more in certain areas of the business, marketing being one of them. And so depending on the underperformance of what we see, as far as our return on investment with marketing, we may increase that level even more as we go throughout the year.

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Operator [10]

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Our next question comes from Abhey Lamba with Mizuho Securities.

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Abhey Lamba, Mizuho Securities USA Inc., Research Division - Analyst [11]

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Michael, you talked about the competitive landscape, and it seems like there's a lack of focus by others. And we understand your comments about the significant opportunities that's out there, but your license revenue growth is not materializing. Can we talk about what needs to happen for you to capitalize on that opportunity? And related to that, what needs to happen for you to kind of get more new customers to adopt the platform?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [12]

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When a business performance is pretty solid and consistent, over time, but obviously, license revenue is volatile from quarter-to-quarter. And we think that over the course of a year or 2, it smooths itself out. Our primary focus to grow the license revenue is twofold. One is, we're focused on our sales and marketing programs, improving the tools, the techniques and the programs we're executing. That means a number of additional improvements to our field marketing and we're beginning to drive our advertising and our branding much harder with online digital campaigns. We're driving a number of innovative programs with regard to technology, like the Jump Start and the free Desktop, which seem to be promising. And of course, I think there are a number of partner programs that are pretty promising. I'm pretty enthusiastic about our current conversations with partners to grow the business, especially where we have overlapping interests in cloud or IoT or in embedded analytics. So continued focus on sales and marketing, I think, is a big part of this. I think the other part of this is just continual improvement to the product, which comes in a pretty consistent fashion, quarter-by-quarter. And as the product gets better and just gets more productive, I think that makes it easier for us to grow the license number. So we'll just continue to focus on that and innovate. I think our customers understand that we're here for the long term and we're going to continue to keep improving the offering we put in the market. And I think that our focus upon these programs is very comforting to our partners as well, and we're seeing increased interest and increased support in the partner channel for MicroStrategy as some of these other incumbents lose momentum. And so I think the combination of partners defecting from or losing focus upon our competitors and then us redoubling our efforts to improve our own sales and marketing programs will result in growth and benefits over time.

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Abhey Lamba, Mizuho Securities USA Inc., Research Division - Analyst [13]

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That's helpful, Michael. And your balance sheet continues to become stronger. Can you give us an update on your plans for the cash? And also, Phong, can you talk about are we still looking to see revenue growth this year for the full year? That's it from me.

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [14]

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Yes, we're pleased with our cash flow and we're pleased to see the balance sheet continue to strengthen, and I think that is a's great source of comfort to everybody involved in the corporation. We continue to consider best uses of the cash and there are a number of different factors we take into account, including the macro environment and the currency environment and the tax environment. And that, combined with the investor sentiment and certain opportunities that we have, are taking into account on a pretty routine quarter-by-quarter basis. So we don't have any particular announcements to make at this point. But we're comforted by the fact that we have a really strong balance sheet, and we're always thinking about the best way to take advantage of that asset for the benefit of the business.

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [15]

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As far as revenue growth goes by, we're pretty, overall, satisfied with Q1, which saw a modest revenue increase, 1% on a year-over-year basis, 2% on a constant-currency basis. And our objective is still to grow revenue this year.

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Operator [16]

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(Operator Instructions) Our next question comes from Walter Pritchard with Citi.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Research Associate [17]

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This is Tyler Radke on for Walter. I noticed on the 10-Q disclosure that the large deals were down pretty substantially year-over-year, but the smaller portion of the deals under $500,000 was actually up. I guess, 2 questions. One, can you just talk about some of the weakness you saw on the large deal segment? And then on the smaller deals that did grow, is there any kind of take away that we can have from this, suggesting that maybe you're getting more of the net new customers’ kind of more of the land-and-expand type deal?

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [18]

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Tyler, thanks for the question. I wouldn't read into the deal sizes too much, especially in Q1, going from somewhere like 4 to 1 large deal. It really just -- it's a such a small number there, and the likelihood that we close 2 or 3 extra-large deals in a quarter really swings sort of, do we go up or down our large deals. And Q1 is a as I've mentioned, sort of our historically lowest quarter, and therefore, the number of deals and their effect on the overall income statement and revenue is just further magnified and amplified. So I wouldn't read into that too much. Similarly, I wouldn't read too much into the small deal volume. It's just a lot of volatility that occurs in Q1, and so we don't over interpret those numbers.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Research Associate [19]

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Great. And then, as a follow-up, you mentioned, Michael, a lot of positive things about AWS and the cloud business, but it sounds like there's some moving parts from that business. You have some hosting business that's more legacy, combined with some of these newer opportunities on AWS. Is there any way to help us think about this business better? Any way to kind of quantify the mix of what's in that cloud segment? And then maybe, when will we get to a point where that mix shifts to the higher-growth AWS segment? And then, just a separate question on the cloud. Are your current customers that are adopting AWS, are these net new, or are they people shifting kind of an on-prem MicroStrategy installment to the cloud?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [20]

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We have a cloud business consist of us providing cloud applications and hosting a support service. And some of it, we still operate out of our data centers, although more of it, I believe, we operate on the AWS environment now. That's a stable business. I really think the MicroStrategy for AWS offering, which is the 2017 upgrade to our platform, is really all upside. And so the best way to think about this business is MicroStrategy for AWS is all upside, and we believe we have the best enterprise analytics platform on AWS in the world, bar none. We think our platform is far better than the competitions, not just because the platform is better, but we think our cloud implementation is better. It's a flexible, elastic, single-tenant, secure, API-enabled platform. And our customers like that, and I think that, that opens up the opportunity for us to acquire large chunks of business that otherwise wouldn't have been closed off to us. So as we look forward, I think, the way to look forward is to say, here's a company with an enterprise analytics and mobility platform that's bringing to market the ability to deploy it directly to AWS in an extremely liquid productive fashion. That is a competitive advantage versus other companies that have some AWS capability, and it's a mega strategic advantage over companies that don't have any AWS capability who're going to suffer dramatically. So we view it as being a competitive edge, a productivity edge, and it's also a new value proposition for us, for our partners and our customers. And if I look out, in terms of revenue opportunities for us. One revenue opportunity is people that are really committed to deploying analytics out of AWS now, and they see our products as such a good fit for them, and that's new business for us. A second revenue opportunity is our existing customers that would like to be able to migrate to the AWS cloud and are struggling with it, and now, this is a straightforward solution for them. And the third opportunity is partners that would like to integrate in to providing the hosted support agreement out of the cloud. And for them, they see -- take MicroStrategy, and instead of actually selling system integration or application development, they can sell Software-as-a-Service and a fully hosted solution to their customers. And so that's a great value enhancement for them, and we're providing them with a set of tooling that's a dramatic improvement in productivity for them. So we see this as a great chance to expand our partner ecosystem to add value to our existing customer base and also to obtain new customers, while simultaneously, we're differentiating ourselves more against our incumbent competitors. And punctuating the fact that their architecture is really rusting, over time. The inability to fully embrace AWS is a crippling deficiency at Oracle. And the inability to embrace AWS in a full fashion is crippling deficiency at IBM, and there's no way for them to get out from under that. For those who are embracing AWS, while there is -- it's kind of like, do you I have a cheap -- a shallow port, or do I have a rich native implementation on a given platform? And we believe we've got the richest, most native implementation of enterprise analytics for AWS in the marketplace. And as customers start to evaluate that, I think, they will tend to agree with us.

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Tyler Maverick Radke, Citigroup Inc, Research Division - Senior Research Associate [21]

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And just quickly following up on that. The 3 opportunities -- revenue opportunities you mentioned, do you have a view as to which of them is biggest any way you can kind of rank order them?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [22]

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My intuition tells me that feeding the partner ecosystem with a set of cloud enablement tools that allows them to spin-up thousands of instances in the cloud and then sell their complete data center-hosted offering, plus the analytics application platform integration services and application development services is just the real benefit to them, and they're going to be great allies to us because we're solving a problem for them and getting them into a revenue proposition that they didn't have previously. And so they, of course, have many, many relationships everywhere in the world. So I feel like a we are going to get great benefits in our partnering in our channel business because we're bringing this AWS offering to the marketplace.

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Operator [23]

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Our next question comes from Yun Kim with Benchmark.

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Yun Suk Kim, The Benchmark Company, LLC, Research Division - Analyst [24]

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Michael, just questions on AWS again. So can you update us so far on own what products are today available on AWS and what are your plans for the product release going forward? And then, is there a specific plan to introduce just products that's only going on AWS? And do you plan to offer only-subscription term for the AWS and what not?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [25]

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Yes, good question. In 2016, MicroStrategy had the MicroStrategy 10 platform for Windows and MicroStrategy 10 for Linux. And we could give those to a customer and a partner, and they could actually deploy the platform in their own data center on one of those 2 platforms, with the full entirety of features. If you wanted to deploy MicroStrategy on AWS, we didn't sell it as a product, we sold it as a hosted service and support agreement, and we would actually create the instance for you. And then, we would run and administer it for you. And so that was a professional service and a hosted service we offered. In 2017, we expanded our offering by offering MicroStrategy 10 for Windows, for Linux, and then we added MicroStrategy 10 for AWS, so it's a third part of our product offering. And what that means is now we provide all of the tooling for any partner or customer to install our software in the dedicated instance of AWS that they control, where they will be built for it, they will administer it. And we took ourselves out of the position of having to provide the hosting or the support agreement. That enforces a much more scalable model, and we're basically putting pure intellectual property into the marketplace. And it makes it possible for a thousand entities to spend a hundred of these instances each and have 100,000 instances in AWS that are administered, managed and maintained by personnel other than MicroStrategy Professional Services people. So in terms of what that does, well, it does everything that MicroStrategy for Linux and MicroStrategy for Windows does. So it's the full enterprise suite of analytics and mobility capabilities. Any analytics or mobility app that you build on the MicroStrategy platform that could be deployed on Windows and Linux can now be deployed on AWS. But it is much more than just that because MicroStrategy for AWS also includes a whole set of custom deployment tools, administrated tools, implementation tools and also development and automation tools that allow the partner or the customer to customize that environment and to elastically configure it over time and personalize it and securitize to that particular organization. And in the background, MicroStrategy for AWS has a whole set of functionalities that's tailored to the major AWS services like the Lambda and S3 and the like. And so we've optimized our entire platform to run in an AWS environment, so you're really getting something like a data center in a box, whereas, if you're deploying MicroStrategy for Linux, you have to bring your own data center. And so we're not providing all those components. So the richest, deepest stack of functionality we offer is MicroStrategy for AWS as a platform install. It's a dramatic productivity boost for anybody that turns to use it. Instead of having 6 specialists spend 6 weeks try to figure out how to get the instance up and running, one person could do this in 30 minutes. So we're very enthusiastic, and our customers and partners are pretty enthusiastic about this as well.

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Yun Suk Kim, The Benchmark Company, LLC, Research Division - Analyst [26]

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Great. But I do want to ask, is that -- I am assuming the AWS SKU, that's available only on licensing terms? Or can that be also purchased on a subscription term?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [27]

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Yes, the MicroStrategy for AWS is sold right now as a term license, but we sell it as a license as opposed to as a service. So we're licensing software. It is different than the license we would give for a MicroStrategy on top of Windows, for example. So it's a new product offering with new licensing potential for us.

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [28]

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It shows up in our subscription services revenue.

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Yun Suk Kim, The Benchmark Company, LLC, Research Division - Analyst [29]

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Okay. Great. And then I just want to make sure. So when it's deployed like that, your core product on AWS, is that a -- is it fair to characterize that as a single tenant model more than a multi-tenant, just because it looks like there's instance being built for each customer?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [30]

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If a customer were to license and deploy MicroStrategy on AWS, it would be single tenant with regard to them. That is, the bank would be running their own instance and their own secure environment of AWS. But they might choose to make that available to hundreds of their customers, and it's multi-tenant with regard to their customers. So the bank has complete control of the instance, and they can choose to support multiple of their downstream customers or multiple instances of applications. But they're not sharing any bandwidth with any other MicroStrategy customer. So they can tailor it, however, they like and they secure it to their own specifications. Does that help?

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Yun Suk Kim, The Benchmark Company, LLC, Research Division - Analyst [31]

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Okay, great. That does helps to better understand what you are doing on AWS. And then just curious, is Usher part of the -- available today on AWS, or is that part of the plan at all?

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [32]

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First of all, the entire MicroStrategy analytics and mobility platform includes Usher, includes the mobile app, includes the web, includes the desktop, includes the back-end service, the gateways and drivers. So when you punch the button to install this, you have all of that functionality, and it's tightly integrated, and that's, I think, one of our great advantages. But there's another new launch that maybe you picked up on, I'm glad you did, which is that a lot of the appeal of MicroStrategy for AWS is that you've got so much elastic power on demand. And so if you wanted to deploy a 10,000-user digital identity solution or IoT solution where you're actually generating telemetry from all 10,000 mobile apps in real time, then it's really great to be able to spend that up in the AWS cloud and then to be able to elastically adjust it. One of the critical shortcomings of some of our other competitors' approach in the cloud is, they would actually offer you a fixed slice of bandwidth and a fixed amount of memory, and then they would run the entire environment for you. But of course, some customers are going to need a small amount of bandwidth because they've got a limited use case. Other customers are going to need a huge amount of bandwidth because they want to run a real-time Internet of Things application with mass amounts of data. And so that kind of cookie-cutter, one-size-fits-all cloud model just won't work. You need to be able to spend up a different instance and a different amount of bandwidth, depending upon the application, and indeed, you might even need to change the bandwidth depending upon the time of day or the day of the week, depending upon what you're trying to accomplished. And so when we talk about having a single tenant, industrial-strength, enterprise cloud, we really mean the ability to control your own destiny, to tailor it to whatever your organization needs to have done and to scale it up and scale it down from time to time, and even to automate the configuration via APIs or trigger, so that you can integrate it to your other enterprise applications. That's what's appealing to our customers and our partners, that kind of an enterprise-grade technology.

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Yun Suk Kim, The Benchmark Company, LLC, Research Division - Analyst [33]

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Sounds great. And it sounds like it's the perfect fit for AWS, that type of solution that's also there. Phong, real quick, maintenance revenue declined sequentially, which is consistent with your prior Q1. Can you just remind us what are the dynamics behind the revenue declining sequentially in Q1?

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [34]

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Yes. First of all, with maintenance revenue, I'd prefer to look at it on a year-over-year basis than sequential. In any particular quarter, we may have a late renewal, and some of our customers pay as much as $1 million to $2 million in maintenance revenue. A late renewal, in any particular quarter, means we can't recognize that revenue for that quarter, and it pushes up to the next quarter. And Q4 happen to be a little bit higher on maintenance revenue. As a result of that, we had some revenue that was deferred into Q4. It causes a little bit of a peak, and then we came down again in Q1. So that's sort of the dynamic on why it's better to look at it either on a year-over-year basis or also a trailing 12-month basis. It's a good way to look at maintenance revenue.

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Yun Suk Kim, The Benchmark Company, LLC, Research Division - Analyst [35]

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Okay, got it. And so you recognize maintenance revenue on a cash basis, is that the dynamics there, then?

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Phong Q. Le, MicroStrategy Incorporated - CFO and Senior EVP [36]

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We recognize that on a cash basis, yes.

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Operator [37]

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Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Michael Saylor for closing remarks.

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Michael J. Saylor, MicroStrategy Incorporated - Chairman of the Board, CEO and President [38]

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Good. I want to thank everybody for their support, and thanks for being here today. We're looking forward to the rest of 2017, and we'll speak to you in 12 weeks.

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Operator [39]

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Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.