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Edited Transcript of MSTR.OQ earnings conference call or presentation 27-Oct-20 9:00pm GMT

·41 min read

Q3 2020 MicroStrategy Inc Earnings Call VIENNA Dec 2, 2020 (Thomson StreetEvents) -- Edited Transcript of MicroStrategy Inc earnings conference call or presentation Tuesday, October 27, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael J. Saylor MicroStrategy Incorporated - Chairman & CEO * Phong Q. Le MicroStrategy Incorporated - CFO & President ================================================================================ Conference Call Participants ================================================================================ * Hamed Khorsand BWS Financial Inc. - Principal & Research Analyst * Tyler Maverick Radke Citigroup Inc., Research Division - VP & Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the MicroStrategy Q3 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) It is now my pleasure to introduce Chairman and CEO, Michael Saylor. -------------------------------------------------------------------------------- Michael J. Saylor, MicroStrategy Incorporated - Chairman & CEO [2] -------------------------------------------------------------------------------- Hello. This is Michael Saylor. I'm the Chairman and CEO of MicroStrategy. I'd like to welcome all of you to today's conference call regarding our 2020 third quarter financial results. I'm here with Phong Le, our President and Chief Financial Officer. First, I'd like to pass the floor to Phong, who's going to read the safe harbor statement. -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [3] -------------------------------------------------------------------------------- Thank you, Michael. Good evening, everyone. 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'll 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 www.microstrategy.com. There's a lot to cover on today's call. I'll start by providing some color on our third quarter performance, and then I'll update you on some of our strategic priorities. MicroStrategy had one of our strongest growth and profitability quarters in the last decade. Our strategic focus on growth in HyperIntelligence, cloud and OEM, all contributed to our strong business results. We continue to engage our existing customers, which has resulted in excellent renewal rates and are seeing customers continue to migrate from our on-premise platform to our cloud platform. Embracing the virtual wave in our go-to-market areas and our overall business has led to reduce costs and improve profitability. And our capital allocation strategy focused on buying back MicroStrategy stock and utilizing bitcoin as our primary treasury reserve asset has been well received by current and prospective shareholders and the general technology community. In the third quarter of 2020, we had exceptionally strong product licenses revenues, with year-over-year growth exceeding 50%. Our license business benefited from a large transaction with a major financial institution and strong federal government demand as well as an increase in overall deal activity compared to recent quarters. The strength of our new business activity is particularly encouraging given the uncertain macroeconomic environment due to COVID-19. We are pleased with the adoption of HyperIntelligence during the quarter. We saw a number of important wins, including the U.S. federal government and a large big box retailer. HyperIntelligence continues to be the most rapidly adopted solution in our history. Its unique ability to provide actionable knowledge to workers with 0 clicks inside their existing productivity tools is empowering them and driving better business results for our customers. Our cloud offering also showed solid adoption, which led to a year-over-year increase in short-term deferred subscription services revenues of $6.7 million or 52%. We saw a record number of new cloud customers during the quarter, including a new agreement with one of the largest retailers in the U.S. We also began migrating multiple large financial services customers to our cloud. In each case, our ability to provide a hosted cloud offering has reinvigorated our engagement with these customers and driven new strategic conversations. One customer standardizing on the MicroStrategy cloud platform and replacing their legacy BI on-premise standard. This represents a significant expansion in our relationship with this customer. We continue to be excited about the growth opportunity for our cloud offering. It is clear that COVID has been a catalyst for enterprises to reevaluate their IT stacks and plot a more aggressive course for moving to the cloud. The rapid adoption of cloud data warehouse offerings like Snowflake is also providing for a natural conversation regarding the future of enterprises' BI solutions. We're also seeing positive results with our OEM, our embedded analytics business, where technology providers embed MicroStrategy into their offerings. We had a large OEM win with a global online retailer during the quarter who went live with an embedded solution for a large cybersecurity company. Our technology partners are choosing MicroStrategy because our platform is modern, open, independent and enterprise grade. These are some of the most sophisticated technologists in the world, and they are choosing MicroStrategy because they know our platform works at scale and can support their technical and business needs. Overall, our performance in the third quarter is a positive indication of the demand trends in the BI market have been moving in MicroStrategy favor. In our 30-year history, we have seen the BI market go through cycles that alternate between a focus on robust enterprise-grade solutions and departmental level charting and visualization tools. What we've seen historically is that during and coming out of recessions, the pendulum swings towards enterprise-grade solutions, which is MicroStrategy strength. In those times, there has been a clear focus on return on investment, security and data governance. We're hearing these topics more and more in our discussions with customers and industry analysts, which is a positive indicator for MicroStrategy. Our performance in the quarter was also an important validation of the lower cost go-to-market strategy that we implemented earlier this year. Our fully virtualized marketing program is ramping up and generating meaningful website visits and high-quality actionable leads for our sales team. Through our virtual model, we're also directly connecting a far great number of prospects and customers with our direct sales team and we would have been able to if we were engaged in each prospect in person. The net result has been a notable increase in the velocity of our pipeline at a materially lower cost. This improvement in sales and marketing productivity was one of the main drivers in the continued improvement in our cost structure. Sales and marketing costs decreased 20% year-over-year. Adjusting for the incremental compensation expense related to our revenue performance in the quarter, operating expenses declined sequentially. We believe that we can fully fund our growth initiatives, drive improved top line performance and generate increased profitability. As a result, we continue to be confident in our ability to deliver on our 2021 non-GAAP operating income target of $60 million to $90 million. During the quarter, we also made significant progress executing on our capital allocation strategy. We successfully repurchased 432,313 shares at $130 per share through our modified Dutch Auction tender offer returning $60.5 million to MicroStrategy shareholders. Subject to market conditions, we are evaluating opportunities to further execute on the plan we outlined last quarter to return up to a total of $250 million of excess capital to shareholders. We also instituted our new treasury reserve policy, which states that bitcoin will be the primary treasury reserve asset for the company for capital that exceeds our working capital needs. As part of this policy, during the quarter, we purchased approximately 38,250 bitcoins for an aggregate price of $425 million. This equates to an average price of approximately $11,111 per bitcoin. We've been gratified by the market's reaction to our nontraditional treasury strategy and believe our bitcoin holdings can provide our investors with a more stable treasury asset and one that holds a greater return potential than cash held in U.S. dollars. Our investment in bitcoin has also allowed MicroStrategy to tap into the passion of the broader crypto market and the smart sophisticated technologists to advocate for the independent and open markets, whether for financial assets or digital ones. We've seen a notable and unexpected benefit from our investment in bitcoin and elevating the profile of the company in the broader market. This is benefiting our company reputation overall and raising our mine share amongst prospective customers. Before I review our results in detail, I want to finish by saying that we are excited by how the business performed in the third quarter. We are mindful of the uncertain economic environment globally and its potential continued impact on IT budgets, BI market growth and deal close rates in the fourth quarter and beyond. That said, we are pleased that the underlying trends we have seen in our business are positive. Our focus is on executing against our strategy to drive adoption of HyperIntelligence and our cloud offering through our virtualized go-to-market model. We believe this will position us well to achieve our 2021 non-GAAP operating income target. Combined with our proactive management of our balance sheet and the upside potential of our bitcoin holdings, we believe there are a number of opportunities for us to generate shareholder value going forward. Turning to our third quarter 2020 financial results in more detail. Revenues for the quarter were $127.4 million, up 6% year-over-year and up 6% on a constant currency basis. Product license revenues were $29.6 million in the third quarter of 2020, a $10.6 million or 56% increase year-over-year and up 58% on a constant currency basis. The strength in product license revenues, which was one of our best quarterly performances in years was due to a large expansion deal with an existing financial services customer as well as good overall deal activity. Subscription services revenue in the third quarter of 2020 were $8.3 million, an increase of 5% year-over-year and 4% on a constant currency basis. The growth in subscription services revenues reflects the growing portion of our product bookings that are related to our managed cloud platform. We are pleased with the performance of our cloud business in the quarter. Product support revenues were $71.4 million in the third quarter of 2020, a 2% decrease year-over-year and a decrease of 3% on a constant currency basis. The year-over-year decrease is primarily the result of conversions to subscription or on-premise term licenses. Trailing 12-month product support revenues were flat year-over-year on a constant currency basis. Our renewal rates remained strong in the third quarter. Our strategy, which includes actively working to migrate customers to annual term licenses is impacting our product support revenues. This proactive strategy allows us to increase engagement with our customers and is expected to result in product support revenues, either moving to subscription services revenues if customers transition to the cloud or to product license revenues if customers convert from a perpetual to an on-prem term license. Finally, services, which largely reflects our consulting services, decreased 9% year-over-year and 10% on a constant currency basis. Remote delivery of our services is leading to lower bill rates and lower billable T&E, both of which affect our consulting revenue. We expect our consulting business to strengthen as product licenses strengthen to begin to offset the ongoing impact of remote consulting delivery. Total deferred revenue at September 30, 2020, was $172.5 million. This is up 5% year-over-year, primarily due to an increase in long-term deferred subscription services revenue and a favorable FX impact of 1%. The increase in long-term deferred subscription services revenues is due to multiyear subscription contracts. It's also important to note is that more existing customers convert to our managed cloud platform. There will continue to be a shift from deferred product support revenues to deferred subscription services revenues. Total non-GAAP expenses were $100.9 million in the third quarter of 2020, an 11% decrease year-over-year and down 1% quarter-over-quarter. The year-over-year decrease is driven by efficiency and staffing, reductions in corporate travel and a reduction in the number of in-person events, mostly related to marketing. During the quarter, we had a couple of nonrun rate expense items, including higher sales commissions related to our strong product license performance and onetime expenses related to the implementation of our treasury management and capital allocation strategies, including the bitcoin acquisitions. Non-GAAP operating income was $26.5 million or a 21% non-GAAP operating margin in the third quarter. This represents a year-over-year improvement in non-GAAP operating income of just over $20 million. Turning to the balance sheet. We ended the third quarter with $52.7 million in cash and no debt. As discussed earlier, we have implemented our new treasury reserve policy, whereby we will hold excess capital beyond what we need to run the business and for working capital purposes, primarily in bitcoin. To that end, we purchased approximately 38,250 bitcoins for $425 million during the quarter. Going forward, we'll continue to actively manage our balance sheet, including potential share repurchases. Per our treasury reserve policy, you should expect that we will purchase additional bitcoins as we generate cash beyond what we need to run the business on a day-to-day basis or to deploy for other corporate purposes. I'd like to take a moment to discuss how our bitcoin holdings are and will be reflected on our financial statements. We account for bitcoin as indefinite-lived intangible assets, which are subject to impairment losses if the fair value of our bitcoin decreases below the carrying value at any time since their acquisition. The carrying value of our bitcoin as of September 30, 2020, was $380.8 million, which reflects a $44.2 million cumulative impairment loss, which is reflected as a loss on our income statement. In determining asset impairment has occurred, we consider the lowest price of 1 bitcoin quoted on the active exchange at any time since acquiring the specific bitcoin. Impairment losses cannot be recovered for any subsequent increase in fair value. Therefore, negative swings in the market price of bitcoin could have a material impact on our GAAP earnings and on the carrying value of our digital assets. Positive swings in the market price of bitcoin are not reflected in the carrying value of our digital assets and would impact GAAP earnings only when the bitcoin is sold for a gain. Compared to an average purchase price of $11,111, the recent price per bitcoin has been over $13,500. We do not believe changes in the carrying value of our bitcoin are relevant to understanding the underlying earning potential of our BI business. As a result, our non-GAAP operating income, net income and EPS calculations exclude the quarterly impact of bitcoin impairment charges. Before I turn it over to Michael for his comments, I'll finish by saying there are a lot of positive things happening at MicroStrategy. We've introduced innovation through HyperIntelligence and our cloud platform that has resonated in the market and provided additional opportunities for top line growth. Our embrace of the virtual wave has dramatically simplified and streamlined our operations, driving substantial improvements in productivity. Finally, our approach to our balance sheet has been transformative as we actively deploy our excess capital to seek to deliver value to shareholders. We think this is a great time to learn more about everything we are doing here at MicroStrategy. To that end, we'll be hosting a virtual Investor Day on Monday, November 16 at 1:30 p.m. Eastern Time. We will be providing a deep dive into our strategy, product road map, cloud migration and views on our bitcoin investment, among other topics. We hope you will be able to attend. With that, let me turn the call over to Michael. -------------------------------------------------------------------------------- Michael J. Saylor, MicroStrategy Incorporated - Chairman & CEO [4] -------------------------------------------------------------------------------- Thank you, Phong. I just want to start with a few views on company performance. And then I'll talk about our product strategy. Then I'll talk about our treasury reserve policy and then wrap it up with a few thoughts about the virtual wave. So first of all, company performance. I'm extremely pleased with our revenue, operating margin and cost structure results. Revenue year-over-year growth is great and at a challenging time. It's great to see that. I thought the operating results were tremendous and getting to a non-GAAP operating margin north of 20% I think it's extremely strong. What's nice is to see revenue is growing, while the cost structure compressing and I think it's emblematic of the fact that the company is becoming a leaner, much more efficient operation with a much higher thrust to weight ratio. We've thought long and hard about what we need to do in order to grow the business and what we need to do in order to provide value to our customers. And I think that our structure for the business today is very, very different and dramatically more efficient than where we were at the beginning of the year. There's no way we could have done this without superior performance from the management team. What's really compelling is that we saw extraordinary innovative performance and commitment from our marketing department to completely restructure the way we market from our consulting organization to figure out how to deliver services remotely from our IT organization, which is now sitting at the core of all of our virtualized sales and marketing and service operations, much more strategic than they were even a year ago, and they've all risen to occasion. Our support organization has dramatically improved the productivity and the effectiveness with which we provide support. Our education was overhauled completely and scaled up by an order of magnitude as we went through this COVID crisis. Our finance and our legal teams have both been catapulted into strategic arms of MicroStrategy. And you can see it with our treasury reserve strategy and our bitcoin investment and all of the work we had to do in order to arrive at that result. And I think everybody recognizes that the company, in general, has been strengthened and we couldn't have done it without extraordinary leadership from both finance and from legal, and I'm very proud of what we've done. And I think that we're providing leadership to other people in the industry by our transformational work there. Our engineers and technology have thought long and hard about how we streamline, accelerate and virtualize our product offering. And I'm just incredibly excited about where we're headed with that. And so if you put it in a nutshell, all these things, and I guess I left out HR, but I really shouldn't have managing 2,000 people through the last 3 months has just been extraordinary. And we're managing our processes everywhere in the world more effectively and more efficiently today than we were a year ago even though we had to rethink how we do it. So the management team is firing on all cylinders. Every department is strategic to the company, they all just pulled off extraordinary transformations to get us where we are. And I couldn't be happier about that. I couldn't be happier about the performance all of our employees, too because we started the year, and we had 1 set of circumstances, 1 go-to-market model. And today, we have transformed dramatically and every engineer, every consultant, every, every corporate employee, every executive has restructured what they're doing, and they've come together in an impressive harmonious organized fashion. So I think that the results speak for themselves, but I would just say to everybody on the call that there's not a single employee in the company that wasn't integral to getting to those results, and there's not a single department that didn't have to rethink the way that they operate in a dramatic fashion and make changes that normally come along once every 20 or 30 years. And we did all that in the past 6 months and in the past 3 months, we accelerated that. So Q3 was I thought just awesome performance by the management team. My thoughts on the product. Well, we went into the pandemic crisis with 1 advantage, which is that our primary value proposition is delivering software to large enterprises and that software provides intelligence. And everybody needs as much intelligence as they can get. And we're just very fortunate that we're providing business intelligence to some of the most sophisticated and important organizations on earth. Our product organization built on that strength and we've dramatically enhanced what we're doing and double down and Phong alluded to a number of these things. Our HyperIntelligence offering gives people insight at a glance within their existing enterprise applications. And it could make you, and we've said many times, it does make you smarter, faster and stronger, it makes you 100x smarter, 100x faster or 100x stronger. And it's a real big linchpin of what we're doing. I think our cloud offering has improved dramatically this year. And it's another critical engine of growth for us. And customers, enterprises' enthusiasm for the cloud has [leaped] since COVID kicked in. And so our cloud teams rising to that occasion, making lots and lots of improvements to that cloud platform. And then our OEM business really has been a source of brightness for us. We've always prided ourselves having an open, intelligence architecture with APIs and OEMs push us to keep improving that architecture. Now more so than ever, people want to embed intelligence into their own custom applications, and we're seeing more and more companies viewing information as strategic to their value proposition. So a modern open analytics platform that they can plug into their applications is pretty compelling. So I'm happy to see us making strides there. We've got some really exciting innovations this year. One of them is our Hyper SDK. What that means is you can create a HyperIntelligence application with HyperCards. And you can deploy it to all of your users by simply embedding the HyperIntelligence code in your own web app. So that means that someone might be able to build a HyperIntelligence application, embed the code in their web app in a matter of minutes to hours, turn it on and then thousands -- tens of thousands, hundreds of thousands or millions of people would go hit their website and they'll see our HyperIntelligence embedded in the other website. No need to download an extension or install an app. You simply go to the website and it's there. That, of course, has real great potential for both selling HyperIntelligence to the enterprise and also selling HyperIntelligence to OEMs. We've been hard at work on faster migration tools to migrate our enterprise customers to our cloud offering, and we're excited about that. We continue to improve our APIs and make them more open. And we've got a very exciting multi-tenant offering of our HyperIntelligence application functionality coming up. We call it Hyper. Now. And I'm really excited about Hyper. Now. It's built on a world-class SaaS framework, and it's going to allow us to deploy HyperIntelligence to a dramatically larger number of entities in a faster, more accessible way. So that's something that -- which will be coming soon to the market, and we expect that will be a cornerstone of growth in 2021. We've made some other really exciting changes to the business or upgraded the business. One of them is rolling out our new modular website. And if you go to microstrategy.com, what you'll see is that we've modeled microstrategy.com on YouTube. You sign up, you can set up your own account, and we're video-first in the way we communicate. So if you want to know anything about our products, we have a set of videos with the related web content. And if you want to learn anything, all of our education is available via videos right on our same website. And if you're a customer, you need support, we have the answer to any questions you have on our product via these videos on the website. We've even converted our recruiting and our HR to video. So if you're considering being a software engineer working for us, now we've got videos that describe the role and you can run them on demand. And the exciting thing about a video-first modular website is we can very rapidly put deep specific content on to our web, deliver it to the prospect of the customer that needs it quickly and easily and maintain it in a containerized fashion. That has helped us to virtualize a large portion of our marketing and a decent portion of our sales and another decent portion of our services operations and make those marketing, sales and service value propositions in a much more accessible to a large group of people. We see that as a cornerstone of becoming a more scalable virtual wave or virtual age company. That Hyper. Now offering that I'm excited about, built on the multitenant cloud, that's going to be followed by an [Intel. Now] offering. And when we put out Hyper. Now, we'll provide HyperIntelligence to anybody off of our website in a matter of an hour. And they'll be able to build and deploy an application with 1 hour of effort. And when Intel comes out or Intel. Now comes out, I think we'll be able to provide prospects and customers and partners the ability to build a full business intelligence application in a matter of an afternoon and deploy it that day to their enterprise with enterprise-grade world-class security, and scalability. So we're just really thrilled with that because we're delivering HyperIntelligence and Business Intelligence via a virtual wave framework and architecture that should allow us to become dramatically more scalable and dramatically easier to do business with. We expect that will allow us to reach new constituencies, we expect that it will speed up sales cycles, we expect it will delight our customers, and we expect that it will cut down on service and maintenance liabilities and the challenges of upgrades over time or support expenses, and that will allow all of our customers to move forward with their strategic intelligence initiatives faster, cheaper, more efficient. The general theme of all of this is make our customers smarter, faster, stronger and be easy to do business with and do it using the best tools that are at our disposal in year 2020. As you can imagine, this takes a set of inspired, capable, talented engineers. And I think we've got some of the best in the world, and I'm very proud to have them, excited to see how this entire story evolves and I hope you will be too. So moving on to the third subject, our treasury reserve policy. We're pleased with the market reaction and our investors' reaction to our strategy. We were aware that we were pioneers in this particular process, and there's a lot of uncertainty going into this initiative. But nonetheless, we thought it's the right thing to do, and it's the best thing long-term for our shareholders and for all the rest of our constituents. We are [certainly] seeing marketing benefits to the overall company. We've activated Twitter as a communication channel, and we've activated YouTube as a communication channel. We built our Twitter and YouTube presence, and I believe that that our brand and our channels, communication via cyber space are going to continue to strengthen over time. This should accrete as a benefit to MicroStrategy's brand to the MicroStrategy corporation. It should help us draw new people to be interested in our value proposition, our offering. I think it helps us with recruiting. It helps us with marketing. It helps us with our partners, our employees, our customers and with our Investor Relations, just it's easier to reach larger constituencies. I think it's clearly helpful that bitcoin is becoming more mainstream in the year 2020. When -- since we began the year, we've seen support for bitcoin coming from Fidelity, from hedge funds like Paul Tudor Jones. We've seen -- now we're seeing comments and coverage from Bloomberg and from JPMorgan. The support that's come from Square to build bitcoin and to promote -- actually to take bitcoin on the balance sheet was a big deal. I think Square is selling a bitcoin and support in the Square Cash application is a big deal. Now that PayPal has announced that they're going to do it in the PayPal app, I think that's legitimizing. When PayPal delivers that in Venmo next year, I think that will be a big plus. What I have said on a number of occasions is bitcoin is digital gold. I still -- I don't think people really understand completely what we mean by that and I think it bears mention right now that if you virtualize gold. If you take the theoretical safe haven asset of gold and if you virtualize it and you take the mass out of it and then you put it on an open protocol and you make it possible to program it then the fact that it's programmable gold or a programmable asset means that it is going to be smarter, it is going to be faster, it is going to be stronger, it is going to be harder than the physical version of itself. In the same way that Google Maps is a smarter, faster, stronger map than a Rand McNally printed Atlas and in the same way that a camera on an iPhone is smarter, faster, stronger than the camera that you had to carry around in your hand. I think in that way, virtual gold or bitcoin is smarter, faster, stronger than a bar of actual gold. And what it means is banks are going to be able to program it into their banking offerings and consumer mobile apps like PayPal and Square are going to be able to program it into the handset. And it means that that over time, as software gets better and as hardware gets better and as human beings get more innovative, it's going to get better and that's the fundamental principle. I personally believe bitcoin is -- it represents the first example of a digital monetary network. It's a software network that is capable of storing and channeling monetary energy. And if you compare that to what Facebook was, which is a digital social network, a software network to store and channel social energy. You see it's a profoundly new idea, nobody understood Facebook. They couldn't conceive of the idea of channeling the social energy of 1 billion people until after it was done. Today, I think we all understand the power of collecting the social energy of 1 billion people on a single software network and channeling it. I think in time, people will start to understand the power of collecting the monetary energy of 1 billion individuals or thousands of corporations or banks or billionaires or high net worth individuals or governments. If we can collect that monetary energy onto a software network and store it and channel it, it becomes something altogether more exciting than just the bar of gold or a virtual bar of gold or a digital-only bar of gold, that becomes a monetary network. And it's a monetary network, a digital monetary network that doesn't bleed monetary energy. Monetary energy is the superset of all energies, kinetic energy, electrical energy, nuclear energy, chemical energy of sorts. And all of these energies eventually roll into monetary energy. I can use money to buy any of them. And I can trade any of them for money. So as we actually pull monetary energy, the #1 problem is it bleeds if it's stored in other types of assets. If I put my monetary energy in gold and gold miners produce more gold. Then as they debase -- increase the gold supply, you lose some of that energy. If I put the energy in a battery, you lose 2% a month in a battery. If I put that energy into cash or Fiat currency and the central bank prints -- expands the monetary supply, the energy content per unit of cash decreases. So the significance of a bitcoin is it's a fixed supply, the energy is not depleting over time and the idea of being able to store monetary energy for long periods of time without having it depleted is the big idea. And as more entities start to understand that idea, which is a pretty compelling one, I think that the adoption of bitcoin will increase. And as the adoption of bitcoin increases, I think it will be beneficial to all those that chose to adopt bitcoin as an energy network in order to preserve their monetary energy over time. And that's, in essence, what the company is thinking about as we adopt bitcoin for our treasury reserve. Now maybe my last subject, which is the virtual wave. We are seeing the benefits of the virtual wave. What is the virtual wave? It's the dematerialization of products, services, processes, programs. It's the explosion of Zoom. It's the explosion of YouTube. It's the explosion of on-demand streaming video. It's the tendency to want to do things from a distance to automate things. We've gone through a virtual way of transformation this year. We've virtualized our sales and marketing and services on our website. We've virtualized the way that we provide sales support to our customers. This will continue. I say to all my executives at MicroStrategy, in the virtual age, you can now Zoom anywhere at the speed of light and you can bend time and space. What are you going to do with it? It's a profound statement. It takes a lot of time to wrap your head around it. What it means is 200 salespeople can have 25 meetings a week in 25 different cities, that's the zooming at the speed of light. They can punch record when they have that meeting and save the 200 x 20, right, 4,000 meetings. They can save all 4,000 meetings, upload them to a server and their head of sales could duck into any of the 4,000 hours of meetings that were relevant. That's bending time and space. You could be everywhere, it's a profound idea. And on the other hand, if you have 1 person in the company that can solve the problem, that 1 person can record the solution, upload to our website where it can stream 19,000 times so that 1 person can solve the problem of 19,000 times. So this idea of bending time and space and reaching hyper productivity by going things 1,000 times or 10,000 times instead of once and by moving at the speed of light, forces you to rethink how you consider marketing and services and support and product development. And 1 conclusion is you can get more done with less effort if you have talented people working as a team with the right tools and the right architecture and the right framework. So I -- as we continue down our path of virtual wave transformation, we can find a way to lower or to control our cost structure, compress our cost structure while increasing our value proposition, driving more productivity and providing better result for all of our customers in the marketplace. So that virtual wave commitment, it gives us confidence that we can generate cash flow and we can continue to generate operating income. That gives us confidence that we can continue with our strategy of deploying capital either to buy back our stock or to purchase more bitcoin. And we're going to pursue this strategy with a laser-like focus on delivering the best, modern, open enterprise business intelligence functionality to the world. And with that, I want to thank everybody for your time today and for your support of shareholders, and we'll go ahead and take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we have a question from the line of Hamed Khorsand with BWS Financial. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [2] -------------------------------------------------------------------------------- Just a couple of questions. One about the product license activity that you saw. Could you just try to cipher for how much of that was related to just closed deals that were delayed because of COVID? And how much of it was brand-new engagements that you had the sales force because of the virtual activities improve productivity? If you could just quantify that? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [3] -------------------------------------------------------------------------------- Hamed, it's Phong. It's a bit hard to quantify that way. We certainly did have some deals that slipped from Q1 to Q2 and Q2 to Q3 that resulted in some better product license revenue. But I think the experience we saw in Q1 and Q2 where we had good pipeline going into the quarter. But slowed close rates or delayed deals, et cetera, did not really occur in Q3. We had good activity at the end of the quarter for the most part. So it was a return to what I would consider more normal activity, better close rates and then just generally a strong pipeline, which we've had really since the end of last year. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [4] -------------------------------------------------------------------------------- And do you think your pipeline for Q4 was higher than where you started Q3 from? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [5] -------------------------------------------------------------------------------- I think generally speaking, Q4 is a very seasonally strong quarter for us. Q3, I think everything we saw there, we did a lot of things right. We also had several very large deals and significant deals that were unusual for the quarter. So if you're asking the question whether we should see a repeat performance in Q4, I would say things are looking generally good overall for the business. The piece that we're uncertain about, and there's just a lot of volatility going on right now is what we saw as an opening up of budgets in Q3 might end up tightening again in Q4, depending on macroeconomic, political environment, et cetera. So although we're optimistic heading into Q4, I think there's just still a lot of unknown going up there that's external to MicroStrategy. -------------------------------------------------------------------------------- Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [6] -------------------------------------------------------------------------------- Okay. And then can you just talk about the increase in customer activity since the bitcoin news, has that led to actual new customer wins? Is it just new conversations with customers that never exist or has it just been traffic? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [7] -------------------------------------------------------------------------------- I think it's somewhere in the middle, right? We haven't seen material revenue as a result of the increased activity. We've seen more traffic to our website. We've seen more engagement with certain end -- and conversations with customers we haven't had before. Our pipeline process usually takes 6 to 9 months before we close a deal, but we're seeing increased activity upfront. And we're also taking on some incremental tactics to try to capture that activity. As you see, we have a bitcoin section on our website, and Mike talked about using our website overall as a lead generation tool. So we're early on in the process of realizing that in terms of pipeline and material conversations. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from the line of Tyler Radke with Citibank. -------------------------------------------------------------------------------- Tyler Maverick Radke, Citigroup Inc., Research Division - VP & Senior Analyst [9] -------------------------------------------------------------------------------- Definitely one of the more exciting earnings calls in a while. So congratulations on the nice performance. Phong, I wanted to ask you about the large deal you referenced, probably one of the largest deals, I can recall, with the financial services customer. And maybe if you could just go into a little bit more detail on that use case. Was this kind of associated with a large upgrade? What did it involve that contributed almost $10 million in perpetual licenses? And do you feel like there's anything that can be learned from this deal that maybe you can apply to future deals? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [10] -------------------------------------------------------------------------------- Yes. I would say, Tyler, first of all, I don't think we indicated the size of the deal. Just to give you a sense, even if we had not done it, we still would have seen growth our product license revenue on a year-over-year basis. All that said, it's sort of using a lot of the tools that we've laid out in the last 1.5 years since we introduced MicroStrategy 2019, right, upgrading the customer to our latest version of MicroStrategy, selling HyperIntelligence, selling mobile, selling all the things that we have sort of in our tool set. And then that's sort of from a product side. And then from a customer engagement side, right, I think they, like many of our customers, look to MicroStrategy as a modern, open enterprise-grade solution. And again, like many customers fully embedded in the operations. And so when there's strategic use cases, a lot of times, our customers will turn to MicroStrategy. So -- and obviously, we have a very engaged sales team and some of the things that we do like free upgrades, free education for a period of time, all the things we do to keep our retention rates high lead longer-term to happy customers who want to buy more software. So although it was a great deal for us, I wouldn't say that there was anything singular that was -- caused it to occur that wasn't consistent with our overall strategy as a company. -------------------------------------------------------------------------------- Tyler Maverick Radke, Citigroup Inc., Research Division - VP & Senior Analyst [11] -------------------------------------------------------------------------------- Okay. Yes, I was just looking through the 10-Q, and it looked like there was a reference to a deal that contributed $9.8 million in recognized revenue. So I just wanted to clarify if that was the financial services deal that you talked about in the call or if that was a separate deal. -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [12] -------------------------------------------------------------------------------- Yes, I think that was. -------------------------------------------------------------------------------- Tyler Maverick Radke, Citigroup Inc., Research Division - VP & Senior Analyst [13] -------------------------------------------------------------------------------- Okay. Okay. Great. And then you talked a little bit about seeing kind of strong renewal rates. It looks like maintenance revenue or product support revenue did decline on a constant currency basis year-over-year. Obviously, you have had a number of years of product license revenues declining. But I guess what's kind of the thinking on the trajectory of product support revenue from here given the improved license performance that you saw in the quarter? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [14] -------------------------------------------------------------------------------- Yes. I think -- so there are 2 main drivers, right? One is a conversion from existing on-prem product support paying customers to the cloud. And so what you see there is it moves from product support revenue over to subscription revenue and in some cases, deferred subscription revenue. So that's driver number one. And as we are moving customers to the cloud and having that conversation, sometimes they opt not to move to the cloud, but they want to move into a term license model. When we move them to a term license as opposed to a perpetual license with support revenue, what ends up happening is that shows up in product license revenue. So there's 2 drivers there that's converting that sort of product support revenue over to different revenue line items. And I think you will see more of that over time. I think that's a reasonable sort of shift you'll see, especially to the subscription side as we actively move our customers. -------------------------------------------------------------------------------- Tyler Maverick Radke, Citigroup Inc., Research Division - VP & Senior Analyst [15] -------------------------------------------------------------------------------- Got it. And then just as you think about Q4 and maybe even next year. I mean how do you feel about the pipeline? I mean it seems like this is a very strong execution quarter from getting deals across the finish line. But were there deals that closed this quarter that maybe came out of Q4 that makes you a little bit less bullish on the pipeline heading into the year-end? Maybe just help us understand kind of the moving pieces there beyond, obviously, the stuff that you can't control around the economy and budgets tightening up? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [16] -------------------------------------------------------------------------------- Yes. I would say, generally speaking, we feel positive about the growth trajectory of the company, right? Like this was a very strong quarter. I think it'd probably be unreasonable to expect 50% -- north of 50% product license growth on a go-forward basis as much as we would like that. I think what you'll end up seeing is generally a trajectory of product license and subscription growth and hopefully, revenue growth that follows that, subject to its quarterly volatility and macroeconomic factors. -------------------------------------------------------------------------------- Tyler Maverick Radke, Citigroup Inc., Research Division - VP & Senior Analyst [17] -------------------------------------------------------------------------------- Got it. And then just one last clarification question on the bitcoin accounting. So is it right that, say, for instance, bitcoin were to only go higher from here, the way you would report it in terms of the impairment charge, you essentially wouldn't get any of that benefit as reported on the financial statements because you kind of have to take the lowest value since you've owned the assets. I just want to clarify that that's the methodology and just how you're thinking about that, if that's the case? -------------------------------------------------------------------------------- Phong Q. Le, MicroStrategy Incorporated - CFO & President [18] -------------------------------------------------------------------------------- Yes, that's correct, Tyler. Given there's not a lot of precedent for public companies owning bitcoin. What happens as a result is we treat it as an intangible asset. And once you go down that sort of route, there's a series of GAAP accounting for long-lived -- for intangible assets on a go-forward basis, one of which is we assess it for impairment every single quarter. And it's -- we take a look at the price of any particular bitcoin that we own at any point in that quarter and take the low point price. So not the price at the end of the quarter, but the low price in the quarter. And we basically take that as the basis for our impairment charge. So that was south of $10,000 per bitcoin on an average basis. And that's what resulted in our impairment. You're correct. On a go-forward basis, if the bitcoin prices go below that mark, we wouldn't have to further impair and we don't actually recognize a benefit on the bitcoin unless we were to sell it. It's a very conservative way to account. It's the correct way based on current GAAP precedent. And that's why we adjusted out for non-GAAP purposes. As you know, the carrying value of bitcoin right now versus what we bought it for has seen a significant appreciation. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- (Operator Instructions) Okay. This concludes today's Q&A session. So with that, I will now turn the call back over to Chairman and CEO, Michael Saylor, for any closing remarks. -------------------------------------------------------------------------------- Michael J. Saylor, MicroStrategy Incorporated - Chairman & CEO [20] -------------------------------------------------------------------------------- I want to thank everybody, all the shareholders on the call and everyone else who spent the time with us today. If you're interested in delving deeper in these matters, as Phong pointed out, we will host an Investors Day coming up in mid-November. So I'd encourage you to join us for that, and we'll do a deep dive into this and other related matters. And until then, thanks for your support, and we look forward to doing this again in 3 months. Take care. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.