Microstrategy Inc (MSTR) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

My name is Paul, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the MicroStrategy Incorporated second quarter 2002 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers? remarks, there will be a question-and-answer period. (Caller Instructions.)

I would now like to introduce Mr. Michael Saylor, the Chairman and CEO of MicroStrategy Incorporated.

Mr. Saylor, you may proceed.

Thank you.

I want to welcome all of our shareholders to our Q2 conference call.

I?m here with Eric Brown, our President and CFO, and Sanju Bansai, our Chief Operating Officer, in order to review the results of Q2 with you.

We?re delayed slightly in this call because we had difficulty getting our press release up on the wire.

It is on Yahoo?s web site right now.

It may not be on other web sites, so if you have a hard time finding it I suggest you go to Yahoo, and you?ll see it there under our ticker symbol.

At this time, I?d like to turn over the floor to Eric Brown, who is going to read our Safe Harbor and then review Q2 results for you.

Thank you, Michael.

The various remarks that we may make about our future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as the result of various important factors, including those discussed in our registration statements in periodic reports filed with the SEC.

I?d like to start off by describing highlights from our second quarter 2002.

We sustained both GAAP and pro forma profitability for the second consecutive quarter.

Our pro forma earnings were five cents per share this quarter, and we exceeded consensus by six cents per share.

This marks the eighth straight quarter we have either met or exceeded Wall Street EPS expectations.

We had positive net cash flow of 4.3 million for the quarter, ending the quarter with 37 million in cash.

EBITDA continues to be strong.

For Q2 we posted EBITDA at 7.3 million.

This marks the fifth consecutive quarter of positive EBITDA.

On a trailing four quarter basis we have generated 27.5 million in EBITDA.

We closed 232 deals during the quarter, which is up from 218 in Q1 2002.

We added 105 new customers.

Finally, we restructured all of our outstanding preferred stock.

All the outstanding Series B and C totaling 61 million in principal value are being redeemed and exchanged for 10 million cash, a $5 million note, and a combination of common stock equivalents.

We?re also eliminating all the 14.5 million Series D preferred, which is effectively converting into 2.9 million common shares at the stated $5 per share conversion price.

This refinancing is significant because it removes the dilution uncertainty that was associated with the future reset and conversion of the series of B and C, and D preferred stock.

I will discuss the details of this transaction later in the call.

Revenue in first quarter was 36.8 million, which was at the upper end of our revenue guidance and exceeded consensus estimates of 34.9 million.

This is up three percent sequentially.

Total license revenue in the quarter was 15 million, which increased by half a million versus last quarter.

And total service revenue was 21.8 million.

The Q2 revenue mix was 41 percent license and 59 percent services, which is consistent with the prior quarter.

The license revenue mix was 53 percent new customers and 47 percent from existing customers, compared to 54 and 46 percent respectively in the prior quarter.

Overall revenue mix in Q2 was 63 percent U.S. and 37 percent international, compared to 66 and 34 percent respectively in Q1 2002.

Channel influenced revenue was 31 percent in the quarter, versus 35 percent last quarter.

Gross profit margins remained strong at 81 percent, which is the same as last quarter.

And improved significantly versus Q2 of last year which was at 75 percent.

Margins in the license business are at 96 percent.

Margins in the services business were 70 percent, up slightly versus the prior quarter of 69 percent.

Our total headcount at the end of the second quarter was 791 people, and is comprised of the following: 220 cost of services, 218 sales and marketing, 211 R&D, 142 in G&A.

Our operating cost structure in Q2, 2002 remained relatively flat versus last quarter.

And again, is significantly improved versus Q2 of last year.

Overall total cost of revenue and operating expenses excluding goodwill amortization and restructuring were up by .4 million sequentially, and declined by 18.5 million versus Q2 of last year.

Compared to last quarter we had lower sales and marketing costs, mostly as a result of the MicroStrategy World User Conference that was in Q1 of ?02.

Our R&D costs in Q2 were slightly higher than those of Q1 since we ceased capitalization of 7i software development costs midway through Q2 when 7i was released [GA].

G&A costs were flat in the second quarter compared to Q1 ?02.

Total costs of revenue and operating expenses, again excluding amortization restructuring costs, are down by 37 percent versus Q2 of last year, which is $74 million in savings on an annualized basis.

We believe that our operating cost structure is properly aligned for 2002, and we expect to shift more overall spending and headcount into sales and out of other areas as we focus on 7i field execution.

We are actively recruiting quota carrying personnel at this time.

We reported total pro forma net income of 4.9 million in Q2, compared to 1.8 million in the prior quarter and a loss of 4.9 million in Q2 of ?01.

For the second consecutive quarter we reported a GAAP profit.

In Q2 we reported 24.9 million in GAAP profit, compared to .4 million in GAAP profit in Q1 ?02.

Our Q2 GAAP profit of 24.9 million included two large non-cash items.

A $17 million gain on the Exchange Applications contract termination, and an $8 million gain on the revaluation of our litigation settlement.

Both of these items have been excluded from our pro forma results.

We have provided detailed disclosure on the reconciliation of GAAP results and pro forma results in the press release.

We applied the exact same methodology for the reconciliation as in prior quarters.

Again, the primary adjustments to GAAP profit were the gain under the Securities Litigation revaluation, and the gain on the Exchange Applications terminated contract.

Pro forma EPS for the quarter using fully diluted share count was a profit of five cents per share versus Wall Street consensus estimates of a loss of one cent per share.

The GAAP fully diluted EPS for the quarter was 24 cents per share.

The restructuring costs related to discontinued operations and other items were in line with expectations.

Strategy.com liabilities are continuing to wind-down exactly per our original plan.

The only significant items remaining relate to equipment leases.

For the quarter we made a $1.2 million adjustment to our subleasing restructure accrual to reflect the assumption that we would have slightly higher rent concessions over the next five to six years as we sublease vacant office space.

In terms of the balance sheet, I?ll note that we had 37 million in cash at the end of the quarter, which is up 4.3 million versus the prior quarter.

Total deferred revenue was down slightly versus the prior quarter by 1.8 million, with most of the change coming from long-term deferred revenue.

We ended Q2 with 22.6 million in deferred revenue versus 22.8 last quarter, and long-term deferred revenue of 2.6 million this quarter versus 4.2 last quarter.

Of the deferred revenue on our balance sheet at the end of Q2, again, 90 plus percent of this relates to maintenance.

Our Q2 DSO figure was 56 days, which compares favorably at 58 days in Q1 2002.

This is well within the range we expect moving forward, which is 50 to 65 days.

In terms of cash flow, we generated positive cash flow of 4.3 million for the quarter.

Cash flow from operations was also plus 4.3 million.

The reconciliation of cash generation is as follows.

First of all, starting with EBITDA of 17.2 million, which is detailed in the press release.

We subtract 1.4 million of cash used for restructuring charges, .8 million for discontinued ops cash usage for a total of 2.2 million on the restructuring related items.

Deferred revenue was cash outflow of minus 2.1 million for the quarter.

Working capital and bad debt gave us a combined cash flow benefit of two million.

Cap software was minus .6 million in terms of cash flow.

Proceeds from investment .3 million positive cash flow.

And other items minus .1 million from cash flow.

And finally, our capex for the quarter was minus .2 million in terms of cash flow, which ties out to the 4.3 million of overall cash generated.

For the second quarter we posted EBITDA of 7.3 million.

As noted earlier, this marks the fifth consecutive quarter of strong positive EBITDA generation.

In terms of the key operating metrics for the quarter, total new customers was 105 which is roughly the same as in the prior quarter.

Our customer count to date is 1,747.

Our new versus exiting customer revenue was balanced in Q2 with 53 percent of revenue coming from new customers, which is essentially the same as last quarter.

The breakdown of license deals by transaction size is as follows. 27 deals greater than 200,000, 17 deals greater than 250,000, five deals in excess of half a million, and zero deals in excess of one million.

Although we did not close any deals greater than one million in this quarter our deal count for transactions over $200,000 was stronger than it has been since the end of 2000.

Indirect revenue as a percent of overall product revenue was 31 percent in the quarter.

And we also signed a total of 18 new channel partners in the quarter.

We had a total of 72 quota carrying people at the end of Q2, with 65 direct and seven channel quota carrying individuals.

Last quarter we had 61.

The total headcount at the end of the quarter was 791.

As of today it?s 787, so it?s stable at roughly 800.

For the trailing 12 months ending Q2 2002 the attrition rate was 21 percent, which is down a bit from 22 percent in the previous quarter.

The average deal size for the quarter was up seven percent versus the prior quarter, to $74,000.

And as I mentioned earlier, the gross margin for Q2 is 81 percent.

We had a total of 232 license deals, compared to 218 last quarter.

And again, the revenue mix was 63 percent U.S., and 37 percent international.

At the end of June and early July we issued the class action notes and warrants.

These securities now trade on NASDAQ under the symbols MSTRG for the notes, and MSTRW for the warrants.

Moving forward, we expect that there will be no further revaluation of the class action notes, thus no impact on the income statement.

While the warrants will continue to be revalued on a quarterly basis we do not expect there to be a material impact on the financials.

We recently decided to terminate our credit facility with Foothill Capital, but given our improving cash flow position and the desire to have greater flexibility with respect to balance sheet restricting activities.

When we terminated the Foothill Facility we did not have any draw-down, and only used the line to secure about 5.5 million in letters of credit.

As part of terminating the facility we posted 5.5 million in restricted cash to collateralize the LCs, and our expectation is that we will replace the facility with a more flexible line by the end of this coming quarter.

MicroStrategy announced today that it has reached an agreement with all the holders of its Series B, C, and D preferred stock.

All the outstanding shares of the B and C preferred securities which totaled 61 million of principal value are being redeemed and exchanged as follows.

For 10 million in cash which will be paid from cash on hand, a $5 million note which is non-convertible with a one-year term and a 7.5 percent semiannual coupon, and the issuance of 25 million common stock equivalents which are issued as a combination of straight common stock, and a new Series F preferred that has a permanently fixed conversion price and no dividend yield.

We are also effectively converting all the outstanding Series D preferred which has a face value of 14.5 million into 2.9 million common shares at the stated fixed conversion price of $5 per share.

The Series F preferred stock that we are issuing may be converted into common stock at the fixed conversion price of $1.50 per share at the election of the holders during the two-year period following the closing.

This conversion price is not subject to any future price reset other than adjustments due to stock splits.

After two years any remaining outstanding Series F preferred will automatically convert into common shares at the fixed conversion price.

In the event of any change of control the Series F automatically converts to the common shares, again at the fixed conversion price.

As part of the refinancing, the Series B, C, and D preferred holders have agreed to 15 percent volume trading limitations over the next 12 months.

Dividends that would have otherwise accrued at the rate of 12.5 percent for $33.1 million worth of Series B, and $27.8 million worth of Series C have been eliminated.

This is expected to save the company 7.6 million in dividends per year, or a sum total of approximately 15 million over the next two years that would have otherwise been paid out of cash or in common stock.

The transaction is subject to certain closing conditions, and is expected to be completed prior to the end of September 2002.

We expect that the transaction will be highly accretive from a GAAP earnings perspective.

As I said, it eliminates $15.2 million worth of preferred dividends over the next two years.

It also eliminates the capital structure uncertainty associated with the future perspective conversion price reset on the $61 million worth of Series B and C.

The company also announced that it plans to sell two remaining non-core business units, Angel.com and Alarm.com.

This sales process will be managed by the company?s audit committee.

The proceeds from these asset sales would be used for general corporate purposes and to retire debt.

The company intends to complete the sale of Angel.com and Alarm.com by the end of 2002, and expects that the dispositions will result in annualized savings of approximately two million.

The company intends to sell these businesses for cash to the highest bidder.

Our CEO, Michael Saylor, has informed the Board of Directors of his intention to submit a bid for these assets.

The sale will, however, be overseen by a committee of the Board of Directors consisting solely of independent directors.

As of today, Angel.com has 16 FTEs, and Alarm.com has six FTEs.

We have provided guidance information in the press release, and the comment that I?ll make here is that all the numbers that we presented in terms of the actuals.

And also all the numbers that we?ve given on a pre-split basis we intend to file an 8-K with post-split numbers here shortly.

And of course, we?ll be filing the final 10-Q with all the post-split numbers, as well.

The financial guidance is valid as of today only, and we do not undertake any obligation to update this information in the future.

For the quarter ending September 30th, 2002 we expect revenue to be in the range of 33 to 37 million.

Pro forma results of operations excluding special items are expected to range from a loss of two million to a profit of two million.

Pro forma EPS excluding special items and assuming a basic weighted average share count is expected to range from a loss of approximately two cents per share to a profit of two cents per share.

Average share count in the quarter using the basic weighted average share count method is expected to be 109 to 115 million.

For the full-year 2002 we expect that consolidated revenue will be in the range of approximately 145 to 155 million.

Consolidated pro forma EPS, again excluding special items are expected to be in the range of approximately four cents to nine cents per share.

We are, in effect, increasing our full-year EPS guidance versus our previously issued guidance last quarter.

In the press release you?ll see that the company has announced that its Board of Directors has approved a one-for-ten reverse split of its outstanding shares.

We believe that a reverse split is in the best long-term interests of our shareholders, and the split is expected to be effective as of close of business today.

Upon the effect of the reverse split the number of shares of the company?s common stock outstanding will be approximately 10.5 million which excludes the impact of the common shares to be issued in connection with the aforementioned Series B, C, and D preferred stock restructuring.

This concludes my remarks.

I will now turn the call over to Sanju.

Great.

Thank you, Eric.

MicroStrategy?s hard work in the past two years to make our company more productive and more competitive continued to pay off this past quarter.

Our success with the leading organizations across all industries has continued to grow, and here?s a partial list of customer deals we?ve closed in Q2.

Air Canada, AT&T Wireless, Capital One, Fannie Mae, H&R Block, [Aimet] Health, JP Morgan Chase, Key Bank, Land o? Lakes, Liz Claiborne, Metropolitan Life, Texaco, and Votaphone, [Amnatel].

As Eric mentioned, our license revenues increased sequentially, and our average transaction size increased, as well.

These results are significant when you consider there are no million dollar license transactions in the quarter.

At 232 total transactions during the quarter we had good deal volume and efficient sales execution across our entire field operation.

Our increasing success with major customers is due in no small measure to the major investments we?ve made and continue to make in ensuring world class customer service and support.

Our sales force views our customer wins not simply as new deals but new relationships that demand the best support from MicroStrategy.

Recently an independent firm, Data Impact Marketing, conducted a customer survey of 212 current MicroStrategy customers worldwide.

The survey found that 98 percent of MicroStrategy customers polled said that they were satisfied with MicroStrategy products.

With that as an introduction let me talk a bit more in detail about the quarter.

We had an impressive number of new account wins, 105, and we had a good total number of transactions at 232.

Q2 was a very solid operational quarter for us.

In addition to acquiring new clients we managed to significantly to up sell and cross sell our customers, both with new services offerings and our new MicroStrategy 7i product.

Our new technical account management and education offerings have been very well received with approximately 30 education package deals, and 12 TAM deals, or Technical Account Management deals in the quarter.

The newly released MicroStrategy 7i products, both professional and OLAP services in particular, have allowed us to expand our project footprint, and hence, our license revenue potential within our customer base.

I?d like to briefly highlight several noteworthy customer wins in the quarter.

First is Food Lion, one of the largest supermarket chains in the United States and a member of [Delhi?s] America.

They purchased MicroStrategy software services in the second quarter to extend their business intelligence applications across the enterprise.

Food Lion Associates in category management and in sales will benefit from the MicroStrategy platform.

Second, Telefonica.

Telefonica is the leading telecommunications operator in the Spanish and Portuguese speaking world, and they purchased additional MicroStrategy products and services to extend their business intelligence applications worldwide.

The success of Telefonica?s current MicroStrategy applications have prompted them to deploy five additional applications over the next six months, making MicroStrategy the enterprise wide business intelligence standard at Telefonica.

The company plans to expand its web reporting applications to empower over 1,000 employees with critical financial, auditing, sales and marketing insight.

Yahoo licensed MicroStrategy 7i in the quarter to create customized data analysis tools for Yahoo?s Data Solutions Group, as well as for individual retail categories such as apparel, home and garden.

We had previously issued a press release on that, so I?ll leave the detail at that level.

Shoppers Drug Mart, Canada?s largest retail drugstore group, selected the MicroStrategy platform as part of its enterprise wide business intelligence strategy.

Shoppers Drug Mart plans to use MicroStrategy based applications in its marketing, finance, category management, and merchandising departments.

Also, in Q2 we entered into relationships with 18 system integrators and OEM partners including our plan to automate Deloitte Consulting, [Keva] and [Kovansis].

Reaffirming our technology leadership, in Q2 we released our breakthrough new software platform, MicroStrategy 7i.

This major release was two years in the making, and has given us a leadership position in web reporting technology. 7i has won praise from industry analysts and customers alike.

Henry Morris, an analyst at IDC has written ?MicroStrategy?s 7i with its powerful OLAP and web reporting capabilities significantly increases the range of applications its customers can run.?

We?re seeing this increase in our addressable market as we?re now getting invited into opportunities that previously were reserved for competitors with reporting focus and, or OLAP focused products.

So we are seeing good expansion in our market, thanks to these two new products.

To summarize, MicroStrategy?s future continues to look brighter.

Our product line is the best in the business intelligence platform market.

We?ve significantly tightened our operations, as you can see from our ability to generate significant profits.

And we continue to take steps to improve our balance sheet.

On the sales side I?m very pleased, in fact, that we?ve accretively eliminated the B, C, and D preferred stock, as it should provide increased financial transparency to our shareholders and our customers.

Our product capabilities have been a true competitive advantage in sell cycles, but as I?ve mentioned before on previous calls like this, our competitors have used our complex balance sheet to create insecurity with prospects.

By eliminating the preferred stock, and by demonstrating our continued profitability, I think we?ll be much better equipped to address the financial stability concerns that are often painted by our competitors.

Overall, we?re winning significant new business.

We have significant up sell opportunities with our MicroStrategy 7 products, particularly OLAP services and Web Professional.

And we continue to provide world class service levels for our existing customers.

We?re feeling confident about our market opportunity, and have started to expand our sales force once again.

And we expect to add at least 10 to 15 quota carrying headcount in Q3.

I?ll end by stating that we?re pleased with our Q2 operational results, and are looking forward to continued good execution in Q3.

With that, I?ll turn it to Mike.

Thank you, Sanju.

I think Eric has given a fairly detailed rundown of the financial results of the company, and Sanju had a good overview of our sales and marketing efforts.

I would like to finish-up our comments by noting that we felt as a Management Team it was a strong quarter in Q2.

The business intelligence marketplace continues to hold-up in the face of a difficult macro economy.

The applications that our customers are building with our business intelligence platform allow them to become more efficient, or transparent, or secure.

We?re seeing renewed interest in fraud detection, risk management, loss prevention, financial reporting applications.

We?re also seeing enthusiasm for asset management, market optimization, and inventory control applications.

And our BI platform focus has given us access to many new opportunities.

In fact, many of the prevailing themes in the market today, such as the drive for financial certification on the part of public company officers are increasing people?s awareness of the need for financial reporting and transparency systems.

And our strength has always been the ability to transparently analyze data all the way down to the transaction level.

And so, people that may not have seen as much need for having control of all their transactions and a handle on all of their various contracts in their business are now becoming believers in the power of business intelligence.

And I think that that suggests good things for our business going forward.

We have taken a multi-faceted approach toward improving our business over the past year.

Part of it comes in the form of improving our product line.

We?ve created new products, and they?re creating new opportunities.

As Sanju had mentioned, 7i is well received and is driving deals.

We have never been more competitive technically, and our new modules in 7i such as Web Professional and OLAP services are now generating revenue.

The second prong of our approach toward improving our business is to improve our service lines.

And our new services are proprietary, and they?re benefiting customers.

One of them is technical account management.

As Sanju had noted it is being embraced.

We brought on a dozen or more customers in technical account management programs in the last quarter.

Customers in the technical account management programs sign up to a one-year subscription of our best practice in business intelligence implementation.

It gives them a great proprietary service.

It gives us visibility and predictability, and hence, of course, profitability in our services lines.

Our education packages have also been a success.

We?re pre-selling annual education packages to our customers.

We?ve found that these create both good opportunities for our customers to get the education services they need under good terms.

But they also are creating very, very good opportunities for us as a company to generate profitable revenue.

Our service lines in general, as I?ve said, are more proprietary.

They?re becoming more predictable.

You can see the success of the service lines reflected in our service margins, as Eric had noted they?re 70 percent.

And I think as many people have noted to me the test of a focused software company is not the ability to generate high gross margins on product, because most software companies have high product gross margins.

But rather high margins on service, high service margins indicate a company which is very disciplined in the services it chooses to offer.

And very well-managed.

And I think that over the past two years our service margins have steadily improved, and it is indicative of our decision to exit the commodity markets of system integration, and focus upon proprietary business intelligence services which our customers need and they value, and they?re willing to pay for.

The third prong of our focus on financial improvement has been to impart a new set of fiscal disciplines across our entire corporation.

We?ve done that through innovative and bottom line focused compensation plans and budgeting.

I would summarize our moves by saying that our new culture is bottom line focused.

Our account executives? compensation plans have a focus upon maintenance renewal, cash collection.

They are actually commissioned when the company collects the cash.

And they?re incentivized to sell not just on products, but also our high margin proprietary services.

And that being the case, they?re starting to focus much more on serving the customer, and making sure the customer is happy.

And that, of course, drives them to do things that are good for the shareholders, like keep our DSOs down, but also keep our customer satisfaction rates up.

And ensure that not just our software, but also our service lines remain profitable.

Our consultants have become very, very focused upon utilization and availability, which again is a bottom line attribute.

But also it drives the kind of behavior that?s good for the customer and the shareholder.

We do work that customers value, and we do work that shareholders benefit from.

And it has squeezed out inefficiencies from our system.

And it?s driven us to ask the question ?is this really something which the market requires and values us to do??

Our executive compensation plans have been structured around contribution.

And again, it?s driven executive accountability down to lower levels in our organization.

And we are starting to see it reflected in our bottom line numbers.

Overall, the corporate culture we have drives teamwork because everybody is responsible to everybody else for solving issues like collecting cash, ensuring utilization, making sure our products and services are profitable.

It drives us to fix problems.

If there is a problem in our corporation, if we?re late billing a customer, if we?re late collecting money, if the customer is not satisfied, those issues get immediately escalated up to the point where someone can fix them.

And ultimately, what that means is we have a sense of urgency which is tied to some common sense, bottom line, focused metrics that everybody can understand, and everybody can drive toward.

I think that this represents a logical maturation of our company from a revenue and growth and entrepreneurial oriented organization of three years ago to a bottom line, profit focused, responsible, mature but proprietary software company which is what the market expects us to be, and which is what our customers need for us to be at this point in time.

The fourth prong of our financial improvement strategy has been to improve our balance sheet.

We have, as Eric has articulated, worked to restructure our convertible preferred securities in a way that?s accretive to the shareholders.

We have also settled our Exchange Applications matter in a way that eliminates the liability from our balance sheet.

And we have taken the step proactively to reverse split our common stock so as to start to align our common stock structure more appropriately with the structure of a mature, profitable company in a marketplace where people are now focused much more on earnings and EPS as a key measure of value creation, as opposed to revenue multiples.

We think that all of these things are constructive, and they?re going to contribute to the corporate health.

And so by focusing upon the right new products to create opportunities, the right new services to make sure we?re proprietary and we?re benefiting our customer, and the right new culture to make sure we?re bottom line oriented, and finally the right new balance sheet to contribute to our corporate health, we think we?ve taken a multi-part, measured, balanced but common sense strategy in order to establish our company as a stable, profitable, focused software entity.

I think the results speak for themselves.

Over the past six quarters we?ve actually seen nearly 100 million in pro forma earnings improvements.

I think that?s really an extraordinary progress for our company to make over 18 months.

In the last 12 months, as Eric had articulated, we?ve gone from a $5 million loss per quarter to a $5 million gain per quarter.

We feel very good about that.

Gross margins, operating margins, service margins, DSOs, all these metrics are all moving in the right direction.

And they're moving in the right direction not due to any one particular thing, but due to, I think across the board, many, many small but material changes in the way that we do business that are to the good of the shareholders, and to the good of our overall operation.

We have stabilized our business.

We?ve now gone three quarters since our last restructuring.

Our headcount is stable.

Our corporate organization is stable.

Our business model is stable.

And each of those three quarters we?ve felt a little bit better about our business.

And we think that that?s reflected in the GAAP earnings that you can see reflected in our results.

The road ahead, now that we have this stable platform, consists of two prongs.

Our first focus point is to continue to build sales momentum within our business intelligence business.

We are hiring quota carrying salespeople.

We have refocused upon our sales academy, sales training, sales management, and sales execution.

Every executive in our company is very, very heavily focused upon sales, and we?re all involved, and have our shirtsleeves rolled-up to make sure that we?re driving good sales behavior.

And we?re out with customers and driving deals.

I believe that our new product lines and our new service lines have combined to open-up new sales opportunities for us as a company, and we?re very excited about pursuing those in the coming 12 months.

The second prong of our strategy going forward is a technology strategy.

We are in the process of porting all of our business intelligence platform products to the UNIX environment.

We believe that?s going to open up new opportunities for us both within our install base and outside of it.

And we also are intent upon continuing to add new features to our business intelligence product line, new reporting features, new application integration features.

And as we add them, I think that will again allow us to take on new types of business, and to compete even more favorably against the rest of the market.

So, in short, there?s no one thing that I would point-out right now as key to MicroStrategy?s success in the last quarter and going forward.

I do think that we have taken a holistically balanced, responsible view toward running our business with focus and with emphasis on both profitability, and also growing a proprietary business which is to the benefit of our customers.

We would like to thank all of our shareholders for supporting us throughout the last year.

And assure all of you that we?re excited about the coming year, and we believe that our company with these late balance sheet restructurings and new product releases is better positioned than ever to compete in the marketplace.

With that, I will end my comments, and we will be happy to take questions from the audience.

(Caller Instructions.)

Your first question is from Mr. David Hilal of Friedman Billings Ramsey & Co.

Thanks.

A couple of questions.

First, Eric, I guess I appreciate all the data, but I?m still going through the 14 pages here.

The first question, Eric.

On the balance sheet the accrued litigation settlement, I figure now that the notes had been issued as part of that share, as part of the lawsuit settlement, that item would have been reclassified on the balance sheet under a more traditional form of debt.

And I guess I?m surprised that it hasn?t.

If you could walk me through why?

And then, now that the notes have actually been issued, if the face value was 80 million how come on the balance sheet we?re still showing less than that, and in this case 55 million?

Okay, David.

The answer to the first part of your question is that the class action notes were issued right at the end of Q2, a portion of them, a small portion.

One to two percent, with the balance being issued basically July 2nd or July 3rd.

And so that?s why you still have for the 6/30 financial statements the accrued litigation item.

What you?ll see on the Q3 balance sheet is everything classified as a note, so it has to do with a timing issue in terms of the physical issuances of the notes themselves.

And the notes themselves will be carried at the fair value.

We had them, you know, reassessed.

They do, indeed, have a stated face of 80.3 million, but the discounted fair carrying value is less than that.

And that?s what you?ll see reflected in the balance sheet, the difference to be accreted up over time over the five-year term.

Okay.

And the second question, on the ? I want to go through any interest payments or any lump sum cash payments you have.

So you?re going to have to do a $10 million payment as part of this restructuring of the preferred.

Can you walk me through any other lump sum cash payments that are on the docket over the next, you know, call it 12 months?

Yeah, the only other lump sum cash payment is what we?ve discussed in previous calls.

That?s the first accrued interest payment on the notes which will be due 12 months after the date of issuance which will be, you know, in part right at the end of Q4 and right at the beginning of Q1 next year.

And that?s 10 million?

It?ll be approximately $10 million.

Okay, so that 10 million plus the 10 million for the restructuring, so 20 ? am I missing anything?

Anything else?

The other lump sum, you know, cash item is actually an inflow.

You know, again, we?ve announced the sale of certain Encore assets.

And we expect to raise cash within the next 90 or so days from that activity.

Okay.

Any estimated value of Angel.com and Alarm.com?

It?s difficult to say at this point, at the time, and so I?m not going to speculate on it.

But we believe the businesses definitely do, indeed, you know, have value.

There?s valuable intellectual property.

There?s customers, there?s revenue, there?s developed technology.

And we have a network of external partners that are actively working with both the Angel.com team and the Alarm.com team.

And we believe that they?ll be quite interested in these assets.

Okay.

And for Mike and Sanju, could you maybe talk a little bit about the competitive landscape and any changes you might be seeing there?

Sure, this is Sanju.

I think that we?ve seen increasing pressure over the last quarter from our competitors on our financial health.

And so in deals where we?ve been competing before and competing on a technical basis we?re seeing that our competitors are generally speaking not competing technically anymore.

In fact, they?re saying ?you might as well go ahead and take my strategy technically.? However, you want to consider their financial health and their current balance sheet before you do anything with them.

So they?re raising quite a big of concern or FUD in the minds of the prospect.

I think that this restructuring will help us address that.

I think our continued profitability will help us address that.

And so I think that over time we?re going to be a bit more competitive and a bit better able to go ahead and drive these sales cycles to positive closure for us.

Again, our positive cash flow has been, again, another good indicator that the company is not only stable, but it?s now cash generative.

And I think that will help us as we go out and start to communicate to prospects, that we?re in good financial stead.

Okay, great.

I?ll let somebody else hop-in.

Thanks, guys.

Thank you.

Your next question is from Mr. Rob Tholemeier of Wells Fargo Securities.

Hi.

Nice quarter, guys.

A lot of work.

Eric, one question for you.

I?m just trying to back-of-the-envelope, fully diluted number, post-split.

And considering that you closed the transaction on the B, C, and D what fully diluted share count will be about $15 million.

Is that about right?

No, not quite.

The way to look at the share count, Rob.

Is I?ll stick with the pre-split numbers just for simplicity.

And we can just divide by 10 at the end.

We have 105 million common shares outstanding as of today.

When the closing of the Series B, C, and D re structuring takes place we?ll immediately issue approximately 13 or so, 13.9 million shares of Class A common.

So at that point, at the end of next quarter we?ll have a total of about 118 or 119 million.

On a weighted average basis, however, I expect those additional 13.9 million shares will only be outstanding for approximately, you know, one month of the quarter.

Hence, our guidance of the shares shown in the press release.

Okay.

Then if we look ? do you not have to fully dilute the F when you get to GAAP profitability?

Under certain circumstances, yes.

The F contains approximately 13 million common share equivalents, as well.

And so, if you?re looking at the, you know, the fully diluted ending share count basis you would take the 105, you would add essentially the 13.9 million, and then you?d add an additional 13.9 million or thereabouts for the Series F.

So pretty close to 150?

No, pretty close to ?

130.

130, maybe 132.

Okay, 132.

All right, okay.

And there?s no other shares outstanding besides those?

There are no other shares outstanding that would be factored into that computation.

Okay.

And when you issue the ? help me out again on the shares on the accrued litigation.

As those are being offered will they show-up as convertible shares or just this straight debt?

They?ll show-up just as straight debt, Rob.

Okay, great.

Question for Michael.

When you poured over the MicroStrategy 7i, talking about going to UNIX, have you chose platforms?

Do you planning on supporting mainframe Lenox and Solaris?

Or how do you do a full portable?

What sort of other platforms will the strategy 7i products be available on?

Yeah.

Well, we?ve got initial ports, and then later on we?ll be going to more.

But clearly the high priority ones are Solaris, AIX, and HP.

Those have been first on our list.

I think with some of our products we?ve implemented a J2EE type approach where we can run on an application server like a BEA which opens-up the world for us to actually run on many, many different flavors of UNIX.

Anything that would be supported by a BEA type application server.

So I think the quick answer is the big three or four platforms quickly out of the box with many to follow, but the more technically appropriate answer is that in some cases we?ll support a dozen platforms or more immediately.

And it will depend on which of our platforms we?re speaking of.

And so, and over the course of 12 months that will expand, I think pretty rapidly.

Okay.

Sanju, I wanted to ask you about any special linearity in the quarter sort of characteristics, front-end loaded, back-end loaded?

How does the pipeline look?

What?s the coverage look like for next quarter, just sale cycle sort of metrics?

What do you see happening there?

Sure.

In Q2 I think that we had a pretty, a little bit more balanced quarter.

It was a little bit less back-end loaded than we?ve seen in other quarters.

I think our deal sizes, as I noted before were pretty consistent.

That is we didn?t have any large one or two transactions that skewed the quarterly results one way or the other.

And so we?ve seen I think good, solid, and stable execution throughout the quarter.

So I?ve been pretty pleased with that.

I think that we have a view out into the future that our opportunity base is increasing, and that?s why we?re hiring salespeople again.

And so, while we?ve been, as you know, for the last couple of quarters and the last year and a half in a reduction mode, we now again feel that our technology and our competitive strength is quite good.

And we?re going to go ahead and add to our distribution channel by hiring more direct sales executives, and we?ve also been hiring additional resell partners, or bringing them on with resell contracts.

And we?re sort of well into the quarter now.

Any sort of comment on how July is feeling at this stage?

No comment that I think is really that interesting.

Again, we feel good about our prospects.

Okay, again, congratulations guys.

Thank you.

Your next question is from Mr. Mark Murphy of First Albany.

Eric, what is the ? what is your projected cash low watermark now given the balance sheet restructuring?

It?s going to, you know, range between 15 to 20 million as of the end of Q4, early Q1 next year.

Okay.

A question for Sanju.

When do you plan on ending support for product releases that are pre 7i?

We?ve already done that effectively, and so we?ve announced out to our customer base as of about three months ago that support for the MicroStrategy 6 product line was basically terminated.

And so we?ve seen pretty good migration even before that to 7i.

I think that today we have approximately 96, 97 percent of our customer base running on 7 or 7i.

Okay.

Are there any million dollar plus deals in the pipeline at this point for the second half?

I probably shouldn?t comment on that, so I will not.

Can you give us any metrics in terms of how many deals included an OLAP component with the new OLAP services product?

I don?t have that data.

We?re not measuring that as a reported metric.

I will tell you that I think that we?ve started proposing conversions in the middle of the quarter.

We had several close, and I can?t give you an exact number.

But we think that the bulk of the conversions will occur in Q3, Q4, and then Q1 of next year.

And then given the focus that you?ve expressed to us where you?re actually taking your employee base and focusing them on maintenance renewals.

What would you expect, what should be a normal seasonality in deferred revenue for a Q2?

A normal seasonality in deferred revenue?

I mean how do we expect our maintenance renewals to impact deferred revenue over time, over the course of the year?

Yeah, that?s correct.

I don?t think we?ve formed an opinion on it that would be appropriate to express right now in the call.

I think in general our efforts to improve customer service and renew maintenance contracts have been reasonably effective, and we?ve been seeing good things happen.

And that has been counterbalanced by the general malaise in the economy, and the fact that there are more companies going Chapter XI or just being liquidated or disappearing.

So there are certain customers you can?t possibly renew that probably would have been in business two years ago.

And so I don?t think we want to encourage people to think that our maintenance renewal rates are going to go up substantially because of the difficult economy.

But I do think that our focus on maintenance renewal gives us a degree of confidence that that business will be stable over time.

Mark, this is Eric.

I?ll just add a couple of additional comments there.

I mean our maintenance renewal rates are quite solid.

They?re stabilized.

And again, it?s part of the overall field compensation plan for the, you know, account executive.

And it?s built into the regional P&Ls that we have.

And so I think that we have a pretty good handle and focus on maintenance renewals.

I think our rates compare extremely favorably with what you might see across the industry.

More importantly, I know that our customer satisfaction ratings which are a leading indicator of maintenance renewal are the highest in the industry.

Okay.

One last one, if I might.

What is the current highest bid for Angel.com and Alarm.com?

We?re not going to comment on that.

I think that it?s important to note that the sales process is going to be directly overseen by a committee of independent outside directors.

And you know, they?re the ones that are going to kind of set the terms and conditions, and accept or reject bids.

So it?s just premature to comment on that.

We?re just kind of, you know, a week or so into that thought process at this point in time.

Do those businesses have revenue at this point?

They do, indeed, have revenue.

It is not significant or in any way material to our financials.

But yeah, they do have revenue.

They do have decent business models.

But other than that, you know, we?re not going to provide like specific results.

I will just note that they have approximately two dozen total headcount between the two of them.

Approximately 16 or 17 in Angel.com, and approximately six in Alarm.com.

Okay, thank you.

And congrats on the results.

Thank you, Mark.

Your next question is from Frank Sparacino of First Analysis.

Hi, guys.

I was wondering if you could break-down the 65 people in the direct sales force side, in terms of international versus North America?

We?re looking for the exact numbers for you, to give you accurate results.

Roughly, as Eric said, our business is roughly two-thirds North America and one-third international.

And so the headcounts kind of follow that.

Actually that?s a bit incorrect.

Let?s wait for Eric to give you the exact numbers.

Okay.

And then also maybe the Q1 number there Sanju?

And then Sanju, or Mike, maybe just talk about internationally, relatively decent performance for you.

Maybe what you saw from, you know, sort of Asia-Pac versus Europe?

Sure.

While Eric?s still looking for the exact headcount numbers to give you I?ll comment a little bit about the business.

We?re starting to see a bit of increased penetration in Asia-Pac.

We?ve got reasonable relationships with our distributor in Korea through SamSung that we are continuing.

We?ve seen both direct operations and operations through distributors, notably NCR in Japan be successful.

So we feel like that business is coming along nicely.

It?s not a terribly large part of our revenue base, but it is a good business and a profitable business.

And it?s one that we?re continuing to expand.

I think that, you know, what we?re seeing in terms of overall sales force growth which I think is part of your question is that we do have a chance, I think right now, both in the Americas, as well as in Asia-Pac, as well as in Europe to increase our headcount in sales.

And so we?re going to go ahead and take this opportunity to do that.

Okay.

I understand TAM and [what?s there], but on the education side what?s new from a packaging and pricing standpoint today?

Sure, the primary advancement on the education side is that we have these prepackaged what we call learning units.

So it?s a bundling of education units that the customer can use at their election over the coming 12 months.

And what we?re finding is that allows us to increase the utilization of our training classes.

So by pre-selling education as opposed to having it be at 100 percent on demand function we can actually schedule classes a bit better and increase the utilization factor in those classes, thus driving up our margins.

Yeah, to follow-up on what Sanju just said, the real subtle change in our approach is that we recognize education classes are sort of like airplanes leaving.

And rather than having people run up to the gate and book them the day before or the day of and then have planes leave half empty, we?ve focused on encouraging corporations to buy annual service contracts.

Now, the annual service contract pre-commits them to a certain number of days of education reflected as learning units.

And it could be 150 of them.

We?ve had some customers that have purchased 300 days of training up front, for example.

Now, the benefit to them to do that is that we give them more favorable rates, slightly larger discounts.

We would give, of course, a bulk purchase discount to purchase these things in advance.

And we also give better service terms.

And so we do things like wave cancellation penalties or we give people better access to course ware or training consulting, or other things that they deem is a benefit, in order to entice them to enter into an annual contract with us.

If you know you?re going to go through all the training then it makes sense.

It?s a win, win.

But from our point of view, if we can sell an annual contract then we know we?re fixing a certain amount of demand.

The supply is fixed on our side because we know exactly how many classes we?re going to teach.

And because the customer is pre-committed and they paid us cash in advance, the business then starts to take on a much more profitable characteristic.

And it?s a good thing all around.

I think customers perceive it as a good thing, and it makes it easier for us to run a stable, profitable education business.

Frank, this is Eric.

To respond to your initial question of the 72 quota carrying personnel that we had at the end of Q2.

It breaks-out as 34 international and 38 U.S. based.

Okay.

And then, Sanju or Mike, maybe talk about the analytic modules that you have, and you know, what type of demand you see for that?

But maybe more importantly just in general do customers understand, you know, your positioning, the platform positioning, the differentiation relative to some of the competition?

Or is it, you know, just a lot of confusion in the marketplace in terms of what applications are?

And where you fit in?

I think that right now there?s been a lot of confusion in the analytical apps market, as well as a lot of disappointment amongst customers generally who have bought larger applications and heavier transaction size applications, where they?ve already spent half a million or a million dollars on an analytic app.

So as you know, we have a slightly different strategy with these analytical modules which are relatively inexpensive.

And I think that customers and even our own sales force are starting to understand that positioning.

Again, it?s a little bit different than our competitors.

And so it takes awhile for that message to seep into the market.

But I think that our lower price point and our template approach has been pretty successful in the following ways.

One, it?s given customers a pretty good view of how they might use our software for web traffic analysis, for sales analysis, or perhaps for even financial analysis.

Number two, it?s given them a set of starter templates which are relatively low cost to get going.

And I think that they, more than they even understand it, what they do is they respond well to the low cost pricing at this point.

Number three, I think that as we continue to see some softness in the economy I think people will be looking for starter kits which are easily modifiable at low cost points.

And so we have really been pushing hard our platform message.

We?ve incorporated analytical modules underneath the platform message, not as a separate message.

And so it hasn?t been a real strong messaging point for us.

But in sales cycles we do use the platforms to show what can be done with the platform.

Customers are responding quite well to the packaging of, you know, a report.

And I think that it?s a good strategy, especially given the current economic climate.

And if you look at our performance relative to let?s say ePiphany, or even Informatica that?s taken a much bolder application strategy, I think that we?re going to find that our strategy is probably the right one for the current market.

And to follow-up on that, I would just reiterate.

Our message to the marketplace is ?use MicroStrategy if you want to build rather than buy an analytical application.? And there are lots of analytical applications that companies need that need to be customized for statutory or for proprietary reasons.

Maybe the best example of how these analytical modules play into our market position and create opportunities for us and also meet customers? needs would be our upcoming financial analysis module.

As you are aware there?s a lot of excitement about financial transparency, and a lot of interest in it right now.

Especially due to the August 14th date for financials to be certified by a large public company officers.

Financial certification is a perfect example of a custom, very proprietary analytical application that shares a lot of common components.

Every single public company has a set of things in common with other public companies, and it needs a financial analytical module that will actually analyze the balance sheet and do P&Ls.

But at the same time, every company has a set of unique contracts.

It either holds mortgages, or it holds software, contracts, or it?s in the business of providing services, or it?s in the business of selling cars on a leaseback schedule.

And those individual types of contracts inevitably have uniqueness to them.

The customer, in this particular case, a big corporation has to analyze that.

They?ve got to get something up and running, and maybe they have to do it in three months.

It?s urgent to the Board.

It?s urgent to the CEO.

They can?t wait three years for SAP to deliver it in a module.

Nor would they go into trust something which is tailored for 1,000 other companies or 100 other companies.

They are going to take a very personal, passionate interest in it.

And so what they want is a tool that allows them to build financial reporting quickly.

They want to customize it.

They want to plug it into the detailed transaction database.

Their transaction database is not going to be generic.

It?s going to be very unique to their business because it consists of something which took five or 10 years to customize for their particular line of business.

And so you get unique database, you get unique requirements, but you get a common application with common parts.

That?s exactly the type of need that our financial or our analytical modules were built to meet, and that?s exactly why our platform is strong.

And so we?re pretty excited about taking that particular analytical module out into the market over the next six months.

And we think in general that particular niche is going to be ideal for us.

One where people have a custom analytical project they need to do quickly, but they also don?t want to build it from scratch in C++.

They want a good accelerator, toolkit that has industrial strength flexibility and object orientation built into it.

That?s what we?re all about.

Okay.

Thanks, guys.

And nice job.

Thank you.

Thank you, Frank.

There are no further questions at this time, Mr. Saylor.

Do you have any further comments?

I want to thank all of our shareholders for spending the time with us today.

And just reiterate our commitment to you, and our appreciation for your support.

We?ll see you in 12 weeks.

Thank you all for participating in today?s MicroStrategy Incorporated?s second quarter 2002 conference call.

This concludes today?s conference.

You may now disconnect.