Microstrategy Inc (MSTR) 2002 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the MicroStrategy 2002 third quarter earnings conference call.

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

After the speakers remarks there be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you ladies and gentlemen I would now like to turn the conference over to MicroStrategy Chairman and CEO Mr. Michael Saylor.

Thank you Mr. Saylor.

You may begin, sir.

Thank you.

I want to welcome all our shareholders with us today.

I'm here with vice chairman and executive vice president Sanju Bansal and vice president and chief financial officer Eric Brown.

I would first like to pass the floor to Eric who will read safe harbor statement.

Thank you, Michael.

Various remarks that we may make about future expectations and plans constitute forward-looking statements for purposes of the safe harbor provisions under private securities litigation reform act of 1995.

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

Thank you, Eric.

I would like to start with a headline, which is I believe that the third quarter of 2002 is really an inflection point of our turn around here at MicroStrategy and we're very excited about that as a management team.

The company on a financial basis performed as it was expected to in Q 3.

As you know, Q 3 is a challenging quarter normally, and in our particular case it was a challenging quarter on about three levels.

It's seasonally always a challenging quarter for a software company because August is a very slow month.

I think on a macro economic basis it was challenging because the stock markets both in Europe and in the United States slid pretty drastically in Q 3, and the macro economic sediment turned more negative.

In a micro sense too Q 3 was challenging for us because we did enter the quarter needing to go through and affect a reverse split and also working on a restructuring of our convertible preferred stock.

Having said all those three things, I think that the hallmark of a very good business model is that in difficult times a good business model is profitable and in good times a good business model is very profitable.

And what we saw and proved to our self in Q 3 is that we have in deed reshaped the company into a good business model.

We have, we've been working on as part of our restructuring and our turn around, working on cleaning up both the P & L and the balance sheet, and as of the Q 3 time period, I think that we've dramatically improved the quality of our revenues.

The revenue in the third quarter may not have been the largest number in the history of the company, but I believe that the non-cash accruals are becoming [diminimise] in their impact on our financial results and we've gotten through the impact of some of the large dot com deals we did in the 2000 time frame.

So now the revenues that we have are business intelligence platform revenues.

They generally correlate to cash invoices; they almost always correlate to our customer relationship that could be expected to result in reoccurring revenues and up selling [inaudible] potential going forward.

So I feel like we've really improved the quality of those quite a bit over the past year and Q 3 revenues were all very, very high quality revenues.

Consequently, I believe that the drives us to a higher quality earnings business model.

I think the second thing that we've been working to do in our restructuring is clean up our balance sheet, and you know, as we got through Q 3, we were successful in repurchasing our convertible preferred stock, and we did that in a way that was very accretive to the shareholders.

Approximately 35 to 36 million dollar benefit to the shareholders.

And we were also successful in repurchasing approximately $10 million dollars face value of our class action notes, and we did those at a substantial discount, and that also resulted in a substantial benefit to the shareholders.

We also, of course previously in previous quarters eliminated the exchange aps case.

So the overall balance sheet, if you look at it in these financial results has improved and there's been a demonstrable improvement in shareholder equity.

That number moving over the past nine months or so by something on the order of $90 million dollars to the good.

And so I think that those are all very, very good things.

I mean, there is a tendency sometimes to look at these and think they are non-cash, but what I will say is that the refinancing we did in the third quarter not only removed something on the order of $70 million dollars in principal payment obligations that would have come due, but also removed something on the order of $20 million dollars in interest obligations.

And so that is a true cash obligation we would have had to pay and much of that over the next 24 months.

So the balance sheet and the overall financial stability of the company has been dramatically improved in Q 3.

Now having said that, I believe that, you know, as a management team, we expected Q 3 to be the low point, and we've of course forecasted that.

We came in within our guidance range on both revenues and for earnings.

We have of course starting the beginning of the year put the company on a growth path, and during Q 3, we put in place some additional sales capacity earlier in the quarter, and then we brought on more sales people later in the quarter.

We've also added additional two regional vice presidents who are leading individual groups in the field at selling.

I think we've strengthened our field sales and service management pretty well.

Those things normally take about six months before they start to kick in and show revenue benefits.

But I do think that what we've done is positioned the company to have a good fourth quarter.

And also to have a good 2003.

We're expecting and you can see in our guidance, we're expecting moderate revenue growth in 2003 and we're expecting strong EPS growth in 2003.

Both of which I think we're pretty proud of given the current economic environment and where we've come.

What I would like to leave you with is just a few thoughts about the posture of the company.

I think the corporation is moving to an offensive posture, and MicroStrategy is going to be on the offensive over the next 12 months.

We are a leader in the BI space, and we're going to be asserting and making sure that people understand that we have leadership in a number of technical areas, including the best web product, the most scalable product, and the best analytical product.

We are adding more sales people, and we'll continue to do that.

We are doing that with a very disciplined cost structure and a very disciplined set of compensation plans, which are consistent with our business model, which we've constructed to be highly leveraged on the up side, so we're working very hard to make sure we're growing but we're growing responsibly and we'll continue to do that.

You can expect us to launch more competitive positioning marketing campaigns during the coming year.

The marketplace as we see it is reducing down to really just three companies, ourselves, Business Objects and [cog nos] and our job in marketing and sales is becoming fairly straight forward, which is simply to make sure that people understand how we're different from Business Objects and [cog nos].

And I think that is [harbiture] of good things for us.

You're going to see us drive home our superiority to either of those companies in a number of different ways in the coming 12 months.

For example, I'll give you one example, which is we have seen pretty credible industry surveys now that are showing that if you sample a large basis of the customer base, the average [cog nos] customer has a database of approximately one gigabyte and the average Business Objects customer has a database of approximately seven gigabytes, the average MicroStrategy customer has a database of approximately 256 gigabytes simply putting that on a chart and explaining it to people I think adequately positions us as the [territator] of this space [inaudible] the high end company that you would go to if you had the most demanding requirements, and that makes us the premium provider, and I think that's exactly where we want to be right now.

It's an attacker's advantage and it's very consistent with our core technical sales and marketing strengths.

We are going to manage our top sales opportunities very tightly, and I think we feel better about the pipeline than we have in the past, and I feel the pipeline is quite strong, and we're managing it across the entire senior management ranks with very good transparency all the way up to me.

And I would finish up with the last note, which is that the executive team is engaged, it's focused and it's very enthusiastic about the future.

We believe that we have the best business intelligence technology.

We've seen from customer wins that we can convince blue chip customers of that.

We're seeing in customer deployments that people are succeeding.

They are very happy, there are large barriers to exit and there are large barriers to entry in our space.

We're seeing that the VI space in general is a growth market, people seem to be enthusiastic about it, and we believe that with our renewed focus and our move to the offensive that we're going to reap dividends in the near future.

And so with that, I am going to now pass the floor over to Eric Brown.

Thank you, Michael.

I would like to begin by describing the highlights from the third quarter.

We sustained both GAAP and pro forma profitability.

This marks our fourth consecutive quarter of profitability.

Our pro forma earnings were 1 million dollars for 8 cents per share. [inaudible] positive income from operations of 1.5 million, [on] revenues of 33.4 million.

Our gross margins continue to be strong and our operating expenses are under control, allowing the company to generate earnings despite a difficult selling environment.

We had positive net cash flow from operations of 3.2 million dollars for the quarter.

This is the second straight quarter the company generated positive cash flow from ops.

In Q 3 we had EBITDA of 5.3 million.

This marks the sixth consecutive quarter of positive EBITDA on a [inaudible] four quarter basis, we have generated 31.7 million in EBITDA.

We closed 256 deals during the quarter, which is up from 232, in Q 2, 2002.

And we added 110 new customers.

As Michael noted earlier we completed the restructuring of the series B, C and D preferred stock, we continue to make very good progress in our sales force expansion plan, and the 7i release is selling very well. 94% of the license sales in the quarter with a new 7i release and approximately 23% of license sales were from the new web professional and web services products.

Revenue in the quarter was 33.4 million, which was at the low end of our revenue guidance range.

This is down 9% sequentially and down 19% versus Q 3 last year.

Total license revenues is 12.9 which decreased 2.2 million versus last quarter and total service revenue is 20.5.

The revenue mix for the quarter is 39% license and 61% services.

We did experience some slight weakness in our international operations in Q 3, approximately a million dollars in European deals slipped out of Q 3 and have now been closed in October.

The license revenue mix was 48% from new customers and 52% from existing customers.

Overall, our revenue mix was 65% U.S. and 35% international.

Gross profit margins continue to remain strong at 80% for Q 3, which is roughly the same as the prior quarter.

Margins in the license business were 92%.

Margins in the services business were 72%, which is up slightly versus the prior quarter of 70%.

Our total head count at end of the quarter was 796 people and is comprised of the following; 216 people in cost and services, 234 in sales and marketing, 205 in R&D, and 141 in G&A.

Included in these numbers are a 14 head count in the [inaudible] business unit and 7 head count in the alarm dot com business unit.

Those 21 heads roll into R&D.

Our cost structure in the third quarter declined slightly versus Q 2.

And was significantly improved versus Q 3 of last year.

Overall total cost of revenue and operating expenses were down by 1.5 million dollars sequentially and declined by 12.7 million versus the third quarter of last year.

Compared to last quarter we had lower sales and marketing costs, our R&D cost in Q 3 were lower due to slightly lower head count and lower outside fees and G&A cost in Q 3 were lower than in Q 2 due to lower professional fees.

Total cost of revenue and operating expense are down by 29% versus Q 3 of last year is approximately $51 million on an annualized basis.

Stated last quarter our operating cost structure is proper in line for 2002 with the exception we're adding more sales head count.

We are actively recruiting quota carrying personnel and on track to hit our hiring targets.

Our total reported pro forma income was a million in Q 3 compared to 4.9 million in Q 2.

And a loss of 5 million in Q 3 from 2001.

I will note that last quarter we had the benefit of a 1.7 million dollar foreign exchange gain for Q 3 the foreign exchange impact and other income was negligible.

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

We applied the exact same methodology for the reconciliation as the previous quarters.

The primary adjustments to GAAP profit were the 36.1 million dollar gain on the restructuring of the series B, C, and D preferred stock.

The 4.7 million dollar gain from the partial extinguishment of the litigation notes payable, and the 1.1 million dollar non-cash discount amortization expense in the litigation notes.

The pro forma EPS for the quarter using diluted share count was a profit of 8 cents per share, which was within the upper end of our guidance range.

The GAAP diluted the EPS for the quarter was 18 cents per share, which excludes the gain on the preferred stock transaction.

The restructuring cost related to discontinued operations and other items were in line with expectations for the quarter we made a $400,000 adjustment to our subleasing restructuring accrual.

Turning to the balance sheet I would like to make a number of comments.

At the end of Q 3, we had a total of 22 million in cash and 6.1 million in restricted cash.

During the quarter, the company spent a $10 million dollars in cash to restructure the series B, C, and D preferred stock.

Additionally the company terminated its credit facility at Foothill Capitol and as part of terminating the facility we posted 5.5 million dollars in the restricted account to collateralize our existing letters of credit.

Our expectation is that we'll enter into an alternative AR backed facility and use that to remove the restricted cash by the end of the year.

Short-term deferred revenue is up slightly versus the prior quarter while total deferred revenue is down versus the prior quarter by $600,000 dollars with the change coming from an expected long-term deferred revenue decrease.

Of the 25 million in deferred revenue as of Q 3 2002, 85 plus percent of this relates to maintenance.

Since we have issued all the class action notes we are now showing the liability in the notes payable line item on the balance sheet.

The note payable is a book value of 49 million, which is discounted from the 70.8 million dollar face value as of the end of the quarter.

Our Q 3 DSO figure was 54 days compared to 56 days in Q 2, and 53 days in the third quarter of last year.

While the overall cash balance is down due to the one time 10 million dollar cash payment for the preferred refinancing and the posting of cash for letters of credit, we generated a positive cash flow from operations of 3.2 million dollars for the quarter.

The reconciliation of cash generation is as follows.

Starting with the EBITDA 5.3 million dollars which is detailed in the press release, we used 1.3 million in cash for restructuring items, we used .4 million under the changed deferred revenue balances and we used $400,000 in working capital which leaves you with cash from operations of positive 3.2 million.

Cash opportunities for the balance of the year include the non-core asset sales and the release of the restricted cash by putting in place the new assets based credit facilities.

We are working on both these items in the fourth quarter.

Key operating metrics in the third quarter are as follows.

Our total number of new customers was 110, which is up from the prior quarter of 105.

Our total customers to date is 1,857.

Our new versus existing customer revenue is balanced in Q 3 with 48% of revenue coming from new customers.

The breakdown of license deals in the quarter is as follows; 24 deals greater than 200 K, 18 deals greater than 250 K, five deals in excess of half a million dollars and one deal in excess of one million dollars.

In direct revenue as a percent of overall product revenue is 22% in the quarter.

We signed a total of 21 new channel partners in Q 3.

As of the end of Q 3 we had a total of 82 quota carrying personnel with 77 direct and five channel quota carrying individuals.

As of today, we have 90 quota carrying people.

We expect this number to be approximately 100 by the end of Q 4, 2002.

Total head count at the end of Q 2 is 796, head count as of today is 811.

For the trailing 12 months the attrition rate was 19%, which is down from 21% reported in the previous quarter.

The average deal size for the quarter was 67,000.

This is down from 74,000 in the prior quarter.

Gross margin is 80% versus 81% last quarter and up versus the 74% that we reported last quarter of Q 3 in 2001.

And again the total license deal account for Q 3 was 56 compared to 232 last quarter.

At the end of June and early July, we issued the class action notes and warrants and as I noted earlier we're showing 49.4 million of notes payable on the balance sheet.

As of today, the outstanding note face value is 70.8 million dollars.

The notes themselves are recorded in balance sheet net of a 21 million dollar discount and this discount represents the fair value of the security of the time of issuance less the face value.

This discount will be amortized over the next five years through interest expense on our income statement.

In Q 3, 2002, we recorded a 1.1 million dollar non-cash discount amortization expense.

Since the discount amortization expense is non-cash and non-operational, we are excluding this from our pro forma results.

On August 6, 2002, the company closed the previously announced preferred stock restructuring.

At the end of Q 3, 2002, we reported 2.2 million face value of series F preferred outstanding.

As of today all the remaining series F preferred shares have been converted into common stock.

Therefore, we no longer have any form of preferred stock in the balance sheet, and the conversion overhangs for the preferred stock is now completely behind us.

Now that we have refinanced preferred stock our share count will become more transparent to our investors.

At the end of Q 3, not the weighted average count, we had ending shares outstanding of 13.2 million.

As of today, with the final conversion of the series F, our share count is just over 13.3 million.

During the last quarter we added two new board members.

We replaced John and Jane with David London and Rick Ricardson.

David London is the CEO and founder of the Boston based software company Vivicorp and is previously served in board and senior executive capacities for other enterprise software companies including Vinuit.

Rick Ricardson is the COO and founding partner of Bayer Capital a one billion plus technology oriented private equity investment firm.

Rick has been actively involved with portfolio enterprise software company serving for example as chairman of the board of software AG from 1997 to early 2000.

We provided financial guidance in the press release.

This guidance is valid as of today only and we do not undertake any obligations to update this information in the future.

I will note that we're expecting to meet the upper end of our 2002 EPS guidance that we originally established at the beginning of the year, and are increasing our EPS targets for next year based on total revenue and license growth that we foresee.

The primary driver for growth next year is operating with an expanded base of account executives.

Secondly continue to up sell opportunity from our new 7i products web professional and web services.

And thirdly up sell from our upcoming 64 bit UNIX capable universal products, web universal and Iserver universal.

This concludes my remarks.

I will now turn the call over to Sanju.

Great, thanks Eric.

As has already been conveyed by both Michael and Eric, sustained profitability during the third quarter has fortified our confidence in the future.

We've got ample reasons to be bullish.

Our new sales this quarter as a leading organization (INAUDIBLE) leadership and our competitive edge.

Here's a partial list of some of our customer wins this quarter.

Advanced PCS, Senus for Medicaid and Medicare services, [inaudible] Federal Highway Administration, KeyBank, Liz Claiborne, Nationwide Insurance, Pfizer, PPL Corporation, Prescription Solutions, RX west, Serpro, Siemens, Solutionant, U.S.

Department of Education, U.S.

Postal Services, Verizon, Yamanouchi and Zomax Inc.

As many of you already know earlier this year we released a new version of our business intelligence software platform MicroStrategy 7i.

Winning high praise from both customers and leading industry analysts, 7i represents a technological breakthrough for our industry as it's the first truly integrated 100% web based platform that delivers all five styles of business intelligence.

Those would be relational overlap, multidimensional overlap, querying reporting, alerting and statistical analysis.

In Q 3, we released the latest version of 7i also known by its version number 7.2.1.

Addressing the industry needed for financial tracking and reporting, the latest release of MicroStrategy 7i incorporates features that make it easy to construct and deploy world-class financial reporting applications.

Using MicroStrategy 7i companies can deploy world-class web based financial reporting systems in 90 to 120 day rather than the usual six to 12 months.

In contrast to other reporting systems that provide over rudimentary reporting capability and lack analytical breadth, 7i can drill down to the full depths of transactional data and can perform automated [inaudible] detection.

We've seen great up tick in interest in the 7i product.

And not only is it a strong capability in itself but again it reports on data in SAP, Oracle, JD Edwards, PeopleSoft and Bog Financial Systems as well as data and custom developed financial applications.

But that is preamble.

Let me talk a little bit more on details about this quarter.

As Eric said we had 110 new customer wins in the quarter, and 256 overall transactions.

Both of which are positive numbers especially in a challenging summer selling season, which Q 3 always is for us.

During Q 3 we had good success selling our existing and new 7i products, our technical account management services and our education packages.

We doubled our [can] contracts in Q 3 and took this program to a new level by adding a set of referencable clients during the quarter.

Of note in Q 3 was our high worldwide maintenance renewal rate of 85% with an even greater 88% renewal rate in the United States.

Our clients have expressed their increasing satisfaction with our products and services and they continue to invest in developing and deploying applications with MicroStrategy technology.

I would like to briefly highlight some of our more note worthy wins during the quarter.

The first is Advance PCS.

In the third quarter of 2002 Advance PCS the nation's largest provider of health improvement services expanded its agreement with MicroStrategy's products and services to create applications for its clients.

Advance PCS service is more than 75 million health plan members, that's approximately one in four of every Americans in the U.S. and links to 60,000 pharmacies and manages 28 billion dollars annually in healthcare expenditures.

The second customer is Liz Claiborne a leading marketer and designer of apparel and accessories for women and men.

They purchase MicroStrategy's software and services to extend their business intelligence applications to over 200 employees within their wholesale division.

And this will allow Liz Claiborne to refine future product lines, product assortments and retail account forecast, thereby improving customer intimacy.

Solutionants is the third customer I'd like to highlight.

They maintain the health care industries leading health care database containing more than 96% of patient discharge records.

They serve a client base of more than 5,000 customers and the company provides information resources to more than 3,000 hospitals as well as 18 of the top 20 pharmaceutical manufacturers in the U.S.

They partner with MicroStrategy to enhance their suite of marketing and planning products and our technology enabled Solutionant to meet both their products functional requirements including access to Terabyte databases as well as their aggressive market objectives.

Final customer I would like to highlight is Verizon who in the third quarter of 2002 purchased additional license from MicroStrategy to expand the reach of its MicroStrategy base business intelligence applications.

End users of Verizon's network metrics portal will use MicroStrategy technology to analyze information contained in their data warehouse in order to make better business decisions and they are deploying this again over the web to over a thousand people throughout Verizon.

Also in Q 3 we entered into relationships with 21 systems integrators in OEM partners including Angoss, A square, AutomationOne, Born Information Services, Diversified Systems, e-Bank, General Technology, Honovi, QuantiSense, Solution Builders, Strategy DU and Weingartner Consulting.

To conclude we're very confident about our future growth prospects.

As a reflection of that confidence as both Mike and Eric mentioned we've been steadily expanding our sales force since January from 70 at the end of the Q 1, to 72 at the end of Q 2 to 82 at the end of Q 3 and up to 90 as of Tuesday this week.

We project that we'll be at about 100 sales people quota carrying sales people at the end of this quarter.

The up shot of this new hiring is that it will further expand our capability to generate new customer wins, new deals with existing customers and of course ultimately new revenue.

This quarter that is Q 4 of 2002, will also achieve an exciting milestone that will strengthen our competitive position.

We'll be releasing a UNIX based version of MicroStrategy web.

Our UNIX product line will further enhance our unparalleled ability to scale up to meet the demanding needs of the worlds most challenging VI applications.

An availability of MicroStrategy on UNIX will expand our prospect face and start to direct our channel reaching depth, satisfy our existing customers who wish to their leverage their commitment to UNIX and expand hardware options for customers that want to deploy MicroStrategy 7i.

In summary I think you can sense the management team has renewed optimism about our future.

Our confidence today results not only from our positive financial results this year, but also from continued product improvements and investments, our ongoing sales force expansion, our barrier high customer renewal rate and the fundamental cost we put in place to allow us to growth in 2003 with the high profitability and good discipline.

With that what I would like to do is move to the Q & A. And I guess we can operator open this up for question and answer.

At this time, I would like to remind everyone in order to ask a question, please press star followed by the number one on your telephone key pad.

Again if you would like to ask a question, press star, followed by the number one on your telephone keypad.

We'll pause for just a moment to compile the Q and A roster.

The first question comes from Mr. [David Hallel] of Friedman, Billings, Ramsey and Company.

Thank you I've got a few questions.

Eric, the $10 million dollars of debt, the face value that you bought back, I was hoping you could share with us how much that costs from both I'm assuming you used a combination of stock and cash, and if not, what did you use, but if you could give us some of the details what it took to buy that back?

David, I would rather not be too precise in that for obvious reasons since we're in an inactive program there.

We've actually disclosed in our 10 Q those parameters.

I'll just say that, you know, we have the right to purchase up to 40% of the original 80 million face, and you know we're going to continue to pursue that, that particular program.

Can you repeat that, 40-- can you repeat that again?

We can purchase up to 40% of the original total face amount, which was 80 million.

Without having to do an entire redemption on the class.

Okay.

The notes payable, so the face value of that 70 million is 49, which is on your balance sheet, but what is the, there's a notes payable on the current liabilities of 4.6 million.

What is that?

There are two notes outstanding.

The first is the class action note, which we've been discussing here. 70 million face. 49 million, a fair value on the balance sheet.

And there is a short-term note at 5 million dollar note that we issued in connection with the preferred stock refinancing.

So one year note, 7 and a half percent coupon rate due in 12 months.

Okay.

And on the product front, Sanju you mentioned putting MicroStrategy web on UNIX.

Any WIN X plans?

We're going to start by porting to [solaris] and AIX those are our first two UNIX platforms that we're going to be supporting and those have been the two that have been most demanded by our clients.

I think in 2003 we're hopeful we'll also be on Linux and perhaps even on HPUX.

Okay.

Eric, I just want to revisit the repurchasing the debt.

Is there, I know the answer to this, but is there a limit to what you won't pay for that debt?

Can you give us a range, if you can't give us a specific number, can you tell us where you're comfortable buying back that debt in the open market?

David, I'm not going to give an indication there, since we have an active repurchase program under way.

Okay. fair enough.

I'll let somebody else jump in.

Thanks, guys.

Thank you, David.

We'll take our next question from Mr. Mark Murphy with First Albany Corporation.

Hi, congratulations on the bottom line result in the quarter.

Eric, can you comment on linearity of license sales in the quarter, maybe how they compared to what you saw in Q 2, and then how they compared to what you would normally see seasonally in Q 3?

I would say it was, it was generally similar to what we had experienced in previous quarters, Mark.

I did mention we had a couple of deals, you know, pushing on the international side, but to me that's not indicative of any type of trend.

I would say that right now, you know, pretty good confidence level based on the sales pipeline we see for Q 4, and it's noted previously that in Q 3 its always seasonally difficult for us, and we typically do see and expect to see an up tick in the fourth quarter.

Okay.

Also, if we were to drill into the revenue range that you've given for Q 4, should we be, should we be counting on any kind of a meaningful up tick in service revenue, or are you more expecting service revenue to be flat with an up tick in license?

This will be a moderate up tick in service revenue.

Just bear in mind that with the holidays particularly in Europe in the third quarter, there are less days available to deliver services, and so we're expecting a bit of an up tick in terms of consulting revenues as well as education revenue in the fourth quarter.

We're also expecting a license up tick in Q 4 versus Q 3.

Okay.

What is the expected cash flow watermark at this point, and what is the timing of that?

Is it still expected to occur in Q 4?

The timing of that is exactly what we've been saying throughout the year.

It will be at the end of Q 4.

The cash flow low water mark will be $10 to $15 million dollars.

We have a couple of opportunities versus that low watermark.

One is the sale of the non-core assets, which is in process right now.

And the second thing is you know the asset based financing which would free up about 6 million in restricted cash between now and year-end.

Okay.

Then maybe a question for Sanju or Micheal.

Can you talk about any expected price differential for the UNIX products?

And then secondly, you're talking a lot more about financial reporting in tracking products, which seems like a logical thing to do given the regulatory environment.

Was there any contribution there in Q 3 and what kind of a contribution from those products should we look for in 2003?

Sure.

I'll take the first part of that.

First, which is the question about the UNIX up lift.

I think the way we're positioning our Universal products certainly they allow our customers to run on UNIX, which I think will be one of the primary benefits.

But in addition they run on any web server or any ap server.

They also allow coding in using JSP in addition to ASP's so that's sort of a driver for the Universal nomenclature.

Because of that additional capability what we're seeing is that we should be able to charge a premium.

Right now we're thinking it will be on a 35% or more premium for the UNIX products over Windows products so we expect to get some additional revenue there.

One other thing we're excited about and our customers are excited about is the products run on 64 bit architecture which right now Windows NT is not the current Intel [inaudible] or not.

So we're going see some performance enhancements that will make that an attractive offering for our clientele.

To answer your second question with respect to 721 or financial reporting, features that we've added, we're seeing a good interest right now from a lot of folks who are, who have been tasked with creating better financial reporting and transparency applications.

So you know the web X's that we run, where we attract people within that interest the attendance has gone up dramatically over the last 90 days so we are excited about that so we think in 2003 that will be an application driver or trend that will drive our BI platform.

We're also seeing with our channel partners including JD Edwards who licenses and OEMs MicroStrategy technology, a pretty good up tick in their burn down of their MicroStrategy inventory so they are starting to have greater success selling their products for financial reporting on top of their ERP system.

Thank you.

Sure.

Our next question is from Frank Sparacino with First Analysis.

Hi, guys.

I wanted to first talk about the two new regional PT's that were added just maybe more specific there, and then also is there someone now who is basically in charge of the east region? .

This is Mike.

Actually, we've, we took the east region and divided into two pieces, the northeast and the southeast, and we found two fairly experienced enterprise software executives to take on those two regions.

We're pretty excited about it.

Both of them have about 10 years experience in our business one-way or the other.

And David Flynn.

So they entered the quarter in charge of those two regions.

And I think we have a good head of steam up in both of those cases.

We're currently continuing to do everything we can to pressurize the sales force and to put in place stronger leadership as well as stronger sales people, and more sales people.

I feel pretty good about the way this is working out.

Everything feels like it's coming on at the right time.

Yeah.

And Frank, to add to that, what we're finding right now in the market are pretty good experience software sales people that also have good database or business intelligence experience, and so we're picking up both programmable but also opportunistically a set of high performance players that we think will be pretty additive in 2003.

Okay, I assume that freeze up some of your time as well as Michael?

I mean how much time are you two spending on the sales front, you know, last couple of quarters in though vacancies.

I think we're most excited about the fact that going into the fourth quarter, the perception of our customers is that our stock issues are fixed and our financial issues are fixed and the same perception of our employees.

They feel good about the business, and because they feel good about the business, I or Eric or Sanju don't either have to answer questions about that nor do we have to be concerned about the effort it took to go through the refinancing and the other financial transactions.

As for sales, we have been involved heavily and we will remain involved heavily.

The difference is now we've got, we've got some more help on a full-time basis in the regional level and what that means is that I think there's a baseline of performance that we can count on, and it freezes up Sanju and I to spend more time with the very, very large customers on the very large deals, and working those prospects and also opening up accounts.

So I expect that what you'll see is that we will continue to be very focused on sales, but that our efforts will actually be more directed toward growth as opposed to just maintaining the existing sales function.

Okay.

On the new products front with web professional and [elapsed] services.

Can you repeat the statistic, the 23% again what that signifies?

Frank this is Eric.

What that statistic represents, if we look at the sum total of all licenses that we sold in North America and we break it down by product line, you know about 24% is either web professional or [elapsed] services and you know those are our incremental purchases, i.e. up sell opportunities to our existing install base.

Okay.

And any idea as to with a new sales of 7i you know what the attach rate is of the new products versus basically you know selling new products entirely back into the install base?

Are you asking a question Frank for customers that are buying for the first time?

Yes.

What is the attachment rate of [elapsed services] or web professional?

Yes, Sanju.

I don't have a exact stat for you, but right now we're finding that web professional has pretty high up tick given it's a user interface oriented product.

People generally want the most complete user interface they can get their hands on.

So I would say that has the highest attachment rate and I think we're seeing good interest in [elapsed services], people are generally testing it before they buy it since it's a performance enhancer they want to make sure they need that performance enhancer before actually procuring it.

My perception Frank is that both products are very popular and if we're looking for a percentage, certainly 50% or more would not be unreasonable as an answer to the question.

I mean they are playing generally in most sales cycles and we're not selling them in every sales cycles but certainly they are interesting and a good amount of time if not half the time or more we're seeing people buying them the first time they go around.

Okay.

And then on the indirect side, I mean, you guys are continuing to be successful in terms of adding new OEMs, et cetera, however when you look at the contribution there, it has declined.

Is that function of size; is it a function of some [inaudible] relationships maybe just more detail there?

Frank the answer to that is fairly straightforward.

If you look at the third quarter versus the second quarter, in the second quarter we had still some deferred license roll off from the NCR transaction, and in Q 3 we basically had zero.

That's about a 1.6 million dollar Delta, and that's 1.6 million dollars less of partner-influenced revenue in Q 3 versus Q 2.

And if you flow that through the overall license number of 13 million, and that's a significant portion of the decline percentage wise.

Okay.

I would just add one other comment there to Eric's comment which is we are seeing some good partner pick up in areas where it's not really reported in the income statement.

For instance, we do have prepayment to continuing and they are making good progress but even more impressively the J. D. Edwards guys who also have had inventory.

They seem to ramping up very nicely in their business intelligence applications and I suspect that we'll start to see in Q 3 next year that prepay is actually burned down pretty good income added to our income statement.

Okay.

And then maybe lastly Sanju, on the tam sales this quarter, you said you doubled the number of deals.

Or did you double the amount of revenue?

That was a deal metric.

Yeah.

We doubled the number of deals.

We're, I think the sales force now for really two quarters Q 2 and Q 3, has been out promoting and selling the tam service offering, which again is a little higher margin, more predictable stream of revenue offering for us so we're seeing good up tick from customers who are demanding that service capability.

Okay.

And maybe one other.

Just in terms of the sales cycles today maybe Michael or Sanju, what has changed, you know, relative to your positioning, you know today maybe versus six months ago.

Is there more focus from, you know an architecture standpoint?

Feature functionality?

Just maybe a little bit of color there.

This is Sanju.

We're seeing a couple of things.

Certainly I'm seeing one, we're finding that reference selling particularly on the high end, is becoming more important a lot of times the reason customers are coming to us is because they've heard other of their peers have been more successful with our technology than they have been with some of our competitor's technologies.

So while they might have already bought a Business Objects or crystal or something else for reporting, they feel like they are not being as successful as they would like to be and they are hearing from other large implementers that they are being successful so we're seeing reference and reference selling is becoming more important.

Number two, we are trying to stress in our marketing in our selling efforts the importance of architecture.

I can't tell you whether that's actually being, if that's driving buying criteria.

I know it's a greater emphasis for us because we believe it to be important so we'll continue to beat that drum and we believe it will have impact in '03.

Finally, one thing I noted which echoes what Mike said in opening comments, I've seen less of a concern about financial viability and stability over the last quarter and maybe I've seen for the last 12 months.

And so it seems like either people have decided that things are okay here at MicroStrategy or it's become less of an issue.

And I know that our competitors continue to make it an issue but for whatever reason we don't hear it as often in our sales cycle.

I would just add the following thoughts one of which is that I think that the industry is shaking out, and it's off, it's becoming much more common that it's, there's simply sales cycles whether either business or [cog nos] is there and we're a potentially replacement or their sales cycle where two of the three of us are being evaluated or all three of us are being evaluated.

I don't see as much competition from other vendors, and so I think we've gone from a market, which had 25 vendors five years ago to a market where there's now just three, and I think that that's a nice collapse at least from our point of view.

We see that as being very positive.

It makes our selling and communications process much simpler.

Also we're getting to the point where most deals like look we've already seen them before.

It's like it's like we've lived through the sales cycle where we convince a retailer that we can do their merchandising and no one else can do their merchandising and after about 100 of those you pretty much can anticipate everything that the competition is going to say and everything we're going to say and what references they are going on offer and what references we're going to offer.

So I think the business is becoming a bit more routine and as it becomes more routine, then our job becomes more simple.

At this point, I believe that our company's focus is become pretty squarely just on sales.

The other elements of the business question marks about technology or finance or do you have a reference customer base or are you with the right services et cetera, all those things are already solved and there's an answer to them.

And so the only real thing to do right now is just execute on the sales cycle.

Okay.

Thanks, guys.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Saylor, do you have any closing remarks?

Yes I would just like to thank everyone for their time today and just reiterate I think what I said in the my earlier comments, I think Q 3 was an inflection point for us.

We're happy that the company continues to be profitable.

We've now been a profitable operation for a year.

And I think 12 months proves this is not an anomaly.

I think we really have fundamentally changed business model around here.

I think that every month that goes by our business gets a bit more straightforward.

We're picking up momentum, and we've put in place some investment over the last six months so I think I'm going to start to yield benefits during the coming year.

Our goal is on a financial basis is pretty straightforward.

It's to moderately grow the revenue and strongly grow the earnings in our business and we're sort of looking at earnings per share growth get better and we think that any publicly traded company that could show earnings growth of 40% would be pretty proud in this particular market environment.

On the market area and with regard to technology, I think that we enthusiastically anticipate that every single month that goes on from this point forward people are going to be become more aware of our superior offering and I think in fact we'll carve out a pretty clearly identifiable part of the market that we can thrive in.

And that part of the market I believe is the high-end growth part of the market.

So I think we've found a very, very strong strategic plan, I think we've got the right business model.

I think we've a very enthusiastic set of managers here, and sales force, which is getting bigger and more enthusiastic every day.

And lastly I'll say that following the restructuring and the buy back of our converts, I think we have a new and very enthusiastic investor base and we're pretty excited to have you guys on board and we feel the full conversion of all the preferred stock is indicative of the fact that at this point the investor base of this company is consistent with our growth prospects and I think on board for the plan during the coming year.

So I like all the indicators and I think that in general we're positioned well for a strong 2003.

I'll look forward to speaking with you when we report our quarterly for Q 4.

Thanks and have a good evening.

This concludes today's MicroStrategy 2002 third quarter earnings conference call.

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