Microstrategy Inc (MSTR) 2002 Q4 法說會逐字稿

Good afternoon, my name is Corey, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Microstrategy 2002 4th Quarter earnings call.

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

After the speaker's remarks there will 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 Mr. Michael Saylor, Chairman and CEO of Microstrategy.

Mr. Saylor, you may begin your conference.

I would like to start by thanking everybody for being with us on this call today.

Our agenda is going to start with our President and CFO Eric Brown reading the Safe Harbor Statement.

Then Eric is going to give a financial overview of the 4th Quarter of 2002.

Sanga Bansal our Vice Chairman and Chief Operating Officer going to give a review of sales and marketing of the quarter with a final summary of the year 2002.

Then I'm going to give a brief overview of our strategy and outlook for 2003 followed by us taking questions and answers from people on the call.

And so with that I'm going to pass the floor to Eric Brown.

Eric?

Thank you, Michael.

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 1985.

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

I'd like to begin by describing the highlights from the fourth quarter of 2002.

We exceeded guidance for both revenue and earnings this quarter.

This marks our fourth consecutive quarter of GAAP profitability and our fifth consecutive quarter of pro forma profitability.

Our GAAP EPS is 33 cents per share and our pro forma EPS was 40 cents per share this quarter.

We reported in excess of $20 million license revenue and had 9 percent license growth versus the 4th Quarter of 2001.

We generated positive income from operations of $4.5 million on revenues of $42 million.

Our gross margins continue to be above 80% and our operating expenses are under control, allowing the company to consistently generate earnings.

Excluding a large one time acrogenous payment, we had positive net cash flow from operations for the quarter.

We also continued to make good progress on our sales force expansion plan and as of today we currently have 98 quota sharing per sale.

Revenue in 4th Quarter was indeed $42 million which is in the upper end of our revenue guidance and well above the consensus estimates of approximately $36 million.

This is up 26% sequentially and down an aggregate by 4 percent versus Q4 2001.

Total license revenue was 20.5 in the quarter which increased by $7.6 million versus Q3 of this year total service revenue was $21.5 million.

The Q4 revenue mix was 49 percent license and 51 percent services.

Both our North American and international operations had strong quarters.

I will note in the 4th Quarter we closed approximately a million in license deals that had slipped out of Q3.

The over all revenue mix in Q4 was 63% U.S. and 37 percent international.

Gross profit margins continue to remain strong at 83% for the 4th Quarter which is an improvement versus prior quarter and also an improvement versus Q4 of last year.

Margins in the license business were up to 96 percent and margins in the services business were 72 percent consistent with prior quarter and also consistent with the 70% we recorded in Q4 last year.

Our total headcount at the end of Q4 was 809 people comprised of the following, 216 people in cost of services, 241 sales and marketing, 206 R&D, and 146 G&A.

Our operating costs in the 4th Quarter increased versus Q3 as expected.

Since this is the end of the year our variable compensation costs were higher as we accrued sales costs at the upper end of the commission scale and also funded approximately $3 million of the year end bonus pool for our non field personnel.

The bonus cost was distributed across the G&A, R&D and sales and marketing lines.

Over all total cost of revenue and operating expenses excluding good will amortization, restructuring and intangible write offs were up by 4.9 million sequentially.

An increase of 2.6 million versus Q4 of last year.

For the fourth consecutive quarter in a row we reported a GAAP profit.

In Q4 we reported 33 cents EPS on a GAAP basis.

Total pro forma net income was 5.5 million in the 4th Quarter compared to 1 million in Q3 2002.

Again the pro forma EPS for the quarter using diluted share account was a profit of 40 cents per share.

This compares favorably to the wall street consensus of approximately 13 cents for the quarter.

The reconciling items from GAAP income to pro forma income are as follows.

First of all starting with GAAP income of 4.6 million we add back 1.4 million expense for the intangible write-off associated with the teracube assets.

We add back half a million in expenses for non cash and tangible amortization, we reverse out approximately 2.1 of gain on no repurchases in the quarter, we repurchased in fact 7.5 million worth of notes face value in Q4.

And finally we add back a million of expense which was related to the non-cash discount amortization on the class action notes.

The sum total of both items brings us to the Q4 pro forma earnings of 5.5 million.

I will note that we provided detailed information on the reconciliation of GAAP pro forma in the press release and also our methodology in terms of computing GAAP versus pro forma is entirely consistent with all previous quarters.

The balance sheet and financial restructuring initiatives we have taken throughout the year are clearly reflected in the improvement of our shareholder's equity.

In total shareholders equity is increased by more than 100 million dollars in the last 12 months and this is driven by accretive events throughout the year, such as the refinancing of our convertible preferred stock the redemption now of more than 17 million in face value of the class action notes at a deep discount, resolution of other liability such as the exchange applications agreement and improved operating results.

Turning to the balance sheet I would like to highlight a number of items.

First of all, at the end of the quarter we had a total of 15 million dollars in cash which is at the upper end of the 10 to 15 million dollar range that we gave last quarter.

Cash balances over all are down by 7.3 million versus the 22.3 million we had at the end of Q3.

The primary source of cash outflow was the large 8.3 million dollar accrued interest payment that we made in late December.

As previously noted this represented a non recurring payment of 21 months worth of accrued interest on the 7.5% class action notes.

During Q4 we redeemed 7.5 million of note face value for a total consideration of 229,000 common shares issued.

This brings the outstanding note face value down to 63.3 million as of the end of Q4 2002 and again I'll note that the notice carried on the balance sheet at a book value of 45 million which is discounted from face.

Prospectively we will make interest payments on a semiannual basis for the remaining 63.3 million of note face value and this will amount to approximately 2.4 million per payment period.

Total deferred revenue for the quarter is up by .7 million versus the prior quarter.

Our Q4 DSO figure was 61 days which was up slightly compared to the 54 days in Q3.

This increase is driven primarily by the large amount of license revenue that we closed in the last half of December 2002.

This DSO figure is sill within the range that we expect which is 50 to 65 days.

EBITDA generation continues to be strong, for the fourth quarter we posted EBITDA of 8.7 million.

This is the 7th quarter in a row positive EBITDA and on a fairly fourth quarter basis we now have generated 27.7 million in EBITDA.

And again we have provided detailed disclosure on the reconciliation of net income results to EBITDA results in the press release attachments.

Key operating metrics for the 4th Quarter of 2002 are as follows.

First of all the total number of new customers in this quarter was 128 which is up from prior quarter of 110.

The total number of customers to date is 1,985.

Our new versus existing customer revenue was balanced in the 4th Quarter with 51% of revenue coming from new customers.

The new costumer revenue from Q3.

The breakdown of license deals from the quarter is as follows.

We had 39 deals greater then $200,000, 23 deals greater then $250,000, seven deals in excess of $500,000 and only one deal in excess of $1 million.

Two comments here, First of all the 39 deals greater then $200,000 dollars is the highest level we have experienced in the last 11 quarters, which indicates that the additions to our sales force are starting to become productive.

Secondly, the one deal in excess of a million dollars was just a tad over a million.

It was one million dollars and 10,000 exactly, so there is no skewing of the statistics.

Indirect revenue as a percent of overall product revenue is 22% in the Quarter, which is the same as Q3.

At the end of the quarter we had 90 quota carrying people.

As of today we have a total of 98 quota carrying personnel which is essentially at the target of 100 that we have been discussing for the past six months.

The average deal size for the quarter increased, it's up to $81,000 versus $67,000 in Q3.

Gross margin was above 83% for Q4 compared to 80% in Q3.

We had a total of 336 license transactions in the quarter which compare compares favorably to 256 in Q3.

In terms of share count I'll note that as of the beginning of the 4th Quarter all the remaining series F preferred stock was completely converted into common stock so there is zero conversion overhang at this point.

At the end of Q4, 2002, we had 13.776 million shares outstanding.

This is an increase of 600,000 shares from the end of Q3.

In terms of the share count roll forward the reconciliation is as follows: As noted previously, we issued 229,000 shares to repurchase class action notes.

There were 344,000 shares issued as a result of the remaining series F conversion and approximately 27,000 shares issued as a result of options and ESPT.

In terms of guidance for the first quarter of 2003 and the full year I'll make the following comments: First of all, the guidance is valid as of today only and we do not undertake any obligation to up date this information in the future.

But to highlight the fact that we are reaffirming both our full year revenue and earnings guidance for 2003.

Our Q1 2003 revenue guidance is 33 to 37 million.

Pro forma earnings .9 million to 1.7 million which translates into 6 cents to 12 cents per share on an expected share count of 13.5 to 14.5 million.

Our full year 2003 guidance for revenue is 150 to 160 million.

Pro forma earnings of 15 million to 20 million, which translate into a dollar to a dollar 40 EPS per share on a share count of 14.0 to 15.0 million shares.

Please note that in the press release we have given GAAP based guidance which when adjusted for certain non operational items which we have consistently excluded this will correspond exactly to these pro forma guidance numbers and again I would like to emphasize the point that this guidance is entirely consistent with what we reported 90 days ago.

The primary driver for growth next year will be operating with an expanded base for account executives. , Contined up sell from our new 7I products, up sell from our 64 bit UNIX compatible products.

At this time what I would like to do is turn the call over to Sanga.

Great, thanks Eric.

The very significant milestone that Microstrategy marks today, which is one full year of profitability, is due to the hard work by our dedicated employees.

By making substantial improvements to our balance sheet and tightening all aspects of our operations we believe Microstrategy has established the software industry model for financial restructuring and operational revitalization.

This progress would not have been as remarkable without a continuous stream of technology and innovation, so I'll start with a brief recap of recent technology developments.

As you will recall we released Microstrategy's 7I in April 2002 and this release was focused on the usability and deploy-ability of our platform. 7i has been a great driver of our revenue growth and we continue to see very strong interest in 7i from our install base as well as new prospects.

Most recently in November, Microstrategy released an easy to deploy, scalable web usable interface, Microstrategy Web Universal that runs on UNIX, LINUX, and the Windows Operating Systems.

Like Microstrategy Web, Microstrategy Web Universal delivers reports building and editing capabilities over the web with a zero footprint user interface.

As our first ever UNIX release Microstrategy Web Universal will allow us expand our customer base , allowing us to serve those who have a strong preference UNIX.

We also anticipate this UNIX offering will enhance our channel reach and depth in 2003.

Shifting to our view of sales in Q4, new sales with leading companies this past quarter were impressive.

Here is a partial list some of our new deals in the quarter, All Italia, Aventis Pastor, BellSouth, Crane and Company, Discovery Communications, GE Medical Systems, Grange Insurance, Harris Teeter, IMS Health Canada, KAX Group, Coke Industries, Lending Tree, Prescription Solutions, Ream Manufacturing, RBC Financial Group, Shaw Industries, Solutent, Toyota Financial Services, Universal Studios, U.S.

Air Force, and Wells Fargo.

With that as introduction, lets me give you some more color on the quarter.

As Eric noted we had a good total number of new customer wins at 128 keeping pretty consistent above 100 for the last four quarters.

We had an outstanding number of total transactions at 336 which was up from 256 transactions in Q3.

Operationally Q4 was a strong quarter for Microstrategy.

We closed the vast majority of deals forecasted for closure at the beginning of Q4 and our maintenance renewal rate continued to stay high in Q4 keeping at a rate of 90% in the U.S. up from 85% in Q4 of 2001.

A significant highlight in Q4 was the large number of transactions, rather than depending on a large license deal or set of large license deals to meet our quarterly targets we transitioned the business to a diet of small and medium sized transactions spread across many customers.

These small and mid size transactions are more predictable and reduce our execution risk.

We consider our current transactional model to be very healthy and we are glad to see the new trend.

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

Discovery Communications is the first one.

They are a leading media and entertainment company with over 830 million subscribers, and they are the home to the.

Discovery Channel, Travel Channel, Animal Planet and the Learning Channel.

Discovery selected Microstrategy 7i as its business intelligence standard because of its integrated architecture, ease of use and low cost of administration.

Discovery plans to deploy multiple sales, financial and management applications using the Microstrategy platform.

Second we have Toyota Financial Services.

Toyota Financial Services is a leading captive finance company with assets of more than 40 billion dollars and they purchased additional Microstrategy software and services to expand their financial reporting applications enterprise wide.

Impressed by the scalability and functionality of Microstrategy Toyota expects to grow its user base to over 400 associates across the country in early 2003.

Next we have All Italia, which is one of the leading airlines in Europe.

To maintain its leadership positional All Italia uses Microstrategy for customer profiling, client segmentation, campaign creation and management and for market basket analysis.

All Italia deploys Microstrategy Web and Narrow Cast Server to deliver this customer centered and sales data.

Finally we have IMS Health Canada, they have developed an extra net ASP application using Microstrategy to provide sales and marketing data to pharmaceutical companies.

The recent purchase of additional Microstrategy software and services will allow the company, IMS Canada to expand its reach from 650 customers on the web to over 1,000 and from 2000 subscribers oversee personal insight via Email to over 3500.

The company offers these data services to its pharmaceutical customers to help them determine optimal sales and marketing strategies to improve their market presence.

We're very proud of these wins and we expect to continue our improved sales performance.

We feel we have a solid sales engine going into 2003 as we increased our sales force by approximately 30% in 2002.

We expect to continue to expand the sales force an additional 10 to 20% in 2003, and this sales force growth would be impressive in a growing economy.

I think this growth is particularly noteworthy today, during today's more challenging macroeconomic environment.

Finally, I would like to highlight some very positive industry analyst commentary we received in Q4.

The independent highly respected OLAP Survey 2, a survey of 2,236 people from organizations based in 49 countries recently found Microstrategy's software superior to that of Business Objects, COGNOS, Highperin and BREO in real world web deployment and data scalability.

The OLAP Survey 2 also determined that Microstrategy customers are more loyal than those of Business Objects, COGNOS, Highperin and BREO.

Let me quote directly from the survey's author: Nigel Pensey. "Microstrategy's ability to provide full analytical access to the entire range of data and support very broad web deployments is critical to maximizing business insight.

The fact that Microstrategy customers reported the highest web deployment rates among all BI vendors in both editions of the OLAP survey is a testament to its web architecture's attractiveness.

Also, the fact that Microstrategy customers analyze the largest amounts of data is no surprise given its highly scalable architecture.

This may help explain why Microstrategy has had the highest loyalty rating among BI specialists in both editions of the OLAP survey."

In conclusion it is often said that hard work is it's own Reward.

We have worked hard in 2002 to improve the efficiency of our sales engine, to tighten our internal operations, and to deliver world class products.

As a result we have gained respect from customers, partners, and analysts for exceptional industrial strength software, for our outstanding and responsive customer service, and for our ongoing commitment to constantly innovate our technology.

We're enthused to see our hard workman if he is itself and improve financial results and we think our four quarters as well as full year profitability demonstrates that we've turned Microstrategy around and we're now poised for revenue growth.

I think our profitability track record improves customer's and prospects confidence in us and will substantially improve our ability to compete in 2003.

We're looking forward to the coming year and believe that our future as a business intelligence industry leader is indeed very bright.

With that I would like to turn it over to Michael Saylor.

Thank you, Sanju.

I thinker Eric and Sanju have given a pretty comprehensive review of the business to date so I will try to keep my comments brief.

I'm looking at it from a strategic point of view.

I think the beginning of 2002, we laid out a multipart plan to improve the business prospects based upon a focus on fundamentals.

Our plan was to introduce new products, to focus our compensation plans on cash generation, customer retention, profitability, and visibility.

To focus our marketing message on our BI platform asset and its strengths in the competitive arena, and finally to strengthen our balance sheet.

We worked this plan for the entire year.

Our results in Q4, I think, illustrate that we've realized some fruit from our labor.

Our license sales grew and the demand has been broad based as Sanju pointed out.

Our maintenance business was strong in Q4.

Our business is profitable and across individual geographies and lines of businesses we feel very comfortable that those are also profitable, and so just as the revenued and demand is broad based we feel our profitability is based not on one particular group performing exceptionally but the business as a whole performing in a healthy fashion.

The balance sheet has improved dramatically with healthy decreases in our debt, our preferred stock, and our aged receivables, we're happy about that, so looking into 2003, we'll enter with a healthier business than we took into 2002.

Our stock price is healthier due to our reverse split.

Our interest and dividend obligations are lower than they were in 2002.

Our field sales force is stronger.

And our policies and compensation plans are stable within that group.

We brought in more leadership and they appear to be working out very, very well in the area of field sales.

Our products are working better as they get more seasoned and as we have more time with our new technology in the market.

And finally the source of all value in our business is our customers.

They are succeeding with our technology.

They're building more applications.

And they are deploying to more users as examples like the IMS Health example illustrate.

Those customer successes are creating a demand in our market, and that's the demand that actually is driving our business forward.

So with that I will go ahead and end our call and take questions and answers from the audience.

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

Again to ask a question, press star one.

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

And we'll take our first question from David Hilal from Friedman Billings Ramsey and Company.

All right.

Thank you.

I've got a few questions here.

Eric, on the balance sheet, in the cash, outside of the 2.4 million dollars semi-annual payment, are there any other cash outlays, or should we think of cash flow as basically being operations and every six months this cash outflow for the interest?

I think you hear essentially correct, Dave.

We have the class action notes outstanding which I mentioned, 63.3 million face, and we also have a $5 million note which is due in July of 2003.

Both those instruments bear interest at the rate of 7.5%, and they're semiannual pay, and so that's all we have in terms of interest bearing debt load at this point.

And the 5 million note is due when in '03?

July.

And is that associated with the restricted cash?

No it's not.

It was actually a note issued in connection with the preferred refinancing.

And I remember three months ago you had hoped to enter into a new -- some type of new credit facility to remove that restricted cash.

Can you give us an update on that?

Yeah, we have nothing to report at this time.

It's something that we're still, you know, looking into.

Okay.

Moving on, the guidance for Q1 assumes -- I'm going to take the midpoint of your revenue and the midpoint of your EPS.

It assumes operating expenses come down a pretty good amount in Q1.

Am I interpreting that correctly?

Yes, David, that's correct.

Yeah, we had unusually high operating expenses in the 4th Quarter due to, you know, year-end bonus accruals and also, you know, pay out in the field force at the higher end of the commission scales.

We had a lot of account executives moving from the initial base rate pay out to a higher rate for the Q4 transactions.

For Q1, we're looking to have essentially, you know, flat headcount versus Q4.

We expect to have, you know, lower variable compensation expenses, and that will impact each of the line items, cost of sales, R&D, G&A, and sales and marketing.

Okay.

Mike, can you, you know, Business Objects has been making this push into the application side of BI, and you guys had said, toyed on the CRM side two years ago or so.

Give us your latest vision about BI as an application versus, you know, a platform and tool.

I believe that there is a place for packaged applications in the marketplace, in the analytics area.

I just happen to think that SAP and CBOLD and PeopleSoft will probably end up owning whatever there is there.

At the same time, we observed that there are thousands and thousands of analytical applications that need to be constructed and the great majority of them are custom because the companies themselves are statutorily unique or politically unique or have contractual obligations to make them unique, an example being comp plan, no two have the same compensation plans yet they want to analyze things.

So the driver for our business is the continual unique evolving requirements for companies to build their own analytical application.

I think that it's reasonable for a BI vendor to shift item plates or perhaps starter kits or components that accelerate the construction of a custom application and I think that that's a reasonable strategy and to the extent that we can do that we do.

However, I think that it's not very realistic and it's not very practical for a BI vendor to hop to shift the entire MO to co-application because that implies shipping the Schema and also a whole host of very ETL and custom work flow and in our experience that's not a profitable business to be in because there are so many fragmented applications out there in the marketplace.

So to the extent that other BI vendors are pursuing creating a better tool set for customization of analytical applications I think that's probably wise.

To the extend that they're pursuing their own stand alone applications I think they're going head to head with SAP and in a space where they can't possibly win and that's probably not wise and they're abandoning their core strength which is serving as a merchant solution for companies which absolutely need to customize and have an economic value proposition that makes customization a wise thing to do.

Okay.

Good.

Eric, guidance on income taxes, how shall we model that?

I think that, to make a couple of comments there.

I think you picked up on the fact then David in the 4th Quarter our tax expenses were lower than in previous quarters.

The reason for the decline in tax expense in the 4th Quarter is as follows: We periodically review our defered tax asset valuation allowances and as of the end of this year certainly our foreign subsidiaries that had a remaining NOL have established a history of profitability and that trend is expected to continue during 2003, so accordingly we released a portion of the valuation allowance associated with those NOL deferred tax assets.

We'll continue to monitor our worldwide evaluation allowances in the future and the way I would look at this from a modeling perspective is to keep the taxes at approximately 3 to $400,000 per quarter and, to the extent that we have any cause to re value the allowances we'll, of course, be communicating those, but this was a -- an anomaly or an adjustment in Q4 relative to the other quarters in 2002.

Okay.

I'll let some others in.

Good work, guys.

Thank you.

The next question is from Mark Murphy with First Albany.

Hi.

Congratulations on an outstanding quarter.

I wanted to start by asking about the new UNIX and LINUX oriented product.

Were there any sales in the quarter to speak of, or could you give us any insight into how the pipeline looks on the non-windows platforms?

Mark, this is Sanju.

We don't break those out.

I'll tell you that momentum for that product is building.

We launched it in November, and so we've started to see some good demand from existing customers who have been waiting for UNIX products for sometime.

There is also a lot of interest in J-2 double E compliance and so just having a good java architecture that people can customize around has been highly attractive.

I expect that we will start to see as we typically do for new products about a three to six month lag between the release of the product and real activity, so we got to get the word out which we have been doing and we're starting to see some demand but again I think the bulk of the revenue will start to show up in probably the late second quarter or third and 4th Quarter of this year.

We are excited we are seeing renewed interest from hardware partners that for a long time had not been working with us, so at our upcoming Microstrategy user conference which is next week in Las Vegas we do have as sponsors HP, because of our UNIX support which of course they can take advantage of as well as Sun who's a first time partner for Microstrategy and both of those are going to be sponsoring us at the gold level, so we're pretty excited about their participation.

We also do, of course, have IBM as our platinum sponsor.

They are excited about our AIX port, and I think we're going to see some channel pull that we haven't seen historically because of our lack of UNIX.

Thank you, Sanju.

Michael, could we get some of your high-level thoughts on the IT demand environment?

Do you sense at all that it was picking up in the 4th Quarter, or was this more a case of improved Microstrategy internal execution in the quarter?

I think that there are some areas in the IT environment which are still difficult.

I don't think I would want to be selling a 5 or 10 million dollar application into the IT environment right now because typically the view is they want to put off large capital investments.

On the other hand, they can't put off evolving requirements driven by Sarvane Zoxley or driven by the Bossel Accord or driven by increasing difficult retail or other environment.

So when they're stuck dealing with requirements and they can't make a large capital investment they tend to get stuck into the decision making process of trying to figure out can they cobble it together themselves or can they go find a tool or buy a tool or re purpose a tool.

So I think it's actually created a reasonably good environment for people who are selling the tool sets and platforms to create custom applications that are going to be satisfying mission-critical requirements, so if you're in a business where you are actually offering a tool set to help a customer build a credit-scoring application or fraud-detection application or loss-prevention application or sales-analysis application, and these things are major agenda items for the executive team of the company, then I think you see good demand.

And right now I think we feel pretty good about the demand we see, but that doesn't mean or translate I think to good demand across every single industry group in the software business, and I suspect that some are doing better than others.

How deeply do you think you have penetrated the existing customer base with the platform?

And if we look within that base, currently, do you think the growth is being driven by data growth in existing apps or user growth or are we looking at entirely new applications?

Well, I think that the ways in which we can penetrate our customers is we can go from a handful of applications to a few dozen applications.

I think we can also penetrate by going from a few hundred or a few dozen users to a few thousand users, and, finally, I think we can penetrate by creating applications which are more valuable by doing a more sophisticated credit scoring analytic or more sophisticated fraud detection analytic than we did before and that drives demand up and utilization up.

I have seen statistics across our 2000 customers that indicate that for large volume sample sets we have two to three applications in our customer base, but I know from personal experience with our top 100 customers that it's more common with our best customers that we have one dozen to two dozen applications.

So I believe we're under penetrated by an order of magnitude with regard to number of applications in our customer base.

I know that our best customers in areas like retail had deployed to 10,000 or more active users every day and yet I know we have hundreds of retailers and probably many of them or most of them have 50 to a 100 to 500 users.

So I think that we're under penetrated in the area of users as well.

And so in general, if I were looking at our growth prospects as a company, I would say they come from three areas.

One area, clearly, is the expansion of utilization in our customer base which could be tremendous.

Another area is the number of applications that people are using our technology for which I think will expand and is expanding.

And the third area is that as we get stronger and stronger reputation in certain markets, for example, in the banking market in Spain right now we have extremely good coverage or in the telecommunications market or in the retail market we have very good coverage across the space.

I think our reference selling to our new costumers gets easier and it's simpler for us to penetrate into new accounts because we have a stronger reference base and I think that's the third pillar for our growth going forward.

Okay.

Thanks a lot.

The next question is from Frank Sparacino of First Analysis.

Hi, Eric or Sanju, I was hoping one of you would comment on the contribution uptake of what professional apps services this quarter.

Just give us a moment, Frank, we're working on that.

Okay.

In the meantime, Mike or Sanju, maybe, if you could just talk about the for-example that you gave in the press release in terms of customers, the general sales cycle and maybe what you see differently today relative to six or 12 months ago that's, obviously, helping you compete better and any changes, you know, tactically from a positioning standpoint.

Okay.

Let me go ahead and take that question, and then I thinker Eric will respond to your question on OLAP services and web professional.

With respect to our ability to compete I think we're seeing that there is a better awareness of Microstrategy today as a business intelligence platform player than we had maybe 12 or 18 months ago, so I don't think there's as much confusion in the market about who we are, and those people that are getting the message are clear about our position in the market, and that is we offer a technically advantageous platform to that offered by perhaps Business Objects or COGNOS or BREO.

I think we're starting to get for the first time here in Q4 a set of channel poll that has historically has been a bit weak for us so we saw in the 4th Quarter a new partnership with IBM, which we are going to be expanding in 2003 in the form of field working relationships.

We saw with the Discovery Communications deal which I referred to as one of the four example deals, another partner that pulled us in as part of a referral deal.

So I think we're starting to get a bit of channel pull that we weren't getting before and hopefully they will turn into more quote un-quote easy revenue for us because typically if somebody pulls you in they are going to recommend you as well.

I do think that sales cycles are not quite as vicious for us as they used to be, and typically as people decide to invite us in they already have a good sense that they want Microstrategy because they have run into a wall with their current provider, so if I already have Business Objects or Brio or COGNOS, I probably have a pretty good sense of where I'm limited with those technologies and they're inviting us in as typically an upgrade to their current technology.

So I think that for 2003 we're hopeful that our message will continue to get out.

I think our competitive intensity, while I'm not saying the competitors aren't out there, I think buyers that are buying Microstrategy they know the problems with the other competitors and they're looking for a solution that we can offer, and so I don't think that we are going to have as much competitive difficulty as we have had historically where we just try to go out with a non differentiated message.

So I'm looking forward to 2003, I think it will be an easy execution year.

Certainly fiscally, which Mike alluded to, the financial overhang which we had in 2001 and early 2002 appears to be lifting and I think people are much less concerned about our financial environment and our future financial prospectus and that's using sales cycles as well.

Frank, to more specifically respond to your question, in the second quarter we had approximately 2.4 million in license revenue for OLOP services and Web Professional combined and in the third, that would have been the 3rd Quarter, and in the 4th Quarter we had approximately 4.4 million.

So it's not quite a doubling of the uptake but a fairly significant increase of about 80% or so quarter to quarter.

How long would you anticipate, Eric, that type of sequential uptake?

Maybe not to the same magnitude but --

Yeah, I really wouldn't attempt to forecast it, Frank, to be perfectly honest.

I would just say I don't think it's wholly saturated yet in terms of the percent mix of our products at this point in time.

And so I would expect that it's going to increase a bit over the next quarter, is what the steady-state, long-term rate is, it's, I really can't say right now.

Okay.

And then from a sales force perspective, any changes in '03 in quotas?

Yeah, this is Mike Saylor.

With regard to quotas in 2003, I think we have brought in more people in the sales force and in some cases we have placed individuals in metropolitan areas that we hope to penetrate with not as many customers, and so in those cases we give them normally lower quotas.

In other cases we've got some sales people handling very large accounts and we have actually raised their quota.

So the quotas range from, anywhere from, you know, typically, $500,000 to $1 million for a low end quota for someone with a very green patch all the way up to $3 million or more if they have a very large territory, and we allocate those quotas depending upon the territory and the experience level and the prospects of any individual sales team.

Okay.

Thanks.

Mice job, guys.

Thank you.

Thank you.

Your next question is from Patrick Mason of Pacific Growth Equities.

Hi, guys.

Makes me look good, since I just initiated.

But just a couple questions, ones more on you're talking about where maybe there's some business limitations with Business Objects, BREO, COGNOS, etc.

Can you just kind of talk a little about that, maybe if you guys have actually displaced some of those technologies or maybe they're just more complimentary and those technologies are still there?

Sure.

Why don't I start and then Sanju can follow up if he has other comments.

I think the key is that about a decade ago we focused our product development around doing detailed analytics for very, very large data warehouses in the marketing area for companies like McDonalds and so we have also come out of that school of thought where we're not going to be able to simplify or truncate the data set and the data was going to change every day.

Business Objects and COGNOS; traditionally have focused their analytics on mid sized to small data sets, a gigabyte versus 200.

If you look at the OLAP survey I think our medium customer has 280 gigabytes or more, the median VO customer is 7 gigabytes the median COGNOS customer is one gigabyte so when you look at the chart you wonder that we're even considered to be in the same market at all it's like considering the carrying capacity of a super tanker versus a small pickup truck.

I mean they are both hauling something but it's a different two orders of magnitude stuff they're hauling.

Now that may not mean much to a non-technologist but if you actually manage that amount of data what you find that there are dozens if not hundreds of features that are required in specialty type techniques in order to analyze data in those sort of data stores and it turns out that those database sizes are normally correlated to certain applications like merchandising or fraud, because it only makes sense to do fraud detention on a very large database, not a small one.

So when you look in specific, at us versus BO or us versus COGNOS; what you find is versus COGNOS they require that you truncate down to a very small amount of data, probably one 1 one-hundredth the amount of data that we would access or one thousandth and the deficiency is just that, that there's a whole range of applications that it's just impossible to run against such a small data set or because you truncate down you have a maintenance problem.

With regard to Business Objects, it's similar.

Business Object's architecture doesn't have a server between the database and the client so if you had 500 people and they're all running against a terabyte of data they would all hit the database at the same time and they put much much larger loads on the database and it makes it much harder to execute, to build administrative features or put centralized security or central scheduling into the system because you just don't have the architecture to do it with.

If you put all these things together and combine it with one other twist which is that we've implemented statistics as SAS has and a set of financial features like Excel, what our architecture offers is a full dynamic range of analytics against a full range of information even if it's changing every minute and what our competitors offer is a very truncated set of analytics against a truncated amount of data, so there will be things that our applications are well suited for their technology.

There will be other applications that aren't at all suited for their technology.

And the key to our business is finding those applications where our competitors really aren't suited much at all and to communicate that to the marketplace.

Sanju?

Yeah, I think the answer to the other part of the question which are where have we had some replacement wins recently, I think over the past year some that come to mind would be relative to COGNOS, Bell Canada, we had a big enterprise win their right in COGNOS's backyard where they standardized us across the enterprise even though they had already been using COGNOS in certain pockets of Bell Canada.

Michelin France, again a big COGNOS replacement.

With respective Business Objects, Air miles Spain, KPMG I think with a Business Objects replacement.

The Limited, which is of course a big retailer, J.C.

Penney, they are also a big Business Objects shop.

So starting to see again customers that have been pretty experienced in using first generation or second generation architecture are now saying that those are not really, you know, meeting their need, and they're migrating to a third generation server centered architecture that gives them the scalability and reliability that we offer.

Okay.

That's -- go ahead.

I'm sorry.

I was going to say one other thing, which is that in our marketplace, it goes without saying that if a customer has a database, they probably used crystal before they used us and they probably used COGNOS and Business Objects before they used us so almost by definition nearly every single Microstrategy customer is replacement for one of those three because the nature of our product line is that you can port a Crystal or BO or COGNOS application to our architecture much easier then you could ever port and application from our architecture onto theirs..

And so I almost never hear, very, very rarely hear about one of our customers who built an application and decide that they're going to port it to our competitor but in fact nearly all of our applications consist of our customer saying I had a reporting tool like Business Objects or like Crystal and it doesn't do X, Y, and Z, and I need someone that can do X, Y, and Z and we normally can do it so we get the business.

So we like that.

From a strategic point of view it has implications for our sales and marketing activity.

Clearly two or three years ago people spent a lot of marketing money trying to create the market and trying to convince people that they should actually be interested in spending money on certain technology.

In 2002 and 2003, I think the market is well defined.

There is a demand.

Our marketing activity consists of simply underscoring to people that we're in the market and our technical unique selling proposition or our technical superiority against their existing vendors.

That of course is much easier to do and it's much cheaper to do and it's more efficient and we really rely upon I think the mid-range and low-end competitors in the BI market to create the space and create the demand and our feeling is that as long as we're very aggressively competitively positioning vis-a-vis them we're going to find the biggest budgets, the biggest data warehouses and the most demanding applications, and they'll migrate to us, and those are the ones that are in some ways most difficult to get because you have to prove technically your superiority but they are also the hardest ones to lose and so we build a base through grass roots work, and over time we believe that's a great asset for us.

Okay.

That's a good explanation.

Now one other question is on your Web Universal product just more I'm positioning to, would you say that's more like web based reporting, that's more like an actuater or Crystal you would bump into more often.

I wouldn't position it that way necessarily certainly we do have great web based reporting with Microstrategy Web and Web Universal product line, the real push with Universal was to deliver UNIX compliance so the fact that we now run on various flavors of UNIX and also on LIUX is a big break through and also will allow us to work on 64 bit windows architectures so that's actually going to be quite a break through as well.

Okay.

Great, one last question for Eric, on the press release you talked about the excluded items, one was 40 cents and it was like a 2.0 million, partial extinguishment of notes payable and later in the release you had a repurchase at 7.5 at face value kind of mentioned in it and had a 2.1 gain.

Is that linked together?

It's essentially the same item.

It's just a rounding issue.

Okay.

And if you look at the detail table at the back of the press release you'll see the exact dollars.

Okay.

That's great.

Thanks.

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

Gentlemen, are there any closing remarks?

I would just like to thank everybody for being with us on the call today and wish you all a happy new year, have a good day.

Thank you for participating in Microstrategy's 20024th Quarter earnings call.

You may now disconnect.