Microstrategy Inc (MSTR) 2003 Q1 法說會逐字稿

Good evening.

My name is Corey (ph) and I will be your conference facilitator.

At this time, I would like to welcome everyone to the MicroStrategy 2003 first-quarter earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2, on your telephone keypad.

Thank you, ladies and gentlemen.

At this time, I would like to turn the conference over to Mr. Michael Saylor, Chairman and CEO.

Mr. Saylor, you may begin, sir.

I'd like to start by thanking all of you for being with us today.

I have with me Eric Brown, our president and CFO, who is going to give you a financial review of our results for the first quarter.

I also have Sanju Bansal, our Vice Chairman and Executive Vice President, who is going to give you a sales and marketing review for the quarter.

And then I will wrap up with some final thoughts about the business this quarter and the coming year.

So without further adieu, I'd like to introduce Eric Brown, who will read the safe harbor statement.

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 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important pocket important factors, did can you 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 first quarter of 2003.

Revenue for the quarter was 37.4 million, which was at the upper end of our revenue guidance range.

Our GAAP earnings per share was 5 cents per share, and our adjusted or pro forma EPS was 12 cents per share.

Our adjusted EPS of 12 cents per share was at the upper end of the earnings guidance range and exceeded consensus EPS of 11 cents by a penny.

This marks our fifth consecutive quarter of GAAP profitability, and sixth consecutive quarter of adjusted net earnings profitability.

We reported 16.5 million in license revenue, and had 14 percent license growth versus Q1 of 2002.

We generated positive income from operations of 3.8 million in Q1, and our gross margins continue to remain strong at 82 percent.

We generated 7.5 million in cash flow from operations for the quarter.

Our cash balance at the end of Q1 was 21.9 million, which is up by 7 million from the 15 million in cash that we had at the end of the fourth quarter 2002.

For Q1 we recorded EBITDA of 6.2 million and on a trailing four quarter basis we generated 27.5 million in EBITDA.

Finally, we repurchased 1.8 million in note principal value during the first quarter of 2003, and then between March 31st and through today, we've repurchased an additional 8.5 million in note principal value, reducing the total face amount outstanding to $53 million as of today.

In terms of the revenue review, again our revenue for Q1 was 37.4 million.

This was down 11 percent sequentially from the seasonally strong fourth quarter of 2002.

Total revenue was up by 5 percent versus Q1 2002, and our license revenue in Q1 at 16.5 million is up 14 percent quarter to quarter versus Q1 2002.

This marks the second consecutive quarter of sequential license growth.

The Q1 revenue mix was 44 percent license and 56 percent services.

The geographical mix in Q1 was 64 percent U.S. and 36 percent international.

Our three strongest vertical segments for the quarter were retail, information technology, and pharmaceutical.

Gross profit margins continue to remain high at 82 percent for Q1, which is roughly the same as last quarter, and slightly above Q1 of 2002, which was 80 percent.

Margins in our license business were 95 percent, again consistent with prior quarter.

Margins in the services business were 72 percent, again consistent with prior quarter and slightly improved versus Q1 of 2002.

Our total headcount at the end of Q1 was 819 people, and is comprised of the following by GAAP category: 205 headcount in cost of services, 268 sales and marketing, 204 in R&D, and 142 in G&A.

As expected, our operating costs in Q1 2003 decreased versus the fourth quarter of 2002.

Since Q4 '02 is the end of our year, our variable expenses were higher as we reviewed compensation costs at the upper end of the commission scale and also funded a portion of the year-end bonus pool for our non-field personnel.

Overall, total cost of revenue and operating expenses, excluding goodwill amortization, restructuring, and intangible write-offs, were down by 2 million sequentially and up by 1.8 million versus Q1 of 2002.

For the fifth consecutive quarter, we reported a GAAP profit.

In Q1 2003, we had a GAAP profit of .7 million, or 5 cents per share.

We reported total adjusted net earnings of 1.8 million in Q1 2003 compared to 5.5 million in the prior quarter.

Again, the adjusted net earnings EPS results for the quarter, using diluted share count, was a profit of 12 cents per share versus consensus of 11 cents per share.

The reconciliation of GAAP net income to pro forma, or adjusted net earnings, are as follows.

First of all, starting with the reported GAAP number of .7 million of profit, we have a $100,000 expense add-back for non-cash intangible amortization.

We have a $20,000 elimination of income on the non-cash gain on note repurchase.

And we have a $1 million expense add-back for non-cash discount amortization expense on the class action notes.

If you add those three items together, that reconciles the .7 million of GAAP income to 1.8 million of adjusted net earnings.

Again, we have provided GAAP to adjusted net earnings reconciliation detail in the press release financials.

We applied the exact same methodology for the adjusted net earnings reconciliation as in previous quarters.

Turning to the balance sheet, I'd like to make a number of comments.

During Q1, we increased our cash balance by 6.9 million to 22 million.

As noted on the previous quarter's call, we had expected cash balances to increase throughout Q1 as we collected receivables.

During Q1, we redeemed 1.8 million of note face value, for total consideration of 56,000 shares of common stock, bringing the note face amount down to 61.5 million as of the end of Q1 2003.

The note has a balance sheet carrying value of $44.6 million.

Between the end of Q1 and today, we repurchased an additional 8.5 million of note face value, and issued total consideration of approximately 262,000 shares of common stock.

This brings the note face amount down to $53 million as of today.

I will note that these repurchases of the notes were done at approximately a 25 percent discount to their face value, so we feel that these are accretive transactions.

Assuming no additional note repurchases in Q2, we expect that the book carrying value of the remaining 53 million of note principal value will be approximately $39.2 million at the end of Q2 when we report.

Prospectively, we expect that based on the $53 million note face value, we will make semi-annual interest payments of approximately $2 million every six months through the maturity of the notes in 2007.

The non-cash discount amortization expense on the notes is expected to be approximately .8 to $.9 million per quarter in Q2.

Total deferred revenue increased by $2.8 million in Q1 versus the prior quarter.

Short-term deferred revenue, which is comprised primarily of deferred maintenance revenue, increased by $2.4 million over Q4, and long-term deferred revenue, which consists primarily of multi year maintenance contracts increased by .4 million versus Q4.

We continue to see improvements in our maintenance renewal rates in Q1 versus Q4.

Our Q1 DSO figure was 59 days compared to 61 days in Q4 '02.

The DSO metric is comfortably within the 50 to 65-day range that we expect.

EBITDA continues to be strong.

Again, as previously the noted, we had a Q1 EBITDA reserve of 6.2 million.

This is the eighth consecutive quarter of positive EBITDA.

On a trailing four-quarter basis, we generated 27.5 million in EBITDA, and again, we have provided detailed disclosure on the reconciliation of net income results to EBITDA results in the attached press release financials.

In terms of cash flow, our cash balance increased by 6.9 million this quarter, bringing the free cash balance to 22 million.

This is the fourth consecutive quarter we've generated positive cash flow from operations.

The reconciliation of cash flow is as follows: First of all, starting with the 6.2 million in EBITDA detailed in the press release, we net out 1.3 million in cash restructuring costs, we add back 2.9 million due to the change in deferred revenue, and working capital other items is a reduction of .3 million.

Leaving net cash generated from operations of 7.5 million.

We net out capex and other items, and a hundred thousand in disk ops cash utilization which brings us to the net cash in cash balance of 6.9 million which reconciles to the balance sheet change quarter to quarter.

A summary of our key operating metrics is as follows: In the first quarter, the total number of new customers added was 97.

Our total number of customers to date is 2,082.

Our new versus existing customer revenue mix in Q1 was 48 percent from new customers.

The breakdown of license deals in the quarter is as follows: 20 deals greater than 200 K, 17 deals greater than 250 K, 8 deals in excess of 500 K, and four deals in excess of $1 million.

Indirect revenue as a percent of overall product revenue was 23 percent in the quarter, and we signed a total of 12 new channel partners in the quarter.

At the end of Q1, we had a total of 102 quota-carrying personnel, with 95 direct and seven channel quota-carrying individuals.

Compared to Q4 last year, we had 90 total quota-carrying personnel, so which is up by 12.

Total headcount for the organization was 819 people, and for the trailing 12 months ended Q1, the attrition rate was 22 percent, which is the same as the prior quarter.

The average deal size for the quarter was 90,000, which is up from 81,000 in Q4.

Gross margin for the quarter was 82 percent versus 83 percent last quarter.

We had a total of 236 license deals in the quarter, compared to 232 in Q1 2002.

And again, the revenue mix for the business was 64 percent U.S. and 36 percent international.

Approximately 29 percent of license sales in the quarter were from the new 7i products web professional and O-lab (ph) services.

At the end of Q1, we had 13.8 million shares outstanding.

During the quarter, the cause of the change in the share count was due primarily to the issuance of shares in connection with the repurchase of the class action notes.

In terms of financial guidance, we provided detail in the press release.

To recap the guidance, which is valid as of today only, revenue for Q2 is expected to be in the range of 35 to $39 million.

Net income is expected to range from a loss of approximately .3 million to a profit of 1.2 million.

Diluted earnings per share, GAAP, is expected to range from a loss of approximately 2 cents per share to a profit of approximately 9 cents per share.

Adjusted net earnings, which exclude approximately .9 million in expected non-cash discount amortization expense, and approximately .9 million in expected non-cash losses on the early extinguishment of notes payable, is expected to range from a profit of approximately 1.5 million to $3 million, or approximately 10 cents per share profit to 21 cents profit per share.

The average share count in the quarter, using the diluted weighted average share count method, is expected to be approximately 14.5 million.

Our guidance for the full year 2003 is as follows.

Consolidated revenues is expected to be in the range of approximately 150 to 160 million.

License revenue for 2003 full year is expected to increase by approximately 10 percent versus 2002.

GAAP net income is expected to range from approximately 11 to $16 million.

Diluted earnings per share is expected to range from approximately 70 cents to $1.09 cents.

Adjusted net earnings, which excludes approximately 3.4 million in expected non-cash discount amortization expense and approximately .2 million in non-cash expected amortization expense of intangible assets and approximately .9 million in non-cash losses on the early extinguishment of notes payable conducted in April '03, netting those out adjusted EPS for Q - for the full year is expected to range from a profit of 15 million to 20 million, which translates to EPS of $1 to $1.40 cents per share on a diluted basis.

The average share count to be used for the year using the fully diluted weighted average share count method is expected to be approximately 14 to 15 million.

Please note that in the press release, we have again listed out the GAAP-based guidance, and noted the expected non-operational items that need to be adjusted out to arrive at the adjusted net earnings amounts.

And again, for Q2 '03, we expect to incur a non-cash GAAP charge of approximately .9 million due to the amortization of the note discount.

We also expect to incur a non-cash GAAP charge of approximately .9 million due to loss on the note redemptions that were completed during the months of April 2003.

We may also have additional note redemptions in the second quarter that could either produce GAAP gains or losses.

These items, if applicable, would also be excluded from our Q2 adjusted net earnings results.

I will note that our second-quarter '03 earnings call is scheduled for Tuesday, July 29th, at 5:30 p.m.

In summary, we feel Q1 was a solid quarter, with good operating metrics, an increase in our deferred revenue, and our net cash balance position, as we continue to delever the balance sheet in an accretive manner.

This concludes my marks.

I will now turn the call over to Sanju.

Great.

Thanks, Eric.

I would say that Q1 2003 was another successful quarter for MicroStrategy.

While some of our competitors are having trouble growing their core BI license revenue, our license revenue has grown for the second consecutive quarter.

MicroStrategy is winning significant deals with some of the largest companies in the world who are deploying our platform enterprise-wide.

Our customers are building numerous, sometimes dozens or more, applications that reach into all facets of their operations and serve thousands of users.

This exciting growth in both the number of BI applications per customer and the number of BI users is fueling our license growth.

Here's a partial list of companies we executed license transactions with this quarter: Airlines reporting corporation, Belk (ph), Campo Freeo (ph), Car 4 (ph), Catalina marketing, Seneca (ph), Comcast cable, CSK auto, Deutsche Banc, Frazier Health Authority, Hudson Bay company, Key Bank (ph), PF Chang's China Bistro, Premier, Prescription Solutions, Telefonica (ph), Unilever Cosmetics International, United States Postal Service, Universal Studios, University of the Nations, and Warnico.

As Eric mentioned we had a total of 236 license transactions which is up slightly from the previous - from Q1 last year, and I think that number was 232, and we had 97 new customer wins in the quarter.

In Q1, we entered into 12 relationships with systems integrators and OEM partners, including Adastra (ph) corporation, Delta Solutions and Technologies, Pinpoint Solutions, Christie (ph) information solutions, Professional Innovations, Retail International Systems, and 3C software.

Q1 2003 was a good quarter for the MicroStrategy sales force.

In spite of a limited number of actual prospecting and selling days due to this year's nearly week-long MicroStrategy worldwide conference in Las Vegas, our sales force managed to close a good number of transactions and develop a healthy pipeline for the second quarter of 2003.

Additionally, our new education offering, the perennial education pass or PEP was well-received by our existing and new customers worldwide, resulting in more than 60 PEP transactions in its first quarter of availability.

As Eric noted, our license revenue increased from Q1 of 2002 by 14 percent, and our maintenance renewal rate continued to remain high at about 90 percent worldwide.

This maintenance renewal rate is higher than it was in both Q1 last year and in Q4 of 2002.

We believe this increase in maintenance renewals reflects customers' increasing satisfaction with our technology, as well as their increasing confidence in the future fiscal health of MicroStrategy.

I'd like to briefly highlight some of our more noteworthy wins during the quarter.

First is Best Buy.

Best Buy has significantly expanded its relationship with MicroStrategy in order to deploy business intelligence enterprise-wide.

Approximately 16,000 Best Buy employees are now using MicroStrategy daily for store performance management, evaluation of marketing effectiveness, merchandise and pricing management and supplier performance tracking.

On average, 100,000 queries are fulfilled daily providing Best Buy's staff to obtain the trends and patterns essential to its operations, reflecting the vast amount of transactional data being harnessed, Best Buy runs it's seven strategy applications against the seven terabyte Oracle database hosted on its own hardware.

Additional planned MicroStrategy based strategy including analysis and reporting of employee performance, company financials, and purchase trends by customer.

Second, I'd like to highlight Catalina marketing.

Catalina marketing is teamed with MicroStrategy and IBM to deliver advanced interactive retail business intelligence.

Catalina is the global leader in behavior-based marketing and provides consumers with targeted incentives, primarily grocery and pharmacy outlets.

Catalina manages one of the largest data warehouses in the world which we estimate to be nearly 100 terabytes.

After an in-depth evaluation of many of the competing products in the industry, Catalina and IBM selected MicroStrategy as the BI platform for our scalability, our functionality, and our easy to use web interface.

Third, we have Hudson Bay Company, which is Canada's oldest corporation and their largest retailer.

Catalina - or Hudson's Bay, rather, will deploy the MicroStrategy platform enterprise-wide with nearly 5,000 users expected to harness the MicroStrategy platform for reporting, analysis, and information deliver.

These users will include store managers, company executives, financial and marketing analysts, and outside vendor personnel.

The applications will include reporting store sales and advertising expenditures, merchandise management, category reviews, vendor scorecards, financial analysis, and supply-chain reporting and analysis.

MicroStrategy will provide visibility into Oracle and tera databases of 2 to 3 terabytes, and these databases are expected to grow significantly over the next three years.

Fourth, we have Comcast cable.

Comcast cable, the leading - the country's leading cable and broadband communications provider, has selected the MicroStrategy BI platform to increase internal operational efficiency and employee productivity.

Comcast has more than 55,000 employees in six divisions, and serves more than 21 million customers.

Comcast will utilize MicroStrategy to track and assess business data across functional areas to provide managers with greater insight into the company's internal operations.

Comcast will run these snow and applications against a 1-terabyte red brick database.

To conclude, we continue to perform well as a result of a strong product cycle, and our improved financial stability.

Our focused business intelligence platform strategy is clearly working.

Unlike our competitors who are trying to divert attention away from their core BI products by promoting their ETL and BI applications offerings, in addition to their core BI products, we've continued to focus on delivering the world's finest business intelligence platform.

As a result, customers looking for enterprise business intelligence continue to graduate from departmental BI technology to MicroStrategy's enterprise grade technology.

Our focus on delivering a world-class BI platform explains why, unlike many of our competitors, our BI platform license revenues have continued to increase.

Our MicroStrategy 7i industrial strength BI platform continues to win praise, recognition and awards.

This past quarter, for example, MicroStrategy strategy customer Nationwide Insurance sent application development trends data warehousing 2003 innovator award.

In late April, the leading trade publication, DM review, announced that two MicroStrategy-based applications deployed by MicroStrategy customers Avnet (ph) and the state of Tennessee were finalists for two of the publication's 2003 world-class solutions awards.

Notably, our competitors, Business Objects and Cognos, received no nominations.

Later this year, we'll further enhance our leading-edge technology with the release of our new enterprise reporting product named Project Gutenberg (ph) we demonstrated prototypes of this reporting producing at MicroStrategy World in February and received very - and have received very positive feedback from both customers and analysts.

We believe this enterprise reporting offering will further expand our addressable market by allowing us to participate in the growing pixel-perfect web reporting space.

Overall, we're proud of the work that the MicroStrategy team accomplished in 2001.

Sorry, in Q1, 2003, and we're looking forward to a positive Q2.

With that, I'm going to turn it over to Mike.

Thanks, Sanju.

Our recipe for creating shareholder value is pretty straightforward and boils down to one word, which is focus.

Our focus as a management team is laser-like on four areas.

One is sales coverage and management.

We benefited by adding additional general managers in various territories around the world who we believe are coming up to speed quite nicely, and as Eric pointed out, we've added additional account executives and account managers to cover geographic territories we had difficulty getting to in the past.

We've also made a concerted effort to improve the systems that we use to support the field sales organization, and we're creating a new level of transparency and an empowerment in our field service organization which I think is benefiting the corporation and the ability of our sales organization to work and react very quickly to the customer environment.

I believe that we can continue to make strides in creating additional revenue opportunities as we get better coverage on the global 2000 population of customers that we pursue.

I don't think that we have fully mined that base yet, and I think that as our sales force grows and as we improve our systems and our management in this area, we'll continue to find new revenue opportunities.

W feel good about that, and we expect that the additional sales capacity we're putting in place right now will yield us dividends over the next six to 12 months.

The second area of focus is customer service, and the management of our customer service operations.

Just like in sales, we've been strengthening our management team.

We've been bringing in more service directors who are responsible for making sure that our customers are getting the right training and that we're doing the right types of advisory work with our customers.

Our product has been employed in an increasingly mission-critical application environment.

Our customers are putting more and more load on our application infrastructure, and they're creating more value, as is indicative of the Best Buy example.

We now have in some cases customers that deploy to thousands or tens of thousands of users, and generate a hundred thousand queries or more in a given day.

That has placed an opportunity and a burden on us to make sure we provide good service.

We see it as an opportunity to both create customer value and create shareholder value.

And we think that we can actually do very, very good business with service offerings which are both valuable to the customer, as well as profitable to our company.

So we're going to continue to grow that business by strengthening continually our service executives, adding more in more jurisdictions so that they can get closer to the customer.

We're continuing to offer - or bring to the market new service offerings like our perpetual education program that allows people to get as much training as they want for a flat fee each year.

That's been a very effective program, and very successful.

It's been braced by most of our customers, and it's a win-win.

Because our customers are getting more education than they ever got before, and that's improving their application development activities.

At the same time, we're creating a predictable source of revenue for our own company and we're finding ways to increase our effective education capacity and therefore revenue potential.

We're also continuing to invest in systems to provide better customer service.

Systems to make sure that the right information gets to the right customer, and that we manage all of our resources in the most efficient way possible.

We've seen good strides in this area over the past 24 weeks or so.

I think we'll continue to see strides.

Our third area of focus is technology performance and our feature set.

As I'd said before, our best customers are deploying our software on more applications and to more people, so it's very important that we continue to improve our technology so that it runs quicker, it runs as well as possible, and that people have a very, very good experience with it.

In our experience, just like a jet engine or industrial turbine, it can never be too good, it can never perform too efficiently, and we continue to refine it at every step of the way.

We're also focusing, while expanding our technology footprint, and we expect over the next 12 months to bring out additional modules of functionality which will allow us to enter certain parts of the business intelligence market that we haven't previously competed in very, very heavily.

Specifically, we expect we're going to get much more business in areas like report writing where we haven't traditionally competed aggressively, and also we believe that our footprint in the Unix part of the marketplace is going to improve over the coming 12 to 24 months as we bring out our Unix offerings.

So technology is the third prong of our growth strategy.

And finally, the fourth area of focus is on our balance sheet.

We believe in steady blocking and tackling, and continuing to do the right things to generate shareholder value.

Certainly, some of those things include a focus on cash flow, and you can see in this quarter that we did extremely well in the area of generating free cash flow.

There are many levers that we can lean on to continue to improve our cash flow operations.

Obviously, controlling expenses, as well as providing customers incentives to purchase forward contracts like the PEP education contract, which generates cash in advance of services rendered and generates deferred revenue and visibility.

Also, encouraging customers to purchase our premium maintenance offerings or sign up to prepaid maintenance programs.

That's been a great benefit to our cash flow, and of course to sell more software licenses and just generally increase the size of all of our lines of business.

So we think that that's very important.

We also believe that we've had good success managing our debt reduction program, as Eric had pointed out.

We've managed to buy back a decent portion of our outstanding debt at a discount to par.

That gives us a number of benefits.

Of course the first benefit of buying it back at a discount is it's good for the shareholders.

The second benefit is that we're reducing our overall debt service obligations and we believe that, of course, is also good for the shareholders.

Going forward, I believe that there's still room to improve on the balance sheet across all these areas, working on our deferred revenue, working on our cash flow, working on our expenses and our overall debt position, and where we see accretive opportunities to do that, that are good for the customer and good for the shareholders, then we'll continue to pursue those things.

I don't believe in the current market environment that there's any one silver bullet.

Our management team has a belief that we have to manage all parts of the business, and stay focused on all parts of the business.

Q1 was indicative of that focus, and I believe we made progress in all of these areas in Q1.

I look forward to continuing to make progress in these areas during the coming year.

And I want to thank everybody here for their support, and with that, I will go ahead and open the floor for questions and answers.

Thank you, sir.

At this time, I would like to remind everyone if you would like to ask a question, please press star, then the number 1, on your telephone keypad.

Again, if you would like to ask a question, or make a comment, press star 1.

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

We'll take our first question from David Hilal with Friedman, Billings, Ramsey & Company.

I've got a few questions.

First, Sanju, how is customer uptake been on some of the other non-windows platforms you guys have recently added?

You know, like Unix and Linux.

Sure.

We introduced, in Q4, the MicroStrategy web universal product, and I think that we've had reasonably good interest in that product.

In our first quarter of availability, which was Q4, we saw some initially strong sales.

We also see - we saw continued uptake in Q1.

Let's see if we can pull up those numbers.

Just one second.

We had, in Q1, approximately $1 million worth of Unix license revenue, and that's for North America only.

We don't have the international numbers broken out exactly that way.

But in the U.S., we saw about a million dollars worth of license revenue attributable to our Unix capability.

Okay.

Roughly how many deals would that be?

Is it a dozen plus, it sounds like?

I don't have that data close at hand, but I imagine it's probably less than a dozen deals.

Okay.

Eric, in terms of guidance for Q2, those numbers you gave, that is assuming what for license and what for taxes?

And then also for the year for taxes, how should we look at that?

First of all, in terms of the question on the taxes, that assumes, you know, approximately half a million in tax expense for Q2.

In terms of the revenue mix, we're expecting in the second quarter that services revenue will be roughly, you know, constant or consistent with what we reported in Q1, and then, you know, the variability there is really reflecting our guidance is the license line.

The services is flat and so ...

Approximately.

Okay.

Okay.

All right.

In terms of the indirect channel, I know you guys have been placing more of an emphasis on this.

It sounds like you signed up another dozen or so partners.

Any increased traction with some of maybe your bigger partners, like a JD Edwards or I know you guys have done stuff with PeopleSoft in the past.

Maybe you could comment on some of those bigger relationships.

Sure, David.

I think that as you know from the point that you start to focus on these indirect relationships, it takes a bit of time for them to gestate.

We started in early Q1 by signing a new head of global alliances at that time, and I think that we've reinitiated a lot of the relationships that maybe we had had for some time previously but had lost.

I think that you're going to see probably in Q3 and Q4 more activity that's announcesable (ph), that's notable.

I think right now, I'd characterize our work as rebuilding our relationships and making sure the people are re-aware of the MicroStrategy story and I think that that will bear fruit in the second half of the year, but there's nothing material to report at this time.

Okay.

We'll take the next question from Mark Murphy with First Albany.

Hi.

Good quarter.

Eric, I just wanted to clarify.

Did you state that 29 percent of license revenue was related to O-lap in Q1?

No.

To be very specific there, the statistic there related to the - what we characterize as the new 7i products and that consists of O-lap services plus web professional, and the statistic was approximately 29 percent of license revenue in the quarter in the U.S. was composed of either web professional or O-lap services.

Okay.

Is the - I'm assuming that sounds like it's a big year-over-year increase in O-lap services.

Should we draw from that that you're competing with products like Hyperion S base more frequently?

I think that again, we launched 7i so, you know, web professional and O-lap (ph) services in April of 2002, and so what we've seen is, you know, a ramp from, you know, roughly, you know, kind of five to ten percent in that initial quarter of sales, Q2 '02, up through approximately, you know, 28 to 29 percent of sales in Q1 2003.

And I think that, you know, we are, indeed, becoming a bit more, you know, competitive in that O-lap (ph) category.

Again, this is the first time we've had a directly comparable, you know, kind of Q-based product.

Yeah.

I would agree with that.

And I think that we are starting to see that more people are taking our Q (ph) capable seriously and they're evaluating us on the basis of the speed and performance that our technology provides because the select device (ph) that's available through the Q (ph).

Okay.

Also, looking at the services revenue line, I believe you had pass-through maintenance price increase of 7 percent during Q1.

Can you give us an update on what percentage of the customer base has been - or has renewed at that higher level?

This is Mike Saylor.

First of all, we did modify our maintenance pricing as of the beginning of the year, but of course it takes 12 months for that to ripple through the entire installed base, and so, you know, only one quarter of the maintenance base actually comes due during the first quarter.

I mean, if we were perfectly a one-year business.

As for maintenance renewals, they're substantially better this year than last year.

We're pretty excited about the maintenance renewal rate.

I don't think we have the exact numbers, but it seems as though that they are substantially better in 2003 than they were in 2002, so we certainly haven't seen any negative impact from that price increase.

And in looking forward into Q2, is there - does the pipeline support much likelihood that there would be another three or four deals in the seven-figure range?

During the second quarter, we don't manage our business based upon the exact size of the deals, and so sometimes deals that we expect not to be that big turn out to grow and sometimes deals we think are going to be large turn out to be more moderate sized.

So I really couldn't answer that question one way or the other.

I do believe, to be responsive to your question, I do believe it's interesting to note that we see more customers deploying successfully to more users over the past six months to nine months than we have, say, a year, year-and-a-half ago, and so the environment that creates the opportunity to do very large license deals is generally one of two things.

It's either a customer has been using your software for two or three years that's got four or five thousand users that now has decided they want to upgrade and buy a new product like O-lap (ph) services for everybody simultaneously, and that creates a large licensing opportunity, or it's a customer that's purchased CPU licenses that decides to double or triple the number, and that creates a license opportunity.

So the easiest way to generate large deals is with those kind of matured customers, and we've seen more of those every quarter, so we're excited about that opportunity.

The other way you can generate large deals is if you happen to have a really strong reference base in a given vertical industry.

For example, the deal we did with Hudson Bay Company was a large enterprise purchase by a completely new customer for a new customer to make a commitment to deploy your software to thousands of users requires that they be fairly comfortable that you're not only the best choice, but maybe the clearly superior choice, and we're very fortunate in certain verticals, one of them being retail in that people do perceive us to be the clearly superior choice and they're willing to make those kind of commitments.

So I think that in both those cases, time is only on our side, and because it appears to us that customers are continuing to succeed with our software and they're continuing to deploy more applications and more value to more users, I think that's creating a fertile environment for us to sell into, and we look forward to managing that environment in the next year.

Thank you.

Your next question is from Frank Sparacino with First Analysis.

Hi, guys.

Eric, first question for you.

Looking at Q2, when you look at the operating expense section, can you just give me a sense directionally where we're going on the three main-line items?

Sure, Frank.

What we're expecting in general is the following.

You know, sales and marketing expenses, you know, to increase slightly.

R&D and G&A, you know, in aggregate, roughly flat.

We did not have any capitalized software in Q1.

You know, there may be a small amount in Q2.

It really depends on how we do in terms of our development efforts in terms of reaching our milestones.

So roughly flat, other than sales and marketing, which will tick up a bit.

When you look at the G&A line, how much of that is nonrecurring, maybe legal, that you have in Q1?

I would say in - you know, we're still in the midst of the two primary legal actions, our affirmative case against actuate and the case with business objects, and so, you know what we're expecting is that, you know, through the next couple of quarters, we'll continue to have, you know, elevated levels of legal spending and so, you know, we're basically looking at those costs being at about - you know, the same level, maybe down a bit in the second quarter compared to the first quarter.

I will just simply note that as a matter of record, we concluded the trial portion of the actuate case in Q2 and we're just waiting for a decision there.

Okay.

Sanju, maybe following up on the earlier question on Web Universal, do you have any more detail in terms of the new versus existing customer and maybe it's too early to tell, but, you know, which do you anticipate having greater uptake with?

I think that right now, we're seeing good demand across the board for Web Universal, and so both new customers, obviously, are interested but even existing customers who perceive that there's some advantage to taking their NT installation and migrating it to an Unix platform typically for consolidation with their data warehousing platform are also interested in it.

So I think there seems to be even interest with both existing and with new customers.

Okay.

And Eric, on the four million dollar deals, can you give any more detail in terms of what was the largest or how those shook out?

Sure.

They're - you know, they're all between 1 and 2 million, and Sanju gave some commentary on some of the deals that we could actually publicly reference already.

Okay.

And then Sanju, maybe back to you.

You talked about in February some goals in terms of lead flow generation and maybe after Q1 here, where do you stand?

I think we're making good progress in continuing to generate lead flow for the field.

I think that we've seen a bit of an uptick from Q4 into Q1 in terms of lead flow out to our field force.

And so we'll continue to work on that.

But generally, I'd say it's trending in the right direction.

Okay.

And then lastly, where do we stand on migration to 7i?

Yeah.

I'd say the customers continue to migrate to 7i.

We're seeing good uptake for both O-lap (ph) services and web professional, and so those have both been well received and I think that we're going to see probably over the next two to three quarters continued strong purchase activity of those products.

Sanju, can you quantify that at all in terms of percentages?

I don't have any percentages in front of me.

I'll just tell you that generally, people have been very, very keen if they've rolled out the next version of their existing projects, to try to get onto the new platform.

Okay.

Thank you, guys.

Thank you.

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

Hi.

Great quarter.

Just need to - just - if you can give me any kind of color.

Obviously you talked a little bit about, you know, obviously the sales force ramped up significantly from this time last year to, I guess, 102 today.

Just talk - give a little color around, you know, do you expect that to continue to ramp from 102?

You mentioned this on the last quarter, it was going to slow down a little bit.

Any other change in thoughts on that?

It's been our goal to get to about a hundred to 110 people in the field.

At this point, we feel like we've got pretty decent coverage.

We may have a few spots we want to continue to fill, but I don't think you can extrapolate linearly from where we have been over the past nine months.

I do believe that right now, as I said, we're really focused upon managing the business, so we'll be monitoring the field sales organization very carefully, and to the extent that we see good performance or over-achievement, then we'll go ahead and feed that organization a bit more.

Otherwise, I think that we've achieved a level of headcount that should allow us to perform better than we have in the past, and cover more account opportunities.

I think our next focus will be on making sure that we're getting appropriate sales velocity and every single salesperson we have in the field is as efficient as they possibly can be, and every transaction is as efficient as it possibly can be.

And just another follow-up.

You mentioned you had 98 going to 102.

You know, obviously you had some attrition going on there, so the net new hires since the last time you gave us that data point at 98, is it roughly 10?

Hold on for one second.

Actually, Pat, this is Eric.

Yeah.

Last quarter, we were at 90.

Right.

And we're at 102 as of the end of Q1.

And as of today, we're at 102, so we had net adds of 12 over Q1.

Patrick Mason Okay.

There was a bit of attrition in there, but that's a net number.

Insignificant, okay.

Last question on more along the lines of business objects and Cognos.

You guys had talked about having a marketing initiative to go after some of their customers that may be maxing out on the data volume level.

Can you talk a little bit about that?

Did you have any particular success with that program in Q1 or is that supposedly ramping up more so later in the year?

Yeah, I think generally one of the trends that we're seeing in the market right now is that, you know, we're a decade into business intelligence and probably 95-plus percent of all the installations that are out there are departmental in nature, which is small numbers of users, small amount of data.

And as customers are starting to experience success with business intelligence, they're starting to have enterprise aspirations, and as a result, they're looking to scale both the data and the number of users, as well as the number of applications for business intelligence.

We're finding and they're finding, actually, as they try to scale with their existing products - and those might be Crystal, Brio, Business Objects, Cognos, all of whom I think did a pretty good job in the departmental business intelligence market, they're having trouble scaling to the enterprise and that's just because their architectures are first-generation, they're not optimized for the web and they're not server-centric.

I think that we're starting to punch that message out through a variety of means.

Certainly we've been briefing the industry analysts' on that message and they're starting to carry that forth to their customer base.

We've been running an ad campaign since the beginning of Q1 which starts to highlight that our average customer has two orders of magnitude or more data than the average business objects or the average Cognos customer and I think as a result, that message is starting to get out and I think that we'll start to see that more and more companies who think about enterprise deployment will start to come to us.

Certainly even in some of the companies that I highlighted as part of my commentary, like Hudson Bay, they've been using other competitors for quite a while and as they start to get serious about their enterprise deployments, they're coming to look at MicroStrategy.

So I think that that strategy is going to be successful for us, because it's just a natural reaction or reflection of how it is that people are growing as they become more successful in their BI deployments.

What we need to do is just continue to message that message aggressively, and like I said, we're about 90 to 120 days into taking out that message.

I think while it's early, it is starting to work and we are starting to turn people's perceptions to our enterprise strategy.

All right.

Thanks a lot.

Thanks, Pat.

The next question is from Richard Peterson with WR Hambrecht.

Hi.

Thanks.

If I look at guidance in Q4 and then guidance now, after this call, on a GAAP basis, looks like things went down a little bit, but guidance on a pro forma basis stayed the same, so can you tell me, are there any changes in the assumptions about some of the non-cash adjustments you're going to make?

And also just I guess more broadly, kind of help me reconcile what looks like a little bit more cautious expectations for the next quarter and relatively unchanged expectations for the year.

Thanks.

Sure.

This is Eric.

I'll address your questions.

First of all, our full-year guidance for 2003, it's essentially - you know, it is the same as what we gave, you know, 90 days ago.

You know, top line and bottom line, in terms of, you know, revenue and expectations in terms of pro forma or adjusted net earnings.

The difference here is we had to tune a bit the full-year guidance on the GAAP number because, you know, in the last 90 days what we've done is we've experienced, you know, some additional progress on the note redemption activity and that's generated some, you know, non-pro forma items in the P&L, and so we had to take those into act when we provided revised full-year 2003 GAAP based guidance.

So that's really the only change there.

Otherwise, the adjusted net earnings guidance and the top-line revenue guidance is the same.

I wouldn't necessarily characterize the - you know, the 2Q guidance in any manner other than just to say that while this is the first time we've provided a Q2 guidance ...

Right.

... and also, as you've seen last year, we tended to have both the revenue and earnings a bit back-end loaded into the second half of the year, particularly in Q4, and so in terms of phasing, I think that's, you know, an important, you know, piece of take-away.

Okay.

So no significant changes in that non-cash - in the assumptions behind some of the non-cash adjustments?

That is correct.

Okay.

Thank you.

You're welcome.

The next question is from Robert Mattson with Janney Montgomery.

Thanks.

Good quarter, y'all.

Two quick questions.

On the sales force, you've been ramping it up over the year.

Could you kind of walk us through where you stand in terms of them getting really meaningful contribution out of the latest hires?

And, you know, the pipeline they're generating, is there any difference in the type of deals, deal size, or anything that we should expect as their contribution starts hitting the books?

Generally, in the enterprise software business, it requires anywhere from 6 to 9 months or so ...

Right.

... before you start to see meaningful revenue generated by additional salespeople.

And so we take that into account as we're adding them, and we try to temper our expectations accordingly.

Having said that, you know, the impact varies depending upon what roles you're bringing them into and what geographic jurisdictions we're bringing them in.

I mean, sales headcount is a proxy, but on the other hand, adding three heads in Brazil is probably not the same as adding three heads in New York City.

Right.

And so it's also important where we're putting them and how we're placing them.

And of course - and sometimes certain more senior people have the ability to impact revenue a lot more than junior people.

We'll occasionally take a very small city where we think we can generate, say, three or $400,00 in revenue and place a person who makes $50,000 there, and look at that as a reasonable trade.

But in certain other territories, we would expect the person being placed to do two or three or $4 million of revenue, and so we'd have different expectations for them.

As for what we expect with regard to the additional salespeople, I think that I wouldn't factor it as straight linearly, because as a matter of course in our business, the first 50 salespeople will get the richest territory and will have the most pricing leverage in the installed base.

The next 50 salespeople will get the second richest territory and have somewhat less pricing leverage, and less quota generating capability, and lower quotas, in effect.

The next 50 people will maybe get Greenfield territories where in fact they'll be doing new deals and those new deals are generally not quite as large or if they are as large, they're a little bit more expensive to come by, so the net productivity of the next traunch (ph) of people falls a bit more.

At some point, of course, you're - if you add enough salespeople, effective productivity falls below their costs and it makes no sense.

And so right now, we believe that we're adding an increment of people that are going to be very profitable for us.

The only way that we make sure that we're always in that zone is to carefully monitor every quarter, and then add as appropriate.

I will say regarding field productivity, we're very careful about managing field gross margins on our district-by-district, region-by-region basis, and we've seen a very, very good trend over the past eight quarters of field gross margins improving consistently, and so even though we have been increasing our headcount, we've also seen that our gross margins in our field operations have been improving.

Our goal for the years 2002 were to primarily improve gross margins and secondarily to add people.

Our goal during 2003 and going forward is to hold those gross margins constant and make sure that we've added additional people that are productive.

So we'll take those additional increment of people and we'll continue to focus on managing them better and making them more productive, and at least not having gross margins fall.

If we actually achieve that - and I expect that we will - then we'll start to see revenue continue to rise and - and depending upon how productive they are, we'll make decisions about how many more people to add or how to adjust.

Now, taking into account what you were saying, I mean obviously new hires tend to start off with a lower quota because they've still got to ramp, but it also sounds like the way the geographies or the way - the places the new hires are being placed by themselves might necessitate a lower quota as well.

Could you give us a sense, as you bucket it in the groups of 50, kind of the magnitude difference in say, the average or medium quota of each bucket?

Well, I don't think it's a model quite that way, because a new hire might take over a very rich customer territory and have a high quota, if, in fact, they're replacing someone that previously had that territory, so when we add additional people, we don't necessarily know that everybody in that last bucket of 50 is going to have a low quota.

Having said that, we try to look at quotas and territories fairly scientifically, so we'll focus upon the customers to be serviced there and how much demand there is and how much utilization of our technology and how many users, and we have tapered quotas that range anywhere from half a million dollars to someone with a very barren territory without any existing customer activity that has to build it on their own, all the way up to $3 million or more for someone that has a fairly rich territory where you could expect to walk into a customer that's been using our software for five years and maybe sell a upgrade deal on 5,000 licenses as your first transaction.

Right.

You know, unfortunately in our business, the amount of sales effort does not always correlate to the amount of revenue generated in the transaction.

Sometimes the revenue generated correlates to the sales effort of ten people who came before you, and 20 application engineers that have worked for, you know, 50 man/years collectively, so we have to be always thinking about that and make sure that we don't, you know, make the mistake of treating everybody the same.

So the truth of the matter is, for the next increment of 50, the real question is, where do they go, what city do they go in, what territory do they have, and are they replacing someone or not, and has something evolved in our customer base, has the customer evolved to a point where you could expect them to actually have a greater demand for software and services.

I guess let me rephrase it, then.

Is the sense that there's - the way the net effect of all the points you've made breaks out is that there shouldn't be, the best you can tell, a material difference in the average quotas of the two different buckets?

It ...

Or private, however you want to measure it.

I'm trying to get a sense of, you know, should we view the incremental contribution of the new hires, you know, at a lower rate than we would existing players as a whole, or, you know, I'm going to take all the different points you said and say kind of view it the same because maybe net-net, it washes out.

Well, if I were counting the number of salespeople in the company and the company had 80 instead of a hundred, I wouldn't reduce the software sales estimate linearly.

Right, right.

Because, in fact ...

Bottom of it.

... more than 80 percent of the work.

And if I went from 80 to 120, I wouldn't increase it because (ph) I can't remember either because there's sort of a re-aggression to the mean and as we reduce headcount, it gets easier that's left because they've got more territory and richer customer territories to sell into.

As we add more, we make it a bit harder for everybody to make their quota number because they have further existing customers and more new sales opportunities, which are statistically more expensive.

So if -I would think of it in terms of decreasing productivity as we add more people, but as for what that decrease is, well, I mean there are many, many factors that go into that and sometimes we're not even sure until after the year is over.

Right.

So ...

Okay.

We are fairly confident that it's more than it costs us, but as for, you know, what factor more than our costs to us, we learn that as time unfolds.

Right.

So time will tell.

The second point, you're still - I guess some people you're still trying to get over on the utilization pricing.

Where do you stand on that?

I know some people have some caps or some contracts in parts and you were going to use some leverage points to try to convert them over to the new pricing.

How has that been going?

Kind of an update there.

Could you just restate that question again?

You got - some of the pricing on clock speed and, you know, there are some customers who have I guess, caps or previous provisions that you're trying to unwind and get them onto the new pricing.

Kind of an update of where that stands.

You know, generally with our product line, we either sell named user licenses and you get unlimited capacity for a fixed number of named users, or we sell fixed amount of capacity for an unlimited number of named users.

So if you think you need a fixed amount of capacity and you're going to deploy that out to, you know, who knows how many users, you can buy that from users, or the opposite.

As for our customer base, all of our new products are priced this way.

As people buy the new products, they generally make one of those two choices, or settle upon some mixture of those constraints.

You know, we try to, you know - not try.

We generally avoid selling unlimited software for a limited amount of money, because that obviously is not a very good business model.

And I think we've been fairly successful in establishing either a named user constraint or establishing a capacity constraint, so that as the value of the application within the account grows, we also realize additional revenues.

We think that's a - it's a reasonable business principle and we've found that our customers also tend to agree with that because that's, for the most part, the way they do business.

Okay.

Great.

Thanks a lot.

Gentlemen, there are no further questions at this time.

Are there any closing remarks?

I'd like to thank everybody for being with us today, and again, I'll look forward to speaking with you 12 weeks from now.

Between now and then we're going to continue to focus upon our sales, customer service, technology, and balance sheet improvement activities, and we will report back to you at the end of the second quarter.

Have a great day.

This concludes MicroStrategy's 2003 first-quarter earnings call.

You may now disconnect.