Microstrategy Inc (MSTR) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Kay and I will be your conference of facilitator.

At this time, I would like to welcome everyone to the MicroStrategy second quarter 2003 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 had 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.

Mr. Saylor, you may begin your conference.

Good morning, this is Mike Saylor, Chairman and CEO of MicroStrategy.

I'm here today with Eric Brown, the President and CFO, who is going to give a financial and operational overview of the second quarter.

I'm also here with Sanju Bansal, our Vice Chairman and Chief Operating Officer.

And he's going to give us sales and marketing activity in the second quarter.

I will then finish up with a summary and some thoughts about our strategic direction going forward and where we expect to take the company during the coming year.

After that we'll take questions from the audience, and we'll be done for today.

With that I'd look to pass the floor to Eric Brown.

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 factors, including those discussed in our registration statements and period can reports filed with the SEC.

I would also like to add that we will post supplemental information regarding our financial results to the IR section of our web site which is located at WWW.microstrategy.com.

I'd like to begin by describing the highlights from Q2 2003.

Revenue for the quarter was $43.6 million, which exceeded the upper end our revenue guidance and also exceeded consensus expectations.

Our GAAP earnings per share was 15 cents for the quarter, and our adjusted or pro forma EPS was 39 cents per share.

Our adjusted EPS exceeded the upper end of our guidance and also exceeded consensus EPS of 22 cents by a margin of 17 cents per share.

This marks our sixth consecutive quarter of GAAP profitability and seventh consecutive quarter of positive adjusted net earnings.

We reported $19.6 million in licensed revenue and had a 31% license growth versus the second quarter of 2002.

This is the third consecutive quarter of year-over-year license growth for the company.

We generated positive income of operations of $4.7 million.

Our Q2 gross margin continues to remain strong at 84%, and we generated $7.3 million in operations from cash flow for the quarter.

Our cash balance at the end of Q2 was $34.9 million, which is up by approximately $13 million, from the $22 million that we reported at the end of Q1 2003.

Our Q2 adjusted EBITDA was $8.7 million, and on a (inaudible) four quarter basis we generated approximately $29 million in EBITDA.

Early in Q2, we repurchased $8.5 million dollars in principal value of our 7.5% notes, which reduced the outstanding principal balance to $53 million.

On June 23, the remain $53 million worth of notes, into common stock in a conversion that will be effective July 30, thousand 23.

We will issue approximately 1 .7 million shares of common stock in this conversion.

Revenue in the second quarter, as I noted, was $43.6 million which is well above our guidance range of $35 to $39 million, and above consensus estimates of $38.5 million.

Revenue was up sequentially for the first quarter of 2003.

License receive in the quarter was again up 31%, and our Q2 2003 revenue mix was 45% license and 55% services.

The geographical revenue mix in Q2 2003 was 68% U.S. and 32% International, compared to 64% and 36% from last quarter.

Our four strongest vertical segments for the we're were retail, government, information technology, and banking financial.

Gross profit margins remain high at 84%, which is slightly higher than last quarter examines 82% and up versus Q2 last year, which is at 81%.

Our license margins remain high at 96%.

And margins in the service business were 73%, which is up slightly requests Q1 of '03 at 72%, and up versus Q2 of last year which was 70%.

In terms of our head count for the end of Q2, we had 829 people total.

The composition of the head count by line item was 215 cost of services, 272 sales and marketing, 202 R&D, 140 G&A.

Included in the numbers above are 20 R&D employees in the angel.com and the alarm.com business units.

Our operating costs in Q2 '03 increased versus last quarter due to annual merit increases, which became effective midway through Q1 03, higher commission costs due to license revenue, and variable compensation costs tied to financial performance.

Overall total cost of revenue and operating expenses, excluding restructuring and intangible write offs and other intangible items were up $3.8 million sequentially, and increase by $5.1 million versus Q2 of last year.

Compared to last quarter we had higher sales and marketing costs due to higher commission payoffs, our R&D costs in Q2 were higher than those in Q1, due to higher compensation expenses.

And our G&A costs were slightly higher due to higher professional fees and expenses.

For the sixth consecutive quarter we reported a GAAP profit of $2.3 million or 15 cents per share p in Q1 we reported 0.$7 million in GAAP profit or 5 cents per share EPS.

So there is a considerable improvement there.

We reported total adjusted net earnings of $5.8 million in Q2 '03, compared to $1.8 million in Q1 2003, and $4.9 million in Q2 of 2002.

The adjusted net EPS results for Q2, using diluted share Count, was a profit of 39 cents per share exceeding consensus by a wide margin.

Again, Wall Street consensus coming into the quarter was 22 cents per share, and our original guidance range on a pro forma basis was 10 to 21 cents for Q two 2003.

The reconciliation of GAAP to pro forma income is as follows.

Starting with reported GAAP income number of $2.3 million, we add back $1.7 million of expense related to restructuring charges on higher lease vacancy rate assumptions in our northern Virginia real estate portfolio.

We add back $0.9 million in expense for the non-cash loss in note repurchases during the quarter, and we add back $0.9 non-cash discount amortization expense of a class action note.

We add up those items net it against the $2.3 million in GAAP income, you arrive at $5.8 million of Q2 adjusted net earnings.

The appropriate denominator to use for the pro forma EPS calculation is 14.94 million diluted shares, net-net out to 39 cents of pro forma earning per share.

Income tax for the quarter was a credit of $71,000 compared to an expense of $850,000 in Q1 '03.

This income tax credit was primarily attributable to certain foreign subsidiaries where we recognized deferred tax assets.

Again, going forward, we expect income tax expense to be in the $400,000 to $500,000 range per quarter, excluding non-cash GAAP deferred tax adjustments.

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

First of all, our cash balance increased by $12.9 million to $34.9 million as of the end of Q2.

I will note that as of today we have approximately $39 million in free cash.

During Q2 the company entered into a new $10 million line of credit with Banc of America.

This facility allowed $5.6 million of restricted cash to become unencumbered versus the end of Q1 '03.

A couple of comments on note repurchases and the conversion.

Again, earlier in the second quarter we redeemed 8.5 million of notes face value, in exchange for total consideration of 262,000 shares of common stock.

This brought the note face amount down to $53 million as of the end of the Q2 '03.

At the end of the Q2, the note has a balance sheet carrying Cal value of approximately $39.2 million.

On June 23, 2003, we announced that we are electing to convert the remaining $53 million in outstanding notes as of July 30, 2003.

Based on the conversion price of 32.2611, the conversion will result in the company issuing approximately 1.656 million shares of Class A common stock on or about July 30th.

Upon conversion of the notes, the company expects that its balance sheet will reflect an increase in stockholders’ equity of approximately $39.8 million.

If you take the total stockholders' equity deficit of $21 million reported at the end of the Q2 2003, roll this forward and then increase it by $40 million to reflect the note conversion our stockholders’ equity is expected to be a positive $19 million after the conversion.

By converting the notes into Class A common stock, the company will eliminate its obligation to pay the $53 million in principal.

We will also eliminate approximately $16 million in total cash interest that would have been paid out over the remaining four-year term of the notes.

In terms of deferred revenue, we experienced a quarter to quarter increase of $1.8 million.

The increase was exclusively due the an in crease in short-term deferred revenue, which went from $26.4 million in Q1 to $28.2 million in Q2.

The increase is mainly due to maintenance, as we continue to see improvement in our renewal rates versus previous quarters.

In terms of working capital, our Q2 DSO figure was 61 days, compared to 59 days in Q1 '03, with the change being driven primarily by the 70% growth in revenue versus the prior quarter.

This DSO result is still within the 50 to 65 day range that we have for the this metric.

For the second quarter we reported adjusted EBITDA of $8.7 million.

This marks the ninth consecutive quarter of positive EBITDA.

On a trailing four quarter basis we generated approximately $29 million in EBITDA.

In terms of cash flow, I'd like to give you the reconciliation.

In the press release we provide EBITDA of $8.7 million, and I'll provide the forward starting with that EBITDA amount.

We spent cash restructuring costs of $1.4 million.

We had a cash increase of $1.6 million due to deferred revenue.

We had a cash outflow, due to working capital changes, of $1.6 million.

Netting to cash generated from operations of positive $7.3 million.

We had a $5.6 million cash gain due to the release of the restricted cash.

We spent approximately $1.3 million on capex.

We had a cash benefit of $1 million due to stock option exercise and ESPP and a cash gain of $0.3 million of other items.

This reconciles to a total net change in cash of $12.9 million, which, rolled forward from the $21.9 million at the end of the Q1, gets you to as of the end of the second quarter.

Key operating metrics for Q2 are as follows.

The total number of new customers in Q2 was 139, which is up from the prior quarter of 97.

The total number is of customers to date is is 2,221.

Our new versus existing customer mix in Q1 was 57% new customers.

This is up from last quarter which was 48%.

The break down of license deals in the quarter is as follows. 23 deals in excess of $200,000, 15 deals in excess of $250,000, 4 deals over $0.5 million dollars, and 2 deals in excess of $1 million.

In direct revenue as a percent of overall pro detect revenue was 23% in Y 1 which is identical to Q2.

We signed a total of 12 new channel partners in the quarter.

We had a total of 105 quota carrying personnel at the end of the Q2, with 97 direct and 8 channel quote quota carrying individuals.

Last quarter there were 102 total quota carrying personnel.

Total head count at the end of Q2 was 829, and for the trailing 12 months ending Q2 2003 the attrition rate was 21%, which is roughly the same as previous quarter which was 22%.

We had a total of 317 license deals in the quarter, which is up by 35% compared to 236 last quarter.

The average license deal (inaudible) for Q2 was $80,000.

This is down from the $90,000 in Q1 '03, due to the higher deal count.

Gross margin for Q2 is 84% versus 82% in Q1, and up versus the 81% that we reported in Q2 2002.

The revenue nix was 68% U.S., 32% international.

At the end of the Q2 '03 we had 14.158 million shares outstanding.

There is an increase of approximately 309,000 shares from the end of the Q1. 262,000 of the share increase was attributable to repurchase of the class action notes, and the remaining 47,000 share increase is due to option exercise in the employees' stock purchase plan.

The weighted average number of shares outstanding for the quarter was 14,088,000 basic, and 14,940,000 fully diluted.

We provided guidance in the press release financials, and I'd look to take you through this at this time.

First of all, I'd look to note that the following statements are subject to risks and uncertainties described at the end of our earnings release.

Management guidance for next quarter and full year 2003 is valid as of today only and supercedes any previously announced guidance as to the company's expectations for financial results.

In considering our guidance for the consolidated continued operations of MicroStrategy for Q3 2003 and for the full year 2003 it should be noted that on July 30, 2003, the note conversion date, MicroStrategy will reconvert the remaining 53 million in principal amount outstanding of it is 7.5% series A notes into Class A common stock.

The conversion will result in MicroStrategy issuing in aggregate approximately 1.65 million shares of Class A common stock.

On the conversion date the company expects to in cure a non-recurring non-GAAP cash charge which is equal to the difference between A, the fair market value of the conversion shares on the conversion say date; and B, the carrying value of the notes plus accrued and unpaid interest on the conversion date.

That amount is $39.8 million.

If, for example, the fair market value of the conversion shares on the conversion date were equal to $40.86 per share, which is the closing price of our stock as of July 28, '03, MicroStrategy expects to incur a non-recurring, non-GAAP charge in Q2 '03 of approximately $27.9 million as a result of conversion.

If the fair market value of a conversion share on the conversion date may be higher or lower than the $40.86 per share price assumed in this example, the actual charge attributable to the conversion of the note may be higher or lower than the $27.9 million charge reflected in this example.

The actual charge will impact MicroStrategy’s GAAP net income for the third quarter of 2003 and for the full year ended December 31st, 2003, and is expected to result in a GAAP loss for both Q3 '03 and the full year 2003.

Assuming this charge of $27.9 million , attributable to the conversion of the notes, management offers the following guidance for the consolidated continuing operations of Microstrategy for the quarter ending September 30, 2003, and for the full year ending 2003.

Q3 2003 GAAP EPS is expected to range from a loss of $1.75 to $1.60 her share.

Full year GAAP EPS is expected to range from a loss of $1.17, to a loss of 77 cents per share.

Q3 2003 pro forma EPS is expected to range from a profit of 10 cents to 20 cents per share.

Our full-year guidance is unchanged at $1.00 to $1.40 pro forma EPS for the full year 2003.

This guidance is unchanged versus the full year '03 guidance that we gave approximately 90 days ago.

The company expects to have positive operating cash flow in both Q3 and Q4 2003.

In summary, Q2 was a good quarter, with very solid operating metrics, an increase in deferred revenue and improved cash balances with the stage being set for the final clean up in early Q3 of the remaining long-term debt.

We increased the full-year revenue guidance by $5 million at both the lower and upper end, and have left our full-year earns guidance unchanged at a range of $1.00 to $1.40 pro forma.

Our confidence factor to the full year is increased due to the solid Q 2 results.

This concludes my remarks.

I will now turn the call over to Sanju.

Our Q2 financial results once again demonstrate that we have MicroStrategy into a highly competitive, cost effective strategy.

Interestingly, while some of our competitors are having trouble increasing their license revenues, our license revenues increased for the 3rd consecutive quarter.

As Eric note year over year license revenues were up 31% in Q2.

This success will can be attributed to improved sales execution, as well as is the competitive strength of our industry leading business intelligence software.

Our technology is unique in its capacity to be deployed to thousands of information consumers, and against the largest transactional data bases, while also providing user friendly reporting features, powerful analytics and a fully deployable web interface.

Our technology is getting a reputation for being unrivaled for the most demanding BI applications and also very appropriate for companies just getting started in BI.

Our industrial strength technology is by MicroStrategy is winning significant deals with the largest companies in the world, many of whom are deploying our platform enterprise-wide.

This quarter, for example, we won enterprise-scale deals with organizations such as E-bay, Wells Fargo, Time Warner Unilever, and the U.S.

Postal Service.

Leading accompanies are using MicroStrategy to build numerous, sometimes dozens, of applications that reach into almost all facets their operations and touch thousands of users.

This application growth and success is and will continue to be the engine of our vibrant license growth.

Here's a partial list of companies we won business with this quarter.

Natural Gas Company, CSK Auto, E Bay, Fleet Boston Financial, Garden Ridge, G E Medical systems, Hanaford Brothers, Kohls,, Land O Lakes, National Institutes of Health, MDC Health, Pfizer, Rail East, (Inaudible) , Time Warner Cable, Wells Fargo and Wet Seal.

With that as introduction, let me talk about some highlights in the quarter.

We had an excellent number of new customer wins, as Eric Noted, at 139.

We had good total number of transactions--microtransactions, at 317.

Also in Q2 we entered into 12 relationships with systems integrators and original equipment manufacturing partners including Altea (ph) DoubleClick, Marketing Direct, S&L Simonson S 3 Store systems solutions, (inaudible) , Systems Evolution, Systime (ph) and Gemco (ph).

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

First is a deal you may have read about, we did a press release recently on the U.S. postal service purchased over $5 million of MicroStrategy software licenses , education, and software support services in June 2003.

The postal service will deploy the MicroStrategy platform enterprise-wide for reporting analysis and information delivery.

Additionally, the postal service has acquired options to procure consulting services, education, and software support over the next five years.

Secondly, at Unilever Cosmetics International and Unilever Cosmetic International is a division of Unilever, and they selected MicroStrategy to increase internal operational efficiency and employee productivity.

Approximately 200 employees, including sales, marketing and operations personnel, will perform sales promotion management, sales reporting and supply chain reporting and analysis against an Oracle data warehouse.

Unilever selected Microtrategy for its reporting and analysis capabilities, it's scalability, and it is ease to use web interface.

Third, we have Shaw Industries.

Shaw industries is the world' largest manufacturer of carpeting, carpet than products.

They selected the platform as their enterprise for reporting standards.

Approximately 1,000 employees, including sales, marketing, and accounting personnel, will perform reporting and analysis, reporting and analysis of sales and marketing data against the TeraData data warehouse.

After an in-depth evaluation of many of the competing products in the industry Shaw selected MicroStrategy for both our scalability and superior analytical capabilities.

And fourth I have O'Reilly Automotive, which is a mid- size retailer.

They're a nationally recognized retailer after-market auto parts.

And they selected MicroStrategy for sales and inventory reporting and analysis, using MicroStrategy, O'Reilly will have a consolidated dynamic view of sales of stocks enabling consistent availability of their products for their over 1,000 stores.

The company chose MicroStrategy for our ability to consolidate and evaluate corporate management data and an easy to use graphical web format.

We also had this past quarter tremendous success in the awards and recollection recognition category.

Basically, in addition to customer lends we found that independent third part started to note and highlight MicroStrategy technology as being a leader in the industry or leading in the industry.

The firm Gardener group evaluated MicroStrategy technology and gave it a strong positive rating.

That would be a 5 out of 5 rating.

The highest rating it has ever conferred on any BI vendor's technology.

So we're quite proud of that.

They're quite critical, as some of you may know, and the fact that we received their highest rating, the highest grate than they've ever given a BI is quite indicative of our technological strength.

Last month MicroStrategy is in the state of Tennessee's department of finance and administration were on word a data management review regular world class solution award for a MicroStrategy application that processes and analyzes millions of Tennessee financial records.

This Microstrategy application has reduced costs and significantly improved the quality of financial information for decision-making by state officials.

Also, last month the CIO of Lowe's home improvement warehouse won a 2003 technology magazine leadership award.

Business in tell generals deployments Lowe's is using MicroStrategy to power their pricing, merchandising and inventory reporting and analysis applications.

As we look ahead, many of our customers are now progressing beyond their first Beverly BI applications.

In fact, leading customers have built thousands of valuable BIFs using our platform.

The amount of data being captured and the number of users are growing dramatically.

We expect these trends to continue creating demand for our software.

Later this year we'll further enhance our leading edge technology with the planned release of Guttenberg.

It's a project we talked about before.

It's the code name for our new pixel perfect enterprise reporting engine.

So we had a good early speed back on the capabilities of that product, and we're hopeful that that will continue to drive good demand for our software book in the installed base, and from new customers look than for an enterprise grade report than engine.

Overall we're seeing good customer interest in our products and services.

Our customers continue to build valuable applications that generate demand for additional software.

Having just completed our sixth consecutively profitable Quarter, the highest revenue in six quarters, and three consecutive quarters of year-over-year license growth, we believe that our financial market position are quite strong, and continue to improve.

With that I what I would like to do is turn it to Mike.

Thank you, Sanju.

I would like to summarize in four different areas.

I'd look to make a few comments about the balance sheet, our P&L, our customer dynamics, and our market dynamics that we are observing.

I think with regard to the balance sheet, the most important observation is that over the course of the year we have taken a balance sheet that had approximately $150 million in either debt or preferred securities, from $150 million to 0.

And that's greatly to the benefit common stock shareholders, who had $150 million in security holders ahead of them.

At the same time, I believe that we've learned to operate our P&L much more efficiently.

We're making good strides with service margins, they're improving, as Eric pointed out, gross margins are improving.

We're generating cash effectively now from the business.

We expect going forward that the combination of an efficient P&L combined with some substantial net operating loss assets that we have accrued over the past few years, will be beneficial in generating additional cash going forward.

We are satisfied that the balance sheet is stable, and we're also satisfied with our progress in improving the P&L.

I think the results speak for themselves there.

That gives us a very stable platform for growth going forward.

Turning to customer dynamics, I think that the customer dynamics have improved over the past year.

We're seeing more large deployments.

Those large deployments are enabling us to enter into large transactions, like that with the U.S. postal service.

If there weren't thousands and thousands of users interested in business intelligence, and especially in our particular business intelligence applications, then it would be, of course, more challenging for us to enter into those transactions.

But the fact that our customers are succeeding in large deployments is generating organic growth opportunity for us within our install base.

And that's, I think, a very favorable dynamic.

We also note an increase in mission critical application development.

Our customers seem to be more committed to their applications now than a few years ago.

And the technology we delivered to the market I think make it easier for them to deploy more critical applications to greater use are populations.

I think that's making our software much stickier and again it's also increasing our ability to grow the business and giving us a very defensible franchise as well.

As the applications proliferate, within our customers, I think our enterprise platform capabilities become more important, and I think that our ability to grow our platform in the enterprise is enhanced.

Finally, moving onto market dynamics, as most of you are well aware, there has opinion a lot consolidation activity in the business intelligence industry over the past month.

Crystal has been purchased by business objects.

Brio (ph) has been purchased by Hyperion (ph).

In my experience in this industry over the past decade, I can recall something on the order of 2 dozen vendors, and now they've been reduced to just a handful.

I think that -- and I think the management team would agree that this is a positive dynamic for our company.

Fewer vendors creates less confusion in the marketplace.

There's less noise in the marketplace.

What might have been a five-horse race is now a three-horse race.

We compete against business obviously in Cognos.

Our view is we have the best horse, and we also have the technology with the least exposure on the low end of the market, to potential pressure from Microsoft.

And so we view the market as a pyramid with us at the top, focused upon mining the high end of the business, and with business in Cognos in the middle market.

And for the most part, the rest of the noise and the messaging in the marketplace is falling off.

I believe that the impact of this on customers is that it's causing them to take longer-term views toward business intelligence partnerships.

It's more likely that a customer will make a longer-term commitment to a company if there are only one or two alternatives, and because they're familiar with the two alternatives, and so they're not expecting that some dark horse is going to come out of the blue and be better than everybody in the marketplace next year.

So that being the case, I believe we are in a much better position collectively as an industry to do business.

I believe that the consolidation is probably good for all the remaining independent business intelligence vendors.

And I believe of all of them we'll been benefit the most, primarily because we have the best technology and we have the most focused of all the remaining BI companies.

We have the least integration risk and all of our issues are focused upon driving a single platform forward, and a customer base that we understand well, with a set of employees and partners that we've got a good experience base with.

When we consider all these things together, our improved balance sheet, our improving P&L, the favorable customer dynamics, and our own install base, and then the favorable market dynamics, which make it easier for us to do business and to communicate our message and to enter into a relationship with customers--I think that those things are all very positive for our business.

Our strategy going forward is fairly straightforward.

We intend to grow the high end of the BI marketplace, focusing upon enterprise-scale customers, winning more customer relationships like the ones we have now with the U.S.

Postal Service or E-bay and others you may have read about.

We believe that's a defensible part of the market.

We also believe that that's a high growth part of the mark, and that the growth opportunities in helping and enabling those users to go from hundreds of users to thousands of users to 10,000 users or more are good growth opportunities, where we uniquely suited to compete.

So, we intend to focus upon our part of the market using our strengths, and continue to do what we've been doing successfully over the past year which, which is to take a very, very close view on all of our operations and make sure that we are superior executing company.

I would like to thank everybody for being with us today.

We appreciate your time and attention and support, and with that I'd like to open up the floor for questions from the audience.

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

We will cause for just a moment to compile the Q&A roster.

Your first question comes from David Hilal with Friedman Billings Ramsey and Company.

Great.

Thank you.

A few questions.

First on the pro duty front, Sanju I chow you mentioned Guttenberg on target in the second half.

Can you gives a little more color as to whether it's a Q3 or Q4 release, and I'd have the say question for Mozart and the intelligence server on Unix, please.

Sure.

With respect to our product pipeline, right now we expect that somewhere around the late Q3 time frame flowing into a beta cycle.

It might be a bit before that but we're not forecasting it to be any time before that Guttenberg offering.

And so perhaps we can do a bit better but right now we're guiding that way, and then we'll have to see how long it takes for us to get the products stable and comfortable shipping the product.

Right now we think we're on target to ship this year as we've told people all year long, and so I think that's still possible, and right now we're optimistic did about the state of the code.

With respect to intelligence server on Unix, which is the code name Polyx (ph) project, we're expecting probably an early Q4 beta cycle initiation.

We think that we've done a lot of work to get that code stabilized, and it's looking pretty good right now.

It is performing pretty well, but given it's our first time out with an I (ph) server on Unix, we're anticipating a longer cycle, so we're thinking sometime in the middle of Q1 we would likely release that product.

With Mozart we haven't really put any plans in place for, public plans, rather,.

We have internal plans, for the beta schedule, and then ultimately G&A schedule.

I'd prefer not to discuss that, discuss those plans at this time.

Okay.

Eric, I had a few questions on the numbers and model.

I guess the expenses in the quarter were certainly higher.

You attributed a lot of that to the better top line performance.

Going forward, should we assume the operating expense lines flatish, upper, or would they come in a little bit in Q3 which would be much of a down quarter, it looks like?

We would expect that operating expenses will be a bit lower in Q3, David.

Again, we expect it to be a satisfies Neal slow quarter, as you can see in the revenue guidance that we've given for Q3 '03 which is $36 million to $39 million.

And so a lot of our costs are indeed variable-- Sales commissions, presales commissions, consulting utilization bonuses, and anything else that's side tied to a financial metric.

So a lot of the costs should adjust downward with the revenue.

And then move upwards again in Q4 which is traditionally the strongest of the four quarters for us.

In terms of that revenue guidance, I understand the sequentially down nature of it given the seasonality, but the magnitude seems to be a little bit big are than you guys have experienced in past September quarters and that the industry in general experiences.

Why such a big sequential drop in terms of the guidance?

I think, David, we're actually working off of our strongest, you know, Q2 in recent memories.

As noted earlier on the call Q2 is the strongest revenue result in the last six quarters in aggregate.

So it was a very strong quarter.

It certainly helps to get a large multimillion dollar advance action in.

As you recall, our guidance for Q2 was not constructive in contemplation of any multi million dollars deal, so we certainly did a lot better than expected.

So, you know, Q3 for us is as expected, and I think the reduction in Q2 is just really a function of an exceptionally strong Q2.

I'll turn it over.

Thank, guys.

Thank you, David.

Your effects question comes from Mark Murphy with First Albany.

Thank you.

Congratulations on an outstanding quarter.

Eric, given the presence of a very large deal in the second quarter, is it safe for us, then, to assume that discounting late in the quarter in other parts of the deal flow was minimal?

And that there was not much lien yeans in terms of terms and conditions late in the quarter?

Mark, I think that we pretty much Q2 like we did.

Certainly, we spent some time working, you know, this large transaction, but that really didn't impact our philosophy or our approach or our negotiations into other transactions.

I think it would be fair, it's really not safe to assume, for any enterprise software company to assume, a large transaction that looks pretty good in the pipeline is, in fact, going to close.

It's just very difficult to get seven-figure deal done.

There's always a risk factor attached to that.

And so we ourselves really didn't modify our operating or discounting.

Okay.

Question for Mike.

You had mentioned that MicroStrategy has the least exposure to Microsoft.

You are developing a reporting solution, and so I wanted to look for some clarification.

With Guttenberg, where does it knit into the market if we look at it competitively, and how should we set or expectations for the revenue ramp from that Guttenberg product relative to what we've seen from, say, the old lap cubes (ph) or the Unix version of the front end?

Our goal for Guttenberg is threefold, but the 1st and foremost goal is for us to provide our existing customer base with a good superior reporting solution.

We've heard from many, many of our customers that they would like to be able to deploy some sort of banded report as an additional object or additional report type off of their enterprise data warehouse.

And having spent some time with them, I think we concluded that there is a very real reasonable revenue opportunity there that's material.

I think many, if not most of our customers will want that capability over time.

And so over time, maybe over the course of two, three, four years, but over a material amount of time we'll see, I think, a pretty good penetration of the Guttenberg offering within our install base.

The second goal of Guttenberg is of course to enhance our overall platform allowance for end deals we might not have had otherwise and to squeeze out other people out of the IT budget or protect a portion of the IT budget.

And the third goal, the most ambitious goal, would be to actually start to competitively pressure other report-writing companies.

I think that that third goal is a weighs off and it's rally not critical to our business plan one way or the other.

If, in that, Guttenberg puts pressure on other report writing companies that's great.

But our number one goal is to use it to ser versus or own customer base and create value for our own customers, who have communicated to us very clearly that their applications would be much more valuable and they will reward us for it if they gave them that capability.

Regarding exposure to Microsoft, I that think that clearly Microsoft is excessively song in the sequel server marketplace, and in the market, and Crystal, of course, originally became a well-known company based upon their relationship with Microsoft and their distribution agreements with Microsoft.

To the extent that Microsoft is going to cease distributing crystal or was going to slow down that distribution or switch over to start to distribute their own product, clearly the company most impacted by the entire Microsoft strategy would be Crystal .

To a certainly degree, business objects (ph) may have acquired some of that exposure through their merger, and therefore they're going to go from being a mid-range company to having a decent part of the low end of the market in their risk profile going forward.

I think that the best way, or the way we would evaluate business intelligence companies is to look at the underlying data architecture that they perform their analysis upon.

So if you've got 50,000 customers and 25,000 of them run sequel server and 25 run Oracle and 5,000 run DB 2 and Tera Data, then you're largely exposed to those middle or the low end of the market.

On the other hand -- especially if they're small Oracle processors or small servers.

On the other hand if 95% of your, data bases are running on (inaudible) data or some massively parallel to Oracle system, then that's not really the market that Microsoft or anybody else could easily serve on the low end.

And you just don't see them pop up in sales cycles.

What you see if you look at statistics on our customer base that our customer base is that are customers have databases a hundred times larger than either (inaudible) or Cognos.

So we tend to pick up the biases of very high end data shops.

They like Unix.

They like Massively Parallel.

They're certainly not running sequel server.

They're not thinking about using a Microsoft-type tool for that sort of thing.

And for that reason we try not to really get caught up in the industry dine mechanic that drive the mid-range companies or the low end companies in the reporting space, but we think about what is it that the ET director the a high end shop would want p that's the person who is actually going to be buying with from us, and it's their requirements that we have to satisfy in order to be successful in the marketplace.

Thank you, Mike I wanted to just finish up with a housekeeping question here for Eric.

Could you gives a little more color on how we would reconcile the lower ASPs with the presence of a large deal in the quarter?

And then also the taxes in the NOL situation for the company?

What is the level of the NOLs and therefore how long should we expect those that last?

Thank you.

Your first question is your average deal size.

You're correct in observing that it dropped in Q2 versus Q1.

Even with the presence of a -- you know, the large deal.

However, our transaction count is up considerably, our license transaction count is up by approximately 35%, and that's what's really driving in the ASP Delta Q2 versus Q1.

With respect to tax situation, I think what we're seeing right now rolling through our P&L are tax adjustments relating to certain foreign subsidiaries, more specifically, European subsidiaries which have a profitable statutory operating profiles right now.

In the U.S., as we've disclosed in the 10-K, we have an excessive, say, $200 million in tax loss carry forward.

We're not expecting any near-term release or recognition of those tax assets in the U.S.

Really this is going to be more of a mid-range issue.

We really can't give any more specific guidance at this point in time as to the precise timing or amounts that are released in recognition of that U.S. tax laws carry-forward benefit.

Thank you.

Your next question comes from Frank Sparacino with first analysis.

Hi, guys.

Eric, maybe you could provide some details around what universal this quarter perhaps something about the two new components there.

I didn't mention it specifically during the operations commentary, but I will report the new 7I products which are designed as web services plus web flow plus web universal comprise approximately one-third of our license revenue in the quarter.

So it's a meaningful pickup?

It's a slight increase versus where we were last quarter.

Okay.

And on the web universal side?

We're not going to decompose it for the product line.

It's certainly less than 10%, though, for universal in Q2.

Maybe Michael or Sanju.

One of the things I think we consistently heard this quarter was a more aggressive stance on pricing from one of your primary competitors.

I'm curious is if you would agree with that and maybe any other details you could provide around that

Maybe you could elaborate a bit more.

What did they tell you exactly, that they're being more aggressive in pricing?

Just in a lot of the deals in terms of your competitors, you know, willingness to levelly discount in order to you have you obviously capture customers here, which is the primary goal.

So is your question do we observe that in the industry or in our business?

Yes.

.

I guess what I would say is that clearly there is a sense in the marketplace right now, almost a sense of an anticipation, that we're crossing the chasm, the industry is shaking out, and customers are starting to sort of zone in on one of the, you know, probably three major vendors.

So I think that that's causing a greater awareness of competitiveness than before.

I think that our major competitors are a little bit more sensitive to the inroads we are making than they were a couple of years ago.

I think they're a bit more concerned.

I think it was easier to be less concerned a yes, sir year or two years ago.

I think there is a little bit of trepidation in the marketplace.

And so I think in some cases, in many cases where we're winning large deals against either installations of, say, Business Objects or Cognos, they've attempted to drop prices or they've offered customers lower prices.

We haven't seen that it's helped them that much.

Very rarely is price the determining characteristics where with a sophisticated customer, an enterprise customer, especially one that's purchasing at the enterprise level.

It might make a difference if you were thinking about buying 20 or 30 or 50 copies.

I can think of a number of examples over the past 12 we can where we competed, say, head to head with a Business Objects, and they attempted to drop the price, and it got them pretty much nowhere.

But that's because in our business across the full cost of deployment and life cycle cost over a five-year time frame is dominated for the most part by the database system integration and application development expenses, and also by the additional inefficiencies of to having a tool that doesn't do what you need it to do.

And the actual license expenses tend to be the cheapest component in the overall budget.

So it would only be a less-educated customer that would at the end of the day be totally swayed to buy an inferior product at a lower price.

I think the industry is primarily competing on the basis of technical capability and ability of the platform to deliver the applications that trade value.

And where people are seeing aggressive pricing, it's on the periphery, and I don't really think that it's -- I don't think it's material to our business.

Sanju do you have any comments?

No.

It doesn't seem like we've been impacted much at this point by price decreases that other competitors may be offering as part of their negotiation.

Right now I don't see any real change in our business.

Okay.

And on the sales force productivity, if you could talk with it on about it on the quantitative or qualitative basis, how the progress has been since you've been adding people.

I think that, as you can see based upon our quarterly results, we are getting a bit more efficient in our sales operations.

And sales, efficiency and sales operations will manifest itself in higher license sales.

It may also manifest itself in higher gross margins.

I may also manifest itself in higher service margins because normally if you have a very inefficient sales force you end up having to give away a lot of services in order to get deals.

So, the fact that there are margins across the board are generally improving, I think is the best indicator that our sales force efficiency is also improving.

I think that that's probably about as much as we can say on that subject right now.

Okay.

And then lastly, on the services line, Eric, what sort of the increase?

Was it more of the maintenance business or did the consulting business, education, have a pickup as well?

I think we had improvements across the third service lines, maintenance, consulting services, and education services.

Our maintenance renewal rates remain high.

They're progressively through the price increase that we announced at the outset of February this year, a sourcing that quarter by quarter had a benefit.

Our utilization rates are going up in our operations.

We're seeing a good, strong pickup in North America in journal.

And education services utilization fill rates are improving as well.

So actually the improvement in services applies to each of the three subcomponents of that particular line item.

Eric, maybe one quick follow-up on that.

Is 72% gross margins sustainable or, how high can that figure go?

We think that's sustainable.

We don't -- we don't expect it to be materially higher than that.

We still think there is some room for improvement.

We're kind of in the, within the company's zone that we set for ourselves.

I think that prospectively, our focus will be on one, again maintenance, making sure that we keep our renewal rates high.

Because that's the most important component of our services Line.

And we have renewed emphasis on utilization worldwide and a slightly expanded kind of management structure to drive more product to the billing across that we have.

So we're still looking to do better, but based on comparisons that we've seen across in different enterprise software companies or we're operating at a pretty decent margin zone for services right now.

Frank Sparacino Okay.

Thanks, guys.

Nice job.

Thank you.

Your next question comes from Robert Mattson with with Janney Montgomery.

Congratulations on quarter.

Couple of questions.

One is did you mention renewal rate of maintenance or did you just say it was nice?

Rob we didn't mention it specifically but it's in the mid-90s.

And I missed your operating you were flying through all those numbers.

Operating cash flow per quarter?

the operating cash flow for the quarter is $7.3 million.

And did I hear you correct that you said the year-end pro forma EPS is constant at $1.00 to $1.40?

That's correct.

We're maintaining full-year EPS guidance of $1.00 to $1.40.

and so you're not flowing through, depends on how you want to cut it, let's call it 20-cent upside from this quarter.

Are there other expenses on litigation or something else that's coming in to bring this down or is there something just I'm not understanding how in how this is getting out into the year-end?

A couple of things.

I think Sanju noted that we're more likely to have a GA date with universal in Q1 next year, and so that's going to impact a bit, capitalize R&D in the second aft half the year versus what we saw 90 or 180 days ac so that's a mitigating fact for.

I think the other fact is a strong Q2,simply gives us an even higher degree of confidence for hitting the full year pro forma earnings value range.

So in other words the capitalized software that's shipping out offsets the 20 cents you would have had flowing through this quarter?

Not entirely but it's certainly a fact, to kind of a Chang versus where we were 90 or 180 days ago.

So is it fair to say, then, that the postal service deal and the Ebay deal, the two deals you large deals you had this quarter were factored into year-end but maybe not in this particular quarter when you give guidance for in quarter?

That's' correct assertion.

I mean, for the last three or four quarters what we've been seeing is that in the current economic environment is difficult to build your forecast or guidance range on the assumption that you're going to close a number of large multi-million dollar deals.

And so I think that while we were kind of tracking some large opportunities, we certainly weren't, you know, banking on them, if you will, from a guidance perspective early on in Q2.

Robert Mattson Okay.

But you were for the year.

Well, --

I'm trying to get if it's just more of a timing issue, you pulled it in no, you know.

It's -- we don't get that -- we don't put together a full year forecast, Rob, looking at one deal, say, two and a half quarters out.

We're not that -- not that precise, I would say, in our forecasting the methodology.

And so when we're looking at sort of the next quarter's guidance what we do is a fairly careful rollup of what we see in the pipeline.

We use the same kind of waiting technologists.

We tend to assign very high list can factors to seven-figure deals just given the purchasing environment we're operating in today.

Right.

And what about litigation expenses?

I know there was some talk that Q3, Q4 that could be coming down.

Will you be going after an appeal, and Jonathan set loose on that or what should we see?

How should we look at litigation expenses going forward?

We haven't made any decision in terms of what to do next with respect to the (inaudible) case.

I won't comment on that.

I think war past the trial.

We will be going to trial against Business Objects in the second half of the year, and we expect a ramp of a G&A costs associated with those legal expenses, and that's kind of reflected in our current guidance.

and also, in terms of there's been a lot of discussion already in term of the acquisition that's been going on with Crystal and with Brio.

Sanju, I don't know if you mentioned it and I just spaced it and didn't hear what you said.

Have you all been developing particular marketing initiatives to go after this opportunity as a.

There tends to be some confusion out there.

And leverage what's going on?

I think that there certainly will be market opportunities that will come out of the merger and acquisition activity that is occurred.

I think that, however, there's probably even a bigger opportunity that we've been tracking and are going to be focusing on.

And that is there is this natural graduation that's occurring in the industry which is starting to become not incident incidental; it's becoming sort of a big movement, and that is people are moving from first generation to departmental business intelligence applications, which have been pretty good for them.

They've been pretty successful deploying maybe half a dozen or a dozen smaller an case, which have been pretty good for them.

And they now say, the PI is great, it's working, and we're getting great benefit and as a result we now have enterprise scale aspirations.

So they're adding more application, they're adding more users and they're going down to transactional data.

And we're finding that when people are making that sort of leap of faith beyond their first department applications up to the enterprise level applications, that oftentimes the technology architecture they've been using is not working very well.

We talked a bit about the e-bay deal we talk about with some of the folks that we briefed on it, and they've had other first generation products.

And what they found again was that they couldn't get to where they wanted to with those arc tech cures.

We see that quite often in our customer base where they've got other products involved, and they're really sometimes upgrading the MicroStrategy.

So I think that this industry trend towards taking the BI seriously and investing in a BI architecture, started over maybe the last year or two but now it's gained some momentum oh so our marketing message will reflect that which is helping people graduate from enterprise to BI.

Certainly as part of that we're going to pick up on the message that as picked up crystal, they picked up a low end technology.

They picked a set of customers that probably also want to consolidate, but perhaps not to BO, but not MicroStrategy level of capability.

But I think that the overarching method won't be one of trying to pick up customers that are confused with the M&A deals that have occur but rather picking up customers that have real requirements to go to the enterprise.

I guess to paraphrase it sounds like the answer to my question is know but more or less maintaining the course that you had before in terms – it sounds like pretty much what you've always been talking about.

I think with greater amplification on the idea that people will need to go through some sort of technology discontinuity as they go from departmental to enterprise BI.

Robert Mattson Okay.

Great.

Thanks, and congratulations again on the quarter.

Your next question comes from Patrick Mason with Pacific Growth.

Patrick Mason Yes, definitely good quarter.

Curious on the U.S. postal deal, did you guys talk about how much you recognize in the quarter, kind of what to expect, if there is any follow over into subsequent quarters?

We didn't talk about it, you know, specifically.

What we have said, and I think what's been provided in the press is that it's a $5 million transaction overall.

The bulk of the transaction is licensed revenue, which we recognize in Q2.

The remainder of the transaction revenue which is consulting, education, and technical support services are going to be delivered and hence recognized over the next 12 months.

Okay.

Great.

And then on the just hiring of like quota sales reps I guess 105.

Is there any change in this that on a forward basis or minimal?

Get kind of a flavor on that?

Sure.

Basically the target zone that we had set for our self about a year ago which is kind of about 100 quota carrying personnel, you know, plus or minus, say, 5% on either side.

So we're at that target at this point in time, and our focus now is to drive pro you productivity.

I will say that with some of the M&A activity that we've seen in the sector, we're getting lots of calls from people, not just at the acquired target companies, but the acquirers who are out in the field, wondering what their (inaudible) structure is going to look like in two to three months, and so there is some talent out there.

We'll have to evaluate that prospectively.

But for the time being we set the targets 12 months ago, Pat.

and then lastly, just on the cap ex, I mean, the capitalized software piece, what activity you're going to incur more capitalized software in Q3, are you saying that's going to be push out to like Q4 and Q1?

I would say that versus our assumptions 90 and 180 days ago, Pat, we're expecting to have less capitalized software in Q3 and Q4 and hence higher reported R&D expenses in the second half of the year, so that's a change in kind of our forecast outlook versus where we were last quarter.

Okay.

Thanks a lot.

Your next question comes from Nate Schneiderman with WedBush Morgan.

Hi.

Congratulations also on your quarter.

Eric, would you be able to talk about the two seven-figure deals?

What would you say that was a percentage of license revenue?

the two largest million-plus dollar deals, yeah, I'd say they're in excess of $4 million combined.

Mike, could you talk about the seven-figure deals in the pipeline and how that is changing?

Do you look at the Q2 results as an anomaly in terms of seven-figure deals, or do you see evidence in your pipeline that there's a lot more of that to come and related to that is there any seven-figure deal closures that are in the guidance for Q3?

We do our best to keep careful track of the pipeline, and, of course, that's an ongoing week by week thing for us.

We don't give any specific guidance on what kind of deals we have in the pipeline going forward.

We haven't traditionally done that, and I don't anticipate we'll be in a position to do that any time in the future, but we're comfortable right now with managing the business and we don't see any particular change in its status.

You don't see a growing portion of the pipeline as seven-figure deals?

I think that we don't really categorize good deals as being seven figures and bad deals as being six figures.

Sometimes, you know, what we see is that as customers are expanding we just see greater deal velocity or more deals coming.

As Eric pointed out, our deal flow increased 34% in Q2.

A lot of time it's increased after market purchasing by customers.

And so all things being equal, I think that one way to get to success is by having a number of very large seven-figure deals.

But another way to get to success is just by having a really large number of six-figure deals--just a lot of healthy $200,000, $400,000 things that just keep coming.

And the odds are in our business that if we have more deals coming at a smaller level, then they'll probably come at a greater frequency, and that gives us even a bit more manageable pipeline.

So I don't think that we would focus so heavily on whether or not the individual seven-figure deal number is greater or less than it was last quarter as much as we just look at the overall pipeline volume.

And then we season it and look out over a few quarters and we try to compare that over what it's been for a time and the quality of the customer base that's coming out of it, and at if we feel good about that, then we generally feel good about the business.

Okay.

Eric, a follow-up question on the renewal rates.

You said that the current rates are in the mid-90% level.

Can you tell us what that was several quarters ago and maybe a year ago to give us some sense of the trend there?

Yes.

I don't have like the data for 12 months back, but I guess I made the comment over the last two quarters, I think, that the maintenance renewal rate that has increased by approximately 5% to 7%.

So that's been the trend.

We're now at a level where, again, I won't say it's impossible to do much better about the it gets increasingly difficult to show improvement.

Okay.

And finally, final question for us, can you give us an update on your partner relationships with larger systems integrators, IBM, the current status of the Tara data relationship, and any movement on efforts to forge new relationships with the larger systems integrators?

Thanks a lot.

Sanju.

With respect to the SBIs think just a bit of historic commentary--we had over the last couple years not a lot of great success with the systems integration community as they were concerned about our financial condition and situation.

And so as we went out and spoke to them, I think a lot of them said good things about our technology and we had a good reputation for having high quality technology but they really weren't feeling that they could work with us only because they were concerned about what might happen to us financially.

Over the last year, as you've seen, our financial position turn around, we're starting to get much more activity and interest from the systems integration community.

And in particular starting in about February of this year, we've gone out and tried to cultivate better relationships with the Tera Data channel, the IBM global, services channel, the Eccentric (ph) channel among others.

Those relationship typically have started with us recommunicating what our technology stands for, what stand for and also how people are using.

And so I would say we were from February through about June in a goodwill building phase with a lot of these folks.

What we're starting to do now is get trading commitments from the systems integrators.

That is, they're agreeing to pony up anywhere between half a dozen and 20 or 30 of their people to participate in MicroStrategy training classes, which is a good next commitment step.

And what we'll see I think between now and year-end is that a number of systems integrators will go through MicroStrategy training to get up to speed on the technology so they're in a position to recommend it to their clients.

What I expect is that in 2004 we'll start to see some beneficial impact from the groundwork that's been laid or seems to have been basically planted in 2003.

We might get lucky , and we might find in the fourth quarter we start to see an uptick in activity coming through the integration channel.

But when we set out on there we knew et would be a 12 month cultivation effort and so we set up our programs that way.

But I can tell you right now the level of interest and the level of dialogue and the commitments they're making to train personnel are certainly higher opinion they have been any time over the last two and a half years.

I suppose that's our last question, and so with that I'd look to thank everybody for being with us on the conference call.

We will look forward to speaking with you all in 12 weeks.

Until then, have a great rest of the summer.

Goodbye.

This concludes today's conference call.

You may all disconnect.