Microstrategy Inc (MSTR) 2003 Q4 法說會逐字稿

Good afternoon.

My name is Michael and I will be your Conference Facilitator.

At this time I would like to welcome everyone to the MicroStrategy Q4 2003 Earnings Conference Call.

All lines have being placed on mute to prevent any background noise and after the speakers remarks there will be a question and answer period.

If you would like to ask a question at that time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number two.

Thank you.

Mr. Saylor you may begin your conference.

Hi, this is Michael Saylor, I’m the Chairman and CEO of MicroStrategy.

I’d like to welcome everyone to our conference call to review our results for the full year and 2003 and for fourth calendar quarter.

I’m here today with Eric Brown, our President and CFO and Sanju Bansal, our Vice Chairman and Executive Vice President.

Eric is going to start by reading the Safe Harbor and then review our Q4 financial results as well as the full year result.

Sanju is going to do a review of sales and marketing and I’m going to conclude with the corporate outlook for 2004 and some summary thoughts, then we’ll take some questions and answers from analyst in the audience and we’ll adjourn.

Thank you so much for being with us and with that I’d like to pass the floor to Eric Brown.

Thank you Michael.

Various remarks that we may make about our future expectations, plans and prospects are 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 discuss in our registration statements and periodic reports filed with the SEC.

I’d also like to note that we’ll post supplemental information regarding our financial results to the IR section of our website which is www.microstrategy.com.

The supplementary information will provide a detailed reconciliation of GAAP to Pro Forma results.

I’d like to begin by describing the highlights from Q4 2003.

Revenues for Q4 were $51.7m which is up 23% versus the fourth quarter of 2002.

License revenue for Q4 was $22.4m which is up 14% versus the fourth quarter of 2002.

Our GAAP EPS was a positive $1.02 cents per share, including in our GAAP results for the $5.2m non cash income benefit from the change in our differed tax assets valuation allowance, and a $0.8m benefit from discontinued operations related to strategy.com.

Our adjusted or Pro Forma EPS of 68 cents per exceeded the upper end of our earnings guidance which was 27 to 44 cents and also exceeded first call consent EPS of 46 cents by 22 cents.

This marks our 9th consecutive quarter of possible adjusted net earnings.

We generated $13.2m in net cash flow for the quarter and our cash balance for the end of the year was $51.9m.

Highlights from the full year are as follows; revenues for 2003 were $175.6m which is up 19% versus the full year of 2002.

License revenue for 2003 was $77.2m which is up 23%.

Our adjusted pro forma EPS for the full year was $1.61 cents per share which is up 46% versus the full year 2002.

We ended the year with a 16% operating income margin which is up significantly from the 7% operating income margins from 2002 on a full year basis our cash balance increase by $37m. (Inaudible) as noted earlier revenue in fourth quarter was approximately $52m which exceeded the upper head of own guidance range of $39-45m going into the quarter and was above the consensus revenue estimates of $45m.

Total revenue was up by 22% versus Q4 ’02 and up 21% sequentially from the third quarter of 2003.

License revenues were $22.4 again up 14% versus Q4, ’02 marking the fifth consecutive quarter of year over year license growth.

Services revenue in the fourth quarter was $28.3m which is up 31% versus Q4 ’02, the revenue breakdown in the services line was maintenance $18m, consulting 7.2m and education revenue 2.9m.

The Q4 2003 revenue mix was 45% license and 55% services.

The geographical revenue mix in Q4 ’03 was 67% US and 33% International compared to 64% US and 36% International in Q3 of 2003.

Our four strongest vertical segments for the quarter were retail, banking financial, information technology and telecommunication.

Gross profit margins continue to remain high at 86% for Q4, 2003 which is higher than last quarter of 84% and improved over the fourth quarter of last year which was 83%.

Gross profit margin in the license business remained at 96%.

Gross profit margin in services business was 77%.

Our total head count at the end of the fourth quarter 2003 was 893 and is comprised of the following categories; 216 people in cost of sales, 283 sales and marketing, 196 R&D and 154 in G&A.

Included in the numbers are 21 employees from the angel.com and the alarm.com business units.

In terms of operating cost, total cost of revenue and operating expenses excluding restructuring and intangible write offs and other one time items increase by $3.3m sequentially and increase by $3.1m versus Q4 of last year.

In Q4 2003, we had higher sales and marketing cost versus Q3 due to higher commission and higher marketing spending for the report services product launch.

R&D cost in Q4 were lower than those of Q3 due to approximately $1m of capitalized software development cost associated with the development of report services.

G&A cost were higher in Q4 compare to Q3, 2003 due to the higher external legal fees and other cost.

In Q4 2003 we reported an operating income margin of 24% versus 11% in Q4 2002.

In Q4 03 our GAAP net income was $17.5m or $1.02 cents per share.

We reported total adjusted net earnings of $11.6m in Q4 2003, compared to $6.2m in Q3 of 2003 and $5.5m in Q4 of 2002.

The adjusted net EPS results for the quarter using a diluted share count of 17,152,000 was a profit of $0.68 cents per share again exceeding first call consensus and our own Q4 guidance.

First call consensus going into the quarter was $0.46 and again our guidance range was $0.27 to $0.44.

Reconciliation of GAAP Pro Forma is as follows; first of all, starting with reported GAAP number of $17.5m and we subtract $5.2m due to the non cash income tax benefit from the net change in our deferred tax asset valuation allowance and we subtract approximately $0.7m from reversal of the discontinued operation accrual related strategy.com.

That nets out to approximately $11.6m in Q4 adjusted net earnings.

Again we provided a GAAP results and the additional financial information in press release to reconcile adjusted net earnings as discussed above.

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

Income tax, the expense for the quarter was accredit of $3.7m compared to an expense of $0.3m in Q3 03, the tax credit in Q4 was due to net change of $5.2m in our differed tax asset valuation allowance for the U.K., Netherlands and Germany, as both entities have reached a level of profitability that is projected to continue for the foreseeable future.

This allows us to conclude that we currently expect these subsidiaries to realize the value of their net deferred tax assets, primarily consisting of net operating loss carry forward.

Prospectively, we expect income tax expense to be approximately up $400,000 to $600,000 per quarter, excluding any adjustments to our deferred tax valuation allowance.

In terms of the balance sheet, I would like to make a number of comments (technical difficulties). 50 days in Q3 2003, this DSO metric is within the 50 – 65 day range that we expect.

For the fourth quarter, we reported adjusted EBITDA of $14.5m, this marks the eleventh consecutive quarter of positive EBITDA.

On a trailing four quarter basis, we generated $38.5m in EBITDA.

The overall cash balance of the corporation increased by $13.2m, bringing the ending cash balance to $52m.

This marks the seventh consecutive quarter that the company generated positive cash flow from operations excluding the large one-time accrued interest payment in Q4 of 2002.

Reconciliation of cash flows is as follows; first of all starting with EBITDA of $14.5m, we net out or subtract $0.7m for cash restructuring cost, we net out $2.1m from deferred revenue and other and add back $1.6m for working capital to arrive at cash from operations of $13.3m.

Capex is a cash outflow of $1m.

Cash inflow from stock options exercise is $0.9m and outflow due to caped software is $1m, which nets out to net change in cash flow for the quarter of $13.2m.

The operating metrics for Q4 ‘03 are as follows.

The total number of new customers in this quarter was 201 which is up from the prior quarter of 116.

Total number of customers to date is 2,538.

Our new versus existing customer revenue mix was as follows; 75% of revenue was from new customers including the new 7.5 release, which is up significantly from last quarter which was 44%.

The breakdown of Q4 transactions by size is as follows, 39 deals greater than $200,000, 31 deals greater than $250,000, 17 deals in excess of $0.5m and 6 deals in excess of $1m.

Indirect revenue as a percent of overall product revenue was 25% in the quarter and we signed a total of 29 new channel partners in Q4.

We had a total of 102 quota carrying personality at the end of Q4 2003 compared to last quarter when we had 103 total quota carry personnel.

Total headcount for the corporation was 849 with a trailing 2 months ended Q4 2003 was 18% which is roughly the same as in previous quarters.

We had a total of 385 license deals in the quarter compared to 283 last quarter and 336 in Q4 of 2002.

The average license deal size for Q4 2003 was $93,000 which is an increase from the $83,000 from Q3.

Gross margin again was 86% up from 84% last quarter and up versus the 83% that we reported in Q3 ’03.

The revenue mix for the business in Q4 again was 67% US and 33% international.

At the end of Q4, 2003 we had approximately 15,966,000outstanding, this is an increase of 0.1m shares from the end of Q3.

The GAAP weighted average number of shares outstanding for the quarter was 15,950.000 basic and 17,152,000 on a diluted basis.

In terms of guidance again we provided guidance in the press releases itself and I will review that here with the group, the Q1 2004 revenue is expected to range from $40-43m.

The full year 2004 revenues is expected to range from $185 to 195m.

We are increasing the full year 2004 revenue range by $10m versus what we provided last quarter.

Q1 2004 GAAP EPS is expected to range from a profit of 14 cents per share to 26 cents per share.

Full year 2004 GAAP EPS is expected to range from a profit of $1.70 per share to $1.90 per share.

We are increasing the full year 2004 EPS range by 20 cents per share versus what we provided last quarter.

The full year diluted share count we are assuming is 17-17.5 million shares which for the purpose of computing dilutions from stock options assumes a stock price roughly equal to our current price.

Final comment.

On a dollar basis, we’re expecting full 2004 adjusted net earning to increase by up to 32% compared to 2003 while adjusted EPS is expected to increase by up to 18%.

The difference between the two growth rates is a function of diluted share account which will increase year over as a result of the shares issued from the note conbvcersion in mid-2003 and the increase in our share price which impacts dilution from stock options.

In summary, we are pleased with both the Q4 2003 results and full year results and have demonstrated that our business model has very good operating margin leverage and cash flow leverage.

This concludes my remarks.

I will now turn the call over to Sanju Bansal.

Great, thank you Eric.

As the numbers show Q4 was a great quarter for MicroStrategy and it was a great finish to a remarkable year.

Our revenues were strong, our margins continued to improve and our cash position was excellent.

As for our non financial assets in Q4, our customer base continued to expand at a healthy clip and our industry leading technology was enhanced with the introduction of MicroStrategy Report Services.

The launch of Report Services was an important event for MicroStrategy and perhaps the entire VI industry.

We’ve long been known for having industrial strength VI technology able to support large user populations and multi terabyte databases.

Our software is the accepted standard for business critical applications where transactional analysis is required.

That’s why we have such a strong customer base in retail, financial services and telecommunications industries where the ability to access and analyze transactional detail is critical.

While our historical reporting capabilities have been praised by our customers, our strength really has been our ability to provide on the fly analytics against the entire breadth and depth of enterprise data.

Now with MicroStrategy Report Services we’re leveraging our technical leadership in user scale, data scale and analytical scale to provide a differentiated offering in the enterprise reporting space.

Here’s what Nigel Pensey (ph), a leading industry analyst and author of widely respected OLAP report remarked about Report Services. “Microstrategy is the first vendor to release a fully integrated formal reporting product that provides traditional list reports, (indiscernible) dashboards and interactive OLAP analyses in any combination all in a single module.

It’s noteworthy that Report Services uses the same infrastructure, security, calculation engine and deployment options as the rest of the Micro Strategy product line.

For many years industry pundits like myself have been predicting the convergence of enterprise reporting in BI but this is the first product to deliver it.” Again I think that there’s been a lot of great commentary about Report Services and certainly it’s had good impact on quarter.

I’ll speak more about report Services at the end of my comments but first I’d like to provide some additional color on our outstanding Q4 results.

Here’s a partial list of customers we conducted business with in the quarter.

Albertsons, Applebee’s, Bank of Montreal, Barnes & Noble.com, Career Builder, CCC Information Services, Cox Communications, First Franklyn Financial, Giorgio Armani, H&R Block, Allied Medical Service Association, IMS Health, Ingenics, Lowes, Myer, Net Life, The National Institute of Health, Novartis, RH Donnelly, Shell Industries, Wet Seal, 20th Century Fox and Verizon Communications.

With that as an introduction, I’ll now provide additional about detail our sales results this quarter.

As Eric noted in Q4 we had a very number of new customer wins at 201 and that’s a tremendous up tick for where we have been historically.

We also had a very good total number of transactions at 385 just a good pace and momentum across the quarter in terms of transactional activity.

Also in Q4 we entered into 29 relationships with systems integrators and original equipment manufacturing our OEM partners including C3i, CGENY, Cognizant Technology Solutions, CSI, Dynex, HR Vista, Tritech Systems, Geloc, Divare and Ziomatrix

As I’ve indicated before on these calls, in 2003 as part of our commitment to customer satisfaction, we really have focused on maintaining very high maintenance renewal rates and I’m happy to report we had a strong maintenance renewal quarter in Q4.

Strong maintenance renewal rates are a good indicator that customers are succeeding with our products and are satisfied with our support services.

Also in Q4 our consulting business experienced a significant increase in both sales and contributions posting better revenues than in the previous seven quarters.

Consulting utilization steadily improved all year and reached a record high for us in Q4.

Now I’d like to briefly highlight some of our customer wins in the quarter.

Firstly, we have Auto Trader.com.

Auto trader is the leading internet auto classified marketplace and consumer information website and they selected MicroStrategy Report Services for enterprise wide reporting and analysis.

Over 800 Auto Trader.com will run reports against a 7 terabyte Data Warehouse use MicroStrategy Reports Services for sales reporting to improve operational efficiency and competitive insights.

Next we have Metropolitan Life some persons knows it as MetLife.

MetLife has expanded its deployment MicroStrategy for sales reporting and analysis, approximately 1500 users including underwriters, sales managers and marketing personnel perform sales and profitability analysis on data in an IBM DB2 Data Warehouse.

Third we have Grange Insurance.

Grange is a property and casualty insurer and they’ve expanded their deployment of MicroStrategy making it the enterprise wide standard for reporting analysis.

More than 300 associates including internal marketing, pricing and customer management personnel, access product sales, transaction and customer interaction data via the web.

With Micro Strategy Report Services Grange Associates have a reporting solution that provides dash boards with pixel perfect printing quality.

Finally we have Meredith Corporation and Meredith Corporation is one of the nations leading media and marketing companies and the publisher of magazines such as Better Homes and Gardens and Ladies Home Journal and the selected MicroStrategy for their customer analysis needs.

MicroStrategy enable Meredith to query and report on customer date over the web stored in a terabeta Data Warehouse.

With the new MicroStrategy based applications Meredith will be able to fully investigate and statistically analyze all its customer information.

For the concluded 2003 we completed our financial turnaround and I think that’s readily apparent by the numbers that Eric’s gone through.

More importantly with investments we made this past year we laid the foundation for the next chapter in the MicroStrategy history.

With the release of MicroStrategy Report Services, we’re extending the full power of high value business intelligence to the whole enterprise and historically the combination of detailed analysis with compelling report formatting has been available only to a hand full of business analysts inside a corporation.

Report Services not only marks our entry into the enterprise space increasing our addressable market.

It makes the business insight MicroStrategy is known for available in a far more consumable sort of container to more users than ever before.

By enabling the development of dashboards, score cards, operational business reports and customer statements, Report Services can enrich existing intelligence applications and use the creation of numerous new ones.

Many of our customers have already built dozens of applications spanning their operations and encompassing thousands of users.

With MicroStrategy Report Services we’re looking forward to even greater demand for MicroStrategy based BI applications which will further fuel our license growth.

I want to close by stressing that just as important as the launch of MicroStrategy Report Services has been it is just one piece although a significant one, of a highly productive product cycle that we’re in the midst of.

In the coming months as we launch our UNIX Intelligent Server and other cutting edge enterprise reporting features, I think you’ll conclude that MicroStrategy is at the very beginning of what should be a grate decade fro us.

With that I’d like to turn the call over to Mike.

Thank you Sanju.

I think both Eric and Sanju have been quite comprehensive in their review of the results for the quarter so I will not dwell on those.

I would like to just summarize a few thoughts for the shareholders on the phone.

I think in summary 2003 was a year of change in both our industry and in our company that I think were very beneficial to the shareholders.

Our industry consolidated in 2003 and is becoming increasingly the consensus of many people in the industry that there are about three players in the marketplace, ourselves, Cognos, and Business Objects that keep getting mentioned over and over again.

The fact that they’re all three clear players that get mentioned continually I think has been a boom for us.

We have benefited with less clutter and noise in the marketplace.

Its easier for Channel Partners the hardware vendors and system integrators figure out who they need to focus upon.

I think its making our marketing more efficient, its making our sales more effective.

I think that we also benefited because the way the industry consolidated was such that some companies like Saigon got shut down.

Some companies like Brio got merged or fused with applications and that a really good moving themselves from merchant business intelligence market and then other companies like Crystal merged with Business Objects and the result of that is that now we have a company Business Objects which has got two different platforms and two different architectures and I don’t believe that they’re going to easily be able to merge those in the next twelve months time frame.

So that creates and opportunity for us.

We have another company Cognos with which I think we are fairly clearly differentiated.

Cognos has a product and has a focus that is different from ours.

Our focus is the high end industrial part of the market.

Surveys seem to indicate that our customers are running databases that are ten times or more bigger.

Most of our customers know the difference between our product and Cognos and so we don’t have the same kind of challenging positioning issues that we might have if we had vendors in the marketplace that were fairly close to us and what they were trying to do.

Probably the best news here is that we have a couple of vendors in the marketplace that have different technical agendas and different businesses there’s room for all of us and the consolidation has made it easier I think for each of us to pursue our business model.

I think the second thing that happened in 2003 that’s significant is that we managed to clean up our balance sheet completely.

We eliminated our all of our debt, our preferred instruments and we emerged from a situation of having negative shareholder equity to having positive shareholder equity.

With a clean balance sheet I think that has been very beneficial to our (inaudible) position as one of the three long term buyers in the market and I think customers view that as being a very positive thing as do employees as do our partners in the channel.

I think its helped us to compete and I think it’s a benefit to the shareholders.

I think the third thing that happened in 2003 is that we focused with great diligence on strengthening our software sales operations and our service operations.

And so you can see it in the numbers, you can see it in the service margins.

Were doing a lot more services and yet the cost of doing services haven’t changed much.

You can see it in the efficiency of our sales and marketing activities although you can see it in the growth of licenses but also in the growth of services and you can see it in the expansion of our operating income and our operating margins.

That’s our basic, blocking and tackling but the company is very, very focused on it.

I believe they made good strides in 2003 and the numbers speak for themselves and those three things I think were key to our results in 2003.

Looking forward to 2004, on our agenda is to continue to benefit from the industry consolidation to continue to accentuate our differentiated value proposition.

We know there are customers out there that will view us as being the best and that will translate to business and profitable business for us.

I think the second thing that we’re going to focus on in 2004 of course is to continue to strengthen our software operations.

We’ve come a long way over the past 12 months but I believe that there are still a number of things we can do to continue to strengthen our ability to sell and service our customers in a profitable and high quality fashion.

And so we have learned a lot during the last 12 months and the practice of putting out into the fields and in many other places now.

So a lot of excitements in the company and in the customer base and in the service base right now about our opportunity to do an even better job in 2004.

And finally, I think we have a really exciting product schedule coming up in 2004.

We have some products that we brought to market like a report services that show that reasonable good uptake in Q4 but were going to have an entire selling year to focus on those.

It’s my belief that the great majority of our customers will purchase report services and they will benefit from it and we will benefit first because they purchased it and secondly because report services are the ideal product to distribute to the masses.

So people who do purchase will probably actually expand their employment of MicroStrategy.

Creating additional demand for our other products on our product line as well as additional services as well as making it easier for us to maintain a status as an enterprise standard or to become a standard in enterprise.

So I think we’re excited about that product we have a product called Office which allows us to integrate much more tightly with Microsoft Office and there’s a fair deal of excitement about that.

And then we have coming up in 2004 the last installment of our UNIX transition strategy our MicroStrategy universal product line will be complete in 2004, which means that we will be able to offer our customers a complete architecture on either NT or UNIX and the universal product line will expand us from 32 bit to the 64 bit domain which is becoming interesting if not exciting to a lot of enterprises that are looking to deploy out past the hundreds into the thousands of people.

And so it’s an exciting product line or 2004, it’s in our sweet spot.

It’s what our customers have been asking for.

We think we’ve done a pretty decent job on it and so, if you put all these things together I think we’re in a position to exploit the momentum we’re able to generate in 2003 and continue to do more of the same.

Before I pass the floor over to the analysts for questions and answers I would like to also note that since the people on this call are normally long-time watchers of MicroStrategy and interested in our results and in our technology, we have coming up in Miami, in about a week and a half, MicroStrategy World 2004.

At MicroStrategy World we are going to have all of the executive team, many of our field personnel, something on the order of a thousand people or more overall.

Hundreds and hundreds of different companies and customers will be represented.

Dozens of our partners and there will be dozens of different presentations on our technology and the application of our technology in the field.

So for someone who is very interested in what our customers are doing and the successes of our technology and where the industry is headed and the business has headed that would be I think a really nice place to be and we would welcome you and we’d like to have people come.

So please feel free to check out our website and if this is interesting to you we’ll see you in Miami in a couple of weeks.

With that I’d like to open up the floor to the analysts for questions and answers.

A this time I would like to remind everyone if you would like to ask a question press star then the number one on your telephone keypad.

Your first question comes from the line of David Hilal.

Great thank you.

A few questions, first I was hoping to get more commentary on OF services I guess quantitatively what I think you’ve given a percent in the past and qualitatively I want understand how you’re doing kind of coming down stream from those high and demand customers to more of the main stream market.

Sure David, this Sanju I’ll go ahead and give you some qualitative commentary.

We are certainly seeing that (inaudible) to have a cash and capability as people pull data out of relational data stores so that they can fight and dice it efficiently is popular and so we are making progress there and it selling reasonably well.

I think that in some sense there’s been some good natural demand for it as you probably know we already have other cash and capabilities in our product as well.

So we’re seeing good demand for it.

I think that over the last quarter or two there has been more focus in other areas of our product line, like report services but I think we’re going to continue to see in 2004 a good activity an good up kick in sales of (inaudible) services.

David this is Eric.

In terms of drawing down that a little bit if we look at our new product results for the fourth quarter 2003 and now we have a definition which includes of course your web pro-oact services and now our report services and you know in aggregate we’re looking at a number that’s approximately 35, 36% of revenue overall.

License revenue?

License revenue

Sanju what are your plans on sales quota carrying growth for 04 I’d say you were pretty much flat I think down one person this quarter are you adding to 04 or (inaudible)?

Our current head count plan is to make modern additions throughout the year layered in through out the year, so there is no big rush here in Q1 to add staff.

We will allure people in and like we’ve been doing all last year we’ve been monitoring the field business based on contribution margins so as we think that there is some more margin opportunity as margins permit rather we’ll add additional field staff.

But it’s going to be meted in and sort of not aggressive at the beginning of the year and which we’ll just add throughout the entire year.

Ok and last question Eric, two parts.

First on margins you know it will take to about 17% for the year it’s very impressive from 12% last year.

How much more margin expansion is there and Mike what do you think can get to in this year in the out years and then the second number question, Eric I think I missed your guidance on taxes if you can just reiterate that please.

Certainly I’ll answer the last question first.

Our guidance in terms of tax expense lower each of the quarters in 2004 is approximately $400,000- $600,000 per quarter and that would exclude any extraordinary adjustments.

Now in terms of the operating margin you’ve correctly pointed out the fact that for the year 2003 we took about a 16% operating income margin that is up pretty significantly versus last year.

What we said you know consistently I think from the last several quarters is that you know our mid term objective is to get to 20% operating and income margin.

Mid term doesn’t mean the next quarter though.

Mid term means over the next three, four years in that range.

Ok so the 1% increase per year (inaudible) what you think Mike or is that being (inaudible).

I think that would be reasonable if we can take up 16-17-18 and that sort of thing over the course of the year, to year to year.

Good guidance, thanks guys.

Thanks David

Your next question comes from the line of Mark Murphy.

Thank you, congratulations on an outstanding quarter.

Question on the, at the New Report Services products can you give us a split on that revenue contribution in terms of new versus existing or in other words how frequently is that product being deployed along side the core MicroStrategy server.

Mark its Michael Saylor.

You know the report services product is always being deployed with the core MicroStrategy server.

In some cases its being deployed to existing MicroStrategy users on top of our servers and in conjunction with MicroStrategy web so it’s going to drive web demand, it’s going to drive intelligent server demand.

In other cases it may be used to deploy new application in which case it will drive even more demand because it will drive new licenses as web or the server as opposed to using existing licenses but it’s sort of tricky to quantify that because there is a mixture of (inaudible) or in CPU licenses on the customer base and so there is no one simple rule but in general its fairly synergistic.

Do you have any estimate of the, our contribution from the report services product in Q4 and or any type of feel for how it might ramp during the year.

Yes Mark this is Eric, we did approximately 30-35-45 license transactions involving report services so it was pretty good activity over all.

In terms of the ramp over the next couple of quarters, you know it will say the same thing here today as what we said the last quarter.

Our best proxy is perhaps to ramp up for now that’s what we saw with you know with 7i.

But again it’s too early to tell initial uptake is encouraging we are successful converting people that participate in the beta program to paying customers in Q4 and I think for us the important thing is that we did a fair amount of investment in terms of marketing for that launching report services at the end of the year.

I think the key thing in 2004 is to have 12 solid months of selling the new product line.

Ok I guess a broader question on the reporting market if we are trying to understand which reporting products in the marketplace would be hurt the most by the release of the Microsoft report services product.

Would you think it would be those products that have low end functionality, those that are stand alone in other words don’t have any olap or rollap engine we think it will be more of those products that are primarily running on sequel server as the database?

Yeah Mark I think if you look at Microsoft’s activities traditionally Microsoft was the number one ally of not distribution channel of Crystal.

So Microsoft’s decision to get into the reporting business first and foremost represents a loss of a distribution channel for Crystal and then represents the gain of an inclined competitor for Crystal.

So I think Crystal is by far the most exposed given the fact that Microsoft had a decade to study what Crystal was and by their own admission they chose Crystal as the surrogate for what they want deliver their customer.

So that would be my first concern and you know their operations is part of business (inaudible).

I think otherwise Microsoft’s is going to be very strong and the sequel server world.

They are going to be strong in the small enterprise mid size enterprise world and that’s where the world of Cognos and Business Objects and Crystal.

It’s not really our world as we had said we had 25(technical difficulties) (inaudible) the oracle DV2 (inaudible) market is, is not going to be affected very heavily if at all I think what Microsoft is doing because all three of those data base infrastructures require customization, certification and tuning that Microsoft has no strategic interest in doing or any particular expertise in.

I think we’ll stay there we’ll stay focused on it.

I do think it will it will be a bit more challenging for people who are on the low in the middle end of the market.

And if I were to put my finger on any one that’s most exposed I think it’s a no brainer it’s Crystal given the fact that they were getting a large chunk of there lift and sales momentum from Microsoft and lost that.

And now they’ve also got a sort of in current competitor that is I think by Microsoft’s definition meant to be an exact replacement of them.

Okay one last question is there anything you can share in terms of the status of Micro Strategy’s relationship with JD Edwards, the OEM relationship?

Is there any time frame when that comes up for renewal is there any chance that it could be expanded into something under the broader PeopleSoft umbrella?

Or is there any chance that it could be expanded to include the reporting product?

This is Sanju with the JD relationship we have today over 100 joint customers.

So they have been successful selling the Micro Strategy product bundled in with the JD Edwards product over about the last 2 years.

We’re going to continue to look to expand the relationship and we’re going to continue to look to get more customers together.

And beyond we really got no indication, either from JD Edwards or People Software that there’s a broader possibility.

Okay thank you very much.

Your next question comes from the line of Frank Sparacino (ph).

Hi guys first question for Eric under the deferred revenue line Eric could you just comment what the changes were on sequential basis for down slightly?

Certainly it was a quarter to quarter decline of $1.5m, $1.3m short term and $.2m long term.

And just to add a couple more comments on that I think the reason that we’re seeing the decrease is due to the fact that we have heavy end of year maintenance renewal activity, which obviously we do most of our license business in Q4 versus the other quarters and maintenance renewals come up they fall in Q4.

We expect that this cash from maintenance renewals was received in Q1 deferred revenue balance is going to increase.

Okay, Eric you commented on Report Services in terms of I think you said and a great majority of the customer base.

Do you have a sense to day you know what has great majority translated to?

Is it 50% of the customer base or is it too early to tell?

I think that over a course of 2 to 3 years which is the national product diffusion cycle, more than 50% of the customer will purchase and utilize Reports Services.

And if you look at the 35 to 40 transactions you did this quarter, how many of those were truly competitive verses you have an existing customer today that obviously you guys have been successful with and they simply default to you and look to that product and there really isn’t any true evaluation POC?

This is Sanju I would say that certainly it’s mixed, some are going to be existing customers that are defaulting to Report Services as a natural add on to their existing solution.

We’ve had other new accounts wins within the quarter like Auto Trevor(ph) which I’ve mentioned and they picked MicroStrategy along with Report Services for their reporting requirements that was a heavily competitive sales cycle.

And then we got other people that have MicroStrategy infrastructure but in fact are looking to replace their existing investments in Crystal reports, actuate another report writers with Microstrategy, so it’s really Frank a mixed bag.

But I think probably to get to another part of your question which you didn’t really ask, is how competitive will it be in the open market, I think we’re going to find it’s going to be very competitive.

We definitely think, this is Saylor sorry, we definitely think that our competitiveness head to head with traditional enterprise reporting companies has been dramatically improved.

Traditionally we always had very strong back end technology and scalability and analytical sophistication and administration capability.

Occasionally, in a beauty contest a product that’s put out a very pretty report would end up getting a lot more attention.

And we at this point have the ability to create Desk Top Publishing quality reports and so I don’t think we’ll be losing so many brief beauty contests and so I think this has been a major step change in our competitiveness vise-a-vie everybody else in the market.

One last question guys’ maybe Sanju or Mike if you want take it, in terms of the competitive deals you had with Reports Services is there any one or two things that stand out in terms of why you won that deal outside of the fact that it’s truly integrated with the rest of the platform?

This is Sanju you took the words out of my mouth but we’re finding is (inaudible) we’re pushing in the market is that the integration with the other staff and business intelligence that we’ve been offering the Analytics and the Adhoc Query and the ability to narrow cast out, is actually one of the greatest strengths and the reason is important obviously is for reduced administration and increased leverage.

And so I think that’s in a simple way one of our greatest strengths for the entire united product line and that’s why Report Services is even out of the box in version 1.0 is getting a tremendous amount of fan fare, people do want to integrate analytics into the reports, they do want to be up in there (inaudible), they want one set of Meta Data, they want one security model, and some people look at the entire host of product lines and saying these seems to be done the right way.

There are a few other subtleties as well for example if you were to work with Cogno’s you have chose between an impromptu or power play or their report net product and each one has different features and each one as slightly different administrative and meta-structures which aren’t easy to mix and match, so it’s a fairly frustrating situation whereas we just don’t have that situation.

Second I think if you look at our customers they’re wanting run against sometimes very large comprehensive data bases and many of the architectures of other competitors in the business preclude from directly accessing those architectures.

There’s too much an intermediate queue building and things like that go on that choke the data base or---in some ways choke off the application.

So for people that are looking for any type of functionality to be delivered against all of their data, they find that our product line is built to do that and it’s pretty clear pretty quickly.

And if they don’t go with our product line they really have a whole host of very difficult choices they have to make, which nobody really wants to make if they can avoid it and each of those choices preclude them from a certain path of action.

So right now I think we are well positioned for the Enterprise customer.

Okay thanks guys nice job.

Your next question comes from the line Tom Herns.

Thanks guys this is Bill Daphnia for Tom Herns.

Couple of quick questions.

One of the 30- 40 license transactions for Report Services can you say whether any of those were part of the 6 deals over a million dollars?

And then second if you comment on the pricing environment incrementally is it getting better?

I saw your ASPs ticked up a bit just some comments on pricing if you could thank you.

Yeah some of the larger like the million dollar plus transactions did include report services as a component of them, bear in mind again that anybody buying that much software from us is probably buying a mixture of intelligence server, web server they might have Report Services and then other types of professional services.

Regarding your second question I believe it’s about the nature of pricing right now?

Right exactly.

I think if you look at price it’s an interesting thing.

What’s going on right now is that our customers are building more applications according to more people so I think that the average selling price for given installation for an individual customer, the amount of money that they’re paying us is probably going up but that’s a reasonable assessment.

At the same time the average costumer had 300 users five years ago and today the average customer might have 3000 users so perhaps the average price for the end user is going down, and what should happen logically is we should see customers go from 1000 to 10,000 to 50,000 end users, the average price for the end user will be lower, but we’ll be sitting at the middle or the center getting in on a cut on a lot more activity.

So I think those are both very good trends, it’s good for the customers it’s also good for us.

We’re meeting a need that they have to consolidate their platform requirements to a single platform and they save money by doing everything on a central platform.

And from our point of view we make money because were actually selling with you know higher average selling price for the centralized platform.

Great guys, thank for a good quarter.

Your next question comes from the line of Patrick Mason.

Yeah, good quarter obviously just curious on the pipe line mix any kind of flavor on that from various products?

Pat this is Eric, again it’s a little too early for us to discern what the pipe line mix is in our new products report services versus the other products.

So we really can’t quantify on it changing.

What I can say though is that we will be definitely be even more focused on Report Services as we move through to 2004.

Again we only had about a half quarter of selling on Report Services in Q4, we just simply don’t have enough data points yet.

Yeah, any just color on your partnerships with some other companies may be Essential or somebody like that that played a more important role trend wise in Q4?

I don’t know that there is any one partner that stands out in Q4.

Certainly through out 2003 we have been getting back out to systems integrators and resellers and other people that are providing tangential products like the ETR space and making sure that they are aware once again at the Micro Strategy story.

And so I think that certainly our awareness is increasing we’re getting better referral activity from other partners.

And we’re starting to see some resale from IBM Global Services and some of the other mid tier business integrators.

So no body sticks out in Q4 as being exceptional but I think that over all the trend is positive in the channel.

That is we’re seeing more channel interest in us, we seeing more channel buzz and more channel activity around Micro Strategy.

And last question is kind of ironic but obviously your stock has performed very well didn’t think I would ever have to say this, this early in ’04 but have you ever thought about splitting the stock?

Are you looking for a target of 100 before you think along those lines?

The main reason I am asking the question is obvious you have a lot of variation in your EPS guidance and obviously if you had more shares it would be narrower.

We are flattered by the suggestion and we are appreciative and at this point we don’t have any plans for splitting stock.

Okay.

Your next question comes from the line of Mark Verbeck

Thank you, could you help me a little bit on the expense lines, specifically R&D came down were you capitalizing more or less this quarter?

And then G&A went up again this quarter and I thought perhaps your legal fees might be moderating.

Can you just give me a little more color on what’s going on with those expenses?

Yes certainly this is Eric Brown, yes the R&D expenses came down and we had approximately $1m worth of capitalized soft ware costs in the fourth quarter which of course related to the development of report services and we have no significant soft ware capitalization in the prior Q3, 2003.

So that’s really the – the cards have changed there quarter to quarter.

As far as you know G&A costs and other specific spending items like legal fees you know it’s our intent to manage those down in absolute numbers and as a percent of the corporate revenue over time.

Okay, and then on the pipe line looking out are you seeing any difference in terms of the number large deals in the pipe line kind of quantitatively by size?

I’m just trying to get a sense for if kind of the new customers that you have and the momentum you’re showing is having any kind of impact on potential deal size?

This is Saylor I think we’ve reflected a bit more comfort in our guidance that we offered with this press release.

And so you can extrapolate from that guidance back to our thoughts about the pipeline in the quantitative sense.

I don’t think I have anything else to say.

Are the deals larger or just more deals?

I think that the pipeline is evolving pretty consistent with the growth of the company right now.

And I would expect it and we’ll see sort of more of the same of what we saw in 2003 in 2004.

Okay great thanks.

Your next question comes from the line of Brian Hidsude (ph).

Good afternoon I have a quick question on universal intelligence server, you sort of mentioned they were going to be complete in 2004.

I was wondering if you had any more granularity as to a GA date on that?

Right now we’re not forecasting the exact GA date but we certainly thinking middle of the year it will be available.

We’re hopeful that we’ll be able to go beta in February.

And secondly I was wondering if you could talk some more about the competitive landscape that you saw in Q4?

I know that you’re saying you have a different set of products from Cogno (ph) and that the subject – maybe you’ve been a little bit distracted.

But I was wondering who you saw during the quarter and in particular if you had ever seen Seibel or Enquire or anything like that?

I think right now that the landscape looks like the Business Objects and Cogno and our self, to much lesser degree some of the small report writer companies, you know, the Actual Rates and the Briers (ph) are much less problematic than they once were.

We don’t really see much activities from Seibel, we don’t really see a lot of activity form any body else.

Sarz (ph) is of course is always out there, but it’s not always clear that our competitors, they are almost in a different part of the market.

So I think the competition is Cogno and Business Objects right now.

Great thank you.

There are no further questions at this time.

Are there any closing remarks?

Yes I would like to thank everybody for being with us today and we appreciate your support.

And we’re looking forward and excited about 2004 -- definitely come to Miami to Micro Strategy World if you have further interest if so we’d love to see you there.

And we’ll forward other wise to seeing you in 12 weeks at our next quarterly conference call.

Have a good day.

This concludes this afternoon’s conference call.

Thank you for participating you may now disconnect.