Microstrategy Inc (MSTR) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the MicroStrategy Q1 2004 earnings 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. (OPERATOR INSTRUCTIONS).

Mr. Saylor, you may begin your conference.

This is Michael Saylor.

I am the Chairman and CEO of MicroStrategy.

I wanted to welcome all of our shareholders and other constituents with us today on this conference call to discuss our results for the first quarter of 2004.

I have with me Eric Brown, our President and Chief Financial Officer, and Sanju Bansal, our Vice Chairman and Executive Vice President and Chief Operating Officer.

Eric is going to begin by reading the Safe Harbor Act, and also by discussing our financial and operating results.

Sanju is going to follow with a discussion of our sales and marketing activities during the quarter.

I am going to finish up with a discussion of our strategic operations and plans going forward, and give a CEO overview.

And then we're going to take questions from analysts in the audience, and then we will be done.

And with that, I would like 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 periodic reports filed with the SEC.

I would also like to note that we will post supplemental information regarding our financial results to the IR section of our Website, which is www.MicroStrategy.com.

The supplemental information will provide a reconciliation of GAAP to pro forma results.

I would like to begin by describing the highlights from Q1 2004.

Revenue for Q1 was 49.1 million, which is up 31 percent versus Q1 of 2003.

License revenue for Q1 was 18.8 million, which is up 14 percent versus Q1 of '03.

Our GAAP EPS was a positive 60 cents per share, versus guidance of 14 to 26 cents.

Our adjusted or pro forma EPS of 60 cents per share exceeded the upper end of our earnings guidance, and exceeded First Call consensus EPS of 29 cents by a 31 cent per share margin.

This marks our 10th consecutive quarter of positive adjusted net earnings.

Our operating income margin was 21 percent for Q1 '04, which is up from 10 percent in Q1 '03.

We generated 24.4 million in net cash flow for the quarter.

Our cash balance at the end of the quarter was 76.3 million, which is up from 51.9 million at the end of Q4 '03.

Deferred revenue balances increased by 9.2 million versus the prior quarter.

Revenue in Q1 was 49.1 million, which exceeded the upper end of our revenue guidance range of 40 to 43 million, and was above the consensus revenue estimate of 44 million.

Total revenue, again, was up by 31 percent and down 5 percent sequentially from Q4 '03.

Our license revenue in the first quarter was 18.8, which is up 14 percent versus Q1, marking the sixth consecutive quarter of year-over-year license growth for the Company.

Services revenue in the first quarter was 30.3 million, which was up 45 percent versus Q1 '03.

The services revenue breakdown was as follows -- maintenance, 20.4 million, which is up 46 percent versus Q1 '03; consulting, 7.1 million, up 37 percent versus Q1 '03; and education was 2.5 million, up 57 percent over Q1 '03.

The Q1 '04 revenue mix was 38 percent license and 52 (ph) percent services.

The geographical revenue mix in Q1 was 57 percent U.S. and 43 percent international, compared to 67 percent U.S. and 33 percent international in Q4 '03.

The international revenue component was higher in Q1 '04, since we closed an international transaction worth a total of 4.6 million in the quarter, comprised of 3.5 million in licenses and 1.1 million in services.

Our four strongest vertical segments for the quarter were retail, information technology, banking/financial and government/public services.

Gross profit margins continued to remain high, at 84 percent for Q1 '04, which is down slightly versus the previous quarter, and improved versus Q1 of last year, which is 82 percent.

Gross profit margin in the license business was 96 percent, which is the same as last quarter.

Gross profit margin in the services business was 77 percent, which is the same as the prior quarter, and improved from Q1 of last year, which was 72 percent.

Our total headcount at the end of the first quarter was 872 people, and is comprised of the following -- 229 FTEs and cost of services, 283 in sales and marketing, 200 in R&D and 160 in G&A.

Included in the numbers above are 22 employees in the angel.com and alarm.com business units.

In terms of operating costs, the line-by-line review is as follows.

Cost of services in Q1 was 7.8 million, versus 7.3 million in the previous quarter.

Sales and marketing was 16.4 million, versus 16.8 in Q4 '03.

R&D was 6.7 million, versus 6.1 million in the fourth quarter '03, and G&A was 8 million, versus 9 million in Q4 '03.

A couple of comments here.

First of all, compared to last quarter, we had higher cost of sales, due to higher payroll expenses from having about a dozen or so more FTEs in the cost of services line in Q1 versus Q4 '03.

Sales and marketing costs were lower in Q1, due to lower variable compensation and lower marketing spend in Q1.

In Q4 '03, sales and marketing costs were computed, with many field personnel being compensated at higher commission rates if they exceeded annual quotas.

Our R&D costs in Q1 '04 were higher than those of Q4 '03, due to lower capitalized software development costs.

During Q1 '04, the Company capitalized approximately 400,000 of software development costs associated with Intelligence Server Universal.

This compares to approximately 1 million of capitalized software development costs during Q4 of '03 associated with Report Services.

G&A costs were lower in Q1 compared to Q4 '03, due to lower external legal fees.

In Q1 '04, we reported GAAP net income of 10.4 million or 60 cents per share in EPS.

We reported total adjusted net earnings of 10.3 million in Q1 '04, compared to 11.6 million in Q4 '03 and 1.8 million in Q1 '03.

So this is a substantial year-over-year improvement.

The adjusted net EPS result for the quarter, using a diluted share count of 17,253,000 shares, was a profit of 60 cents per share, which exceeded First Call consensus, which was 29 cents, and our own original Q1 '04 guidance.

Again, First Call consensus estimate was 29 cents per share, and our original guidance range was 14 to 26 cents per share for Q1.

It is important to note that our reported GAAP EPS and pro forma EPS are essentially the same, at 60 cents per share.

This indicates that the adjusting items have been reduced to a minimal level, and GAAP and pro forma results have converged, improving the transparency of our results.

There are only two minor reconciling items between our GAAP and pro forma results, and this is described in one of the attachments to the earnings release.

First of all, starting with a reported GAAP income number of $10.38 million, we have a subtraction of about $50,000 for minority interest and an $18,000 add-back for amortization of intangibles, which leads to 10.35 million in adjusted earnings for Q1 '04.

Income tax expense for the quarter was 0.8 million, compared to a credit of 3.7 million in Q4 '03.

In 2004, we expect income tax expense to be approximately $600,000 to $800,000 per quarter, excluding any potential adjustments to our deferred tax valuation allowance later in the year.

I will address prospective tax rate assumptions for '05 during the financial outlook section of my comments.

Turning to the balance sheet, I would like to note that our cash balance again increased by a healthy 24.4 million versus the prior quarter.

Again, the total deferred revenue balances quarter over quarter increased by 9.2 million, comprised of an increase of 8.6 million in short-term deferred revenue and 0.6 million in long-term deferred revenue.

As expected, we had a very good maintenance, billing and collection cycle coming off of the end of Q4 and beginning of Q1.

Working capital, our Q1 DSO figure, was 43 days compared with 53 days in Q4 '03.

This DSO metric is slightly better than our expected range of 50 to 65 days, and marks the lowest DSO, I believe, in the last three years.

For the first quarter, were reported adjusted EBITDA of 12.3 million.

This marks the 12th consecutive quarter of positive EBITDA.

And on a trailing four-quarter basis, we have generated 44.6 million in EBITDA.

The overall cash balance increased by 24.4 million this quarter, bringing the Q1 ending cash balance to 76.3.

This marks the eighth consecutive quarter the Company generated a positive cash flow from operations, excluding the one-time accrued interest payment in Q4 '02.

The reconciliation of the cash flows is as follows.

First of all, starting with EBITDA of 12.3 million, we subtract 0.6 million for cash restructuring costs, add back 8.8 million for deferred revenue change, add back 4.6 million for working capital improvement, which yields net cash generated from operations of 25.1 million.

CapEx and other items are an outflow of 2.2 million.

Stock option exercised in ESPP (ph) is an inflow of 1.9 million, and cap software is an adjustment or a subtraction of 0.4 million of cash, which gives us the overall net change in cash of 24.4 million for the quarter.

We have provided the cash flow statement, as well, to the financial attachments to the press release.

Key operating metrics for Q1 '04 are as follows.

The total number of new customers in Q1 was 156, and our total number of customers life to date is 2,694.

Our new versus existing customer revenue mix in Q1 was 39 percent of revenue from new customers -- this is down from last quarter, as our largest transaction in the quarter was an international direct deal with an existing customer.

The breakdown of license deals in the quarter is as follows -- 26 deals greater than 200,000; 19 deals greater than 250,000; eight deals in excess of 500,000; and two deals in excess of $1 million.

And direct revenue as a percent of overall product revenue was 15 percent in the quarter, which is down from Q4 '03.

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

We had a total of 98 quota-carrying personnel at the end of the quarter, compared to 102 quota-carrying personnel at the end of Q4 '03.

Total headcount at the end of Q1 for the Company is 872, and for the trailing 12 months ended Q1 '04, the attrition rate was 20 percent, which is up slightly versus the prior quarter at 18 percent.

We had a total of 297 license deals in the quarter, compared to 385 last quarter, and 236 in Q1 '03.

So we have a year-over-year pickup.

The average license deal size for the quarter was 88,000, which is down a bit from 93,000 in Q4 '03.

Again, gross profit margins for Q1 '04 remain strong at 84 percent, and is up versus the 82 percent that we reported in Q1 '04.

Approximately 27 percent of worldwide license sales in the quarter were from new products, which consists of Web Professional, Web Services, Report Services and MicroStrategy.

In terms of share count at the end of Q1 '04, we had 16,045,000 shares outstanding.

This is a nominal increase of approximately 100,000 shares versus the end of Q4 of last year.

The GAAP weighted average number of shares outstanding for the quarter were 16,010,000 shares basic and 17,253,000 shares on a diluted basis.

I would like to comment now about our guidance.

First of all, I would like to state that the following statements concerning our financial guidance are subject to risks and uncertainties described at the end of our earnings release.

Management guidance for Q2 '04 and full year 2004 and beyond is valid as of today only, and supersedes any previously-announced guidance as to the Company's expectations for financial results.

Q2 '04 revenue is expected to range from 43 to 47 million.

Full-year 2004 revenue is expected to range from 190 million to 200 million.

We are increasing the full-year 2004 revenue range by 5 million, versus what we provided last quarter.

Q2 '04 GAAP EPS is expected to range from 20 cents to 40 cents per share.

Full-year 2004 GAAP EPS is expected to range from a profit of $1.90 to $2.10 per share.

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

Our guidance assumes no significant adjusting items between GAAP and pro forma EPS, as we expect the two to converge.

If there are any adjusting items in the future, we will report them as reconciling items.

The increase in our full-year guidance reflects the improved visibility that we have in our overall revenue pipeline, as more of the our revenue comes in the form of highly profitable and predictable services revenue.

The full-year diluted share count we're assuming is 17 million to 17.5 million shares.

A couple of comments on taxes.

In 2004, as I stated earlier, we expect income taxes to be approximately $600,000 to $800,000 per quarter.

At the end of 2004, and prospectively beginning in 2005, we may have significant changes in our reported tax rates.

As of March 31, 2004, we had net operating loss carryforwards of approximately 309 million, and other temporary differences consisting of 288 million of U.S. net operating loss carryforwards and approximately 22 million of international NOLs.

These NOLs and other temporary differences result in net deferred tax assets of approximately 148.7 million.

As of March 31, 2004, we had a valuation allowance of 143.5 million on our deferred tax assets.

This nets to 5.2 million in deferred tax assets, as shown on our Q1 2004 balance sheet.

If our operations and in particular our domestic operations continue to demonstrate profitability, and we stay within or exceed our 2004 EPS guidance, we may release a substantial amount of our valuation allowance by the end of 2004.

The magnitude of this number is uncertain, and therefore not included in the EPS guidance I gave earlier of $1.90 to $2.10 per share.

Any such release of our valuation allowance will result in a non-cash tax benefit in our statement of operations and the balance sheet recognition of an increased deferred tax asset.

If we release a significant portion of our domestic valuation allowance at the end of 2004, then we expect our 2005 effective tax rate will increase to approximately 36 to 40 percent for the next several years thereafter.

However, given the magnitude of our NOLs, particularly the domestic NOLs, if we generate profits, we expect our cash effective tax rate in the 2005 to 2007 timeframe will remain in the low range of 4 to 8 percent.

In summary, we're pleased with the Q1 '04 results, particularly the operating income margin of 21 percent and the very strong net cash flow results.

The predictability of our revenue is improving, as we continue to compound the highly predictable and profitable recurring maintenance business.

This concludes my remarks.

I will now turn the call over to Sanju Bansal.

Great.

Thank you, Eric.

As the numbers demonstrate, Q1 was another very good quarter for MicroStrategy.

As important as the numbers are, however, I think the underlying forces and trends driving our sales were more interesting.

First, we are reaping benefits directly and indirectly from a very strong product cycle, with the successful launch of MicroStrategy Report Services in November and the successful launch of MicroStrategy Office earlier this month.

MicroStrategy Report Services' momentum is building.

In just over four months, we have already secured over 100 customers for this breakthrough enterprise reporting product.

Report Services is also helping drive additional sales of the underlying MicroStrategy platform, as well as sales of maintenance, consulting and education.

Our Company and product leadership is increasingly being recognized and praised by industry analysts, customers and the trade media.

Here are just a couple of recent noteworthy examples.

In January, MicroStrategy won Intelligent Enterprise's prestigious 2004 Editor's Choice Award as one of the most influential companies enabling the intelligent enterprise.

At about the same time, a leading independent survey of the business intelligence software market, the OLAP Survey 3, again validated the superior capabilities of MicroStrategy technology.

For the third consecutive year, MicroStrategy's business intelligence software was found to be superior to that of Business Objects, Cognos, Hyperion and Brio in data scalability, Web deployability, and Extranet deployability.

MicroStrategy also scored better than both Cognos and Business Objects in each of the survey's eight business benefit criteria.

MicroStrategy was also the top-performing specialist business intelligence vendor for quality and timeliness of product reports, rating 15 percent higher than the average of the other products ranked in the survey.

The author of this independent survey, Nigel Pendse, will be presenting the results of the survey this Thursday in a special live Webcast from noon to 1:30 PM Eastern Daylight Time.

I encourage you and invite you to attend, and you can register for the Webcast on our Website.

I would like to now provide some additional color on our positive Q1 results.

Here's a partial list of customers we conducted business with during the quarter.

Associated Food Stores, AutoTrader.com, Bell Canada, BMC West, Brickstream, CareerBuilder, Car America, Children International, Comcast Cable, CSK Auto, Dick's Sporting Goods, First Franklin, Grange Insurance, H&R Block, Kent (ph) Unified School District, Marathon Oil, May Department Stores, Meredith Corporation, Network Solutions, Shoppers Drug Mart, Solucient, Spartan Stores, Spectrum Health, Summit (ph) Racing, TRX Data Services, 20th Century Fox, Verispan, Waterford Wedgwood, Wassau (ph) Benefits and Zomax.

With that as introduction, I will try to give you a bit more detail about the quarter.

As Eric noted, we had a very good number of customer wins in Q1, new customer wins, at 156.

We also had a very good number of total transactions, at 297.

Our consulting and education services businesses continued their momentum in Q1, and have both experienced significant year-over-year growth in sales and in margin contributions.

During the quarter, the quality and quantity of our deals also continued to rise.

Additionally, we signed 12 new alliance agreements, and new partners included Auto Town, High Impact Technologies, Lancet Software, Premier Systems Support, Systech and Vestmark.

Now I would like to briefly highlight some of the customer wins in the quarter, giving you some sense as to how these customers are going to be using our software.

First, we have Ace Hardware.

Ace hardware has made a multimillion dollar investment in MicroStrategy technology and services, and plans to deploy to more than 6400 users enterprise-wide.

Ace has recently expanded its deployment of MicroStrategy for enterprise-wide reporting and analysis of marketing, retail pricing, category management, merchandising, inventory management and customer loyalty programs.

A variety of corporate employees, vendors and Ace retailers are using MicroStrategy to analyze and report on data housed in a centralized Teradata data warehouse.

Next, we have Fraser Health Authority, and that is the largest health authority in Canada, with a budget of over C$2 billion.

They selected MicroStrategy as their organizational standard.

Over the next three years, approximately 500 users, including operations, finance, and clinical managers, will perform cost analysis, patient care analysis and financial performance analysis against a soon-to-be-deployed data warehouse.

The FHA will utilize MicroStrategy to track and assess patient care operations and logistical data across 150 separate facilities.

Third, we have Chela Financial.

Chela Education Financing, as they're commonly known, is a leading not-for-profit education financing company.

Chela's analysts and senior management use MicroStrategy software to monitor their $2.4 billion student loan portfolio.

End users are able to evaluate the performance of these loans, monitor past acquisitions and originations, provide analysis that improves the modeling of future loan acquisitions and originations.

Chela also uses MicroStrategy to report on the origination and composition of its loans.

Finally, we have CSK Corporation.

CSK Auto Corporation is successfully using MicroStrategy for retail reporting and analysis.

CSK employs the MicroStrategy platform to run loss prevention and vendor performance reports against a 500-GB DB2 data warehouse.

Company employees are able to track changes in sales by region and product category, and they also analyze product performance by vendor and store, to enable them to more effectively manage vendors towards profitability.

As I noted in my opening comments, our strong new product cycle is driving our revenue growth.

New products such as MicroStrategy Report Services are improving our relationships with existing customers and partners, by broadening the scope of applications that can be built using MicroStrategy technology.

And these new products are also enhancing our corporate imaging and our brand.

We are seeing an uptick in press mentions with Report Services, and we are being noted more often in the press as a provider of business intelligence software that is appropriate for the entire enterprise.

Our most recent major new product, MicroStrategy Office, unveiled this month, brings high-value business intelligence technology to users of Microsoft Office applications including PowerPoint, Excel and Outlook.

MicroStrategy Office can significantly expand the ranks of enterprise knowledge workers who can access enterprise data.

So, put differently, a lot more people now within an enterprise can actually get to data that is in their enterprise data warehouse through Microsoft Office.

It is winning praise for its ability to empower business users to serve themselves important business data through the Microsoft Office productivity tools with which they are already so familiar.

MicroStrategy Office fully leverages MicroStrategy's industrial-strength BI platform and adheres to Microsoft's Smart Client architecture, offering scale, manageability, security and enterprise data consistency.

It is too early for us to tell whether or not MicroStrategy Office will be as pervasive as MicroStrategy Report Services has become, but it's clearly helping to enhance the perception of MicroStrategy platform, making MicroStrategy 7i seem more appropriate for an organization's enterprise BI needs.

Here are some statements assessing MicroStrategy Office from two leading industry analysts.

First, IDC's Research Manager Dan Vesset said, "MicroStrategy Office has a large potential user base.

It enables new kinds of business intelligence applications by opening a wide new window for non-IT workers to enterprise information through the vehicles of popular Microsoft Office applications.

MicroStrategy Office is likely to provide a significant contribution to the way business people use business intelligence, empowering any Microsoft Excel, PowerPoint and Word user to natively access enterprise-wide data with the necessary consistency, security and scalability they require."

And Wayne Eckerson, Director of Research at the Data Warehousing Institute, said, "MicroStrategy Office represents a leap forward in making secure enterprise data available to users in the context of how they really work.

MicroStrategy is ahead of most of the competition here."

So, in summary, I think that MicroStrategy stakeholders have ample reason to be optimistic today.

Whether you judge the Company by its technology, its finances or its customer and partner relations, MicroStrategy is perhaps in the strongest position we have been in in our 14-year corporate history.

So with that, I would like to turn it over to Mike.

Thanks, Sanju.

I will just summarize with a few high-level thoughts that strike me as being particularly salient as of this point in time.

The first thing I would like to say is that we are 100-percent focused on the high end of enterprise business intelligence market.

That is what we care about most.

And we are great believers in the organic growth opportunity, and in fact we believe the high end of the market is going to grow faster than the middle of the market or the low end of the market.

The high end of the market for us is large databases which keep getting larger every quarter, large user populations which keep expanding every quarter, large requirement sets and sophisticated questions which keep becoming more and more interesting every quarter.

We have been very happy to see that market continue to evolve, and if we look at our results, the three major points that pop are that we are experiencing good revenue growth right now.

As you saw, we grew 31 percent year over year.

It's strong growth; it's also organic growth.

We are not buying our revenue growth by buying other companies.

We are not looking for weaker companies than ourselves, or different companies or other technologies which may or may not overlap with ours in order to get the revenue number up.

We are only adding products to our product suite that are complementary, and that we believe strengthen our overall enterprise platform offering.

So that is the next point I would like to make, which is that we are focused on having good success with new products.

We're excited about them.

Report Services has been enthusiastically embraced, and we have high hopes for it going forward.

We're excited about MicroStrategy Office.

When you consider these things, along with our UNIX platform that we are bringing out into the marketplace or have brought out, they all add up to an enterprise offering which is meant to appeal to CIOs who wish to make a corporate standardization decision.

We have went forward with a product plan that makes it easier for companies to use us more pervasively, to deploy us to more users.

And we have worked very hard to make sure that we eliminate any reason or any objection a customer might have to embracing our platform wholeheartedly.

So, in addition to that nice strong organic revenue growth and our strong product cycle, I think the third salient point that is clear in this particular press release is the strength of our services business, and how that is turning out to be a very important component of our success as a corporation.

If you look at our services results during the first quarter, we saw service revenues expand from 20.9 million to 30.3 million, approximately $10 million or so in expansion over the course of 12 months.

Now, our service costs expanded only approximately $1 million, and so this was a very, very highly profitable expansion of approximately 10 million per quarter over the course of 12 months.

This is generally much more predictable revenue for us, and recurring revenue for us, from quarter to quarter and from year to year.

It also means that we're doing a much better job of entering into deep value-creating relationships with our customers that allow us to become intimate and provide much better customer service.

It allows us to understand our customers' high-end requirements much better.

It allows us to mitigate any risks of customers who are making big deployment decisions, and allows us to help enable our customers to build more valuable applications and deploy them more broadly.

So, services revenue is good revenue for all of us, because it's predictable, because it's proprietary, because it's profitable, but also because it progresses our business forward and helps us to organically grow the high end of the enterprise BI segment.

Our strategy is clearly about delivering technology and services that large, rich, successful customers need, and then helping them to reap value from those technologies and services.

And as they do that, they tend to increase their budgets for consumption of our BI technology, and as they increase their budgets, of course, we're able to grow with them.

We don't see this as a zero-sum game.

Our goal is not to take a limited or static market share.

Our goal is to increase the size of the market by working as partners with our customers, and I think if you look at our results, you can see that that appears to be working in the first quarter of 2004.

Our strategy going forward is simply summarized by the words focus and discipline.

We are focused upon the high end of the enterprise BI market.

We're focused upon doing everything consistent with organic growth in that market.

We're focused upon delivering the products and services necessary to be the single best solution provider for that market.

And then, we are also focused upon continuing to meet the needs of large database customers, large user counts, large requirement sets.

That focus permeates our sales organization, our software organization, our services organization, our corporate finance organization, our support organization.

Everybody understands who the customer is.

We all understand that if we make them successful we will in turn be successful, and we do our best to keep that focus.

And we do that by applying discipline.

And that is my second important word.

We're taking a very disciplined approach toward building our business.

And I think, over the next 12 months, discipline is going to be a very, very critical consideration for us.

We are very focused upon improving our sales team and putting in place very disciplined processes, disciplined support systems.

We're bringing in new executives, we are bringing in new account executives and account managers, as well as more senior sales managers.

We did introduce a new Vice President of our European operations in the past quarter, and we are pretty pleased to be putting in place other key country managers that will strengthen our sales operation and sales team.

We have also taken a very disciplined approach toward strengthening our services team, bringing out new best practices, promulgating our best practices throughout our services organization, building support systems to ensure that the quality of services we provide across all of our customer base remains constant, building the team with new executives and ensuring that we're putting in place the right training and education resources, not just for our own people but also for our customers, to make sure that they are being successful.

And the third area of discipline, of course, is through our technology.

We're excited about some upcoming deliveries of UNIX platforms in the middle part of this year.

Also, we'll be making very consistent incremental improvements to our Report Services product, to our other products, all with the eye toward ensuring that a CIO of a global 2000 can run us on their platform of choice, and can deploy us to their user of choice through their interface of choice.

We feel that if we're providing and staying true to that mission of enterprise platform, then we're providing options to CIOs, and they will be appreciative of that, and will reward us with more loyalty and more business in the future.

If you add up all these things, I think it boils down to a simple focus and belief in the high end (ph) of the market, and a strategy for us which consists primarily of superior customer service, much more intimate, longer-term, consistent value-creating relationships with our customers, and our cultivation and promulgation of best practice to ensure that our customers are able to create extremely valuable applications which generate revenue or cost savings in their business, and which will then, of course, reflect themselves in additional budgets to acquire more products and services from our Company.

With that, I would like to thank you for your support, and I am going to open the floor for questions from analysts in the audience.

(OPERATOR INSTRUCTIONS).

David Hilal, Friedman, Billings, Ramsey & Co.

Thank you.

I have got a few questions.

I'll start off with Eric on the numbers.

First, Eric, that 806,000 of other income -- what was that, and should we back that out when we think about pro forma EPS?

Other expense income, yes.

It's FX.

A lot of it is FX gain, in this case.

And so we have not netted it out of pro forma.

It's actually difficult to forecast prospectively.

We make no net assumption on that.

So it could be positive, it could be negative; it depends on which way exchange rates move throughout the next quarter and throughout the year.

I want to talk about guidance.

You guys kind of blew away EPS numbers again.

Your guidance, though, seems a little bit odd, in the sense that on one hand, you could say you have raised the annual guidance, but you did not raise it by more than you beat this past quarter.

So in effect, the next three quarters, one could think that you are lowering that guidance.

So walk me through how you think about that.

Why are you forecasting the June quarter to be sequentially down?

That's rather rare.

I understand you had that large deal this quarter, but I would like to understand why Q2 is sequentially down and why the annual number would not go up by at least what you beat Q1 by.

It's a reasonable question.

I think you touched upon, really, one of the more important points, that we were fortunate in that we closed a single significant transaction, and we explicitly disclosed that in the earnings release.

At this point in time, we are just not comfortable enough on a 60- to 90-day forward-looking basis of forecasting multi-million-dollar deals.

So in Q2, we're just simply not forecasting any multi-million-dollar transactions.

It's as simple as that.

So we're not expecting a recurrence, at this point in time, of the very large multi-million-dollar deal that we had in Q1.

So, that's the first comment about why is Q2 down versus Q1.

Also, we expect that through the balance of the year, there is probably going to be an adverse change in exchange rates.

Our assumption is that the kind of reported USD dollar-denominated results of revenue and net income contribution from our international operations is going to weaken a bit, and so we have tried to incorporate some of that in our full-year forecast.

What about the Ace deal?

It sounds like that is over a period of time, a rather large deal.

Is that revenue going to be recognized over several quarters?

How is that going to work?

The Ace deal, we're very happy with; actually, it's a multi-year deal, not a multi-quarter deal.

We as a Company have increasingly begun to stretch our timeframe, so we consider our strategic relationship to be anywhere from a two- to a five-year contract with the customer that includes revenue components that take place in each of those years that are contractually obligated.

So we would expect very, very consistent, predictable revenue from the Ace deal over the coming many years -- two, three, four years.

And most of that deal -- much of that deal was not revenue recognized in this particular quarter, only a portion of it.

Given a choice, we have generally opted not to do singular, exceptional, one-time deals that resulted in a lack of predictability as to when the next deal would take place with a given customer.

We would rather enter into more akin to subscription or term relationships, or at least predictable relationships where we have an understanding with the customer as to what mix of products and services they will purchase over the next 24 or 36 months.

Mike, how has the traction with Report Services been?

Can you quantify maybe a number of deals, or let us know how that product has been going?

Yes;

David, we have the feel that right now, Report Services plays a major role in about one-third of the software deals we do.

And it depends upon exactly how much unique overlap we have from quarter to quarter with customers.

But something on the order of 120 software deals included Report Services as a critical component in the past four or five months.

We feel like that is getting started pretty nicely, and I think that it will continue to play a major role in something on the order of one-third of our business.

We can't really say exactly what happens in the future, but it is certainly material.

And then a final question, Eric, on the effective tax rate for '05.

Just to be clear, maybe, so everybody is consistent, is your guidance for analysts to model in a 35 to 40 percent effective tax rate?

And in terms of what gets reported to First Call, etc., is that what you are suggesting, knowing that the cash effective tax rate is 5 percent?

First of all, we have not given any guidance for 2005, and we are not prepared to do so at this point in time.

That's the first comment.

Secondly, I think that the takeaway from our comments here about the tax situation should be broken down into the following categories.

One, we have a significant kind of corporate asset, which is the net operating loss carryforward, and we are very specific in identifying that as worth roughly $300 million on a pre-tax basis.

And so, over the coming years -- and not to be specific, but you know, multiple years, if we are profitable we expect that to have real value to the stockholders.

It will shield a large portion of taxes that would otherwise be payable if we sustained profitability.

Now, at the end of 2004, we will make an assessment of the deferred tax asset situation.

What we want people to start thinking about is that if we continue to execute throughout the year, and if we hit or come close to hitting our guidance, and if, prospectively, we have a sufficient level of kind of confidence for a multi-year forecast of primarily the U.S. business, then we will effectively be able to recognize the value of those deferred tax assets.

And there is a possibility that we will have, A, in the fourth quarter of 2004, a large credit on the P&L, which would be non-cash and one-time nonrecurring.

And if, indeed, we show that credit in Q4, then prospectively from that point forward, in 2005 and beyond, our reported effective tax rate -- again, assuming a variety of things, sustained profitability and so forth -- we would show on the face of the P&L a higher 35 to 40 percent effective tax rate.

Now, our cash tax expense through all this is really not going to change.

We expect it for the foreseeable future to remain low, i.e., in the 4 to 8 percent range that we have historically seen, because we have such an extensive portfolio of NOLs.

So the way to think about this is that it could indeed be a change in '05, assuming a whole variety of other assumptions indeed play out, and that there may in fact be two ways to look at modeling our business -- one with the cash effective tax rate, which is low in single digit, and the other with a reported effective tax rate, which may be higher.

And at this stage, we just can't say definitively which way it is going to be, but we think that there's a reasonable chance that, beginning in '05, we have a higher reported effective tax rate.

That's about all that we can say right now.

It is a bit early.

We will continue to keep all of our stakeholders updated on this as we go throughout the year.

And toward the end of this calendar year, we will give our first official 2005 guidance.

Nice work, guys.

Thanks.

Mark Murphy, First Albany.

Great job on the quarter.

Eric, a little follow-up or clarification on the tax rate for 2005.

Should we be looking at this as a binary event, where there will either be a change in the tax situation resulting in a full-blown corporate tax rate, or it will remain at the current rate?

Or is there some potential middle ground next year?

A fair question.

I think that it is more or less binary, and you either -- the way that you revalue the tax losses and the valuation allowance against the tax losses is you do it in large, kind of discrete steps.

And you have to meet a test; it's technically a probability that is more likely than not.

So, translated, I guess greater than 50 percent.

And once you meet that test, then you look at the amount of the losses that you expect to use.

If you pass that test, what that means is you expect to be profitable, not just in the next forecasted year, but for multiple years out into the future.

And that would suggest that if you release the valuation allowance reserve, you expect to use a large portion of the tax loss carryforward, which would mean you would have a sustained change in effective tax rate.

So if you ask me to choose between is it binary or some kind of continuous variable, it is indeed more binary.

But again, we cannot really quantify the probability of that slipping one way or the other, at this point in time.

What we want to alert people to is the fact that it is approaching the more likely than not probability at this stage.

We won't know until the end of this year.

We will keep everyone updated.

As a follow-up, Michael, at the recent MicroStrategy World event down in Miami, there had been some talk about the Company shooting for, from a financial model perspective, shooting for a 1 point per year increase in the operating margin moving forward, and then ultimately having a goal of reaching a type of profit operating margin of a Company like SAP.

And just in looking at the Q1 result here, with margins up 10 points year over year -- and actually the margin is about a point away from SAP's Q1 margin -- is there any revision to the long-term margin goal of the business?

It's a good question, Mark.

I appreciate it.

First of all, I would like to again say that we're happy with the Q1 results, and we are pleased we can report them.

Having said that, we did benefit from a particular large deal.

And although large deals are a part of our business, and they come from time to time, and we certainly expect that there will be a number in the future, we think it would be prudent to not forecast another particularly large deal in the next 60 to 90 days.

So we try to be fairly conservative in our near-term estimates.

As for what this means over the mid-term -- a year, two or three years -- I think we're comfortable with our current guidance.

And as the year evolves, we will have more information, and at that point we can offer all of our shareholders our best future guidance.

And you will be the first to know, as soon as we develop that level of comfort.

Meanwhile, we continue to execute on our business plan, which is to be a high-end enterprise software vendor, is to be very customer-intimate.

We do have the highest degree of respect for companies like SAP, who have managed to do this very effectively.

And although we have not completed the journey yet, we continue to be on our way, and it is one of our goals to continue to realize consistently good operating margins on a highly leveraged proprietary software business.

One last one, if I may.

A question about the next release of Hyperion Sbase with Ukraine.

There has been some talk about that product trying to target sparse datasets a little more effectively.

Any thoughts on the potential to generally, for cube architectures, to handle the larger datasets?

And where do you think the ceiling may be on the amount of data that these cube architectures can handle?

I don't think that we know that much about the new architecture, so it's not really prudent to comment about the new architecture.

But we know that this problem, which is being able to target large datasets with cube architecture, has been underway now -- that is, it's been under attack for about 10 years, with not a lot of progress made.

I think that inherently, cube architectures are going to continue to suffer from this problem of cube explosion.

And so I don't think there's going to be any breakthrough in the near term.

Having said that, I do think that the world is more and more evolving to relational databases, more transactional storage, and they are increasingly building large-scale relational data warehouses.

And so I think that is going to be the approach that people take.

If I could add one other comment, which is that one of the benefits of cube architectures for the past 10 years has been that it provides developers with a much simpler, crystalline cubic metaphor for building applications.

And another way to say it, in layman's terms, terms is it lets you lay out things like a spreadsheet.

Relational databases don't lay out like spreadsheets.

And so the struggle that a company with a cube architecture has is they train tens of thousands of people to think like a spreadsheet.

So, were they to introduce a relational database in the back of a spreadsheet, they would not necessarily get that much benefit from it, because all of their metaphors, development tools and object structures are not really geared to take advantage of a relational database.

If you were to store your spreadsheet in a relational database tomorrow, you would not necessarily get any particular benefit from it, without rebuilding all of your spreadsheet models to be relational models.

And so these guys, they have a real uphill climb, because not only do they have to actually create a relational analytical tool without that much experience, but then they have to retrain all of their customers, end users and support people to think completely differently.

And it's hard to change someone after a decade of thinking the opposite.

So I think that, as Sanju said, in 1994 we heard the same things from cube vendors, and in 1996 we heard the same thing, and in 1998.

About every 18 months, they declare that they are going to solve the problem of cube explosion, and they come out with some widget, and it doesn't really do much of anything, and then we just go back to status quo.

I think, ultimately, if you want something to float, you create a boat, and if you want it to fly you create a plane.

And planes will never be very good boats, and boats will never be very good planes, and pilots of planes will never be very good pilots of boats.

And there is a place for both in the marketplace, and it has taken us 10 years to figure out how to do what we do well, and those 10 years have probably encompassed tens of thousands of customer feedback years and testing years.

So creatures evolve in their ecosystem to do something particularly well, and if you have not ever lived in the jungle, and you have lived in the desert your entire life, you could decide that you wanted to go in the jungle, but you don't really know what you don't know, and you probably will never be particularly good in the jungle, not until you have been there for a decade.

So I guess I would say, whatever they do, if it's perfect five years from now, perhaps it will be interesting to us.

But for now, I think we're comfortable in our competitive space.

We feel that we can compete effectively, and we will sit back and watch.

By the way, one more point I would make is if Hyperion was really comfortable that their cubic technology from Sbase was going to scale, they would not have gone out of their way to buy Brio, because Brio represented their relational entree.

And we are quite familiar with Brio's capabilities before it was purchased by Hyperion, and don't believe that it represents a comparable product to ours on the high end of the marketplace.

So we will wait and see how the market evolves, but we feel pretty good about our business prospects.

Frank Sparacino, First Analysis.

Eric, maybe a first question for you.

Of the 9 million increase in deferred revenue, how much of that was license revenue?

The vast majority of it was maintenance.

I don't have the exact breakdown in front of me, but it's similar to what we've seen in previous quarters.

It's on the order of 80, 80-plus percent maintenance.

On the Ace Hardware deal, Eric, could you just be more specific on exactly how large it was, how does that break down among the components, and why the multi-year structure, when I know that's something you guys have tried to get away from in the past, given history?

Just one comment.

This is Michael.

I worked specifically on that deal.

I would not characterize us as trying to get away from a multi-year structure based upon the past.

I think that in this particular case, these were fairly standard revenue components, things like maintenance, a customer agrees to buy maintenance not for the next 12 months but they agree to renew it in year two and year three.

And therefore it removes the uncertainty from us of whether or not they are going to actually renew their maintenance in year two or year three, so the deal becomes larger.

Another example would be education.

A customer agrees to buy education for 10 developers in year one, and then they agree to renew it in year two and year three.

Another example is something we call technical advisory.

A customer agrees to have a technical advisor on-site part-time for either one year or two years or three years.

All things being equal, we would prefer to have a three-year commitment from a customer than a one-year commitment from a customer, especially for all of our standard business components.

So the Ace deal was simply a set of standard products and services that they commit to purchase over the course of multiple years and renew as years come.

It lays out a degree of predictability in the business relationship.

They know they are going to get the services they need, at a reasonable price, and we know that there is going to be a revenue-generating event for us in the future, at a reasonable price.

But these are standard deliverables.

They are not multi-year system integration contracts; they are not project work.

Our requirement to generate the revenue from an education contract is just to make education available and our standard courseware available, and we provide technical advisory.

We don't commit to deliverables.

We simply agree to make an advisor available, and of course we provide maintenance.

We don't commit to anything other than to provide our standard maintenance offering.

So these are generally really good commitments to our Company that don't entail any particular level of risk to us going forward, other than just continuing to do business as usual.

So we feel good about them.

Mike, since you are involved with that, from a customer's perspective, Ace -- obviously they get some type of discount for buying ahead of the curve.

What other benefit would they get from a transaction of that nature?

A customer that enters into a multi-year arrangement with us would get software discounts.

We oftentimes will provide more favorable licensing terms to buy the software.

If you buy it just upfront, once, and you commit to one year of maintenance, we don't always give the same discount level, whereas if a customer were to commit to purchase maintenance for three years, then that would be beneficial to us, because it removes uncertainty about whether or not they will renew in year two and year three.

Even more important to us, of course, is a customer that commits to a consistent program of premium support or technical advisory or education over the course of three years is, in our view, a committed strategic customer because they are going to have the service programs they need to be successful.

What we offer in return for that commitment generally is visibility on what the pricing is going to be on those service components, so they don't have to worry about the price changing or going up.

We also tend to offer, again, better and more aggressive pricing on our software, or options to buy software that the customer might like, that allow them to budget for the total cost of ownership over the course of three years.

In the past, we have had a three-year maintenance prepay, where customers simply purchase the maintenance and nothing else, but we think that deals like we do with Ace are beneficial to both our Company and to them, because we're not just selling unbundled maintenance; we are also bundling it with education and with technical advice and sometimes with software.

In certain cases, some customers actually make a commitment to purchase software from us next year, off of our standard price list.

So we know the order is coming, and we have already got the product in the marketplace, so there's no real risk to us.

We just know there is going to be some revenue for us, and then they have some time to figure out how to properly use all of our software, and they have got our services in the meantime, and they have got a much better budgeting horizon.

So I think probably the big picture here is that in a consolidating BI market, it's not like there's 20 companies you're going to choose to do this business with over the next three years.

It comes down to two or three big players like us or Cognos and Business Objects.

And once you have decided that we are the right horse to ride, then you would rather, actually, get a commitment from us, so you have got availability of the product and service you need, so that you can budget properly from it.

And of course, we would rather have a commitment from a customer so that we actually can build visibility in our business and properly budget and provide guidance to our shareholders.

And so we see it as a win/win all around, and we're excited about that.

Again, all of the future commitments we get from customers are always for standard products and services that are already generally available in the marketplace, and they are standard service contracts.

We are not entering into long-term relationships where we have to prospectively create something new that has any component of risk.

This is not a contract model where we are entering into a five-milestone contract and we have to deliver each of the four milestones to recognize revenue.

Generally, the milestones for these contracts are just dates on the calendar. 12 months hence, we will renew the contract for education education, and we will recognize the revenue.

And we rely simply upon our basic support and education service offerings being available at that time, as the basis for revenue recognition.

So we think it's prudent, and it's good for the customer, and it's good for us, provides everybody with a clear roadmap forward for how the partnership is going to evolve.

And we have seen it to be very popular.

Maybe the last question is just on the new product contribution, which I think, Eric, you stated was 27 percent this quarter.

If you look at the contribution from Report Services thus far, in comments that you have made, Mike, it would seem that number would start to tick up unless the opportunity with 7.2 has largely come and gone.

But maybe if you could just comment along those lines?

I just want to make one comment, which is that if you look at the way we think about our business, if we have a given customer, we would expect that we're going to sell them a package which includes support, premium support, education, technical advisory and software, all various components.

And that software might be new products, and it might be additional capacity to deploy to new customers, and it might be some combination of new capacity and new products driven by the new product.

For example, a new product like Report Services might cause the customer to deploy from 500 to 5,000 users, and when they go from 500 to 5,000, that might actually create a demand for 4,500 copies of Enterprise Intelligence Server.

So sometimes these products actually drive demand for other products.

When that happens, it's going to drive demand for more support, and it's going to drive demand for more education and more technical advice.

So these things are all interlinked, and we tend to look at the business holistically, with the attitude that we would like to build up our proprietary revenue stream from high-margin items -- obviously, maintenance, software, things that have extremely high gross margins.

And we look for our new products as one's catalyst for building those high-margin, predictable proprietary revenue streams.

The 27 percent number is important, because it is indicative of the fact that this is materially impacting our business to the good.

In theory, though, the number could be somewhat less, and it could materially impact our business more if what happened was we were selling 50,000 copies of Report Services at a discount, and then driving extremely large volumes of enterprise server business, or we were convincing a customer to buy Report Services, switch over to UNIX and buy that platform offering or do a multi-year service agreement.

And so I would caution you against focusing too much on the exact number, because at the end of the day, the way the business works, we will be successful if we provide the customer with all the components they need.

And when we do that, they are going to want to buy them all at the same time, and that is going to drive our overall topline and our bottom-line numbers.

But we don't, as a practice, try to micromanage an individual product to make it look good.

I would rather have the business predictable and profitable, and have a tight relationship with the customer than be able to say, "Well, I've got this one product, and this one product looks really good for you guys this quarter."

I think that, the world being the way it is, we're doing our shareholders a service by managing the business holistically.

Patrick Mason, Pacific Growth Equities.

Just a couple questions.

Most of them have been asked already.

But competition-wise, with Report Services, are you guys seeing (ph) in the new customer sales or Crystal or ReportNet or any replacement of Crystal?

And then secondly, more just a financial question, on capitalized software, I know that kind of fluctuates from quarter to quarter.

But you have kind of like -- and since you guys have annual guidance, do you have kind of like an annualized capitalized software expectancy for 2004?

Sanju will take the first question, and Eric will answer the second.

Sure.

With respect to how Report Services is faring in deals, and maybe also how it is faring against competition, I would say that a lot of the transactions for report services, as you can imagine, have been with the existing MicroStrategy customers that are taking their MicroStrategy 7i platform now out to the entire enterprise, so they are adding scorecards and dashboards using Report Services as a vehicle.

What I am hearing from them, as I speak with them, is that they are, in certain cases, working Greenfield opportunities.

That is, they are adding reporting where there wasn't any reporting before, or there was rudimentary sort of data access or ad hoc queries.

But now they are adding full-fledged reporting, and those would not be competitive.

There are cases, though, where perhaps Crystal or Actuate -- I hear those names a lot -- were sitting side-by-side with MicroStrategy.

And what they're looking to do is consolidate on the MicroStrategy platform for all reporting and for analysis.

And so what we're finding from those customers, what they are telling us, is that Report Services seems to be a good replacement -- that is, it has the bulk of the feature set that they require.

It also has, of course, very tight integration back to the metrics and the metadata that they have already created.

And so I think the news for us and our takeaway, when we ask them, is generally the product seems to be feature-rich, and of course the integration is the differentiator.

In new deals, we are competing with companies like Cognos and Business Objects, with their old report writing as well as Crystal now.

And I think generally we are faring pretty well in those new deals, as well.

So I think that generally the view is Report Services has the feature set that people require, and what we do is we kind of play a "me too" game on the reporting, and then what we do is we differentiate, given the enterprise-caliber scale that the rest of (ph) the platform provides.

And then on the capitalized software?

As I understand the question, you want to know can we give you a sense of what cap software is expected to be for full year 2004.

What I will do is just as a recap, state that in 2003 we had 1.2 million in cap software, with the bulk of it falling in Q4 '03.

Thus far in '04, at about $400,000 of cap software in Q1 '04, we have another big release coming in the middle of the year, the (technical difficulty) version of intelligence (technical difficulty).

And it's kind of the best kind of rough estimate I would give is that we would expect roughly cap R&D in aggregate for '04 comparable to what we saw in (technical difficulty), i.e., somewhere around (technical difficulty).

Mark Verbeck, Smith Barney.

You've talked about doing these multi-year deals for maintenance.

A couple of questions on maintenance.

One is what has your maintenance renewal experience been?

And then secondly, I know you have been trying to get some get some maintenance increases from your customers.

Can you tell me kind of where you are in that cycle, if you still have quarters to go on that as people renew?

Regarding maintenance, we don't as a matter of practice go out and attempt to sell multi-year maintenance contracts unbundled.

Sometimes customer organizations like governments have rules where they need to buy three-year maintenance contracts.

And so they bring it up, and we will accommodate for people (ph) particular requirements.

We more often work to provide what we will call platinum maintenance, which is to link bronze maintenance, which is just basic product support, product updates and phone support, with additional on-site service components we consider to be premium services, such as education contracts, perpetual education passes, premium support, which means dedicated support engineers who are proficient in a customer's individual application or configuration, or actually on-site support, which is what we call technical advisory, where we actually send a person to go over the technical requirements with the customer and track them from quarter to quarter and make sure that we are actually exercising best practice, and we're aware of all their technology requirements and they are aware of all of our best practice guidance, so that we have at least a good technical interconnect.

That technical advisory is not system integration, and it's not really building applications.

It's providing advice, and it's an insurance policy for the customer.

So what is most common is for us to actually sell a premium support policy, a platinum package, which has a mixture of all these services, because it, of course, increases our service revenue.

But it also increases our degree of customer intimacy, and it also allows us to provide a better level of service to customers, since obviously, having a dedicated support engineer on a site or having a dedicated technical advisor on the site is certainly going to make them more successful over the long term.

Sometimes we will link the two, and as customers renew the one, renew the other.

And for some people who prefer to have sort of guaranteed availability and guaranteed supply over a multi-year timeframe, we will enter into a multi-year deal.

I would not want to set the expectation that that's the great majority of our situation with maintenance, because I don't believe it is.

But it is a growing phenomenon in our business, and we think it's a positive phenomenon.

Is there a big difference in the renewal rate between the people on the premium, the platinum packages, and the regular bronze package?

I think our renewal rates -- we don't normally break it down that way, so I can't give you any hard numbers.

I think our renewal rates historically have been in the anywhere between 85 and 95 percent range -- could be 90 percent.

And we have been pretty pleased with the renewal rates of all of our customers.

We think that it's a good sign.

Having said that, I believe that customers that purchase the platinum package, and they commit to the more education, the additional technical advisor, the gold support -- they tend to be customers that have more successful deployments.

So it's less likely they call us on the phone and they complaint about a problem with meeting a schedule, or it's less likely they are surprised by anything.

It's more likely they will build more applications, they will create more value.

Those executives and those customer organizations are more successful in their career.

That means their budgets increase over time, and it's certainly a leading indicator for spending more money with us.

So, all things being equal, you would like to have happy, successful customers, because they are the ones that keep spending more.

I would not go so far as to say that we need to do this in order to get them to renew.

I think that a better way to think about it is we need to do this in order to get them to grow, or at least to mitigate the risk that they won't grow.

So we see it as being just good business practice over time.

You certainly can do business without doing this.

It's just we think this is a better way to do business.

Nathan Schneiderman, Wedbush Morgan.

I have a couple of questions for you.

Eric, on the tax rate issue, if I understand you correctly, you're saying that the rate might adjust to 36 to 40 percent just on the basis of capturing the benefit of the U.S.-based NOLs?

That is correct.

Just out of curiosity, my understanding, then, is you are still shielded on the international side, which is one-third of your revenues.

Are you suggesting that when that is eventually captured, your tax rate would be north of 50 percent?

No.

I am suggesting that the effective tax rate could be what I indicated.

I did not mention 50 percent.

The primary source of our NOLs is indeed U.S. NOLs.

That is like the most important point, and kind of the key takeaway here.

And we expect that most of our pretax income, statutory pretax income in the future over many, many years is going to be (technical difficulty) U.S.-based (ph), not necessarily international-based.

Taxable pretax income (technical difficulty) not track reported revenues (technical difficulty) between the two line items (technical difficulty) pricing and other issues.

So I think the good news here (technical difficulty) this is really a question of a presentation which we talked about, but the good news is that we're approaching a point where we expect that we can realize the full value, or a large portion of the value of the U.S. NOL.

This is roughly 290 (technical difficulty) on an after-tax basis has significant real cash value over a multiple-year time horizon. (technical difficulty) stockholders, and so (technical difficulty) that is an asset that we may very well realize (technical difficulty).

I'm just a little surprised that the rate might adjust that high, given the shield on the international side.

You don't think that's -- or I guess, once the international side is captured, where would you expect the overall effective tax rate to go?

(technical difficulty).

That's what the overall effective tax rate might adjust to.

It has (ph) been showing a 48 percent effective tax rate (technical difficulty) not able to realize (technical difficulty) U.S. NOL.

If we're able to realize the value of the U.S.

NOL, that reassessment is going to occur at the end of this year, when we have an additional 12 full months of information.

Then the effective tax rate will adjust upward.

And on a blended basis, we expect it to be roughly in the range of 36 to 40 percent, if this whole series of tests and caveats that I previously articulated has been met.

So we are not saying this is definitely going to happen.

We're saying that this is a possibility.

The other takeaway is that, on a net cash flow basis, there's really nothing that changes here. (technical difficulty).

We have a large amount of NOLs that would have to be burned through.

And we're talking about $100 plus million of NOLs here.

Just to follow up on this issue, from a timing perspective, as far as the assessments, are these assessments just during the fourth quarter?

Is this a -- every single quarter you will evaluate whether it's appropriate to capture the benefit of the U.S.-based or the international-based NOLs, or does this just happen in Q4 of each fiscal year?

It tends to happen at the end of the year.

Again, what you want to have, in order to kind of update your analysis, you need to have another full year worth of information.

So by default, that means you have to run through Q1, Q2, Q3 and Q4.

And as part of your Q4 close, you take a look at this, your new year of information, and you look at your updated kind of multi-year forward-looking forecast.

And then you make your determination if you are more likely than not to realize the value of your deferred tax asset.

And so, we don't expect to do this work in Q2/Q3; we expect to revisit it as part of our Q4 closing process.

So would you say a logical scenario, then, is that you're going to look carefully at the U.S.-based issue this Q4, and perhaps Q4 '05 you would look at the international issue?

We will look at everything in this Q4, both the U.S. domestic business and the various international subsidiaries.

A couple of other quick questions.

What was the license fee contribution from clock speed-related upcharges?

We don't track it specifically, but it's definitely a component, in terms of driving deals at this point in time.

Or can you characterize it as multi-million-dollar license fee contribution, or not?

As Eric was saying, we generate license fees from new product, we generate license fees from new capacity.

Sometimes the new capacity is additional named (ph) users, sometimes it's additional clock speed, sometimes it's additional CPUs.

And sometimes it's just Greenfield new developments where people just put in place new configurations.

It's difficult to say which of these is the case, but it's reasonable to think that every single category I just named there is in excess of a million -- a couple of million dollars a quarter.

We try to just take a just take a very broad view towards this, and then just let the business evolve as it naturally does in an organic fashion.

And, Michael, a final question for you.

I understand that the legal team reports directly to you, and I was just -- given the decline in legal expenses, have you changed your philosophy toward the legal actions that are outstanding?

Or just what can you tell us about that, and the implication on a go-forward basis for G&A?

We pride ourselves on evaluating our business every quarter, and certainly every year.

And we try to take a fresh view and ask ourselves where do we need to spend money, in order to create shareholder value, and also what kind of investments are prudent.

In this particular case, I think we have been managing our legal expenses a bit tighter, but I don't think it changes our particular view toward things.

We just have not had a need to spend as much money on legal activities in the first quarter.

And we get more efficient every single year in how we conduct our activities, as we get more experience.

So I think it's certainly a good trend that our legal expenses are down a bit.

And I think that the appropriate amount of money to spend on legal activities is really just a function of the circumstances we face at any given time in the marketplace.

So, as of now, I think that we're spending the right amount, and I think that our legal agenda is pretty consistently moving forward.

I am pleased with the way we are managing things.

Tom Ernst, Deutsche Bank.

One thing I noticed in a lot of your marketing materials is it appears that enterprise-wide and standardization are showing up in more of the press releases.

A couple of questions there.

Is this a trend that you're seeing, that more customers are in fact choosing enterprise standards now?

Certainly, I think that as some of the larger customers have had a cacophony of business intelligence products in their shops for a decade or more now, they are going through some reduction of vendors that they would like to work with.

So we see some of these companies have a dozen or 20 different BI products, and these would range from simple reporting tools to cube analysis products to ad hoc query tools.

I think that what we're going to find is that there are going to be reductions that occur.

It's already occurring.

Whether they are going to standardize on a single product remains to be seen.

That tends not to be the case.

They try to get down to a handful of vendor relationships, and then maybe over time they might get to a single.

But certainly, there is some rationalization occurring, and there is -- there is an increasing overlap between the products.

People are trying to thin down the number of vendors they work with.

Sanju, I think you have said in the past that that is a small percentage of the business, yet is it still 10, 20 percent more?

In terms of those people who are looking to --?

To concentrate their purchases -- consolidate their purchases, I should say.

It's just difficult to say.

We don't track any stats like that, so I would say it's still a minority of the business.

I just don't know how much of the business it is.

If I could offer one other way to look at this particular issue, too, which is if you roll the clock back five or six years, the average BI application was only deployed to a few hundred people.

And if you look today, I can think of a number of applications where the initial target was 5,000 people, and sometimes where they want to go to more than 5,000 people.

So when you get to numbers that are thousands or 5,000 or 10,000, by definition, the application is enterprise-wide.

And all of a sudden, the tool is an enterprise choice, because it has to appeal across a wide variety of end users and a wide variety of departments, and maybe on a wide variety of platforms.

And so it's not necessarily the case that you have to go and squeeze out every other possible reporting tool you can find in the enterprise, in order to make an enterprise decision.

It sometimes is the case that we have bought 27 tools, we built 32 applications with them, and now we have got this one application which is about to go from 500 to 15,000 people.

We have to make a choice of an enterprise tool which is going to go to 15,000 people.

And that is what we have to do now; it's application driven.

If we do that, and it proves to be popular with the 15,000, we will probably go mop up and take some number of the other applications and switch them over and migrate them because, of course, we have got one central platform scaling to 15,000, and we have got 32 platforms going to 200.

And so you end up being sort of a de facto standard to go to, but even then, organizations, the big global 2000, might take a decade to migrate 27 applications from 10 platforms to 3 platforms.

So we don't pin our hopes on the fact that we're going to get someone to throw out five tools and standardize on our one tool sometime in the near future.

What we think is much more likely is that the applications people are using are going to become more enterprise-scale, and customers are going to make larger commitments and build more enterprise-scale BI deployment teams.

And they have to choose which course they are going to ride when they make that investment, and once they choose that horse, then it tends to be a nice platform from which to grow other parts of your business over the future time period.

As you look at recent deals and at the pipeline, are you beginning to see any impact or presence or competition from the bigger software companies that have come out with newer BI products, the SAP, Siebel, SAS, Microsoft?

You know, right now, we perceive our primary competition to be coming from Business Objects and Cognos -- to a much lesser degree, coming from, perhaps, companies like a SAS or a Hyperion.

And our first order, number one focus in our business is not even those competitors, but rather to simply make sure we're successful in the account and to continually get a larger share of the budget by showing that we can create more value from the customer.

So it tends to be a customer-service-driven business for us.

How can we provide more and better customer service?

If we are going to be threatened directly by a competitor, it would be more likely to be BO or Cognos.

We read some marketing things in the finance press about Siebel, but we don't really see them.

And with regard to Microsoft, Microsoft tends to appeal to SQL Server database users, and to the low and the midrange in the market, which is a market that has traditionally been dominated by Crystal reports and by Cognos.

And since we don't really play heavily in that market, we don't really see any exposure there.

For the most part, our customers are committed to the tune of $50 million or more to DB2, to Teradata, to Oracle.

And there is very, very little likelihood that they are going to throw all that stuff out, along with all of their UNIX and mainframe hardware, and switch over to an NT type Microsoft SQL Server platform.

So we don't see anything like that happening anytime soon, not in the next few years.

As for other players, there is always something people are talking about, but for now it seems pretty clear to us that Cognos and Business Objects are the players most likely to pop up if a customer decides to go through a three-way bakeoff.

That's encouraging since (ph) it sounds like your answer has not change for that question in this quarter.

One follow-up to that.

A big win at Sprint you announced -- that looked like it was concurrent with a choice by Sprint to deploy Siebel CRM.

Were they competitive in that deal on the BI platform side?

We have been doing business with Sprint for many, many years, back into -- in fact, there was a gentleman from Sprint who was a reference for us when we went public back in '98.

So we have a relationship with Sprint which lasts a long time.

And they built a number of applications which they had deployed -enterprise-wide, and I think that this was a purchase and a commitment to help them continue with that enterprise-wide deployment.

It was never really competitive.

It was more just an issue of how can they maximize and get the best service and support from us, in order to make those enterprise commitments.

Our position tends to be one where people will build custom applications on custom or configured data structures, whereas decisions for Siebel are more like a Siebel off-the-shelf application.

So it's much more likely that we're complementary.

In fact, I am not really aware of any place where we work with Siebel where we were not complementary.

At this time, there are no further questions.

Mr. Saylor, are there any closing remarks?

I would like to thank all of our shareholders, followers and constituents for being with us today.

We appreciate your time, and we will look forward to speaking with you again in 12 weeks.

Have a good day.

This concludes today's MicroStrategy Q1 2004 earnings call.

You may now disconnect.