Microstrategy Inc (MSTR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MicroStrategy third-quarter 2014 earnings call. (Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to Michael Saylor.

Hi. This is Michael Saylor. I'm the Chairman and CEO of MicroStrategy. I want to welcome you all to today's conference call regarding our 2014 third-quarter financial results. I'm here with our Presidents, Jonathan Klein and Paul Zolfaghari, and our CFO, Douglas Thede.

First, I'd like to pass the floor to Doug who's going to read the Safe Harbor statement. Then he's going to give comments on the quarter's financial results. I will follow with additional commentary and then we'll take questions from analysts.

Great. Thanks, Mike. Various remarks that we may make about our future expectations, plans, and prospects may constitute forward-looking statements for purposes of the Safe Harbor provision 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 most recent quarterly report on Form 10-Q filed with the SEC. These statements reflect our views only as of today and should not be reflected upon as representing our views of any subsequent date. We anticipate that subsequent events and developments will cause the Company's views to change. However, while the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today, which is located at our website at www.microstrategy.com.

Now, regarding some comments from me. Since I assume that you've all seen the press release from earlier today, I thought it was best to simply note some highlights and make a few observations on our third-quarter results. As stated in the press release, our total revenue of $151 million reflects an increase of over $9 million or 7% over the third quarter of 2013. This includes an 8% growth on our product licenses and subscription services, driven mainly by the growth of our cloud offering.

Breaking down our product licenses revenue further, I'll note that approximately 55% of this revenue is generated domestically and 45% internationally. Also, we have 13 deals over $0.5 million compared to eight in the third quarter of 2013, representing an increase in larger commitments to our platform by our customers. Furthermore, we had growth of 5% in our product support revenues as compared to the third quarter of 2013, reflecting continued strong renewal rates of over 90%. And an 8% growth rate in our other services, which is consulting education, reflecting an increase in delivered consulting hours during the quarter.

While we increased our revenue, our results reflect increased operating expenses as well, excluding restructuring charges, of 15% in the third quarter of 2014 as compared to the third quarter of 2013. These cost increases were concentrated in both sales and marketing expense, which grew 15%, and research and development expenses, which grew 30%. Both of these increases were mainly attributable to increased average headcount and related costs in the third quarter of 2014, as compared to the third quarter of 2013.

Additionally, the increase in research and development cost was also attributable to the fact we capitalized approximately $1.4 million less in development cost during the third quarter of 2014 than we did in the third quarter of 2013. Finally, G&A costs increased 2% during the third quarter of 2014, as compared to third quarter of 2013, due mainly to increased stock compensation expense offset by a reduction in executive bonus expense.

I should note, however, that our operating costs, exclusive of restructuring charges, declined by approximately $7 million from the second quarter of 2014, reflecting the beginning of the implementation of our restructuring and related cost saving initiatives. As a result, our non-GAAP income for the third quarter was $8.5 million, compared to $12.5 million in the third quarter of 2013. As is shown in the press release information, this non-GAAP metric excludes the stock-based compensation expense and restructuring charges.

As for the restructuring, you know that we originally discussed delivering at least $40 million in annual pretax cost savings on our call in July. However, as we worked through this process, we concluded that we could actually achieve anticipated savings of approximately $75 million. As a part of this plan, we incurred $11.6 million of restructuring charges during the third quarter.

As of September 30, we had reduced our workforce by approximately 270 employees as a part of this restructuring plan. When fully implemented, the restructuring plan is expected to result in a reduction of the Company's workforce by approximately 800 employees in total, at an aggregate cost of approximately $18.4 million, which is inclusive of the $11.6 million already incurred in the third quarter.

As of today, substantially all of the affected employees have left the Company or are in the process of transitioning out of the Company by the end of the year. Overall, this restructuring has been a difficult process but one that we feel is necessary in order for us to operate in a more fiscally disciplined manner. As I mentioned on the last call, we do have a long history of profitability and I trust that these actions that we have taken to date, and expect to substantially complete by the end of 2014, demonstrate our commitment to our profitability going forward.

In closing, I will highlight that our balance sheet continues to reflect a solid financial foundation for us. We have cash and short-term investments totaling $354.6 million at the end of the third quarter and no debt. Our year-to-date operating cash flow is $16.3 million, reflecting strong collection activities, reducing our accounts receivable days outstanding to 34 days for the third quarter of 2014, from 40 days in the third quarter of 2013.

Additionally, our total gross deferred revenue balance at the end of the third quarter of 2014 totaled $192 million, compared to $190.2 million at the end of the third quarter of 2013. Furthermore, we do have additional future minimum commitments by our customers to purchase our goods and services of $132.8 million, as compared to $108.5 million as of the end of the third quarter of 2013. That represents a 22% increase.

Overall, I remain very enthusiastic and confident about our place in the market and our future prospects. Now, I'd like to turn it back to Michael for some additional comments.

Thanks, Doug. I thought I'd share a little bit more color with regard to the business right now. A few thoughts on our operations in the field.

We did a lot of business with both existing customers and new-name customers during the third quarter. There is still I think an evolving demand for enterprise analytics, as appreciation of data grows, and our existing customers have more need for it all the time, and we continue to find exciting new companies, large ones that are interested in what we're doing here and have a need for it.

Even just in the past four weeks, I'd say we've done major enterprise deals with a global casino chain that you would know and you've probably been in before; a very large airline, I'm sure many have you flown on it; and a major European manufacturer. They're all household names, and I can't mention them because of contract restrictions.

But I do think that in a business like ours, an enterprise software, if you can get the largest, most successful corporations in any given industry to choose you and deploy you on an enterprise basis after a very competitive evaluation, then you've got proof from the marketplace that your product is necessary and a sustainable value proposition to build a great business on. And so I think we're all very motivated and enthusiastic to see that the market appetite for enterprise analytics is strong and is growing.

We have been engaged in a restructuring process over the past 12 weeks. I have been working personally with all the members of the management team, and we've been taking a hard look at every single aspect of the business. Everything from our HR processes to our IT process, our corporate procurement, our expense management, the way that we run technology development, our sales, our marketing, our services, our education businesses. There's really no stone left unturned.

And over the course of that 12-week effort, we thought long and hard about where the market was evolving and what works for us in our business. And we made some difficult decisions that are important to the business. We made some decisions which weren't terribly difficult, but they just had not been scrutinized over the course of a number of years and we learned a lot.

We've decided that we needed to and we'd benefit from streamlining our operations and focusing upon strategic markets, so we've taken a long look at the geographic markets we're in, and there are some markets that we concluded we're over-invested in and those were easy restructuring decisions.

We have and had two development centers in China, one in Beijing and one in Hangzhou, China, and after some serious consideration, we concluded that we'd be better off with one than two. And so we decided to shut down our Beijing operation. Ultimately developing software in the most expensive city in China is kind of like coming to the US and developing a software operation in New York City. It's useful to tap the culture, but it's not necessarily what we thought was best over the long term. And so as a business decision, we streamlined.

We've also streamlined various satellite technology operations where we thought we had too many small offices and we brought things together into a much more manageable structure. And in the process, I think we get some efficiencies. There's a good reason to do all the things we had done in the past, but like many things, having a good reason isn't the best reason. And so this entire process has been, I think, a constructive effort as we thought long and hard about how we would achieve the results we wanted but in a more efficient way.

We centralized a lot of business processes and in many cases we brought them back to the center of the Company. In other cases, we've eliminated steps that we used to think were reasonable and now we conclude we can do much more efficiently. We've standardized a lot of procedures. We've identified redundant systems and we've worked to bring those together and consolidate.

We've spent a lot of time at the department level considering where there's overlap. The business over the past many years was operated in a way where many of the departments had autonomy to do things they thought were important. But in the current environment, we've concluded that we had overlap and we could eliminate some of that overlap to the benefit of the overall corporation. Not done without lots of communication and lots of consideration, but well worth doing.

We've been working very hard to foster an environment of cross-departmental cooperation and teamwork. It's always -- again, it takes more energy to consult with two or three or four different department heads on certain things than it is just to do it independently, but as we have gone through that process, we have found cost savings and efficiencies. And I'm pleased with the way the teams worked together in order to achieve all these things.

You see that reflected in some of the financial results. The full weight of the restructuring will take a bit longer to manifest itself in our financials. But we feel comfortable that in the 2015 calendar year, we'll have all the benefits of those difficult restructuring decisions, as well as all of the operational efficiencies we've identified.

And so having moved through that process to structure the business for success in 2015, we've now shifted our focus to our growth plans. And in essence, our growth plan for the Company involves a number of things, some straightforward and externally focused and some internally focused. Clearly, focusing upon our key offerings, which are enterprise analytics and enterprise identity, that's critical. In the enterprise analytics area, we expect to continue to drive our core theme and to do it with sharper sales and marketing programs, and we think that cloud and mobility as upgrade options are going to be beneficial in driving our revenue.

So we're not about any kind of cloud. We're about cloud analytics for the enterprise and cloud mobility for the enterprise, especially when the mobility comes from analytic applications. I think that'll be very important. I think that in the area of identity, the emerging demand for cyber security solutions is going to provide us with a good market environment to sell into in the 2015 calendar year.

I think internally, we're going to continue with our corporate efficiency initiatives, and we're going to be upgrading our corporate performance analytics system so that we have much clearer transparency to revenue, productivity, and profitability across every part of the business in near real-time for the coming 2015 calendar year. We're going to take that corporate performance initiative and plug that into much more sophisticated upgraded budgeting and planning systems, which includes breaking down the business into about 100 or more business units, each of which can be evaluated on the basis of profitability and operational efficiency.

Having done that, we're plugging that performance analytic and those budgeting systems into the executive team, and we're tying them together with compensation structures that will be more margin driven than revenue driven. I think that will be a cultural shift to the benefit of the entire Company as we use our upgraded budgeting and analytic systems in order to deliver margin analytics to at least the top 100, if not the top 200 executives in the Company. This, we think, is going to be an internal change that will help us to drive entrepreneurial meritocracy and be much more aggressive in our business development activities without suffering from an over-expansion or a dilution in profitability as we go about doing it.

So, in a nutshell, if I had to summarize, I'd say the marketplace is promising and very exciting. I think 2015 is going to be a great year for software companies. And I think enterprise software in particular benefits as more enterprises embrace data and software to drive their value prospects.

I think that we have gone through an important restructuring process that's caused us to get much more into the details. And we are, as a Company, much more detail oriented today than I think we were a year ago. And I think that attention to detail and that focus upon efficiency is bleeding into lots of things that we do, to the benefit of the overall organization.

I think that having done that, we're still putting in place some great engines for growth. Some internal ones that revolve around creating a great entrepreneurial meritocracy and implementing world class analytics and budgeting. And some external ones that have focus on strategic markets and are focused upon our key offerings. I think that the business will move forward and will prosper based upon the hard work that we do in our marketing programs and our sales programs.

I think that the new product offerings in 2015 in the area of analytics and identity will be important to our growth. I think that the operating disciplines that we have been implementing and will continue to implement will be important to our growth. And long term, the macro environment is going to continue to be a benefit for us. As we see the avalanche of smart devices continue and the avalanche of data that comes from those devices continue to flood all of our enterprise business customers, I think that there will be opportunity and there will also be need for the kind of enterprise-grade analytic systems that can be built on our platform.

And so with that, I'll be happy to go ahead and open it up for questions from the analyst community.

(Operator Instructions) The first question comes from Karl Keirstead from Deutsche Bank.

Thank you. I've got two questions for Michael. Michael, normally a 25% headcount cut is either precipitated by a (technical difficulty) back or can itself cause a license shortfall. That didn't happen in your third quarter and for me, that's one of the key positive take-aways. I'm wondering if you could comment on why it didn't? Perhaps the bulk of the headcount reductions were non-customer facing, perhaps it was that core analytics demand is strong. So, perhaps a comment there.

For those of us that might be worried about a revenue disruption as a result of these headcount cuts in the coming quarter, if you could comment on the disruption risk from all of these changes and how you plan to mitigate it. Thank you.

Okay. They are good questions, Karl. We have a lot of cuts that were in prospective cuts where we were adding additional headcount in engineering areas where there were engineers that were newly on board that were not even engaged in existing engineering efforts. So you could look at them as growth opportunities and we decided just -- not that engineering that fast. We already have a strong and a capable engineering organization, and I think we decided that focusing on productivity is a better use of our energies at this point in time.

But as you know, the products you engineer have probably a three-year delay. In our case, we have an expansive scope in certain areas where we're looking to add additional products. We decided we wanted to focus on a key set of product areas that we just simply didn't need the extra staff in those areas. So those are -- there's a large number of the cuts that actually I would say are more than two or three years out in their ability to affect our revenue, and that's the first tranche.

There's another set of cuts we make in certain corporate areas and administrative areas that aren't directly revenue facing. And we just took a clean sheet of paper and started thinking about how you would do things in the year 2014 or 2015. And a lot of the things we were doing were good ideas in the year 2000, are good ideas in the year 2007. But as you know, you don't have to keep doing them the same way. And so when we did that, we were able to eliminate more heads that aren't really related to revenue.

I think that we have a number of different departments that had an evolving department set of structures where we would have some redundancy and some cross overlap. As we looked at it, we realized that we could eliminate the redundancies without impacting our revenue. So as we started to streamline certain departments, that was also a changing factor.

Those are areas where arguably -- unlike technology where you build a product and three years from now you think you're going to sell it. There's some areas where they're arguably never going to have an impact on revenue.

This is not an example of a headcount cut, but we as a Company adopted a bring your own device policy and then we adopted freeconferencecalling.com and Skype as communication standards. It should save millions of dollars a year or many, many millions of dollars over the next few years. I'm doubtful that it will have any effect on revenue whatsoever. It's just an opportunity.

And as you start to turn over every stone, you start to see that there are some things that you used to do for a good reason that you just don't really need to do anymore. But the people that are doing them are doing them because they've always done them, and it's above their pay grade to question the decision of the CEO. The decision of the CEO seven years ago, by the way, isn't necessarily a very good decision for the Company today.

So sometimes it's just revisiting things that made sense in the past and asking if they make sense anymore. We found that in other cases, we were doing things to try to drive revenue but they were actually maxed out and we weren't driving any more revenue, we were just spinning our wheels and trying a little bit too hard. In some areas of the business, you can get to the point --.

I'll take an example, education, where you can sell the education offering that everybody wants to buy and it can be an obscenely profitable business. Or you can add additional offerings, chasing after incremental specialty segments of the market until eventually you get down to the point where you're creating custom education courses. And then you can create your own education sales and marketing function and development function to create custom education courses because the goal of the education department is to maximize education revenue.

But at some point you might just flatten out. As you can imagine, if you called everybody in the planet and asked them if they wanted a master's degree in art history, you would spend a lot of money trying to market that, especially to people that didn't really want to buy it. It would become obscenely unprofitable. But if your only job was to do it and I gave you some amount of money, you would spend it all just trying. So I think that to a certain degree, the focus makes a big difference.

I think there were other changes that took place in the quarter. For example, a couple years ago we thought that expansion in Russia was a good idea. And that was before the war with Ukraine. Then, we decided that maybe it wasn't such a good idea after the war, and so we shut down our Moscow office. We had a number of things like that, that under different circumstances would have been revenue generating but now there is just risk we didn't want to take.

With regard to enterprise marketing, there's a classic saying: I know I'm wasting half my marketing budget, I just don't know which half. When you look at the entire budget and then you get motivated, you scrutinize every single line item and you find the half that didn't generate revenue and you cut that half. Or maybe you just take a more risk-averse position and you require things pass a certain hurdle before you fund them.

I think that in the area of sales, in the enterprise software business, there are certain sales that come because the customers aren't -- the installed base you have is buying the software because they're organically expanding. And you need to service those customers and you need to have salespeople call on the accounts. But selling a licensed deal to an account that needs to expand anyway is dramatically easier than selling a licensed deal of equivalent amount to a brand-new account that's never heard of you before. And both of those are examples of revenue that we track very tightly in our pipeline.

There are other examples of sales resources where they don't have an opportunity to sell to a new customer, nor do they have an opportunity to sell to an existing customer, and generally, you could predict that they wouldn't sell to anybody within 12 months. And so not all sales resources are created equal. The same is true in services. At the end of the day, you can scrutinize every single part of the business and you'll find that there's a bottom 10% of every single part of the business which is generally not correlated to 1% of the revenue.

In fact, I would think that if you stop in most companies every three or four years and you scrutinize it, you'll find that if you identify the 10% least productive, or least strategically aligned, part of the business and you cut that, you might actually drive revenue up as opposed to driving it down. Because you don't focus upon a non-strategic thing and you don't focus upon a very difficult problem and you shift all of your energy to a more straightforward thing.

So summary is, in some areas the market wasn't there. In other areas the market changed over the course of seven years. And in some cases, we just had business processes we no longer needed or expenses we no longer needed.

I'm confident that in every place where there's serious revenue, you can be quite sure that -- and we look at our forecast over the next 12 months and look at our 100 most promising opportunities. All those things are fully covered, and we're probably more focused on those than ever.

That's a terrific answer. Thank you, Michael. I might actually ask my second one to Doug to give him a chance. And Doug, the question I have for you is, you mentioned about the other cost initiatives. And Michael in his prepared comments ran through a number of the internal initiatives. I'm wondering if you might take a shot and bracket what you think the impact of those other initiatives might be on margins next year? Thanks.

Thanks, Karl. What I would say there is that the majority of our savings that's we've been talking about, the $75 million, is related to headcount. The number that we quoted, but there are other things, Mike mentioned briefly as well, related to telecommunications. I will highlight the fact that he did reduce his own salary. That's part of the cost savings initiatives as well. But really it will be a couple more million dollars, but candidly, with what he said, we're trying to run a much tighter ship and challenge basically every single dollar we're spending. So, we hope that basically that will have the impact that we're looking for.

Got it. Okay. Thank you both and I'll go back in the queue.

The next question comes from Greg McDowell from JMP Securities.

Great. Thank you very much. Thanks for doing the call again. So you've made some key hires on your senior management team. A new head of sales, new head of services, new head of alliances. I wanted to ask you about these additions made and whether these strategic hires are going to lead to a potential change in the go-to-market strategy of the business? Thanks.

Look, I think that we've definitely been in the business of wanting to upgrade the management team. And we're able to upgrade the management team because the market's excited about our offerings. We've got some great new technologies coming aboard. Because we've started issuing stock options to senior executives, that's made it easier for us to attract a group of people that otherwise wouldn't consider us. I think as we've drawn talented new people into the Company, they brought other talented people.

I think that generally, people understand that we're deadly serious about the enterprise analytics space, and we have a very serious interest in this enterprise identity space.

Anybody that's in the marketplace right now looking for an exciting opportunity would like to be with a mid-sized enterprise software company that's got some serious upside, that doesn't feel bureaucratic or too big to make a difference in. As you know, over the last decade, there's a massive consolidation in enterprise software where hundreds and hundreds of mid-sized enterprise software companies got taken out. And it's just not that fun to be one division manager in a conglomerate with 257 divisions and get buried. So I think there's a lot of talent out there that's available and we've been tapping into it as best we can.

In terms of our go-to-market strategy, I don't think we changed our go-to-market strategy. Our business is all about identifying the Global 2000, finding the CXOs that actually want to deploy compelling enterprise applications. They buy from us, because we allow them to build those applications plugged into their enterprise databases, their enterprise directories, with security, with scalability, with sophistication. And they've got big problems they need to solve and they can't do them with toys or tools.

Selling enterprise software isn't that different from when Oracle wrote the book on it. And it consists of getting very aggressive, very talented senior field salespeople, led by talented sales executives, backed by a marketing function which is driving a cutting edge communication message. And they have to be supported by a great services team that's able to get in and help the customer be successful.

And of course, these companies want to buy from a strong multi-national that's got a solid balance sheet that they trust, that they can do business with. And if you can master all of those things, then typically you can do business with the biggest, richest companies in the world.

The only thing that's really changed over the past 10 years is just there's just a lot of good companies got slurped up by IBM and Oracle and SAP. At the same time, there's been a subtle shifting of the various platforms so that ideas like mobility get more commercial every single quarter. Ideas like cloud get more commercial every quarter, and otherwise data as it floods the market is like rain coming down. It's enriching all of these analytic opportunities and creating an opportunity for all of us together. Does that answer your question or is there a follow-up?

That does, Michael. Thank you. Just one quick follow-up. On the last call when asked about sort of a longer-term operating margin view, you had mentioned the 10% number, 12 months to 24 months out. I was wondering if you've sort of rethought that number now that the restructuring has gone from $40 million to $75 million and whether we'll see that 10% sooner or will it be a number possibly even higher than 10%? Thank you.

I had my head down with the team and we worked through a very intricate restructuring. As part of that, I've spent a lot of time taking apart and studying different parts of the business. As I went through consulting and education and sales and started scrutinizing conversion rates of leads and thinking really hard about productivities and what's possible, it made me more comfortable that we could drive the restructuring a bit further than we had announced 12 weeks ago.

Having followed that, now I'm heads down with the team working on corporate performance initiatives which have to be 50% all about growth and 50% all about expense management and efficiency. And there are, of course, as many or more of those. We're going to do as many things internally to improve performance and get transparency over the next 12 weeks as we've done to restructure the Company over the last 12 weeks. And I think that when we get into the new year, into 2015, and we've had a chance to see how all of these performance initiatives are getting embraced by the business, I'll be able to give you a better answer to your question.

Right now, I think we're happy with the rate that we're moving and we're cautiously optimistic about all of our initiatives and all of our opportunities moving forward. But at the same time, I think that this is just a hard job for everybody on the management team, and we have a lot of work cut out for us.

So I don't want to give you any impression other than the fact that we're heads down and we're doing everything that we can in order to balance the growth interest of the business against the efficiencies and the profitability requirements that we know are essential if we're going to grow solidly during the coming five years.

Okay. Thank you. I'll get back in the queue.

The next question comes from Frank Sparacino from First Analysis.

Hi, guys. Doug, maybe first question for you. Can you just talk about this quarter, there was a fairly significant decline in the deferred product license revenue and I know it fluctuates quarter to quarter, but can you just remind me kind of what the normal events are that cause that and what transpired in Q3?

Yes, just to be specific, in which metric you're talking about. You're talking about product license revenue or deferred revenue?

Deferred product license revenue.

And from a decline, you're saying from Q2? I just want to make sure I understand the --

The sequential decline, Doug, Q2 to Q3.

I mean, look, as is always the case with the complexities associated with revenue recognition, some quarters will basically do more of what we internally refer to as bookings and some of those basically get deferred and then some of them will have runoff. We did have a deal in the quarter that basically we had previously deferred and we recognized, which was about $1.6 million. That could have been one of the drivers that you're seeing from a reduction in product license revenue -- deferred product license revenue.

Okay. And then you referenced earlier, Doug, 13 deals north of $500,000 during the quarter. How many of those were north of $1 million?

Give me a second.

Sure.

There were four.

Okay. Maybe lastly from me. Mike, just on the enterprise competition, so-to-speak, you look at who you're competing with today, how you're competing, and the basis of differentiation. How are those enterprise sales cycles maybe different than they were 12 months ago or in the past? Obviously, you have some new entrants which are much stronger, much more sizable companies than they were years ago. But just any color there would be helpful.

You know, Frank, I'm going to defer that to Paul because Paul's much more hands on with some of the more competitive sales cycles, and I'll let him answer.

Thanks, Mike. Frank, first I'll start off with a point Mike made earlier, which is the art and science of enterprise sales to large corporations hasn't changed. You have a competitive landscape that remains active and has been active in different directions over the last 15 years on different vectors.

Over the last 12 months, you have interest in certain enterprises in these point solution providers, which I'm sure you're partly referring to. And an interesting trend that we've seen, which I can at least comment on about what's it like now versus 12 months ago is, 12 months ago there was a lot of enthusiasm, momentum behind these point solutions as a be all to end all. Meaning just as a standalone response to what was existing in the marketplace.

But over the last 12 months, there's been a very pronounced interest in customers to really understand the long-term implications of having these point providers take on material parts of the business. Because what they're creating is a fragmented version of what used to be the single version of the truth.

So what we're hearing back from a lot of our customers and from the prospects, are while there certainly is opportunities and interest in some of these point providers, a more mature and the longer-term view that we see playing out over time, is the education process that's really been going on over the last 12 months. And that is really what is the better long-term vision for an enterprise.

So if I was to tell you where we are now versus 12 months ago, I think the buying public is more knowledgeable now about both the advantages and disadvantages of point solutions, and is taking a more appropriate consideration of what the longer-term vision will be.

And the vision that MicroStrategy has been pushing, as Mike has said, is enterprise analytics that is agile and deployable. It gives customers the ability to have that single version of the truth, can be deployed easily, allows companies to supply and support their requirements for both individuals, departments, and the enterprise.

We're in the midst of that education process now, and I'd say 12 months -- like meaning now versus 12 months ago, we're substantially better positioned to present that message to the marketplace. And if you look at the analyst reports, whether it be Gartner or Forrester, you hear them supporting really that same view. High level, we think the market is being more educated, more sensitized, and we think we're optimistic about the MicroStrategy message being the compelling long-term solution.

Thank you, Paul. That's helpful.

Frank, this is Doug again. I wanted to correct my comment. It's actually five in Q3 that's greater than $1 million, not four.

Great.

Thanks.

The next question comes from James Gilman from Drexel Hamilton.

Thank you. Good afternoon, or good evening here. I have two questions for you, Michael. One is around an observation that I have seen with the new or product license sales -- the new product license sales as attributed to sales and marketing. Essentially, when you look at it from that perspective, it's been relatively flat over the last few years. I maybe attribute that to selling into the installed base.

Whether my attribution is correct or incorrect, my question to you is how can we drive or how can you drive that productivity of the sales force higher on the new license line? Is that due to the some of the new initiatives that may be coming out?

Which leads to the second question, Michael, and that would be you typically report on your fourth quarter during your user conference. So my question would be would you consider inviting the investment community and having an investment event at your user event and discuss the fourth quarter results. Thank you.

Okay. Let me take the last one first because it's shorter. I think we're open to different ideas, and we're considering our investor communications right now. So it's not out of the question. We'll take it up and consider it as a group when we get off the call.

We are working to build more opportunities for us to answer questions for our investors and sponsor Investor Days or at least an Investor Day once a year. And that's not a bad idea at all. So I appreciate that suggestion.

With regard to sales productivity, I think sales productivity is a complicated creature. We can drive sales productivity by improving the quality of sales management, and I think that's one initiative that we're taking. We can also drive productivity by improving the quality of the sales systems, especially sales tracking and other sales force systems, and we've been doing that as well.

The third thing we can do is we can improve the quality of our product marketing group, which provides all the tools that salespeople use to sell. And I think that also improves sales productivity. And they're getting a lot of interest and a lot of focus right now.

The fourth area is you can actually improve the quality or the quantity of leads that flow into the sales organization from other corporate initiatives. And that's another important focus of ours right now. The fifth thing you can do is improve your relationship with the channel. That's why we hired Jon because we felt like there are some channel partners and channel partnerships that we can put in place that will be beneficial to our sales productivity.

You can also improve sales productivity by bringing additional product features and additional product lines to the marketplace. When sales productivity is -- I didn't mention, you could hire different salespeople and you can train them better. But when sales productivity is low, it's generally because one or more of those things is not working.

Unfortunately, it can be quite an intricate thing to figure out which of those drivers is causing sales productivity to be low. And that's why I think if you're going to run enterprise software function, you need to take a very multi-departmental view and you can't just run the departments in isolation.

I think that we have lots of initiatives going across all those areas I mentioned, and success will drive sales productivity north. And our challenge, of course, in a business is to figure how to correlate that success to the amount of money we're spending in any given area so that we don't over invest as we chase after that. But I'm optimistic based on what I've seen so far. I think that as we cut back the scope of what we're doing, both geographically and functionally, and as we focus in on the things that are really, really important to us, I think our productivities go up.

Thank you, Michael. It sounds like you've given it long and considerate thought. I appreciate the color you've provided.

The next question comes from Karl Keirstead from Deutsche Bank.

Hi, thanks for letting me ask one more and it has to do with cloud BI. A few weeks ago, salesforce put cloud-based analytics center stage. Michael, to give you a little bit of credit, you started that journey with MicroStrategy a couple of years back.

And what I wanted to ask you and Doug, as well, is what the impact of that shift is having on the Company and might have on the financials next year? Subscription revenues is now I think 15% of total license and subscription, so it's getting reasonably large.

Perhaps for Michael or Paul, I'd love to ask what changes that move from on-prem to cloud has on the business model or sales process? And then for Doug, as we try to figure out whether it helps you or hurts you in terms of your margins next year, perhaps a little color of things we should keep in mind as we model this cloud shift? Thank you.

I'll say a few words and I'll let Paul, and the other executives add if they have any. I think analytics is a really big market. I think the cloud is a really big market. I think cloud enterprise analytics is our segment of the market.

There's going to be things that salesforce.com is going to do very successfully that probably aren't great fits for us. And of course, there are things that Amazon's cloud business are going to do that aren't fits for us. I think that the ability to successfully deploy enterprise analytics out of the cloud is only a positive.

We haven't really seen it cannibalizing any business opportunities. And the truth of the matter is, much to my chagrin, it's kind of ironic, I've been beating a drum telling my sales organization: why don't you go find some of our existing customers on maintenance contracts and get them to port their entire configuration into our cloud so they don't have to maintain their own data center? And they come back to me and they say our customers are perfectly happy. They don't want to do anything different.

So the negative of that is that if you've got enterprise analytics deployed in the traditional way and your own IT department, and your own data center, that's a very stable business. It might bleed off over 20 years. In an aggressive scenario, maybe it's 10, 15 years that people spend before they re-evaluate those decisions. But it's proven to be fairly stable.

I think most of our cloud business we've seen is coming from new names. It's new at new customers, which is great, and it's new departments and it's new types of customers. The enterprise IT buyer, they're buying enterprise software and they're fitting it with their enterprise infrastructure and that continues to be a decent business.

And yet the explosive entrepreneurial growth in the information economy and all the new companies that are popping up with the mobile app for this or the information app for that. All of those people they tend to be cloud prospects. And as often as not, you have the head of marketing or the head of sales or some non-IT person saying, I've got to get this up and running in three or six months and I just don't have time to do it the traditional way.

So it's -- I don't see it as a threat. I do see it as an opportunity. I think that we're getting better at it. We did enter the market earlier than most. I think the key is with all these things though, you can never rest on your laurels. You've got to continually re-evaluate, re-build, re-engineer, re-focus what you're doing because every 12 months there are new developments that make it possible to drive forward.

Our credibility as provider in our customer base and the rest of the things we know about the industry, they help us quite a bit and they kind of give us the ante we need to get taken seriously. And from there, it's all about execution. Paul?

Thanks, Mike. Specifically I'd say to Mike's point, just to put a finer point on it, what we're finding is cloud allows us to have a discussion with a new set of constituencies. Historically, MicroStrategy's enterprise analytics deployed on-prem is something where the IT departments took the labor in or in the evaluation.

What our cloud business has allowed us to do is have conversations with line of business users and the primary driver in people moving to our cloud is time to market. And what it means is business users with a compelling business problem can use MicroStrategy's cloud to bring in the power of our analytics applications to the marketplace but in a much more expeditious fashion.

We also have a very high attachment rate in our cloud between our cloud and our mobile business. Which means that most of the customers who are deploying MicroStrategy's cloud analytics is also using our mobile platform. Because we have a market leading mobile platform and that platform and that use case is also very well understood by business users, these two trends come together very well in our cloud. Mobile and cloud allow us to bring a very value-added use case to business users that allows it to be deployed very quickly. So what we aren't seeing is the cannibalization in our business.

And to Mike's point, we have a very high percentage of the companies in our cloud are brand-new prospects. I'll give one last piece of color to this. The reason that we're seeing this uptick with net new accounts is because using our cloud allows many of the installed corporations that would otherwise have a BI standard, allow them to do business with MicroStrategy if we are not the current business intelligent standard. So it allows companies to do business with MicroStrategy even if their corporate standard for BI and analytics might otherwise be an Oracle or an IBM or an SAP. That trend plays very well to us because of the strength of our offering and allows us to unseat some of these incumbent vendors on these key applications.

Karl, this is Doug. I'll just add one thing. When you look at the margins in that cloud business, you will note in the press release that we did increase the cloud revenue $2.6 million on a year-over-year basis, but the cost associated with that only went up $400,000. So once we've kind of gotten over the large fixed base that we invested in, we do have some room to expand without significantly adding cost to operate the cloud.

Got it. All very helpful. Thank you so much.

The final question comes from Greg McDowell from JMP Securities.

Hi. Thanks for squeezing me in for one more. I have a use of capital question. With over $350 million in cash and investments on the balance sheet, no debt and obviously significant cash flow generation power in light of all these changes you've made, I was wondering about your appetite really to pursue a share repurchase program given that your stock is only trading at roughly 2 times revenue, 4 times recurring revenue? Thanks.

We take an opportunistic view toward buybacks, and if we feel the market is undervaluing the stock then we keep open the option that we go in the market and buy it. But we wouldn't pursue a buyback in a highly public telegraphed way. Just because we're buying back the stock because we think it's under value. We're not trying to drive the stock price up by threatening a buyback.

So we just generally will keep that option open and keep our powder dry. In the event that we feel that there's an opportunity for the benefit of the shareholders, we'll do that and we'll do it aggressively and you will read about it after the fact. (laughter) Can't say anything more than that, but that's how I feel about that subject.

Okay. Fair enough. Thank you very much.

Thank you. I appreciate your support. Thanks for being on the call with us and for those of you who are investors, we appreciate your vote of confidence by investing in the firm.

We're heads down. We're going to go back to work on the business and put in place all of our growth initiatives and operational initiatives for the coming year. Until then, all the best.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.