Microstrategy Inc (MSTR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MicroStrategy Q4 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Chairman, President and CEO, Mr. Michael Saylor.

Mr. Saylor, you may begin.

Hello.

This is Michael Saylor.

I'm the Chairman, President and CEO of MicroStrategy.

I'd like to welcome all of you to today's conference call regarding our 2017 fourth quarter financial results.

I'm here with our CFO, Phong Le.

First, I'd like to pass the floor to Phong who is going to read the safe harbor statement and make some comments on our results for the fourth quarter.

Thank you, Michael, and good evening, everyone.

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 relied upon as representing our views as of any subsequent date.

We anticipate that subsequent events and developments may cause the company's views to change.

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'll 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 on our website at www.microstrategy.com.

Overall, our Q4 2017 financial results reflect a trajectory consistent with our strategy that we shared 6 months ago.

We continue to invest in sales and marketing and technology and our customers and our people, with the objective of growing overall revenues.

We had another very strong MicroStrategy World Conference last week in Las Vegas.

Over 2,600 people were in attendance, with approximately 2,000 of those being customers, prospects and strategic partners of MicroStrategy.

At World, we launched a map for the Intelligent Enterprise, a guide to address worldwide digital transformation needs for software services and strategy.

We were also pleased with the industry analysts' attendance and social media activity related to our event.

In Q4, we released MicroStrategy 10.10, which with the inclusion of our Workstation developer product, represents a culmination of over 2.5 years and 2.5 million people hours of development work to create intuitive, easy-to-use enterprise platform for analytics and mobility.

At the same time, key underlying customer-oriented components of our business, including service and support revenue, as well as customer renewables continue to exhibit strength.

On people, we continue to ramp up our recruiting activities, especially in areas of technology and services across the world.

And we launched an employee fitness program that we're very proud of, reporting via microstrategy.ca active minutes and steps for all of our employees.

Now to our detailed financials.

Total revenue for Q4 2017 was $138.1 million, a $2.0 million or 1% decrease year-over-year.

Foreign currency effects in Q4 2017 favorably impacted our total revenue by $3.5 million or 3%.

Product license revenue was $32.3 million in Q4 2017, a $5.7 million or a 15% decrease year-over-year.

Foreign currency effects in Q4 2017 favorably impacted our product license revenues by $1.0 million or 3%.

We saw strength in our international business in Q4, with 29% growth year-over-year, representing 67% of worldwide product license revenue in Q4 2017 compared to 44% for the same period in 2016.

Our subscription services revenue, primarily driven by our cloud customers, was $8.5 million in Q4 2017, a 9% increase over Q4 2016.

Our support revenue was $75.0 million in Q4 2017, a 3% increase year-over-year, with foreign currency changes favorably impacting such revenue by $1.8 million or 2%.

Our customer support case backlog is at an all-time low and customer satisfaction is at an all-time high, resulting in continued strong maintenance renewal rates.

Our services revenue was $22.3 million in Q4 2017, a 3% increase year-over-year, with foreign currency changes favorably impacting such revenue by $0.6 million or 3%.

Our consulting business continues to focus on delivering impactful expert services, resulting in our highest bill rates in over a decade.

Turning to costs, our strategy to invest in sales and marketing, technology, our customers and our people are driving increases overall.

Q4 2017 cost of revenues was $24.8 million, a 6% increase year-over-year and 1% increase quarter-over-quarter.

Q4 operating expenses were $94.6 million, an 18% increase year-over-year and 8% increase quarter-over-quarter.

Sales and marketing expenses increased $6.7 million or 15% year-over-year and $10.2 million or 24% quarter-over-quarter.

This is primarily due to increases in field marketing with an increased presence at key analysts and technology partner trade shows worldwide; digital marketing with an increased investment in lead generation with traditional channels like Facebook and LinkedIn; in corporate marketing, with increased brand awareness activities and business websites like The Wall Street Journal, Financial Times and The Economist.

We also continue to invest in expanding our footprint in field marketing, global alliances and sales resources, especially internationally, with an increase to 65 people or 11% year-over-year in sales and marketing.

Research and development expenses increased $3.1 million or 17% year-over-year and $2.1 million or 11% quarter-over-quarter.

We've been investing in growing our 3 key development centers: Hangzhou, China; Warsaw, Poland; and Tysons Corner, Virginia.

We expanded headcount of those centers by 47 or 9% year-over-year through campus and experienced hire channels.

We're also improving our base and variable compensation packages to continue to be competitive in the labor market.

We expect these investments will allow us to continue to be at the forefront of product innovation in the enterprise analytics and mobility business.

General and administrative expenses increased $4.8 million or 29% year-over-year and $2.2 million or 11% quarter-over-quarter.

This is primarily due to increases related to recruiting expenses and finance work.

In addition, in Q4 2016, we had a onetime reversal of $3.4 million of previously accrued expenses.

We had income from operations of $18.8 million in Q4 2017 and an operating margin of 14% compared to 26% for the same period a year ago.

We had net loss of $26.2 million in Q4 2017, primarily due to an estimated onetime charge of $44.0 million resulting from the recent enactment of the Tax Cuts and Jobs Act.

This charge is comprised of a $40.3 million tax expense related to the mandatory deemed repatriation of certain foreign earnings and profits and a $3.7 million charge related to remeasurement of net deferred tax assets arising from the new lower corporate tax rate affected by the Act.

We plan to pay the tax expenses over an 8-year period beginning in 2018.

Excluding the impact of this legislation, our net income in Q4 2017 would have been $17.8 million, a decrease of 43% from the same period a year ago.

And our diluted earnings per share in Q4 2017 would have been $1.55.

We had cash, cash equivalents and short-term investments of $675.2 million at the end of Q4 2017 and continue to have no debt.

Turning to 2018.

We feel strongly about our ability to execute on our investment plans across sales and marketing, technology and our customers and our people.

We're also optimistic that we'll begin to see product license and overall revenue growth but continue to be uncertain about the exact timing of this.

In any given year, we'd like to remain cash flow positive and be profitable on an operating basis.

In any given quarter, with the difficulty in predicting revenue levels, there can be a volatility and we're prepared for operating margins to be at or close to 0. I believe we've improved discipline in our systems and processes, operations and financial and budgeting controls.

We'll continue to invest, measure and adjust with a focus on creating value for the enterprise.

Now I'd like to turn it back to Michael Saylor.

Thank you, Phong.

I'm very excited about the arrival of 10.10 to the marketplace.

I think that, that piece of software positions us with some excellent functionality to compete in the analytics and the mobility space looking into 2018.

There's a new revamped Desktop product, and that Desktop product dramatically improves our data discovery solution, which is a really hot topic right now in the analytics space.

The Workstation and 10.10 dramatically improves the enterprise analytics experience, especially for administrators and architects.

And so I look forward to the impact that's going to have on our ability to help people migrate from the desktop to the department to the enterprise.

And the Dossier that's in 10.10 is our most powerful, easiest to use client container for deploying analytics in the history of the company.

It's an interactive book.

It's beautiful.

It renders really well on the web.

It renders really well on mobile devices.

And I believe it's a game-changer for driving web and mobile adoption.

It should make it dramatically easier for MicroStrategy, application developers and analysts to deploy applications.

And it should make it dramatically faster, and I think it's going to make it dramatically easier for people to consume those applications, both on the run by tablet computer or via the web.

And we've even got a really nice capability now in 2018 to deploy it on smartphone devices.

So the 10.10 release is a really exciting point for us.

The other thing that I'm really excited about is our platform emerging as a really compelling and acknowledged open platform.

So our first goal, of course, is to be a great analytics platform, but that second objective to be a great open platform is very helpful.

Dresner endorsed us as a leader in the embedded analytics space as a platform, and that was a great analyst endorsement.

So we have analysts that are trumpeting and singing our praises as a platform for embedding analytics in other applications, and that's a growing opportunity in the market as we move forward.

We shipped a bunch of new connectors that allow us to connect our platform back into other data sources over the past quarter.

And that's getting noticed by our customers, and we're really excited about that.

And then finally, we released new interfaces so that it's now possible to plug other tools into the MicroStrategy platform.

If you wish to publish a set of federated data, you're not limited to MicroStrategy's toolset, you could use third-party data discovery tools to plug into the MicroStrategy platform.

And so we made great strides as an open platform during the past quarter.

And not just in that technology it takes to be a great open platform, but also with regard to market recognition, our qualities as an open platform.

MicroStrategy World just took place a week ago.

I was really pleased with the entire event.

And I thought that it was a great opportunity for us to remind people that not only we're an analytics platform and an open platform, we're also a great enterprise platform.

And we rolled out a number of programs at MicroStrategy World to endorse our enterprise platform capabilities.

In my keynote speech, I articulated the map of the Intelligent Enterprise and spoke about MicroStrategy's commitment to both the technology and the technique necessary to help our customers on the journey toward the Intelligent Enterprise.

I would encourage anyone that's interested to go to our website and check out my keynote address.

It's also available on YouTube.

And it articulates our vision and our best practices for journeying to the Intelligent Enterprise, and it will be an exciting theme for us as we move forward in the market in 2018.

Along with unveiling our pathway and our best practices for reaching Intelligent Enterprise, we deployed the map of the Intelligent Enterprise, and I thought we got really good reviews and reaction from both our partners and from our customers at MicroStrategy World.

And so the theme for 2018 for us is helping our customers on the journey toward the Intelligent Enterprise via both technology and technique.

And that's a theme that all of our marketing programs are aligned behind, that our sales team are aligned behind, that our services programs are aligned behind and that our technology and product development is aligned behind.

So that's a nice and exciting development.

As I look back at 2017 in review, I thought it was a solid year as we transitioned to a growth stance.

We had some strong improvements in our services business.

I was pleased with our operating income results of $74 million.

So I thought it was a solid financial year.

As we look forward through 2018, 2019 and 2020, it's clear to me that we need to invest in a very thoughtful fashion if we're going to grow the business.

And we're focused upon investments in 3 areas: our sales and marketing programs, our services programs and our technology programs.

We've got really exciting plans in all 3 of these areas.

We're going to take a very focused, but aggressive stance toward making these investments and pursuit of establishing a leadership position in the enterprise intelligence space.

With regard to technology, clearly, it's having a great analytics and mobility platform that is open, that has all of the enterprise capabilities that our customers and our partners are looking for in their journey toward the Intelligent Enterprise.

We've got a really great platform there with the 10.10 release.

We will drive toward the next major platform release during the coming year.

And we believe that this is going to catapult us into a nice technology leadership position that's going to support our growth strategy.

Our Intelligent Enterprise campaign is both a sales and marketing campaign, but it is primarily a services mindset and a services methodology, which is transforming and enhancing our entire services organization during the coming year.

Our focus is on customer success, customer satisfaction.

And one of the best ways we can make our customers successful is to help them to establish great intelligence centers, to help them upgrade and optimize their existing intelligent centers, to deliver them the best practices for deploying departmental and enterprise intelligence in the form of world-class intelligence programs.

We're overhauling and upgrading our education offerings to make it easier than ever for our partners and our customers to build these world-class intelligence centers and run world-class intelligence programs.

So our education will be enhanced during the coming year.

We're working hard to retool and to also grow our consulting and professional services organization so that we can more than ever be trusted advisors to our customers as they journey toward Intelligent Enterprise.

We're putting in place more structured investments and programs in our support organization also consistent with our Intelligent Enterprise campaign.

And as we go forward during the coming years, we expect to be more proactive and more strategic in our support and our service investments in order to help our customers as they work to execute on the Intelligent Enterprise vision.

As I look forward to the rest of 2018, I'm more excited than ever about the future of the business.

I think we've got a great market opportunity.

Analytics and mobility, both have really, really nice secular trends.

There's more data, there's more clients, there's more solution requirements.

More and more customers are floating into this market with needs.

And so we've got a great market opportunity to sell into.

We've got a great customer base that we can use in order to build from.

We've got a really great technology platform in version 10.10 and the coming next platform release.

And we've got a great services organization that was materially upgraded in 2017.

And finally, I think we've got a very committed management team and professional employee base out there that's picking up momentum and is enthusiastic about this.

So I'm looking forward to what the year brings.

We'll continue to be very thoughtful, but aggressive about making the various investments we think we need to make in order to grow our position in the marketplace.

I'd like to thank everybody for their support.

And with that, I will go and take questions from the analysts on the call.

(Operator Instructions) And our first question comes from Abhey Lamba with Mizuho Securities.

So Mike, can you give us an update on some of the new initiatives that you kicked off over the past couple of quarters?

Of particular interest to us would be your ability to attract new customers for MicroStrategy.

What type of progress are you seeing over there?

Then I have a question for Phong.

Yes.

With regard to our sales and marketing initiatives, we've been investing in a number of areas, including teleprospecting and lead conversion as well as digital marketing, search engine optimization and field marketing.

I feel really good about our advances in digital marketing.

I think we're much more adept at that today than we were a year ago.

We've ramped up our budget there, and we're starting to see material increases both in brand awareness as well as in lead generation.

With regard to field marketing, we made some partial expansions in field marketing in 2017.

But the majority of the increase in field marketing activity is going to come in 2018, with new trade shows and new outbound initiatives.

We've built on top of our successful symposium program and added to it a number of field marketing activities that will take us more squarely into the sights of CIOs, chief data officers, chief information security officers, CTOs and CXOs in general via a number of partner organizations and other analyst networks.

And so we're also going to other trade show events, and there's a pretty full roster of those in 2018.

So we're beginning to see some increased lead flow from that, but I think we'll see more as we go through the remainder of the year.

With regard to corporate marketing and analyst relations, I think over the last 12 months, I think we've dramatically improved our analyst outreach and influencer outreach.

And we're starting to see some of the fruits of that labor.

I think in 2018, that will start to benefit us.

I think the other areas that probably are worthwhile to point out would be a material increase in both field marketing personnel in the various regions of the world and also channels marketing and sales personnel.

Most of those have come on board over the past 6 months.

So I think they'll have more of an impact in 2018 than they had in 2017.

How about progress on signing new logos as customers?

We are seeing some good progress in that area.

I think we did a decent number in Q4.

Got it.

And lastly, Phong, can you talk about the margins?

If I heard you right, you said your margins could go down to 0 in some of the quarters.

And earlier you had said, they could go down to single digits?

What's the updated thought process on margins, please?

Yes.

A couple of things: one, on our investment plan, I think it's consistent with what we shared 6 months ago.

And you're starting to see the ramp, especially in areas like sales and marketing and research and development, and we continue to expect to ramp throughout 2018.

I think what's different at this point in time is our revenue trajectory, just based on what we saw in the last two quarters, we saw a continued decline year-over-year in product license and overall revenues.

And as much as we would like to see consistent growth in the revenue every single quarter next year, especially in the first half of the year, we see a lot of seasonal volatility.

And even with taking seasonality out, we just see general volatility.

And so we just want to prepare ourselves for lower margin levels if our revenues were to continue on a similar trajectory where they are now.

And our next question comes from Walter Pritchard with Citi.

This is Tyler Radke on for Walter.

Phong, I think you mentioned strength in Europe and kind of inverse that was weakness in U.S. Could you just talk about geographies, what drove the strength and what were the weak areas in U.S.?

I think you -- we've seen over the last few quarters a trend of international strength and North American less strong.

I wouldn't sort of point to any particular trend at this point in time that's causing one or the other.

If you'll go back to 2015, it was the flip side, where we had strong North American revenue and weaker international.

So my hope is that they start to balance each other out or that North America catches up with international this year.

The facts over the last couple of quarters point to weakness in North America.

Okay.

And if I look at maintenance revenue, it looked like it kind of accelerated from -- from Q3 to Q4, it jumped up about $2.5 million, which is higher than a normal Q3 to Q4 move.

Was there anything to call out there?

[Was it the effect of] some type of catch-up?

Yes, there was a catch-up and this happens time-to-time where a customer, for whatever, a variety of reasons, isn't able to pay their maintenance in a particular quarter.

In this case, we had a customer that delayed maintenance payment for a couple of quarters, and they caught up in Q4 paying their bill.

And so we recognized the revenue there.

It's still pretty strong overall, our product support revenue.

But there is definitely an unusual jump from Q3 to Q4 because of a onetime sort of large payment.

And Phong, as you think about the maintenance trajectory now that we've had several quarters in a row of negative license growth, how should we think about that as we head into '18, obviously, on a constant-currency basis, but the maintenance year-over-year growth in Q4, because that catch-up is probably stronger than it will be next year.

But just trying to think about where the overall trajectory of that business is headed, given the limited license growth?

Yes.

We're still seeing very strong renewal rates, mid-90s.

And in fact, for the full year 2017, I'd say, some of the best renewal rates we've seen in a long time.

So that continues to be a benefit to us.

As I mentioned in the call in the prepared remarks, our support metrics, things like our case backlog and customer satisfaction, are at an all-time best.

So that's helped us a lot.

But to your point, the lagging product license revenue will catch up with us at some point.

If we don't start to see product license revenue, grow, you'd expect that the product support on a constant currency basis could start to decline.

Got it.

And then last question for Michael.

One of the features that you talked about over the last year was the ability to better or more easily run MicroStrategy on AWS.

And I'm just curious either some inputs from MicroStrategy World or just anecdotal customer conversations, how that business is tracking?

If there is any type of new use cases that you're seeing out there on the market?

I think we're seeing a building interest in MicroStrategy and AWS, both amongst our customers and amongst our partners.

And I think in the market, in general, there's more interest in 2018 [in AWS].

So I think as we move through the year, we're going to see some of the interest convert into good business for us.

And our next question comes from Greg McDowell, JMP Securities.

I wanted to first ask about the hiring ramp for 2018 and how we should expect it to ramp, because certainly in Q4, it looks like you started to add heads at a faster clip than Q3.

So maybe this is directly for you, Phong.

But how should we think about it?

How is the recruiting process going so far?

And are there any key hires -- maybe that's one for you, Michael, any key hires that you're still looking to make and roles you're looking to fill?

Greg, overall, you're right, we're starting to see a ramp, especially in areas like R&D where we added 20 people or so from Q3 to Q4.

And you're starting to see sales and marketing start to increase also where we added 17 people from Q3 to Q4.

So the activity is starting to increase.

I'd expect it to be pretty steady ramp through the course of 2018.

I think we've talked publicly about trying to add 150 to 200 people in technology and a similar number into our services organization.

So -- but I wouldn't say that it's all going to land in Q1 and Q2.

It'll be steady throughout the year.

And then, Michael, can answer the question around key hires.

No, I think with regard to key hires, I wouldn't single out any particular role.

I would say that we're -- we've got a really exciting technology development plan and because the platform is more open in 2018, we feel that we can put in place more development teams working at the same time.

So we've got big plans to recruit more engineers and software engineering teams in general and the executives that would support them.

I think in the area of services, we've got a very proactive stance toward providing enterprise intelligence technique and best practice to our customers.

So we'll be hiring more support engineers, support managers as well as consultants and principal consultants in just about every jurisdiction around the world as well as our major development centers.

And sales and marketing, when we find talented sales and marketing professionals and executives, of course, we're enthusiastically embracing them.

So we'll continue with the recruiting efforts in all these areas as rapidly as we can during the coming year.

Great.

And one quick follow-up maybe on just the consumption patterns for your software in 2018 and looking ahead.

And I'm wondering if -- as part of the opening up of the platform, how the team is thinking about more subscription licensing in 2018, more term licensing in 2018 and whether or not you're even seeing that from your customer base or seeing requests from your customer base to consume your software in perhaps a more agile way?

I think we offer our software on a subscription basis.

We offer our software in perpetual license basis.

And we offer term licenses.

And as part of the OEM business, we even offer license on a royalty type basis when it merits itself.

I don't think we see any big material trend that would be a shift from one model to the other.

I think that as the business grows, we'll see growth in most of these areas.

And as certain cloud business elements grow, then probably there'll be growth that's more weighted toward term and perpetual.

But I don't really think there is a particular business model issue or license model issue or trend that I would highlight right now as being noteworthy.

And our next question comes from Karl Keirstead with Deutsche Bank.

I wanted to start with the cash repatriation.

I have 2 questions.

So Phong, how much was repatriated?

I think in your 3Q '17 Q, you disclosed that the cash held by non-U.

S. entities was $362 million.

Is that ballpark for how much you repatriated?

And then part 2, maybe, Michael, feel free to weigh in.

What do you plan to do with that repatriated cash?

Is it -- has that changed your posture around M&A or buybacks or some other use of cash?

Karl, on the first question, the number is in the $360 million range.

And just to be clear, we haven't repatriated anything.

We've just taken a provision for the amount that we will be charged in 2018 and beyond because of the change in the tax law.

So the money still, at this point in time, remains overseas.

And then Mike can answer the question of the use of it if we were to repatriate.

Yes, I think that there's still a lot of uncertainty about the detailed treatment of the repatriation.

And there's a number of details that haven't yet been made clear to us by the tax authorities, the regulators and the accountants.

And we're studying that pretty carefully right now to figure out what's the most appropriate course of action.

And I think we'll probably have more clarity on that once those details manifest themselves.

Separate from that, Karl, through our investment plan, we do plan to add folks and headcount in the U.S. But that is something we laid out 6 months ago, and it wasn't directly related to the tax changes.

Yes.

Okay, makes sense.

And then, Michael, maybe a question for you, a little bit less on the company and more on the environment that you're seeing.

As you talk to customers, I know you do pretty frequently.

I'm just curious whether you find the tone shifting at all?

What they might be saying about their IT budget outlook for 2018 as a result of either investing their own proceeds from tax reform or on the back of perhaps a better overall view of the economy?

Are you picking up any signs of a change in behavior?

And if you are, how do you think that affects your business?

I think at the macro level, a lot of people are still wanting to digest all of the late news and political developments.

And there's not a definitive consensus that's emerging, negative or positive, there that I've heard.

At a technical or market level, I think that there is a lot of enthusiasm for mobility and deployment of mobile applications.

And I think there's a lot of interest in some of the hotter technical topics, certainly cloud, machine learning, Internet of Things, and the like in those areas.

And there's probably on the margin more enthusiasm for the digital transformation going into 2018 than there was a year ago.

So I think that the technology trends are all reinforcing themselves.

I think the macro environment, it's not negative, but it's not necessarily positive.

I think people need probably a little bit of distance from all of the major developments going on before they can start to connect the lines and form a consensus.

(Operator Instructions) And I'm not showing any further questions at this time.

I would now like to turn the call back over to Michael Saylor for any further remarks.

I want to thank all of you for your time and your support.

We'll look forward to speaking with you again in the next quarter.

Until then, all the best.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program.

You may all disconnect.

Everyone, have a wonderful day.