Microstrategy Inc (MSTR) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the MicroStrategy Q4 2019 Earnings Call.

(Operator Instructions).

Please be advised that today's conference is being recorded.

(Operator Instructions).

I would now like to hand the conference to your speaker today, Michael Saylor, Chairman, President and CEO.

Please go ahead, sir.

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 2019 fourth quarter financial results.

I'm here with Phong Le, our Chief Operating Officer; and Lisa Mayr, our Chief Financial Officer.

First, I'd like to pass the floor to Lisa, who is going to read the safe harbor statement.

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 the purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recently 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 will refer to certain non-GAAP financial measures.

Reconciliation schedule showing GAAP versus non-GAAP results are available in our earnings release that was issued after the close of market today, which is located on our website at www.microstrategy.com.

I'd now like to turn the call over to Phong, who will provide a summary of our fourth quarter operational performance.

Thanks, Lisa.

And thanks to all of you for joining us today.

MicroStrategy delivered solid fourth quarter results, capped an important year for the company.

As you recall, we made significant investments in our product and people, and we saw positive results from these investments.

In particular, we introduced the most innovative set of products in our 30-year history with the release of MicroStrategy 2019 and HyperIntelligence, improved our go-to-market and customer experience and drove operational efficiency across the business.

MicroStrategy has established itself as one of the largest independent enterprise business intelligence companies in the world, and it's entering 2020 with a much stronger product team and financial position than previous years.

Our primary goal in 2019 was to drive adoption of our newest products, including MicroStrategy 2019, HyperIntelligence and our managed cloud platform.

We ended the year with 740 customers having upgraded to MicroStrategy 2019, and 175 who have purchased HyperIntelligence.

We added 71 HyperIntelligence customers during the fourth quarter alone, including The Co-operators, a large Canadian financial services company; Saint-Gobain, a large French building materials manufacturing and distribution company; and Swiss Medical, a leading organization of hospitals and medical service providers in Latin America.

We've also seen a strong penetration of HyperIntelligence into our Fortune Global 500 customers.

We're seeing growing interest in HyperIntelligence's zero-click analytics that delivers insights and triggers action in seconds.

We believe HyperIntelligence is solving a critical problem in the analytics market and revolutionizing business processes by embedding analytics, suggestions and actions into e-mails, spreadsheets, calendars and ERP systems that employees already use to do their jobs.

Overall, we are pleased with our progress in this area.

We see opportunity for greater adoption in 2020.

Our other major area of focus for us in 2019 was our fully managed cloud platform, which we now offer on AWS and Azure.

We provide customers a highly differentiated cloud offering, which is at full parity to our industry-leading enterprise-grade on-premise product.

This allows customers to deploy and move seamlessly across multiple platforms, avoiding vendor lock-in.

Our cloud platform also offers robust security and API infrastructure, and can be extended to help customers run their business intelligence infrastructure and applications.

Proactively engaging our customers is another key part of our strategy to drive adoption of MicroStrategy 2019, HyperIntelligence and cloud.

This has been a dramatic shift from our historical practice and services and that of our industry, and it is paying dividends.

Our team is doing an excellent job showing customers how our new solutions can provide measurable improvements in their analytics capabilities and digital transformation, and has proven to be one of the key drivers in facilitating migrations to our latest MicroStrategy platform and to the cloud.

Our focus in this area also helped drive strong growth in our consulting services revenue.

We believe this is an encouraging sign that our strategy is working and will help lead to revenue growth in the future.

Before I turn it over to Lisa to review our financial results for the quarter, I wanted to outline for you our key priorities for 2020.

First, our go-to-market strategy will be increasingly focused on the MicroStrategy cloud platform.

As I mentioned, we have seen exciting traction in the market.

Our customers appreciate that our product has full feature parity whether it's run on their own infrastructure or in our cloud.

And they understand that by using our cloud, they can lower total cost of ownership, get faster updates and have greater flexibility to increase adoption throughout their organization.

We expect to see some migration of existing customers to the cloud as well as new customer growth.

Second, we will continue to encourage our customers to migrate to our latest platform version.

Next week, we'll be introducing our latest release, MicroStrategy 2020, at our annual user conference, MicroStrategy World.

Building on the success in MicroStrategy 2019, this latest release will include enhanced functionality for HyperIntelligence as well as cutting-edge functionality related to our modern and open platform architecture.

I'll let Michael describe these enhancements in more detail.

We believe that these migrations will sustain our strong renewal rates and should lead to existing customer revenue growth.

Third, our objective is to generate full year constant currency revenue growth in 2020.

Overall, we feel positive and optimistic about our revenue performance in 2019 and our ability to grow overall revenue in 2020.

While we may face some modest product license and product support revenue impact related to increase in cloud deals, we believe the benefit of our cloud migration strategy and new customer growth will be positive contributors to growth.

I'll let Lisa describe how we think about that transition from a financial model perspective.

Finally, we are focused on driving continued operating efficiency across all parts of the organization.

As you can see in our Q4 results, and as I mentioned last quarter, we have achieved more leverage out of our existing cost structure, and we have done this in 3 principal ways.

First, after the initial large investment in our MicroStrategy 2019 release, which we believe is groundbreaking, we were able to cut back on marketing spend and some R&D efforts.

Second, since I've taken over the sales teams, we've revisited territories and reduced headcount by focusing on sales productivity and lowering overhead costs.

And finally, we have focused workforce growth in lower-cost locations, specifically, our large technology and development centers in China and Poland.

Overall, we're very excited about the future of MicroStrategy.

We believe we have the people, products and pipeline in place to deliver greater value to our customers and improve financial results for our shareholders.

We look forward to giving you updates on our progress throughout the year.

With that, let me turn the call over to our new CFO, Lisa Mayr.

Thanks, Phong.

I'm very excited to be with you today as MicroStrategy's new CFO.

I was drawn to this company because of its world-class products and people and I've been very impressed with what I've learned in the 3 months that I've been with the company.

I look forward to meeting and working with many of you in the investment community in the months ahead.

Turning to our financial results.

Revenues for the quarter were up 1% and almost 3% on a constant currency basis.

Growth came from product support, subscription services and our consulting business, which is classified as other services on the financial statement.

I'd like to review each of the revenue categories.

But before I do, I want to remind listeners as to how we sell the MicroStrategy platform.

We do it in 2 basic ways: the first way is we sell our products to customers for them to deploy it on their infrastructure; and the second way is we sell customers a subscription to access our products, which is hosted and managed by MicroStrategy in the cloud.

Currently, the vast majority of our product sales are conducted the first way.

And revenues related to these license sales make up the product licenses line item under revenues in our financial statements.

Customers who buy a product license also buy an annual product support subscription.

And with our excellent renewal rates for product support, this is a strong recurring revenue stream for us.

In 2019, product support revenues represented almost $300 million in what is similar to annual recurring revenue.

A small but growing part of our business is selling a fully hosted and managed cloud subscription.

The revenue from our cloud platform is contained in the subscription services line item under revenues in our financial statement.

Subscription revenues include cloud support services and associated infrastructure cost and the related revenue is recognized on a ratable basis over the subscription term.

Of note, when a customer buys a cloud subscription from us as opposed to a perpetual license, the first year of total revenue into MicroStrategy from that deal is typically about 1/3 to 1/2 of the first year of total revenue we would have recognized if the deal had been done as a perpetual license transaction.

Assuming our cloud customers renew at similar rate as our perpetual license customers, we expect we can create a more stable, predictable revenue stream in the long run.

Regarding the pace of transitioning from selling product licenses, design cloud subscriptions, we expect the transition will occur over a number of years because our customers tend to be very large companies with large investments in infrastructure to support large amounts of data.

As a result, we expect the transition of our business towards the cloud will be gradual and then the majority of our revenue will continue to be derived from product license sales for the foreseeable future.

Now let's apply this discussion to this quarter's results.

Product license revenues were $30.1 million in Q4 2019, a $1.1 million or 3.6% decrease year-over-year, and down a little over 1% on a constant currency basis.

While we do not disclose bookings performance, if our incremental cloud bookings had been perpetual license sales, we would have seen modest product license revenues growth year-over-year.

Subscription services revenues in Q4 2019 were up slightly year-over-year but were down compared to the 3 months ended September 30, 2019, primarily due to a revenue catch-up that occurred in the third quarter of 2019.

Overall, we are satisfied with the underlying growth in the business during the quarter, and you'll note that the nearly $1 million or 5% increase in our deferred revenue related to subscription revenues year-over-year.

Product support revenues were $74.7 million in Q4 2019, a 1.4% increase year-over-year or 2.7% on a constant currency basis.

Product support revenues this quarter included a benefit related to a change in estimate in our sales allowance reserve.

Finally, you will note that other services, which is largely our consulting services, increased almost 8% year-over-year due to the factors Phong previously discussed.

Total deferred revenue and advance payments at December 31, 2019, were $191.5 million.

This is up 5% year-over-year and is attributable to growth in bookings as well as the fact that we resolved the delayed billing issue we had last year related to our CPQ system implementation.

Our deferred revenue growth is a healthy leading indicator for us.

Turning to cost of revenues.

Gross margin for the quarter improved slightly due to -- largely to higher utilization with our consulting organization and better cost optimization.

Total operating expenses were $99.3 million in Q4 2019, an 8.2% decrease year-over-year, and up 8.7% quarter-over-quarter.

The year-over-year decrease largely reflects the 3 initiatives Phong previously described.

Expense discipline will remain a core focus of the company in 2020, and we believe we can continue to maintain this cost structure while continuing to make meaningful investments in sales and products.

Finally, we continue to maintain a strong balance sheet and ended the year with almost $566 million in cash and short-term investments.

You will note that during the quarter, we repurchased approximately $24 million of MicroStrategy Class A common stock.

We believe buybacks can be a useful way to opportunistically evaluate value for shareholders.

But it's just one component of how we evaluate our long-term capital allocation strategy.

We believe keeping a substantial cash balance on our balance sheet is prudent.

And as a reminder, our policy is not to discuss our buyback intentions in advance.

Turning to 2020.

As Phong mentioned, our objective is to generate constant currency revenue growth this year.

One key variable to the level of our reported growth this year will be the timing and magnitude of a shift towards cloud subscription sales.

As I mentioned, we are still early in the cloud adoption cycle.

And as we progress, we will evaluate ways to provide insight into this shift.

Altogether with our focus on operating efficiency, we believe we are well positioned to make 2020 another successful year for MicroStrategy.

Once again, I'm thrilled to be at MicroStrategy during such an important time in its history, and I look forward to meeting you all in person during the year.

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

Thanks, Lisa.

With the closing of the Salesforce-Tableau acquisition, MicroStrategy is now the largest independent public business intelligence company in the world.

We're excited to assume the mantle of industry leadership and look forward to the opportunities that the consolidated market is offering us.

We are the leading modern open enterprise platform, and that means we're open to all client interfaces no matter what tool or what technology they might use.

We're open to all clouds.

And it might be AWS, it might be Azure or another.

We're open to all the databases, and we support about 200 data sources as of now and there are more coming every day.

We're open to all the enterprise applications like SAP or Salesforce or Workday, and we support them all without bias.

Salesforce, Microsoft, Oracle, IBM, SAP, Amazon, they all have conflicting business interest that prevent them from tailoring their offerings to support the whole stack of technologies that most enterprises demand.

They have massive interest in a particular application like SAP or in a database like Oracle or, of course, a cloud like AWS or they have a particular client interface that they tend to favor.

That puts MicroStrategy in an enviable position of being the [swift one] in this market.

Large companies, the large enterprises we do business with, they never want to be locked in to a sole source.

They would always like to have options, they like to keep their options open.

And the ability to switch or the ability to run multiple platforms at the same time is integral to a responsible IT strategy and a business strategy in general.

We have been the beneficiary of this trend in the enterprise for the past 20 years, and I expect that we'll continue to be the beneficiary.

And with our emergence as the largest worldwide, publicly traded business intelligence company, I think that we're going to get more attention since these enterprises are always looking for that choice in order to avoid vendor lock-in.

2020, we're releasing the most powerful platform we've ever brought to the market.

We're really excited about MicroStrategy 2020.

It's faster, it's more stable, it's more functional than ever.

We've particularly made advances with regard to Agile application development in the form of our Dossier capability.

It's been dramatically upgraded with free-form canvases and compound grid functionality.

This means that Dossiers are now 10 to 20x faster to build than traditional enterprise reports, and then you combine the power of self-service with the security of the government enterprise data sets.

We see a lot of enthusiasm for this upgrade in the marketplace, and we expect this is going to drive a lot of electricity into that capability going into the year.

Our upgraded cloud offering has full parity support for Azure and AWS now, it's generating more excitement than ever.

And I feel that the upgrades we've made to our cloud capabilities with regard to 2020, they position us really well to ride the cloud wave.

We're seeing already positive impact from our customers with regard to cloud adoption due to the upgrades we made to the platform and also the upgrades that we made during the past year to our cloud environment services.

2020 also represents a dramatic boost in our HyperIntelligence product line.

This is the most successful new offering we've launched in the past decade, and it's proven to be very successful at both opening new doors with prospective accounts as well as reenergizing existing customer relationships and expanding our value proposition throughout the marketplace.

2019 was year 1 of the age of HyperIntelligence.

We expect continued innovations to drive this market for the next decade.

And we see trends like the increase in device CPU and memory, the explosion of chromium-based browsers like Chrome and Edge, the proliferation of multi-threaded operating systems in the iOS and the Android ecosystem, all to contribute to the Hyper wave.

Existing business intelligence applications built over the past 20 years are just too weak, and they're too slow.

They're too hard to utilize or too difficult to find.

People are becoming very impatient at the number of clicks and the number of seconds they need to wait to get to the answer.

Most enterprise ERP and CRM applications lack intelligence built into the interface, and they're far too expensive to upgrade.

Projects can take years and only achieve a small percentage of what most companies would like to see.

Customers are increasingly impatient with both of these things because they're becoming used to the convenience and the speed of mobile apps running on iPhones or the latest, greatest application running on chromium-based browsers.

This is creating a wave of impatience and enthusiasm to look for a new solution.

HyperIntelligence solves both these problems by allowing enterprises to create HyperCard applications and deploy them across the entire enterprise in a matter of days or weeks.

Our strategy for 2020 is to upgrade our product -- our customers to our latest platform, to migrate them to the cloud and to deploy HyperIntelligence wherever we can.

And that should keep us busy for the coming year.

I want to thank everyone for their support and their time today.

And with that, we'll go ahead and pass the floor to analysts for questions.

(Operator Instructions).

And our first question will come from the line of Hamed Khorsand from BWS Financial.

This is actually Vahid calling in for Hamed.

First question.

On subscription revenue, could you provide some color on whether the subscription revenue is down quarter-over-quarter and if -- and on the cloud growth?

So subscription revenue is up just slightly, you -- on a constant currency basis.

And then we're also -- as one of our indicators, we look at the deferred revenue, so you can look at the deferred revenue related to subscription revenues, which is up year-over-year.

So was your question around sequential or year-over-year?

Sequential.

Yes.

So as I mentioned in my prepared remarks, in Q3, we did have a onetime catch up.

So you saw that increase in Q3 and then back down in Q4.

So we had a late renewal for a customer that we caught up for in Q3.

So that was a bit of a onetime pickup.

So it is where we expected it to be.

Okay.

And what is the resistance from customers you're seeing from upgrading to MicroStrategy?

We're not seeing resistance from customers upgrading.

So we have about 740 customers who've upgraded and that represents somewhere between 20% and 25% of our total customers, and a greater percentage of our enterprise customers have upgraded to 2019.

As with any upgrade cycle, our customers see it to be a large effort.

And what we've done is, by moving to an annual release cycle, which we started in 2019 with the 2019 release, and going forward, with 2020 and 2021, we've reduced significantly the barrier to upgrade.

So I think we're going to train our customers over time that an upgrade is something very simple and straightforward as opposed to what they're used to historically in the enterprise software industry.

As we move more customers to cloud, to the upgrade experience, it is generally completed by us, and the customer only has to do regression testing.

So I'm pleased with the progress of our upgrade cycle, and I think we'll continue to accelerate it over time.

Let me ask you that question in a different way.

But I think you hit on -- the answer you're probably going to repeat.

But if you're rolling out a new strategy of doing upgrades on an annual basis, can customers maintain the prior year's product and not upgrade?

And essentially, how do you get them to upgrade over?

Yes, a customer can maintain their previous year release.

Typically, we provide product support for products as much as 3 years old.

The primary reason a customer is going to want to upgrade the latest release, whether it be 2019 or now 2020, is the product will perform faster.

Some of our benchmarks show that certain reports and certain dashboards perform 2 to 3x faster with our new product.

And they also can avail themselves a new functionality as part of product support.

And some of the things that Mike will mention like the free-form canvas, as an example.

So yes, a customer can stay at a previous release, but because of the ease of upgrade and the new feature functionality and improved performance, we think customers will want to upgrade more aggressively.

And we like them to set it to a clock, right?

Like if the customer upgrades every April, they'll just know it's upgrade time.

We come in, we help them with the upgrade, and then move on.

And an upgrade can take as little as a few days to a week if planned properly.

And our next question comes from the line of Tyler Radke from Citi.

I had a question on the cloud business.

Just to help frame when you are doing the migrations of existing on-premise customers to the cloud, is there some type of typical uplift that you see?

I think many your peers sometimes call up as much as a 2 to 3x uplift as you take on kind of the cloud hosting and support services.

And then a follow-up to that is just, obviously, we have the subscription revenue.

Would you say that the deferred subscription revenue is kind of a leading indicator of business signed in that business?

Or how would you kind of encourage us to evaluate the performance of the subscription business, whether it be on the subscription revenue line year-over-year, sequentially or deferred subscription revenue?

I'll answer the first question -- part of the question on the impact on revenues and migrating a customer from on-prem to the cloud, and Lisa will answer the second one.

When we take a customer who is an on-premise support paying customer, product support revenue, and we move into the cloud, we have an expectation that we increase revenue through 2 main drivers.

The first is, they'll convert from a perpetual licensing support to a term license, and we do expect that the customer sees more value in our cloud product.

It's something that we've tooled and we've perfected over the course of the last 3 years.

And it's something that provides additional automation and security features for our customer.

And so we expect that they'll pay more for that.

And they'll also decrease their cost overall as a result.

So the ROI is pretty compelling.

So that's piece one.

And then piece 2 is we do expect to receive more revenues from the customers, as you pointed out, from managing their environment and managing their infrastructure, cloud environment and cloud support is what we call it.

So it can be as much as, I'll call it, sort of 1.25 to 1.5x as much as 2x on a customer.

And then the other piece that I think I've mentioned before and Lisa has mentioned also is the next logical add-on is then to sell the customer services to run their platform, to run their system and to go build applications for them.

A customer that is likely willing to outsource their infrastructure and their support are also much more likely to be willing to outsource some of their development work and their application work.

So yes, we're starting to experience that.

And we have some good examples of some name brand Fortune 500 customers who've made that transition with us.

And the second part of your question, I think the simple answer is yes, we would continue to expect to see quarter -- sequential growth in subscription revenues as we're amortizing the new subscription revenues into -- contracts into revenues, unless we had an example like we had in Q3, where I mentioned that we had a onetime pickup, actually it was related to a onetime pickup for a customer.

And so -- and then, yes, absolutely, we look at change in deferred revenue related to subscription, that should continue to increase as well.

So I think if we keep our eyes on both of those, we can indicate where the business is going.

And as I mentioned in my prepared remarks that we definitely are thinking about ways to provide greater insight.

But for now as we're going through this gradual shift, those would be the 2 things I would look at.

Great.

And a follow-up for you, Lisa.

Now that you're -- kind of your first full quarter to -- with this -- the CFO title under your belt, I'm curious how you're thinking about potentially optimizing the business.

It looked like operating expenses did decline pretty meaningfully on a year-over-year basis.

And just curious, I think in the past, Phong had talked about potentially double-digit revenue growth with double-digit margins.

And I think the framework around margins and revenue growth has evolved over time.

I'm just curious kind of what your thoughts are there.

And how you're looking at the business from a potential revenue growth perspective and the cost base needed to support that.

Sure.

Well, first of all, I wish I could claim credit for any of the great optimization work in the fourth quarter, but I -- it's only my 11th or 12th week here.

So there was a lot in motion.

I think we did a -- I think from a cost perspective, as I said in the remarks, we feel good about what we have in place that we can deliver on some revenue growth for 2020.

We're going to be consistent in not providing guidance, we haven't done it in the past.

And so that's not going to change.

But based on -- I think what we said in the prepared remarks is the right level of commentary.

We feel good about the revenue growth, we have the right product pipeline.

I've been very impressed with what I found in terms of making sure we're allocating our assets correctly that we're looking at pipeline very carefully.

And so I think modest revenue growth for 2020 on a constant currency basis, and this current operating cost structure is how we're thinking about the business.

And we'll continue to think about more ways to provide insight.

(Operator Instructions).

Our next question comes from the line of Frank Sparacino from First Analysis.

Just one question for me.

In the cloud deployment situation, do you feel like anything has changed from a competitive sales cycle standpoint, good or bad for you?

Good to hear from you.

In cloud, in general, I would say, most of the dynamic externally that we've seen, and we talked about it at the beginning of 2019, and is further accelerating in 2020, is a plan with pretty much every one of our customers to move some sort of BI load to the cloud.

There isn't one that isn't contemplating it or asking for us to participate in a road mapping or an upgrade process.

The second dynamic, I would say that we've seen increase significantly in 2019 and leading into 2020, is the advent of enterprise-grade cloud, data warehouse providers.

And the increased interest in moving data warehousing loads to the cloud has had definitely a halo effect on customers wanting to move their BI workloads to cloud.

From a competitive perspective, I wouldn't say we've seen any significant changes as it relates to cloud.

Mike had mentioned the increase or the change of ownership of Tableau over to Salesforce, and we're still in the early stages of seeing how that impacts customer reaction.

We are seeing a lot of noise and some competition from power BI.

And some of your more traditional cloud, data warehouse, I'll call it -- or BI-niche players we're seeing less traction and less noise from, I think, as power BI takes over market share from them.

But that's what we're seeing overall with cloud.

And we're definitely happy to be part of the leading edge and getting our customers upgraded fairly rapidly to the cloud.

And I'm not showing any further questions at this time.

I'd like to turn the call back over to Michael for any closing remarks.

Again, I'd like to thank everybody for their support.

And we look forward to speaking with you again in 12 weeks.

Until then, all the best.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating, you may now disconnect.