Earnings Call: Q4 2019

Jan 28, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the MicroStrategy Q4 2019 Earnings Call. At this time, all participant lines are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. 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 Q4 financial results. I'm here with Phong Li, our Chief Operating Officer and Lisa Mayer, our Chief Financial Officer. First, I'd like to pass the floor to Lisa, who's 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 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 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 schedules 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 Fang, who will provide a summary of our Q4 operational performance. Thanks, Lisa, and thanks to all of you for joining us today. MicroStrategy delivered solid 4th quarter results, which have been 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. Is entering 2020 with a much stronger product team and financial position than in previous years. Our primary goal in 2019 was to drive adoption of our Nuix products including MicroStrategy 2019, HyperIntelligence and our managed cloud platform. We ended the year with 7.40 customers having upgraded to MicroStrategy 2019 and 175 who have purchased HyperIntelligence. We added 71 HyperIntelligence customers during the Q4 alone, including The Co operators, a large Canadian financial services company Saint Gobain, a large French building materials manufacturing distribution company and Swiss Medical, a leading organization of hospitals and medical service providers in Latin America. We've also seen strong penetration of HyperIntelligence into our Fortune Global 500 customers. We're seeing growing interest in HyperIntelligence' 0 click analytics that delivers insights and triggers actions We believe HyperIntelligence is solving a critical problem in the analytics market and revolutionizing business process ease by embedding analytics, suggestions and actions into emails, spreadsheets, calendars and ERP systems that employees already use to do their jobs. Overall, we are pleased with our progress in this area to 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 application. Proactively engaging our customers is another key part of our strategy to drive adoption of MicroStrategy 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 transformations 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. 2nd, 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 of 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 migrations will sustain our strong renewal rates and should lead to existing customer revenue growth. 3rd, our objective is to generate full year constant currency revenue growth in 2020. Overall, we feel positive 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've achieved more leverage out of our existing cost structure and we have done this in 3 principal ways. 1st, after the initial large investment in our MicroStrategy 2019 release, which we believe was groundbreaking, we were able to cut back in marketing spend and some R and D efforts. 2nd, 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. Strategy. 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 Mayer. 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 product to customers for them to deploy it on their infrastructure. And the second way is we sell customers a subscription to access our product, 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 subscription. The revenue from our cloud platform is contained in the subscription. The revenue from our cloud platform is contained in the subscription services line item under revenues in our financial statements. Subscription revenues include cloud support services and associated infrastructure costs 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 1st year total revenue in the MicroStrategy from that deal is typically about 1 third to 1 half of the 1st year total revenue we would have recognized if the deal had been done as a perpetual license transaction. Assuming our cloud customers renew at a 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 to selling 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 that 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 $30,100,000 in Q4 2019, a $1,100,000 or 3.6 percent 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 revenue catch up that occurred in the Q3 of 2019. Overall, we are satisfied with the underlying growth in the business during the quarter and you will note that the nearly $1,000,000 or 5% increase in our deferred revenue related to subscription revenues year over year. Product support revenues were $74,700,000 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 8% year over year due to the factors Fang previously discussed. Total deferred revenue and advanced payments at December 31, 2019 were 100 and $1,500,000 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 99,300,000 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 Fang previously described. Expense discipline will remain a core focus for 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 $566,000,000 in cash and short term investments. You will note that during the quarter, we repurchased approximately $24,000,000 in 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 Song 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 Zeller. Thanks Lisa. With the closing of the Sales Force 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 interests, that prevent them from tailoring their offerings to support the full stack of technologies that most enterprises demand. They either 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 the enviable position of being the Switzerland in this market. Large companies, the large enterprises we do business with, they never want to be locked into 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 particularly made 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 20 times faster to build than traditional enterprise reports and they combine the power of self-service with the security of the governed enterprise datasets. We see a lot of enthusiasm for this upgrade in the marketplace 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 and it's generating more excitement than ever. And I feel that the upgrades we've made to our cloud capabilities with regard to 2020 and sorry, 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 proving to be very successful at both opening new doors with prospective accounts as well as re energizing 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. They're 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 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. And our first question will come from the line of Hamed Khorsand from BWS Financial. You may begin. Hi, 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 on the cloud growth? So subscription revenue is up just slightly 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 one time 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 one time 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 7.40 customers who've upgraded and that represents somewhere between 20 percent 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 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 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 to the latest release, whether it be 2019 or now 2020 is the product will perform faster. Some of our benchmark show that certain reports and certain dashboards perform 2 to 3 times faster with our new product. And they also can avail themselves a new functionality as part of product support. So some of the things that Michael mentioned like the free form canvas as an example. So yes, a customer can stay in 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 a customer upgrades every April, they'll just know it's upgrade time. We come in, we help them with the upgrade and they move on. And an upgrade can take as little as a few days to a week if planned properly. Thank you very much. Thank you. And our next question comes from the line of Tyler Radke from Citi. You may begin. Hey, good evening, Phong and Lisa and Michael. 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 of your peers sometimes call up as much as a 2x 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 leaning 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? Thank you. I'll answer the first question part of the question on the impact on revenues and migrating 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 increase revenue through 2 main drivers. The first is they'll convert from a perpetual license paying support to a term license and we do expect that 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 1. And then piece 2 is we do expect to receive more revenues from the customers as you pointed out for managing their environment to 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 1.25x 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 or contracts into revenues, unless we had an example like we had in Q3 where I mentioned that we had a one time pickup. Actually, it was related to a one 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, 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 or 2 with 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, Fong 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? Thank you. Sure. Well, first of all, I wish I could claim credit for any of the great optimization work in the Q4, but I this is only my 11th or 12th week here. So there was a lot in motion. I think we did it. 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 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. Thanks. Thank you. Our next from the line of Frank Sparacino from First Analysis. You may begin. Hi, guys. 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? Thanks. Hi, Frank. 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 it's further accelerating in 2020 is a plan with 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 increased significantly in 2019 and leading into 2020 is the advent of enterprise grade cloud data warehouse providers and the increased interest in moving data warehouse and loads to the cloud has had definitely a halo effect on customers wanting to move their BI workloads to the 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 them 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. Thank you. Thank you. 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.