Microstrategy Inc

NASDAQ:MSTR

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen and welcome to the MicroStrategy Q1 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Michael Saylor, Chairman, President and CEO of MicroStrategy. Sir, you may begin.

[Michael Saylor, Chairman, President and Chief Executive Officer]

Hello. This is Michael Saylor. I am the Chairman, President and CEO of MicroStrategy. I’d like to welcome all of you to today’s conference call regarding our 2018 first 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 first quarter.

[Phong Le, Chief Financial Officer]

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

Our Q1 2018 financial results continue to be on track with our overall strategy. We continue to invest in sales and marketing technology, and our customers and our people with the objective of growing total revenues. Our map with the Intelligent Enterprise is resonating with both customers and prospects that are looking for a roadmap for the digital transformation.

Our Dossier, Workstation and Library products have significantly improved our products to ease of use. Across the MicroStrategy organization adoption, the usage of our platform have increased. And I’m excited to share the release of our Q1 financials of MicroStrategy, Dossier and Library products, and you can get to our Q1 financials Dossier by downloading the MicroStrategy Library app in the Apple App Store or Google Play Store in iOS or Android or by following the weblink provided in our earnings release.

The introduction of our enterprise support offering combined with improvements in investments and technical support, and customer success, and driving improvements in our support revenue and renewal rates. We also continue to recruit top-notch software industry talent into organizations. A key highlights of recent arrival of our new Senior Executive Vice President, Worldwide Sales, Kevin Norlin.

Now to our detailed financials. First, please note that we have adopted ASC 606, a new revenue recognition standard, which shows a full retrospective adoption adjusting our prior period financial statements. Notably, these adjustments resulted in a $14.9 million increase of retained earnings in our balance sheet as of December 31, 2017, a $1.6 million increase in our product license revenues, and $0.7 million increase in our net income on our income statement for the period ended Q1 2017. These changes were primarily related the accelerated recognition of term license in OEM revenues. Further details on these and other adjustments are provided in our 10-Q filed with the SEC.

Compared with 2017 financials going forward will be to the adjusted amounts reflecting our full retrospective adoption of ASC 606. Total revenue for Q1 2018 was $123 million, a $0.7 million or 1% increase year-over-year.

Foreign currency effects in Q1 2018 favorably impacted our total revenues by $4.7 million or 4%. Product license revenues were $17.3 million in Q1 2018, a $5.3 million or 24% decrease year-over-year. Foreign currency effects in Q1 2018 favorably impacted our product license revenues by $0.5 million or 3%.

As I mentioned previously, Q1 2017 product license revenue reflected additional increase to $1.6 million due to the adoption of ASC 606. Our subscription services revenue primarily driven by cloud customers of $7.7 million in Q1 2018, a 1% decrease year-over-year. Our support revenue was $74.4 million in Q1 2018, a 6% increase year-over-year with foreign currency changes favorably impacting such revenue by $2.9 million or 4%.

Our other services revenue was $23.6 million in Q1 2018, and 11% increase year-over-year with foreign currency changes favorably impacting such revenue by $1.2 million or 5%. Part of our improvement in Q1 was due to recognition of previously deferred items and releases certain bad debt reserves.

Turning to cost. our strategy to investment sales and marketing technology, our customers and our people is driving the increases overall. Q1 2018 cost of revenues was $25.2 million; a 9% increase year-over-year and 2% increase quarter-over-quarter. Q1 operating expenses were $97.1 million, a 24% increase year-over-year, a 3% increase quarter-over-quarter.

Sales and marketing expenses increased to $11.8 million at 30% year-over-year and decreased $0.6 million, a 1% quarter-over-quarter. I would note the Q1 2018 is the high quarter for sales and marketing expense was due to our MicroStrategy World and sales kickoff event.

In addition, we continue to invest in growing our business to increased presence in digital corporate field marketing and inside sales areas. In addition, our sales and marketing headcount increased 47% – increased 47 people or 8% year-over-year.

Research and development expenses increased $5.1 million or 28% year-over-year and $2.1 million or 10% quarter-over-quarter. Headcount accelerated in our three key development centers with an increase of 82 people or 16% year-over-year. We’re also investing key leadership positions areas like product management, user experience. We’re finding our efforts to retain, develop and grow our technology talent to be very successful. We’ll look to continue at rapid hiring pace ultimately helping strengthen our product and leadership position of the enterprise, analytics and mobility business.

General and administrative expenses increased $1.9 million or 9% year-over-year, a $0.9 million or 4% quarter-over-quarter. This is due to increases in IT systems implementation cost, as well as recruiting and compensation.

Net income from operations of $0.7 million in Q1 2018 and an operating margin of 1% compared to 17% for the same period a year ago with net income of $1.7 million in Q1 2018, diluted earnings per share of $0.15. With the benefit from income taxes in Q1 2018 due to the change in the proportion of U.S. versus foreign income and a net discrete tax benefit. We had cash, cash equivalents and short-term investments of $695.5 million at the end of Q1 2018 and continue to have no debt.

In Q1 2018, we sign an extension of our headquarters lease in Tysons Corner, Virginia through 2030. MicroStrategy has been headquartered in the Greater Washington D.C. area for nearly 30 years helping build the technology community and serving as a magnet for tech talent, as well as incubator for tech entrepreneurs and companies. We’re proud to continue to call this home for the next 13 years and excited for this stability and this brings MicroStrategy, our employees and the local communities.

The lease extension contributed to a substantial amount of the $13.5 million increase in prepaid expenses and other current assets and as the $18.8 million increase in other long-term liabilities on our balance sheet as of March 31 2018, compared to those balances as of December 31, 2017.

As we continue to sort through 2018, we expected to continue our hiring pace in areas like technology and accelerate in areas like tech support and consulting to improve our product and customer engagements. We review our marketing investments and associated outcomes on a regular basis and continue to make changes to our mixed very high-quality leads, opportunities and revenues.

We’re excited about the improvements to sales process and execution that Kevin Norlin will bring to our sales organization. All these disciplined investments are in place to drive revenue growth in 2018.

Now, I’d like to turn it back to Michael Saylor.

[Michael Saylor, Chairman, President and Chief Executive Officer]

Thanks, Phong. I’d like to share my enthusiasm around a number of various initiatives we have in 2018. We have exciting things going on in marketing, sales, services, technology at the corporate level, and I think they’re all integrated with a common theme, which is to drive our mission of making every enterprise and Intelligent Enterprise.

In the area of the marketing, I’m enthusiastic about improvements to our field marketing programs; we’ve built out our field marketing organization. we’ve expanded our Trade Show Roster and we’re in a lot more places than we used to be.

We’ve also started to engage heavily in a number of CXO, CDO, CIO summits, where we’re presenting the MicroStrategy Intelligent Enterprise message to very qualified groups of senior executives and enterprise organizations around the world. We’ve seen that’s generating a lot of high-quality leads, and also brand awareness for us, and we expect to continue. I’ve been very enthusiastic about those kind of initiatives.

Our digital marketing programs have ramped up versus a year ago, and we’re putting the MicroStrategy message out in a lot more places, and we’re starting to see increased lead flow there and qualified lead flow. We’ve moved on to a focus on the lead conversion and we’re putting more energy into the conversion of qualified leads and the sales opportunities than ever, and I’m enthusiastic about our initiatives there to improve this conversion rate.

We’ve got some exciting business development initiatives plan for the remainder of the year to begin delivering the MicroStrategy message out to all of the senior executives within our named accounts, and our customer base, and we continue to organize and refine our efforts in order to achieve new efficiencies and business development.

And one of the ways we do that is with very structured marketing programs that are integrated into the sales organization. One in particular that I’m excited about is the opportunity to convert and upgrade users of business objects 4.2 to the MicroStrategy platform. Recently, SAP announced that they’re not going to continue to support business objects on premises and there is no – there is no upgrade path there other than further; the business objects customers to switch over to the SAP analytic cloud. This is not really in the best interest of many enterprises, and I believe it’s going to cause them to reconsider their commitment to the SAP platform, and it opens up an opportunity for us to present the MicroStrategy solution to them, and we’ll be engaged heavily in doing that.

The lack of commitment to a platform is in my opinion, our strategic mistake on the part of an enterprise software company, one of our great assets is the fact that we just have one platform and we are committed to it. And so as SAP and IBM, and Oracle shift their commitments away from their BI enterprise platforms to cloud initiatives or AI initiatives like Watson, I think that opens up an opportunity for us and we have some exciting plans to exploit that during the coming year.

In the area of sales, our commitment to enterprise analytics and mobility has created an opportunity for us to attract new talent to MicroStrategy’s cause, and we continue to see an influx of industry sales and marketing leadership to the firm. Three executives that I’d like to highlight on this call that I’m really enthusiastic about are our new Head of Worldwide Sales, Kevin Norlin, who has a history of enterprise software sales leadership across IBM, Sun, Quest, Dell, HP and NCR, and we enthusiastically welcome him into the organization, I think he’s going to bring some great sales leadership to our sales organization and he is going to assist us as we drive forward in pursuing our mission.

I’m also enthusiastic about welcoming Marge Breya to our Board of Directors. Marge has been a Senior Marketing and Executive at Business Objects in Informatica and brings a wealth of enterprise software leadership to the firm. And I’m also enthusiastic about adding Les Rechan to our Board of Directors. Les has a career enterprise software sales with Siebel, with Oracle also with Cognos and with IBM analytics. And so we’ve been able to attract some very talented senior executives to help us as we pursue our enterprise sales and marketing initiatives everywhere in the world and I look forward to their contributions.

We also continue to grow our fields’ sales team everywhere in the world, and specifically, we built out our channels and our partnering organization. And I think that that’s going to help us with our partner initiatives and with field sales, and enterprise sales growth during the coming year. In the area of services, we have reoriented our services organization to support our Intelligent Enterprise campaign and that’s being enthusiastically received by customers every where in the world.

We have rolled out and are rolling out new education programs to support our customers as they build out their intelligent centers and deploy best practices, intelligent architectures and state-of-the-art intelligence programs throughout their enterprise. We’ve also upgraded our enterprise support programs and we’re working directly on-site with our enterprise customers to deploy best practices and provide them with assessment and advisory services to help them on their path to the Intelligent Enterprise. and this reflects a much more proactive approach to enterprise support than we’ve had in the past. and I believe that a proactive hands-on approach is going to benefit us over the long-term.

We have integrated our cloud, our education, our support and our consulting services in a single organization and they’re working together more closely than ever before. And I believe this is going to benefit our customers and also help us with sales execution. And throughout the entire services organization, our focus has been on refining and delivering best practice driven methodologies, so as to migrate from more conventional services to proprietary specialized services that are advisory in nature.

I believe this is not only good for our services organization, but it also aligns services much more closely with our sales organization and it’s also great for our partners, because it allows us to work side-by-side with our partners to assist them as they work to build out their MicroStrategy ecosystems.

I’ve had the opportunity to tour around and present our technology to many of our customers and partners in the past month as part of our field symposium series and our new technology offerings have been very enthusiastically received. We’re gearing up for our next major platform release, which will be version 11 and I expect that we’ll release version 11 as a platform release some time in the 2018 year and very exciting as part of that platform release is the dossier functionality, which is being very enthusiastically received and our new mobility functionality.

The combination of dossier with its collaboration and responsive design, and the fact that we have the library client that runs on tablet computers on iOS, on Android and on smartphones. I think it is going to be a big boost to our enterprise analytics and mobility message. And as Phong pointed out, you can now access even MicroStrategy Financials using our library and Dossier that means that you could be viewing our financials on your own iPad or on an iPhone and doing that with some interactivity and that’s really exciting.

The Dossier application container allows you to deploy custom, agile, analytic applications across the web and mobile, and the order of magnitude faster than our traditional document applications. and that I think will help us as we drive forward to enable enterprise self-service, federated analytics, federated mobility and departmental analytics and mobility programs.

All of that will be embedded in our version 11 release and I feel that is as we get to the platform release of version 11, then Dossier and our mobility offerings are going to be even more broadly deployed than they are now. Another exciting aspect of our platform, which we just started showing off with our latest release of our product is our new geospatial module, which is built on map box and this is a dramatic improvement to geospatial analytics that we had inn the version 10 platform.

It’s a great leap forward, not just because the functionality is improved, but because the functionality will work everywhere in the world. we can deploy geospatial functionality in China and in many markets, where for example, Google Maps wouldn’t work. We think that this functionality is much more suited to the enterprise customers, because it’s much more customizable and integratable into custom applications than an Apple Maps or a Google Maps, it’s a new generation versus traditional as remaps and it lends itself to deploying great applications that run the same way across the web or iOS or Android or a smartphone versus a tablet. and this is an exciting thing for all of our enterprise customers. And I think it’s going to create a dramatic increase in the deployment of geospatial functionality throughout the customer base.

One more point I’ll make is this is a really good thing for us, because oftentimes, our customers look to us to provide the visualization or the mobility functionality that they can’t get from their major ERP vendor like a sales force or an SAP or an Oracle. So to the extent that they can deploy geospatial and mobile visualizations on top of common ERP platforms like sales force, this creates just a great opportunity for us and a very fertile ground for us to grow the business.

Version 11 also has extraordinary improvements in our embedded analytics capabilities and as those restful APIs and as the demand to embed intelligence into custom web apps and custom mobile apps increases and as we see the explosion of new ecosystems like the Alexa ecosystem. The importance of embedded analytics capabilities continues to increase and MicroStrategy is a leader in this space and version 11 is just going to be an extraordinary platform for deploying embedded analytics throughout all of these custom Alexa Skill-type ecosystems and custom Android and iOS applications. And so I’m really enthusiastic about that as an opportunity for us to grow.

The entire version 11 is the first version of our platform version of our software that has our workstation as a core component in it, and the MicroStrategy workstation represents the future of our tools technology. we have taken all of the MicroStrategy architect and developer and administrator tools, and we’ve integrated them into workstation and the workstation is providing our power users and our administrators and architects with a very powerful platform to build, deploy, manage MicroStrategy applications in a more agile fashion. I think this is going to be a great thing for our entire installed base.

And then finally, I’d like to highlight areas of investment we’re making in both AWS and Azure. AWS continues to be extraordinarily successful and explosive growth platform for public cloud capabilities. MicroStrategy on AWS is an extraordinary platform offering, dramatically improving every single quarter and it provides our customers with the ability to elastically deploy MicroStrategy environments everywhere in the world in a very rapid fashion, much more flexibly than ever before.

We have customers deploying MicroStrategy solutions on top of data centers in Europe, in China and in the United States with dramatically less effort and dramatically less capital committed to it by taking advantage of MicroStrategy to AWS and I believe this is just an extraordinary configuration that’s going to continue to create business opportunity for us.

I’d also like to say we’re very proud of the three gateways that we released for Azure in the past quarter in version 10.11, and we’re continuing to support the best Microsoft data services, and relational databases and cloud services in order to allow our customers to take advantage of those and deploy broadly on top of that platform.

I’d like to finish up with a few comments on the corporation. Corporately, I feel that we’re functioning better than ever. our recruiting organization is firing on all cylinders and our plans for recruiting this year are dramatically higher than last year and I think we’re better at it, and we’re pursuing it in a more effective and aggressive fashion than before.

employee morale has been improving consistently and we’re really delighted about that. We’re focused on building out three major development centers in the world; our Warsaw center, our China technology center in Hangzhou and then our Washington D.C. based headquarters, and we’ve got exciting growth plans in all three of those areas. and we see capacity coming online quarter-by-quarter that makes us very confident about those three. The balance sheet remains strong, and as the treasury rates and short-term interest rates improve, we think that’s a good thing for our company and we benefit from that.

I’d like to just finish up with a reminder, our vision is intelligence everywhere. There has never been a time when it’s been clear that intelligence is really coming everywhere. we’re getting to the point, where we’ll see voice-type systems like the ecosystem built into appliances, built into vehicles, built into desks, built into conference rooms and probably for our marginal cost of $20 or $30 an electrical plug.

you can create an interactive intelligent interface just about anywhere. and so it’s an exciting world we live in that we really are in a position to spread intelligence everywhere. and our mission make every enterprise an Intelligent Enterprise, has been threaded from marketing through sales, through services, through technology, through corporate. it is resonating with all of our customers. there’s an incredible thirst to deploy federated analytics and mobility, and every major enterprise around the world.

all of our enterprise customers know that they need great technology to do that and they also want great technique and MicroStrategy’s business strategy is to invest in the technique and the technology to make your enterprise an intelligent enterprise.

So with that, if you know of any enterprises that would like to help, please send them our way. For all of our investors, I want to thank you for your support. and now, we’ll go ahead and take questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Karl Keirstead of Deutsche Bank. Your line is open.

[Austin Dietz, Deutsche Bank]

Hey guys. This is Austin Dietz on for Karl. So maybe, first if you could just talk about what triggered the sales leadership changes and then what sales structure strategy changes Kevin may have in mind. And then just the second question, despite the license declines you guys still posted mid-single-digit maintenance growth. So maybe, if you could provide some color on what drove the string to maintenance and then any thoughts on the durability of mid-single-digit maintenance growth going forward would be great? Thanks.

[Michael Saylor, Chairman, President and Chief Executive Officer]

Yeah. Our commitment to analytics and mobility over the last three years, I think has created a solid reputation within the marketplace from MicroStrategy is the champion of enterprise intelligence. And I think that’s created the opportunity for us to attract some great industry talent and leadership to contribute to the firm, Marge and Les joined the board are two indicators of that, Kevin has got a great history in the enterprise software industry providing sales leadership and we thought that he would be able to make a contribution to the sales execution of the firm, and we’re always looking for talent to contribute to the mission.

[Phong Le, Chief Financial Officer]

On your question on our support revenue growth in the mid-single-digit, we’re obviously we’re very happy with the outcome 6% up year-over-year. if you want to know about 4% of that was due to improvement in FX. So effectively, it was about a 2% year-over-year improvement normalized and that’s about what we’ve been seeing for the last few years. we have made upper 90% renewal rates in our business. our customers are very happy with our software.

I think our recent innovations in our software especially with Dossier and library, and Workstation have let our customers to know that we’re innovating and I think we’re really starting to find our space well and enterprise analytics. So, all those things together including our internal initiatives we’ve taken to improve customer satisfaction to improve backlog and helped us tickets. all those things are just overall helping our support revenue phase. So we’re pretty happy with where we are in that metric right now.

[Austin Dietz, Deutsche Bank]

Great, thanks.

[Operator]

Our next question comes from Abhey Lamba of Mizuho Securities. your line is open.

[Parthiv Varadarajan, Mizuho Securities]

Yeah. Thanks. This is Parthiv on for Abhey. Mike, on the last call, you’ve talked about some net new customer activity, just wanted to get an update on that front. I guess what’s the funnel looking like now that we’re well into 2018 and any change in conversion as leads flow through?

[Michael Saylor, Chairman, President and Chief Executive Officer]

We’re enthusiastic about our opportunities in 2018. I don’t think we have any particular changes to report one way or the other, but we’ve got a number of initiatives to continue to drive sales and marketing effectiveness, and we’re looking forward to executing on them.

[Phong Le, Chief Financial Officer]

Yes, I think Mike – general improvement in our leads data coming in from all of our incremental marketing activities, but I think it’s early yet to determine how that’s going to result in revenue whether with net new customers or existing customers.

[Parthiv Varadarajan, Mizuho Securities]

Okay, great. And then given the announcements from one of your competitors earlier this week, I guess in your conversations with enterprise customers, how developed are their data preparation capabilities and I guess, how does the MicroStrategy platform either directly or through partnerships sort of support those efforts?

[Michael Saylor, Chairman, President and Chief Executive Officer]

I think we’re living in a world, where there are exploding number of data sources. so there are more and more enterprise data sources than ever before and there really aren’t many enterprise assets that are going away. So if you want to be credible in the enterprise marketplace, you need to support lots of different enterprise data sources. And so it’s not surprising that they’re interested in that business. I think that most of Tableau’s announcements of late have to deal with them working to appeal to departmental analytics customers in order to address the threat from Microsoft and the challenges that Microsoft has with their business. In our particular case, we just continue to focus upon the enterprise and we feel comfortable with our strategy.

[Parthiv Varadarajan, Mizuho Securities]

Okay. Got it. And then one last on the capital return front, any – could you give us an update there, any inclination towards incremental buybacks or even the dividend some time in the near-term?

[Michael Saylor, Chairman, President and Chief Executive Officer]

We continue to evaluate the situation and consider the best use of our capital, and it will remain an important topic for us as we go forward.

[Parthiv Varadarajan, Mizuho Securities]

Okay, perfect. Thanks guys.

[Operator]

[Operator Instructions] Our next question comes from Frank Sparacino of First Analysis. Your line is open.

[Frank Sparacino, First Analysis]

Hi guys. Maybe, just to start Mike, you made some comments early on about the sales and lead gen field marketing effort. Is there anything that you can relate us in terms of actual numbers around the improvement in lead gen and I assume your comments around the higher sales conversion was more of a forward-looking comment than it is kind of current state, but maybe those two things?

[Michael Saylor, Chairman, President and Chief Executive Officer]

Well, I think our lead generation has increased in a material fashion year-over-year and we definitely see improvement in the quality of lead flow and also in the quantity of lead flow. And that we see as an auspicious trend.

[Frank Sparacino, First Analysis]

And then on the sales conversion side, I mean your kind of current level of happiness with where that today and where you think it should be down the road?

[Michael Saylor, Chairman, President and Chief Executive Officer]

Well, we’ve aligned all of our sales and marketing talent to focus upon ways to improve conversion of leads into sales opportunities. and we think we’ve got more focus and energy on that than before, and we’re excited about the opportunities that we have in order to improve that part of the business.

[Phong Le, Chief Financial Officer]

I think it’s early still Frank to you, just to know, we came out, I believe, in July of last year and talked about our incremental investment activities in marketing. We didn’t really launch them until October. So we’re really six months into it and as Mike mentioned, we’re seeing good incremental lead flow, this is early to judge the success of that in terms of conversion to sales and revenue.

[Frank Sparacino, First Analysis]

Great. And maybe just last from me, just anything you can provide in terms of kind of footprint related to Workstation to-date?

[Michael Saylor, Chairman, President and Chief Executive Officer]

The Workstation is part of the version 11 release. and so we’re seeing a lot of people starting to use Workstation as part of the 10.11 feature release. but I would say that the broad adoption of workstation will come until the version 11 platform release later this year. and then as customers deploy MicroStrategy version 11 environment. So I’ll start to use the Workstation as part of that deployment.

[Phong Le, Chief Financial Officer]

Yeah. Frank, I think you’re familiar with our product release strategy. But our last platform release was 10.4 and for large enterprise customers that typically standardize on a platform release. and then we’ll deploy the individual releases beyond that in a test environment or in a sandbox environment, but you typically wait until a platform release to do a full deployment to 10 to 1000 [ph] of users.

[Frank Sparacino, First Analysis]

great, thank you.

[Operator]

Our next question comes from Tyler Radke of Citi. Your line is open.

[Tyler Radke, Citi]

Hey, thanks guys. Good evening. So Mike, I wanted to ask you, you made some comments about the SAP business objects opportunity with SAP, kind of forcibly moving their customers of the cloud. And if I think about your strategy over the last year or two, it seems like it’s really centered around getting net new customers and going after the market, where Tableau has had some success. With that having played out the last two years and obviously, not seeing any inflection on the on the top liner and particularly with the new head of sales coming be onboard, are you starting to think about maybe going back to kind of the core roots of where MicroStrategy has had success with the kind of traditional enterprise accounts, especially if you see this SAP opportunity coming up.

[Michael Saylor, Chairman, President and Chief Executive Officer]

I think that both SAP and oracle have this massive corporate agenda to convert all of their on-premise customers to cloud. And I think that that’s a financially-driven agenda for them to which they’re driving as financial engineers. So I don’t think it’s in the best interest of their customers. And we’ve heard that – heard so much of that from their customers. So if you’re – if you’re a business object customer and you deployed applications on the business objects 4.2 platform, then SAP’s recent announcement is basically telling you that if you stick on that, you’re not going to get any functional investment and that’s not going to leave you without access to modern APIs for rest that’s going to leave you without a great mobile product, it’s going to leave you without a path to take advantage of AWS, it’s going to leave you without the modern geospatial collaboration and responsive design capabilities that people wanted.

So, that’s kind of a dead-end and on the other hand, if you follow SAP’s path, you have to rebuild your applications on a new platform, and nobody wants to do that, many of the re-buy part of the platform and nobody wants to do that, and many have to trust your IT operations, the SAP’s cloud, which is going to be the high-cost provider of cloud services. Certainly, there’s nobody in the world and thinks that SAP is going to sell their stuff cheaper than Amazon or Microsoft or Google, so – or even Oracle, so that matters. So if you wanted to find the single most expensive provider of cloud services, that would probably be SAP.

So if you’re an IT executive, and you’ve got some of that works fine and you look at that announcement, right you’ve got afraid of Oracle, you need to stick on the current platform and [indiscernible] and you’re obsolete or you kind of go into the mark, behaving line standard, which is going to be expensive and risky and painful, and in that situation, even if you decided secretly that you would go ahead and do what SAP wants you to do, any competent IT executive or business executive would say, I have to go and consider alternatives in order to protect my negotiating position, and so they’re going to – what SAP has done is they have taken a bunch of happy customers that probably would have stuck on the platform for another 5 or 10 years and they’d be stabilized that install base, and it is thousands of enterprise that we would of course, love to serve and it’s a much easier message for us to deliver that will provide you with a smoother upgrade path. and you can continue to run on-premise and we’ll provide you with all the features you take that from SAP, we’ll do it in a less expensive, much more customer friendly fashion. And if you want to run your own AWS environment or you want to run your own on-premise environment, you can do that, you don’t have to surrender control.

And so I’m enthusiastic about that, and I – SAP and their cloud analytics announcement is the most egregious of those vendor programs, where they’re strong arming our customers. But IBM has got a similar approach, where they’re pushing all their Cognos customers to watch and which is horrible for the customer and probably not a good thing for IBM either, but it is a corporate direction they’ve got. And Oracle’s got their Oracle cloud direction, which again is not good for their customer, but is good for Oracle’s cloud marketing vision.

And at MicroStrategy, I think our opportunity again in the coming three years is to provide all of those enterprises with a better path, a better choice, more flexibility and more functionality at a lower price, and so it’s some obvious straight forward enterprise sales and marketing strategy that we’re uniquely positioned to pursue. And there’s right nobody else in our space that can pursue it so well as we can right now. So, I’m definitely enthusiastic about it.

[Tyler Radke, Citi]

Great. And just I guess to follow up on that. So obviously, these customers have had these platforms for multiple years, but I mean what’s kind of your confidence in their willingness to move off of these platforms and on to something like MicroStrategy and do you feel that from a technical and cost perspective, that that’s actually easier or cheaper than just to go with cloud, because ultimately it is a migration front one vendor to the other, which aren’t the easiest things to do?

[Michael Saylor, Chairman, President and Chief Executive Officer]

I think that if SAP was 100% committed to the business objects, BI platform, then you would typically see renewal rates for those customers in the 90% range or better. But I think that when your vendor drops commitment publicly to the platform and says there is no upgrade path and you have to switch to a new platform. The fact that you have to rebuild your applications to the new platform, that heavily drops that renewal rate by some number of percentage points. And then if you also bundle that and say not only you have to rebuild the app in a new platform, but you also have to find my cloud services with it, and I will sell them one-bundled, that drops your renewal rate by another number of percentage point.

So as for exactly, what the impact that’s going to have on their customer commitment. I can’t give you the exact number, but common sense shows if I tell you, you got to rebuild everything and pay me three times as much to keep running it. Then that’s not going to be viewed favorably by large enterprise IT organizations and I’ve spent about 30 years in this industry and I’ve seen how they react, and although they do like to stay with a platform, which is working for them, when they get strongarmed by vendors, most of those organizations will either spend up RFP process or even if they stay with the vendor over the next three years, they’ll generally start to put it in containment, and then when they have new projects, they’ll consider new platforms and new vendors for the new projects, because they want to have a second source or more control over their destiny.

So, I think this is only a positive thing as for exactly the rate of which people move well, when a vendor does not within perfect they move slower but and in an environment where the vendor is maybe making strategic missteps or strong arming or pressuring our customer, you’ll find these enterprises have a lot of choices and they have good memories and very effective. And so for our point of view we’d like to be invited to the table, it’s a lot easier for us to get into the RFP process at these large enterprises and be stabilized by what I view as a vendor strategic misstep, and that’s what we have right now.

[Tyler Radke, Citi]

And with all that said, how are you thinking about the return to license both, I think you’ve talked about that that still will offer 2018 obviously, the Q1 with license being down double digits, that’s kind of a bit harder, are you still confident in license growth this year or you’re thinking more at the second half of that?

[Michael Saylor, Chairman, President and Chief Executive Officer]

Phong, do you want to comment on this?

[Phong Le, Chief Financial Officer]

Yes, I think we said at the beginning of the year, that we’re excited to see revenue and product license revenue growth in 2018 and that still an aspirational words.

[Tyler Radke, Citi]

Great, thank you.

[Operator]

And I’m showing no further questions at this time. I’d like to turn the call back to Michael Saylor for any closing remarks.

[Michael Saylor, Chairman, President and Chief Executive Officer]

I want to thank everybody for your support and we look forward to speaking with you again in 12 more weeks. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.