Microstrategy Inc

NASDAQ:MSTR

Earnings Call Transcript 2021-Q2

[Jeremy Price]

Good evening, everyone. I'm Jeremy Price, MicroStrategy's Senior Vice President of Financial Planning and Analysis and Head of Investor Relations. I'll be your moderator for MicroStrategy's 2021 Second Quarter Earnings Webinar.

Before we proceed, I will read the safe harbor statement. Some of the information we provide during today's call regarding our future expectations, plans and prospects may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements due to various important factors, including risk factors discussed in our most recent 10-Q filed with the SEC. We assume no obligation to update these forward-looking statements, which speak only as of today.

Also, during today's call, we will refer to certain non-GAAP financial measures. Reconciliation showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at www.microstrategy.com.

I would like to welcome you all to today's webinar, and let you know that we will be taking questions using the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar, and Michael or Phong will answer them at the end of the session. Please be sure to provide your name and your company's name when submitting your questions.

And with that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy.

[Michael Saylor, Chairman and Chief Executive Officer]

Thank you, Jeremy. I'm Michael Saylor. I'm the Chairman and CEO of MicroStrategy. I'd like to welcome all of you to today's webinar regarding our 2021 second quarter financial results. I'm here with Phong Le, our President and Chief Financial Officer. First, I'd like to pass the floor to Phong, who is going to provide an update on our operations and finance for the quarter.

[Phong Le, President and Chief Financial Officer]

Thank you, Michael. I'll start with some highlights from our second quarter performance. MicroStrategy performed well across the Board, demonstrating continued momentum in our business analytics software business, while also completing another successful capital raise that expanded our digital asset holdings. We built upon our strong first quarter performance and now delivered to the strongest quarters of operational performance in years.

We are pleased with the strength and consistency of our execution as we continue to benefit from the numerous product introductions we've made since 2019 and the operational changes we undertook in the first half of 2020. Total revenue in the quarter grew 13% year-over-year or 10% on a constant currency basis and it was up 6% versus Q2 2019, which is our strongest Q2 quarterly performance in six years.

Our cloud offerings continue to gain traction for both new and existing customers. While we once again, got some benefit from our favorable comparison against the COVID-19 impacts during Q2 2020, our performance shows clear momentum across our entire business. License revenue grew 50% year-over-year, but more impressively grew 10% versus the second quarter of 2019.

Subscription revenue in the quarter was up 29% compared to Q2 2020. Current subscription billings grew 13%, our fifth straight quarter of double-digit growth. Our Q2 subscription billings were impacted by a decrease in short-term deferred subscription revenue as we no longer include contract values that are invoiced in the future. Without this decrease, Q2 subscription billings would have grown 42%.

We had another strong quarter of profitability with the non-GAAP operating margin of 17%, up 10% year-over-year. Our performance is being driven by broadening adoption of the MicroStrategy platform. Existing customers have long recognized the value of MicroStrategy, looking for more areas to deploy our best-in-class BI platform.

New customers are also attracted to our solutions, recognizing the need for more robust capabilities than those offered by lightweight dashboarding tools from unproven competitors. Customers are well aware of the legacy vendors, like IBM and SAP have deprioritized BI in favor of their respective cloud transitions, and thus as enterprises look to rebuild applications for the modern world, MicroStrategy’s modern, open, enterprise-grade platform better meets their needs. We are pleased with the market reception of HyperIntelligence and Hyper.Now. We signed several dozen HyperIntelligence customers in the quarter as this modern intuitive design puts actionable insights into worker's hands instantaneously.

Let's look at a few key wins in more detail. We signed a net new win with a German freight company, where we beat Tableau and PowerBI to displace a legacy solution. We signed a new win with a leading cloud communications vendor for a seven figure OEM transaction, where we beat Tableau and Microsoft PowerBI. And finally, we signed a new license deal with one of the leading cryptocurrency exchanges.

We also saw an increase in migrations of existing on-premise customers to our cloud solution, which should also included an expanded deployment of MicroStrategy as part of the migration process. With several wins in the quarter where ARR from that customer more than doubled from its prior run rate, providing value both to the customer and MicroStrategy.

Some exciting conversions during the quarter included, one, a leading clothing retailer in the U.S., who nearly doubled the size of their annual commitment to us, and is now approaching $1 million in ARR; two, a sizeable expansion of one of the world's largest beverage producers, extending its MicroStrategy deployment to now include collaboration of Federated Analytics features as part of its migration to the cloud; and three, one of Europe's largest grocers signed a multi-million dollar expansion to further expand MicroStrategy as its enterprise standard BI platform.

Another exciting area of strength for us is our embedded OEM business, where we are number one in the market. We've seen increased interest from new and existing customers that want to leverage our best-in-class analytics platforms as a core part of their solution. We experienced notable growth in both the number and size of OEM opportunities. We believe our extensive investment in open architecture, driven by open APIs and SDKs provides OEMs with the best solution in the market.

Our success in the market has been driven in large part by the investments we've made and continue to make in our solutions. Even as we significantly enhance the overall profitability of the company, in 2021, we expect our R&D investment to be the highest on an absolute dollar basis as 2014.

And as we look into the future, we expect R&D spend in 2022 and beyond to be even higher. Our investments in cloud, OEM, security in modernizing our UI through workstation, dossier, library and HyperIntelligence are a reflection of our commitment to offer our customers the most complete business analytics platform in the world.

A key part of our strategy is to leverage the virtual wave to drive greater efficiency in our go-to-market efforts, which enhances our overall profitability and provides additional resources to invest in R&D. For example, product license revenue grew 10% since Q2 2019 and subscription revenues grown 46% over that time, while we reduced sales and marketing expense by $8 million or 16% over that same time.

Our performance over the last year has validated our decision to move to a fully virtualized go-to-market model at the beginning of COVID. We believe we can continue to generate additional leverage from our sales and marketing spend, over time while continue to generate consistent topline growth.

Turning now to our digital asset strategy with several exciting developments in the second quarter. First, we surpassed the 100,000 Bitcoin mark ending the quarter with approximately 105,085 Bitcoins purchased at an average price of approximately $26,080. During the second quarter, we acquired an additional 13,759 Bitcoins for $529 million or approximately $38,467 per Bitcoin. The capital used for our latest Bitcoin purchase included proceeds from our successful $500 million upsize senior secured note offering that we priced during the quarter. This is our third successful capital raise with total gross proceeds of $2.2 billion.

It is important to note that during the quarter, we created a new subsidiary, MacroStrategy LLC, that was formed to hold the approximately 92,079 Bitcoins we own prior to the senior notes offering. Additionally, we recently put in place an aftermarket shelf registration to sell up to $1 billion of Class A common shares. We've not executed on the shelf and intend to be opportunistic going forward. We will continue to evaluate opportunities to raise additional funds across the capital structure to execute our Bitcoin acquisition strategy.

Bitcoin prices were volatile in the quarter, resulting in a GAAP non-cash impairment charge of $484.8 million. Our calculation of the non-GAAP market value of our Bitcoin holdings as of June 30th was approximately $3.7 billion compared to a cost basis of $2.7 billion and book value of $2.1 billion. As of July 28, 2021 at 4:00 P.M. Eastern time, the market price of one Bitcoin in our principle market was approximately $40,416, which equates to a non-GAAP market value, roughly $4.2 billion for 105,085 Bitcoins, a 56% appreciation over our cost basis.

We intend to continue to deploy additional capital into our digital asset strategy. As one of the leading advocates for digital assets, we've been working with peer companies and various policies setting agencies in the U.S. to try to determine a more appropriate accounting framework for digital assets. As the largest corporate holder of digital assets in the world, we believe we have a responsibility to share what we've learned since embarking on the strategy to make it easier for other companies to diversify their balance sheet with this new asset class.

Before going into a more detailed review of our financial performance, let me just finish by saying how pleased we are with our performance in the second quarter. The first half of 2021 and the last four quarters since the primary impacts of the pandemic, we are delivering on both of our strategic priorities. Operationally, we are realizing the benefits of the investments in the enterprise analytics software business, which is leading to both improve revenue, growth and increase profitability.

Our operational success leaves us well positioned to deliver on the long-term financial targets laid out in our Investor Day last November. At the same time, our digital asset strategy has generated substantial value for shareholders and elevated MicroStrategy to a global leader in the Bitcoin market. The increased visibility of the company due to our digital asset strategies, also helping to initiate sales cycles, we would have been unlikely to participate in otherwise. We believe we are in the early stages of each of these trends and that there continues to be meaningful opportunities for further improvement in both of our strategic focus areas.

Turning to our second quarter 2021 financial results in more detail. GAAP revenues for the quarter were $125.4 million, up 13% year-over-year and up 6% from the second quarter of 2019. Product license revenues were $22.2 million in the second quarter of 2021, up 50% year-over-year and up 10% from the second quarter of 2019. Subscription services revenues in the second quarter of 2021 were $10.3 million, an increase of 29% year-over-year and up 46% from the second quarter of 2019.

The growth in subscription services revenue reflects the growing portion of our product bookings that are related to our managed cloud platform. Our current subscription billings were $10.6 million, an increase of 13% from the second quarter of 2020. We're pleased with the performance of our cloud business in the quarter. Product support revenues were $71.0 million in the second quarter of 2021, a 1% increase year-over-year.

The year-over-year increase was primarily driven by favorable impact of foreign currency translations, partially offset by certain existing customers converting from perpetual licenses to our subscription services or term license offerings. Product support revenues were down 2% year-over-year on a constant currency basis. As we see more on-premise conversions to our cloud offering, we would anticipate product support revenue will experience a modest decline over time.

Finally, other services revenue, which largely reflects our consulting services were $21.8 million in the second quarter of 2021 and increased 23% year-over-year. Improvements in consulting revenues is an indication of continued engagement from our customers to modernize and expand deployment of their MicroStrategy platform.

Total deferred revenue on June 30, 2021 was $190.1 million. This is up 10% year-over-year, primarily due to a 48% increase in deferred subscription services revenues, and a 6% increase in deferred product support revenues. As we see more existing customers converged to our managed cloud platform, there is a shift from deferred product support revenues to deferred subscription services revenues.

Total GAAP expenses were $539.6 million in the second quarter of 2021, which includes a digital asset impairment charge of $424.8 million. Our Bitcoin holdings are considered indefinite-lived intangible assets under applicable accounting rules, meaning that any decrease in their fair value below our book value for such assets at any time subsequent to their acquisition requires us to recognize impairment charges. Total non-GAAP expenses were $103.7 million in the second quarter of 2021, a 2% increase year-over-year.

The year-over-year cost increase is mainly driven by better sales performance, which resulted in higher variable compensation for sales and marketing. Total GAAP operating loss was $414.2 million in the second quarter of 2021 inclusive of an impairment related to Bitcoin of $424.8 million and stock-based compensation expense of $11.1 million. Total non-GAAP operating income was $21.6 million in the second quarter of 2021, a $13.1 million increase year-over-year.

Turning to the balance sheet. We ended the quarter with $56.4 million in cash. We issued $500 million in aggregate principal amount of senior secured notes bearing an interest rate of 6.125%. The net proceeds from the sale of the notes were approximately $487 million after deducting the initial purchasers' discounts and commissions and customary offering expenses. In accordance with the company's corporate strategy of acquiring Bitcoin, we used the net proceeds from the sale of the notes to purchase Bitcoin.

The carrying value of our Bitcoin holdings as of June 30, 2021 was $2.1 billion, which reflects the $689.6 million cumulative impairment charge. That also is reflected as a loss on our GAAP income statement and in the period incurred. We exclude the quarterly impact of Bitcoin impairment charges from our non-GAAP operating income and non-GAAP diluted earnings per share calculations.

We estimate the non-GAAP market value of our Bitcoin holdings was $3.7 billion at June 30, 2021, reflecting $1.6 billion of unrealized gains when compared to the carrying value of our Bitcoin at June 30, 2021. We are pleased with the execution of our two corporate strategies over the last four quarters. On a trailing 12-month basis, we've generated revenue of approximately $507 million, which represents 7% growth year-over-year.

Our software businesses generated a non-GAAP operating income of $90 million on a trailing 12-month basis, which equates to a non-GAAP operating margin of 13%. As a result of our strong financial performance, the company is raising our estimate of 2021 non-GAAP operating income to $80 million to $100 million. Additionally, over the last four quarters, the company has acquired over 105,000 Bitcoins with estimated appreciation of approximately 33% over the acquisition cost.

Going forward, you should expect that we may purchase additional Bitcoin when our cash, cash equivalents and short-term investments exceed current working capital requirements. And we may from time-to-time subject to market conditions issue debt or equity securities and capital raising transactions with the objective of using the proceeds to purchase Bitcoin.

Finally, we plan to engage in a search for the company's next CFO with a management team focused on two corporate strategies, growing our enterprise analytics software business and acquiring and holding Bitcoin and with the increase in our public profile and operational complexity, we plan to engage in a search for a CFO to compliment the management team and allow me to focus on my role as President, running the day-to-day business of MicroStrategy.

I'll now turn the call over to Michael for comments on our Bitcoin acquisition strategy as well as market trends for business intelligence software and our executive team.

[Michael Saylor, Chairman and Chief Executive Officer]

Thanks, Phong. Well, I'd just like to start by reiterating the company has two strategies. The MicroStrategy software mission is to make every enterprise the more intelligent enterprise via our business intelligence software platform. And our strategy with regard to – and plan with regard to that is make all of our functionality available on demand via the cloud, make it easier for all of our customers to upgrade to the cloud and then make our business intelligence software faster, better, smarter, stronger. And we were well positioned to do that because that's our singular operational focus. With the exception of just a few people in legal and finance, the entire company is focused upon enterprise business intelligence. That is our MicroStrategy.

Where the second strategy, as you know, a MacroStrategy, and our MacroStrategy is to acquire and to hold Bitcoin. Our plan with regard to that, of course, is to continue to acquire Bitcoin, continue to hold Bitcoin. It's a very straightforward strategy. Along the way, we'll be educating the world with regard to the benefits of digital property. We'll advocate Bitcoin and the benefits of the technology to corporations like ourselves to institutional investors will help explain Bitcoin to regulators, to the public, to the media and that will keep us busy, I believe. So MicroStrategy, MacroStrategy.

Pursuant to our MacroStrategy, this quarter, we did complete that $500 million senior secured debt offering. That was a big deal. We are very excited about it because it was a seven-year senior note. It's bearing interest at 6% and 18% interest. We thought that was a very favorable interest rate for a very favorable timeframe. We were able to purchase 13,005 Bitcoin using the proceeds of that debt offering and we did that around $37,617 Bitcoin. We thought that was a good price. And the reason that we did that deal was we thought that that was a deal that would be accretive to the other classes of our security holders and it presented itself at that particular time.

As Phong noted, in the entire quarter, we were able to acquire more than that – more than 13,005 Bitcoin. We acquired 13,759 Bitcoin at slightly higher average price, 38,467. We are very comfortable with that acquisition. I was very pleased to see us making such good progress and ending the quarter with 105,085 Bitcoin. At this point, we've now invested $2.741 billion in Bitcoin. For those of you who have followed me that I believe Bitcoin is digital property, and it's the equivalent of digital gold on a big tech network, but – and calling it digital gold, really understates it, digital property is a bit better.

The ability to convey billions of dollars of value at the speed of light and to program it, and the fact that that digital property has an open protocol that any company can write to makes it a very special thing, a very disruptive technology for this decade. We think that acquiring Bitcoin at this time is going to be a wise strategic move. There will never be more than 21 million Bitcoin. And we feel like there's a land grab right now to acquire as much as you can because Bitcoin represents a macroeconomic solution to those that want a non-sovereign store of value, but it also represents a technology solution. It's a technical solution to mobile companies, like an Apple or a Google or a Facebook because they could implement digital property right into their mobile apps. PayPal and Square have been extraordinarily successful by doing this.

It's also a technical solution to energy companies because if you have a stranded geothermal or stranded renewable, or if you have a nuclear power, or if you have any kind of generator, stranded natural gas or any kind of energy capability, that's running at less than 100% utilization, you can monetize that stranded energy, or you can recycle that wasted energy using Bitcoin mining. So Bitcoin is a compelling technical solution for the energy industry. It's a compelling technical solution for big tech. It's a compelling macroeconomic solution. And because it's so decentralized, you have millions and millions of people thinking about how they can add value to Bitcoin and how they can use Bitcoin to add value to their own businesses.

A few general views on the Bitcoin industry right now. The China Exodus dominated the news in Q2. I think the China Exodus was a really good thing for Bitcoin. The result was a decentralization of Bitcoin mining throughout the world. Bitcoin mining is really the Bitcoin security network. So the decentralization of the Bitcoin security network everywhere in the world made Bitcoin more secure and made Bitcoin more decentralized. The China Exodus was also a good thing because it decentralized Bitcoin holdings. And you saw a general shift of the nexus of Bitcoin holdings and Bitcoin mining from the east to the west and diffuse throughout the entire rest of the world.

I think that long-term the westernization of Bitcoin is going to be good for Bitcoin. I think it's good for the U.S. dollar. I think it's good for U.S. technology. It's good for western technology. And generally what we're seeing is that Bitcoin is now aligning with the big tech networks from Amazon, from Apple, from Google, from Facebook, right. These are very, very powerful, dominant digital networks, and whereas they have grown to dominance by offering digital music and digital retail and digital books and digital communications. Now we have something new, digital property that is aligning on the Bitcoin network with all of these other western networks. And it's a good thing.

Capital is flowing into Bitcoin in the second quarter. We saw this in the form of Bitcoin miners coming public. There are lots of Bitcoin miners that are either public or coming public, and that's going to be our continual trend in the coming six months. And it's an exciting trend because a network of a dozen to two dozen publicly traded companies that are securing the Bitcoin network are going to be beneficial to the asset class. They are bringing financial capital to Bitcoin. They are bringing political capital to Bitcoin. They are bringing technical capital to Bitcoin. They are bringing human capital to Bitcoin, and they are bringing a lot of credibility to the entire digital property network that is Bitcoin.

We saw many constructive developments with Bitcoin investors in the second quarter. More large banks in the western world are supporting Bitcoin. Large exchanges are supporting Bitcoin. We see an expansion in the on-ramps. We see more institutional investors supporting Bitcoin, Bitcoin funds. Bitcoin ETFs being applied for more adoption of and more acceptance of Bitcoin through our mainstream finance and also mainstream media.

I think, if we look at Bitcoin adoption at the individual level, probably one of the most exciting pieces of news that I've seen is the result of the crypto.com survey that just came out today. And that showed there to be 114 million individual holders of Bitcoin as of I think the end of June, maybe the end of May, May or June in that range. And we are adding about 2 million more Bitcoin holders per week. So if you think about adding 2 million a week and breaking through 114 million, these are just incredible numbers.

I pointed out – that makes Bitcoin the most widely held financial asset in the world – in the history of the world, growing at the fastest rate. And that's just an extraordinary thing, right? You can't point to 114 million holders of any stock, any bond, any particular type of instrument in the same way that you see this with Bitcoin. I think that we are going to see this trend continue. And so all of these things are good for Bitcoin. If we add the last observation, which is, I think it's becoming clear that Bitcoin is here to stay based upon mainstream media coverage and more and more regulators are taking an interest in Bitcoin, I interpreted this as a positive, I think.

I think there is an enthusiasm and an awareness that we need to support crypto and Bitcoin and the regulatory frameworks throughout the western world. And I think that that's going to drive a lot of constructive activity and constructive dialogue, which is going to institutionalize this asset class even further. And as we make more progress with regard to all of these developments, I think that institutional investors get more comfortable holding Bitcoin and as they get more comfortable holding Bitcoin, I think it's only good for the asset.

So with that, I'd like to switch my conversation to software industry trends. The big software industry, the big players in software that we have traditionally competed against, they're starting to shift their focus to creating cloud platform so they can use to offer open cloud services that might compete with AWS and Azure. I think that has reduced their focus upon their business intelligence divisions.

I think in general, they're under pressure to grow through the macroeconomic environment, and because the big full-stack software vendors were under that kind of pressure to grow, they'd have to look at making huge investments in new areas that are risky or they have to look at dilutive acquisitions or expensive acquisitions in order to grow their topline. They don't have the strategy we have of holding Bitcoin to cure that on their balance sheet. So because we have Bitcoin, we don't need to engage in a series of acquisitions to keep the topline growing more than 20% or 25% a year. And we can focus upon our core business. And I think that that's really good. It's very important.

I think you see that our results and our growth this quarter is because we are focused upon the core business intelligence business and we are able to become a best-of-breed business intelligence company. I'm really excited by our results in Q2. Topline growth 13%, bottom line growth 153%, for our non-GAAP operating income year-over-year 17%, non-GAAP operating margin is very healthy, our subscription revenues up 29%, this is a really strong number.

Our non-GAAP EPS $1.72 a share versus analyst estimates that were about $0.98 a share, so substantial beat on the bottom line and that's $1.72 a share versus $0.60 a share last year. So needless to say, we are pleased with the non-GAAP EPS results. As Phong pointed out, it's our best second quarter in six years. During that quarter, the CXO team worked like a well-oiled machine. I don't really think the senior management teams ever worked better. The gears are all humming.

We have decided to pursue a CFO search, and we are doing that to allow Phong to focus more on the Presidential role. Obviously, we've got a lot of ambition on our plate. We are excited about continuing to grow the enterprise software business aggressively. We are also very excited about our Bitcoin strategy and by adding this one more role to the management team and allow us to maximize that opportunity.

And so with that, I guess I'll go ahead and open up the floor to questions from the analysts and the investors. Jeremy?

[Jeremy Price]

Thank you, Michael. We're going to jump right into questions. And so the first question is for Phong. First, congratulations on the great quarter. Have you seen any changes in the competitive landscape and what impact do you expect the consolidation of BI and visualization tools will have on your business in the coming years? You are on mute, Phong.

[Phong Le, President and Chief Financial Officer]

Sorry. Rookie Move, I was on mute there. Thanks Jeremy. It's a good question. So thanks, we did have a really good quarter, we’re excited about it. And I do think the changes in the competitive landscape are part of what's impacting the quarter. I mentioned a few of them, Mike mentioned a few others, some are the really large legacy BI vendors, SAP's BusinessObjects, IBM's Cognos, Oracle's OBIEE. We all know those companies are really focused on transitioning their own businesses to the cloud, competing with Google and competing with AWS and Azure, and they've de-invested in their BI platforms. So we're seeing an increasing pace of the inquiry and execution and migration off of those legacy BI platforms. And in the case the companies are looking to do that, especially large enterprises were the logical answer because they're looking for a full scale enterprise platform. That's what those Cognos, SAP BusinessObjects are. And so that bodes well for us.

The other thing that we're seeing on the lower end is, is some of the newer entrance into BI in the last five years that have very niche solutions, and we're not well-capitalized, starting to get weaker in the last three years and especially with COVID and pressures on capital structure, we saw them get even weaker and either get bought, or start to wither. And in that case, we weren't competing with them directly. But we were competing with their mining share, right? And so with fewer players and with more consolidation, it tends to be a good thing for us. We saw this cycle in 2008 and we came out of that very strong and growing. And I think we're seeing something similar now.

So as long as we stay focused on our customer and focus on our product, I think we can continue to grow based on some of those trends that we're seeing. And over the next few years if the trends continue, that’s good for MicroStrategy.

[Jeremy Price]

Thanks, Phong. All right. The next couple of questions, we'll turn to Michael. The digital asset environment continues to evolve rapidly. So couple of questions. First, wondering if you have a thought about diversifying across other digital assets just as Ethereum instead of staying focused on Bitcoin?

[Michael Saylor, Chairman and Chief Executive Officer]

Our strategy is to focus upon Bitcoin. We think the Bitcoin is digital property and digital property in our opinion is the most compelling technical opportunity of the decade. Digital property means that 8 billion people with a mobile phone can carry their property around in a mobile phone. Digital property is a trillion dollar opportunity for Apple, for Google, for Facebook, right, for Amazon. Digital property is the solution to the cybersecurity problem and the trust problem across billions and billions of people. Digital property is going to allow 100 million companies to trade with each other on an open protocol at the speed of light. And so Bitcoin is that is a compelling solution if not the compelling solution.

The other crypto assets and digital assets have their own places. After digital property, you've got digital currency, but digital currencies aren't really an investment strategy. They're really just a medium of exchange in the crypto universe. So holding digital currency is just like holding U.S. dollars, it’s not a strategy for investment. Then you have digital platforms like Ethereum and you have digital applications like the decentralized exchange Uniswap something on top of Ethereum.

Those are different businesses. But they are in essence businesses that have to compete in a market and you have to consider. The digital currencies are competing against existing currencies. The platforms – the decentralized platforms are competing against centralized platforms. The decentralized applications are competing against centralized applications. When I look at all those, I think there's competitive risk, there's technical risk, there's regulatory risk. There's a lot of uncertainty. There's a lot of moving parts and they're completely different businesses. So just because one is involved in Bitcoin doesn't mean that it makes sense to consider the other crypto assets. So we don't have any intention to get involved with other digital assets or other crypto assets. We're going to stay focused.

I guess I'll make one more point here. There are two ways to see the world. If you look at the evolution of the Crypto Economy and if you ask what's the crypto opportunity. One way to see the world is I take Bitcoin, I create digital property and I plug it into Apple, Amazon, Facebook, Google, I plug it into every insurance offering, I plug it into every mutual fund, into Fidelity, into BlackRock, into PIMCO, I plug it into every product, every device, every service, every operating system, I plug it into iOS and I plug it into Android and I plug it into Windows, I plug it into the Cloud, I plug it into AWS, I plug it into Azure. You see, I can plug the Bitcoin digital property into the entire traditional economy, all of it. And it makes everything better. In theory, if you're a big tech company and you plug into Bitcoin, you could generate a $1 trillion of value just by plugging into Bitcoin. So that vision of the world is Bitcoin fixes everything. Bitcoin is a benefit to every governor, every mayor, every CEO, every product, every service, everything can be improved by building Bitcoin into it, right? That's one view of the world that happens to be our view of the world.

By plugging this open protocol, digital property into every corporation, every product, every service, and every government and every agency in the world, you're going to make them better. If you believe that, and you don't own a country, or you don't own a government, you don't own a product, you don't own Apple, you don't own Google, you don't own Facebook, you don't own everything, but you have some assets to buy Bitcoin. You buy Bitcoin so that when Apple, Amazon, Facebook, and Google build Bitcoin into their product, then you're the beneficiary because you can't afford to buy Apple, Amazon, Facebook, and Google, all of them. That's one view of the world.

The other view of the world is, is the innovation is going to come by creating other crypto asset networks, all these other cryptos and by innovating in that decentralized area. We don't happen to believe that, right? Our belief is that the extraordinary value creation activity or opportunity comes simply by plugging Bitcoin into your balance sheet. If the city of New York raises a $1 billion and buys Bitcoin and fixes the balance sheet of the city of New York, and it happens overnight, and it happens not with any more technical innovation, it happens through financial integration. So that's why we pursue this strategy. We pursue. It's a property strategy. If there are compelling platforms and applications in the crypto universe that managed to build on top of Bitcoin, then they will benefit and Bitcoin will benefit.

And if there are compelling applications in the traditional CFI world, traditional banks, traditional governments, and then big tech companies, then Bitcoin will still benefit. We don't wish to express a general opinion or take an investment risk with regard to which platform, which application and which use case of Bitcoin will be most successful. We think that the least risky, most diversified investment strategy is to simply hold Bitcoin. And I know that sounds complicated. People think you should diversify to decrease risk. Well, we believe we are diversified because as long as we hold the Bitcoin, any of 100,000 other corporations or 100,000 other technologies that use the Bitcoin will benefit our investment strategy. And so that's why we do what we do.

[Jeremy Price]

Thanks Mike. And one quick follow-up on that one. Clearly with the financing in Q2, we're exploring the inherent value of Bitcoin on the balance sheet, but this person is wondering if you have any updates on how further to use the balance sheet to drive either core business – the core business, or help drive the strategy to build our digital asset balance?

[Michael Saylor, Chairman and Chief Executive Officer]

Yes. Well, our view with regard to future balance sheet decisions is we'll take into account market considerations and then we'll look for accretive opportunities that are in the interest of our shareholders. And from time-to-time, we'll find those opportunities.

[Jeremy Price]

Thank you, Michael. And Phong, next question is for you. Why didn't the company issue the 1 billion in equity and buy more Bitcoin?

[Phong Le, President and Chief Financial Officer]

Yes. So as I think we're referring to here, we issued – put-out-of-shelf to be able to issue $1 billion in equity. And we put that out in September 14, which is right the day before quiet period begins, which is September 15. And during that period, until our next open period, we're not able to issue shares in the market.

[Jeremy Price]

And then one more for you Phong. Subscription revenue growth seems rather modest especially with continued higher mix in SaaS solutions. How do you feel this is trending against your expectations and around the dozen or so new hyper customers that are net new or expansion from current customers?

[Phong Le, President and Chief Financial Officer]

Yes. So subscription revenues grew 29% year-over-year, which we were pretty pleased with. I think maybe what you're referring to here is subscription billings, which grew 13%, that’s five straight quarters of double-digit growth, but it is a decline versus previous quarters. The primary reason for that is in Q2, we no longer include contract values that are invoiced in the future where we had done that in the past. If we had done the same thing we had in previous quarters, we would have seen subscription billings growth of 42%. And it's a bit of a toss up there, different ways to do that. We thought this would be more conservative on a go-forward basis. So if you sort of normalize it, the 42% subscription billings growth was quite strong and going forward, I think we'll see that level of subscription billings growth. We still see quite a bit of growth in the cloud business overall.

[Jeremy Price]

Thank you, Phong. Michael, back to you. Can you walk through some of the factors you consider when determining future debt or equity raises to purchase Bitcoin? And how much room does the business have to raise additional debt or equity to fund Bitcoin purchases? And will MicroStrategy evaluate lending Bitcoin for yield?

[Michael Saylor, Chairman and Chief Executive Officer]

We look at a lot of different factors. We look at the market in Bitcoin. We look at the price of Bitcoin. We look at the trading patterns. We look at the history. We look at the outlook. We look at the debt markets. We consider fixed income debt markets and both the liquidity available in those markets and also the outlook for those markets and general interest rates and spreads. We look at the convert markets and the trading and the convert markets and the outlook of those markets. We look at our own equity markets and the general software equity markets and the way that our own stock is traded. And we look at the futures and the options market for our stock. We look at the futures markets and the derivatives markets for Bitcoin.

We consider all of the history. We try to compile all of the information at our disposal. We think about the outlook for our core business. We look at the technology trends with regard to Bitcoin and how it's being integrated. We look at the macroeconomic trends. What's going on with the macro economy? What's going on in the general market? We look at institutional adoption of Bitcoin and institutional views. We look at the status of the Bitcoin mining industry, and also the degree of maturity of Bitcoin mining. And as Bitcoin miners come public, they're getting better capitalized. And as billions of dollars flow into the Bitcoin mining network, then that capital is going to change the stock to flow ratio a Bitcoin is also – every single dollar that a Bitcoin miner raises may in fact be a dollar that flows into huddling Bitcoin.

So we try to assess that and the overall regulatory environment, and then the FUD that's in our rear view mirror and the FUD that we may think will be in our forward mirror. And after we consider all of those things, we asked the question, is there an accretive activity that we can take. And sometimes the accretive activity would be to buy stock. In August of last year, we announced that we’re going to buy our stock back to buy Bitcoin. That was a Dutch auction. And sometimes the accretive activity is to convert existing treasury cash. And sometimes the accretive activity is to sell convertible debt. We'd done that twice. Sometimes the accretive activity is to sell senior secured debt. And from time to time, the accretive activity maybe to sell equity, and that really just depends. So those are all – that's a subset of the factors we consider. So you can be sure that we're thinking about it all the time in order to make sure that we act appropriately.

[Jeremy Price]

Thank you, Michael. Phong, next question for you. Can you explain the rationale behind creating a separate entity to huddle your Bitcoin?

[Phong Le, President and Chief Financial Officer]

Yes. So we created MacroStrategy LLC, and other than it being a cool name and we wanted to make sure we had ownership of that. The primary reason was when we issued our secured notes, it was secured against our BI business. So we did not need to use our 92,079 Bitcoin that we had at that point in time to secure the debt. And so we created a separate entity for those 92,079 Bitcoin as separate to our BI business. So that was the primary reason we set it up.

[Jeremy Price]

And Mike, looking out over the next one to two years, do you expect institutional adoption to be largely led by founder-led tech savvy companies? Or do you expect companies and other industries with a more diverse set of owners to begin adopting cryptocurrency? And what do you think are the next catalyst to drive that broader adoption?

[Michael Saylor, Chairman and Chief Executive Officer]

I see institutional adoption coming from macro hedge funds that actually would have bought gold or whatever invested in hard assets or commodities. Now that a Bitcoin is getting on their radar as digital property and the Apex digital commodity and now they've got like a multi-year track record of Bitcoin outperforming gold. I think that there's a lot of money that's going to flow from gold funds and investment funds into digital gold that is Bitcoin.

I think that you're seeing a lot of family offices, high net worth individuals that are private having private money, they're starting to see Bitcoin as an interesting investment because it's a generational wealth preservation strategy. If I'm investing to give money to my grandchildren, then I need a very long duration asset. They're operating out of the public eye, but I hear through my back channels, a lot of that activity going on. I think Goldman Sachs did a survey that was published about a week ago, where they indicated there was a lot of interest in Bitcoin from family offices.

I think that in terms of public companies, the public companies that you will see embracing Bitcoin most enthusiastically will certainly be the founder-led technology companies because they have charismatic founders that are risk takers that understand technical nuance. The companies that disrupted digital music, digital video, digital movies, digital books, digital maps, digital retail, they had to think differently. And if you think different, then once you start thinking different about property and it clicks in your mind, a Bitcoin is digital property, then you go from not understanding it to understanding it. And then there's oh crap moment, where you realize that not only do you understand it, but if you don't embrace it and your competitor embraces it, then you're going to be in a massive disadvantage. You wouldn't want to be the last big tech network to integrate digital property into the protocol because Bitcoin turns your billion user digital communications company into a billion customer bank in cyberspace.

And so I do think that you will see founder-led tech companies start to embrace Bitcoin. They will do it sooner than other publicly traded companies because they get it and because they need to figure it out for competitive reasons. I mean, the example, right – the big example right now you can see in front of all of us is Square cash. Square’s had extraordinary success implementing Bitcoin into their mobile application and that is forced to response from PayPal.

And I think in time, anybody with a mobile application is going to want to use Bitcoin either to turn themselves into a bank and cyberspace, or there's another aspect of Bitcoin, which is an international digital value network, that allows you to establish trust in cyberspace. So if you are Google or Facebook or Amazon or Apple, and you have people posting online, you've got a cybersecurity issue. The way that you actually can deploy cybersecurity is plug them into a network like Bitcoin that allows for the rapid interchange of value on an open protocol. If you can implement open protocol monitoring network like Bitcoin, then you can use that to fight denial-of-service attacks, DDoS attacks. You can use it to fight and to ameliorate or attenuate spam. You can use it to shutdown hostility and create new degrees of cybersecurity.

So I think Bitcoin is really the – it's the secret to cybersecurity going forward and this is really important issue for all of these technology companies. And it's also a bank in cyberspace. And so it's the future of financial security and the future of cybersecurity. And those companies can't really afford to ignore that, they would ignore that at the wrong peril. I think you’ll see more with regard to that as time goes on.

And then I think the last area of adoption with regard to public companies that will be visible. And I think give it six months, you'll see a lot of it. You're just going to see an avalanche of publicly traded Bitcoin miners. Every month or every few weeks, there's a new Bitcoin miner that's announcing that they're coming public. They're either merging with a SPAC, or they're going to do an IPO, or they are public, or they're a public company that's moving from a foreign exchange, like the Toronto Exchange to the NASDAQ or the New York Stock Exchange.

If you roll the clock back 12 months, it's hard to find any company, any publicly traded company with a $1 million of Bitcoin on their balance sheet. Right now, there's a dozen or more with billions and billions of dollars of Bitcoin on their balance sheet. But what happens when there's two dozen or three dozen companies and they've all got material Bitcoin exposure because they have to, I think that that's going to catalyze a lot of maturity of the asset class.

[Jeremy Price]

Thanks, Michael. We are out of time, so I'm going to turn it back to you for closing remarks. Michael, closing remarks from you.

[Michael Saylor, Chairman and Chief Executive Officer]

Yes. Okay. I want to thank everybody for being with us for our Q2 2021 financial results webinar. We appreciate your support. To all of our shareholders, we couldn't do without you. And I will look forward to speaking with all of you again in three months. So until then take care.