Microstrategy Inc

NASDAQ:MSTR

Earnings Call Analysis

MicroStrategy’s Q2 2024: Cloud Transition and Bitcoin Acquisitions

MicroStrategy's Q2 2024 saw a significant shift towards cloud services, with cloud bookings more than doubling from Q1. While total revenue declined by 7% year-over-year to $111 million due to reduced product license revenues, subscription services grew by 21% and now account for 22% of total revenue. Increased cloud hosting costs contributed to a 14% rise in cost of revenues. The company added 12,053 bitcoins, bringing total holdings to 226,500, valued at $15 billion. MicroStrategy remains the largest corporate bitcoin holder and targets a 4-8% annual Bitcoin Yield over the next three years.

Introduction: Transitioning to a Cloud-Dominant Business

MicroStrategy has been undergoing a significant transformation, shifting its business model from on-premise software solutions to cloud-based offerings. This transition aligns with the company's strategy to harness the power of AI and digital transformation. This move is expected to cause short-term declines in license and support revenues, but management is optimistic that this will be offset by growth in subscription services.

Performance Overview: Navigating the Shift

For the second quarter, MicroStrategy reported a revenue of $111.4 million, representing a 7% decrease year-over-year. This decline is attributed to the planned reduction in product license revenues, which fell by 40%, and support revenues, which decreased by 7%. Conversely, subscription services revenue increased by 21%, highlighting the successful onboarding of customers to the cloud. The shift reflects the company's strategic priority to build a recurring revenue base, despite short-term revenue recognition impacts.

Cloud Migrations: A Record-Breaking Quarter

The second quarter saw the highest cloud bookings in the company's history, more than double any prior quarter. This surge compensates for the lower-than-expected bookings in Q1 and signals the potential for robust long-term revenue growth. However, due to the nature of cloud revenue being recognized over the life of the contract, the strong bookings will contribute more significantly to future quarters rather than the immediate one.

Financial Discipline: Managing Costs and Investments

Operating expenses in the software business category were up 4% year-over-year, driven primarily by higher general and administrative costs, stock-based compensation, and cloud hosting costs. Non-GAAP operating income from the software business stood at $1.9 million. Despite these increased costs, the company maintained strong expense management in sales and marketing.

Bitcoin Strategy: Increasing Holdings and Financial Leverage

MicroStrategy continues to pioneer the corporate adoption of Bitcoin. As of July 31, 2024, the company held 226,500 bitcoins, purchased at an aggregate cost of $8.3 billion. The strategy involves using proceeds from debt and equity to acquire more bitcoin, leveraging various financial instruments to maximize shareholder value. This quarter alone saw the acquisition of 12,053 bitcoins, highlighting the company's commitment to its Bitcoin strategy.

Capital Markets Activity: Leveraging Financial Flexibility

MicroStrategy effectively uses capital markets to finance its strategies. Recent activities include raising $800 million through convertible notes and announcing a $2 billion at-the-market equity offering. The company also executed a 10-for-1 stock split to improve stock liquidity and shareholder accessibility. These moves demonstrate MicroStrategy's ability to navigate volatile markets while maintaining financial discipline.

Looking Forward: Strategic Goals and Expectations

MicroStrategy aims to achieve a positive Bitcoin yield of 4% to 8% per year over the next three years (2025-2027). This objective will be pursued by leveraging organic excess cash flows, equity offerings, and intelligent debt management. Additionally, subscription services revenues are expected to grow as more customers migrate to the cloud, potentially increasing overall revenue post-transition.

Conclusion: Balancing Innovation and Financial Stability

MicroStrategy's dual focus on cloud transition and Bitcoin accumulation represents a forward-thinking approach to business strategy. While the short-term impacts of these changes may present challenges, the long-term outlook is promising. By building a recurring revenue model and leveraging financial markets, the company aims to enhance shareholder value and position itself at the forefront of digital transformation.

Earnings Call Transcript 2024-Q2

[Shirish Jajodia, executive]

Hello, everyone, and good evening. I'm Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. I'll be your moderator for MicroStrategy's 2024 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 the 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. Reconciliations 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 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, Phong or Andrew will answer questions at the end of the session. Please be sure to provide your name and your company's name when submitting your questions.

Now I will walk you through the agenda for today's call. First, Phong Le will cover the business and operational results for the second quarter of 2024. Second, Andrew Kang will cover the financial results for the second quarter of 2024. And then Michael Saylor will provide a strategic review and discuss recent bitcoin market updates. And lastly, we will open up to Q&A.

With that, I will turn the call over to the President and CEO of MicroStrategy.

[Phong Le, executive]

Thank you, Shirish. Hello, everyone. I'd like to welcome all of you to today's webinar. As we discussed in the last 2 quarters, MicroStrategy considers itself to be the world's first bitcoin development company. We're a publicly traded operating company committed to the continued development of the bitcoin network through our activities in the financial markets, advocacy and technology innovation. As an operating business, we're able to use cash flows as well as proceeds from equity and debt financings to accumulate bitcoin, which serves as our primary treasury reserve asset.

We believe that the combination of our operating structure, bitcoin strategy and focus on technology innovation provides a unique opportunity for value creation. Being an operating company, our software technology business remains our core revenue and cash flow generator. In addition, it also enables us to acquire bitcoin through the use of excess cash or proceeds from equity capital raises or corporate debt capital raises. These capital market levers allow us to deploy intelligent leverage to increase our bitcoin holdings in a manner which we believe has created shareholder value.

Since our adoption of our bitcoin strategy, we've used 3 primary mechanisms to acquire more bitcoin: cash flows from software operations, since August 2020, we've invested $836 million of total cash on our balance sheet; equity issuances, we have issued $3.2 billion in equity in a manner that we believe to be accretive to existing shareholders; and debt financing, we have $3.8 billion in debt outstanding through the issuance of both senior secured notes and convertible notes. We have used the proceeds from these issuances principally to purchase bitcoin. The blended cost of our outstanding debt is fixed at 1.6% annually.

Turning to the bitcoin highlights for Q2 2024. MicroStrategy remains the largest corporate holder of bitcoin in the world, now holding 226,500 bitcoins with a total bitcoin market value of $15 billion as of yesterday. Since March 31, 2024, we acquired an additional 12,222 bitcoin for a total purchase cost of $805 million at an average price of $65,882. Year-to-date 2024, the price of bitcoin has appreciated, spurred notably by the approval of the spot bitcoin exchange traded products, or ETPs, which has drawn considerable institutional attention. We believe the introduction and initial success of the spot bitcoin ETPs evidences the maturation of bitcoin as an institution-grade asset class with broader regulatory recognition and institutional adoption.

We attended the Bitcoin 2024 Conference in Nashville last week, and we saw tremendous support for the bitcoin ecosystem from policymakers, bipartisan politicians, institutions, businesses and individuals. It's very encouraging to see high-profile institutions and individuals showing interest in bitcoin and are starting to appreciate the importance of this asset class as a part of their portfolios. MicroStrategy remains highly committed to our bitcoin strategy with a long-term focus. Michael will further elaborate later with his thoughts and takeaways from the Bitcoin 2024 Conference.

On the capital markets front, we made significant progress towards the advancement of our bitcoin development company strategy. In June, we raised $800 million through 2032 maturity convertible notes, called for redemption our $650 million 2025 convertible notes, announced a 10:1 stock split and announced a $2 billion at-the-market, or ATM, equity offering program. Andrew will further provide details on our capital markets and bitcoin purchase activity for this quarter.

As a bitcoin development company, we have the unique ability to access the capital markets to create intelligent leverage. During the first and second quarter of 2024, our total bitcoin holdings increased by 13.3% and 5.6%, respectively. During the same periods, our assumed diluted shares outstanding increased by only 4.8% and 1.8%, respectively. When we refer to assumed diluted shares outstanding, we're assuming all outstanding convertible notes are fully converted at their respective conversion prices, all outstanding options are fully exercised and all restricted stock units and performance stock units fully vest in each case without regard to exercise or conversion price or vesting or other contractual conditions.

Our opportunistic use of leverage and excess cash to acquire bitcoin as well as our strategic execution of our capital market financings resulted in an incremental value creation for our shareholders. Our objective is to accumulate bitcoin holdings at a faster rate than we issue shares, and we believe we have a demonstrated track record of doing so.

To assess our performance in achieving this strategic objective, we're introducing a new key performance indicator, which we refer to as BTC Yield. We define BTC Yield as a period-to-period percentage change in the ratio of our total bitcoin holdings to our assumed diluted shares outstanding. We use this KPI to help assess the achievement of our strategic objective and for evaluating capital allocation decisions. If we increased our total bitcoin holdings over a given period at a faster pace than we increase our assumed diluted shares outstanding, we achieved a positive bitcoin yield.

I should note here that bitcoin yield is not equivalent to yield in the traditional financial context. It's simply just a measure of the percentage change period-to-period in the ratio of our bitcoin holdings to our assumed diluted shares outstanding. In addition, when we use bitcoin yield, we consider the various limitations of this metric, including that assumes that all indebtedness will be refinanced or, in the case of our convertible notes, converted into shares of common stock at their respective conversion prices, and it does not take into account debt and other liabilities.

Although bitcoin yield is not actually a yield in the traditional finance context, we internally think about this metric as some might think about a bond yield or a yield on another financial instrument. That's obviously an imperfect analogy, but we look to the metric to help us assess how we are doing on using our capital most efficiently to increase our bitcoin holdings over time.

The historical performance of this KPI is shown on this slide. We achieved an annual bitcoin yield of 47.3% in 2021, 1.8% in 2022 and 7.3% in 2023. We've achieved quarterly bitcoin yield of 8.1% in Q1 and 3.7% in Q2, surpassing the annual bitcoin yield in 2023 as of the year-to-date 2024. We're able to achieve this through the acquisition of bitcoin using our excess cash flows and proceeds from debt and equity financings, which we believe were accretive to shareholders.

Management uses bitcoin yield to evaluate capital allocation decisions and to measure the achievement of our Bitcoin strategy. Our strategy of acquiring Bitcoin in a manner we believe to be accretive to shareholders, thereby achieving bitcoin yield, sets us apart from institutional bitcoin investment options that charge a management fee and would therefore achieve a negative bitcoin yield as we measure it.

Building on our previous discussion, we have a clear strategy to enhance our bitcoin holdings and deliver positive annual bitcoin yield. Today, we are announcing our target to achieve a bitcoin yield of 4% to 8% per year for the next 3 years in 2025, 2026 and 2027. Our approach includes accumulating more bitcoin holdings by, one, using the organic excess cash flows generated by our software business; two, using proceeds from equity offerings when we believe accretive; and three, responsibly using the intelligent leverage framework with a risk-managed approach. We will continue to use the full spectrum of financing options and also explore creative capital market transactions and untapped pools of capital to execute the strategy effectively and prudently.

By sharing our 3-year KPI targets, we're reinforcing our goal of achieving consistent positive bitcoin yield over time. We pride ourselves on being at the forefront of institutional bitcoin adoption. As we look into the future, we anticipate that our ability to consistently achieve positive bitcoin yield will become a crucial benchmark for investors to assess our execution of our strategy.

Turning to the software business. MicroStrategy is also positioned as the world's largest independent publicly traded business intelligence company. In the second quarter of 2024, we continued our shift towards our cloud offering, resulting in subscription services revenue of $24 million, an increase of 21% year-over-year. The strong growth in our subscription services revenue was driven by both existing customer migrations to the cloud and new customer wins. Our customer renewal rates continue to remain high, and our non-GAAP subscription billings remain strong.

Overall, we see strong demand for our cloud platform. Q2 was a particularly strong quarter for customers migrating to cloud. Our objective continues to be growing cloud revenue by migrating customers to cloud while maintaining profitability.

At our MicroStrategy World user conference held in Las Vegas in May 2024, we showcased how MicroStrategy ONE with AI can create more innovative, competitive, high-performing organizations. In our keynote address, we highlighted how some of the biggest brands in the world, including organizations like Vuori, Bayer and the U.S. Department of State, leverage our platform to successfully utilize their data and combat the big data stupor and application sprawl. We unveiled Auto Express to offer an easy and insightful way to engage in MicroStrategy AI, allowing users to build their own stand-alone AI BI bot without a single line of code.

Earlier this year, MicroStrategy ONE became available on the Google Cloud Marketplace in addition to prior deployments on Azure and AWS, allowing enterprises to easily find and deploy this cloud-native platform. Customers can benefit from a wide range of innovative first-to-market AI-powered functionality powered by the Azure OpenAI LLM.

Transitioning our customer base to the technology of the future remains a key focus, and our hyperscaler partners are a key part of this migration. As customers and prospects move to the cloud to empower their AI-driven digital transformations, we expect to continue to see a decrease in product license revenues and support revenues, which will in part be offset by increases in subscription services revenues. This will be most pronounced in the balance of 2024. This may result in a decrease in total recognized revenue in the short term, but in the long run, we expect it to be more than offset by increases in the subscription services revenue. Additional benefits include more engaged customers using our very latest software, higher retention rates, ultimately growing recurring and overall revenues.

I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

[Andrew Kang, executive]

Thank you, Phong. I'll continue with the recap of our software financial results, and then I'll move on to our bitcoin strategy.

Total revenues for the second quarter were $111.4 million, down 7% year-over-year. Consistent with recent quarters, the overall revenue trend reflects the transition of our business from on-premise to cloud. As we migrate customers to the cloud, we shift upfront product license revenues to subscription services revenues, which are recognized ratably over the life of a contract. As a result, we fully expect product license revenues, along with support revenues, to decline, both of which were down 40% and down 7%, respectively, year-on-year.

What isn't immediately seen through reported revenue is that we are building up stronger, more durable cloud recurring revenue that comes in over time, which is consistent for any on-prem to cloud transition. And more robust or faster cloud migrations will have a larger but temporary reduction in upfront revenues, which is what we saw in last quarter's results.

The cloud contracts booked in Q2 were the strongest single quarter bookings we have seen to date, more than double Q1 or any prior quarter for that matter. This acceleration last quarter makes up for the lower-than-expected cloud contracts we closed in Q1, meets and beats last year's quarter's targets and directly reflects the transition starting to take shape. While we'll see the initial benefits of last quarter's strong cloud migrations flow through revenue beginning next quarter, the lower product license bookings in 2024 will result in lower-than-expected recognized revenue for the full year by somewhere between 4% and 5%.

Overall total annual revenues have been generally flat in the past couple of years. But with our transition beginning to take shape in the first half of this year, we expect to see similar patterns in total revenue going forward as we execute on our transformation. This year and potentially in 2025 should reflect the transition point in our long-term strategy, and exiting the next 12 to 18 months, we should start seeing total revenues begin to grow again.

Non-GAAP subscription billings, which represent cloud revenues in the quarter, along with just the next 12 months of deferred subscription services revenues, grew by 45% last quarter to $33.4 million, our fourth straight year of quarterly double-digit growth. Q2 subscription services revenues increased 21% year-over-year, which represents the recognized revenue from previously booked cloud contracts, now make up approximately 22% of total revenues. Subscription services revenues are now larger than our product license revenues and will continue to grow each quarter while product license will decline further from here on out.

In Q1, we enhanced our reported numbers to break out our quarterly results into 2 categories. First, the software business category reflects income or loss from operations related specifically to our BI business. The corporate and other category represents the non-software-related areas associated with our digital asset holdings, which include impairment charges and other related third-party costs. While we continue to operate under one reportable operating segment, we believe the breakout of our operating results into these 2 categories provides more transparency with respect to the performance of our software business while isolating impacts related to changes in bitcoin price.

In Q2, software business revenues were $111 million, as I mentioned a moment ago, while cost of revenues were $31 million, up 14% compared to Q2 of last year. The increase was in part due to higher cloud hosting costs, which is a direct result of our growing cloud business, as well as costs associated with setting up enhancing customer success functions.

Software business operating expenses were $99 million, up 4% compared to Q2 of last year. Higher G&A this quarter was related to higher stock-based comp, legal, consulting and other advisory costs as well as higher employer payroll taxes in connection with employee stock option exercises in the second quarter. However, overall operating expenses were also offset by lower costs in sales and marketing, consistent with recent quarters as we maintain strong discipline on expense and cost management.

Noncash stock-based compensation expense in Q2 was $20.6 million, up 33% year-over-year. And overall non-GAAP operating income or profit from the software business category was $1.9 million. Lastly, the corporate and other operating expense category for the quarter was $182 million compared to $25 million in Q2 of last year, $180 million of which was due to bitcoin impairment in the last quarter.

Now turning to our bitcoin strategy. We had another extremely successful quarter of adding more bitcoin to our balance sheet as we acquired 12,053 bitcoins in the second quarter. And as of July 31, the company held a total of 226,500 bitcoins acquired for an aggregate cost of $8.3 billion or approximately $36,800 per coin. Currently, we hold 175,721 unencumbered bitcoins at MacroStrategy, the wholly owned subsidiary of MicroStrategy, which represents 78% of our total holdings or $11.4 billion in current market value, all of which are currently unrestricted and unencumbered.

The bitcoin we acquired using proceeds from our convertible notes offering in Q2 are held at MicroStrategy, the parent, and served as collateral securing our 2028 senior secured notes. During Q2, we added 11,931 bitcoins to MicroStrategy's holdings at an aggregate purchase price of $786 million using net proceeds from our convertible note issuance. Additionally, bitcoins purchased using excess cash from the software business are also held at MicroStrategy, the parent, which also served to collateralize our 2028 senior secured notes.

During Q2, we added 122 bitcoins to MicroStrategy's holdings at an aggregate purchase price of $8 million from excess cash. Since the end of Q2, we added an additional 169 bitcoins to MicroStrategy holdings at an aggregate purchase price of $11 million, also using proceeds from excess cash. As of July 31, 50,779 bitcoins are held at MicroStrategy or $3.3 billion in current market value.

The commitment to our bitcoin strategy remains stronger than ever. We have added bitcoins to our treasury in every quarter since August 2020, and as a result, MicroStrategy remains the largest corporate holder of bitcoin in the world. As we continue to champion bitcoin as a strategic treasury reserve asset, we are deeply encouraged by the growing number of both public and private companies that are adopting the bitcoin standard to help grow shareholder value.

As of June 30, 2024, the market value of our bitcoin holdings was $14 billion, and an aggregate cost of $8.3 billion equal to an average purchase price of approximately $36,800. This is in contrast to the carrying value of our bitcoin holdings of $5.7 billion as of the last day of the quarter. We fully plan to adopt the new FASB accounting rule, which requires fair value treatment for bitcoin holdings, by Q1 of next year when the rule takes effect, at which time we will realize the benefit of the significant difference between the market value and the carrying value of our balance sheet.

Now turning to our capital markets activities. Since the inception of our bitcoin strategy, we have issued $4.4 billion of debt through senior secured notes and convertible notes. We now have $3.8 billion of outstanding debt with a very low blended interest rate of approximately 1.6% with staggered maturities over several years starting in February 2027 through June 2032. Intelligent leverage remains a key component of our active capital allocation strategy, which when deployed in a thoughtful manner, enables us to add more bitcoin to our treasury reserve at an attractive cost and with a disciplined approach to maximizing BTC Yield.

Continuing with the momentum from the 2 convertible note financings in March, our recent convert in June was upsized and well received by the market. We issued $800 million of convertible notes due June 2032 at an annual interest rate of 2.25% with a conversion premium of 35% and a conversion price of approximately $2,043 per share. As in the past, the net proceeds from the new convert were used to acquire additional bitcoin into our treasury reserve.

We will continue to actively manage our existing liabilities. And to that end, we called for redemption of our $650 million 2025 convertible notes. As a notes were substantially in the money, holders of those notes converted substantially all of the notes into shares of our Class A common stock prior to the redemption date. Our 2025 notes traded up over 300% from time of issuance, resulting in an extremely successful investment for our bond investors and partners.

In addition to raising debt, we continue to demonstrate a solid track record of issuing equity in a manner that is accretive to shareholders. Today, we announced that we filed a new shelf registration for a $2 billion at-the-market, or ATM, equity offering. We will remain extremely disciplined in the use of both the ATM and other capital markets activities, executing on them when we believe it will achieve the most bitcoin yield.

Our overall capital allocation strategy continues to be focused on increasing our total bitcoins at a rate faster than we issue new shares, which results in higher BTC Yield. As Phong mentioned earlier, we are targeting an annual BTC Yield of 4% to 8% in each of 2025, 2026 and 2027. Having exceeded that already in 2024, we believe those targets are achievable and also provide transparency in reinforcing our goal of consistent, positive BTC Yield over time, further differentiating MicroStrategy's value proposition.

Lastly, we also announced a 10-for-1 stock split of MicroStrategy's Class A common stock and Class B common stock effected as a stock dividend. This will lead to better accessibility for our investors and employees and greater liquidity in our stock as well as in our options activity. The shares are expected to be distributed after the close of trading on August 7, 2024, and trading is expected to commence on a split-adjusted basis at the market open on August 8, 2024. The stock dividend will not have any impact on the voting and other rights of stockholders.

The next slide lays out our debt maturity profile. As you can see, the conversion of the convertible notes due 2025 has moved the nearest debt maturity out to 2027. We actively monitor the capital markets and evaluate liability management opportunities to manage our debt and interest expense as well as opportunities to raise additional future financings.

MicroStrategy has demonstrated a strong track record of applying a disciplined approach to navigate through volatile times in the bitcoin market, and we believe we have established significant credibility to execute on our strategic goal of generating value for our shareholders. As Tom said earlier, we believe that the combination of our operating structure, bitcoin strategy and focus on technology innovation provides a unique value proposition for shareholders when compared to other forms of bitcoin exposure.

Thank you for your time today and for your continued support of MicroStrategy. I'll now turn the call over to Michael for his remarks.

[Michael Saylor, executive]

Thank you, Andrew, and thank you to all of our shareholders for being with us here today. I'd like to give a few thoughts on bitcoin, the macro environment and MicroStrategy's operations.

So I'm going to start with the Bitcoin Conference 2024. It was extraordinary. And what was very clear is that bitcoin has entered the political conversation. Governors, senators, House members and presidential candidates were all in attendance at the conference. There was a Lummis bill presented at the conference. Robert F. Kennedy made some very interesting commitments at the conference. Donald Trump made some very interesting commitments at the conference. Four years ago, all of this was inconceivable. So we've come a long way in the past 4 years.

Bitcoin has also entered the corporate conversation. During the conference, Marathon announced that they're adopting a full HODL strategy. They acquired additional bitcoin on their balance sheet, and they announced they're not going to sell bitcoin from their mining activities. Semler Scientific was there at the conference speaking. We have companies like Metaplanet that are very vocally adopting a bitcoin standard. So lots of conversations and lots of Main Street, Wall Street and Capitol Hill participants in Nashville.

There's a growing consensus that digital private property is a right, and it's a natural right. Likewise, a right to self-custody is rippling throughout the -- all of these speakers and throughout the public discussion in the public forums. There's also growing enthusiasm toward building a strategic bitcoin reserve at various levels. The Lummis bill is a bill to create a strategic bitcoin reserve for the United States government. That was announced at the conference and just rolled out or presented yesterday.

The Trump speech was a milestone. He reaffirmed the right to self-custody. And also quite salient was a note that his policy would be to not sell bitcoin. And it turns out that the idea of not selling bitcoin elevates bitcoin to be the apex property of the nation as well as the apex investment asset. If the federal government were to seize a building, a farm, a portfolio of big tech stocks, a bunch of ETFs, gold, diamonds, watches, cars, jets and yachts, even though they were valuable, even sports teams, they would sell it. And yet what won't they sell, national parks and bitcoin, 2 very exciting things. So bitcoin has really entered the global geopolitical conversation, and Bitcoin Nashville punctuated that.

We can go to the next slide. We're still early in bitcoin, but it's worthwhile to make some points about the macro outlook. As you can see, bitcoin, it's a $1.3 trillion asset class. That makes it 1 of the 10 most valuable assets in the world, a spot or position it achieved in 15 years with no marketing and no management team and no corporate sponsor. It's quite amazing. And people are beginning to realize just how extraordinary that is. But as you can see, mapped against the map of global wealth, and there are many, many different types of global wealth maps you could generate as one of them, you can see it's not 1% of the global wealth in the world.

There is a trend. There's, on the bitcoin side, an institutional adoption trend. We're approaching 40 bitcoin spot ETFs now. And each one of them is solving the problem of compliance, capital controls and convenience and custody in Australia, in Hong Kong, in Switzerland, in Brazil, in the United States and Canada, et cetera. So those ETFs are not just the marketing distributors of bitcoin, but they're also the custodians and the compliance managers of bitcoin. And that's having a pretty big effect.

There's also a digital transformation taking place. And all of us in the investment community noticed that it was present in Meta's stock performance in the last day. You can see the impact on Microsoft. You can see the impact on all big tech companies. What's very clear is that AI is going to drive a profound increase in productivity. It's going to drive profound new products. We can see cars driving themselves. We can see a future of autonomous robots. We can see a future of AI replacing search. And now you just ask the question, you get the answer. And then you ask the AI to do the thing for you, and it does it. And in the last 12 months, it's gotten to the point where even nontechnical users, eyebrows are raised, and they can extrapolate over the next 10 years and see that this is going to have a profound impact on capital creation.

Clearly, the big winners in the corporate world are going to be the big tech companies that can take advantage of AI to create products. And the market is very enthusiastic about Meta because they can deliver an intelligent AI offering to billions and billions of people instantly. And that being the case, the macro wins, they favor equity and especially big tech equity, and they favor digital capital, which is what bitcoin is. Over the 20th century physical and financial assets, you can imagine that the big tech companies, they're not going to need so much material or labor-intensive assets, and they're going to want high-speed digital assets.

And we've got a number, a handful of trillion-dollar companies. There's going to be a lot more trillion-dollar companies, and those trillion-dollar companies are going to generate capital at an enormous rate. And there's going to be a pressure to put that capital somewhere, and bitcoin has emerged as the primary global digital capital asset. And so the macro trends are very good. There's going to be increasing excitement as this trend continues.

We can go to the next slide. MicroStrategy likes to keep track of its performance. This chart is as of yesterday, market close. So as we look at the trend yesterday, this is over about 4 years from August 10, 2020, to close of market July 31, 2024. And what you can see is that traditional financial capital that is bonds, they're not performing well. There's definitely a lot more money in the system, but bonds are minus 18%. Silver is not keeping up. Gold is underperforming the general cost of capital. S&P and Nasdaq, up 60% and 64%, respectively. That 60% is effectively the institutional traditional cost of capital for mainstream investors. And it works out to divide by 4, 11%, 12%, 13% compounding per year. Bitcoin has dramatically outperformed that. Bitcoin is up 442% over that same time frame.

MicroStrategy's objective was initially to escape the malaise of being a non-big tech company. And then it was to track the bitcoin index, and now it has become to outperform bitcoin. And we're proud to say that we've managed to achieve 1,206% return for our shareholders versus the bitcoin 442% over that time period. Now clearly, we have done that through the use of intelligent leverage and taking advantage of our operating flexibility. And Phong and Andrew laid out some of our metrics, especially BTC Yield. And you can see a company that can generate a BTC Yield or some intelligent leverage has a decent chance of outperforming bitcoin.

We've also compared ourselves not just to main asset classes, but we compare ourselves to big tech stocks. And as you can see, big tech stocks that are labor intensive and energy intensive and capital intensive and have a lot of friction in the operations, shipping and energy intensive, they've struggled more. And you see Amazon is up 19%. You can see Meta, Apple, Microsoft, Google, Tesla, they all look extraordinarily strong. They've all outperformed the Nasdaq, and those are typically on the tip of people's tongues as the great, strong, big tech performers. But of course, there's one standout, which is NVIDIA. And NVIDIA has captured the great majority of the AI productivity boost and excitement and enthusiasm.

And as I pointed out to people, if you are one of millions and millions of companies and you can copy big tech and copy Apple or Meta or Google or Microsoft or the like, you should. But of course, it's very difficult to do. You could try to copy NVIDIA. But as you can see from the chart, even Google, Microsoft, Apple and Meta are struggling to copy NVIDIA. Everybody in the world is asking the question, how do we copy NVIDIA and what do we do when this run ends? And I'm proud to say MicroStrategy is outperforming NVIDIA over these 4 years, right, 1,206% versus 948%.

And I'll make the point that we make often, which is it's not obvious to me how any company copies NVIDIA. It's very straightforward to copy MicroStrategy. We published our corporate playbook. We're happy to explain it to anybody. We do have some companies that are starting to copy us now, and we couldn't be pleased or more -- happier about that. So we think the bitcoin strategy is the way to go. What we're doing is taking advantage of digital capital. NVIDIA is being boosted by digital intelligence.

And clearly, every company is going to be profoundly impacted by digital intelligence in their P&L. They can use it to cut their cost, or they can use it to create breakthrough new products, revolutionary products, revolutionary new services or just dramatically increase the quality of their products and services. And so of course, every management team is thinking, how do I improve my operations by plugging digital intelligence into my P&L. But our message is you should also plug the digital capital into your balance sheet.

And as you look at the chart below, you can see most companies are capitalized on bonds, and bonds are minus 18% for the past 4 years. And if they were rather capitalized on bitcoin, which is plus 442%, that would be a game changer to every company, every public company, every private company. And you can see just how much of a game changer it is when you just look at the MicroStrategy results, but we think it's pretty clear. If you have a healthy business, digital capital is going to make it even better. And if you have a cash cow business or if you have a business which is not growing as fast as big tech and FANG stocks, then digital capital in the form of bitcoin is going to save it. And so we will continue to pursue a bitcoin strategy. And every quarter, we'll keep track of this result.

Now we go to the next slide. MicroStrategy is a bitcoin development company. So how do we intend to move forward? Well, first, we'll take advantage of our advantageous corporate structure. We're an operating company. That means we have permanent bitcoin capital, and it also means that we have operational flexibility. And our objective is to outperform spot bitcoin ETPs. They're trust companies. They don't have permanent bitcoin capital. They have to redeem when someone presents the shares for redemption. And they don't have, therefore, that permanent capital base that they can lever. They don't have the operating flexibility that an operating company has.

So the key for us to outperform is to responsibly use that capital and responsibly use our operational flexibility. We also are using our ability to develop software to generate cash flows to build our brand and to make bitcoin successful. We will use our cash flows that we generate in the operating business in order to acquire bitcoin. And of course, capital markets is a very important part of our strategy. This last quarter, as Andrew noted, we used a combination of debt issuance and then convertible issuance and convertible redemption and cash purchases in order to create BTC yield and in order to acquire bitcoin.

We can go to the next slide now. The world is full of bitcoin investors and especially bitcoin maxi investors, they like bitcoin, and they would like to find a way to outperform bitcoin spot ETFs, and they like to find a way to get more bitcoin per share. And so we've created this KPI BTC Yield. We focus on it, right? If we have a chance to do a deal, which would not have a BTC Yield for us, it looks like a bad deal. And when we see a deal that generates good -- a very substantial BTC Yield, well, we like that deal. You can see what we've done year-to-date, 12.2% BTC Yield. We are going to run the business such that we can generate a consistent ongoing BTC Yield.

As I've said, we've got operating flexibility. We've got bitcoin capital. We also have credibility in the capital markets, and we have experience in the capital markets. So we'll be continually evaluating various options. And when we see a chance to generate BTC, we'll move forward. And if the market isn't offering us something we find compelling, then we'll take our time.

And with that, I'd like to thank everybody for their support. And I suppose we can move on to the Q&A.

[Shirish Jajodia, executive]

Thank you, Michael. We are now going to jump into questions. And the first question is for Michael. MicroStrategy's equity premium to its bitcoin holdings has remained healthy over the past few months despite the bitcoin price swings and Board directions. Would you attribute this to your ability to achieve positive BTC Yield?

[Michael Saylor, executive]

Yes. I think that long-term bitcoin holders -- and bitcoin really is the longest-duration asset. People that believe in bitcoin are thinking this is the apex property that you do not sell your bitcoin. So when you have an investment in bitcoin, you're not talking about holding it for a short period of time and flipping it. Now when you think about holding something for 30 years or 40 years, if you have a vehicle like a closed-end fund that charges 250 basis points as a fee, that looks like a negative BTC Yield of 2.5%. We have experience with those sort of things, and we've seen they trade at a discount to net asset value. Closed-end funds with a long fee that you're going to own an asset you're going to hold forever, they start to like a multiple of the negative BTC Yield.

And on the other hand, if you can -- if we can get away from that and we can create the opposite but a positive BTC Yield, we expect that, over time, investors are going to say, how much does it cost me? Or how much do I benefit from holding my capital in that closed-end fund versus that ETF versus that operating company? All things equal, I'd rather have a company that generates plus 250 basis points a year instead of minus 250 basis points a year.

The market is going to value our equity based upon their assumptions about the risk and their assumptions about the bitcoin market and their holding period. And they will make assumptions about what kind of BTC Yield we can generate and how important that is. And then they'll put a multiple on it. But I know that in the debt or fixed income market, if you have a 30-year swap and interest -- or a long-dated treasury bond and the interest rates move up, then the bond can trade down. As the interest rates move down, the bond can trade up. And normally, you'll multiply the interest rate change and basis points by a duration number. It can be long duration. You can get to 10 to 20 depending upon the bond.

And in the equity business, people will look at earnings per share per year, or they'll look at whatever accretion they'll get each year, and they'll put a [ PD ] multiple on it. If they're enthusiastic, they'll put a high multiple. Or if they're skeptical, they'll put a low multiple.

So I think that we're trading at a premium to net asset value based upon our shareholders' belief that we can outperform the ETFs that don't have any operating flexibility. And they've been pleased with our capital markets activity, and they've been pleased with our strategy of acquiring bitcoin by various methods. And that represents a differentiated investment for them. So I think that the BTC Yield is a useful metric to consider. I think that the investors will end up deciding what they think over the next decade. But a bitcoin development company should be able to outperform spot bitcoin ETF in the form of a trust if the management team is prudent in their measures.

[Shirish Jajodia, executive]

Thank you, Michael. Next question is for Phong. On the software side, how did you feel about the Q2 cloud conversions relative to your expectations? And how should we think about the rest of the year with respect to your cloud migrations and AI-related partnerships?

[Phong Le, executive]

Thanks, Shirish. We had, in Q2, the largest cloud bookings quarter, including conversions that we've had in the history of the company and by about twofold -- a little bit more than twofold. So the conversions are accelerating, which is great. It's going to have our long-term ARR and our long-term recognized revenue. But as Andrew mentioned, it depresses short-term recognized revenue because that doesn't show up and get recognized in the quarter. It gets recognized ratably over the course of the year.

So we had a really good quarter in terms of cloud conversions. And of course, that helps with the overall health of the business. But the other thing it does is it accelerates the adoption of AI because our AI product is only available on the cloud. And so we also saw a big uptick in the purchase and the use of AI in the second quarter. And I think that's going to start to accelerate also. And so we'll see nice adoption and usage of our first-to-market AI product. So both of those are positive trends in the business and bode well overall.

[Shirish Jajodia, executive]

Thanks, Tom. Next question is again for Michael. How does management decide between raising proceeds from debt or equity issuances and whether to use the convertible debt or ATM equity issuances? And how do we think about different options?

[Michael Saylor, executive]

Well, we have lots of options. We have options, including cash purchases, straight debt, convertible debt, equity or other types of operational measures that might generate income that we can use to acquire bitcoin. We're continually evaluating the capital markets. And the relationship between the options market, the futures market, the bitcoin spot market, our equity market and then developments in our business and the opportunities we have from various counterparties all go into the mix. This year, we did acquire bitcoin with equity issuance. And we thought that, that was extremely accretive. Then we did a debt offering and a convertible debt offering that was extremely accretive. It turns out that the next week, the bitcoin market surged and the convertible market surged and the equity market surged and we could do another convert offering.

That was literally a decision-making process that took place over a matter of days. Sometimes in days, we'll move when the market offers an opportunity. Then we went ahead and redeemed the '25 note that was in response to the capital markets. The next debt deal in Q2 was in response to the capital markets. We're always -- we consider things like the duration of the deal. We consider the nature of the pricing of the deal. We didn't really choose to pursue equity so much in Q2 as we did in Q4 of last year or early Q1 just because the markets are shifting.

And the relationship between bitcoin, the options market, the convertible debt market, the fixed income market, the equity market, those are all changing. They literally change. To say they change every quarter is a reasonable statement, but sometimes they change week-by-week and month-by-month. So I think the great situation we're in is that we don't have to do anything quarter-by-quarter. We can afford to take a quarter off. But we can also -- like in Q1, we can do an ATM deal, a convertible debt deal, a second convertible debt deal and a cash purchase. And we can use all 4 different things, and we can do that in a hurry.

So we tend to let the capital markets drive our decision-making by keeping an open mind and being flexible. And what we wanted to do was give our shareholders a useful KPI that helps them understand how we think about a deal that's a good deal to do. We think if we can generate BTC Yield and a substantial BTC Yield, then probably we'll entertain it. If the market is offering us a proposition that looks like a de minimis yield or no yield or negative yield, obviously, we just pass on that.

[Shirish Jajodia, executive]

Thank you, Michael. I think we have time for one last question, and this is for Andrew. How do you think about any incremental leverage capacity and interest expense capacity given the increased overall interest expense relative to the operating cash flows from software business?

[Andrew Kang, executive]

Thanks, Shirish, for the question. I guess I'd start by saying we actively manage and forecast our cash. And at the moment, we forecast adequate cash to service our existing debt based on the overall software revenues, which continue to remain durable. And as we mentioned before, we're building stronger ARR as we transition to the cloud. We also manage our cash after taking into account a fully funded software business as well as our debt service needs. So we take the full picture when we're thinking about incremental debt and interest expense. And I just would say we manage it extremely carefully.

And keep in mind, too, we also have additional sources of liquidity available to us, as Michael mentioned, via the capital markets if needed. And we continually assess various liability management opportunities across the debt stack that kind of gives us a profile of our needs as well as our capacity. So overall, I'd say we feel very comfortable with our ability to service the debt. And we'll continue to be active in ways that will continue to generate that BTC Yield KPI that we announced earlier today.

[Shirish Jajodia, executive]

Great. Thanks, Andrew. So thank you, everyone, for your questions. And this concludes the Q&A portion of the webinar. I will now hand over the call to Phong for final closing remarks.

[Phong Le, executive]

I want to thank everyone for their time today, and appreciate all of your support, and I look forward to seeing everybody again next quarter. Thanks.