Microstrategy Inc

NASDAQ:MSTR

Earnings Call Transcript 2020-Q4

[Jeremy Price]

Good evening, everyone. I’m Jeremy Price MicroStrategy Senior Vice President of Financial Planning and Analysis and Head of Investor Relations. I'll be your moderator for MicroStrategy is 2020 Fourth Quarter Earnings Webinar. And 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'll refer to certain non-GAAP financial measures. Reconciliations showing GAAP versus non-GAAP results were 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 question.

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

[Michael Saylor, Chairman & CEO]

Hi, this is Michael Saylor. I'm the Chairman and CEO of MicroStrategy I'd like to welcome all of you here today to our webinar regarding our 2020 fourth quarter financial results. I'm here with Phong Le, our President and Chief Financial Officer.

I'd like to pass the floor to Phong who is going to discuss our operational and financial results for the quarter.

[Phong Le, President & CFO]

Thank you, Jeremy. Thank you, Michael.

The fourth quarter was a good finish to what was an exciting and transformational year for MicroStrategy. Before I review our fourth quarter results in detail. I want to underscore the key highlights from 2020 for the company. First we had a solid sales year in light of the economic environment. Total revenue for the year was down only modestly and our performance in the second half of the year was notably strong.

We also made important progress and our shift towards our cloud offering which drove current subscription billings to $15.5 million as of December 31, 2020 up 41% year-over-year. Second, we embrace the virtual wave to dramatically improve the cost structure and operating efficiency of the business.

For the year, we reduced non-GAAP operating expenses by 15% or $55.8 million and increased non-GAAP operating income of $68.2 million dollars from $9.2 million in 2019. Third, we deploy the excess capital on our balance sheet to generate substantial shareholder value. We return, a $123 million to shareholders via share repurchases and instituted the unique an innovative treasury reserve policy that made MicroStrategy the first publicly traded company to utilize bitcoin as its primary treasury reserve rights.

Over the course of the year, we purchased 70,469 bitcoins for an aggregate price $1.125 billion or an average price $15,964 per bitcoin. As of 4:00 p.m. in January 27 our digital assets had a market value of $2.2 billion. Finally regarding our bitcoin strategy our pioneering decision to make bitcoin our primary study reserve asset has made MicroStrategy a thought leader in crypto currency market in generating great interest in MicroStrategy as a corporation.

Going forward, we continue to plan to hold our bitcoin invest additional excess cash flows in bitcoin and explore various approaches to acquire additional Bitcoin as part of our overall corporate strategy. Our fourth quarter performance demonstrates significant success across each of these key objectives. From a demand perspective, we had a solid quarter particularly in light of the uncertain macroeconomic environment related to COVID-19.

Subscription revenue in the quarter was up 21% year-over-year and subscription billings were up 41% year-over-year. Our subscription business is being driven by new sales of prospects and existing customers and conversions of existing on-premise customer deployment. In Q4, we converted several retailers for MicroStrategy’s on-premise software to cloud continue to expand our presence with major pharma companies worldwide and are adding to our pipeline of conversion included in the financial services industry.

As we have discussed in the recent quarters. We see enterprises getting more aggressive and developing plans to move to the cloud in the coming years as a part of a broader refresh of their IT stack. Business Intelligence Solutions are one of the last segment of the IT stack to move to the cloud and we believe market conditions are favorable to that migration to accelerate in the coming years.

Product license revenue performed in line with our expectations and was a solid result following the exceptionally strong performance we delivered in the third quarter. The growing strength of our cloud business and the improved performance of our license business in the second half of the year is an encouraging indication of improved demand for the MicroStrategy platform as well as our ability to manage the mix shift to the MicroStrategy Cloud and subscription revenue without a significant impact to our product license revenue.

HyperIntelligence also had a strong quarter in Q4. The combination of HyperIntelligence is ease of use and powerful actionable insights it's highly differentiated and is enabling us to signed deals. We believe we would have been unlikely to win several years now. In Q4, we had large HyperIntelligence license deals with a strategic federal government agency as well as a major North American telco.

HyperIntelligence as well as our entire suite of modern enterprise and analytics offerings like dossier and library remain a key focus for us and we will continue investing deferred brought and enhanced the solution. We're also seeing positive results in our embedded business, our position as the leading independent enterprise grade business intelligence platform makes MicroStrategy the preferred vendor for technology partners the complex technical and business needs.

During the quarter, we signed a sizable new win with a Fortune 500 customers in the financial services payments industry and also saw strong adoption with existing customers. Our fourth quarter results are also an important demonstration of the positive impact from the changes we've made throughout the year through our go-to-market efforts. We're now eight months into our transformation to a fully virtualized demand generation marketing and direct sales strategy.

This is an ongoing process. As we continue to iterate and refine best practices for generating demand virtually. We continue to see very positive returns from this transition with significant improvements and lead generation and customer engagement at a fraction of the price. Importantly, our pipeline of opportunities remains strong even as we work through this virtual transition.

A great example of the benefits of virtual demand generation is our upcoming Annual User conference MicroStrategy World scheduled for next week February 3 through 4th. We've been hosting a physical event for years that typically drew 2,500 attendees. This year we plan to more than quadruple that attendance and reach customers and prospects in more than 100 countries. We plan on using this event to introduce our MicroStrategy 2021 product.

Highlights include significant upgrades to our modern clients including HyperIntelligence, HyperVision, library and dossier continued innovations in our cloud solution, including our multi-tenant SaaS product HyperNow and improvements to our enterprise capabilities like Hyper SDK, Python SDK and greater API functionality all to further establish ourselves as the leading enterprise embedded analytics and OEM BI platform.

And of course our product continues to get faster with more in memory key data, smart memory management and the MicroStrategy desktop application. We also will host a bitcoin for corporations track as part of MicroStrategy World where we will bring together luminaries in this space to talk about how other companies who use bitcoin within their organization. We're excited to host everyone next week and provide updates on our product roadmap and how MicroStrategy helps drive better business performance.

We're proud of the speed and effectiveness with which we've embraced the virtual wave in our go-to-market team. It is having a significantly positive impact on both the top and bottom line. Lower sales and marketing expense is the biggest driver and a 17% reduction in non-GAAP operating expenses in the fourth quarter. In Q4, 2020, we had $30.1 million of non-GAAP operating income up from $12 million in Q4, 2019.

Our Q4, 2020 non-GAAP operating margin was 23%. The sustainable improvement in our operating profitability gave us the confidence to further strengthen our balance sheet with a successful $650 million convertible notes offering during the fourth quarter. The positive market reaction in the offering which we substantially upsize from our initial target of $450 million is an encouraging validation of our strategic priorities.

In accordance with our treasury reserve policy, we deployed the net proceeds of our convertible offering to buy an additional 29,646 bitcoins at an average price of $21,925 during the fourth quarter. We believe utilizing our balance sheet to acquire additional bitcoin is an important way we can enhance the returns we generate for shareholders. Before turning to our financial results in greater detail, I'd like to finish by reiterating some of the key takeaways from the Investor Day we held in November.

We are as excited as we have ever been about the opportunities that lie ahead for MicroStrategy. The analytics market has evolved to more focus on modern open enterprise scale platforms that play to our strength. The investments we have made in recent years and our product portfolio with the release of MicroStrategy 2019 and 2020 and the introduction of HyperIntelligence enables us to take advantage of these favorable market trends.

Most recently the introduction of HyperNow will make it easier than ever for customers to experience the value of MicroStrategy it should facilitate a compelling land and expand opportunities opportunity with new customers. We're confident that we have laid the foundation to return to sustainable long-term revenue growth and significant profitability. Our goal is to generate constant currency revenue growth starting at this from year 2021.

Based on our performance in 2020 including our ability to improve our cost structure and accelerate our transition to the cloud. We are updating our non-GAAP operating income forecast for 2021 to $70 million to $90 million. In addition, we believe investors should focus on two key metrics to judge our strategy success in 2021 growth in cloud subscription billings and the price of bitcoin.

Subscription billings would be the best leading indicator of our momentum in the cloud which is our top operational priorities. Bitcoin is our top asset allocation priority and we remain confident it represents of compelling asymmetric investment is positioned well for meaningful additional appreciation going forward. We believe success on these fronts would make MicroStrategy compelling investment opportunity.

Turning to our fourth quarter 2020 financial results in more detail, GAAP revenues for the quarter were $131.3 million down 2% year-over-year. Product license revenues were $29.8 million in the fourth quarter of 2020 essentially flat year-over-year. Subscription services revenue in the fourth quarter of 2020 was $8.8 million and increase of 21% year-over-year. The growth in subscription services revenues reflects the growing portion of our product bookings that are related to our managed cloud platform.

We're pleased with the performance of our cloud business in the quarter. Product support revenues were $71.9 million in the fourth quarter of 2020 a 4% year-over-year decrease. The year-over-year decrease was primarily the result of a decrease in new perpetual in term license contracts in the first half of 2020 and customer conversions to subscription or term licenses. Our renewal rates remain strong this quarter.

And we are executing our strategy to actively migrate customers to annual term licenses. As we continue to execute on this strategy, product support revenue will continue to move to subscription revenue with customer’s transition to the cloud while product license revenue if the customer converts from a perpetual to on-premise term license.

Finally other services revenue of $20.9 million in the fourth quarter of 2020 which largely reflects our consulting services decreased 3% year-over-year and increased 15% quarter-over-quarter. Remote delivery of our services to customers is impacting services revenue – which we expect to grow, which we expect to continue going forward. Total deferred revenue at December 31, 2020 was $205.9 million.

This is up 8% year-over-year primarily due to increased deferred subscription services revenue up 110% partially offset by a decrease in deferred product support revenue down 2%. Foreign currency translations positively impacted deferred revenue by 2% particularly in support revenue as we see more existing customers convert to our managed cloud platform there is a shift from deferred product support revenue to deferred subscription services as well.

Total non-GAAP expenses were $101.2 million in the fourth quarter of 2020 a 17% decrease year-over-year and essentially flat quarter-over-quarter. The year-over-year cost decreases is driven by efficiency and staffing, reductions and corporate travel, a reduction in the number of in-person events mostly related to marketing and lower rent expense due to a one-time gain related to modifications in our headquarters leads. Total non-GAAP operating income was $30.1 million in the fourth quarter of 2020 a 152% increase year-over-year and up 13% quarter-over-quarter.

Turning to the balance sheet, we ended the quarter with $59.7 million in cash we issued $650 million in convertible notes bearing interest rate of 0.75% an initial conversion price at $397.99 and conversion premium of 37.5%. The net proceeds from the sale of the notes was approximately $634.7 million after deducting the initial purchaser's discounts and commissions and customary offering expenses payable by MicroStrategy.

In accordance with the company's treasury reserve policy we invested the net proceeds from the sale of the notes in the quarter. In the fourth quarter of 2020, we purchased approximately 32,220 bitcoins for $700 million an average price of $21,726 per bitcoin. As of December 31, 2020 the company holds an aggregate of approximately 70469 bitcoins which were acquired an aggregate purchase price of approximately $1.125 billion at an average purchase price of approximately $15,964 per bitcoin inclusive of fees and expenses.

We account for our a bitcoin holdings as an indefinite, lived tangible – intangible assets which are subject to impairment losses if the fair value of our bitcoin holdings decrease below its carrying value during the reported period. The carrying value of our bitcoin holdings as of December 31, 2020 was $1.1 billion which reflects a $70.7 million cumulative impairment charge that also is reflected as a loss on our GAAP income statement.

We incurred an impairment charge of $26.5 million in Q4, 2020. We are required in March, our bitcoin holdings at the lower spare market value price since acquisition of each bitcoin. We exclude the quarterly impact of bitcoin impairment charges from our non-GAAP operating income and non-GAAP diluted earnings per share operations. Going forward, we’ll continue to actively manage our balance sheet including potential share repurchases.

You should expect for our treasury policy that we will purchase additional bitcoins we generate cash beyond what we need to run the business on a day-to-day basis or to deploy for other corporate purposes. Consistent with this policy on January 22, 2021 we announced repurchase approximately 314 bitcoins for $10 million an average price of approximately $31,808 per bitcoin inclusive of fees and expenses.

I'll finish by saying we're encouraged by the company's performance in 2020 and we're excited about the potential for 2021. There are a lot of positive things happening at MicroStrategy.

And with that I will turn the call over to Michael to talk about our product innovation, MicroStrategy World and our capital allocation strategy in more detail.

[Michael Saylor, Chairman & CEO]

Thanks Phong.

I'm really excited about 2021 looking forward if we think about the really exciting technology opportunities we have HyperIntelligence is really the cutting edge of MicroStrategy’s business development strategy. HyperNow really represents giving people the power of HyperIntelligence out of the cloud in a multi-tenant environment in less than an hour. I think the HyperNow gives us scalable HyperIntelligence.

If we can take all of the human labor out of the mix and all of the software downloads and installations of the mix then it’s possible for a mid-sized company and Singapore on a Saturday afternoon to find our website sign up for HyperNow plug into our SaaS offering, integrate into one of their databases, plug in their enterprise security, build an application and deploy it out to thousands, tens of thousands or hundreds of thousands of their employees.

Customers and partners all not even on a week-day without talking anybody on the phone, without going into the office it's just really compelling. HyperIntelligence is not just compelling because we're going to be deploying it out of the cloud in 2021. It's also exciting because we've made a lot of nice upgrades to HyperIntelligence. For example, we provided HyperVision and you can see an example of HyperVision on our strategy.com website.

But the idea is, I look at the documents and I lighted up in 10 different colors based upon the underlying metrics that the HyperIntelligence engine sees and codifies. So wouldn't it be great if I can read a list of one thousand names and see the ones in green that are making me money, the ones in red that are losing money and the ones in the yellow that I need to be focused on my see it in a split-second that's HyperVision.

We made it possible to build these HyperVision applications and deploy them rapidly many cases less than half an hour. Our technology strategy is take 20 years of engineering of business intelligence that's industrial strength that was formally deployed on-premises or in single-user instances and to place that into a multi-tenant through SaaS offering take away the friction and make it possible for anyone honor of anytime to build these applications quickly and easily.

So Hyper is part of it. The multi-tenant cloud is part of it another really cool part of it is the embedded aspect of our business intelligence offering. Everybody wants to embed intelligence into their apps into their websites with HyperIntelligence you can actually build a HyperCard application. If you're a big retailer, a big exchange and Amazon and eBay, what have you, you can build a HyperCard application.

And then you could deploy it into your own website with just a few lines of code that you paste into website using our SDK, and what that means is we view the website with millions of users and you wanted to deploy HyperIntelligence on your website, without any download without any installation of an extension without any special authentication. You could build that app, you could deploy it on your website, you could deploy it out of our cloud subject to your security using our SDK in an hour on a Saturday that's really powerful embedding.

We focused upon similar types of embedding technology to allow you to embed very, very deep analytics from MicroStrategy is platform or dossiers from MicroStrategy’s platform. And I think the thing that makes us truly industrial strength in 2021 is the ability to spin up these cloud environments plug them into data and then embed them into applications that already have thousands or hundreds of thousands or millions of users.

So we're really excited about that. I'm excited about some other cool innovations we're working on. For example, the next version of HyperNow and HyperIntelligence has the ability to tweet and share to Twitter HyperCards. And so I think you're going to start to see more HyperCards floating around the Twitter sphere shortly. As always our business strategy is to innovate on the cutting edge to provide the most modern, the most enterprise grade platform that we can.

And to be the industrial strength platform for intelligence for corporations that make their living off of extracting these insights and those corporations need to embed those into their own OEM offerings. We are running the virtual wave as you can see right now. And as I say to people and my own corporation all the time – in the era of the virtual wave, you can now so many words at speed of light and you can bend time and space.

What are you going to do with that power? What it means to us is reach out to more of our customers more frequently more effectively. You're going to see that in full force next week with MicroStrategy World which is going to be our biggest marketing and education event in the history of the company. It's free to all, it used to be that our business was about, collecting 2,000 3,000 or 4,000 customers for a few days at some hotel in Vegas or Orlando or somewhere in Europe.

And they had to take three, four, five days of their life to come. I estimate that probably between the expenses of MicroStrategy and the customer expenses it was a $10 million operation to stage a MicroStrategy World. This year we're going to have a MicroStrategy World event, which will be better and be more comfortable for our customers. We’ll have dramatically more attendees. We’ll spend an order of magnitude less money and they will spend almost no money.

We are already in excess of 10,000 expected attendees, but that registration is building very, very rapidly as we approach the final date. That MicroStrategy World now we'll have more engaging sessions. We’ll have solutions sessions. We’ll be bringing together our customers that are working on common platforms everywhere in the world. We're doing some innovative things to make this easier for international customers in Europe, and Asia-Pacific to get involved.

Of course we'll generate huge amounts of content that will be uploaded as on demand streaming content so that it continues to work for our customers in the coming 12 months. We've had the opportunity with that MicroStrategy World event to add a track call the bitcoin for corporation’s summit. And that's very, very exciting for us as well I’ll say more about that in a second.

A few words on our capital allocation strategy as you know, we've been using bitcoin as our treasury reserve asset and we continue to believe that bitcoin serves as the best store of value and its very attractive investment asset with more long-term appreciation potential to holding cash. Going forward, we're going to pursue two corporate strategies. One strategy is to grow our enterprise software business.

The other strategy is to acquire more bitcoin, it is a bitcoin strategy that means we're not only holding our bitcoin as a primary treasury reserve asset, but we'll also be seeking to actively acquire additional bitcoin as part of our overall corporate strategy. In the quarter, we did acquire bitcoin on three separate occasion or two separate occasions. We acquired $50 million worth of bitcoin at $19,227 a bitcoin on which we announced around the 4th of December.

And around 21st of December, we announced we had acquired another $650 million worth of bitcoin at around $21,925 a bitcoin. And of course as Phong pointed out on the 22nd of January, we acquired more bitcoin $10 million worth of it at $31,808. Our view of bitcoin is, it is the technically superior digital asset in the world. It’s a superior asset for storing value over the long-term.

That means we expect capital to flow into this asset from other weaker assets or other assets that don't have the favorable technical characteristics of bitcoin. And in addition to bitcoin being a great digital asset and a great store of value bitcoin is also an open protocol for moving monetary energy. It is in essence the first digital monetary network having an engineered safe haven assets and also having it run on a digital monitoring network makes it an extraordinarily unique opportunity for our company.

We intend to continue in our role as an innovator and as a market thought leader in the space. One thing we've done is prepared a bitcoin corporate playbook and we have gathered all of our documents related to governance, to accounting, to security, to technical protocols, to finance that we believe would be interesting to other corporations that wish to integrate bitcoin into their corporate strategy.

And we're going to open source these documents and make them freely available to the world. We think it's good for the industry, we think it's good for us. And if you sign up for our bitcoin for corporation’s summit next week, you'll be able to get early access to these documents. We will go beyond this to make other bitcoin education materials available to anyone in the world that's interested in them.

We have done that up to now by placing many of these education materials on our hope.com domain. So if you ever want to know more about bitcoin just remember bitcoin is hope and type hope and you will go to our hope domain and you will see not only the ability to sign up for this conference. But also all of the other bitcoin materials we have gathered and curated. I continue to advocate the bitcoin standard and evangelize bitcoin as a solution to many problems that corporations and individual investors around the world face.

We've had good success in our outreach. On YouTube I've got videos, some videos that have run 400,000 times certainly 2 million hours or more probably 2 million to 4 million hours of streaming video on YouTube that we've contributed. We believe this is good for bitcoin we believe it's good for MicroStrategy’s brand. We believe that is going to help us to grow our enterprise software business as well as to pursue our bitcoin strategy.

And so far we've seen lots of positive benefits from our educational initiatives, very, very good feedback from our employees. We're finding that we're able to attract and recruit employees more easily. We found it's good for employee retention and moral. We found it's also very good for our sales and marketing and outreach to corporations all over the world. When you are an enterprise software company, one of the most important things to do is always established relationships with Senior C-suite executives.

And if they know your company and if they've heard your company and there are positive vibes in the marketplace around your brand that makes it easier for all of our executives and sales teams to meet with and engage with the customer. So we feel really good about the synergy between our software strategy and our bitcoin strategy and we'll continue with that.

With regard to Bitcoin for corporations next week on the 3rd and 4th of February, we will host I expect it will be about 2,000 or more executives and officers, directors and advisors of corporations who are interested in figuring out how they might integrate bitcoin into their corporate strategy. And it's a hot topic because as the bitcoin monetary network grows, you’ll see lots of examples of successes like Grayscale.

Grayscale grew their assets by a factor of 10 in 12 months. You’ll see successes like Square and PayPal, both of which have had extraordinary success by plugging their mobile apps into bitcoin. You’ll see other companies like Genesis and ID who have an extraordinary success acting as prime brokers for bitcoin. You see companies like Fidelity they are having success offering, offering fund and brokerage and custodial services for bitcoin.

The industry is really growing rapidly all the companies in the industry that have that have managed to integrate bitcoin into their strategy, either on their balance sheet as a treasury reserve asset or and their P&L are seeing extraordinary enthusiastic response from – market share gains and they're creating shareholder value. We're going to be sharing everything that we know about how to go about doing this.

And in addition to laying out our methodology and sharing our experiences, we've also brought together 10 of the enterprise grade bitcoin vendors in this space. And either I or Phong will be interviewing the CEOs or the heads of institutional services and sales for each of these top 10 vendors in the space. So that if you wanted to come up to speed in a matter of 10 hours and jump start a process that would take you two or three months then you can do it in two days next week.

And of course when we finish with our sessions next week, we will go ahead and upload those on demand to make those resources available to the industry going forward for the coming year. So to summarize, we're really enthusiastic about our enterprise software strategy HyperIntelligence. Our multi-tenant cloud and our embedded Intelligence in SDK capabilities give us a differentiated offering in the market we're best-in-class there.

And I expect we'll continue to grow that business. We're very enthusiastic about our bitcoin strategy. We have a chance to be a leader in this marketplace and we're going to do our best to execute on that strategy and help other companies follow us in what we have done. And with that I want to thank everybody for your support and shareholders.

And I will go ahead and pass the floor to Jeremy for Q&A.

[Jeremy Price]

Thank you, Michael. We've got some good questions here and we'll start off with Michael. Michael, how do you envision the role of MicroStrategy participation in the bitcoin network evolving in the future and will the company look to build a software business that leverages the growth of bitcoin – the bitcoin monetary network will you expand the company go beyond being a leader for bitcoin treasury education?

[Michael Saylor, Chairman & CEO]

We have a strong team and we're actively studying the bitcoin industry and all the activities in the process in the industry and all the data in the industry to determine the best way for us to add value with our existing business intelligence and HyperIntelligence. Although we don't have anything that we are ready to announce, right now. We are enthusiastic about the opportunity to bring our intelligence to the industry at the right time in the right fashion.

[Jeremy Price]

All right. Just as a reminder, please use the Q&A feature at the bottom of your zoom screen in order to ask questions. Next question for Phong, how should we think about the growth of license in 2021 given the momentum around cloud in subscription?

[Phong Le, President & CFO]

Yes thanks, Jeremy. Obviously we're pretty excited about the ability to transition to the cloud. We are still early in that process. I think as I noted, we saw 21% growth in our cloud revenue on a year-over-year basis and 41% growth on our cloud billings on a year-over-year basis that was off of Q3 where we saw an 80% growth in cloud billings on a year-over-year basis. So, although early on we're starting to see good momentum.

Obviously when we see subscription revenue come through it’s recognized on a ratable basis so it ends up depressing slightly our product license revenue. And many people study cloud transition models and have experienced that. So if not for that cloud growth in Q4, we would have seen higher product license revenues. All that said, our revenue is generally speaking were flat from Q4, and flat for the full year.

I think as we start to accelerate our growth in 2021 across perpetual licenses and cloud. My goal is to not see a significant change in our product license revenue, not a significant impact from our transition to cloud and see growth in both. And I think with the momentum that we see in our business that is a potential positive outcome its growth across all of our revenue segment.

[Jeremy Price]

Good, thank you, Phong. Next question and I think there are a couple of people who have asked this or some version of this. Are you planning to do another convertible debt offering or have you considered issuing equity debt or others securities to allow you to purchase more bitcoins?

[Michael Saylor, Chairman & CEO]

We're continuing and continuously evaluating our capital position, as well as the market conditions in the capital markets. We have sufficient liquidity to operate our business as it's currently conducted while it's possible to raise additional capital if we think it makes sense to, it would be inappropriate for me to comment on any future financial plans.

[Jeremy Price]

Okay and I think a follow-up question there is, will you purchase additional bitcoins in future periods?

[Michael Saylor, Chairman & CEO]

Well bitcoin is an important part of our overall strategy. So going forward, we will continue to plan to hold our bitcoin we will invest additional excess cash flows in bitcoin. And we'll explore various approaches to acquire additional bitcoin as part of our general corporate strategy.

[Jeremy Price]

All right, thank you Michael. Let's see here. Are you a software company or just a bitcoin investment vehicle?

[Michael Saylor, Chairman & CEO]

We’re a global leader enterprise analytics software and services. We continue to operate the software business as we have over the last 30 years. I mean, but at the same time bitcoins an important part of our strategy, we have a bitcoin strategy. In addition to our software strategies so if you just keep in mind that we've got two strategies we're going to pursue them both very enthusiastically.

Then I think that's the best way to think about the company. We're going to grow our enterprise software business and we're going to acquire additional bitcoin on the balance sheet.

[Jeremy Price]

All right. This one is another bitcoin question, does your bitcoin strategy depend on selling high and buying back more bitcoin at lower prices?

[Michael Saylor, Chairman & CEO]

No, no, it doesn't. Our belief is that that bitcoin is the first effective digital monetary network and it's going to grow over time. We're early adopters. The early bitcoin holders are adopters. It's the solution to every company's problem and every individual investor’s problem. And so, as more and more corporations adopt the bitcoin’s standard and they use it as a store of value. As more investors and mutual funds and hedge funds use it as a store of value, as more individuals use it as a store of value, the overall amount of monetary energy, the total amount of capital flowing into the network is just going to increase in time.

And because there's a fixed amount of Bitcoin, that just means the price is going to go up. And as I've said to many people, if you - the nature in the free market is in a free market capital flows from the weakest assets to the strongest assets. If you were in an economy that had a collapse in currency like Venezuela, and you had dollars and you had Venezuelan Bolivar.

Well, the dollar is going to go up in value versus the Bolivar continuously and forever, as long as the one currency is weakening, the other is strengthening. And I think free capital markets were continuously adjusting as the capital flows to the place where you get the highest return. I think because Bitcoin is the technically superior asset, it's thermodynamically sound money, I think that more and more monetary energy or capital will flow into it. I think the price will continue.

And certainly, there's no reason why it shouldn't replace gold as a nonsovereign store of wealth, and gold is a $10 trillion asset class. So we don't try to time the market. We don't think there's any particular point at which you would ever trade out of the market. Bitcoin is a better safe haven asset than gold. If, in the future, God comes down and invent something better than Bitcoin and more money and more people adopted that, and that becomes bigger and stronger and better, and we see that, well, we'll share that with our shareholders.

And we may incorporate that into our treasury reserve strategy. But right now, Bitcoin seems to be a dynamically strongest asset and a technically superior asset. So we just intend to progressively acquire more Bitcoin.

And we'll probably do it at prices that are going up. I think when we acquired Bitcoin at $11,800, then we did it at $10,000 when it dipped down, and we did it at $19,000, then we did at $21,000, then we did it at $31,000. We're not really attempting to time the market. We're strategic buyers, and we're looking out a decade or longer, which we think is the right way to think about this.

[Jeremy Price]

All right. Thank you, Michael. I'm going to give a question to Phong here. I think Michael has been working too hard. From the time a CFO or a CEO of a publicly traded company mentally commits to buying Bitcoin for their company, to the time it confirms on the blockchain and is on their balance sheet, what's the average time frame for the whole process?

[Phong Le, President & CFO]

Yes, it's a good question and something actually we'll be addressing in our Bitcoin for Corporations Summit next week. There's really no sort of straight answer or one-size-fits-all answer. It depends on how a publicly traded company might decide to invest in Bitcoin. If they decide to invest in a fund, it could be quite a bit faster. There are corporate governance issues and treasury issues that need to be worked through.

If they decide to invest directly into Bitcoin on the exchange and through a custom solution, that could take longer as they identify the right platform, the right custodian or custodians, and the associated controls to it.

So it literally can be done in a matter of weeks if somebody wanted to invest via a fund, and it could take months, as long as six or nine months depending on the corporate governance structure and how detailed the corporation wants to be in.

[Jeremy Price]

Thank you, Phong. Next question is, is MicroStrategy using a self-custody cold storage solution for the company Bitcoin holdings or are services of a third-party custodian being utilized?

[Michael Saylor, Chairman & CEO]

We can't comment on that for security reasons, unfortunately, but thanks for asking.

[Jeremy Price]

All right. We've got another cryptocurrency question. Are you interested in acquiring other cryptocurrencies or diversifying beyond Bitcoin?

[Michael Saylor, Chairman & CEO]

Is this for me or for Phong?

[Phong Le, President & CFO]

I'll let you take that one, Mike.

[Jeremy Price]

This is for you, Mike.

[Michael Saylor, Chairman & CEO]

Yes. Our view is that Bitcoin is an institutional grade treasury reserve asset. It's 95% dominant as a proof of work crypto asset network. That makes it the crypto asset winner if the use case is money or long-term store of value, i.e., digital gold. So what we wanted with our treasury was, in essence, digital gold from the dominant monetary network in the world, the one that was most secure, the one that was most adopted by other institutional grade investors.

And that would be Bitcoin. I think the other cryptos are investment theses. They are more like venture capital investments, and they have a different risk reward profile. And so we don't have a portion of our treasury allocated to venture capital, so it wouldn't be appropriate for us.

[Jeremy Price]

All right. Thank you, Michael. This one will be for Phong. When do you think your subscription revenue will become over 50% of total revenue? And would you agree that it's conservative to assume, based on the current product offering, your total revenue to grow, let's say, 7% to 9% CAGR during the next five years and generate over $500 million of free cash flow?

[Phong Le, President & CFO]

Yes. So a lot of interesting questions in there. First, on our split of revenue, subscription revenue versus support revenue, I think it's probably the way you think about it. We're, right now, we have about $280 million in support revenue and $35 million in subscription revenue, so maybe 10% of total subscription. We are looking to aggressively change that mix shift, right, and move customers who are currently on-prem perpetual maintenance paying customers to subscription customers.

We think it's a higher quality customer, a better level of engagement, and it's something that the whole organization that is working hard on. That said, not every customer is ready to move to the cloud, and we're not going to force them to move to the cloud. So like in 2019 when we had a big program to upgrade all our customers to our latest version of MicroStrategy, this year and going forward, we'll have a program to move our customers to what we call our enterprise cloud.

And then over time, we'll have them move to our SaaS cloud. We think it's an important core part to the business. What is that pacing? I think we'll know a lot better after this year at what pace we can move because we're not forcing our customers and we'll move as fast as can with respect to our customers.

As far as our growth levels, we've talked about a long-term plan, call it three to five years, where we think we can achieve 10% revenue growth. We talked about that in our Analyst Day. Now does that translate to 7% to 9% CAGR over the next five years? I don't think we can get quite that specific yet. But we think that range is not unreasonable. And as a result of that, we think we can see some more incremental cash flow generated from the business so that we can reinvest it for corporate purposes or into Bitcoin.

[Jeremy Price]

Thank you, Phong. And next question is, how are you hedging the volatility in the price of Bitcoin in your financial statements? If Bitcoin is being accounted for as an indefinitely lived intangible asset with annual impairment tests, will there not be a lot of volatility in the financials year-over-year?

[Phong Le, President & CFO]

Yes. It's a good accounting question, but it's sort of the, I'll call it, book value of our Bitcoin versus what may be perceived as the market value of our Bitcoin. How we get to, based on the accounting of Bitcoin as an intangible asset, is every single quarter, we take each and every one of our wallets of Bitcoin and we look at the prevailing low price on our current exchange that we look at and we write-down or impair each of those wallets' stock price. And that's what's led to, I'll call it, sort of GAAP changes in our balance sheet that you saw in Q3 and Q4. And there is a - it creates a perceived disconnect between the book value and what one might interpret as the market value of our Bitcoin.

What we've done is we provided non-GAAP financials that back out that impact in our financial statements and in our earnings report. And as a result, I think there's transparency into both means, the book value and a potential market value that someone can understand better. And I think the market understands that very well and it's very mature. So we don't really need to do any other, I'll call it, hedging of the volatility of our Bitcoin assets as a result.

[Michael Saylor, Chairman & CEO]

And if I could piggyback, Jeremy, we don't hedge the Bitcoin. I don't think it would be a good idea to hedge the Bitcoin. I think that the volatility comes hand-in-hand with the appreciation and the value of the Bitcoin. So it's a mistake to pursue any particular hedging strategy. We would be losing the alpha or the theoretical return on the Bitcoin over time. Our financing time frame is five years.

We have five year convertible note. So we certainly don't look at the volatility over the course of a day, a week, a month or even a year. And over five years, we don't really have any financing against the Bitcoin itself marked to the value of the Bitcoin. The financing is just against the business in general. So I would characterize us as being very patient, long-term holders a Bitcoin, not overly concerned with near-term or even midterm volatility for that matter.

[Jeremy Price]

All right. Thank you both for those answers. And I'd like to thank everyone for submitting questions and participating in the call. I'm going to turn it back over to Michael for some closing remarks.

[Michael Saylor, Chairman & CEO]

Okay, Jeremy. I want to thank everybody that joined us today. For our shareholders on the call, thank you for your support. We look forward to speaking with you again in 12 weeks. And until then, all the best.