Q3 2019 Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Microstrategy Q. So eat what do you mind <unk> earnings call.
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I would know like this article on friends over to your host Mr. Michael Saylor.
<unk> President and CEO you may begin.
Hello, This is Michael Saylor.
I'm, the chairman President and CEO of micro strategy.
I'd like to walk from all of you to today's conference call regarding our 2019 third quarter financial results.
I'm here with our Chief operating officer, and she airfone formally.
First I want to past affordable who's going to read the safe Harbor statement and make some comments on our results for the third quarter.
Thank you Mike going good evening everyone.
Various remarks that we may make about our future expectations plans and prospects may constitute forward looking statements for the purposes in the Safe Harbor provision another private Securities Litigation Reform Act at 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in her most recent quarterly report on Form 10-Q filed with the FCC.
These statements reflect our views only as of today should not be relied upon as representing our views as of any subsequent stage.
We anticipate the subsequent events and developments may cause the company's views to change.
Well the company May elect to update these forward looking statements at some point in the future the company specifically disclaims any obligation to do so.
Also during the course of today's call, we will refer to certain non-GAAP financial measures.
Reconciliation schedules showing GAAP versus non-GAAP results are available in the Form 10-Q filed with the FCC. After the close a market today and in our press release that was also issued today, which is located on our website www dot Microstrategy dot com.
We delivered solid third quarter results that reflect the positive impact from our new product introductions and improvements in our go to market and demand generation efforts in particular, we continue to be pleased with the results. We've seen for Microstrategy 2019, hyper intelligence and our Microstrategy cloud offerings.
In Q3, we closed about 40, hyper intelligence deals, which brings us to about 120 since the launch of the product 10 months ago.
Major wins include Corinne Dallas Fort Worth International Airport, Freddie Mac, you'll be building company Skechers.
We believe this diverse lists reflects the significant interest of organizations across industries, and driving 100% adoption of analytics around enterprise using zero click intelligence with existing productivity tools and workflows.
The combination of powerful analytics and ease of use offered by hyper intelligence is resonating with prospective customers.
As a reminder, purchasing hyper intelligence requires upgrading to the Microstrategy 2019 platform.
For the ended the third quarter more than 500 customers have already upgrading the Microstrategy 2019 were targeted we have a targeted program in place to facilitate upgrading most remaining enterprise customers over the next few quarters.
We're also seeing increased customer interest in our cloud offerings earlier. This year, we reintroduced our cloud platform, which is now available both on either the U.S. and.
Our ability to allow customers to leverage both hyperscale cloud vendors seamlessly move applications between them. The multi cloud environment has been important selling pointed underscores the benefit being the leading independent data analytics platform.
Our utilizing our cloud solution customers are able to leverage the benefits of the cloud and have us manage their microstrategy deployments in the cloud for them, helping to create meaningful cost savings and faster time to value.
We've also revamped our marketing and sales approach for cloud offering which is helping to drive demand.
We believe the analytics market is just beginning to embrace cloud solutions and at the growing adoption of next generation cloud data warehouse solutions is a positive catalyst.
Well, we anticipate that a meaningful portion of the data analytics market is years away from embracing a cloud offerings. We're increasingly optimistic the cloud adoption will become a significant growth driver for us.
The following a few examples of customer wins for cloud offerings.
And Accenture source, a leading provider of hospitality technology moved their on premise is analytics environment to the Microstrategy pod platform on eight of U.S. to streamline cost reduced data discrepancies addressed security and scalability.
This customer can scale its Amazon S. Three storage services in two environments up or down to see a cost its platform upgrades or 75% faster I need of yours cloud.
Fanatics, a leading online retailer licensed sportswear is you can microstrategy ADW asked to run thousands of analytical queries and share dossiers with hundreds of employees, an instant getting us users the intelligence they need to make critical sales and inventory adjustments on the fly, especially during big sports.
Before I review, our financial results for Q3 more detail I'd like to provide some high level context overall demand for our products continues to be healthy Q3 bookings growth continued to meet expectations, which we believe underscores the success of Microstrategy 29.
Circular over the last year, we're seeing interest in our cloud platform increased more quickly than we had anticipated.
Excited by the customer interest in cloud, which we believe will resolve result in higher quality more predictable revenue overtime.
However, in the near term the shift toward towards cloud could result in a negative impact that recognize product licenses revenues in favor of subscription services revenues.
We do believe put your ships will be an overall benefit for us as one we are the opportunity to develop stronger more complete relationships with our customers by managing their microstrategy software called environment and development of analytics applications.
Two with a differentiated cloud product offering full parity on premise and cloud solutions and open platform with a multi cloud adoption across eight of U.S. and Azure and high quality called support.
Three how subscription services licenses historically and had a higher renewal rate resulted in more upselling of additional products, resulting in better financial performance overtime.
Turning to our financial results in more detail total product licenses revenues were $19.0 million in Q3, 2090 $1.3 million or 6.4% decrease year over year.
Foreign currency effects negatively impacted product licenses revenues by zero point $9 million, 4.6%.
Well, we faced some more challenging year over year comparison in Q3, we also had more deals and typical slip out of Q3 2019, primarily in your new regulations like GDPR are leading to additional contract and complexity in approval cycles as we and the enterprises. We served in greater experienced in handling the impact of these new regulations on the deal.
We'll cycle, we expect these challenges to lessen.
I'd also note that we signed the majority of the slip deals in the early weeks in the fourth quarter.
Product support revenues were $72.9 million in Q3, 2019, a 2.1% decrease year over year foreign currency effects never negatively impacting the such revenues by $1.4 million 1.9%.
Overall, we continue to see strong customer renewal rates, which we believe reflects the value customers generate for Microstrategy products. We continue to anticipate products support revenues will generate growth for the full year on a constant currency basis.
Total deferred revenue in advance payments at September Thirtyth 2019 were $164.7 million. This is up 5.6% year over year and is the best year over year performance. The last six quarters, we've worked through the delays and invoices that resulted from the implementation of our update a quota system and a realizing the benefit.
As an efficient and timely renewal quoting an invoice in process.
Other services revenues were $19.9 million in Q3, 2019, essentially flat year over year other services revenues were up 713.7% quarter over quarter.
Quarter over quarter improvement and other services revenues reflects the improved product bookings in recent quarters and a renewed focus on proactive engagement with customers. We believe we may have hit an inflection point and our services revenues in Q3 2090.
Turning to cost total operating expenses of $91.3 million were essentially flat year over year end down 6.1% quarter over quarter, we're making significant progress in generating increased productivity from our sales and marketing spend and then rationalizing G.H. bass.
We continue to focus on de layering, our organization, where appropriate, especially non revenue generating areas as we seek to reduce costs.
And establish more streamline decision making.
We continue to make meaningful investments in product development, while evaluating opportunities to drive efficiencies in this area.
Pleased with the progress we've made on cost in recent quarters, and we'll continue to pursue additional opportunities to generate leverage across the business going forward.
Our income from operations for Q3, 2019 was $4.6 million compared to $7.2 million in the prior year period.
Where knitting <unk> net income was $9.7 million in Q3, 2019 and diluted earnings per share of 94 cents with net interest income of $2.9 million.
Finally, I want to provide an update on our CFO search.
I'm excited to announce that Lisa Meyer will be joining microstrategy as our new CFO effective on her start date, which we expect to be November 4th.
Lisa was most recently the CFO ever find privately held education technology software company.
Part of that she was the CFO of Blackboard and has more than 20 years of finance and audit experience leases extensive software experience, including a transition from an on Prem license model to the cloud make her an ideal fit for microstrategy.
Michael and I are excited partner, Lisa we'd like to welcome her on behalf of the entire Microstrategy too.
As previously mentioned I will now transition of focusing solely on my COO sales and services response, [laughter], where I will oversee the day to day operations at the revenue teams.
We believe this management structure will better enable to company to respond to market trends drive productivity improvements across the business.
I will work closely with Lisa to ensure smooth transition and I anticipate being actively involved in our investor relations activities for the foreseeable future.
To summarize before I turn the call back to Michael overall, we are pleased with the progress we've made in the business in new capabilities, and Microstrategy 2019, especially hyper intelligence and our Microstrategy cloud platform generated meaningful interest from both existing and new customers.
These innovations have enabled us to effectively repositioned the company as a modern enterprise analytics and mobility platform.
We believe the investments, we're making in the business in a renewed focus and increasing operating efficiency will enable us to deliver growth profitability and increase free cash flow overtime.
Now I'd like to turn it back to Michaels.
Thanks, Paul.
[noise] I'd like to highlight a few key thing [noise].
Our first of all hyper intelligence is the most compelling innovation and the BTI market in the past decade.
Conventional b. I tools provide answers to questions on three minutes and many complex microstrategys invented a technique to deliver insight and three seconds and zero clicks.
That's hyper intelligence, our technology Revolutionizes business processes by embedding analytics suggestions.
And the action is directly into the email spreadsheets calendars and ERP systems.
That end users are living and.
Every hour of the day.
Information and options are flowing 100 times faster.
And that makes the business users not just hyper intelligent, but hyper productive.
If we look back over the last 30 years, the last big paradigm was mobile and before that in a web.
Well hyper intelligence paradigm shift is possible.
Because of Hot New technologies, the new mobile operating system July you went bad and Taligent App whats right into the flow of messaging and communication.
The new chrome base browsers phones, chrome and edge that allow you to embedded extensions right and to the HTML experience.
The new office productivity tools like out walk that might you in bad extensions right and to the flow of the email or the calendar.
You couldn't have done at two or three years ago, you couldn't even imagined it a decade ago, but.
But.
This is 100 times faster.
And not just 100 times faster to get to the insight.
But what the Hypercard you can click on a trigger and be launched into our system of record.
And once you're in that system and record take action. So these as I'm reading through 100 names in an email when one of the hundred when the 67th name triggers a hard I'm literally one quick from taking action to exploit that she that either rectifying issue or.
Forward an opportunity.
And show Hyper intelligence is really really a critical development for US is we're going to 2020, we released the product in 2019, and we thought it was cool, but we couldn't be quite sure how consequential it would be because at the end of the day.
Everything is is reflected in the eyes to customer.
But as far as pointed out we're seeing extraordinary uptake on the hyper intelligence offering and beyond 120 deals. We've seen this year, we're seeing hundreds of projects initiated in our customer base import hyper intelligent.
So this is an office space, just beginning where we're going to be leading with hyper intelligence in the coming here. It is a compelling differentiating message and it's a differentiating technology offering that microstrategy has our competitors haven't even attempted to copy it David copied the message Evan.
Copied the underlying product and so that gives us some open market running room for awhile.
What's really exciting and I haven't had you should not just a theoretical benefits of the technology. The idea you can do something 100 times faster on zero clicks or the idea you can do taken action on wonderfully well. What's also exciting is the actual use cases that our customers are finding.
For example, we have a retailer that's created a a product style card and whenever they see a product they can hover over it they'll see a picture of the product installs. The part all the K P. Asha product all and hundreds of milliseconds, Oh of course, their stock and trade as manipulating products and making decisions so having that kind of information.
At your fingertips is really extraordinary.
We've got a hospital customer that that builds hypercard to track patients and so as to the doctors are interacting with the patients via email or text messaging or counter entry or anything within seconds. They have at their fingertips. The latest diagnosis and all the stuff they need in order to provide good patient care.
It's all about making the doctor hyper intelligent hyper productive.
We've got a newspaper customer that to publish in storage on the web and now they can have ruled that the story and instantly get the usage and traffic calculations, along with the conversion rates of that story into paying customers. So you're actually and the end the magazine or in the newspaper.
Paper, but you've got enterprise statistics, informing you of course and the situation, there's no better way to receive intelligence and when you're actually reading the magazine and seeing the article that someone is or is not responding to.
We've been airport customer that actually uses hyper cards to keep track of the traffic through the airport and and user traffic and bottle action and commercial opportunities.
And they are they in all four of these cases, our customers have used hyper intelligence to do something that that is it everybody wants to do but do it 100 times easier hundred times faster than they could do it with the traditional our conventional software technology.
Okay.
They're inventing these use cases and ER and the innovation that's going on it's just extraordinary so I feel that we will continue to see this burst of innovation for quite a while to calm and this is going to fuel the growth of my current strategy.
Looking forward to 2020.
Microstrategy 2020 will be the leading modern open analytics platform.
We're offering a marketplace.
A choice between AWB acid as youre between on permission cloud.
Between Linacs for Windows between iOS or Android.
Between Oracle S.J.P. or Salesforce ERP suites.
Most of the traditional be our competitors in suffering from from our corroded technical obsolescence.
I like to cognizant business, Haagenson crystals embryos and actuation information builders of the world as they fall behind the cutting edge H.P., our age the cutting edge client toolset cutting edge server platforms.
And if they're not suffering from a technical obsolescence, they're being absorbed more closely into the full stacks that Oracle I say piece sales force, Google Amazon and Microsoft for all promoting and are heavily committed to.
With the acquisition of Tablo, the last major independent analytic provider got got sucked into the orbit of a full shaft vendor and the disappearance of tableau and the absorption of locker and the absorption of so many other tools.
Into either ERP system vendor or a full stack vendor has created a bit of open space for us as the open merchant provider of intelligence and the marketplace needs that this is a this is going to be a good thing for us going into 2012.
Okay.
Microstrategy services, our offshore gonna be dramatically enriched going into 2020.
We're upgrading all of our education offerings, we got more cautious in certifications than ever to teach to teach in certify all the push on as necessary for the success of the intelligent enterprise.
We're also offering everything on demand everywhere around the world and we're going to deliver the greatest assortment of virtual and physical clash opportunities than we've ever delivered on a global basis.
So I'm very excited about our education offerings, our advisory services had been refined over the past year, and we're developing a pretty efficient techniques to help our customers upgrade their software to deploy a API and their software to deploy.
Hi, mobility, a two to optimize and turn our or implement new security protocols with our software and we found this to be very popular and I think this will be continue this will be an engine outgrowth of our professional services business as we go into the year.
And.
In the area cloud.
We have refined and cultivated our cloud environments services in our cloud support services their dramatically upgraded their available on not just eight up yes, but also as youre.
And as we go into 2020, we're gonna hub.
The most powerful most functional shut off cloud services available to our customers that we've ever had.
If you're looking to deploy a analytics, where now giving you the option to do it and your enterprise data center or we give you the option to deployed and your own virtual environment that you control on AWB Ash. We've also delivered a near parity offering with ashore and then if you don't.
Wish to manage your own virtual environment, we can give you a microstrategys environment and the public call. It off your choice and we manage all of the patching security optimization that administration.
Where where delivering this and marketing this everywhere in the world and 2020.
And as falling at noted we're seeing increasing interest from customers.
And a full stack of cloud services.
Finally, microstrategys going to enter 2020 with the strongest executive team ever.
We're delighted to welcome Lisa.
Meyer so our team as our new CFO .
I'm delighted to have fallen entering the year as chief operating officer, and I see the benefits of having sales and services report up to one senior executive and that's going to be a great a great improvement for the company.
And ER and asked for the rest of the Cxo team I think we've got a the strongest array of talent that we've had and as long as I can remember.
So we've got to cutting edge message, we've got a lot of customers very excited and innovating very rapidly.
We've got a great strategic position as a modern open analytics platform.
And we've got a full suite of services.
Got it help our customers move forward and with all of those things I'm looking forward to the coming here I think will be the best one ever.
So I'd like to go and open the floor for questions from analysts.
Ladies and gentlemen, if you have the question I think Stein. Please press Star then the number one key on your Blackstone's on the phone. If your question. It's been answered are you wish to remove yourself from the Q price without key.
We have a question from the line of high mid quarter sand from VW as financial your line is now open.
For questions could you first started off talking about it wasn't a resources this year or customer issue that you're upgrades for Microstrategy Twain team it was only.
Went up about 100 last two quarters that you're adding I'd read about 200 to quarter.
Yeah, Matt. Thanks for the question. It was neither a resource nor customer issue I think it's just natural volatility as we get through the upgrade cycle with their customers. We are seeing some customers choose to delayed or upgrades, depending on the time of year and their seasonal cycles.
As we get towards the latter half of the year as many customers are saying hey, let's wait until Q1, when we get passed for example, retail companies are busy period.
So there is a little bit of a driver there and so we still have good pacing and good activity with their upgrades and I wouldn't take sort of a number of upgrades delivered in Q3.
As any indication of a slow down or or interest in our 2019 a product.
And could you elaborate on this.
Commentary out of Europe , the you saw Slippages.
Did those customers sign up in early Q4 are they still hanging on because of the regulatory concerns.
That's correct the vast majority of our slip deals occurred and the very last few days in Q3 and have been signed since then but.
But we did have some operational and contractual challenges that deals with them.
It completed in the very last a few days in a quarter.
Okay and then my last question is the.
What kind of you know.
Revenue or you did you think you missed out on because of this conversion to cloud from license.
Yeah, I'm going up I won't talk specifically.
You are actual cloud bookings versus our perpetual license bookings just because we don't disclose that number.
I do anticipate over the next few quarters, we'll disclose more of our financial model and our transition timing to the cloud I can say as you probably understand when a customer buys a license on the cloud it tends to be a term license, meaning it's a one year term license versus a multi.
Full license so a term licenses to be smaller than a perpetual license, but its recurring in nature. So we get paid back overtime.
So thats 0.1, and point to that term license that a customer buys in the cloud is recognized ratably over the course the contract. So you don't get stuff in quarter revenue or a recognition that you've made with a perpetual license.
A pretty significant impact on our product license revenue, but as I mentioned for a variety of reasons as you've probably seen in the software industry overall, we consider to be higher quality revenue and it which is one of the reasons why we're pushing our customers that are willing to take the product to a cloud first strategy and were pushed.
Our sales folks to propose crop more often.
Okay. Thank you.
Next question is from the line all spire and LER right <unk> from Citi. You May ask your question.
Hey, Thank you and congratulations on the the CFO higher <unk>.
I I know you're stepping out of the role there, but maybe you could you share us and thoughts on you know how you're thinking about Q4 here and and how you expect to finish 2019, obviously you've had some.
Fusion challenges in Europe in in Q3, but sounds like a lot of.
Those deals has.
Something close to just curious how you're thinking about a Q4 and and finishing out the rest of the year.
Hey, teller, Thank you and and thanks for the question look we generally feel very positive about our ability to finish the year strong.
We don't provide guidance so I don't want to get in particular is about where we're going to close the year specifically around the revenue.
You know the trends that we're seeing overall continued strong bookings we are seeing a movement of our bookings from perpetual licenses to cloud licenses, which does create a slight dislocation in there.
In our product license revenue, but overall good bookings performance and so the proportion of our bookings in Q4 that come from cloud or will be seen in our product license revenue deferred subscription revenues to that 0.1 support revenue continues to be strong.
Oh, we have some FX headwinds of about 2% any particular quarter, but our renewal rates continued to be stronger. So we feel positive there and as you heard me indicate our services revenues really starting to turn around and we believe reached an inflection point. So overall I feel positive and optimistic about our revenue performance in our ability to.
Grow overall, however, some of it shipped to cloud may have a drag on product license revenue. That's on top line perspective from a cost perspective, I think you've seen what were generally trying to do a gradually which is get more leverage out of our existing cost structure, Oh, it's very satisfied whatever your quarter over quarter.
Year over year cost trajectory and I think we'll continue to move in that direction.
We should lead to an ability to create positive operating margin operating income and cash flow.
So I I expect Q4 to be a continued evolution of what you're seeing from the first few quarters here.
Do you have a sense on how much the product mix is trending towards cloud. The up is there any way to quantify what percent of bookings are coming in cloud and maybe how that compares historically.
Yeah, it's a it's a pronounced increase versus what we've seen in previous years and we're purposely doing that if you look at our pipeline. We also see a pronounced increase in our pipeline.
With our cloud offering I I don't sort of I'm not prepared to talk about the exact distribution I think that's something that will start to provide more details into as we get more comfortable with a piece of our transition or a lot of it is driven by microstrategy the quality of our product or how we.
Train and compensate our sales team, but a lot of it even more so it's driven by the desire is of our customers and as I mentioned that Mike mentioned, especially as some of our larger enterprise customers are taking up a cloud data warehouse solutions cloud analytics, a follows right behind that so.
Even though we may have pipeline and ability to predict yen, it's still a customer decision for microstrategy, we want to offer them both.
Great solutions on prime in the cloud and so in that regard our strategy slightly different than you have may have seen in other cloud transitions, where it was a forced transition here, we want the product to speak for itself, but the cuts from make the decision and the change you've seen in our total since the first quarter or a year ago is primarily driven by the customer.
Great and last question for me is you know looks like maintenance revenue did.
Decline year over year on on a constant currency basis, I know you talked about it.
Growing for the full year, but how should we think about that growth rate going forward is especially if you are.
Starting to see from a higher mix shift towards cloud.
Yeah. So that's a good question as we see a higher mix shifts towards cloud what you'll see is what would go typically into support revenue be replaced with what goes into subscription revenue.
That that will take a little bit a time as you can imagine right like what drives most of our support revenue is our renewal rates and those continued to be strong. So I think using sort of our historical constant currency growth, which you've seen I think last through the two or 3% range.
It's a reasonable precedent for what we'll see in the future I think as you get into 2020, you're right, we'll start to see a mix shift occur for a.
Customers, we have an existing customer that replaces their maintenance and moved to a cloud and subscription revenue, we would expect that fee or we would try to drive that to be revenue neutral it doesn't increase.
Okay. Thank you.
[noise] again, ladies and gentlemen, if you have a question that makes the brain. Please press Star then the number one key on your Touchstone telephone. If your question. That's been answered are you wish to remove yourself from the Q I asked about.
[noise].
Okay.
I'm showing no further questions at this time I would like to turn the conference back to Mr. Michael Saylor.
Men, President and CEO for closing remarks.
Well I want to thank everybody for their support in your attention today.
A wish you happy holiday season, and we'll look forward to speaking with you again with the new year.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.