Q4 2019 Earnings Call
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I don't I like to hand, the conference to your Speaker today, Michael Saylor, Chairman President and CEO . Please go ahead Sir.
Hello. This is Michael Saylor, I'm, the chairman President and Chief Microstrategy.
I want to walk them all of your todays conference call regarding our 29 chain fourth quarter financial results.
Finally, our chief operating officer at least the mayor or Chief Financial Officer, first I'd like to cost afford Elisa who's going to read the safe Harbor statement.
Thank you Michael and good evening, everyone. Various remarks that we may make about our future expectations plans and prospects may constitute forward looking statements for the purposes of the safe Harbor provision under the private Securities Litigation Reform Act of 1995 actual results may vary materially.
On the as indicated by these forward looking statement as a result of various important factors, including those discussed in our most recently quarterly report on Form 10-Q filed with the FCC.
These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
We anticipate the subsequent events and developments may cause the company's views to change, but the company may elect to update these forward looking statements at some point in the teacher 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 schedule showing GAAP versus non-GAAP results are available in our earnings release that was issued after the close the market today, which is located on our website at www Dot Microstrategy dotcom.
I'd now like to turn the call or we define who provides a summary of our fourth quarter operational performance.
Thanks, Lisa and they've to all of you for joining us.
Microstrategy delivered solid fourth quarter results, the cap and important year company as you recall, we made significant investments in our product in people with a positive results from these investments.
In particular, we introduced the most innovative set of products that are 30 year history with the release of Microstrategy 2019, and hyper intelligence improve their go to market and customer experience and drove operational efficiency across the business.
Microstrategy has established itself as one the largest independent enterprise business intelligence companies in the World is entering 2020 with a much stronger product team and financial position in previous years.
Our primary goal in 2019 was to drive adoption of our newest products, including Microstrategy 20, Nike Hyper intelligence and our managed cloud platform.
We ended the year with 740 customers, having upgraded and Microstrategy 20 nights.
And 175 purchase cyber intelligence.
We added 71 hyper intelligence customers during the fourth quarter alone, including the cooperative large Canadian financial services company Sonko bond a large French building materials manufacturing distribution company as with medical leading organization of hospitals and medical service providers in Latin America.
We've also seen strong penetration of hyper intelligence into our fortune Global 500.
We're seeing growing interest in hyper intelligence is zero click analytics that delivers insights and triggers action.
We believe hyper intelligence solving a critical problem in the analytics market and revolutionizing business processes by embedding analytics suggestions and actions into emails spreadsheets calendars ERP system that employees already used to do their job.
Overall, we're pleased with our progress in this area the opportunity for greater adoption 22.
Our other major area focus for us in 2019 was our fully managed cloud platform, which we now offer an age of U.S. and as.
We provide customers a highly differentiated cloud offering which is at full parity to our industry, leading enterprise grade on premise product.
This allows customers to deploy a move seamlessly across multiple platforms avoiding vendor lock in.
Our cloud platform also offers robust security and 80 I infrastructure.
Extended to help customers run their business intelligence infrastructure and application.
Proactively engaging our customers is another key part of our strategy should drive adoption of Microstrategy 2019, hyper intelligence and cloud.
This has been a dramatic shift from our historical practice and services and that of our industry and it is paying dividends.
Our team is doing an excellent job showing customers, how our news releases simplified and measurable improvements in their analytics capabilities and digital transformations as proven to be one of the key drivers and facilitating migrations to our latest microstrategy platform and to the cloud.
Our focus in this area also helped drive strong growth in our consulting services right.
We believe this is an encouraging sign that our strategy is working well help lead to revenue growth in the future.
Before I turn it over to lease at a review our financial results for the quarter I want to outline for you our key priorities for 20 point.
First our go to market strategy will be increasingly focused on the microstrategy cloud platform.
As I mentioned, we've seen exciting traction in the market our customers appreciate that our product has full feature parity, where there is right on their own infrastructure or in our cloud and they understand the by using our cloud. They can lower total cost of ownership get faster updates and had greater flexibility increase adoption throughout their organization.
We expect to see some migration of existing customers in the cloud as well as new customer growth.
Second we will continue to encourage our customers to migrate to our latest platform version.
Next week, we'll be introducing our latest release Microstrategy 2020 at our annual user conference Microstrategy World.
Building on its success and Microstrategy 2019. This latest release will include enhanced functionality for hyper intelligence as well as cutting edge functionality related to our modern and open platform architecture.
I'll, let Michael describe these enhancements in more detail. We believe that these migrations will sustain our strong renewal rates and should lead to existing customer revenue.
Third our objective is to generate full year constant currency revenue growth in 2020 overall, we feel positive and optimistic about a revenue performance in 2018, and our ability to grow overall revenue 20 twond.
While we may see some modest product license and product support revenue impact related increase in cloud deals. We believe the benefit of our cloud migration strategy add new customer growth will be positive contributors to growth.
Let Lisa describe how we think about that transition from a financial model perspective.
Finally, we're focused on driving continued operating efficiency across all parts of the organization.
As you can see at our Q4 results and as I mentioned last quarter, we've achieved more leverage out of our existing cost structure and we've done that some three principal ways.
First after the initial large investment our microstrategy pre 19 lease, which we believe this groundbreaking we're able to cut back and marketing spend and some R&D.
Second since taking over the sales teams, we revisited territories and reduced headcount by focusing on sales productivity and lowering overhead costs.
And finally, we have focused workforce growth and lower cost locations.
Typically our large technology and development centers in China and Paul.
Overall, we were very excited about the future like a strategy. We believe we have the people products and pipeline in place to deliver greater value to our customers and improved financial results for our shareholders. We look forward to getting you updates on our progress throughout the year with that let me turn the call over to our new CFO , we some there.
Thanks, Fine I'm very excited to deal with you today is microstrategys new CFO .
John This is company because of its world class products and people and I've been very impressive what I've learned in the three months that I've been with the company.
I look forward to meeting and working with many of you in the investment community in the months ahead.
Turning to our financial results revenues for the quarter were up 1% and I'm, a 3% on a constant currency basis.
Growth came from product support subscription services, and our consulting business, which is classified as other services on the financial statement.
I'd like to each of the revenue categories. So before I do I want to remind listeners as to how we sell the microstrategy platform.
We do it in two basic ways to persuade as we thought probably to customers for them to deploy it on their infrastructure.
And the second way as we sell customers and subscription to access our product, which is hosted and managed by Microstrategy in the cloud.
Currently the vast majority of our product sells are conducted the first way and revenues related to these license sales make up the product licenses line item under revenues in our financial statements.
Customers to buy a product license also by an annual product support subscription and with our excellent renewal rates for product support. This is a strong recurring revenue stream for it.
In 2019 product support revenues represented almost $300 million and what is similar to annual recurring revenue.
A small but growing part of our business is selling a fully hosted and managed cloud subscription.
Revenue from our cloud platform is contained in the subscription services line item under revenues in our financial statement.
Subscription revenues include class support services and associated infrastructure caught and their related revenue is recognized on a ratable basis over the subscription Tam.
Of note when a customer buys the cloud subscription from us as opposed to a perpetual license. The first year total revenue into Microstrategy from that deal is typically about one third to one half of the first year total revenue. We would have recognized at the deal had been done as a perpetual license transaction.
Let's see me our cloud customers renewing its similar rate as our perpetual license customers. We expect we can create a more stable predictable revenue stream in the long run.
Regarding the pace of transitioning from selling product licenses to sign cloud subscriptions, we expect the transition will occur over a number of years, because our customers tend to be very large companies with large investments in infrastructure to support large amounts of data.
As a result, we like the transition to read business towards the cloud will be gradual and then the majority of our revenue will continue to be derived from public license sales for the foreseeable future.
Now let supply this discussion to this quarter's results.
Product license revenues were $30.1 million in Q4, 2019, a 1.1 million dollar or 3.6% decrease year over year and down a little over 1% on a constant currency basis.
Well, we do not disclose bookings performance it for incremental cloud bookings have been.
Had been threat to license sales, we would have seen modest product license revenues growth year over year.
Subscription services revenues in Q4, 2018 were up slightly year over year or were down compared to the three months ended September Thirtyth 2019.
Merely due to revenue catch up that occurred in the third quarter of 29 team.
Overall, we are satisfied with the underlying growth in the business during the quarter and you'll note that the nearly 1 million dollar or 5% increase in our deferred revenue related to subscription revenues year over year.
How does support revenues were 74.7 million in Q4, 2019, a 1.4% increase year over year or 2.7% on a constant currency basis.
To support revenues this quarter included benefit related to change in estimate and ourselves allowance reserve.
Finally, you will note that other services, which is largely a consulting services increased almost 8% year over year due to the fact is fine previously discussed.
Total deferred revenue in advance payments at December 31st 2019, where 191.5 million. This is up 5% year over year and is attributable to growth and booking as was the fact that we resolve the delayed billing issue, we had last year related to our Cpqd system implementation.
Deferred revenue growth is a healthy leading indicator for us.
Turning to cost of revenues gross margin for the quarter improved slightly to the largely to higher utilization with our our consulting organization and better cost optimization.
Total operating expenses were 99.3 million in Q4, 2019, an 8.2% decrease year over year and up 8.7 present quarter over quarter.
The year over year decreased largely with like through the three initiatives time previously described.
Expenses at the moment, a core focus of the company and 2020 and we believe we can continue to maintain this cost structure, while continuing to make meaningful investments in sales and product.
Finally, we continue to maintain a strong balance sheet and ended the year with almost $556 million in cash and short term investments.
You'll note that during the quarter, we repurchased approximately 24 million in Microstrategy class a common stock.
We believe buyback can be a useful way to opportunistically evaluate value for shareholders, but it's just one component of how we evaluate our long term capital allocation strategy.
We believe keeping has substantial cash balance on our balance sheet is prudent and as a reminder, a policy is not to discuss our buyback intentions in advance.
Turning to tiny tiny as Tom mentioned, our objective is to generate constant currency revenue growth this year.
One key variable to level of I reported growth this year will be the timing and magnitude of a shift towards cloud subscription sales.
As I mentioned, we're still early in the cloud adoption cycle on as we progress we will evaluate way to provide insight into this year.
Oh together with our focus on operating efficiency, we believe we're well positioned to make 2020, another successful year for maker strategy.
Once again I'm thrilled to be at Microstrategy during such an important time in its history and look forward to meeting all in person during the year.
Now I'd like to turn it back to Michael seller.
Thanks Lisa.
With the closing of the Salesforce tower blow acquisition Microstrategys now the largest independent public business intelligence company in the World.
We're excited to assume the mantle of industry leadership and look forward to the opportunities with the consolidated market is offering us.
We are leading modern open enterprise platform and that means we're open to all client interfaces, no matter, what tool or or what technology. They might use we're open to all clouds and added might be ate up yes. It might be as you were or another we're open to all the.
Databases, we spent about 200 data sources as of now and there are more coming everyday.
We're open to all the enterprise applications like actually P. or sales force or workday, and we support them all without bias.
[noise] Salesforce, Microsoft Oracle I B M.
C P.
Amazon They all have conflicting business interest.
That prevent them from tailoring their offerings to support the full stock of technology is the most enterprises demand they either have a massive interest in a particular application like I say p. or in a database like oracle or of course or cloud like kws or are there particular client interface as they attempt.
Favre.
That puts microstrategy and Emil.
Enviable position of being the Switzerland in this market.
Large companies the large enterprises, we do business with they never want to be locked into a sole source.
They would always wiped out of auctions I like to keep their options open and.
The ability to switch or the ability to run multiple platforms. At the same time is integral to a responsible I T strategy in a business strategy in general.
We have been the beneficiary of this trend in the enterprise for the past 20 years and I expect it will continue to be the beneficiary and and with our emergence as the largest worldwide publicly traded business intelligence company I think that we're going to get more attention.
Since these enterprises are always looking for that choice in order to avoid vendor locked in.
2020, we're releasing the most powerful platform we've ever brought to the market. We're really excited about Microstrategy 2020, it's faster, it's more stable once more functional than ever.
We particularly made advances with regard to agile application development and the form of our dossier capability, it's been dramatically upgraded with freeform kansas's and compound grid functionality.
This means the dossiers are now 10 to 20 times faster to build than traditional enterprise reports and they combine the power of self service with the security are governed enterprise datasets.
We see a lot of enthusiasm for this upgrade in the marketplace and we expect this is going to drive a lot about lecture city into that capability going into the year.
Our upgraded cloud offering as full parity support for as Youre, an eight of the US now is generally more excitement the number.
And I feel that the upgrades, we've made to our cloud capabilities with regard to 2020.
And ER.
Sorry with regard to 2020.
They position us really well to ride the cloud wave.
We're seeing already positive impact from from our customers with regard to cloud adoption.
Due to the upgrades have made to the platform and also the upgrades that we made during the past year to our cloud environment services.
2020 also represents a dramatic boost in our hyper intelligence product line.
This is the most successful new offering we've launched in the past decade.
And it's a proven to be very successful at both opening new doors with prospective accounts.
As well as reenergizing existing customer relationships and expanding our value proposition throughout the marketplace.
2019 was year one of the age of hyper intelligence.
We expect continued innovations to drive this market for the next decade, and we'll see trends like the increase in device GPU and memory.
Explosion of chromium based browsers like chrome an edge.
The proliferation of multi threaded operating systems, and any iOS and Android ecosystem all to contribute to the hyper wave.
Existing business intelligence applications built over the past 20 years with just two weeks and they're too slow.
Hi, there too hard to utilize are too difficult to find.
People are becoming very impatient on at the number of clicks and the number of seconds the need to wait to get to the answer.
Most enterprise ERP and CRM applications lack intelligence built into the interface and they're far too expensive to upgrade projects can take years and only achieved a small percentage of what most companies would like to see.
Customers are increasingly impatient with both of these things because they're becoming used to the convenience in the speed of mobile apps running on I phones, or the latest and greatest application running on chromium based browsers.
This is creating a wave.
Impatience and and enthusiasm to look for a new solution.
Hyper intelligence solves both these problems by allowing enterprises to create hypercard applications and deploy them across the entire enterprise in a matter of days or weeks.
Our strategy for 2020 is to upgrade our product our customers to our latest platform.
To migrate them to the cloud.
And to deploy hyper intelligence wherever we can.
And that should keep us busy for the coming year.
I want to thank everyone for their support and their time today and with that well go ahead and pass the floor to analyst for questions.
As a reminder to ask the question you went to press star one on your telephone.
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Please standby I'm always come out of the kind a roster.
And our first question will come from Ryan.
And of course, I'm from BW S. financial you may begin.
Hi, this is actually the heat calling in for Harman.
First question on subscription revenue.
Could you provide some color on whether the subscription revenue is down quarter over quarter and on the cloud growth.
To subscription revenue is up just slightly.
You are on a kind of currency basis and then we're also.
As one of our indication we look at the deferred revenue as you can look at the deferred revenue related to subscription revenues, which is up year over year. So what's your question around sequential or year over year.
On a sequential.
Yes, so as I mentioned in my prepared remarks in Q3, we did have a onetime catch up.
So you saw that increase in Q3, and then back down in Q4 that we had a late renewal for a customer that we caught up Korean Q3, so that was a bit of a onetime pick up so it is where we expected it to date.
Okay, and what does the resistance from customers you're seeing from upgrading.
Two microstrategy.
We're not seeing resistance from customers upgrading so we have about 740 customers have upgraded and that represents somewhere between 20 and 25% of our total customers at a greater percentage of or enterprise price customers of upgrade its 2019.
As with any upgrade cycle, our customers see it to be a large efforts.
And what we've done is by moving to an annual release cycle, which we started in 2019 with a 29th year lease going forward with 2020 and 2021 we've.
Reduce significantly to barrier to upgrade so I think we're going to trade our customers over time that an upgrade is something very simple straightforward as opposed to weather used to historically in the enterprise software industry.
As we move more customers to cloud to the upgrade experience is generally completed by us and the customer we have Stewart aggression testing. So a I'm pleased with the progress of our upgrade cycle. It I think we'll continue to accelerate it overtime.
Yeah, you that question there differently, but I think you hit on the answer you're probably going to repeat but.
If you're rolling out a new strategy doing upgrades on an annual basis.
Customers maintain the prior years.
Got it cannot upgrade.
And.
Actually how do you get from upgrade over.
Yeah customer can can maintain their previous year release, typically we provide product support for products as much as three years old.
The primary reason to customers got a lot to upgrade to the latest release whether between 19 are now 2020 is a product will perform faster some of our benchmark show that Sir and.
Certainly reports and certain dashboards before two to three times faster with our new product.
And they also can avail themselves of new functionality as part of products supports and some other things that Michael mentioned like the free form canvas.
As an example, so yes, the customer can stay at a previous release, but because of the ease of upgrade in the new feature functionality and improved performance, we think customers will want to upgrade more aggressively.
And and we'd like to have a set at two o'clock right like if a customer upgrades every April they'll just though it's a pretty tight we come in we help them with the upgrade and they move on.
It upgrade can take as little as a few days two week if plan properly.
Thank you.
Thank you and our next question comes online Tyler Radke from city you may begin.
Good evening, falling and Lisa medical.
Had a question on the cloud business just to help frame.
When you are doing the migrations of existing on premise customers to the cloud is there some type of typical uplift that you see I think many your peers, sometimes call up as much of the two to three X uplift is as you take on kind of the cloud hosting and.
Support.
Services and then.
Follow up to that is just you know obviously, we have the subscription revenue.
Would you say that the deferred subscription revenue is kind of a leading indicator of.
Business signed that business or how would you kind of encourage us to evaluate the performance in the subscription business, whether it be on the subscription revenue line year over year sequentially or deferred subscription revenue. Thank you.
I'll answer the first question part of the question.
The impact on revenues and migrating a customer from other from the cloud at least will answer the second one when we take a customer who is an on premise support paying customer product support revenue and we move into the cloud we have an expectation that we increased revenues for two main drivers. The first is though convert Friday.
Factual licensing support to a term license and we do expect to that customer sees more value at our cloud product.
It's something that weve tool than perfected over the course of the last three years.
As something that provides additional automation and security features for our customer. So we expect that they will pay more for that and they'll also decrease their cost overall as a result to the ROI is pretty compelling.
So thats piece one.
And then piece too is we do expect to receive more revenues from the customers as you pointed out for managing their environment to manage their infrastructure.
Cloud environment of cloud support is what we call. It so it can be as much as I'll call. It sort of 1.25 to one of the how effects as much to X out of customer.
And then the other piece that I think I've mentioned before leases mentioned also is the next logical add on is that to sell the customer services to run.
Their platform to run their system and to go build applications for them a customer that is likely willing to outsource their infrastructure.
And their support are also have much more likely to be willing to outsource some of their development work in their application work.
So yes, we're starting to experience that and we have some good examples of some name brand fortune 500 to customers, who have made that transition with us.
And the second part of your question I think that simple answer is yes, we would continue to expect to see and quarter sequential growth and subscription revenues as we're amortizing the new subscription revenues into our contract into revenues.
Unless we had examples like we had in Q3 wary I mentioned that we had a onetime pick up.
Actually it was related to a at one time pick up for a customer.
And so and then yes, absolutely we look at change in deferred revenue related to subscription that to continue to increase as well. So I think if we keep rise on both of those.
We can indicate where the business is going and as I mentioned in my prepared remarks that we definitely are.
Or thinking about we provide greater insight for now but for now as it as a bank is gradual shift those would be the two things that would look at.
Great and a follow up for you Lisa.
Now that you're.
Kind of your first.
Third quarter two Adam.
With this the CFC total under your belt.
Curious, how you're thinking about potentially optimizing the business it looked like operating expenses.
Did decline pretty meaningfully on a on a year over year basis, and I'm just curious I think in the past.
Following the had had talked about potentially double digit.
Revenue growth with with double digit margins and I think the framework around margins and revenue growth has evolved over time I'm just curious.
You know kind of what your thoughts are there and how you how you're looking at the business from a potential revenue growth perspective, and the cost base needed to support that thank you.
Sure well first of I wish I could claim credit or for any of the great optimization work and the fourth quarter, but and I designed my 11 or 12 week here. So there was a lot medicine I think we did that.
I think from a cost perspective as I said in her remarks, we feel good about what we have in place that we can deliver on revenue growth for twenties funny.
You were going to be consistent and not providing guidance, we haven't done it and that's a path and that's not going to change, but but based on I think what we said in the prepared remark is right level of commentary we feel good about the revenue growth, we have the right product pipeline and I've been very impressed with what I found them in terms of.
Sure we're allocating our assets correctly that were we're looking at pipeline a.
Very carefully and so I think at modest revenue growth of 2020 on a constant currency basis and this current operating cost structure is how we're thinking about the business and we'll continue to think about more ways to provide insight.
Thanks.
Thank you.
I was reminded us kind of one for question Star one.
Our next question on cost line of Frank Sparacino from first I notice you maybe we could.
Okay.
Hi, guys just one question for me.
In the cloud.
The deployment.
Situation do you feel like anything has changed from a competitive sales cycles standpoint.
You know good or bad.
For you thanks.
Hi, Frank good to hear from you and called in General I would say most of the dynamic.
Externally that we've seen a and we talked about at the beginning of 2019 and is further accelerating in 2020.
Is.
A plan with pretty much every one of our customers to move some sort of be I allude to the cloud.
There isn't one that is contemplating it or asking for us to participate in a road mapping or upgrade process.
The second dynamic I'd say that we've seen increased significantly in 2019, a leading into 2020 is the advent of enterprise grade cloud data warehouse providers.
The increase interest in moving data warehousing loads to the cloud has had it definitely a halo effect on it or customers wanting to move there would be I workloads.
From a competitive perspective, I wouldn't say, we've seen any significant changes as it relates to cloud.
Mike had mentioned the.
Didn't create or the change of ownership of Tablo over to Salesforce and we're still in the early stages and seeing how that impacts customer reaction.
We are seeing a lot of noise.
And some competition from power VI as some of your more traditional cloud data warehouse I'll call of or VI niche players, we're seeing less traction and less noise from I think its power takes over market share.
But that's what we're seeing overall with cloud.
And we're definitely happy to be part of the leading edge.
And getting our customers have created a fairly rapidly.
Thank you Carlos.
Thank you and I'm not showing any further questions at this time I like to turn the call back over to Michael for any closing remarks.
I guess I'd like to thank everybody for their support and we look forward to speaking with you again and 12 weeks until then all the best.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.