Q1 2020 Earnings Call
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I would now like to handle topics I want to your speaker today, Michael Saylor, Chairman President and CEO. Please go ahead.
Hello. This is Michael Saylor, I'm, the chairman President and CEO micro strategy.
I'd like to welcome all of you to todays conference call regarding our 2021st quarter financial results.
There's been quite an unusual uneventful quarter for the world than for micro strategy, we bought the share an update.
I'll start with the change our leadership team.
Are you sure mayor has decided to resign from microstrategys pursue other opportunities we wish her well.
I'm happy to announce it interplay strongly as agreed to reserve his duties as CFO. In addition to continuing his role she oh.
He's here with me today, and we'll start by sharing our safe Harbor notice.
Thank you Michael and good evening, everyone somebody 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 those forward looking statements due to various important factors, including their risk factors discussed her most recent 10-Q filed with the S easy.
We assume no obligation to update these forward looking statements, which speak only as of today.
Also during today's call will refer to certain non-GAAP financial measures reconciliation showing GAAP versus non-GAAP results are available on our earnings release, which was issued today is available on our website www dot Microstrategy dot com.
I want to begin by saying, we hope you and your families are staying safe and healthy in this difficult time. The Kobin 19 pandemic is an unprecedented global emergency that's fundamentally change our business is being done at least in the near term and Microstrategy. We've successfully institute at work from home initiative for all of our employees.
I was pleased at how quickly we're able to make this transition while working from home without a perfect substitute for our normal working environment does present challenges I want to thank all microstrategy employees for quickly adapting to the situation and their dedication to ensuring our customer success.
Before I review, our first quarter results I want to reiterate a few key points about microstrategys financial strength that we believe are particularly important in the current environment.
As a management team that will take the steps necessary to work through this economic and public health crisis, while also helping to ensure we are making the investments necessary to capitalize on our market share.
We have a strong balance sheet with more than $500 million, a cash and short term investments and no debt.
Microstrategy as a three year old business that experience tough economic cycles before we believe our debt free balance sheets that strategic asset for the company and provides us with significant flexibility in uncertain economic times.
We have over $300 million, an annualized subscription charm and product support remedy. This is a stable highly profitable source of recurring revenue for us one of the key strengths in our financial model.
Hi, gross margins are cost structure, that's mostly variable are reasonably flexible and low capital investment requirements.
Scalable and flexible cost structure enables us to react quickly in an uncertain environment.
Today I'll provide a high level review or first quarter performance, how the co bid 19 pandemic is impacting our business provide an update on our strategic goals for 2020 discuss some product updates and finish by discussing Q1 in more detail.
Well, we were on track to have strong first quarter license revenues through the middle of March on average, we typically close about 60% of our license revenues in the last two weeks of each quarter in March we began to see some deal slippage certain customers pull back on investments given the high degree of uncertainty in the market as well as they're needed.
Because some operational continuity for their employees and customers.
Overall I characterize for Q1 performance as reasonable given the environment at the ended the quarter.
We continue to take steps to support our customers. During this time it make it easier to do business with Microstrategy.
We're now providing free upgrades to the latest version of our platform Microstrategy 2020 over 1000 customers are on Microstrategy 2019, or 2020, our customers appreciate having access the latest software in the most comprehensive security features and Microstrategy 2020 shelf support their work from home initiatives.
Proactive customer engagement is delivering good upgrade activity, which we believe will help sustain high renewal rates and drive increased spending from existing customers overtime.
Similarly, we made our online learning portal free to use through May 15, providing our customers access to hundreds of up to hundreds of hours of training courses certifications and tutorials, who see the tremendous response from customers and partners with nearly 15 thought with over 15000 unique user registry.
So since we announced the program.
Free upgrades and education demonstrate our commitment to be a long term partner focus on our customer success, which we believe will benefit us in the future.
Our field sales organization has quickly adapted to engaging with customers virtually we had strategic and longstanding relationships with many of our customers, which makes it easier to engage virtually we have also use this opportunity simplifier sales and sales enablement processes, so that would make it easier to sell our products and demonstrate a faster ROI to our.
Customers.
All of our marketing events and move to virtual platform.
We're seeing a significant benefits to this approach, including making it easier to organize and schedule customer events and being able to leverage our senior leadership and thought leaders more broadly.
For example, we ran a virtual round table for federal business, bringing together, our best customers to discuss issues and challenges there anything the group was moderated by are ahead of market here in the past we've had two of the top three highest attended webcast in the history of our company.
This combination of strong customer interest greater flexibility and significant cost savings encouraged us to focus more on virtual marketing resources and events going forward.
We continued our progress of selling our managed cloud platform in Q1, which as a reminder is at full parity to our enterprise grade on premise product in today's environment businesses are looking for fast secure an economical solutions and that is how we are positioning our product.
Our customers understand the by using our managed cloud platform. They can lower total cost of ownership and get data faster and more securely.
Before too before turning to the financials I'd like to review the highlights from our annual Microstrategy World user conference in Orlando. This is one of the best attended World events, we posted with around 2500 attendees.
The highlight of the event was the introduction of Microstrategy 2020, our latest platform release that builds upon the tremendous innovation and Microstrategy 20 lighting.
In particular Microstrategy 2020 includes additional enhancements the hyper intelligence, making it easier to gain insights from popular websites applications and devices people use everyday including chrome edge and I'll.
Customers can now click on dynamic links within a hyper intelligence car to take direct action, making that seamless to put insight into action.
We signed transactions with some great news hyper intelligence customers, including Pfizer General services administration, and new skin enterprises.
Customer feedback at our new innovations and product roadmap has been very positive and underscores our position as a leader in the enterprise analytics market.
It's not just our customers that are recognizing the strength in the Microstrategy platform Microstrategy received the highest east key scores from Gartner and the enterprise analytics use case 4.86 out of five and embedded analytics use case 4.96 out of five and a Gartner 2020 critical capabilities for.
Analytics and business intelligence platform as report.
We're very proud of these scores and believe our breakthrough technology hyper intelligence satisfies the new customer use case for speed agility that hasn't been addressed by traditional analytics and VI tools.
Turning to our financial results in more detail revenues for the quarter were up $111.4 million down 3.4% year over year and 1.7% on a constant currency basis.
Lot of license revenues were $12.6 million in Q1, 20, 25.7 million dollar or 31.2% decrease year over year and 28.2% on a constant currency basis.
As discussed we had a number of deals slip in the few weeks or the first quarter related to the last few weeks at the first quarter related to the effects of the co bid 19 pandemic. However, as at the end of Q1, no major deals were lost due to cold in 19.
We make spirit has decreased product license revenues compared to prior year period until the effects of the pandemic has decided.
Subscription services revenue of $8 million in Q1, 2020 were up 11.5% year over year and up 9.9% compared to the three months ending December 30, Onest 2019, the growth of subscription services revenue reflects the growing portion of our product bookings that are related to our marriage cloud cloud.
[noise] product support revenues were $71.2 million in Q1, 2020, a slight decrease year over year about a 1.2% increase on a constant currency basis, our renewal rates remain strong this quarter, although our product support revenues were not materially impacted by the covert 19 pandemic. During Q1 2020, our product support revenues may.
Maybe negatively impacted in future periods. He extend the customers require extended payment terms or determined not to renew their product support arrangements as part of their efforts to reduce expenses.
Finally, you'll note that other services, which is largely our consulting services increased 6.7% year over year.
1% on a constant currency basis.
We've been delighted in our consulting organizations ability to can continue to effectively deliver services remotely to our customers and we're expecting that remote delivery trend to continue its a great example of our operational agility and focused on serving our customers. Although our consulting revenues were not materially impacted by the koby 19 pandemic during the first.
Quarter 2020, we may experience declines in our consulting revenues in future periods as our customers continue operating a remote work environments and aim to reduce expenses.
Total deferred revenue and advance payments at March 30, Onest 2020 were $188.6 million. This is down 3.1% year over year, but there are two factors at play here.
First there is a relatively large foreign exchange impact of 1.7%, particularly impacting our product support deferred revenue.
Secondly, we had an unusually high rate of renewals and our managed cloud platform business slipped into early April primarily due to customer administrative delays.
These renewals have since closed one other thing to note within deferred revenue as we begin to see more existing customers convert to our managed cloud platform. There is a shift from deferred product support revenue to deferred subscription services revenue.
Okay.
Turning to costs gross margin for the quarter improved slightly to 78% compared to 77.3% in the same period last year, largely due to do to improve consulting utilization.
Total operating expenses were $87.0 million Q1, 2020, a 12.7% decrease year over year end down 12.4% quarter over quarter.
The year over year cost decrease is driven by efficiency and staffing reductions in corporate travel and a reduction in the number of in first and events mostly related to marketing. We also had a onetime benefit from the cancellation of our sales employee awards event, which was required as a result, the coal at 19 pandemic.
Driving efficiency driving efficiencies across the company has this key strategic focus for us and we continue to balance making investments in the business that will enhance our growth opportunities with identifying opportunities to cost out of the business. We're confident that we can improve both topline growth and margins overtime.
Turning toward our balance sheet, we ended the quarter with $539 million in cash and short term investments you'll note that during the quarter, we repurchased approximately 355000 shares of Microstrategy class a common stock for $50.7 million will continue to be opportunistic in our share repurchase.
Activity, which is one component, how we think about long term capital allocation.
As a reminder, our policy is not to discuss our buyback intentions and events.
Looking ahead, the emerges Kobe 19 pandemic has significantly impacted the world.
Most companies were evaluating the financial impact to our business from a demand perspective, we're seeing the positive impact from our product and go to market investments of the past 18 months and our pipeline for product license and cloud subscription sales.
The normalized environment I would be feeling confident our ability to generate constant currency revenue growth. However, given the high level of uncertainty in the market due to the coded 19 pandemic associated economic disruption in the deal slippage we experience at the end of March we expect our ability to convert this pipeline to sign deals will be more challenging.
Right now there is simply a wide range of outcomes for product sales in Q2, and the balance of the year.
We also expect to see some modest headwinds to our product support and consulting revenues over the rest of the year.
We have a highly diverse customer base and consistently high renewal rates.
We do have some customers with extreme challenges in their business that we believe may lead to some payment lapses or delays.
Leading to some pressure on renewal rates.
We are expecting some pressure on consulting revenues as some customers look at ways to reduce spending to manage their near term expenses.
With regards to expenses as we discussed last quarter. We believe we have the right size the organization to allow us to continue to invest in the business, our prior initiatives, including driving greater productivity in sales and moving some of our R&D and overhead functions to lower cost locations now with the recent changes to our operator to our marketing programs and reductions.
And travel we believe we had the ability to offset a potential drop in revenues. Our objective is to deliver positive operating margin and positive free cash flow and 22000.
Now I'd like to turn it back to Michael Saylor.
Thanks, Paul.
As far as said.
No challenging times, but we feel pretty good about the path ahead.
Were pretty seasoned company would been around 30 year. If you look through a number of other crisis, but every 10 years, there's only a difficult time.
I think our balance sheet is is a great assets.
Sitting on all cash with no debt.
And so where we can calmly think about how we want to move forward.
I think we made the right structural decisions over the last few years to create a very efficient PL were structured to generate cash flow.
We've got very stable recurring revenues, we got flexible cost structure.
I'm enthusiastic about the fact that we have a modern open platform.
What we're seeing and 2020 as a major digital transformation and certainly one transformation is is to work remotely buys zone.
And the other transformation that's work out of the cloud.
And so we're really looking at.
What I'll think of it is.
As explosive virtual wave.
Change.
We're positioned while with it because our platform runs.
Equally well on shoring shore.
And because we support Windows and Linux, we can move seamlessly between the enterprise cloud and we're well positioned to bring online Google support later this year.
I believe that we're going to see increasingly companies are going to want to be able to move between eight I'll be ash as youre in Google as they become more dependent upon cloud bandwidth.
Our enterprise intelligence all fragrance is that more demand the number I think hyper intelligence mobile intelligence and web intelligence, all sell resonate very very well with the marketplace.
We've got to a good remote delivery model.
We can go over our software and remotely and have.
We've learned that we can deliver services remotely we restructured our education fairly quickly to eliminate all of our classrooms.
And physical sessions and go to virtual sessions and then we've rebuilt our education offerings. So that we can offer on demand education.
We left that our limits from 20 users across the 200 users class in some cases wouldn't teacher 400 people on the same classroom. So we found that our education could scale nicely.
We also were able to switch all of our consulting engagements from on premise is to remote fairly quickly probably half of them, we're already remote going into the coldest crisis, but the other half were able to go remote.
Very quiet period of time, and we were very very impressed with the dexterity of the entire consulting team to do that.
Our support and our cloud operations are performing slowed way and and effectively.
And our remote mode.
And and sorry, if I look forward.
No our method for monetizing the brand is we shipped software and we ship services and if we can deliver the software the education that consulting on the cloud services all on a remote model than that puts us in good position regardless of.
What shape.
The evolving post Kobin World takes.
We also.
Have seen that our agile analytics model works really really well in this environment.
We've moved through a number of very intricate corporate business reviews, and wearable it do them at the combination of zone calls Microstrategy dossiers and Microstrategy hyper cards, and if you just put a microphone.
Microstrategy dossier onto the screen in the middle of its own call. You can have 12 people and 12 different locations all looking at the same information and by hovering over any particular line item a hypercard comes up and split second.
And you're able to get the information you need at your fingertips, all walls zooming around anywhere.
And it's.
Really really elegant model for running a business. It's what we said differentiator for US we think we do it better than anybody.
I think that.
This explosion and demand for Xome will end up playing really well to our agile analytics strength.
And we've learned that weekend.
We can not only operate sophisticated business reviews, using zone, plus dossiers, plus hyper parts, but in many of these cases, we can change the dossier construction and the 24 hours before the meeting and we can change the hypercard 24 hours before the meeting so it's easy faster.
It's agile.
This is really really good place to be as we as we look forward more and more businesses need to find a way to operate and a virtual environments.
Normally that means how do I create something useful in a matter of hours and deploy that some people all over the world and do it.
Sub second response.
And.
We didnt just put this together in the past few weeks, we've always been working on it to the past five years quarter than Microstrategy 2020 platform, but but I think that 2020 passionate lot of operating test with flying colors over the past month.
And so we're really happy about that.
Finally of course, our biggest asset is our customer basin.
And we have enterprise class customers.
It includes lots of banks healthcare companies telcos governments.
Technology companies and retailers some retailers right now take of this crisis, the major supermarkets shipping food and there are essential other retailers and the fashion luxury segment that are a bit more hit by this the good news is that the great majority of our customers are.
Our our either critical an essential to their various economies or they have extraordinary balance sheets and even if they are impacted by co bid.
They'll continue its going concerns and entities. So we can't.
We can't assume that we want.
We won't actually suffer some compression or our customers will suffer some some odd deleterious outcome because of the koby crisis, but but all in all.
We feel the our customer base is better positioned than most.
And our business model combined with our balance sheet combined with our product and service offering is better positioned than most to do well as we move to.
To a virtual environment.
And so with that.
I think we'd be happy to take questions from analysts.
Thank you I first question comes on the line of Tyler Radke Citi. Your line is now open.
Hey, Thank you very much for taking the question Hope you you both are staying healthy in safe.
Maybe you could start with with you Fung.
I appreciate that the color on some of the trends that you're seeing out in the field.
Maybe to just elaborate in terms of.
If theres particular verticals or segments of customers that you're seeing.
On the steel Slippages come from.
Are those the same customers that you pretty perhaps anticipate.
Renewal rates to to be pressured and do you have any any sense on when those.
When those headwinds could could reverse and just trying to understand it if you anticipate the renewal rates to be.
Worse or they are they churning off microstrategy or they just going off support maybe would just be helpful. The to clarify that thanks.
Hey, Tyler thanks.
Thanks for the question and I hope, you're doing well too.
As far as the deal slippage from Q1.
As I mentioned a lot of that happened in the last few weeks at the quarter and it wasn't necessarily any particular industry or segments. A lot of what we heard from customers who are still very interested in our software and incremental purchases was.
Especially hey, we're just really focus on business continuity right now so where an I.T. department was ready to implement increased usage or microstrategy. They are now just figure out how to make sure every one of their employees had locked laptops or they can work offline or work work work from home and that is that particular at any in this.
It was really just a lot of customers sort of had to turn and focus on and that sort of the media first couple of weeks.
And those cases were continuing those discussions now and most of them have gotten through the first two to four weeks of disruption and I think those deal cycles are looking positive.
So so that's sort of the first part on the renewal rates I think it's early to tell certainly there is some impact from customers who.
Our seeing revenues decrease and areas like travel and hospitality.
And restaurants and those areas.
But it's not sort of the predominant case of where customers are concentrated.
Nor is it.
Nor are we in a place where we can say, we're predicting that trend yet I think.
As we're seeing in the world and we're seeing a sort of in the macroeconomic.
Sort of environment, I think Q2 will tell us and tell a lot of our customers a lot about sort of where this is all going to go so as I mentioned instead of our prepared remarks, it's still early to predict how this will impact.
Our product support revenue streams, but as Mike mentioned I mentioned.
We're well prepared to be reactive and proactive with our customers.
Great and just a follow up on that I guess, if I look at the deferred product support revenue I know you talked about some.
A few different dynamics in terms of invoicing and delays that wasn't sure if that was on the subscription or product support line, but it's part of support different products that port being down roughly 5 million year over year as that is that kind of what you're you're looking at in terms of.
The concerns the potentially seeing the headwinds manifest itself in reported revenue or is it something in the in the pipeline that that gave you the caution on the support rates.
Yeah, I think the only thing that you can really point to it as far as actual financial impacts.
Our product license revenue and as I mentioned, that's because we pick up a lot of that in the last couple of weeks at the quarter.
Slight decline in product support revenue is primarily related one to FX.
Packs, which we continue to see some headwinds there and to some of that revenue moving from a product support overdose subscription.
So nothing immediate we definitely are having conversations right like even in the last few.
Last few weeks with customers, who are asking for a delayed payment terms, we're seeing a lot of that right. You know extended payment terms or 30 days and we have customers asking for 90 days 180 days and then we do have a small section of distressed customers, who are asking for relief on their maintenance.
Nothing nothing sort of in the actual Q1 financials I would point to you, but more conversations we're having with customers through our customer success channels into our sales channels.
Great and then my last question.
And I apologize I joined the call couple of minutes late but could you just talk about.
You know the CFO transition.
That that probably caught a lot of folks by surprise given that the short tenure that that Lisa mayor had but.
What what any anything to call out there and then are there are there plans to hire another full time CFO and.
What are your just thoughts on the that transition.
Yes, nothing as far as they transition itself lease or sort of resigning in going on to look for other opportunities that I think is worth expansion.
Hey, you know I did this job six months ago for four years I'm actually looking forward to do it again, so fortunately for her maybe unfortunately for all of you get to talk to me again and more.
And as far as our plans going forward, we're not immediately planning out its cherishing for CFO.
I think the nice part is as I ramped up and second half of last year with sales and consulting I was able to put in to a pretty strong leadership team and a deep bench. We've promoted a bunch of people from would then so I feel like the leadership in sales and consulting have really stepped up which allows me to better.
Split my time between finance and operations and I'm actually really looking forward to it and hopefully you guys all our too.
Okay. Thanks, so much.
Thank you.
Next question comes on the line of comment Courson BW as financial your line is now open.
Hi, So few questions or is there any risk of less usage of customers have employees working from home would they need less services.
Consulting.
Yes, good question Hominy.
Maybe two parts in terms of use of our software I think the answer is no.
Studies sort of previous downturns in the economy.
We notice that people using our software for operational purposes, especially tends to increase not decrease.
People work from home, we'll see more of a move to the cloud.
Supply chains get more complex and I would say more scrutiny I think our software it will increase the usage due so on a per customer bases to extent, there's still operating I am not too worried there.
On the consulting side I do think.
When people are working from home.
There is less of an interest in spending up large consulting engagements and major I T improvements in capital spending associated consulting.
We saw a little bit of that towards the end into Q1, and we're seeing some of that in Q2.
So I do expect for that period of the co vid 19 disruption.
A impact on our consulting revenues.
And then how you navigating just this environment as far as sales goes and Shitting quotas, if quotas exist at this point.
Just given that everyone you would be targeting is working from home.
You know it's interesting if you'd asked me six weeks ago I would have said, we're still figure it all out.
We have.
Fortunately fit into environment, where all of our salespeople generally speaking our working remotely anyways.
So it's not as if it's a major change to how they operate the differences and set a meeting a customer in office.
In the middle and Manhattan, or London or.
You know in so in the Bay area, they're doing it remotely.
As you more webex and actually it gives them an opportunity increased productivity. So theyre not traveling three four hours a day and they're able to meet threex to fourx. The number of customers. So we've actually seen some pleasant outcomes there.
And the customers are getting used to it too.
On the side a quotas, yeah, when you're down 30% year over year product license revenue I think salespeople look at Q1, and I do worry about their ability to make money.
As I sort of mentioned earlier the pipeline is strong and so I think people see positive outcomes as he goes through the rest of the year and our hope is that our customers.
Start to transition from a reactionary focus on business continuity mode to a proactive take advantage of the situation I really start to invest and analytics again, and I think that will be positive for for our sales folks, but I think we'll learn along as to how our customers that are.
Sales folks who are reacting Q2.
And then last question.
Any upgrade get done when companies have employees working remotely well I mean, what's good enticement to do anything.
Yes, that's been a you know and Mike talked about it the pleasant surprise with our business. If you will is we gave out free education expecting a maybe a few thousand customers and our sort of best case scenario to take it in over 15000 unique customers and partners signed up for education, and we'll realize as well.
People are working from home they actually have more time and they want to brush up on their resume and they want to brush up in their experiences.
Upgrade.
Especially because it's free it's the perfect substitute for capital investment either in software and services and we found our you know we've actually improved our ability to upgrade remotely.
And we're seeing good positive outcomes in upticks and upgrade activity also so.
Those were I would say two scenarios, where we actually took advantage of the current situation to give something back to our customers and obviously you know customers who get educated them microstrategy upgrade to our latest platform show that there are highly engaged with our software and when.
The time is right they'll they'll buy more education they'll buy more services go buy more software. So we've been pleased with how we've been able to pivot on that and I think the customers see it as a very positive sort of thing for us to do at a time and need for that.
Thank you.
Thanks.
Thank you we have no further questions at this time I would like to towards a call back over to Michael Saylor for closing remarks.
I want to thank everybody for your support over the past 12 weeks I want to.
I wish you all.
The best to come I know, it's very difficult time, we appreciate you being with us today and.
All the best will speak with you and 12 more weeks.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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