Q2 2020 MicroStrategy Inc Earnings Call
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Brad sorry, Yeah, I would now like the hand to conference over to your Speaker today, Mr., Michael Michael Saylor, Chairman and CEO. Thank.
Thank you. Please go ahead.
Hello, This is Michael trailer.
I'm, the chairman and CEO micro strategy.
I want to walk them all of your todays conference call regarding our 2022nd quarter financial results.
I'm here with falling away, our president and Chief Financial Officer first I want to pass support to fall, it's going to read the safe Harbor statement.
[music]. Thank you Michael good evening everyone.
So many 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 at our most recent tend to Q filed with the FCC.
We assume no obligation to update these forward looking statements speak only as of today.
Also during today's call will refer to certain non-GAAP financial measures reconciliations showing GAAP versus non-GAAP results are available in our earnings release, and our new presentation, which were issued today and are available on our website www Dot Microstrategy dock.
There's a lot to cover on today's call I'll begin by providing a high level overview of our performance in a second quarter and provide our updated thinking regarding our strategic focus going forward.
Then close or the more detailed review of our second quarter financial results before turning the call over to Michael for his comments.
Overall, we delivered solid second quarter results, given the challenging global economic backdrop due to the cobot 19 pandemic.
We continue to see healthy deal pipeline activity and the selling dynamics that the ended June were somewhat better than what we experienced in March at the height of depend epic.
However, there's still it's a great deal, but certainly in the market, which is having an impact on our close rates. This impact shows up most notably in our product license revenue, which was down year over year, but didn't show improvement relative to the first quarter.
We believe we will see further improvement in this area overtime to the extent the macro economic environment improves.
In the second quarter, we continued to see revenue growth from Piper intelligence, when we signed a number of Piper intelligence transactions with new and existing customers, including 711, Japan, Dubai Health Authority and the International Commerce Bank of China, Several global software in financial services companies.
We also saw notable strength in our cloud offerings, which helped drive double digit year over year growth and subscription billings.
The enhancements, we continue to make to our cloud platform, coupled with the scalability ease of deployment of a cloud platform are generating strong interest from customers.
The rapid move to work from home environment has proven to be a catalyzing event for many organizations that has the reevaluating the pace and scope with their digital transformation initiatives.
I believe our cloud platform as well positioned to benefit more companies as they look to move away from their traditional on premise I T stuck.
One other notable areas strengthened the second quarter and a last year, it's been our OEM business, where companies embed the Microsoft Azure platform into there and customer solutions Microstrategys Modern open enterprise grade platforms rated the number one OEM business intelligence solution by several industry analyst.
We also made notable improvements in profitability with non-GAAP operating income of $8.6 million, an increase of $10.3 million from our non-GAAP operating loss of $1.8 million and the second quarter 2019.
This reflects the impact of our cost rationalization efforts over the past year as well as additional steps taken during the quarter.
<unk>, we have reduced year over year non-GAAP operating expenses for the past three quarters with total non-GAAP operating expenses down $16.2 million or 17% year over year on the second quarter.
We're pleased with the profitability improvements we have generated across the business as a result of shifts in our go to market approach scaled our club business an increased focus on GNS expenses.
We intend to these initiatives are still run a more lean and efficient organization committed generating increased cash cash flow, while still focusing on revenue growth.
A lot more about additional opportunities for improvement in a few moments.
From a go to market perspective in the second quarter, we made significant progress Virtualizing business operations. For example have been very pleased with the productivity improvements, we're generating from before fully Virtualized marketing program.
As discussed last quarter virtual events and an increased focus on driving lead flow through our interactive web site allows us to reach a much greater number of customers more quickly with greater flexibility and materially lower costs and the traditional live events static website. There were a core part of our historical marketing efforts.
Now fully committed to a virtual demand generation approach and expect us to represent the majority of our marketing strategy. Even after the pandemic is behind us.
We're also making changes to our sales focus will now be leading with their cloud platform and most discussions of prospects and customers.
We're leaning on a cloud based approach given the early traction, we're seeing whether cloud platform and our view that many organizations are likely to accelerate cloud deployments post cobot.
The benefits of the cloud deployment are becoming more apparent to many customers and we believe the replatforming.
Of the data warehouse layer, which is a common catalyst for switching to a club VI platform has reached a critical mass to.
To facilitate this trend we plan on making we plan to make our cloud pricing more transparent online for prospective customers and to make it easier funded by our cloud platform and hyper intelligence and the second half of 2020 and into 2021.
By simplifying our pricing and building out our online and digital marketing efforts. We believe we can reach a broader cross section of potential customers than we have historically.
Going forward will also begin instituting incentive programs for existing on premise customers to begin migrating to our cloud platform. We believe there are significant benefits for customers, who are ready to make the transition to a cloud deployment to be clear, we don't intend to force any customer to move and we will continue to sell and support our traditional on premise platform for the.
Foreseeable future.
We have deep and trusted relationships with our customers and we're committed to their success.
We recognize that there are some customers that operate in a highly regulated industries or just at the beginning of their digital transformation strategies that are unlikely to move to the cloud anytime soon.
We believe there is a strong demand for our cloud platform and our expectation is that a cloud first focus will also make it easier to do business and Microstrategy, we're continuing to evaluate the revenue impact from this transition, which will change the mix of revenue between product license revenues support revenues and subscription revenues in favor of the latter overtime.
However, I would note that we expect this transition will likely take a few years to effect. So the piano impact is expected to be more modest than many other subscription transitions in the software industry.
The transition the cloud will be a priority for us going forward shifting license revenue from product licenses to subscriptions they make it more difficult for us to achieve topline revenue growth in the next year.
We also believe it to run the business much more efficiently than we have in the past as we further operationalize our virtual strategy, which includes changing our marketing programs as we noted above as well as making changes to our global facilities footprint and our travel and entertainment expenses. We believe we can achieve additional material reductions in our cost structure.
We recently reduced our workforce by 6% in early July while it is never easy to let people go the operational changes, we're making that the business, meaning we can do more with less.
The actions we've taken the second quarter 2020, and we'll continue to take the rest of the years to significantly reduce operating expenses going forward compared to second quarter levels. We believe overall non-GAAP operating expenses in 2020 will be 10% to 15% lower than in 2019 and that we can approach and potentially exceed 10% non-GAAP op.
Operating margins in 2020.
Looking beyond this year, we believe that we can generate $60 million to $90 million of non-GAAP operating income in 2021.
Going forward our goal is to consistently generate profitability at this level or higher at the same time, our commitment to profitability is not at the expense of topline growth.
We believe our focus on hyper intelligence transitioned the cloud our OEM business and embracing the virtual wave will position us to help increase both revenue and productive.
With our commitment to generating long term operating income and free cash flow will also take a more opportunistic approach to our balance sheet.
We believe we can manage our day to day business with approximately $50 million of operating cash. This leaves approximately $500 million of excess cash cash equivalents, a short term investments, which will be more after the manager to date, we've been utilizing our cash would generate shareholder value through share repurchases.
Including $11.1 million in the second quarter.
Overall, we've returned more than $245 million to shareholders for the repurchase of 1.8 million shares since the fourth quarter 2018.
Our capital allocation strategy going forward is to return a portion of this excess capital to our shareholders and invest a portion and assets with higher return profiles in cash.
Accordingly today, we are now say a capital allocation strategy under which we plan to return up to $250 million to our shareholders. Over next 12 months. In addition, we will seek to invest up to another $250 million over the next 12 months in one or more alternative investments are assets, which may include stock.
Yes bonds commodities, such as gold digital assets, such as big coin or other asset types. Both of these strategies will depend on market conditions.
Turning to our second quarter 2020 financial results in more detail.
Revenues for the quarter work $110.6 million down 6% year over year end up 4% on a constant currency basis.
Got it license revenues were $14.8 million in the second quarter, 20, 25.3 million dollar or 26% decrease year over year down 23% on a constant currency basis.
We experienced delays in closing certain product license deals in the quarter do a general increase and the time it takes to close deals and the current depressed macroeconomic environment.
We may continue to experience decrease product license revenues compared to prior year period until the effects of the pandemic hubs at side.
Subscription services revenue in the second quarter 2020 were $8.0 million, an increased 13% 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.
Products support revenues were $70.0 million in the second quarter, 2024% decrease year over year, and a decrease of 2% on a constant currency basis, the larger than usual year over year decrease was primarily the result of one a decrease in new product support contracts to certain customers can burden.
We'll licenses to our subscription services offering three higher than usual Q2, 2019 product support revenue due to several late renewals closing in that quarter.
Our renewal rates remained strong in this quarter trailing 12 month product support revenues were up slightly year over year on a constant currency basis.
Finally services, which largely reflects our consulting services increased 1% year over year in 2% on a constant currency basis, we continue to deliver services remotely to our customers and we're expecting that remote delivery trend to continue.
Well consulting revenue grew 7% year over year education revenue decreased 45% year over year, primarily as a result of a decrease in the average sales price of our education offerings.
And free education offered to customers in late first quarter and early second quarter.
Total deferred revenue at June Thirtyth, 2020 was $173.6 million. This is down 4% year over year, primarily due to support contract ended fluctuations and to a lesser extent migrations to subscription services.
Foreign currency trends relations negatively impacted deferred revenue by 1%, particularly in support revenue.
As we begin to see mortgage listing customers convert to our managed cloud platform. There is a shift from deferred product support revenue to deferred subscription services revenue.
Total GAAP expenses were $104.3 million in the second quarter 2020, a 15% decrease year over year down 6% quarter over quarter.
The year over year cost decreases driven by efficiency and staffing reductions in corporate travel and a reduction in the number of in person events, mostly related to marketing.
Over the last three months like many corporations Microstrategy has spent significant time evaluating our business and our go forward strategy.
We're excited about the plan, we've developed and for the future of the company.
We will continue to focus our revenue growth in our core business, primarily from hyper intelligence, our cloud platform and our OEM business.
We're simplifying and streamlining our go to market approach, including our offerings and pricing will be offering cloud first platform as a service solution with a greater focus on prospects.
We believe these changes will allow us to streamline our cost structure throughout the business leading to material improvements in operating margins EBITDA margins and free cash flow as a result, we expect we can run our business with approximately $50 million and operating cash, allowing us to utilize our excess cash strategically and transparently.
Returning a portion of shareholders and make an alternative investments and assets with higher return profiles than cash.
I will now talk turn the call over to Michael for additional thoughts.
Thank you Paul.
I have.
A few things to add.
Regarding Q2.
Our results.
Our expected our license execution to be choppy due to the degree of uncertainty in the quarter, but I was pleased to see the support cloud consulting revenues holding up strong.
Given the currency headwinds in the locked down challenges I think our team performed well.
The company is doing a good job managing expenses and transitioning into a more digital firm.
We have adopted so much corporate standard.
Systems are holding up well as we work remotely productivity is improving.
Often times point out to the to the executives.
And the virtual age you can now fly anywhere at the speed of light and you can bet space.
When you assume somewhere.
What would have been a one day troubled trip becomes one hour meeting and when you record the meeting or beating with one person might be.
Video watch 500 times and of course, the video might be watched 300 times, while you're sleeping.
So shifting into zooming environment with streaming video in order to do sales marketing and services is just want to profoundly interesting dividends of the year 2020.
And it's driving changes and the way, we do our sales to where we do our marketing the way we think about support the way we think about all of our internal reviews in our corporate activities.
I think based upon these new approaches will continue to see improvements the sales marketing service in corporate productivity going forward.
We're learning new things that new ways to do things every day, we're getting more efficient.
We're getting higher velocity.
Acting more automation content into our business processes.
Now, let's say a few words bar technology focus looking out.
As we look forward for the coming coming year, we're really focused upon delivering our hyper intelligence on our business intelligence capabilities at a high performance low made ma'am small type tenants cloud environment, we call that Microstrategy cloud platform.
Our Microstrategy cloud intelligence.
See I for short sometimes in the idea of the M.C.
[music].
As to combine the license the cloud environment the administration.
Ports and and hosting elements into a single offering that we consult with the term license.
Similar to the way that slack and sell it.
Have you up a thousand users and you want hyper intelligence, we're going to give you hyper intelligence for 1000 users for sure.
Price per user per month on an annual contract.
We plan to release Hyper intelligence Honda TMC platform in Q3.
We've heard towards hyper now hyper now is going to allow you to deploy hyper intelligence to your entire enterprise in less than one hour.
That's the marketing moniker.
Correct.
Deploy hyper intelligence to your enterprise in less than an hour unquote.
We're just extraordinarily excited about this it's going to be dramatically easier to buy dramatically easier to try dramatically easier to market itself.
And we think that this is a great way for us to spread our intelligence value proposition everywhere.
We hope to deliver business intelligence on this.
Q4.
Marketing moniker will be deployed business intelligence to your enterprise and an afternoon unquote.
And that would be.
Our modern datasets, federated data or dossiers or moderate dossier based mobile applications and and traditional dossier dashboard type applications running on Android and iOS last and clients and window clients and the web.
And were excited about that.
So I think we've got an exciting technology plan that builds on the strengths of our platform, but we're product pricing in a way.
That thousands of customers can find on our website. They could go to our web site. They can they could.
Learned everything it didn't know about the product offering from streaming videos then they could start their trial then they can deploy the application all of that without any human intervention or whatnot without a lot of manual labor or friction involved so it's a truly virtual version.
The Microstrategy platform.
It should be dramatically easier to deploy.
So.
That's very exciting thing for us and I think that growth will come from that Microstrategy cloud intelligence initiative overtime.
I'd like to a few words about fall and his promotion to the role President.
I'm really pleased falling assumed the role of president of micro strategy.
And thats capacity he'll be able to integrate sales marketing services corporate finance, a technology operations of the from more tightly.
He's proven himself to be a very adept and agile high bandwidth leader. We made this decision in order to leverage his skills more fully.
The timings fortuitous since the company needs to transform and integrate more tightly due to the digital transformation being driven by the virtual way.
Having a single hands on executive.
Holding all of the various pieces together and driving driving operational efficiency is more important than ever before so.
This transition is partially about about and due to falling in his great capabilities.
And it's also a great thing at the right time because of our virtual transformation.
I am going to continue to be engage full time.
And corporate strategy and marketing strategy and product strategy.
Working hands on in product design.
Systems development.
And I'll be focusing on our alternative investment strategy and execution of that strategy.
Sure away my focus will be on items that are one to three years out and falling we'll be running the day to day operations of the business.
A few words about our corporate strategy.
During Q2, we gain better clarity regarding the impact of coal transition to the virtual wave and the impact that was going to have our core business.
These observations combined with the major developments and the macroeconomic environment that took place during the quarter.
Prompted us to adjust our corporate strategy for our business operations.
And also to adjust our corporate strategy.
For our Treasury policy.
And how we're going to make use of our balance sheet.
Regarding our business operations.
Our core value proposition of enterprise intelligence remains strong.
Our secondary value proposition.
Intelligence services and all the things related to our software has transitioned smoothly.
We found that.
There's as much demand as ever for enterprise intelligence that we're able to provide the consulting support and virtual environment effectively.
Our customer base has weathered the crisis and its holding.
Our operations have simplified as we transitioned away from traditional sales and marketing techniques flying around going to trade shows meeting face to face with customers and we've moved to digital techniques.
Framing video.
James et cetera.
We're getting the same thing done, but in a quicker easier more efficient fashion.
That's caused our productivity to improve with the introduction of all these digital techniques.
Our key growth opportunity as hyper intelligence to sold or enterprise customers and and.
The exciting new thing is going to be hyper now sold out of our cloud environment.
So our product strategy is to refine and deploy hyper now.
We can deploy hyper intelligence to your enterprise and less than an hour. So it's going to be an extraordinary.
Extraordinary opportunity for us.
So.
Given all of these things.
We expect to generate cash flow and to be consistently profitable on annual basis looking forward.
We've got opportunities to grow revenue, an increase margins as well.
On a going forward basis.
And.
We don't expect our continuing operations or our growth to be capital intensive.
Along as laid out all of these things.
Pretty effectively.
I think.
Our conviction with regard to these to these considerations.
Became much stronger as the quarter progressed.
At the end of March.
There's a huge amount of uncertainty and the macro environment and in the business environment. There's lot of uncertainty both guard, how our customer base would react and also how our business would would be impacted.
I think that after 12 weeks of experience, we were able to get our bearings and that made us confident that in fact, we can run an enterprise intelligence business more efficiently and with a higher velocity.
And generate cash flow from it.
And.
That caused us to start to reassess the balance sheet.
I think the balance sheets, the second part of our corporate strategy that's material.
We have a large amount of U.S. de on our balance sheet and we have carried that for awhile.
Overtime the yield on our dollar values has decreased.
And at points, we had an expectation that we would get higher real yields.
And therefore, there was no real urgency to address this issue.
But.
As of today.
We're expecting negative real returns or a negative real yields on us dollars.
And and that's an expectation that has materially change over the course of the last three months.
We expect on a macro economic basis more monetary stimulus from the fed we expect more fiscal stimulus.
From politicians, both in the U.S. in Europe, and perhaps everywhere else in the world.
And we expect a low interest rate environment for quite some time.
Sure on Powell said, we're not thinking about raising interest rates and we're not even thinking about thinking about raising interest rates and not being the case.
If you're if you have large dollar values and you're hoping for any kind of return on that faded.
Gold silver and bitcoin are showing strength.
The dollar that Dx y axis weakening.
Great then fee our currency.
Across the market.
Is fading.
And.
We've seen that and rallies in most asset classes during Q2.
Accordingly.
Be prudent to continue to hold a large portion.
You asked the.
As our treasury strategy.
And that's that's prompted us to rethink this.
Our strategy is to return a portion of our capital to the shareholders via buybacks and invest another portion of our capital and to assets other than dollars that will.
Yield a positive real rate of return.
That will result in us reducing the number of shares outstanding.
It should be accretive to all shareholders.
Having said that we need to maintain a healthy capital base its its equilibrium arent dauman as an institution.
And we need that capital base in order to assure our investors our employees our customers and our partners that were going to be around through good times and bad times. So.
While it's.
It's potentially dilutive for us to carry that capital dollars that doesn't mean that we don't need capital.
Hence if we look at assets gold silver bit corn in equities have all been increasing as the dollar has been weakening it makes sense to shift our treasury assets into some investments that can't be inflated away or are less likely to be inflated away.
There is just about.
Nobody we can find in the market today that isn't expecting some form of inflation to calm.
So as we as we pursue alternative investment strategies for our Treasury assets, we expect.
We will have more volatility at least as measured and U.S. dollar terms looking forward.
But with the consensus of the market that fee on currencies were going to continue to debase now's the time for us to address this issue would make a change in our policy.
We're going to work to execute this two prong investment strategy.
Over the next year, taking into account market conditions and the opportunities as they arise.
And with that.
I would like to go ahead and open the floor for questions from analysts.
Our first question, we have Tyler Radke with Citi. Your line is now open.
Hey, Thanks, and good evening, Mike on Fung Phong I appreciate all the clarity you've given us on some of the efforts you.
Put into reducing expenses, both from workforce reductions and sizing down your global footprint, maybe help us understand some of the assumptions into that 60 to 90 million dollar.
Net income range next year, obviously op income the combination of revenue.
In operating expenses, but just how should we think about kind of the trajectory those two items to get us to that 60 to 90 million range that you put out there.
Yes, Tyler good to hear from you as always.
A lot of that range between 60 and 90.
It's dependent on where we think revenues will go next year and the dependency on revenue is primarily based on the speed of adoption of cloud.
The speed with which we move existing customers, who are paying maintenance to cloud.
Platform could actually be accretive to revenue moving from.
From a product support to subscription services, but the speed with which we move customers from.
The new customers or new product license revenue to subscription services as you know could in a short term be dilutive to revenue but.
Prove our overall balance sheet in deferred revenue so that that uncertainty is what's going to drive that differential between sort of 60 to 90 million and of course also in addition to that just sort of what our assumptions on revenue growth overall.
The parts that were fairly certain about is where we think we can take our cost structure right you've seen in the course of this quarter.
A roughly 15% year over year decrease in our operating expenses.
I think.
We can continue at that type of a pace on a go forward basis in realizing a full year of that could be quite beneficial to.
Our operating income so those are the two components I would say the revenue is what creates the range in a cost we have greater certainty and as Michael mentioned, we really thought long and hard in the last three months about how we want to run our business.
And we think we can do it in a.
And the more economic fashion.
I do want to stress. This knock unless you know this is not sort of harvesting the business for cash we can be more economic but still be able to grow the business.
Appreciate that and maybe just to help.
Clarify little bit so so just to say to get to the 60 million, maybe just talk about the opex.
Assumptions for next year would you expect another kind of double digit.
Decline in terms of Opex growth next year.
Probably not also this year for right like I don't think we're going to get necessarily that aggressive. Although we can you know will start to look at the business overall, but I think what we're assuming is what you saw us at about a year over year basis. In Q2, we can project that out for a full year and realize the full year benefits of that so.
Hi, there are still other things that we can do especially as we move more customers to cloud I think we can get better economies of scale, Mike talked about some of our new product initiatives to the extent that those take those over require even lower.
What are cost to serve cost to sell cost of market.
So.
There's still additional things we can do that could create more cost savings that will evaluate over time.
Got it.
On the product support.
Revenue.
Obviously that.
Decline that little bit year over year.
Maybe just help us understand when you think that starts to return to growth I know there were some timing issues or maybe the answer is with the subscription transition.
It doesn't return to growth can you just see growth and subscription, but maybe just help us understand.
The differences and.
Gross.
In the public support verse subscription.
Yes, I think the objective there as you see customers move from paying perpetual maintenance over to cloud that we see an uplift as we move them over so product support will decline over time, depending on the speed that we move customers to the cloud, but they'll pick up and be revenue accretive over on the subscription services side.
So it's hard to project sort of how fast that will happen as I mentioned in my prepared remarks, we're starting to incentivize salesforce to move customers from on Prem into the cloud.
Yes, the extend obviously that they increase our a are.
And that's been our observation today is when we move customers from on Prem to the cloud we do see an increase in a are on its fairly significant right anywhere from I'll call. It 20% to 50%. So predicting the product support revenue going forward. The primary function of that is how quickly we move that revenue overtime.
Description surfaces, and then we see an uplift come out of it. So overall it should be accretive to total revenue by moving customers over.
Great and then last question for me just.
Obviously, the these cost cuts.
Our.
Yes, very positive in terms of returning to.
Profitability and generating positive free cash flow, but just how are you.
Yeah thinking about the impact on you know.
Returning to revenue growth I mean, I imagine you know look at your sales and marketing expenses are down pretty significantly year over year. So just how confident are you that you can return to revenue growth, despite making some pretty big cost reductions in you know in areas that would generally be viewed as revenue.
Regenerating.
Yes, it's a you know it's interesting and Mike talked about this the world has really changed right. So you know big primary like sort of things that have reduced rate like in person marketing events. We've moved it to digital we haven't seen a substantial decrease in pipeline as a result in fact in some regions of the world we've seen an.
Increase in pipeline, so we're spending significantly less money, it's not impacting our ability to market to our customers and our prospects right Teeny expenses right. There's always been a historical point of view that you need to be in front of a customer too.
For that initial meeting for the PSC to close a deal we've seen that hasn't been the case.
And we think that you know we don't need to return to previous levels. Now are we going to be operating it zero t. any post coded probably not but we think that we can be much less than we've ever been in the past without it impact to revenue again.
And those are probably the two big buckets on the marketing side.
Then just in terms of sales productivity. Our view is if people arent traveling if they aren't going to knees physical events and they're not spending time on an airplane, they're able to take more meetings meet with more customers advance deal cycles. So we're able to do more with less overtime.
And we're seeing this it generally speaking.
In the enterprise software a world happen.
Pervasively.
We have a good portion of being a pretty agile company. We move quickly we make fast decision. So.
We think that all these cost changes and then you know as we move to cloud right like when we are able to attract customers through digital channels consume get them to trial on the web get them to buy very quickly after or trial.
And your click wrap agreements various standard agreements entered upgrades like a lot of the back office expenses overtime, we'll be able to reduce too and we're seeing some of that so.
It's all sort of this digital transformation that the company is going through and so the reason, we're able to start providing guidance about operating.
Income next year is we have a lot of conviction and the ability to make these changes to the business and a year from now or two or three years from now not necessarily have to reintroduce. These costs as a means to generate revenue. We think we can generate revenue growth without these costs.
For the foreseeable future.
Thank you.
And our next question comes from the line of Hamad Khorsand with B S. The double yes.
Line is now open.
Hi, its first I wanted to start off with.
Already implemented your asset investment strategy.
No we havent, we're announcing our strategy today as part of our earnings.
And we'll start to implement over the course of the next 12 months.
Okay and then.
What can be seen from the customer base as far as.
The adoption is concerned on your cloud products that gives you conviction over this.
Guidance and the Opex would cut that you're expecting.
Yes so.
The conviction that we have on the guidance in the Opex cuts. This is partially related to the implementation of our platform, but as I mentioned to Tyler. It's also related to things that we're able to do to change our marketing our productivity et cetera.
On the cloud side, we've definitely seen a wave in the net last year or two years of customers, especially leading with cloud data warehouses.
I have the interest in moving the cloud.
So conversations that we've had been pretty pervasive throughout the world of customers up ticking cloud you're seeing it initially show up in our subscription services revenue, increasing 13% to 15% depending on a quarter that you're looking at so that sort of initial traction on our cloud subscription services rather.
The new is an indication of where we can take this and remember this is before we fully implemented.
I would call more of a platform as a service solution. Mrs are running what we've been running for the last few years not more private cloud.
So we haven't seen.
The initial indications of interest from our customers.
We've seen initial buying activity.
Customers buying into the cloud with migrating existing customers a new prospects.
We expect this will accelerate the other thing I'd mention is sort of post covanta lot ever come customers coming back to asking for.
You know to move to the cloud and even a more rapid way so.
Theres definitely a lot of data points that point too.
The increase adoption of our complex.
And because of.
This pandemic.
What are you seeing from customers as far as.
Anything from a budget cuts standpoint, or elongated sales process.
We are and that's that's the primary reason for our Q1 Q2 decreases and product license revenue.
I think we're seeing two factors one at the end of Q1, what we're seeing was a distraction customers not willing to have conversations on buying be software because they're trying to figure out business continuity.
In Q2, what we're seeing is either budget freezes or escalation of budget authority to more senior levels. We are starting to see some relaxation on not.
But you know that not long enough that we can predict what will happen in Q3 or Q4.
But we do expect a turnaround the once.
Global pandemic starts to use and the economic situation becomes more clear for everyone, but in the short term surfaces itself in longer deal cycles unexpected escalations of authority required to sign on a deal and so we're putting things in place more precision on our our deals.
Hi to predict for that.
And if if today was the Q3 quarter and how much of a benefit or impact would you see from the weaker U.S. dollar.
You mean on our balance sheet or on our income statement income statement.
I don't think we would see a lot of a benefit from the weaker U.S. dollar I mean, it's just really depends on the extent that we have our.
Our earnings sort of in the U.S. versus international and as you probably know there's a lot of volatility quarter to quarter on our product license revenue, whether it's happening in the U.S. versus international one quarter it might be 40% U.S., 60% international in the next quarter might be 70% U.S., 30%.
Rationale so that that distribution will be what FX. So the U.S. dollar translation of our international income into our income statement.
And you know and when we moved to cloud will need to subscription services will see less volatility in that distribution, but while large part our revenues is coming from product license there'll be a lot of volatility so.
Okay. Thank you.
And there are no further questions. Please proceed.
Okay. So are there no further questions.
There are no further questions.
Okay great.
I want to thank everybody.
Turning on today.
Our call and through all of our shareholders on the call. Thank you for your support.
I look forward to speaking with you again and 12 weeks until then.
Be safe.
And ladies and gentlemen, that's concludes today's conference call. Thank you for participating you may now disconnect.
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