Q1 2022 Microstrategy Inc Earnings Call
Well as through a $205 million first ever public company Bitcoin backed term loan I will discuss the terms of the loan in more detail and our financial section.
In total we have raised an aggregate of $3 $4 billion in new debt and equity capital that we've deployed in support of our client acquisition strategies.
To reiterate our strategy, we seek to acquire and hold bitcoin and long term.
We view, our Bitcoin holdings as long term holdings, and we do not currently plan to engage in sales of bitcoin.
As of March 31, 2022, the company own an aggregate of 129218 bitcoins that we acquired for a total cost of $3 97 billion or.
There are $30700 per bitcoin net of fees and expenses.
The market value of our Bitcoin holdings was $5 9 billion.
At March 31, 2022, reflecting $1 $9 billion of unrealized gains are nearly 50% appreciation when compare to the original cost basis of our big client at March 31 2022.
Carrying value of our Bitcoin holdings as of March 31, 2022 was roughly $2 9 billion.
Reflecting $1 1 billion in cumulative impairment charges.
We continue to see opportunities for micro strategy to target a multibillion dollar software market that is at an early stage of moving off of legacy tech into the cloud we are well positioned to meet the demands of enterprise customers with our modern analytics platform as we discussed in detail in our last earnings call, we see three key areas.
Growth for us enterprise analytics embedded analytics and cloud.
We will seek to grow by developing our pipeline, making our customer successful and continuing to innovate automate and simplify our technology stack.
Next I would like to provide you an update on our product enhancements in our latest platform release, which expands the value provided to our customers and represents future incremental growth opportunities in particular the product now includes an impressive differentiated set of new capabilities that enable organizations to build seamless scalable business.
Telegent applications at a faster pace, either deployed standalone or embedded directly into other products with a fully modern immersive and interactive design, even introduce a simple no code application development option built on the foundation of micro strategy Library.
<unk> powered developers to deploy a powerful customized data portals for multiple user groups at enterprise scale and a rapid speed to market microstrategy applications bring a competitive edge to our customers developers can build one app for employees using ipads on the sales floor and another for finance executives and headquarters.
<unk> all based on the same highly governed single version of the truth.
This delivers greater trust less hassle and lower maintenance costs, all qualities that make micro strategy the ideal partner for enterprises and independent software providers.
Applications also provide enhanced tolerable security controls to grant limited <unk>.
Access and log in as well as sophisticated and embedding functionality for extended flexibility and customization speak.
Speaking of security micro strategy also separated itself from the competition recently by way of our fast transparent and effective response to the high profile log for Jay and spring for shell vulnerabilities are customers benefited from rapid mitigation and remediation of these issues solidifying the peace of mind.
They have come to expect from our partnership.
Those customers in Microstrategy cloud has zero day fixes installed over the weekend and updates and patches installed in a week.
Our strategy continues to be growing a growing part of the mix Microstrategy cloud continues to be a growing part of the mix of our business. We are on track to accelerate the subscription billings momentum in 2022, we expect to grow by migrating on premise customers to the cloud expanding the footprint for existing cloud.
Cloud customers and defaulting deployment of as many new customers as possible to the cloud.
We also expect to have our micro strategy fed ramp compliant version of our software available in Q3. This year for those customers that are not yet ready to move to cloud such as those in highly regulated industries or countries. We remain committed to supporting them also.
Our underlying cloud architecture is also improving leveraging containers and micro services. This architecture is built to deliver highly scalable multi tenant SaaS solutions across tens of thousands of users and provide developers with a streamline experience to leverage continuous integration and continuous development.
Overall, I'm very pleased with the pace of product innovation and we are confident in our ability to achieve our long term growth targets, while maintaining profitability.
Finally, our annual user conference Microstrategy World was another tremendous success.
World 22 was our second virtual world events and enable us to reach a bigger broader audience with customer success stories product presentations thought leadership peanuts, and a hugely popular bitcoin for corporations event held in tandem.
Our content was available to all for free via an online event platform the keynotes, including the Michael Saylor, Jack Dorsey, Chino, where simulcast live on Youtube all in all we had nearly 14000 registrants on the platform and over 180000 viewers of the content across all mediums replay.
As for the sessions are available on our website.
Turning to our first quarter 'twenty to 'twenty two financial results in more detail revenues for the quarter were $119 $3 million down 3% year over year. They were almost flat on a constant currency basis.
Trailing 12 month basis total revenues are up 3% year over year.
Product license revenues were $16 $5 million down, 22% year over year and down 20% on a constant currency basis.
The decline is mainly due to a large transaction included in Q1 2021 that contributed the majority of the year over year differential on.
On a trailing 12 month basis product license revenues are up 2% year over year.
Subscription services revenues were $12 8 million, an increase of 28% year over year were up 30% on a constant currency basis. The growth in subscription services revenues reflects the increased portion of our product bookings that are related to our managed cloud platform. Our current subscription billings in the first quarter of 2021 were <unk>.
Seven 4 million, an increase of 18% year over year, the growth was slower than expected for the first quarter or some deals slipped out of the first quarter in part caused by the ongoing war, Ukraine impacting the purchasing patterns of customers in Europe and worldwide.
We see strong demand and pipeline for our cloud licenses and the potential for our future for further growth going forward.
Product support revenues were $67 2 million in.
In the quarter, a decrease of 5% year over year or 3% on a constant currency basis. The decline was partially driven by certain existing customers converting from perpetual product licenses tourist scripts to our subscription services are term licenses offerings and partially by an impact from unfavorable foreign currency exchange.
As we see more on premise conversions to our cloud offering we would anticipate product support revenues will experience a modest decline overtime that said our in quarter product support renewal rates for Q1 continue to be among the highest we've ever experienced.
Finally, other services revenues, which largely reflect our consulting services were $22 $8 million in this quarter, an increase of 9% year over year or 13% on a constant currency basis, primarily driven by an increase in billable hours worldwide, partially offset by an unfavorable foreign currency exchange.
<unk> impact and a decrease in average billing rates, we believe that growth the consulting revenues as an indication of continued engagement from our customers to modernize retain and grow their deployment of the microstrategy platform.
Shifting to our cost total non-GAAP expenses, which include share based compensation expenses were $275 million, which exclude share based compensation expenses were $275 million in the first quarter of 2022 as compared to $298 million in the first quarter of <unk>.
'twenty one.
Of this amount $170 million for bitcoin impairment charges in Q1, 2022 and $194 million in Q1 2021.
As a reminder, on the treatment of bitcoin impairment charges, a bitcoin holdings are considered indefinite lived intangible assets under applicable accounting rules, meaning that any decrease in their fair value below our carrying value for such assets anytime subsequent to their acquisition requires us to recognize impairment charges during the first.
We incurred digital asset impairment charges of $170 million.
As discussed on our last earnings call on a go forward basis, and a non-GAAP financial measures, we may present, and future filings will retain the impact from bitcoin impairment charges. This change in the presentation of our non-GAAP financial measures does not impact our strategy operations or GAAP financial statements or previous SEC filings.
We will continue to report the bitcoin impairment charges separately.
Now starting from the bottom of the chart moving up non-GAAP cost of revenues of $25 million in the first quarter of 2022, an increase of $2 4 million or 11% year over year.
As a percentage of total revenues. This reflects an increase of two 6% driven by increases in cloud customer hosting fees and personnel costs from additional head count.
As we continue to accelerate our shift to cloud, we expect increases in infrastructure costs and head count is for additional customers and overtime for our cloud business has scale decrease in cost as a percentage of total revenue.
non-GAAP sales and marketing expense was $29 million, a decrease of $6 9 million or 19% year over year.
The decline is primarily driven by a decrease in variable compensation, mainly due to higher capitalized commissions and decreases in bonus and personnel cost as a percentage of product license and subscription revenue. The charge reflects a decrease the change reflects a decrease of 16% which in part reflects improved productivity.
<unk> of our sales and marketing teams.
non-GAAP research and development expense was $30 million, an increase of $2 8 million or 10% year over year as a percentage of total revenue. This reflects an increase of 3% driven by head count increases cost of hiring and wage inflation.
The technology sector has experienced significant wage inflation and competition for resources and we anticipate that trend will continue in 2022 and that will continue to invest in R&D to retain our talented engineers.
Developed sophisticated innovative products.
We're also shifting some head count to lower cost regions, which we expect will result in some cost efficiencies over time.
Yes.
non-GAAP general and administrative expense was $21 million, an increase of $2 1 million or 11% year over year as a percentage of total revenue. This reflects an increase of two 3%.
Overall, we feel comfortable with our cost structure and our ability to generate cash flow is sustainable.
Total non-GAAP operating loss in the first quarter of 2022 was $155 $6 million inclusive.
Inclusive of impairment charge related to bitcoin and $170 1 million.
The carrying value of our Bitcoin holdings as of March 31, 2022 was $2 9 billion.
Which reflects $1 1 billion in cumulative impairment charges. They have also been reflected as losses on our GAAP income statements in the period incurred.
Our noncash bitcoin impairment charges will remain subject to market volatility of bitcoin market prices as one of the leading advocates for digital assets, we've been working with peer companies of various policy setting agencies in the U S to try to develop an alternative accounting framework for digital assets currently companies that aren't investment companies report bitcoin is.
Intangible assets. This means bitcoin is initially recorded on balance sheets at its historic cost and then is deemed impaired if the market price of the Companys principal exchanged for bitcoin drops below the carrying value and anytime however, the carrying value can never Conversely, you revise upward at the price of bitcoin increases.
In the fourth quarter of 2021, the financial accounting standards Board of FASB announced that it had added a project to their research agenda to explore accounting for exchange traded digital assets as the largest publicly traded corporate holder of bitcoin. The world. We believe we have a responsibility to share what we've learned since embarking on this.
Strategy to make it easier for other companies to diversify their balance sheet with this new asset class.
Next I'll discuss the terms of our first ever coined back long.
Term loan with silver gave bank, we raised $205 million as an interest only loan.
For a term of three years, which is collateralized by bitcoin below matures on March 23, 2025, embarrass monthly interest at a floating rate equal to the secured overnight financing rate or sofa 30 day average as published by the Federal Reserve Bank of New York's website, plus 370% with a.
Florida, a 375%.
So may be prepaid at any time subject to modest prepayment premiums.
The loan had an initial loan to collateral value.
25%, which was thus collateralize at closing by bitcoin with a value of approximately $820 million. While the loan is outstanding we are required to maintain an LTV ratio of 50% or less which essentially allows for an approximately 50% drop bitcoin prices from the time of transaction closing before we are.
It required a pose any incremental collateral. We're also allowed to proactively manage the LTV ratio by posting any desired value of additional collateral if we choose to a bitcoin appreciate some price and the LTV ratio is less than 25% of that anytime we're entitled to a return of excess collateral so long as the LTE.
<unk> ratio would not exceed 25% after such return.
Additionally, we have established a $5 million cash reserve account silver again to serve as additional collateral for the loan that can be used towards the interest payments for the last six months of the long term also we've held back approximately $9 million from the term loan proceeds as cash in macro strategy that can be used.
Towards general corporate purposes, including paying interest for this loan or buying additional bitcoin.
This loan is not guaranteed by any party the agreement does not restrict us from incurring additional debt.
Additional liens, so long as such liens are not on the asset serving as collateral for the loan and permits us to sell assets. So long as they are not serving as collateral for the loan there are no restrictions on utilizing bitcoin.
A part of the collateral for this loan. Thus this loan will be accretive to shareholders as long as bitcoin appreciates more than the issuance expense and cumulative interest expense to be occurred incurred over the term of the loan.
Micro strategy has pioneered the use of digital assets is a core component of enterprises Treasury policy, which has generated incremental value for our shareholders as a snapshot into our current bitcoin holdings by entities as of March 31, 2022 of the total of $129 218, Bitcoin is held by the comps.
Roughly 14100 bitcoins are held at the micro strategy entity all of which are held as collateral securing our 2028 secured notes. The remaining approximately 115100 bitcoins are held at the macro strategy subsidiary.
Of the macro strategy bitcoin approximately 19500 bitcoins are pledged as collateral towards the bitcoin backed term loan and over 95600 bitcoins remained unpledged and unencumbered, we may consider additional opportunities to utilize the strategic asset in the future for example sub.
The market conditions, we may enter into additional bitcoin backed financing this or seek to lend our bitcoin to third parties to generate yield we will continue to closely monitor market conditions in determining whether to engage in any such transactions and may ultimately.
Decided not to pursue any of these transactions.
Next I would like to emphasize the strength of our robust capital structure.
Our balance sheet and liquidity perspective, we are insulated from the near term market volatility of bitcoin prices. Since we currently do not have any debt principal maturity is coming due until March 2025.
The total annualized interest expense today is approximately $44 million.
Which equates to a blended interest rate of approximately $1 eight 2% on our entire debt obligations of $2 $4 billion we.
We expect cash flows generated from our software business to be sufficient to cover interest obligations as they become payable.
Additionally, we maintain a certain minimum amount of cash balance to fund our regular working capital needs as of the first quarter, we had $95 million in cash on our balance sheet.
Going forward, we will continue to evaluate debt or equity capital raising.
Other finance financing opportunities that we believe will be accretive to shareholders subject to market conditions and that further our bitcoin acquisition strategy or optimize our capital structure as needed.
We believe that the further adoption of bitcoin globally will have a positive effect on bitcoin prices, which has the potential to offer asymmetric upside to our shareholders.
Our 2022 outlook remains positive with our continued transition to cloud and our expectation of a sustained increase in subscription billings. Our cloud transition will result in increased subscription revenue and billings with the continued growth of our subscription billings. It is possible that our product license revenue and total revenue growth will.
Salary in the near term, even as our cloud software business, even as our overall software business expense.
This will depend largely on the mix of new sales between cloud and on premise licenses. This is because of new cloud contract, which may have a total higher total contract value than an on premise license still results in lower recognized revenue in the first year.
Overall, we feel we are well positioned to achieve our long term sales growth target of greater than 10% and increase free cash flows over time.
Finally, I'd like to share an update with you regarding the appointment of our new CFO .
To welcome Andrew King, who will be joining micros strategy as our new CFO effective on a start date, which we expect to be on or around maintenance.
I'm thrilled to see him step into this new critical leadership role, where he will be able to contribute from his wealth of experience.
Andrew has over 20 years of experience in banking and consumer finance and most recently served as CFO for Green Sky incorporated a publicly traded Fintech company.
Prior to Greens Guy Andrew served as our corporate Treasurer for Santander Holdings USA, the $150 billion U S Bank holding company under Banco Santander SA <unk>.
Andrew has also held leadership positions and capital markets Finance and Treasury at Santander consumer USA, HSBC finance and capital one.
Following Andrews appointment I look forward to having more time to focus on my role as president running the day to day operations of micro strategy as well as strategically planning for our long term health and growth for both DIY and bitcoin strategies.
I'll now turn the call over to Michael to discuss observations for the Microstrategy World event comments at our Bitcoin acquisition strategy as well as regulatory outlook for the digital asset space.
Thank you, Paul and I want to thank everybody for being with us here today.
I thought I would start with a few observations of global developments.
In Q1, we saw some fairly seminal events.
<unk>, Canada.
The Ukrainian war.
Russian sanctions.
<unk> inflation.
Supply chain chaos.
Concerns about food and energy shortages.
All of those things have been combined with.
A weakening currency environment, the Chinese currency, the Japanese currency, South Africa, South America, and African currencies in autumn Asian currencies are all collapsing.
Against the dollar.
In fact, just about every currency in the world except for two I think are collapsing against the dollar right now.
This is creating a very challenging macroeconomic environment.
It's going to.
Continue to create uncertainty.
And challenges for all businesses.
I think that it has had the impact of increasing awareness and the understanding of the need for our digital asset like bitcoin.
So the silver lining is a tough.
Hundreds of millions if not billions of people are now becoming aware.
<unk>.
The need for for non sovereign store of value digital asset like that coin.
The negative basis trade, some very challenging operating environment.
Over the last few months in the world the bitcoin the inch.
Distinct developments worth.
Worth highlighting.
Are the executive order coming out of the Biden White House on March nine, which was really a first as long as anyone can remember the first time that we had.
The executive branch in the United States in essence, highlighting and.
And endorsing and asset class as being critical to the future of the nation.
And so I thought the dollar is extraordinarily auspicious.
Janet Yellen gave a speech on April 7th at American University equal.
Equally auspicious.
We had the secretary of the Treasury of United States laying out the case for decentralized networks.
Area of digital property talking about the need for digital currencies, but the innovations on the crypto economy.
Suggesting that the administration is going to enthusiastically.
Forward to provide responsible regulations to allow this economy to grow.
I thought that was very critical too I think.
I think if you put all of these macroeconomic developments together with the regulators signal.
What you have is a world.
That's a bit and secure about currencies and insecure about property rights and insecure about 20th century banking systems in 20th century payment systems.
And aware that they need to find a solution.
You also have.
Another big development, which is that that.
Denier has.
Bitcoin and digital assets in general are now being silenced by the administration of the United States.
One of the early crippling criticism was this is just a ponzi scheme or this is intangible or theres nothing here.
And I think that.
With now the head of the SEC the head of Treasury.
The president of the United States acknowledging that there is something here.
And an important priority for the entire government I think that the Dod.
Really isolates the done Ayers, and if not making them look silly at this point because.
It's pretty clear that 250 million people knowing that there is something here and it's growing like wildfire and its pretty clear that the government.
Recognizing space.
<unk>.
We have another classification.
<unk> quite investors Athens, denials, and I will be the skeptics.
Sceptics acknowledged that it exists they acknowledged that it's good they may even acknowledged that its better than gold and is better than than other sorts of money or property and then they follow up with the observation that since it's so good to politicians will banish more the government will advantage.
And that was that's been articulated by a number of fairly well known credible sources over the past two years, but of course with the March 9th Executive order and the <unk> speech of April seven.
Gets increasingly difficult to maintain the skeptical stance.
As you would have to in essence put yourself in opposition to the to the White house is not.
Not the policy of the United States to ban Bitcoin. So in fact is not the policy of anyone in the western world to band Bitcoin. So.
The denials and the skeptics are being silenced.
And now the entire bitcoin market is evolving.
To be controlled by the traders the technocrats in the maximalist.
And <unk>.
Clearly the volatility in the market right now is driven by the fact that.
The traders are are trading bitcoin as a correlated asset to the NASDAQ.
And technology investors that our NASDAQ heavy or are selling or shorting technology assets as our risk off trade.
As the federal reserve raises interest rates.
So I would say that if we look at the last three months, although the macroeconomic environment is difficult and macroeconomic winds are blowing in the face of all risk assets in all operating companies.
I would say the fundamental developments the political developments and the and the market awareness Bitcoin has made enormous strides.
And.
And if you compare where we were today.
And where we are today versus two years ago.
The asset classes matured dramatically awareness has matured dramatically and the risk of holding the asset classes decrease.
And specifically I think the skeptics in the past 24 months are are increasingly disappearing and everyone is migrating to either a trader or a technocrat.
Or are maximized.
I had a chance to attend the Bitcoin conference in Miami Beach.
This this April I noted a massive surge of interest and bitcoin among politicians.
Among media and among among investors and.
There are a lot of politicians that hadn't heard of it and werent interested in it a year ago.
Both international and domestic and now knowledge on their radar and they realize they need to pay attention to it.
It's probably not not.
Uncorrelated to the executive order of March 9th.
I think there's a lot more media coverage and we've seen a change in the media tone I think the media talent. Two years ago was was nonexistent in fact people used to lament that bitcoin was not being covered by mainstream media at all.
It wasn't until.
February of 2021 after Tesla bought bitcoin bitcoin got on to the radar of mainstream media.
But I think that over the past.
Few months the tone has evolved from skeptical.
Or amused two respectful and in fact I almost noticed now that.
That mainstream journalists across the major papers and a major cable news networks are all much much more aware of the entire crypto economy much much more aware of bitcoin and its value proposition and much less skeptical much more interested in and engage in and I think the.
The environment has moved.
From.
Disinterested.
Through skeptical.
Two now.
Neutrally intrigued or even I would say intrigued and trade with me the right word in the media.
<unk>.
Also seen a bunch of investors.
Credible investors that are well respected in the space speaking much more freely about bitcoin in the marketplace and actually.
Becoming much more vocal and and.
And much more supportive and our words and I think that that.
That's a big move forward over the past 12 months.
Examples of that we.
We see here.
Carlos Salinas clause, becoming much more vocal Peter Thiel, becoming much more focused local Paul Tudor Jones, becoming much more volatile.
And.
No.
Orlando Bravo, becoming much more vocal.
I think youll continue to see this.
Yes.
Develop over the next 12 months.
I think <unk>.
Advances in the Lightning network are pretty relevant.
Maybe one of the bigger bigger developments last 12 months is lightning is maturing and lightning is the open permission less non cost audio layer two network.
In essence, if bitcoin represents.
<unk> protocol for sound money.
Lightning represents a protocol for.
For transaction and money transfer that's open permissionless and since it's a cut in theory scale to hundreds of millions or billions of transactions an hour.
This is in essence, the internet of money.
Two years ago. The Lightning network was really just developmental and the past year, it's come to life and so we're now entering into early part of the year or two of the internet for money coming to life.
Major milestones there block and integrating lightning into cash App was a major milestone.
The release of specifications for the tariff protocol on top of Lightning is a major major milestone what it means is that that lightning will in time, not just move satoshis back and forth at the speed of light.
Billions of people Lightning will also move other digital assets like stable coins.
Weather or or.
Or a circle or any any other digital currency or any other digital token.
Our in ft, or or another asset can move over the lightning network.
At extraordinary high speeds extremely scalable, while taking advantage of the security assurances of Bitcoin network.
So thats pretty compelling.
Craig can also incorporated lightning into their exchange.
And that's a very compelling breakthrough.
I think in time, all the competitive digital assets exchanges and all the all of them.
Competitive applications of money transfer and the like are going to have to build lightning as a protocol and to their applications and and we've got a number of years of development there, but the significance of lightning is it takes Beth Cohen from being viewed just as an add.
Asset and and as a low frequency high volume low frequency high value settlement network.
And it takes it to the next level, which becomes a high frequency.
High volume.
Very very functionally rich scalable transaction network.
And there will be I think an explosion of applications on top of the bitcoin network that are empowered by lightning.
Another big development in Bitcoin.
Last quarter is the launch of <unk> 401, K offering we're very enthusiastic about that and of course, we're in early anchor.
<unk> with them on that launch.
Bitcoin is better than gold.
Call. It digital gold is an understatement.
It really is the hardest money in the history of the world but.
If youre, if youre thinking about generational wealth and if you wanted to leave something for your grandchildren or if you wanted a retirement fund.
It's obviously, a very very compelling element of our 401K.
We just saw just on TV today, one of the world's great macro investors, Paul Tudor Jones said and the current economic environment, I, certainly wouldn't be owning stocks and bonds.
I mean people are very skeptical of owning equities and owning bonds in an environment, where you have hyper inflation macroeconomic wins.
So if I can't tell on stocks and I can't tell on bonds, then what am I supposed to put in a 401K.
And this is where a bitcoin content.
One of I wanted to hold some kind of commodity money, that's better than a commodity because no. One can make any more of it and bitcoin is that thing.
So.
I do think that.
The world is evolving rapidly, it's probably evolving faster than regulators in the mainstream media can keep up with it.
Kind of like a shockwave when you start moving through the civilization at a faster rate than people can educate themselves on the consequences Youll see sparks.
But the 401K launch was.
Another shot heard round the world here.
What's going on here is people are going off to stop and think about this in either this is the least risky thing you can point in our retirement portfolio.
It's too risky to put it in our retirement portfolio and of course as soon as you think about it and study it youll realize that it's the least risky thing.
In our retirement portfolio at least that's the opinion of people that have studied bitcoin for a while.
So thus.
401, K offering from Fidelity is is a Mac a massive educational event.
It's going to put this front and center.
On the table for financial advisors retirement planners, the entire the entire big finance industry.
And.
And I think ultimately it's going to introduce <unk> to an entirely new class of investors and broaden the appeal of the asset class.
So.
I'd like to move on to talk about our bitcoin strategy.
We're going to continue to pursue a strategy, which offers our investors spot.
Exposure with leverage to bitcoin.
If what you if you want to buy a security.
And you would like.
That security to own.
Bitcoin.
And then you would like to and you think it would be a reasonable idea to borrow money at one 8% interest in buyback coin than micro strategy looks like a rational company to invest in.
We're going to work to increase our bitcoin holdings over time in an accretive fashion.
So we're not trading bitcoin, we're not selling that coin, we're holding bitcoin and from time to time, when we can we'll buy more in bitcoin.
If we.
If we.
Focus upon this strategy then we believe that we can offer a security to the market and be an operating company that then in essence is is.
Superior to the security that you would get if you were to buy a spot ETF, we won't be in ETF, We're an operating company and we have the software business, but.
Yeah.
For an investor that's thinking about buying an ETF that hold spot bitcoin they'll think about that it will probably have no leverage and they will probably pay a fee.
And our goal will be to offer them the same bitcoin holding but without charging that fee and to use intelligent leverage from time to time when opportunity presents itself.
I was very very pleased with the bitcoin backed loan that we were able to acquire this quarter.
Yes.
Woah.
We will obviously use that.
Mechanisms sparingly.
Because generally were not going to want to develop.
A large set of obligations, where we might have to post additional collateral on a price fluctuation of bitcoin.
So managing our balance sheet versus the risk and the volatility of bitcoin is primary concern.
I was thinking about.
<unk>.
We will slowdown our bitcoin acquisitions when market conditions don't present to us.
With any good opportunities and when the market presents us with lots of good opportunities we may speed up.
And.
Youll just have to tune in quarter by quarter to see what we do there.
We have the option to do nothing.
And if the market doesn't give us a good a good option or we have the option to do things and.
You can see at this point.
We have now bought back coin with senior secured debt, we bought back coin with the tender offer we bought that coin with cash flows from our core business. We bought back coin with convertible debt, we bought that coin with at the market equity.
Issuance and we bought back Cohen with an asset backed financing and.
We pursued each of those initiatives at the time, we did it because we thought that they would be accretive to our common stock shareholders and beneficial to our long term strategy.
My last point I'll make before we take questions.
We will continue to pursue.
Mission of education, and advocacy on behalf of bitcoin to the general market.
As the largest public holder of bitcoin.
It makes sense for us to educate regulators it makes sense for us to educate other corporations. It makes sense for us to educate anyone in the media or any politicians that are interested and what this means to the world and why it's good for the world why it's good for the United States why it's good for their corporation.
Their institution.
And then how they can they can benefit and plug bitcoin into their P&L or plug it into their balance sheet.
If you don't follow me on Twitter. It plays do now just crossed $2 4 million followers and.
I try to share thoughts about the current.
The current environment on a pretty routine basis.
I am pleased to say that by by the end of the day today or tomorrow, a podcast I did with Lex trade men on Youtube will have crossed 2 million views.
So I sat down with Lex and my study at my home in Miami Beach, and we talked for four hours.
Digital transformation and.
And the bitcoin imperative.
And our strategy.
And of course, macroeconomics and geopolitics.
And.
It's not easy to put 2 million people into your living room.
2 million people listening for four hours is a lot of education.
And we'll continue to do more of it.
I feel that.
Well.
There is enormous thirst for knowledge about digital assets Theres enormous thirst for knowledge about the implications of of bitcoin to the world and the and the entire crypto economy.
There's a lot of education to do we're nowhere near done we're really just starting but we have established a platform to do that and and we will get more and more opportunities to communicate this message and educate the world.
I'll continue with.
With our efforts working with bitcoin miners for the Bitcoin mining council and and the entire bitcoin community.
To address misperceptions about mining.
To explain the benefits of bitcoin the benefits of bitcoin mining.
We just had another quarterly relationship bitcoin mining information, where we were able to show.
The world that for the fourth quarter in a row bitcoin mining is running on more than 50% sustainable energy at 58% 50.
<unk>, 58% sustainable energy usage.
<unk> mining industry, the cleanest most sustainable industry in the world of all industries and that was not a surprise to many people and continues to be a surprise to many people, but it's a delightful surprise.
Sure.
The coin mining in general is 63% more efficient year over year and a lot of people don't realize that that the bitcoin network are secured not just by energy, but by technology and that technology is getting exponentially more efficient over time.
So I'm really pleased that we're able to educate the world on the efficiencies of.
The Bitcoin network.
And the benefits of bitcoin and bitcoin mining I think that there is a lot more education to do.
Our leadership role in and acquiring and holding bitcoin as a publicly traded company has afforded us a platform to do a lot of that education.
And we will continue to do that in the coming year.
So with that I want to thank everyone for your support and we'll go ahead and answer questions.
Thank you Michael I'm going to jump right into questions. You have received a lot of good questions and im trying to cover as many as we can.
So the first question is for Fang on the software business.
Andy you have been through a few economic cycles over the years.
Discretionary buy software and do Youll see the current macro just pushing deal cycles out or do you think there are certain deals there'll be put unemployed for life.
Yes, thanks for the question Joe.
The short answer is.
There is a portion of this spend is discretionary and I'll call that speculative trying out new things.
Without necessarily a concrete use case or operational outcome and then there's a portion that's required.
And that's the piece that is required to operate and run an enterprise and.
Fortunately micro strategy falls more into the latter than the former.
So that kind of spending might get pushed out one quarter. When there is uncertain macroeconomic conditions like we had in Q1, but it isn't permanently shelved for the whole year multiple years. So.
Generally speaking I feel good about our ability to weather macroeconomic downturns.
And then we've seen some of our newer.
Competitors, who have who joined the market recently.
Thank you Paul.
The next question is for Michael.
When you purchase bitcoin how much do you consider dollar cost averaging into the purchase during the quarter versus more on X one <unk> strategy.
Okay.
Yes, we try to be thoughtful about the way that we acquire a bitcoin and we do it in such a way that we wouldn't impact the market and we will spread it over and over.
Time period, sometimes the long time period, sometimes a shorter time period, depending upon our perception.
The market volatility.
As a practical matter because we purchased bitcoin on many many different occasions over the past two years, we are a dollar cost averaging as we acquire more capital.
<unk>.
I guess I.
That's what I would say to that.
One more question for Michael.
Are you comfortable with the leverage level and.
What is the long term next strategy.
Yes, I think we're comfortable with our leverage level and our long term debt strategy is not to take on more debt than we can then we can reasonably manage.
I can add to that a little bit.
You saw us share a little bit earlier right now our interest expenses are around $44 million annually, which compared to last year's earnings.
Before interest tax depreciation if you were to adjust out the bitcoin dip.
Depreciation is about half of that and so I think we have plenty of earnings and cash flow to cover our.
Interest expense so we're in a pretty comfortable place right now with our leverage.
Thank you next question is for a phone.
How far is bitcoin at have to file for Microstrategy to.
We receive a margin call and the silver get loan.
And was this loan you gave for cash flow purposes.
I'll take the second part first node alone was not needed for cash flow purposes, we took out the loan primarily so that we could continue.
Continuing to invest more in bitcoin and also really to create a market for a bitcoin backed term loans being the first company to do that in.
In public markets is consistent with.
What Mike said, which is really us being a leader in the bitcoin space in general.
As far as where bitcoin needs to fall, we took out the loan at a 25% LTV the margin call occurs 50% LTV, so essentially bitcoin needs to cut in half or around $21000 before we'd have a margin call.
That said before it gets to 50% we could contribute more bitcoin to the collateral package. So it never gets there so we don't ever get into a situation of margin calls.
Okay.
And continue with the next question for <unk>.
Any risks of bitcoin collateral being liquidated <unk> extreme market when equity.
Regarding the syndicate loan.
Sort of related to just that last question.
Now the risk of.
Really are that we would have to contribute more bitcoin.
As you can see we mentioned previously we have quite a bit of uncollateralized bitcoin.
So we have 95643 unencumbered bitcoin. So we have more that we could contribute in the case that we have a lot of downward volatility, but again, we're talking about $21000 before we get to a point, where there needs to be more of a margin or more collateral contributors. So I think we're in a pretty comfortable place where we are right now.
Next question is from Michael <unk>.
It would be the company's strategy and the price of bitcoin, Steve slack for a prolonged amount of time.
We will continue with our strategy will keep generating cash flow in the core business and from time to time, we'll acquire more bitcoin.
Yeah.
And I'll follow up one more in for Michael.
And Microstrategy provide any details on exploring the <unk> integration part communities on unencumbered Microstrategy Mcqueen.
No.
Is there anything else.
Yes, I mean, we're looking at a lot of different things out there its sort of part of our role that we've been playing as a.
As a leader in the market, but what we're going to do when we're going to do it.
And with deal generation, there is a lot more to it in terms of accounting implications et cetera. So they are all things we look at from time to time.
Next question is performed.
I'll give you get comfortable including bitcoin floral and gift program.
Can you. Please provide some <unk> on the plan and whether it's already active.
Yes.
Similar to the question of how do we get comfortable with Bitcoin in general right and Mike talked about this a little bit first of all I think it's great with fidelity is doing as a leader in the market.
As one of the leading retirement savings plans.
Riders, it's great to see what they're doing from a leadership perspective.
We got comfortable because the executive team the board.
Leadership employees, who spent the last two years.
Turning about studying understanding details about bitcoin, especially as a store of value, especially as an investment and so.
The idea that it's a great long term historic value, which is why we put so much of our investment into bitcoin.
Makes sense for a certain number of employees does it makes sense for everyone and ultimately it will be something that's voluntary.
Have not rolled this out yet something we plan on doing in the second half of the year.
And we're still working through details exactly how we're going to go about it.
Thank you Paul.
One more question for phone.
How much longer do you expect credit license revenue to face headwinds.
How large will be the second.
Within the segment <unk> by the time it standardizes.
Yes, so as you know as we go through this transition to cloud product license revenues start to decline as we replace that with faster growing subscription.
<unk> subscription revenues.
I can imagine last year was a pretty big increase from the previous year and that we wouldn't expect to see that level of growth on a go forward basis on a year over year basis.
For product license revenue.
As we replace that with cloud and subscription revenues over time that will be the engine of growth in the organization on a revenue line.
Thank you Paul.
Next question is from Michael.
Any provide any touch and feel it.
Dubai.
<unk> stock.
A blank microstrategy stopwatches buying mcclain.
I think I think that there are some companies in some situations where people literally can't buy the bitcoin by either legally or by charter.
They can't buy them back coin, but they can buy securities. There are other situations, where people can't or don't wish to buy securities, but they wish to buy property.
So theyre very different things one of them is digital property. The other is a security that happens to toe.
Hold on its balance sheet digital property.
So.
I think that those are the primary issues.
For those people that prefer to own securities in their portfolio, but one that coin exposure then will be one of their options and for those that.
We prefer to own property.
Then bitcoin is digital property and I think thats, the right way to think of it.
Thank you Michael I.
I think one last question for phone.
Got it.
As the top line Miss this quarter, driven by a faster than expected migration to the cloud or is it a reflection of weaker demand.
Macroeconomic risks.
I think it's more of the latter.
And.
I think that is primarily manifested in slippage is of both cloud and perpetual deals into the second quarter.
So I don't think this is a permanent.
Change or or impact, we do have a little bit of the impact coming from stronger cloud, but I think it's more the macroeconomic side in the war in Ukraine.
Great. So I think the top on the dime now so thank you everyone for your questions. This concludes the Q&A portion of the webinar.
I will now turn the call over to Michael for any closing remarks.
I want to thank everybody for being with us today and thanks for your support.
We wouldn't be here without you so well continue with our strategy and we'll look forward to speaking with you again in 12 weeks.
You are the best.
Thank you.
Yeah.