Q2 2022 Microstrategy Inc Earnings Call
Hello, everyone and good evening.
I am sure <unk> head of Investor Relations and Treasury at Microstrategy.
I will be your moderator for micro strategies 'twenty going into second quarter earnings webinar.
Before we proceed I will read the safe Harbor statement.
Some of the information we provide during todays call regarding our future expectations plans and prospects may constitute forward looking statements.
<unk> results may differ materially.
From these forward looking statements due to various important factors, including the risk factors discussed in our most recent 10-Q filed with the SEC.
We assume no obligation to update these forward looking statements, which speak only as of today.
Also during today's call, we will refer to certain non-GAAP financial measures reconciliations.
Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website Microstrategy dotcom.
I would like to welcome you all to today's webinar and let you know that we will be taking questions using the Q&A feature at the bottom of your screen.
You can submit questions throughout the webinar.
And Michael form or Andrew and answer questions at the end of the session.
Please be sure to provide your name and your company's name when submitting your questions.
Now I will walk you through the agenda for today's call.
First.
Michael Saylor will provide a strategic review and discuss our recently announced executive transition.
Second fondly will cover the operational results for second quarter going in 'twenty two.
Then Andrew Congo cover the financial results for second quarter, two and greater <unk>.
And lastly, we will open up to Q&A.
With that I havent done the call over to Michael Saylor, Chairman and CEO of Microstrategy Michael.
Thank you Sherry.
I'm, Michael Saylor, Chairman and CEO of my car strategy.
I'd like to welcome all of you to today's webinar regarding our 2020 to the second quarter financial results.
First I'd like to provide a strategic review.
As you know Microstrategy has two corporate strategies.
First is to operate and grow our enterprise analytics business. The second is to acquire and hold bitcoin.
We've made great strides in both areas over the past two years.
We've digitally transformed our sales marketing and services, we've upgraded our enterprise B I platform.
With migrated many of our customers through our integrated cloud intelligence offering.
We've also established a trusted network of digital asset service providers.
We've developed a set of corporate procedures for acquiring and holding their corn in custody.
And executed multiple equity debt and convertible debt offerings in order to expand our balance sheet.
We are now the largest independent publicly traded business intelligence company.
As well as the largest public holder of bitcoin.
Microstrategy represents a new kind of firm, which generates cash flow based on enterprise software products and cloud intelligence services.
That has a balance sheet based on bitcoin a digital commodity that we believe is superior to traditional physical commodities like energy metals or agricultural products.
This hybrid corporate strategy represents a paradigm shift.
What started as a defensive strategy intended to protect our balance sheet rapidly evolved into an opportunistic strategy as we sought to create shareholder value during the pandemic crisis.
We no longer view Bitcoin acquisition is opportunistic it is simply our second corporate strategy.
Our future now it depends on how we manage and develop our intellectual property that is software as well as how we manage and develop our digital property.
That is bitcoin.
I'd like to talk a bit about our performance in these two strategies.
It's now over two years about two years since we embarked on our bitcoin acquisition strategy.
And while I think a minimum holding period for a long term investment would be four years.
It seems fitting that we should do a mid term review of results so far.
Since August 11th of 2020.
Our stock has outperformed bitcoin as well as every major asset class along with every major big Tech stock now.
Now why do we choose August 11, 2020 that was the day, we announced our bitcoin strategy and we couple that with the Dutch auction, where we offered to buy back $250 million of our shares. So we embarked upon this strategy on August 11th.
We went we looked back at where did Microstrategy closed the day before.
It's up 123% since we embarked on that strategy.
Whereas bitcoin gone bitcoin is up 94% since we announced our bitcoin strategy.
So micro strategy has actually outperformed bitcoin, we've captured more than 100% of the alpha a bitcoin.
From a standing start.
The S&P index is up 23% in that same timeframe NASDAQ was up 13%. So I used to as you can see we've outperformed by a factor of 10, NASDAQ stocks in general we've outperformed the entire S&P by a factor of five.
The option that we had when we chose bitcoin was gold, we said digital gold or gold.
Gold is down 13% since that fateful day, so bitcoin plus 94 gold down minus 13, Microstrategy up 123.
We could have held our 500 million plus dollars of treasury assets in bonds.
And the conventional view is to hold bonds well, we could have held short dated bonds that generated zero percent interest.
Or we could have bought midrange bonds and if we look at the PEMCO Bond Index D O N D D.
That index is down 14% since August 11 2020.
And of course for those who believe in silver inside of gold silver is down 29%.
So as you can see when we're choosing a treasury reserve asset that coin outperformed all other reasonable Treasury reserve assets now, we actually considered micro strategy performance and Bitcoin your performance against Big Tech to for those of you know me that you know I wrote the mobile wave and I've been a big advocate of big.
Digital monopolies like Google Apple Amazon and Facebook you can see Google in this time period is up 54% micro strategy more than doubled it.
<unk> up 43%, Microsoft up 34% so.
We managed to beat those three digital monopolies, but the other interesting thing is that has a big tech is down in that same period. Amazon has lost 14% of its stock value meta group or Facebook down 39% of Netflix down $50 53 per cent.
So.
If we look at all of these numbers and if you recall when we announced our strategy. We said we were considering all possible Treasury reserve options.
We manage to choose the single one bitcoin that's passed 94% of beat everything and micro strategy executed on that we basically started by buying $250 million of bitcoin, we executed on that so as to not just capture a fraction of the bitcoin return, but actually more than a 100% of the.
That coin return for our shareholders in that time period.
During this period, we have successfully raised $2 4 billion in debt.
And 1 billion in equity.
And we expanded our enterprise valuation from approximately $666 million.
To $5.6 billion, an increase of approximately $5 billion.
Or over 730% in those two years.
These results probably come as a surprise to many since there's a tendency to focus on short term volatility of bitcoin and its related impact on our share price.
As a publicly traded operating business that whole digital property.
Our strategy is unlike any other enterprise software company with our deep knowledge of business intelligence Rich enterprise analytic software platform and distributed network of loyal loyal global providers.
Sorry, loyal global customers, providing us with a stream of revenues and cash flow, where unlike any conventional holder of digital assets.
That means we need to think differently about how we manage our firm and maximize shareholder value overtime.
For an analyst considering how to value our hybrid software digital asset firm such as micro strategy.
It makes sense to consider the value of each of the components of the business and then calculate the sum of the parts.
The software business can be valued as a revenue as a multiple of revenue or earnings.
With consideration given to the likely growth rate the customer loyalty and the quality of those recurring revenues.
The digital asset business can be valued at net asset value with a premium based on an assessment of a the ability of the management team to execute effectively and b the prospects of the digital asset.
Adopting this framework, we've organized our firm in order to maximize the performance of both elements of our business, while using finesse to identify and capitalize on synergies that come from pairing a stable enterprise software business with a large potentially high growth at <unk>.
Immediately volatile digital asset holdings.
Now I'd like to talk about the outlook.
We are still early in the adoption cycle of digital assets and bitcoin in general.
There is clearly a strong demand around the world for a number of things first of all.
A a digital property to serve as a long term store of value asset.
B, a digital commodity to serve as a trading alternative to energy metals and other physical commodities.
C.
A digital payments network, that's open neutral fast and free for all to use.
Steve.
A digital currency that can serve as a medium of exchange for those unable to access dollars via the traditional banking system or for those who wish to trade at the speed of light and friction free on mobile phones and websites.
Stable coins like U S. D. C are examples of such a currency.
E.
A digital exchange that allows anyone to trade all currencies and all assets 20 $473 65.
These five things are are they clear innovations and there's extraordinary excitement and enthusiasm around those ideas.
Global consensus has built over the past two years that the world would benefit from these technologies and we need these digital assets to build the economy of the 21st century.
Bitcoin serves as the ethical technical and economic Foundation of this emerging digital economy due to whats Immaculate conception.
Its recognition as a commodity without an issuer.
Global brand recognition.
And worldwide network of mining operators with tens of billions and special purpose hardware and energy contracts that provide unmatched security and network integrity.
The current wave of crypto rationalization regulation and innovation is healthy for this industry over the mid and the long timeframe.
And we expect that coin will be the prime beneficiary of all these trends the.
The demise of Celsius Voyager in three areas has removed unhealthy business practices and dangerous leverage from the system.
Educating millions of market participants on the merits of holding an asset like that coin without counterparty risk and taking self custody or placing that asset and cold storage.
Regulators have been catalyzed by the crypto market meltdown and accelerated plans for regulating exchanges.
Crypto securities and stable coins.
We should see regulatory clarity come earlier than we would've otherwise expected.
And it is clear from communications from Congress and regulatory bodies than more focus is going to be placed on the digital assets industry and the rules and related initiatives will be fast tracked.
Many large institutional investors have yet to make substantive substantial allocations of capital to this new asset class because they are waiting for this regulatory clarity. So the focus the regulators are placing on the crypto industry is welcome news to us and we believe a net positive for bitcoin.
Even while there is market turmoil turmoil innovation and adoption continue and the digital assets space the.
The Bitcoin network is subtle more than 17 trillion transactions this year and the Lightning network continues to expand at a rapid pace, reaching record levels of liquidity and scale each quarter.
Every week, new banks announced breakpoint custody services no derivative products are coming to market, a new financial service providers continue to enter the space offering trading analysis and banking services to the swelling population of investors.
The growing interest in bitcoin for banks, such as Goldman Sachs Citigroup J P. Morgan Santander as well as fidelity as initiatives to offer 401k services that include bitcoin are indicative of this trend.
Macroeconomic trends continue to favor and drive the adoption of digital assets as well.
In the past two years numerous currencies in South America Africa and Asia.
Have collapsed.
And even traditional strong economies are suffering from currency weakness.
The great British pound the Korean won the South African Rand are all down 12% in the last 12 months.
The euro is down 14% against the dollar the Polish zloty and the Japanese yen are down 17% against the dollar.
The Turkish lira is down 54%.
The strengthening dollar has created a demand around the world for digital currency since many people outside the U S would prefer to trade their local currency for U S dollars and many people outside their traditional banking system can install a digital bank on their mobile phone in a few minutes and enter the global economy using the U.
S dollar as a medium of exchange and bitcoin as a store of value.
We believe bitcoin should be the primary beneficiary of these trends.
Since it is still a small fraction of the market capitalization of gold commodities property currency bonds and commercial real estate.
Continued inflation will create a need for a non sovereign store value asset that is neutral and globally available.
Technology will make it easier and more functional to use.
And ongoing education and regulation efforts will introduce more investors to this new asset class each year and make them more comfortable holding well in the form of digital property.
Microstrategy has ambitious plans to grow both parts of our business. There is a continuing need for enterprise analytics everywhere and we are well positioned to grow with our best in class integrated business intelligence platform.
We expect to accelerate our transition to cloud based intelligent services and exploit our increasing brand awareness and global reach to gain new customers and deepen our relationships with existing clients.
We also have a unique opportunity to continue growing our bitcoin holdings via more acquisitions financed by cash flows debt and equity.
We're one of the few operating companies in the World that has the technical capability and the corporate mandate to acquire and own bitcoin as well as issue bitcoin backed financings.
We're also uniquely positioned to develop enterprise software that leverages the bitcoin network.
We expect more opportunities will come our way and we intend to be ready to take advantage of our leadership position and the bitcoin industry. When the time is right.
Given this dramatic increase in the scope of our ambitious plans and the scale of our balance sheet assets.
We've decided that the firm would be best served by expanding and reorganizing the management team.
Andrew Kang recently joined our team as Chief Financial Officer, assuming responsibilities that were previously handled by Fang Li.
Many of you will be hearing from Andrew for the first time on our earnings review call today, and we're delighted to have him aboard.
For the past two years.
<unk> has served as our president and C. F. O now we feel it is the right time to elevate him to the role of President and C. E O responsible for all of our corporate operations.
As long as the ideal candidate to take the CEO role.
He joined our firm in 2015 as CFO progressively assuming responsibility for human resources facilities and information systems.
And later expanded his scope to manage sales and services as our chief operating officer.
Two years ago, he assumed responsibility for marketing and technology as well when he was elevated to president.
And all of these roles. He has been successful and has gained the respect of the board as well as the respect of our employees customers partners and vendors. So the progression to C. E O is both natural and well deserved.
Fang will also join our board of directors as a member of the board.
I will assume a new full time role as executive chairman of micro strategy.
I will remain and executive officer, and employee of the company and chairman of the board of directors as well as assuming the role of chair of our investments Committee, where I will continue to provide oversight for our bitcoin acquisition strategy.
My focus will be on our corporate strategy, our innovation efforts, our bitcoin strategy.
And related bitcoin advocacy and education initiatives, such as my work with the Bitcoin mining Council.
I will continue to act as an enthusiastic spokesperson for micro strategy and as our envoy to the global Bitcoin community.
As global adoption of digital assets accelerates this is becoming an ever more expansive job and I'm comforted, increasing the scope of my advocacy efforts knowing that the execution of the micro strategy business plan rests in the capable hands of Fang, Andrew and the rest of our executive team.
<unk>.
These changes will take place as of August eight 2022.
At that time, the company will have a dedicated chief financial officer, and Angela Kang of dedicated President and CEO and Fang Li and a dedicated executive chairman and myself.
This represents a welcome strengthening of our management team as we prepare for the next phase of corporate growth in my career strategy.
I'm personally excited about this news.
The three of us make a great team, we work together, well and possess mutually complementary skills and experience.
This will be a benefit to our shareholders customers employees partners as well as to the broader community as we continue to lead the way in business intelligence and bitcoin corporate adoption now.
Now I would like to pass the floor to Phong Le our president and soon to be CEO to provide an operational review of our business results.
Okay.
Thank you Michael.
I am honored and looking forward to leading this truly innovative organization in my new role as President and CEO .
Like our strategy is founded 33 years ago as a technology innovator with a vision of intelligence everywhere.
Since then we've become a global leader in business intelligence, serving the largest most respected enterprises and government organizations in the world.
We've also been a technology pioneer in the fields of relational web mobile and cloud analytics, our employees and executives are the foundation upon which our strength in enterprise analytics is built and I'm enthusiastic to work with them to continue to grow this business growth going forward.
More recently like the strategies pioneered the use of digital assets is a core component of corporations Treasury policy.
We believe its still early and further adoption of bitcoin globally can have a positive effect on the corn price, which has the potential to offer upside to our shareholders.
Bitcoin is the right long term store value for like your strategy enterprises institutions individuals and the world.
Our history of innovation has allowed micro strategy to be successful for a sustained period of time.
Plan to continue to build a culture in our company where innovation thrives. In addition, our ecosystem of customers partners shareholders and employees are essential to our success our commitment and focus on this group will strengthen under my leadership.
I look forward to leading the organization for the long term health and growth of our enterprise software and Big point acquisition strategies.
I'd also like to thank Michael Saylor.
Following Mike's footsteps are founder and a pioneer and enterprise analytics bitcoin for institutions.
<unk> micro strategy for 33 years is a great honor and a great responsibility.
I've learned a tremendous amount for like over the last seven years and I'm honored to build upon his foundation at Microstrategy.
I look forward to continuing to work with him in my new role as President and Chief Executive Officer, and as a member of the board and his new role as executive Chairman.
I'll now focus in on the Q2 2020 to business results.
Overall, we were pleased with our results in Q2, despite a challenging macroeconomic environment due to the high inflation weakening foreign currencies and the ongoing war in Ukraine, We achieved total revenue growth at constant currency on the strength of our cloud business.
We had strong growth in our subscription revenue and billings driven by both existing customer migrations to the cloud and new customer wins or customer revenue renewal rates continue to be among the highest we've ever experienced.
To summarize our second quarter software results revenues increased 2% year over year on a constant currency basis.
Total software license revenues, which we considered to consist of total product licenses and subscription services revenues and our consolidated statement of operations increased 8% year over year on a constant currency basis.
We benefited from the increased adoption of our cloud platform, partially offset by a decrease in product license revenues over time, we expect our revenue profile to continue to shift towards recurring subscription revenue.
Subscription revenue increased 40% year over year on a constant currency basis.
Current subscription billings grew 51% year over year, our ninth straight quarter of double digit growth and our second best quarter ever.
We're also seeing growing adoption of our cloud platform and our international customers with several major wins in Q2.
We continue to focus on three key areas of growth that represent core micro strategy Differentiators enterprise.
Analytics embedded analytics and the cloud.
Our customers depend on these differentiating capabilities to build mission critical applications to run their field forces store operations risk analysis groups corporate operations and much more.
For our first growth area I am pleased to share the micro shred you ranked number one in the enterprise analytics use case and Gartner 2022 critical capabilities report for the second year in a row.
We found that during volatile economic times organizations rely heavily on their analytics and looked at enhance how they get that information in the hands of their end users effectively.
The ability to deliver data analytics at scale with high performance and security remains a critical success factor for our thousands of customers worldwide. So we're proud to receive this designation once again.
Moving on to enterprise analytics, we continue to see growth of customers, who build micro strategy into the software solutions that they sell to end users leveraging our open embedded analytics capabilities, our focus on innovation and research and development has enabled us to continue to modernize our platform with improved immersive.
Interactive user interfaces simple no code low code application development with open Apis and innovative capabilities like mobile and hyper intelligence.
Finally, as Microstrategy cloud continues to be a growing part of our business mix, we expect to accelerate growth through increased cloud adoption by both new and existing customers new customers are increasingly cloud first and choose to deploy directly on microstrategy cloud at the same time more and more existing on premise.
Customers are migrating to the cloud and expanding their microstrategy usage to new departments and user groups.
We also expect to launch in Q3 this year Microstrategy cloud for government, our new cloud offering with fed ramp authorization.
This product is our first generally available release of our cloud platform that relies on a modern cloud native architecture, utilizing containers and micro services.
It also continues continues to deliver the enterprise grade security Stu.
Stability and scalability that our customers have grown to expect.
This combination of fed ramp authorization enterprise grade capabilities and managed service delivery will help us further differentiate our solutions with government large enterprises and embedded analytics customers world wide.
Our combined focus on enterprise analytics embedded analytics and cloud services has resulted in more customers rely on us for an end to end business intelligence strategy, often decommissioning and consolidating legacy platforms in favor of an enterprise wide adoption of micro strategy.
This has led to increasing revenue renewal rates every year in the last three years.
In summary, our outlook for the software business remains positive with our continued transition to cloud and our expectation of further increases in subscription billings.
Overall, we're very pleased with the pace of product innovation, and we feel confident in our ability to achieve our long term sales growth and profitability targets.
Turning to our Bitcoin acquisition strategy, we purchased 481 bitcoins for $10 million in Q2, and the average purchase price of $20790 per big point net of fees and expenses.
We've not sold any bitcoin to date.
To reiterate our strategy, we seek to acquire and hold bitcoin long term and we do not currently plan to engage in sales in bitcoin.
As of June 32022, the company own an aggregate of approximately 129699 bitcoins that we acquired for a total cost of $4 billion or.
Or $30000 $30664 per bitcoin net of fees and expenses.
We have a long term time horizon in the core business is not impacted by the near term price fluctuations a big one.
As I mentioned earlier, we're a technology company with more than 30 years of history of innovation, we're going to remain laser focused on technology innovation.
We prudently manage our capital allocation strategy and people strategy.
As seen in the current markets. Many software in crypto exposed companies have had to adjust to periods of rapid cost and head count growth by right sizing their teens or freezing hiring.
In contrast, we have the benefit of a long history with our product and our customers are stable experienced executive team and our long term focus.
We're in a strong position from a people and product perspective, and we will strategically hire and invest in our people while at the same time being cognizant of the current macroeconomic environment and careful managing our costs.
Finally, I'd like to introduce our CFO , Andrew King who joined the company in May.
Thrilled to see Andrew step into this critical leadership role, where he will be able to contribute from his 20 plus years of experience in banking finance Treasury and capital markets.
I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.
Thank you Paul.
And delighted to be with everyone today and would like to start.
Turning to our second quarter 2022 financial results in more detail.
GAAP revenues for the quarter were $122 million down 3% year over year.
Weakening foreign currencies impacted our revenues this quarter when isolating FX impacts total revenue increased 2% on a constant currency basis.
Total software license revenues, which consist of both product license revenues and subscription services revenues were in total $34 million up 5% year over year or up 8% year over year on a constant currency basis.
Both in total software license revenues this past quarter reflects our strategic focus on the migration of our platform to the cloud, which fong highlighted earlier.
In the second quarter cloud subscription service revenues were $14 million, an increase of 36% year over year are up 40% on a constant currency basis.
Total product license revenues were $20 million, a decrease of 9% year over year or a decrease of 6% on a constant currency basis and product support revenues were $66 $5 million, a decrease of 6% year over year or 2% lower on a constant currency basis.
Both license and product support revenues are impacted when new and existing customers convert to a cloud model.
As a result, we expect those revenues to modestly decline alongside a corresponding increase in cloud subscription revenues and billings.
It is important to note that even in light of this transition our on Prem customers continued to reflect the durability of our business as demonstrated with the Q2 support renewal rate of 95%.
Among the highest we've ever experienced.
Finally, other services revenues, which largely reflect our consulting business were $21 $4 million. This quarter, a decrease of 2% year over year, but an increase of 4% on a constant currency basis, we continue to see positive trends in our consulting business through increased billable rates and ours.
Worldwide, while optimizing costs, great global and highly skilled technology consulting workforce.
The 4% constant currency growth year over year is a strong indication of the desire from our customers to modernize and grow their deployment of micro strategy.
Moving to billings or current total software license billings were $39 $9 million, an increase of 12% year over year.
In the second quarter current subscription billings were $20 $1 million, an increase of 51% year over year, reflecting the same strong growth momentum we saw at the end of last year.
This increase was driven by solid results in both subscription service revenues as well as current deferred subscription service revenues.
Also worth, noting our largest cloud billings in Q2 were sold as multiyear contracts with an average term of over 24 months, which only 12 months are reflected on our balance sheet.
We believe the demand to migrate Microstrategy cloud remains very strong with additional pipeline being added from both our domestic and international customers.
Shifting to cost total non-GAAP expenses, which excludes share based comp or $1.02 billion in the second quarter compared to $529 million in the second quarter of 2021.
Aside from the midpoint impairment expense that I will discuss in a moment.
Cost this quarter reflect modest increased in areas specific to building out our cloud platform retaining and attracting talent.
On efficiencies and corporate cost areas.
Starting from the left of the chart non-GAAP cost of revenues were $24 million in the second quarter of <unk> 22, an increase of $1 6 million or 7% year over year.
As a percentage of the total revenue these costs, which are still scaling up to support the build out of cloud reflect an increase of 2%, which was largely attributed to higher hosting fees and investments in technology talent.
non-GAAP sales and marketing expense was $32 million, a decrease of $4 $6 million or 13% year over year.
As a percentage of total software license revenues, the second quarter, a decrease of 19% year over year.
<unk> to reflect improvements in the productivity of our sales and marketing teams along with an increase in capitalized commissions compared to last year.
non-GAAP R&D expense was $29 million, which was an increase of $2 6 million or 10% year over year.
This was an increase of 3% as a percentage of total revenues driven by the ongoing competitive environment for talent across the tech sector.
We are anticipating that this trend will continue in the near term. However, as we prioritize overall spend in the second half and into next year, we will continue to be strategic and opportunistic in investing in R&D to attract and retain engineering talent and to drive innovation that creates demand for our products.
non-GAAP G&A expense was $22 million, an increase of $3 8 million or 20% year over year as a percentage of total revenue. This reflects an increase of 3%.
The overall macroeconomic environment and inflation challenges continue to create headwinds for our bottom line.
The fact is that our business is operating well and our cost structure is stable.
However, in the coming quarters, we will be intentional and prioritizing spend while focusing on areas that drive profitability, while continuing to promote a strong workplace culture.
The largest non-GAAP expense for the quarter was the bitcoin impairment charge of $918 million, you will recall that the GAAP treatment of bitcoin impairment charges <unk> holdings as indefinite lived intangible assets under the applicable accounting rules, which means that any decrease in the fair value.
Below our carrying value at anytime subsequent to acquisition requires us to recognize an impairment charge.
Due to the bitcoin price volatility in Q2, the impairment on our <unk> holdings as measured against the low watermark.
Corn price of approximately $17600.
Future corn prices remained above this low watermark under the current accounting rules, we would not recognize any additional impairment against a substantial portion of our June 32022 point holdings.
Yeah.
On slide 18, total non-GAAP operating loss in the second quarter of 2022 was $903 million, which includes the $918 million of bitcoin impairment charge I just spoke about.
I'd like to highlight that since the adoption of our big point strategy in Q3 2020.
Digital asset impairment charges, we have incurred in every quarter since inception have always been greater and our non-GAAP operating losses.
While our bitcoin holdings are impaired when the price drops below the carrying value under current accounting rules. Conversely, when the price increases accounting rules do not allow the carrying value to be revised upward.
We feel optimistic that the financial accounting standards Board's recently unanimously agreed to review the accounting rules for exchange traded digital assets and commodities as part of their upcoming technical agenda, which could lead to a change in how digital assets are accounted for in the future.
As of June 32022, the carrying value of our Bitcoin holdings was approximately $2 million, which.
Lex approximately $2 billion in cumulative impairment charges.
As you can see in the chart the market value of our Bitcoin holdings is it each quarter and has always been greater than the carrying value under the current rules.
The capital markets have established us enabled us to be agile on access both the equity and debt markets in an efficient way to grow our enterprise value.
Can see on slide 20, the earliest of our debt maturities are not due until March 2025.
The blended interest rate of our totaled $2 4 billion in debt is only one 9%.
As of quarter end, we had $69 million in cash on our balance sheet and we expect cash flows from operations will be sufficient to cover our ongoing interest expense.
Going forward subject to market conditions, we will continue to evaluate opportunities that we believe will be accretive to our shareholders that further our bitcoin strategy or optimize our existing capital structure.
As of June 32022, we held a total of 129690 900 claims of which 14589 declines were held directly at micro strategy with parents all of which secure our 2028 notes.
<unk> approximately 115000 bitcoins are held at our subsidiary macro strategy.
The big points helped us approximately 30000 bitcoins are pledged as collateral to the silver gate loan and just over 85000 big points remained unpledged and available for use.
These unencumbered bitcoin is equivalent to approximately $2 billion, assuming a market price of about 23000 perfect point.
Our bitcoin strategy remains simple.
And hold for the long term and that is it.
In Q2, the amount of bitcoin pledge of macro strategy increased by 10585 coins.
<unk>, the silver gate long as bitcoin prices fell to the Q2 lows.
Our $205 million of quick one backbone requires us to maintain a loan to value or LTV of 50% or less and we have the ability to contribute additional big point to meet the requirement as needed, which we did in Q2.
The price of Bitcoin appreciates and the LTV ratio is less than 25% at anytime. We are also then able to withdraw any of the excess collateral at that time.
With approximately 85000 available unpledged coin, we have more than sufficient collateral to meet the ongoing requirements of alone do any foreseeable price volatility.
Finally, before I open up the call for Q&A I would like to say that I am extremely honored to be part of the micro strategy team and excited to be working with Mike and song in their new roles, where we're all aligned on executing on our corporate strategies of operating and growing our enterprise analytics business.
And acquiring and holding bitcoin for the long term.
I believe micro strategy is truly in a category of one having successfully combined and long standing software business with a successful track record and deep customer customer base with a pioneering corporate treasury strategy to acquire bitcoin coin as a store of value to become the largest corporate holder of <unk>.
Around the world.
Thank you for your time today and with that I'll now turn the call over to <unk> for Q&A.
Okay.
Thank you Andrew.
We have received a lot of good questions. So we're going to jump right into the questions.
The first question is score Michael.
Is the CEO succession, a recent development.
That is something that had been in works for a while.
Okay.
Okay can you hear me.
Yeah, the matter of CEO succession has been carefully considered and planned for at the board level for many years.
We believe in proactively developing our leadership team and we realize the future of the firm is dependent upon our ability to cultivate successive generations of executives and promote from within.
I had seven years of closely working with Fong on a day to day basis on it projects sales activities on technology on marketing on services on facilities on finance initiatives.
And the board had seven years of experience with him because he was the CFO throughout that time and he was closely involved with the board every single quarter.
When Fong was promoted to president of the company two years ago, I think it was pretty clear to company watchers that he was my heir apparent. So in summary. This is a decision seven years in the making when we finally got to the point that.
That seem right. It was an easy one tactic.
To execute on.
Thank you Michael.
Next question is for fun.
What changes do you plan to make.
See you.
Well I think.
Like stated we've been working together for seven years now in my capacity as CFO on at all.
Two years as President I.
I think we're fairly aligned in how to run both an enterprise software company.
And very aligned and working very closely together in the last two years at our big quite acquisition strategy. So I would sort of see this as a business as usual transition where we get to even further clarify our roles in the organization with our employees with customers with partners with.
<unk> shareholders and the media and I don't have any significant changes plans, probably the biggest change that we've observed is really andrew's arrival two months ago.
Him now running the finance organization very incredibly and professionally it gives me more time to run the company against like more time to focus on corporate strategy.
Innovation and the bitcoin strategy.
Thanks, Tom.
Next question is for Andrew.
Do you anticipate any further capital markets activity and what is your long term debt strategy.
Hi.
Thank you for the question <unk>.
I believe the company has executed so far in a very prudent and well thought out capital structure framework.
I am really since 2020 and it has been extremely successful as evidenced earlier when Mike explained our stock performance over the last year compared to our comps.
Our approach to debt or equity will remain the same as it has.
We will continue to evaluate access to the markets that are most accretive and we will.
Look to obtain the most premium per dollars generated that being said right now in the current market we are continuing to evaluate.
All the various opportunities and really have the luxury of continuing to be thoughtful on any future balance sheet execution. So for the moment were bit of a.
Evaluate wait and see but I can assure you that whatever we do in the future.
We will continue to do so in a prudent and safe manner.
Thanks, Andrew next question is trip Com.
Tom Congratulations on your promotion to CEO .
Can you talk about your growth outlook for the software business for the second half of this year.
There are significant macro crosscurrents flowing.
How do you expect this to impact the growth rate of your license and subscription billings in the second half.
Thanks <unk>.
Yeah, It's a good question.
We were able to in my opinion withstand some of these macro economic challenges in the second quarter as you saw primarily by growing in the cloud.
I think the second half, we'll see more America macroeconomic changes challenges the strong dollar.
Unpredictability.
The war in Ukraine et cetera. So.
I think there'll be more challenges our intent is to try to continue to grow.
I think cloud will help us as you all know and as I and Andrew explained growing in the cloud does have a short term negative impact on product license revenue and also has a short term negative impact on total revenue so that will create probably more distraction in our revenues Bang that macroeconomic challenges.
But I think we'll be able to continue to grow I'm optimistic about it that said, we're gonna be prudent and thoughtful we're not going to get out ahead of our skis on.
Cost and we'll see how the business continues but things have been going fairly well when we see macroeconomic challenges given our sort of gave.
Given our strength in enterprise analytics embedded analytics in the cloud.
We'll be cautious but optimistic in the second half.
Yeah.
Next question is from Michael.
Has the recent bitcoin price volatility.
Accompanied with large accounting adjustment affected your view on your bitcoin strategy going forward.
Yeah. It's a great question, we anticipated bitcoin volatility and we understood the accounting implications when we embarked on a bitcoin strategy I view both of these as competitive advantages for our firm the.
The volatility means that a bitcoin is more interesting than less volatile assets and be micro strategy is more interesting than companies holding less volatile assets.
The phrase that comes to mind is volatility is vitality.
We believe one of the reasons Bitcoin is the best performing asset class of the last decade is because the volatility attracts interest capital trading it creates opportunities.
It's very special.
Our firm visibility has been increased by one to two orders of magnitude since we embarked on a bitcoin strategy and interest in our Securities has also increased by one to two orders of magnitude.
We don't have to try to convince companies to want to cover our stock.
And explain why we're unique they're hearing from lots and lots of other channels that we're unique.
And the fact that bitcoin is volatile means that you know on the weekend of bitcoin spikes up 20% or 10% then our stock might be mispriced and all of a sudden there is someone that is thinking about it and obsessing about what to do on Monday morning, and maybe the opposite and the fact that they're obsessing means they have to discover us.
And I notice us and when they noticed us they started asking cautious what does microstrategy do Oh software tell me more about that so every CFO C. E O <unk>. The C suite, they've heard of us the media they've heard of us trade.
Traders provenance and economic incentive to invest in micro strategy.
I used to joke with people you know if you like Bitcoin then you'll like us, but if you hate that coin, you'll still like us because people that hate their coin they want to trade our stock and people don't like that corn wanted to trade our stock and everybody's got to have an opinion on it so the volatility just attracts attention and attracts capital and and.
It makes the company much more interesting.
As for <unk>.
And the interest is important because because.
The thing you don't want is to be irrelevant to the world when nobody knows you and nobody cares, whether you succeed or don't and no. One knows what you do that's the kiss of death and so our company has has really emerge on this on this world scene.
It has helped us.
This helped us to sell to market to recruit to retain employees too to find shareholders.
Et cetera, and so I see those as all positives I think the.
The accounting treatment.
Also benefits our firm because we decided to adopt a bitcoin standard so in an accounting treatment. This indefinite intangible it's kind of challenging to be 3% committed or 2% committed or 18% committed but when you're when you're all in all committed and.
People know they can multiply the price of Bitcoin times 129699.
Any given day and then add in what they think the software business is worth it actually.
It it makes things easy.
And.
We were able to do this because we launched that Dutch auction on August 11th 2020, most other firms would find this a very daunting corporate transition and and they wouldn't be able to sort of completely.
Completely.
Completely transform.
You know the.
On the corporate balance sheet with the support of the shareholders and the way that we did it with that transformational deal.
So as a result of that because people are afraid of volatility in there and sometimes they're off point by the accounting.
We have been able to develop a lead in the digital asset space as the first and the largest public operating company on a bitcoin standard and and I think that has given us.
Sustainable competitive edge and a differentiator that we can use to continue to build shareholder value going forward.
And so what I'd like to add any further color.
No I think like I said, it very well.
Great.
Next question.
It's also for Michael.
How should investors evaluate the new executive structure.
Are there any tangible benefits from it that will become evident over time for example.
The development of the digital asset strategy beyond Bitcoin Heartland.
Well I think the executive structure is.
Is gonna be a benefit to all of US first of all we're actually expanding the management team with the addition of Andrew and and that that gives us a full time finance executive and as you know our our balance sheet has grown with our with our debt off.
Rings, and our ability to issue equity and the explosion of our enterprise value from 666 million to $5 5 billion means that the.
The finance function has become a full time job and its own and so so Andrew has arrived and brought some new skills with them, but also Andrew has has made it possible.
For us to promote falling to president and Chief Executive Officer.
Fang is just an incredibly gifted operating executive in and with.
With the support of Andrew and with the with the CEO role and the unambiguous power that comes with it Fang will be more effective and able to able to move more efficiently and and drive the corporate mission.
Uh huh.
Hi.
I feel comfortable a with Fang and Andrew.
In place as well as with the we haven't mentioned.
<unk> the rest of the executive team, but we have an awesome CX O team right our head of technology, our head of <unk>, our head of consulting our head of sales.
Right and and our head of marketing.
They are the unsung heroes that.
Arent on this call right now, but that team is just very accomplished very stable.
And this new <unk>.
<unk> structure means that I can even more enthusiastic we focus upon communications and strategy and bitcoin advocacy and evangelism.
Knowing that I'm, not ignoring the nuts and bolts day to day operations of the business of which the Theres. A 100000 things you have to do well every year in a software company.
And they need to get done and they will get done.
But.
The the world of Bitcoin is exploding and and everywhere in the world people are interested in how they plug into this network.
And how can micro strategy integrate with them and so that's a that's a job that's actually growing in scope. So I feel like I'll be more effective.
There'll be more effective.
You know Andrew as a welcome addition, it's just a win win win.
Thanks, Michael next question is performed given the macroeconomic risks can you update us on how you think about balancing revenue growth versus margin expansion.
We're focused on growing the revenue I think we have the right cost structure in place to do it. So I don't believe we need to sacrifice revenue growth.
<unk>.
By reducing yeah, if we were to reduce our costs I think we can continue to grow at the current cost structure.
And I think that will also start to result in margin expansion, so that they're not direct tradeoffs in my opinion.
Another one for <unk>.
Good to see growth in core software can you give us an idea on where we stand now and mix between license and SaaS.
When might we expect to see SaaS crude.
Begin to move the growth more materially.
Yeah in our recognized revenue basis, our cloud subscription revenue is about 15% of our recurring revenue on a billings basis. It's about 20%. So we haven't reached that inflection point, where our SaaS business gets to I would say north of 40%, whereas.
As we continue to grow its fully accretive to revenue in the short term right now is accretive to revenue in the long term, but not quite the short term. So I think we have some time left obviously all of you. Many of you have seen.
Companies go from a perpetual license to a subscription revenue transition in the past, but I think youre familiar with.
That short term dip in product license revenue and its impact on total revenue and how that comes out on the other end with an acceleration of revenue. So we're going through right now there's high demand for cloud, which is exciting our customers understand the value proposition of ours marketers understand how to explain our salespeople understand how to sell it.
And we are learning better and better how to operate at scale. So.
I would say full speed ahead with our cloud transition.
Thank you next question is for Andrew but do you like to elaborate further on managing expenses in the second half of 'twenty two.
Sure.
I think you know tagging on to what Tom said earlier, our cost structure is very stable and I think that's the benefit of being a long standing company in business for over 30 years.
And we haven't.
Had this massive growth in head count.
Count's been very stable.
Haven't over hired as we've seen many in the market. The recently so I think from a cost perspective, we will continue to focus on areas that are accretive to profitability. We will look to be opportunistic when we can on bringing in new talent in fact around key areas.
As like Tac in cloud and sales.
And we will really scrutinize.
On the costs that we think we can be more efficient and I've got the benefit of coming in and getting to ask a lot of new questions.
On certain expenses and costs and so I think that'll be helpful. In understanding where we can be more efficient, but ultimately I think we're gonna be opportunistic and spend in areas that will help our business grow.
Thanks, Andrew we'll just take one last question for Fang here on the demand environment.
What are you seeing in the demand environment for VA software given the uncertainty around macro and what is your demand outlook for the rest of <unk>.
And have any deal cycles elongated or any view from customers on their spend.
Yeah. Thanks Krish.
I do think we're seeing choppy or demands elongated deal cycles.
More challenges that are selling environment, especially in international.
All that said as I mentioned before.
If we can push through and execute leverage our expertise in enterprise analytics. The fact that we build applications that large enterprises rely on especially in turbulent times and leverage our cloud transition I think we can work through this and grow it.
And the second half in the future, but theres certainly more volatility we have to be better at execution, we have to be more precise and managing our pipeline and the sales cycles in our opportunities and our customer engagements and our conversation so.
But it requires better execution in these types of times and this is what we're good at where we're a company that has great product great strategy and great execution. So it's hard but we'll work through it.
Great. So we are at the end of time for today's call. Thank you everyone for the questions. This concludes the Q&A portion of the webinar I.
I will now turn the call over to Michael for closing remarks.
Look I want to thank everybody for your support and.
Fong, Andrew Trish and I will I'll look forward to seeing you again in 12 weeks and we wish you a happy summer.
Good day.