Q3 2022 Microstrategy Inc Earnings Call
Andrew will answer your questions at the end of the session.
Please be sure to provide your name and your company's name and submitting your questions.
Now I'll walk you through the agenda for today's call.
First song Lee will cover the operational results for the third quarter of 2022.
Second Andrew Kang will cover the financial results for the third quarter of <unk>.
Then Michael Saylor will provide a strategic review and discuss recent the coin market debates and lastly, we will open up to Q&A.
With that I will turn the call over to formerly president and CEO of Microstrategy.
Thank you Sherry.
I'd like to welcome all of you to today's webinar regarding our 2022 third quarter financial results first our focus on the 2022 third quarter business results.
We had another good quarter overall, achieving constant currency total revenue growth and the strength of our cloud business. This despite a challenging macroeconomic environment in Q3 with continuing high inflation weakening foreign currencies and the ongoing war in Ukraine.
We had strong growth in our subscription revenue and billings driven by both existing customer migrations to the cloud and new customer wins.
Our customer revenue renewal rates continue to be amongst the highest we've ever experienced.
To summarize our third quarter software results revenues increased 4% year over year on a constant currency basis.
Software licenses revenue, which consists of product.
Total product licenses and subscription services revenues and our consolidated statement of operations increased 11% 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.
Uh huh.
Subscription revenue increased 59% year over year on a constant currency basis.
Current subscription billings grew 79% year over year, our 10th straight quarter of double digit growth and our best quarter ever.
We've also seen further global adoption of our cloud platform, among our international customers, including customers in the Asia Pacific region with several major wins in Q3.
We are also seeing further growth of our embedded business with multiple new logos.
Next I'd like to provide some observations from my first 90 days of being the CEO of Microstrategy I spend more time in the field in the U S and internationally listened to our customers and employees and learning from them.
I learned first is that our customers continue to love our product offerings. There are people that have built their careers on the microstrategy platform are dedicated to our success and she is rising above the fray of base basic visualization tools.
We're also excited about modernizing consolidating their platforms and an open multi cloud environment.
Accordingly, we will continue to focus on three key areas of growth that represent core micro strategy Differentiators enterprise analytics embedded analytics and the cloud.
Customers depend on these different differentiating capabilities to build mission critical applications to run their field forces store operations bank branches risk analysis groups corporate operations and much more.
We'll also focus more on innovation.
Continued investment in research and development has enabled us to modernize our platform and enable our customers to transform how they do business through innovative analytics tools and techniques. These include personalized applications immersive interactive Visualizations simple no code low code application development.
Open Apis.
Flexibility of consumption for mobile interfaces and innovative capabilities like hyper intelligence.
We continue to see growth with customers to build micro strategy into the software solutions that they sell to end users leveraging our open embedded analytics capabilities looking forward, we recognize the power of artificial intelligence and machine learning to augment more traditional reporting capabilities and provide contextual and immediate insights.
In Q3, we released our first set of products in this area called micro strategy insights.
This is the basis on which we are combining micro strategies semantic layer hyper intelligence and open architecture to provide the data tracking alerts forecasting recommendations and artificial intelligence that will be key for the future of analytics and intelligence.
We believe this is something like a strategy is uniquely positioned to provide and we expect to release more functionality in this area every quarter.
Another interesting area, where we can differentiate our offerings as bitcoin enlightened software development for the enterprise.
We are in the initial stage of exploring innovative lightning applications for cyber security use cases to help enterprise customers secure networks monetize websites and deploy wallets in mass using bitcoin.
While our core focus remains on innovation. We believe we are uniquely positioned to bring value in this area also.
Mike will elaborate further on this topic.
As Microstrategy cloud continues to be growing part of our business mix, we seek to accelerate growth through increased cloud adoption by both new and existing customers new customers are increasingly cloud first and immediately reap the benefits of our managed service offering those include business agility enterprise security regular updates and upgrades.
Grades and cost savings at the same time more and more existing on premise customers are migrating to the cloud and expanding their micro strategy usage to new departments and user groups.
Intentional in our approach to cloud is our belief and cloud agility, the power of multi cloud hybrid and the portability between private and public clouds and resonates with our customers, who do not want to be locked into a single technology stack we.
We take advantage of the best in each major cloud provider has to offer optimizing our platform to run on and across each we will continue to invest in this area to support our customers' needs for flexibility scalability and security.
We're eagerly awaiting final authorization to operate for the launch of Microstrategy cloud for government, our new cloud offering with fed ramp authorization. This product will be our first generally available release of our cloud platform that relies on a modern cloud native architecture, utilizing containers and micro services.
It will open up the possibility of migrating a large part of our business federal government customers to the cloud it.
It also serves as proof of our enterprise grade security stability and scalability via certifications for large enterprises previously reluctant to move to the cloud like those in the financial services industry.
The combination of fed ramp authorization enterprise grade capabilities and managed service delivery will help us further differentiate our solutions with government customers Orange enterprises and embedded analytics customers worldwide.
Our focus on enterprise analytics embedded analytics and cloud services has resulted in more customers choosing to decommission and consolidate 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.
Another observation from my time meeting customers is their willingness and desire for hybrid interactions.
That includes meaningful rich in person connections alongside virtual meetings.
Accordingly, I am thrilled to share that our next Microstrategy world will be back in person for may 1st to 4th in Orlando, Florida.
<unk> hundred 23 will be a working event designed to help modernize analytics for innovative organizations looking to transform with data <unk>.
Sorry to showcase some of the world's best brands use modern experiences to breakthrough and achieve extraordinary results the.
The conference will also include dedicated networking opportunities workshops and training as well as our third annual bitcoin for corporations about Reggie.
Registration is open November 8th and additional details can be found on our event website and micro strategy Dot com.
Slash World 23.
Turning to our Bitcoin acquisition strategy, we continue the commitment to our strategy in Q3 and purchased 301 additional bit coins for approximately $6 million at an average purchase price of $19000 $19860 per bitcoin net of fees and expenses we.
We have not sold any bitcoin today too.
To reiterate our strategy, we seek to acquire and hold bitcoin for the long term.
And do not currently plan engaged in sales a big point of a long term time horizon in the core business was not impacted by the near term bitcoin price.
Fluctuations.
As a final comment I would say macro and market volatility are expected to be the new normal. We believe change is constant in this world businesses need actionable data enterprise grade analytics, multi cloud capabilities and open architecture and customer success focus.
Micro strategy delivers this.
Our competition prefers dashboard proliferation departmental visualizations single stack vendor lock in and price increases.
This market volatility may impact our financial results in the short term as we target modest constant currency revenue growth during our cloud transition.
This will require us to be financially prudent investing in our platform.
A thoughtful approach to costs with the objective and remaining at least margin neutral in the short term.
I'll now turn the call over to Andrew to discuss our financial results for the quarter in further detail.
Thank you.
I'll start by highlighting our third quarter 2022 financials in more detail.
GAAP total revenues for the quarter were $125 4 million down $2 $6 million four 2% year over year.
Isolating the impact on foreign exchange total revenue was up 4% year over year at constant currency.
Total software license revenues, which is the total of product license revenues and subscription services revenues were $38 $7 million.
5% year over year.
Up double digits or 11% at constant currency.
As we continue to migrate our customers to the cloud we know that product licenses revenues will naturally decline as revenues previously recognized upfront are converted to revenue is recognized over a longer period as subscription services revenues.
When we look at the two together Europe year over year increases on both a GAAP basis and at constant currency are positive indicators that we are successfully moving our customers to the cloud not only on a standalone basis, but as well as contributing to the overall growth of our software platform.
In line with what I just described subscription services revenues were $16 4 million, an increase of 51% year over year and up 59% at constant currency.
On a per license revenues were $22 3 million for the quarter, which was $3 $5 million lower year over year, while product support revenues were $66 million down.
Down $4 $4 million year over year relatively flat at constant currency.
As Hong mentioned earlier, our Q3 renewal rate was again, 95% this past quarter, demonstrating the durability of our platform and our longstanding nature of our customer base.
Finally, other services revenue, which primarily reflects a consulting business was $20 7 million a slight decrease year over year.
A 7% increase in constant currency.
Our highly skilled and experienced consultants continue to support innovate and modernize our platform across our customer base.
And we have been very successful in delivering consulting services across our global delivery centers in the U S. Europe .
Both America, and Asia, while optimizing costs and increasing billable hours year over year.
Moving to billings, our total current software license billings were $36 $4 million, an increase of 2% year over year.
And in the third quarter subscription current subscription billings were $14 4 million, an increase of 79% year over year.
This is in comparison to the increase of 51% year over year in Q2.
This sequential growth was driven by solid results in both subscription services revenues as well as current and deferred.
Subscription services revenues.
It is also worth noting again that we sold our largest cloud billings as multiyear contracts with an average term of over 24 months of which only 12 months are currently reflected on our balance sheet.
We believe our cloud transition has successfully underway and demand from our customers to migrate micro strategy to the cloud remains very strong with additional pipeline being added from both our domestic and international customers.
Shifting to costs total non-GAAP expenses, which exclude share based compensation costs were $102 million in the third quarter compared to $165 million in the third quarter of 2021.
Our total non-GAAP costs this quarter were significantly lower year over year.
As well as compared to Q2 of this year.
This was primarily due to stable bitcoin prices this quarter, which led to a nominal $700000 bitcoin impairment charge in contrast to the $65 million charge in Q3 of 2021.
The coin volatility as measured by the one month realized volatility fell below that of the major equity indices, such as the S&P 500, and NASDAQ This past quarter.
We view this recent market shift as a possible signal that bitcoins investor base and institutional adoption is continuing to mature, making it more suitable and accepted by traditional market participants.
During the quarter bitcoin prices remained above our carrying value low watermark up approximately $17600 and as a result, we saw a minimal digital asset impairment charge in Q3.
non-GAAP cost of revenues were $24 million in the third quarter, an increase of $2 6 million or 12% year over year.
As a percentage of total revenues non-GAAP cost of revenues was up 2% year over year attributed to higher cloud hosting fees and investments in technology and talent as we continue to scale up to support our growth in cloud.
non-GAAP sales and marketing expense was $30 million, which was a decrease of $4 1 million or 12% year over year.
As a percentage of total revenues non-GAAP sales and marketing costs were lower by 3% year over year, primarily due to higher net capitalized commissions this quarter compared to the same quarter in the prior year.
non-GAAP R&D expense was $27 million, an increase of $1 4 million or 6% year over year.
We continue to prioritize research and development and our core software business as we invest in personnel supporting innovation cyber security and growth in cloud.
non-GAAP G&A costs were $20 million, which was an increase of $1 4 million or 7% year over year.
As we emphasized earlier, the uncertain macroeconomic environment and inflationary trends continue to present headwinds to our bottom line.
We believe these challenges are the new normal.
Although we see strong growth in cloud and high sustained renewal rates managing rising costs is critical to weathering the current environment.
We plan to be extremely disciplined in controlling costs in the near term as we navigate these conditions and we will continue to cut cost in certain areas.
Advertising spend that we believe will drive revenue growth.
On slide 13, total non-GAAP operating income in the third quarter was $23 million.
Reflecting a non-GAAP margin of 18%.
The very small bitcoin impairment charge this past quarter that Ive mentioned earlier had a minimal impact on our reported results.
And was the lowest digital asset impairment charge since we launched our bitcoin strategy in Q3 of 2020.
In a reporting period, where there were minimal impairment charges under the current accounting rules, we believe our non-GAAP operating income better represents the underlying performance of our core software business.
As of September 30th 2022, the carrying value of our Bitcoin holdings was approximately $2 billion.
Which reflects approximately $2 billion in cumulative impairment charges.
Through the end of Q3.
As you know GAAP accounting treats our bitcoin holdings has an indefinite lived intangible asset which means that any decrease in the fair value below our carrying value anytime after data acquisition requires us to recognize an impairment.
Conversely, when prices increase the current accounting accounting rules do not allow us to increase the carrying value.
On October 12, the financial accounting standards Board unanimously voted to recommend the adoption of fair value accounting for all public and private companies and measuring certain digital assets, including bitcoin.
Under our current fair value accounting standards, both decreases and increases in the fair market value of an asset would be recognized in GAAP earnings.
We understand this is an initial step in the standard setting process and many of the details and disclosures have yet to be determined but we are extremely encouraged and supported of the fasb's decision for the change and the improved investor transparency It should provide.
We believe this is an extremely positive step for the future of digital asset accounting and we remain committed as we have in the past supporting these efforts.
Turning to slide 15.
Our debt capital structure consists of a $500 million senior secured note a $205 million of bitcoin backbone and $1 $7 billion of convertible senior notes all with a blended interest rate of approximately 2%.
The earliest maturity of which is not until March 2025.
We have also issued $1 billion of equity three previously announced at the market or ATM offering in Q3 and Q4 2021.
Recently on September nine we filed a prospectus supplement for an additional ATM equity offering which will allow us to sell up to $500 million of class a common shares from time to time into the market.
As of October 31, 2022, we have not sold any shares under this program.
We intend to use the ATM under a disciplined approach to sell equity if and when we believe there is an embedded value premium and our stock compared to the market value of our bitcoin holdings and our estimated value of our enterprise analytic software business.
The use of proceeds will be for general corporate purposes, which include the purchase of Big point.
Our focus is and managing capital, we'll continue to be that of a creating shareholder value.
Optimizing our overall capital structure, and ensuring adequate liquidity to run our operations and service our debt.
On slide 16 as of September 32022, we held a total of 130000 bitcoins of which 14890 EBIT coins were held directly by micro strategy the parents.
All of which secure our 2028 notes the.
The remaining 115110 bitcoins are held at micro strategy I'm, sorry, my macro strategy our subsidiary.
In Q3, there was no change to the number of the coins pledged at macro strategy.
Of the bitcoin held at the Sop approximately 30000 bitcoins are pledged as collateral to our bitcoin backbone and just over 85000 bitcoins are 65% of our total holdings equivalent to approximately $1 $7 billion at the current market price of $20400 remained unpledged.
And unencumbered.
You can see we have more than sufficient collateral to meet the ongoing requirements of a bitcoin backbone today and through any current foreseeable price volatility.
As Tom mentioned earlier, our bitcoin strategy remains simple, we have bought and held bitcoin and we'll continue to do so.
Finally, before I turn the call over to Michael I would like to reemphasize that micro strategies principal core strategies.
To operate and grow our enterprise analytics business and to acquire and hope the coin is a treasury reserve for the long term.
This hybrid strategy represents a paradigm shift where we seek to maximize the performance of both segments of our business, while identifying and capitalizing on the synergies that come from combining a mature and profitable enterprise software business with a large scale digital asset holdings.
Thank you for your time today and for your support of micro strategy I will now turn the call over to Michael for his remarks.
Yeah.
Thank you Andrew.
Thank you to all of our shareholders that are with us here today.
I would like to provide a performance review of the company's results since we adopted a bitcoin strategy.
And I'm delighted to report to all the shareholders.
Since micro strategy adopted the bitcoin strategy on August 11th 2020.
Our stock has outperformed all of the major asset classes that we benchmark ourself against it has outperformed all big Tech stocks and we have outperformed all enterprise software stocks that we benchmark ourselves against.
You can say from this chart.
We are as of.
As a four P M yesterday.
October 31.
We were up 116% since we embarked on this strategy.
And I think the most important benchmark, we compare ourselves against is bitcoin itself and.
And bitcoin and at the same time period is up 72%.
So we have managed by our strategy to <unk> to capture all of the bed coin games with a boost.
Now if we compare the bitcoin performance and that two and a quarter years to other assets. The S&P is up 15%. So a diversified portfolio of really high quality stocks or 15%.
The NASDAQ is effectively zero percent. So there is no gain and the NASDAQ.
Our gold and many of you who have followed us on our journey will recall that when we started down this path. Our number one question why should we buy bitcoin or should we buy gold.
Gold is down 19%.
And that time same time period, the bitcoin is up 116%.
That makes sense to us gold is the is the hard money solution for the 19th century, and bitcoin is the hard monetary asset for the 21st century.
But I think it's auspicious that we see the market is is agreeing with us. After these 24 months or so 26 months.
Sure.
The bond index and that's really.
It saw its long bonds about 20 year duration bonds.
They have lost 22% of our value in this timeframe. So bonds are obviously not holding value any interest rate environment, we're struggling with.
They have limited upside generally.
And of course, silver, which is sort of a weaker precious metals and gold is down 33%.
So I think when you look at the at the story here of Bitcoin is waning, but micro strategy is winning even more than the bitcoin right now because of our Levered long bitcoin strategy, we pursued.
We benchmark ourself against Big Tech stocks in and are of course.
Three of the most extraordinary stocks and companies.
In the modern era, our Apple Google and Microsoft.
Of course, apples up 36% to about a quarter of our performance results and our stock overall was up 27% Microsoft is only up 11%.
So micro strategy stock is tenex, Microsoft even though Microsoft of course is the most successful software company on the planet.
The challenge with.
With equities as as we all know is that you have not just monetary risk due to macroeconomics, but you also have execution risk.
And so and you have all sorts of other types of risk. So Amazon is down 35% because of their challenges, which I won't go into Netflix is down 40% and meta group Facebook is down 65%.
So you can say of course this mix performance is probably what drives the zero percent NASDAQ result.
And if we look at the Mega Enterprise software stocks of course, Oracle as the Monster Enterprise software company. They were up 42% is very well run and very stable, but they don't have the benefits of a bitcoin balance sheet.
IBM stock up 14% Salesforce down, 18% S&P down 40%.
So.
Even though I think there's a lot of publicity about the volatility of bitcoin and some of the noncash charges we have taken.
The real interesting story here is that micro strategies Bitcoin strategy is the winner against all of these other strategies over the last two and a quarter years.
We generally pick August 10th 2020 as that data to go back to because.
That was the date before we purchased $250 million worth of Bitcoin, and we announced the $250 million.
<unk> auction or share buyback and so that was a pretty critical point in the history of the company before that date, we were operating the software business without any treasury strategy, and we had our 500 million and cash invested in short term treasuries zero to 12 month Treasury bills.
And our primary strategy was either to buy the stock back or invest in treasuries.
After that date.
We we had a bitcoin strategy that was implemented on $250 million and then we had to wait until the end of the Dutch auction around September 10th of 2020 before we know what was going to happen next and then we had an extra $175 million, which we invested in bitcoin and we have continued with our consist.
<unk>.
Big coin long strategy.
Okay.
I'd like to talk a little bit about the macro environment.
And so we'll switch off the slide for a second.
The most important thing thats happened in the past.
12 months.
Is the risk free interest rate and the world and I don't just mean, the western world the entire world.
Has gone from 12 basis points to 465 basis points.
That's the one year treasury rate on U S treasuries and that's an extraordinary climb.
In the middle of 2018, the one year rate was about 280 basis points. It posted down to about 150 basis points in January of 2020.
And then it nosedived to just a few basis points five to 10 basis points in March of 2020, the risk free rate was effectively nothing for the next 18 months.
And then.
When the Central Bank began to perceive inflation as being the priority more so than economic stimulus. This these interest rates start getting increased and they got increased at the most rapid rate in 40 years.
So we find ourselves in a situation right now where for the last 12 months the risk free rates have increased by a factor of 50.
Financial assets have all suffered not means gold equities.
Bonnie, etc, and crypto assets in bitcoin. So we're all living that I don't have to tell you about that I think you understand that.
The important point right now is that we're now at a seriously inverted yield curve.
The three month bond rate for treasuries is about 417 basis points and the 30 year Treasury bond rate is 410 basis points.
So in essence, you make more money.
Buying a three month bond and a 30 year bond.
This is probably not sustainable for the long term.
The classic interpretation would be that the yield curve is pointing towards expectation of recession and the reason that 30 year rate is higher than the three month rate is an expectation that eventually the fed will began to loosen monetary policy and lower interest rates.
I would say you know you could almost say.
Our monetary policy was kind of to to devalue the currency weakened currency, if not crash the currency for the for the first year.
Of the pandemic crisis and now the monetary policy is ripping the wings off the economy for the last year and.
When you see the wing starting to come off.
All of the currencies in the world have been crashing against the dollar and created a massive macroeconomic headwinds the pound and the euro are off about 15% against the dollar in last 12 months, the Japanese yen is down about 23%.
That manifests itself in a couple of impacts one is for any company, that's primarily a U S base or USD based sees that it's struggling against these foreign currency headwinds and its revenues and its earnings and micro strategy suffered from that this quarter.
We're selling in yen in euros and pounds and those yen euros and pounds are being devalued, 15% to 23% in the last 12 months. So that's a that's a bit of a headwind.
I'm pleased to say that I think our P&L has held up really well against that macroeconomic headwind.
And we're happy about that.
I think the other implication is theirs. This is exporting inflation to the rest of the world. So.
Commodities are priced in dollars like oil and so as the euro and the great and the pound and the yen weekend the cost to buy oil in those nations explodes, and so we're seeing a double digit inflation throughout Europe and throughout the rest of the world. This is.
Trading protest social unrest.
There are riots in some streets in eastern Europe .
This is also creating a crisis.
Amongst a number of conventional conventional institutional investors. We just saw this manifests itself in.
The crisis in the U K the resulted in the early resignation of the Prime Minister and the Chancellor.
That happened.
When they attempted to lower taxes and created a crisis of confidence in the markets and a 30 to 40 year British ponds are bond rates exploded into the five <unk>.
<unk> hundred five handle range and the markets aren't really holding 5% to 6% interest rates very well when that happens that creates a margin call.
Anyone that's using those instruments as their primary Treasury reserve asset.
And so the result is.
The market's hiccup and a wretched and the entire government collapsed in the UK.
I think that that's a that's a warning sign we can see that challenge we can see in Japan right now they've had to intervene to support the yen, which has also been collapsing and there is very.
Explicit intervention.
This is being viewed I think and in the United States and the rest of the Western World and the takeaway is we.
We're just to the point, where we're either going to rip the wings off the economy, if we keep raising interest rates much more or if the interest rates getting into the 5% to 6% zone, we're going to we're going to undermine the balance sheets of pension funds and other major investors.
And this is.
This is.
On international Global problem that that results and a lot of pressure on central bankers to slowdown the rate of interest rate increases.
And we see that manifested with people coming on CNBC pointing out that they have to slow this down we see political pressure to taper, we see international pressure on the U S government from all of these other nation states that have their currencies crashing on the federal reserve to taper this rise.
So we're approaching some sort of macroeconomic inflection point, it's not clear when we get there, but we know that when 30 year bonds and 40 year bonds or five 5% the entire government to the UK collapses.
And we know that the.
The Japanese yen is now laboring, because theyre trying to hold the 10 year rate of 25 basis points and Japan, while the U S 10 year rates or with a four handle.
All of these things.
Our are suggesting that the.
The current trend of continuing to raise the risk free rate can't continue to much longer the resistance of the tightening is increasing.
And that takes me to just a discussion of the bitcoin.
Strategy right now and fundamentals.
Thank the summary here is over the last 12 weeks the bitcoin fundamentals have improved.
As Andrew pointed out volatility of bitcoin shifted for being more volatile than NASDAQ and highly correlated to being less volatile the NASDAQ and not so much correlated in the past three months, that's really bullish I think for the asset class an auspicious.
The other fundamental developments are auspicious being why Mellon officially announced its a bitcoin custody.
Services.
That's very auspicious because that's.
Probably the first major bank.
That stepped up and have that business.
Block upgraded cash App and cash App is a 40 million user type mobile application and they upgraded it and their support of lightning. So now they can send and receive lightning to cash app.
Mobile app.
Application.
Instances and they did it with a universal barcode and so that means that I can hold the bar code up on my phone and you can scan it and it will either send the bitcoin on the base layer the layer one if that's what you requested.
Or it will send it on the lightning layer.
We're already seeing this create a massive amount of enthusiasm in the lightening development community. It's launched a lot more lightning wallets, it's launched a lot more vendor interest in taking bitcoin is lightning payments.
And one of the one of the more interesting stories right now as a supermarket chain called pick and pay.
All around South Africa.
Pick and pay rolled out lightning payments to 40 of their stores in production.
As the second stage of their bitcoin adoption.
And that appears to have been successful there are a lot of video circulating around and people are going in and paying in a matter of seconds Swire lightening transactions off of Android and iPhone.
But the more important point is that their stated plan is to deploy bitcoin lightning support to <unk> hundred 28 stores.
So the broad based adoption of bitcoin as a medium of exchange via Lightening technology is now being taken seriously with the cash App example, with to pick and pay example.
This is getting a lot of attention in that community.
And of.
Of course, the benefit to the retailer would be <unk>.
Not only is it almost no fee, but it's also instant settlement.
And it also appeals to the crypto friendly and right now across our across South America and Africa people are becoming much much more interested in the entire crypto area and bitcoin in particular because.
The currencies are crashing.
The Nigerian Naira has an official exchange rate and the 400 range, but its government manage on the actual exchange rate is crashing to 800 to the dollar.
They're announcing they are going to swap out the currency for a different currency.
So what you see is you see a wholesale currency crashes devaluations and bank failures and capital controls are spreading like wildfire throughout Asia, South America and in Africa.
And the solution to the population is $50 Android phone running on mobile wallets like a lightning wallet.
And of course this becomes you know.
A matter of great passion to them and of course that also becomes a matter of passion to the merchants because if the merchants can't get paid in hard currency.
And they have to go through multiple layers of credit than their businesses are also at risk.
So that's a great fundamental development to bitcoin because.
Traditionally the the view of Bitcoin is this just a store of value.
Because it runs on a on a level one transaction network with only seven transactions a second.
But now that people are saying that it is infinitely scalable over the lightning network. It's not just a store of value. It's a game changing technology that you can build into a mobile app on billions and billions of mobile devices and so this this is becoming very very interesting and it's changing the narrative with regard to bitcoin.
Okay.
Another big development that happened this quarter as fast be made the fair value decision my vote of seven to zero.
It doesn't mean that we have enough guidance to change our accounting, but but if if we consider what happens next we know we have unanimous support to adopt fair value accounting for bitcoin.
The next thing we'll have to be.
Some guidance around and decisions around what the disclosure forms will be <unk>.
After that they will have to be guidance about the transition plan, then they'll need some public commentary and after they have internalized or absorbed all of the public comments on the transition plan and the guidance then I think that we'll see.
We will see companies like micro strategy in any one holding back on our balance sheet adopt fair value accounting and that will be a huge benefit to the asset class.
Bitcoin benefited.
By a few other things this quarter.
First of all noted recognition by the heads of the C. F T C and the SEC. They both mentioned bitcoin favorably and noted it to be a commodity.
And so this is this was very auspicious and this has been noticed by the entire crypto industry and by the mainstream investment community.
I think theres been an increase in defy hacks and the crypto industry this quarter.
But that actually it just underscored how much more secure bitcoin is NY bitcoin is the institutional safe Haven investment grade asset.
Because in the same quarter, where there are lots of <unk> and crypto hacks people are reminded again that there are no bitcoin hacks and there have been no bitcoin hacks and that's a comforting differentiator.
Theres been an increase in SEC crypto enforcement actions.
This is serving to educate.
An entire generation of crypto investors as to the difference between a commodity and a security.
And I think that as people become educated as to the difference they realize that theres a great. There's a great benefit to holding a commodity and bitcoin is the only crypto asset universally acknowledged to be a commodity.
So I think that.
The world is getting educated there.
And then last point I'll make is that.
The bitcoin hash rate is hitting an all time high right now and are there are notes that people are.
Suggesting that touching 300 extra hash so throughout the crypto winter and all the volatility the bitcoin hash rate has continued to expand.
And people often ask well why does that coin backed by its backed by the most powerful crypto.
Computing network in the World, which is also the most powerful computing network on Earth.
Mike So powerful that it's orders of magnitude more powerful than the hash rates there could be generated by all of the Microsoft Amazon and Google Cloud computing hardware. If it were all turned against the network. So.
The fact that the bitcoin has this wall of crypto energy 300, Axa hash of it.
Makes the entire asset.
Censorship resistant hack resistant it gives it integrity it gives us longevity it makes it neutral and.
Ultimately it provides the security that you need if you are going to put large amounts of monetary energy our wealth into bitcoin.
So oftentimes people are spreading fud in their firewall be something like well down there.
The transaction rates will decrease and that will cause the security budget to go to zero or if the price goes down people will stop expanding the network.
What we can see right now is that.
The Bitcoin network is.
Adding additional security and the capital that gets invested in the security has about a six to eight year delay.
<unk> when people made the decision.
So the natural frequency of the Bitcoin network is eight years eight years after.
A disaster catastrophe youll start to see some mitigating effect perhaps.
The hash rate will slightly slowdown and its growth rate, but but what we can say here is that people are adding hash hashing equipment bitcoin mining equipment now that was purchased two years ago to the network and and so this is a very good thing for a crypto.
City, and what we see as bitcoin performing just as you would expect it to perform you know as the most anti fragile digital asset in the world.
So with that.
I'd like to thank everybody for your time and attention I guess shrewish, we're ready for questions.
Great.
Thank you, Michael we're going to jump right into questions and the first question is for phone.
As demand, saying across geographies and industries, you mentioned that you did well in the Asia Pacific region are there any particular areas of strengths or weaknesses to call out.
Okay.
Thanks.
Yeah, what I mentioned, we did well in the Asia Pacific region, and it was related to cloud and primarily because cloud adoption started in the U S. I think over the last year, we've seen it start to grow quite a bit in the European region in Latin America, and most recently, we saw it start to grow in APAC. So that was notable just cause.
We're seeing global adoption of cloud.
As far as overall, if you look at our results I still think Matt.
Macroeconomic impacts geopolitical challenges Ukraine War has an outsized impact on Europe , So we're seeing a little bit.
Of a challenge there compared to the rest of the world and that's probably the only thing I would note geographically that we're seeing right now.
Thanks, Paul and then one for you.
It's good to see the continuation of the strong renewal trends are you seeing long standing customers, but did the MST or spend any differently.
Yes.
Mentioned earlier, what I am seeing is a consolidation of the <unk> spend around the world, especially onto enterprise providers like ourselves so less experimental tools more less departmental tools more enterprise tools. So I am seeing and we are seeing customers reinforced their commitment to <unk>.
Micro strategy over time, which has been a positive thing and that manifests itself.
Both in terms of our renewal rates, but also in terms of customers migrating to cloud with US now migrating to cloud is just another.
Reinforcement and their belief in micro strategy and what we have to offer so that our cloud.
Subs billing.
Billing as it was the strongest we've ever had I think part of that is because of the strength of our platform and all the investments, we're making to R&D in what I consider to be the right places that our customers care about.
Thank you.
Next question.
Can you comment on the wage inflation that micro strategy, you've seen what levers do you have available to attract and keep talent, thereby increasing stock cash com or hiring internationally.
And also can you expand on the hiring goals in the short term.
Do you plan to make headcount changes.
Due to the macro environment.
A question for both Android phone.
Thanks, Felicia I can start.
But the first part of that question.
Yeah.
I would say wage inflation for us has been pretty consistent with the overall market and I would say that.
It's probably been the most competitive leading up to Q3 I feel like we're seeing competition for talent slow smidge with.
General recession fears and cost cutting.
And the overall technology sector in more recent months.
I think we have use stock based comp across all departments and geographies, which is which has definitely been a useful tool and retaining talent.
I think the last thing I'd say too is just keeping in mind that micro strategies talent base across the entire organization.
Including in very critical roles such as in sales and in tech are extremely tenured.
And our attrition rates are trending.
Say lower and our internal targets in recent months.
And the only thing I'd add as well.
Wage inflation is real.
Competition for talent is real as group a little bit like Andrew said, we also have folks, especially our technology teams have been with the company 510, 15, 20 years and quite loyal.
And we'd like to return that loyalty in terms of comp increase in stock based comps. So I think we're doing the right things there.
I do think going forward.
Given macro factors given the volatility we need to be pretty smart about how we manage how many more people we add to the organization. So that will be pretty smart about managing our costs, we're trying to keep our cost relatively flat on head count.
It's just the right thing to do prudent thing to do with our business right now.
Yeah.
Next question is performed again.
Have you seen any changes in the competitive environment as vendors, particularly on the private side look to bring down the cash burn.
Yes, it's similar to the renewal question I do think vendors I do think customers are reducing the number of vendors, so where on average before COVID-19.
<unk> enterprise might have seven to 12 D. I vendors I think that number is cut and at least half and again, that's generally a positive for us. So maybe their overall spend goes down but their allocation towards micro strategy should increase over time.
And that's the trend we're starting to see in a trend we hope to continue to see in the future but.
We don't take for granted any of our customers and we need to keep providing Austin product also services Boston support.
Yeah.
Next question is for Michael.
The Braga crypto market and the underlying technology is constantly analyzing.
How would you characterize <unk> performance relative to broader crypto space over the last quarter.
I think Hum bitcoins continue to strengthen.
For the past quarter against the broader crypto space.
Thank the market is getting more educated institutional investors are getting more educated I think.
There is a the momentum on the technology side as lurching away from the other cryptos toward bitcoin, there's a real explosion and enthusiasm in the lightning community and are there a lot of lightning startups.
Lightning incubators theres more venture capital starting to look at lightning in particular, so I think that coins technology story is improving I think its and I think the story is an asset.
Is is also improving we've got surveys that just came out from fidelity and gray scale that.
That show a remarkable enthusiasm and interest among institutional investors for bitcoin and an expectation that.
It will be part of their portfolio going forward and those numbers have never been higher.
Next question for Michael as well looking out due to treat years, what are some of the positive catalyst, we should look out for broader.
Roger Bitcoin adoption.
I think we're going to start to see more companies building it into their 401 case theres like a 12 month delay there, but I think that that integrating bitcoin and traditional finance and traditional investment products is one I think and time will see a spot that coin a T.
And more etf's and it'll be built into more financial advisor type programs. That's the second.
I think you'll start to see more large large banks.
Similar to <unk> mellon's trying to offer a crypto custody services and either bitcoin trading or bitcoin custody or bitcoin backed loans.
As as the traditional banking establishment embraces bitcoin I think that's going to be another milestone.
I think.
We can see what the FASB process. They began to look at this in late 'twenty mid 'twenty, one and probably it'll be late 'twenty three.
It'll be fiscal year 'twenty four win when the financial or accounting changes take place there tends to be a two to four year delay.
And all of the institutional adoption of regulators.
But once the once the momentum gets going it continues.
So the supportive actions of the CF T C and the supportive actions of the SEC and a supportive actions that have taken place at Fas B will drive more supportive actions across the other regulatory agencies and I would expect when you start to see concrete guidance from the FDIC.
<unk> that'll be another big milestone.
<unk>.
And of course, we have a number of bills in Congress right now.
That would provide regulatory frameworks are that.
That would accelerate the institutional adoption of bitcoin I don't know of any legislation that would be viewed as negative for the asset class. So any any of this work that's being done should be positive for the asset class.
And so all of those are the fundamental milestones I think we are we keep our eye on and of course ultimately the.
The macroeconomic win has a big impact so when the windows to our back it's beneficial to the asset class when the windows to your face and blowing at you it's more of a challenge, but but over time. These things go full circle.
Next question is for Andrew.
And this is regarding the oral bitcoin investment decision. So if any of these for like color on how you make the decision to invest in bitcoin whether from cash flows generated from software business. Our proceeds raised from capital markets activity.
And.
Are there scenarios such as more severe market downturn or are there material changes to the business.
That could lead to you.
Year to tactically change your investment plan.
Thanks Trish.
The short answer is we consider all of the above.
We have demonstrated that when we have excess cash from operations in any given quarter.
Those excess proceeds can be used to buy bitcoin, we've done that in the past few quarters.
As well as proceeds from larger capital markets activities. I think you can continue to expect the same pretty simple strategy going forward.
In terms of.
Hey potential more severe macro during the.
Downturn.
I think.
We do not have any plans to adjust our bitcoin strategy.
We do as we always have viewed our investment is a long term view.
Importantly through cycles, including the one we're in now and then we will continue to believe in that core principle.
Thanks, Andrew next question is for fun.
What is the impact of the macro conditions are.
Are you seeing.
New deal slowing within the space or is it taking longer to get approvals and has the macro environment.
Is it impacted you do or.
Or is it has it impacted the cloud migrations.
I don't think the macro environment as of now is causing fewer deals or fewer cloud migrations, but I think it's reasonable to say that our deals are taking a little bit longer.
Seeing some more delays at the end of the quarter, both with net new deals incremental deals and cloud migrations.
Is it.
I think companies buyers are getting more skittish, which is why we just need to be thoughtful about what we expect in terms of growth, but also in terms of our cost structure.
And.
The good thing is is we have long standing strong customers a great cloud business dollars were built to weather any macroeconomic changes volatility et cetera, but I think it's reasonable to think that there may be impacts over the course of the next year, we just need to be thoughtful about how we grow our business and grow our cost.
Thanks, Paul next question is for Michael.
Any thoughts on diversifying your bitcoin strategy given the industry dynamics for example, a lot of miners are struggling a quick micro strategy of Opportunistically look for returns through getting into mining.
Are there any potential ways to explore a current spot price weakness rather than just accumulating more bitcoin.
You know when we started down this path.
We are in the middle of the.
The summer 2020, we announced we were going to consider all sorts of different treasury assets.
Looked at equity, we look to coal we looked at any any kind of crypto, we considered bonds, we considered any kind of property investment.
We settled upon bitcoin as the as the strongest crypto asset at the time and we said that we thought it was digital gold.
And we've stuck with that strategy throughout the last two and a half years or so.
And everything that has happened in the market so far in my opinion.
Has strengthened the observation that bitcoin is the strongest crypto asset.
And in theory, the strongest form of property is a crypto gold that is constructed such that you can't make any more than 21 million gold bars, and you can move it at the speed of light.
As many times as you want between all the computers on the planet.
So what's happened over the past 24 months is where we're more certain than ever that in fact this is a strong $21 million cap assets. We've seen the growth in the mature Asian of Lightning network, which is which is causing us to conclude that in fact, you are going to see billions of people able to me.
Bitcoin at the speed of light point to point between websites and computers and mobile phones.
When we look at all the other.
Investment options and you know as as people that follow May know I've been recorded hundreds of hours of analysis I've recorded analysis on bitcoin versus real estate property, we've analyzed bitcoin versus gold we've analyzed bitcoin versus every other crypto asset.
We've analyzed bitcoin versus bonds, we've looked at bitcoin versus equity.
And we've looked at bitcoin we've considered.
All of those in our conclude as bitcoin is the apex property and and there is nothing better everything else. So we could invest then it would be dilutive versus bitcoin.
With regard to strategies like do we want to be in a bitcoin derivative strategy or are we going to buy our <unk> coin mining our buyback coin miners are are we going to.
So our our trade derivatives or do something.
You know, we had the ability to to pledge our bitcoin to many of these.
<unk> crypto banks in return for Yale, but our view was the theoretical risk.
Of transferring ownership our custody of the bitcoin was greater than the yield and so we didn't do it and of course, what happened is they all failed and so that was a good strategy.
We also we also considered other.
Other strategies, but at the end of the day.
It doesn't make sense.
To take any any ineffable risk.
With any of those strategies compared to just taking the risk free return on the bitcoin.
So all of those other ideas complicate our strategy and create opacity and you're you end up just having this risk.
And your portfolio you don't understand so we don't wash wish to take on that risk and we don't wish to convey that risk to our shareholders either so our conclusion is.
Is that the best strategy for us.
His long bitcoin only bitcoin is the digital asset.
And to the degree that we're going to look for returns in excess of the bitcoin return and we have achieved that is you could say from our numbers over the last two years in a slide I showed the way we're going to achieve performance better than bitcoin is through intelligent.
Our leverage when we have the ability to either convert our cash flows into bitcoin and we do generate cash flow or if we can we can issue debt or equity under terms that we believe R. R.
Accretive to the shareholders and and they don't introduce any any undue risk or for agility to the balance sheet.
So I think I think you'll just see very thoughtful execution of the Levered long bitcoin strategy.
We don't feel a need.
To reach for yield or or or try to juggle any other asset.
We view that all of these other strategies are dilutive to the bitcoin strategy.
Great. Thanks, Michael.
This brings us to the end of the time, we had for today. So thank you everyone for your questions. This concludes the Q&A portion of the webinar I will now turn the call over to fund for closing remarks.
Thank you Sheree, Andrew Michael I want to thank everyone for being with US today and we appreciate your support.
We are as enthusiastic as ever about both of our strategies, our enterprise software strategy and our bitcoin strategy.
It will continue to execute.
But on both in the coming quarter I look forward to seeing you again in 12 weeks and I wish you all happy holidays and thank you all.
Okay.
Okay.