Q4 2022 Microstrategy Inc Earnings Call
$786 per bitcoin, resulting in a net increase in our bitcoin holdings of approximately $2500 for a net aggregate purchase amount of $45 million or approximately $17850 per bitcoin inclusive of fees and expenses.
Andrew will discuss our bitcoin transactions in the fourth quarter later on this call.
As of December 31, 2022, we held a total of.
132500, bitcoins acquired at an aggregate cost of $4 billion.
Our average cost of approximately $30100 per bitcoin.
We remain committed to our bitcoin acquisition strategy for the long term.
In the fourth quarter, the broader broader crypto and digital assets markets witnessed significant financial distress.
In addition, various prominent participants and the digital assets industry filed for bankruptcy.
Such as F T X Voyager Celsius and Genesis.
And we do not have direct exposure to any of those companies.
In addition, we conducted further diligence of our custodians of execution partners to assess their exposure to these companies and understand that their exposure was minimal.
Since the adoption of our Bitcoin acquisition strategy, we've taken a simple approach from day, one which is to buy and hold bitcoin we've.
We've taken steps along the way to minimize risk, particularly with Counterparties, we buy only bitcoin and U S. Based markets, we custody bitcoin with institution grade U S base regulated custodians in cold storage and we have not landed our bitcoin to third parties for yield or any other purposes.
As a result, we've been able to avoid transacted with bad actors in the space.
To summarize our view of the coin.
First we continue to have a high level of conviction in the value proposition of bitcoin, we're very supportive of the bitcoin network on a go forward basis.
Second we continue to follow a risk managed approach to executing our bitcoin acquisition strategy.
And third we're long term focused and we plan to continue to accumulate bitcoin overtime.
Our core business is not impacted by near term bitcoin price fluctuations.
With that I will now turn to our software strategy highlights from 2022.
We achieved constant currency total revenue growth for 2022 on the strength of our cloud business. Despite a challenging macroeconomic environment last year with high inflation.
Weakening foreign currencies and the ongoing warranty claim.
Total revenue for 2022 was $499 3 million.
Which increased 2% year over year on a constant currency basis.
So software licenses, which consists of total product licenses and subscription services revenues and our consolidated consolidated statement of operations for $147 $2 million.
Which increased 6% year over year on a constant currency basis.
We also made important progress in our shift towards our cloud offering resulting in annual subscription revenues of $67 million an increase.
Kris a 46% year over year on a constant currency basis.
Annual subscription billings were $77 million growing 39% year over year.
The strong growth in our subscription revenue and billings was driven by both existing customer migrations to the cloud.
And new customer wins.
Our customer revenue renewal rates continue to be among the highest we've ever experienced overall, we continue to see further global adoption of our cloud platform among our international customers.
We're also seeing the benefits of being a single analytics platform in the industry that is both enterprise grade and easy to use.
As an enterprise grade platform, we're benefiting from the trend by modernization and consolidation from enterprise tools like SAP business objects.
It'd be under Communist as.
As an easy to use platform for governed AD hoc data discovery, where the tool of choice for corporations that have outgrown Microsoft power bi and Salesforce tableau are no longer want to be locked into a single vendor ecosystem.
On the cost side, we believe in a thoughtful approach to cost management on an ongoing quarterly basis, rather than an annual surges and hiring followed by massive layoffs, we continue to invest in R&D to innovate our product, while being thoughtful about sales and marketing and general and administrative costs. As a result, as a result, we saw.
Relatively flat operating costs from 2021% to 2022.
Next I would like to discuss our key focus areas for 2023.
First we aim to launch something called micro strategy, one which will serve as our core analytics platform designed to meet all of an organization's analytics needs.
There'll be easy to use powerful comprehensive and cutting edge it.
It is intended to be a one stop shop for all of our business intelligence customers and prospects you should expect here to hear more about this from us throughout the.
The first half of 2023, culminating in our Microstrategy World event on May 1st through fourth in Orlando, Florida.
Core Differentiators for micro strategy continue to be our enterprise analytics embedded analytics and cloud offerings. Our focus on these three areas has resulted in more customers choosing a decommissioning 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 our.
Our customers depend on these differentiating capabilities to build mission critical applications to run their field forces store operations bank branches risk analysis groups corporate operations and much more.
As such it's worthwhile to highlight the resiliency of our business even in the tough macro conditions that existed in 2022.
We're the only remaining publicly traded independent enterprise beer company and the stickiness of our products and our long standing tenure of our top customers are testament to our resiliency.
Our 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 using.
These include personalized applications immersive interactive Visualizations simple no code low code application development with open Apis flexibility of consumption for mobile interfaces and innovative capabilities like hyper intelligence we.
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.
Second not new but even more and our focus is growth.
We're going to focus on simplifying our processes grown our pipeline and growing our revenues we plan to get back in the market and in front of our prospects for in person field events field marketing aggressive account based marketing and a revitalized partner program.
Third cloud is that front and center when we talk about focus on growth as.
As Microstrategy cloud continues to be growing part of our business mix, we're seeking to accelerate growth through increased cloud adoption by both new and existing customers new.
New customers are increasingly cloud first and immediately reap the benefits of our managed service offering.
That includes business agility enterprise security regular updates and upgrades and cost savings.
At the same time more and more existing on premises customers, who are migrating to the cloud and expanding in micro strategy usage to new departments and user groups.
Intentional on our approach to cloud is our belief and cloud agility and independents.
The power of multi cloud hybrid and the portability between private and public clouds resonates with our customers, who do not want to be locked into a single technology stack.
We seek to take advantage of the best in each major cloud provider has to offer and optimizing our platform to run on and across each will.
<unk> to invest in this area to support our customers' need for flexibility scalability and security.
In Q4, Microstrategy cloud for governments or Mcg is our new cloud offerings received authorization to operate under fed ramp guidelines.
Mcg as a managed software as a service solution and our first generally available release of our cloud platform that is built on a modern high performance cloud Native architecture that also utilizes containers and micro services.
It delivers a sophisticated security and data privacy requirements across the public and private sectors.
It opens up the possibility of migrating a large part of our business federal government customers to the cloud.
Our fourth area of focus on our employees.
Our employees are our key assets and we will continue to develop and promote people internally and seek to improve employee engagement.
Our employee engagement survey results indicate that we have made great improvements to employees mental wellbeing Lloyd.
Loyalty.
And belief in the company's two corporate strategies.
We're also continuing to develop technical training and certifications to keep our employees up to date and the latest microstrategy software enhancements and soft skills training and keep our managers engaged and employees motivated.
And the last thing is that we will focus more on innovation, both on business intelligence as well as in our Bitcoin acquisition strategy.
On the innovation side and micro strategy insights is our first set of products released in the area of artificial intelligence and machine learning to augment more traditional reporting capabilities.
Contextual and immediate insights.
The Enphase feature accelerates decision, making uncovers data patterns of automated alerting and library applications. The alerts are based on machine learning models working behind the scenes to proactively detect data trends outliers and anomalies equipping users with the timely insights to drive actions.
This is the basis on which we're combining micro strategy semantic layer hyper intelligence and open architecture to provide the data tracking alerts forecasting recommendations.
And ultimately artificial intelligence that will be key for the future of analytics and intelligence.
We believe this is something micro strategy is uniquely positioned to provide and we expect to release more functionality in this area every quarter.
And the Bitcoin innovation side as indicated in our last earnings call today, I'm delighted to share a preview micro strategy lightning or new product that we're developing which utilizes the lightning network a second layer network that sits atop the bitcoin network, we envision micro strategy lightning as an enterprise platform designed to leverage power.
The bitcoin Lightning network to enable new e-commerce use cases and tackle modern cyber security challenges.
The first component of the micro strategy Lightning platform as whitening rewards.
<unk> rewards is intended to allow any enterprise to reward their employees customers partners and prospects for their engagement.
Company spending vast amounts of time and money in digital marketing.
Driving engagement with their brand and their customers and for some monetizing online content.
Believe a platform like micro strategy lightning to enable them to drive that engagement rewarding their customers for that engagement directly rather than lining the pockets of online agile.
We expect future capabilities. The lightning platform will provide opportunities for new business models to monetize online content or minimized threats and the nuisance of bots and other malicious actors.
While we envision Mike strategy Lightning as independent product offering it builds on our core strength and deep experience building highly available easily use enterprise software delivered in the cloud we're.
We're taking a very disciplined investment approach such that our lightning development efforts currently occupy less than 1% of our R&D capacity.
We're currently in the initial pilot stage of the product with our early pre release version rolled out internally the microstrategy employees.
While our core focus remains on innovation. We believe we are uniquely positioned to bring value here, Mike will elaborate further on this topic.
Last but not least I am thrilled to share again that our next Mike strategy of World will be in person for may 1st to 4th in Orlando, Florida, our customers have expressed willingness and desire to for meaningful rich in person connections alongside virtual meetings. So we are bringing back world 23 is a bigger scale event.
With multiple trucks the.
The business intelligence track on May 1st through fourth will be a working event designed to help modernize analytics for innovative organizations looking to transform with data.
We're excited to showcase some of the world's best brands use modern experiences to breakthrough and achieve extraordinary results.
The bitcoin track I may 3rd through fourth will include our third annual bitcoin for corporations on may 3rd and a dedicated lightning for corporations, Dan may 4th.
There'll be a first of its kind of gathering of corporations looking to integrate bitcoin enlightening as a part of their corporate Treasury your product offerings.
The conference will also include dedicated networking opportunities workshops and training.
And finally, microstrategy will be incomplete without an epic party.
We're hosting a theme Park conference part of Universal Studios, Florida, featuring our roller coasters and evening of unforgettable fun and excitement.
We look forward to your participation at the conference.
Registrations are open and additional details can be found on our event website at Microstrategy Dot Com Slash World 23.
Now I'll turn the call over to Andrew to discuss our financials for the quarter in further detail.
Thank you.
Before jumping into the quarterly results.
Quickly reemphasize.
Microstrategy is revenue priorities, our three decade long history of providing data analytics solutions to large and small corporations.
Established a long tenured and diverse customer base, where our platform has proven to be a critical component.
Running our customers' businesses day to day.
Our platform has demonstrated durability through economic cycles and has been strategic during times of growth.
And then what are the foundation to our revenue.
Putting our existing customers as they as their businesses evolve.
Continued to deliver for our customers as seen in our consistently high renewal rates.
Or 90% for the last five consecutive quarters and as high as 95% in Q4 of last year.
Second growing cloud revenue, which for us means migrating existing customers and we fully hosted and managed cloud subscription model, which phone talked about earlier.
Winning new logos into the cloud is important and uplifting services for existing cloud customers is also critical.
We are very pleased with our performance in all of these areas this past year.
Keep in mind as we migrate to the cloud we inherently experienced an offset scenarios on FY <unk> and support revenues. However, the transition to a subscription model will establish high quality annual recurring revenues that will allow us to scale, even stronger growth in the future.
In Q4 of last year, approximately 64% of our total revenue was recurring.
Approximately 60% in the same quarter of the prior year.
That we expect will continue in 2023.
Lastly, in our consulting business, which has been and continues to be essential in providing expert support and solutions to our customers. They not only champions solutions, but they also drive modernization and also impact growth through partner opportunities.
Okay, turning to the results total revenues for the fourth quarter were $132 $6 million.
One $2 million or approximately 1% year over year.
However, constant currency Q4, total revenues were up 4% year over year similar to the trend we saw in Q3.
Total software license revenues were $45 million up 1% year over year and up 8% in constant currency.
When we look at on a license revenues and subscription service revenues together.
Year over year growth on both a GAAP basis and at constant currency continue to show the overall growth momentum for our cloud transition.
Subscription service revenues were $17 $5 million an increase.
Kris a 47% year over year.
And up 54% at constant currency.
Product license revenues were $27 6 million for the quarter down 15% year over year and product support revenues were $66 8 million down $2 $3 million year over year, but up 1% at constant currency.
These trends are.
Consistent with revenue themes that I mentioned earlier.
Finally, other services revenues were $28 7 million, a slight 1% decrease year over year.
And an increase of 5% in constant currency.
Our worldwide consulting business, which makes up the majority of our other services revenues saw higher bill rates globally, Q4, with particularly strong performance among our European in Argentina consultants to add to that we're also seeing early success and momentum and to build out number of India workforce, we plan to grow strategically in the future.
Orders.
Turning to slide 14, we continued to see growth in our software license and subscription billings driven by the continued strong momentum in cloud.
Total current software license billings increased $61 million in the fourth quarter, which was an increase of 10% year over year.
Current subscription billings were $31 million, an increase of 28% year over year, our 11th straight quarter of double digit growth.
And full year 'twenty, two annual subscription billings was 39% compared to the prior 12 months with both subscription service revenue and current deferred subscription revenue growing.
Growing over 40% each year for the full year 2022 compared to 2021.
We are extremely pleased with cloud growth in 2022, which has exceeded expectations in the timeline for transforming and modernizing our platform.
'twenty three will provide to be a pivotal year as well as we begin to see the benefits of the scaling up of our cloud business and the adoption from our customers on the past two years.
Turning to costs total non-GAAP expenses, which exclude share based compensation costs were $309 million in the fourth.
Sure.
Our $50 million higher year over year.
$51 million of the year over year increase was attributed to bitcoin impairment charges in the quarter.
As a result of the price volatility we saw in Q4.
This was driven largely by the collapse of MTX and its impact to the bone or digital asset market.
Price of Bitcoin fell to a low of approximately $15460 during the quarter, which drove the additional impairment to become holdings under the current accounting rules.
non-GAAP cost of revenues were $26 million in the fourth quarter, an increase of $2 5 million.
Or a 11% year over year.
As a percentage of total revenues non-GAAP cost of revenues increased 2% year over year related in part to the growth of our cloud business similar to what we've seen in recent quarters.
non-GAAP sales and marketing expense decreased $3 million or 8% year over year.
$37 million, whereas a percentage of total revenues lower by 2% year over year.
This was due in part to a combination of higher net capitalized commissions this quarter, plus some favorable FX impact compared to the same quarter in the prior year.
non-GAAP R&D expenses were $28 million in Q4, a slight increase of $300000 compared to the prior year.
In this area, we continue to prioritize vendors song mentioned and increased our talent and resources on average for the year.
But we did so intentionally and in a way that kept expenses flat by leveraging a more cost efficient global delivery.
Our non-GAAP G&A costs were $21 million is pretty much flat the decrease of about $400000 or 2% year over year.
As Tom mentioned earlier, our focus on lowering costs has been ongoing and frequent with a strict discipline in managing efficient personnel and non personnel costs.
Not something that we just started thinking about in the second half of last year. In fact, we were fortunate to add this focus even prior to this past year. When we did see higher wages and expenses revenue headwinds due to weaker foreign currencies and we also saw the negative impacts from the war in Ukraine.
Aside from our big point impairment related expenses, we kept our costs flat year over year looking forward, we plan to remain cost conscious while continuing to invest in higher end growth areas like <unk>.
Optimizing our talent and resources across our growing global footprint focusing on lower customer.
On slide 16, total non-GAAP operating loss in the fourth quarter was $177 million.
While the digital asset impairment charge for the quarter was $198 million.
As I have said in past quarters since the adoption of our bitcoin strategy in Q3 of 2020, the digital asset impairment charges, we have incurred each quarter has always been greater than our non-GAAP operating loss showing the significant impact. It has had on our reported income.
On slide 17.
As of December 31, 2022, the carrying value of our Bitcoin holdings was approximately $1 8 billion.
<unk> to approximately $2 2 billion based on the price.
$16556 as of the last day of the year.
So far this year, if corn prices have rallied significantly along with the market value of our bitcoins, increasing to approximately $3 $1 billion.
At the close of markets yesterday, and trending even higher since then.
To touch on the regulatory perspective, we continue to be optimistic with the progress that the financial accounting standards Board has made in its steps update how companies measure certain digital assets, including bitcoin on balance sheets.
Since announcing this isn't an agenda item last year that <unk> has moved expeditiously and voted and agreed on how crypto assets should be presented in our financial statements and disclosures should be required under expected fair value accounting standards. We recognize that what has been completed thus far are just the initial steps in the <unk>.
Tendered setting process, but we are encouraged that the progress up till now has been aligned with standard fair value practices.
We continue to remain committed and supportive of Fasb's decisions and the focus on improved investor transparency for digital assets.
On slide 18 as of December 31, 2022, we held a total of 132500 bitcoins of which 14890 EBIT coins were held directly by micro strategy the parent.
With the remaining 117610 bit coins.
The macro strategy subsidiary.
Of the big ones held at this time approximately 34600 bitcoins are pledged as collateral to the silver Gate Mountain and just over 82900 declines were 63% of our total bitcoin holdings equivalent to approximately $2 billion.
At the current approximate market value of $23800 remained unpledged and unencumbered.
Regarding the silver get well and we remain fully in compliance with our loan to value requirements as we and as we have detailed in the past we continue to have sufficient unencumbered collateral to address any foreseeable volatility in bitcoin prices in the near term.
It is worth highlighting again to that it's the bitcoin prices increase in the loan to value ratio is less than 25%. We are able to release any excess collateral from being pledged to run our current LTV on this phone is now very close if not at that level.
As mentioned earlier for the first time in the fourth quarter, we sold approximately 704 bitcoins that carry a higher tax cost basis compared to the market price of the big point at the time of the sale.
Transactions generated capital losses of approximately $34 million.
Which we expect to carry back against previous capital gains and to the extent such carry backs are available we expect to generate a tax method.
Even with the aforementioned sale, we increased our net holdings by 2500 bitcoins during the quarter.
And we continually explore opportunities to use our bitcoin to generate shareholder value and we may consider pursuing additional transactions that may take advantage of the volatility in <unk> prices.
Or other market dislocations that are consistent with our long term big point strategy.
We'll start to reconsider any of other opportunities in the future and if we choose to pursue anything we will carefully assess any potential risks and do so in a prudent manner as we have done.
Turning to slide 19, our debt capital structure remains unchanged with a total of $2 4 billion of outstanding debt and convertible instruments, which carry a blended interest rate of approximately two 1%.
The convertible senior notes carry an extremely low cost of funds with the earliest debt maturity not until March 2025.
These convertible notes are very attractive in terms of cost and with over two years remaining until the earlier of the maturities now.
Outstanding long term capital remains very valuable.
In Q4, we activated a $500 million aftermarket or ATM equity offering and issued an aggregate 218 575000 shares of class a common stock at an average gross price per share of approximately $213 16.
We raised approximately $46 6 million in gross proceeds which leaves us with approximately $453 million of the outstanding ATM capacity available under our program.
We will continue to evaluate and sell equity under the existing program. When we believe there is an embedded valuation premium and our stock compared to the market value of our bitcoin holdings and our estimated value of our software business.
Use of those proceeds will be for general corporate purposes, including for the purchase of a bit more for other general corporate liquidity needs as.
As we execute under the program, we will do so with a disciplined focus on growing shareholder value.
Optimizing our capital structure and maintain adequate liquidity to run and grow our business.
The overall liquidity from both our operating and financing activities remains more than sufficient to manage our ongoing working capital needs grow our business as well as manage our Fedex.
Our outlook for 2023 remains cautious, but optimistic we are planning for the recent trends and macro and market volatility to likely persist in the near term.
However, we are encouraged that even in this environment constant change businesses need actionable data and analytics to succeed and open architecture to be agile and cloud capabilities to be cost efficient and effective.
<unk> strategy delivers all of us.
In 2023, we will target modest constant currency total revenue growth.
Yeah.
We will continue to grow cloud subscription billings as a percentage of total revenue and we will continue to strengthen the quality of our recurring revenue as we continue to transform our platform to the cloud.
We will remain disciplined and scrutinize costs, while investing in growth areas and we will continue to execute on our dual strategy of growing our business intelligence.
And acquiring and holding bitcoin.
Thank you for your time today and for your continued support of micro strategy I will now turn the call over to Michael British marks.
Thank you Andrew.
I'm, Mike wholesaler, the executive chairman of micro strategy.
I'd like to provide.
Abide our performance review.
When we think about the corporate strategy and its effectiveness. We go back to the summer of 2020, when we made our major strategic decision.
It was.
On August 11 of 2020 that we announced to the world that we had acquired $250 million worth of Quebec coin along with a tender offer.
At that on the day before our stock was about 121 mm $122 a share.
Today, the stock close to $292 a share.
So of course.
We measure our success based upon the creation of shareholder value.
And if we look at the performance of the company stock since August 10th 2020 to the close of business four P. M. Eastern time February 1st.
You can see the micro strategy stock is up 117%.
We pick a number of different benchmarks.
I think the most important benchmark is bitcoins performance and you can see from this chart that bitcoin notwithstanding the fact that it is it is known by all to be volatile.
Everyone talks about bitcoin talks about us being volatile nobody talks about bitcoin actually points out that despite its volatility. It is the number one performing asset over the past two and a half years. So.
So we can see bitcoin is.
Up 98%.
Versus August 10 2020.
And that's just a really critical day, so micro strategy stock as is levered against about corn and so through our execution, we've been able to outperform bitcoin as an index. So we're pretty pleased with that.
We contrast, the performance of bitcoin to other major asset classes and indexes and you can see that while bitcoins up 98%.
Diversified portfolio of high quality companies, such as the S&P 500.
This is up 23% in that same time period.
The NASDAQ is up 8% over the course of the two and a half years.
Gold is a loser gold has lost 5% since the summer since August 10th of 2020.
Our bonds have been even worst performers. So if you'd invested your treasury and long dated bonds like <unk> would be down 16% in your capital.
Although people often talk about gold and silver as money you can see that silver is even a weaker monetary asset and coal that's down 19% over that time period.
So benchmarking digital commodity or in this case, the digital scarcity like bitcoin versus all of these other asset classes you can see the bitcoin has been the strongest performer not by even a small amount by a factor of five to 10 X over over other op.
<unk>.
We also benchmark ourself against Big Tech stocks and so if we look at Big Tech you can see that Google Apple and Microsoft which are three effective digital monopolies and three are the strongest companies in the world.
Without the spirit.
They're up respectively, 36, 29% and 21%.
They've underperformed bitcoin by a factor of three to four or three to five and micro strategy of courses is outperformed the mall substantially now Netflix Amazon and matter group all down minus 25 minus 33 minus 42.
This is a sobering observation because most of those names are actually monopolies and they have overwhelming crushing domination.
But what this illustrates is that in the summer of 2020.
Investors were faced with a very very difficult challenge.
Because it's.
It's just not easy to figure out what to invest and when interest rates went to zero and when we'd already had.
Our substantial balance and and risk assets.
And you can see all of these choices bitcoin correlate what have outperformed them all.
We also benchmark ourself against enterprise software stocks.
So oracle is very well known and is huge it's up 64% has actually done quite well, it's done better than all the big Tech stocks, it's very conservatively managed.
Industrial software company.
But still dramatically underperformed bitcoin and micro strategy is.
As an asset and of course, IBM up 11% Salesforce down, 13% S&P SAP down.
Down 24%.
People often ask us so why why did we do this and are we pleased with the result in and of course, there are lots of headlines about.
Accounting charges and and.
<unk> quarterly losses, our GAAP losses, but as you can see if you're a shareholder.
And your choice for us to choose from any of the bars on this screen micro strategy is still the number one choice in Bitcoin is is the number two choice of what you want to invest in as commodity back Coinstar.
As the winter is a commodity and asset class and if maybe you want to invest in our security micro strategy has worked very hard to provide shareholder value or our.
Our investors.
We have lots of decisions to make.
As quarters go by.
And we always try to evaluate what is the best path forward for our shareholders. What is most accretive for the equity holders of Ams T. R.
And and I think that the scorecard.
Illustrates that to date so far.
We have been effective in that and we will continue to focus.
This chart really illustrates.
Why we are so committed to our bitcoin strategy.
As you can imagine it also illustrates the benefits to the corporate brand of micro strategy all of our employees all of our partners all of our customers in all of our shareholders.
Of this strategy.
I would like.
To say a few words about a couple of other areas, let's start with the macro.
Macroeconomic situation.
2022 was a brutally difficult to year on a macroeconomic basis as short term interest rates went from effectively nothing to four 5% and that resulted in a drawdown and in all financial assets, though is quite painful.
I expect as we go forward there'll be some normalization in 2023 and 2024.
And I think the general macroeconomic environment.
Environment is rotating to a more beneficial place.
For us.
And generally for the Bitcoin community.
We have always focused on bitcoin rather than crypto.
So if you look at the micro economic situations in the past 12 months.
Most of the crypto.
Crypto enterprises in the crypto assets.
And the crypto.
Use cases have melted down in that time period.
Of course, we know the stories of the bankruptcies of block Phi and Celsius and F T X.
And Genesis.
And Voyager.
And Alameda and.
We also know about the the melt downs of all the crypto tokens. The alumina talk on the terror attack on the F T T token et cetera.
In our opinion these were all.
Very weak use cases, and they are very fragile structures and it was a matter of time before they do meltdown.
The meltdown of that has created.
Short term negative headwinds for bitcoin because bitcoin is cross collateralized with all of these are the cryptos.
But long term.
The rationalization of the crypto market.
We will be beneficial for bitcoin. It is it is educated an entire generation of investors.
On the benefits of.
Bitcoin as a decentralized digital commodity and the benefits of not having counterparty risk.
It's made a I think pretty clear what the difference between an asset with an issuer.
First as an asset without an issuer and it's also illustrated the benefits of being able to solve cost today and the risks of being dependent upon a another cost sodium.
The reason that micro strategy was able to get through.
This entire crypto winter is because we weren't exposed directly to any cryptos, nor did we do business with any of the crypto exchanges and <unk>.
And we didn't do it.
For very clear reasons because because.
We don't believe in the value proposition of unregistered securities and we felt that at some point eventually the combination of <unk>.
Brisky behavior in the crypto industry and the ethical on the legal overhang of the unregistered Securities would eventually create a liability.
I think as we go forward.
Youre going to see a much stronger institutions that will be entering the space and they're going to be entering because.
The industry has rationalized so the future is fewer assets fewer better institutions.
Less and less of a.
Crypto risk taking.
And.
And.
If there is any other result of the crypto winter it's it's.
We can see that everywhere in the world.
Regulators and the general public are enthusiastic about the promise of digital assets, they're hungry for.
<unk> digital asset framework.
I think that there'll be more focus on creating a constructive framework and I think people understand better.
Why you can't create a digital asset framework based upon.
Unregistered securities without proper disclosure.
We've said before the only real safe Haven for an institutional investor is.
Is bitcoin bitcoin is the only universally acknowledged digital commodity.
And so if you are an investor Bitcoin is you're a safe Haven in this regard. The others are are all are question marks they are all generally unregistered securities.
And they operate in a regulatory gray zone.
I expect that we will.
Make progress with regard to regulatory developments that will be constructive for the industry, it's not going as fast as we would like.
The consistent denial of bitcoin spot Etf's has been a disappointment.
Lack of a clear digital assets framework.
From coming from regulators or or legislators as a disappointment.
But.
Having said that it's pretty clear that.
That will arrive in time, and we do see signs of this.
Signs of.
Optimism here auspicious development all the the FASB initiatives.
And to introduce fair value accounting for Bitcoin is very auspicious development.
The bipartisan support for bitcoin and for digital assets in general.
And Congress as a as an auspicious development the acknowledgment.
Hi.
All major public figures that bitcoin is digital commodity worthy of attention.
Ah is an auspicious development.
And the fact that bitcoin has managed to survive the meltdown of.
Most of the crypto banks in crypto lenders and most of the crypto exchanges and most of the other crypto assets.
It's a very auspicious development, so I think.
<unk> 2020 to prove the resilience of bitcoin and and also approved the resilience of micro strategies business model.
Now, we look excitedly forward to 2023, and 2024, where we think most of.
The poor behaviors or the irresponsible behaviors have been squeezed out of the system and most of the inappropriate leverage has been squeezed out of the system.
And.
I don't think that people on the crypto market well.
I don't think they'll engage at the same behaviors that they got away with them in the previous few years, because I think the public has been educated.
And I think I think generally.
We have a much more sophisticated set of investors and actors in the space.
All of which I think is good for bitcoin.
The last point I'll make on Lightning Lightning is is really spreading rapidly.
And it's being adopted by many many many businesses.
We see dozens and dozens of lightning startups being launched lots of lightning wallets when you see some exciting applications of lightning and.
And I think that's only going to continue whitening liquidity continues to increase.
We as a company have.
Been very pleased with the early results.
Our lightning R&D effort and micro strategy lightning.
Product development, it's quite impressive what you can do with lightning.
I think.
Traditionally the primary criticism of bitcoin was the slow transaction rate on the base chain may.
Made it difficult for people to see how billions of individuals would onboard to the network and how billions of transactions could take place, but now I think as lightning as spread its becoming fairly straightforward and quite.
Quite easy to see how that's going to happen, we're going to see first dozens and then hundreds and then thousands of layer three applications that move bitcoin within our.
Custodial network like cash App.
More like a coin base or a binance and then we're going to see.
All of those applications start to knit together with the layer two protocol.
Which we call lightning.
And as they adopt lightning is a layer two protocol, we'll see.
There'll be massive transaction throughput on the layer three and then we all see people depositing.
Withdrawing.
So toshiba on layer twos, and then we will see the layer one will evolve to become the settlement network of the entire global digital monetary system.
<unk>.
That's why we decided to host a lightning for corporations track and micro strategy, where all coming up in May.
This will be a first to my knowledge no one's actually hosted a lightening for corporations conference.
But we think that 2023 is the right time.
And it's become increasingly clear that you can build light you can build bitcoin and satoshis and micro transactions and to your products and into your services using the lightning protocol and and I think that there'll be a whole set of breakthrough applications and breakthrough products using lightening.
So so 2023 is an exciting year and I think we're moving into the most exciting phase of bitcoin development ever.
That coin is emerging as the grown up.
Institutional asset in the digital ecosystem and lightning is emerging as the Universal law.
Language for moving money over IP.
And so with that.
I'd like to go and pass the floor back to <unk> open us up to questions and answers.
Great.
Thank you Michael So we are going to jump right into the questions.
And the first question is for <unk>.
Could you update us on the progress of your cloud product and capabilities and how customer migrations are paying today.
And what are your expectations for cloud business growth given the tougher macro.
And thanks for Asia.
Cloud growth is going very well.
In 2022 grew on a revenue basis.
<unk>, 46% constant currency had a $1 billion basis about 39%, which both represent a bit of an acceleration in 2022, I think we'll be able to see that same pace of growth or something that would faster would be our goal in 2023.
I don't think the macroeconomic headwinds will slow our cloud growth.
If anything we might see a slowness of cloud growth.
Because we're getting into bigger and bigger customers now.
We've moved at this point about 20% of our recurring revenue is in the cloud. So we moved a good amount of sort of the medium sized customers.
But that's where Mcg microstrategy cloud for government or a fed ramp offering is going to help us.
There is quite a bit of a federal customers large banks that require some sort of a fed ramp certification those will take longer to migrate but I think that's really the sort of next fashion. They will go after but I'm pretty excited about where cloud growth is going and it obviously is getting to be more and more the standard sort of way we sell our software.
Okay.
Okay.
Thanks, Tom next.
Next question is for Andrew.
Can you please provide more detail about your scene on bitcoin in December .
And do you intend to make any further sales.
Thanks for the question.
As I mentioned in the prepared remarks, we sold 704 bitcoin.
In December which generated a capital loss.
We expect to carry back against a capital gain.
From 2019 matures through.
And all domain the sale.
Apart from that sale, we have not sold.
Any other bitcoin and in fact, I think the main takeaway should be that we have continued to increase.
Total bitcoin holdings, each quarter since inception, including Q4.
And I mentioned this before is all about.
We don't really stop exploring opportunities and thinking of ways to increase shareholder value related to our decline.
And.
In the future we may consider doing other things that may take advantage of market volatility or be opportunistic in the market.
I guess either way anything we do.
We'll do it consistently.
<unk>.
Within the construct of our long term bitcoin strategy, which is to buy Bolton growth.
Thanks, Andrew next question is for Michael.
In light of the recent crypto market events. What do you think are the key catalysts for more adoption of bitcoin by corporations.
And I think a fair value accounting.
<unk> is going to be a big plus for corporate adoption.
Since our since quarry the GAAP volatility created by indefinite intangible accounting as a negative for cfos.
I think the.
The rollout of lightning for corporations are going to be another big catalysts, because the ability to build.
Coin and play to earn or a bitcoin rewards or our bitcoin into marketing programs and to do micro transactions.
Is gonna be viewed as a as a real exciting benefit it could be a great solution for chief marketing officers or <unk> or Ceos are heads of sales.
I think that that over time, one big driver is payment networks, or a fish inefficient and slow and expensive.
So as companies figure out how to monetize their applications and move.
Small micro transactions around friction free at zero cost.
Think that.
There's going to be an interesting use case for heads of sales and Ceos.
So.
And short.
Maybe the last thing is.
Is.
Any regulatory clarity that comes from Washington D C.
With regard to the digital assets ecosystem will be a big driver and so I think we're all eagerly awaiting.
Some sort of digital assets framework.
Bitcoin is his right now as I said, the only university ignore digital commodity.
And so in a way it's the one thing you can deal with in the absence of asset framework, but I also think bitcoin will probably be the biggest winner. If there is a digital assets framework, because it'll just accelerate institutional adoption, both on the investor side and the corporate side.
So I would look to those three drivers.
Thanks, Michael next question is for fun.
With respect to the competition and demand so that duplex have you seen any changes in the competitive environment as customers look to bring down the cash burn and what is the impact of macro on demand with respect to sales cycles and cloud migration.
Yeah on the first item I think the biggest trend we're seeing as customers try to bring down their software causes consolidation of vendors and in the <unk> World. There's really two credible choices for consolidation right now it's micro strategy. If you want a full enterprise solution as power bi if you want a point.
Solution that integrates well with the rest of the Microsoft ecosystem I think what we've seen in the last six to 12 months is that as more companies are trying to use Microsoft whether it be azure or <unk> or otherwise it realizing the limitations right, there's not a common <unk>.
Mantech model there arent reusable objects, it's not scalable it's got a secure and I think customers are also realizing that free power B I with your office 365 enterprise license just means youre going to pay more in azure cost and its a well worn model, where you give certain things away for free to drive more.
Usage costs.
We see a lot of customers consolidated micro strategy and so even though there may be a reduction in overall spend and we get more of the pie and I am excited about that as far as the macro environment Q4 was more difficult, especially especially internationally as coast customers are trying to spend a little bit less.
With that said, we still had a reasonable outcome in terms of our Q4 financials driven by our move to cloud and I do think 2023 is looking a little bit brighter in terms of companies needing to spend to improve their.
Their data and analytics environment, So I'm optimistic about the growth potential in 2023.
Thanks, Tom.
Next question is for Andrew.
Can you. Please provide your cut process on how do you plan to address the 2025 loan maturities coming up.
Thanks Bruce.
So there has been some volatility in our bond prices recently, and just looking back to Q4, and we've seen that pretty clearly, but we've also seen that same.
Volatility pretty dramatically rebound prices here in January in a very short period of time.
I think with that kind of backdrop.
And changes in the market, we are comfortable with our outstanding debt levels and we were confident then that when it does come due we will be able to either refinance it appetizer or paid off.
And we have a lot of different options available to us to manage those maturities and the fact is we still have a lot of time list to do so in the next two plus years.
Thanks, Andrew.
Could you take this one last question for Fang.
What is your margin outlook for 2023.
And how are you thinking about balancing revenue growth versus margin preservation.
Yeah.
Like to have both right.
We're going to focus on driving revenue growth and profitability of our margin growth in 2023, I think a big driver of that is our acceleration of conversions to cloud, which allows us to see an uplift in cloud revenue and overall revenue from hosting <unk>.
<unk> licenses and support fees that are cost side, Andrew mentioned, it but we kept our costs relatively flat our operating costs relatively flat from 2021% to 2022, the goal would be to do something similar or even reduce our costs a little bit.
If you exclude the impact of Bitcoin holdings.
I'm talking about non-GAAP cost here so.
If we can grow revenues and keep flat or reduce our cost in 2023, then we should be able to grow margins and I think that the macroeconomic environment improves faster you can do that even faster in 2023.
Great. Thanks, Sean So I think that brings us to the end of the time for today's webinar.
Thank you everyone for the questions.
Concludes the Q&A portion of the webinar and I will now hand over to Carl to Fong for closing remarks.
Thanks duration I want to thank everyone for being with US today and we appreciate all of your support.
We're enthusiastic as ever.
On both of our strategies, our enterprise software strategy at our Bitcoin strategy.
Wish you all a good quarter and happy spring and looking forward to seeing you again in 12 weeks.