Q2 2023 MicroStrategy Incorporated Earnings Call
Hello, everyone and good evening, I am <unk>, Vice President of Investor Relations and Treasury at micro strategy.
I'll be your moderator for micro strategies 2023 second quarter earnings Webinar before.
Before we proceed I will read the safe Harbor statement.
Some of the information we provide during todays call regarding our future expectations plans and prospects may constitute forward looking statements actual results may differ materially from these forward looking statements due to various important factors, including the risk factors discussed in our most recent 10-Q filed with.
The SEC.
<unk> no obligation to update these forward looking statements, which speak only as of today.
Also during today's call, we will refer to certain non-GAAP financial measures reckons.
Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website at micro strategy Dot com.
I would like to now welcome you all to today's webinar and let you know that we will be taking questions. During the Q&A using the Q&A feature at the bottom of your screen.
You can submit questions throughout the webinar and Michael former Andrew will answer questions at the end of the session.
Please be sure to provide your name and your company's name when submitting your questions.
Now I will walk you through the agenda for today's call.
First <unk>.
<unk> will cover the business results for the second quarter of 2023.
Andrew Gang broke over the financial results for the second quarter after an <unk> III.
Then Michael Saylor will provide a strategic review and discuss the recent bitcoin market updates and lastly, we will open up to Q&A with.
With that I'll turn the call over to <unk>, President and CEO of Microstrategy.
Thank you <unk>.
Hello, everyone I would like to welcome all of you to today's webinar and I'll start with highlights of our software business.
Total revenue results in the second quarter 2023 were mixed with challenges in product license revenue balanced by strength in our cloud business.
Revenues were primarily impacted by an uncertain macroeconomic environment, leading to longer and delayed sales cycles.
Growth in our recurring revenue illustrates the durability of our enterprise grade platform and continued traction in cloud.
We also saw continued strong profitability as we thoughtfully manage our cost structure.
Total revenue was $124 million representing.
Representing a decrease of 1% year over year or flat on a constant currency basis.
Total software license revenues, which consist of total product licenses and subscription services revenues were $35 4 million representing.
Representing an increase of 4% year over year or 7% on a constant currency basis.
Total software license revenue performance benefited from increased adoption of our cloud platform, which was partially offset by a decrease in product license revenues.
Total subscription services revenue was $19 9 million, an increase of 42% year over year or 44% on a constant currency basis.
And our Q2 subscription billings growth was 15% year over year.
Even though difficult macroeconomic conditions continue to persist and may continue to impact our revenue in the coming quarters.
Microstrategy continues to invest.
In and focus on innovation that I'm excited to tell you more about our product developments.
At our Microstrategy World user conference held in person in May 2023, we highlighted and introduced Microstrategy, one our enterprise AI platform.
And our keynote address we highlighted how some of the biggest brands in the world, including organizations like Hilton hotels, and Mika and assurance and Sony Interactive Entertainment.
Leverage the power and unified capabilities and micro strategy to transform how they operate and succeed amidst fierce competition.
With an eye to the future we unveiled our vision of intelligence everywhere and the age of artificial intelligence and what our engineering team is building today.
We also announced the development of our lightning rewards product and innovative approach to monetizing interactions, which love, which leverages the lightning network.
Coin layer two payment protocol.
And we've heard from industry experts across the big coin in Lightning network ecosystems about the practical application of the Lightning network for business today and tomorrow.
The Microstrategy one platform is the most important product innovation in the history of our company.
Does it represents a fundamental shift in our industry to harness the power of business intelligence.
And artificial intelligence together to upgrade the way organizations do business.
Said plainly AI and <unk> are better together and micro strategy is unique advantages for developing an AI b I.
<unk> platform.
Let me explain this next generation product suite is built to unleash new levels of efficiency and creativity.
Organizations are looking to consolidate vendors to save cost simplified deployment and maximize impact there.
They are looking to deploy AI enabled applications to drive efficiency productivity and impact to their operations.
Micro strategy, one offers a comprehensive solution with flexibility and scale to address all types of use cases.
We're extremely proud of the work done to build micro strategy one.
Are excited for customers and prospects alike to experience how it changes the way they think about the future of AI and VR.
Microstrategy is well positioned to organizations build and deploy AI applications to users by leveraging the core capabilities of our leading <unk> platform.
And our experienced 80% of the complexity of building AI applications and solutions is procuring transforming organized and securing and maintaining data.
The challenges with scale and governance and trust with AI or amplified by an order of magnitude.
Compared to traditional bi and security and access control is Paramount all.
All of these are very similar to large scale massive analytics deployments something we believe we do best by leveraging an open cloud native Composedly architecture access was structured and unstructured input set of semantic graph connected to advanced deep learning and large language models. We believe we have a proven.
Framework for success.
With the launch of the Microstrategy one platform, we are now able to increasingly focus on microstrategy hallmark product innovation.
Our innovation focus on native cloud artificial intelligence and the Lightning network builds.
Building on the launch of Microstrategy, one in May we'll be sharing details online and in person around the globe starting in September .
Microstrategy cloud as the foundation of Microstrategy, one and a key area of our research and development and vessel.
The flexibility and scalability and security required to embrace AI further underscore the importance we have seen in this area and the more traditional analytics space. The power multi cloud deployment, a containerized micro services architecture enterprise grade security proactive cloud management from expert.
Seamless migration and backups and single click updates and upgrades allow cloud customers to appreciate immediate benefits of our platform the.
The comprehensive set of tools on our platform and scalable data governance insurers customers benefit from the ability to make fast accurate and informed decisions, while accelerating access to the technology of the future.
These needs necessity, a cloud first cloud native approach that will be transformative for customers and as such will be an area of continued focus for us.
Talking further about our AI innovation, the Q3 upgrade to our a ibi platform planned for release. This September we will have.
Bring advanced AI capabilities, and a new dimension microstrategy AI empowering organizations to rapidly rapidly deploy secure govern and trusted AI applications.
We brought the same care and expertise around data definitions of wrangling multi source data access and governance from the traditional <unk> world and our approach to AI.
The micro strategies, the manta graph combined with generative AI and deep learning will enable organizations to better understand their data and their relationships, resulting in more accurate predictions better data quality improved model training and output and faster actionable insights.
Micro strategies AI innovation focuses on productivity to empower each type of user within an organization to become more intelligent.
As an example, micro strategy data whisper supports the business user providing access to an AI powered chatbot that surfaces answers and self service insights to understand the why behind the data comp.
Companies can make every consumer of data scientists by extending this experience through micro strategy insights they asking questions via chat users unlock advanced algorithms did that detect data patterns outliers anomalies key drivers and more.
Insights uses AI models and evaluates incoming data to surface insights immediately to the user via web and email alerts for the analyst and author simply ask a point our AI assistant at your data set of choice and watch a build a dossier that provides a 360 degree analysis of the data in seconds.
Looking forward Holistically, we're developing further capabilities to extend.
Our line of business owners can accelerate business results across industries and departments as well as the composer ability of the platform to embed AI workflows and productivity into applications.
As we look to expand our customer base and drive revenue growth strategic alliances will become increasingly important.
In Q2, we expanded our relationship with Microsoft announcing a multi year partnership that it integrates the Azure open AI service.
And Microsoft 365, with micro strategies, and advanced analytics capabilities and makes microstrategy available on the Azure marketplace.
<unk> has emerged as the leader in generative AI and we're excited about the Azure service and are further marketplace offering that enhances the access speed and capabilities of Microstrategy, one for all our customers' current and future.
The partnership between micro strategy, Microsoft will empower business users to make faster more informed decisions and accelerate the development and deployment of new AI applications.
Additionally, as discussed at the Microstrategy World Conference, we're actively working on a Google cloud platform relationship and we expect to share further updates in Q4.
Turning to our development of Microstrategy Lightning, which utilizes the second layer Lightning network sitting on top of the Bitcoin network, we envisioned microstrategy whitening as an enterprise platform designed to leverage the power of the Bitcoin Lightning network to enable new e-commerce use cases and tackle modern cyber security challenge.
Yes.
The first use case that the Microstrategy lightning platform is lightning rewards, which is intended to allow any enterprise to reward their employees customers partners and prospects for their engagement.
Companies spend vast amounts of time and money on digital marketing driving engagement with their brand and their customer and for some monetizing online content.
We believe a platform like Microstrategy lightning can enable them to drive that engagement and reward their customers for that engagement directly rather than lining the pockets of marketing or financial intermediaries.
We expect future capabilities of lightning platform will provide opportunities for new business models to monetize online content or minimize threats and the nuisance of bonds and other malicious actors.
While we envision lightning as independent product offering it builds on our core strengths and deep expertise building highly available easy to use enterprise software delivered in the cloud.
While our focus remains on innovation, we believe we are uniquely positioned to bring value here.
These incremental areas of product focus and innovation will drive micro strategy, a strategy of being at the forefront of analytics.
Turning to our bitcoin strategy, we continue increasing our bitcoin holdings in the second quarter in Q2, we acquired 12333 bitcoins. The most in a single quarter since the second quarter of 2021.
After the end of Q2, we purchased an additional 467 bitcoins using cash from our operations as of July 31, 2023. The company held 152800 Bitcoin acquired for a total cost of $4 five $3 billion or 29670.
$2 per bitcoin.
As you know our strategy is to acquire and hold bitcoin and we plan to continue to accumulate bitcoin overtime using excess cash and with the net proceeds of capital markets transactions.
Our core business is not impacted by near term big corn price fluctuations.
Microstrategy is the largest publicly traded corporate holder of the corn in the world and we remain committed to our bitcoin acquisition strategy with a high degree of conviction long term focus and a risk managed approach.
Finally, before I hand, it over to Andrew I'd like to take a moment to discuss personnel changes this quarter.
Our Chief revenue Officer, Kevin Atkinson announced his resignation earlier in July .
It's been my privilege to work with Kevin for nearly seven years, and we wish them luck with his future endeavors.
Kevin's departure I've assumed his responsibilities of head of the sales organization and sales function.
<unk> working directly with our field leaders and team as well as meeting with customers and this will give me an opportunity to spend more time in this area.
Additionally, we're excited to welcome back to Rob Avianca back to micro strategy as our chief product Officer.
Zurab brings more than 20 years of industry experience to the role and as previewed previously served.
Microstrategy as a senior vice President of product management, and also executive Vice President of marketing.
Thus, we continue to opportunistically hire top talent worldwide.
In addition, we started returning the office to enable our employees to make the best of the convenience offered by the hybrid work model, while also benefiting from in person interactions.
I'll now turn the call over to Andrew to discuss our financials for the quarter in further detail.
Thank you.
I'll start by recapping some of the key GAAP financial results for the quarter.
GAAP total revenues for Q2 for $124 million down $1 $7 million or 1% year over year and flat year over year at constant currency.
Total software license revenues, which consist of product license revenues and subscription services revenues were $35 4 million up 4% year over year and up 7% at constant currency.
Subscription service revenues, which reflect recurring revenues from our cloud business for $19 $9 million, an increase of 42% year over year.
Or an increase of 44% at constant currency.
Product license revenues were $15 5 million for the quarter down 23% year over year.
20% at constant currency.
We saw some ongoing headwinds from the overall challenging macro environment. This past quarter. Our results continued to reflect the expected decline in product license revenues as we transition RPI business to the cloud we expect the mix of this revenue will continue to shift from product license to subscription services as we transition to platts.
One over time.
Product support revenues were $66 1 million down 1% year over year and down 1% in constant currency.
Customer renewal rates were 93% for the quarter and remained above 90% for the sixth consecutive quarter.
<unk> to demonstrate the durability of our customer base, even with a tough macroeconomic backdrop.
Lastly, other services revenues were $18 9 million or a 12% decrease year over year.
Score, 11% at constant currency.
Primarily due to lower consulting revenues, while we have seen higher average build rates worldwide. We did experienced lower customer demand for consulting services in the quarter. However, we do expect consulting engagements to normalized in the second half of the year.
On slide 16.
Total current software license billings were $39.
$1 million in the second quarter.
Slight decrease of 2% year over year.
Subscription billings were $23 $1 million, an increase of 15% year over year.
The 13th straight quarter of double digit growth.
We continue to focus our efforts on transitioning customers to our cloud solution and selling new cloud deployments to new and existing customers in.
In Q2, we enhanced our go to market capabilities through a partnership with Microsoft which makes micro strategy available on the Azure marketplace.
This partnership allows existing customers to transition to a cloud solution onager and provides us with the opportunity to sell into new net accounts, which we believe have the potential to drive significant incremental subscription revenue in the future.
We intend to continue to enhance our go to market capabilities through hyperscale or partnerships in the coming year.
In 2022, approximately two thirds of our total revenue was recurring and we continue to focus and improve in this area at 70% of total revenue from the first half of 2023 was recurring in nature.
The ongoing transition to a subscription model will help establish high quality annual recurring revenues into the future.
Shifting to costs on slide 17, total non-GAAP expenses were $132 million in the second quarter compared to approximately $1 billion in the second quarter of 2022.
Most notable difference overall year over year was the much lower bitcoin impairment charge this past quarter of $24 million.
In contrast to $918 million in Q2 of last year.
non-GAAP cost of revenues was $26 million in the second quarter, an increase of $1 $9 million or 8% year over year.
<unk> as a percentage of total revenues non-GAAP cost of revenues were up approximately 2% year over year, primarily due to increase in cloud hosting costs consistent with prior quarters and in conjunction to the year over year increase in our cloud subscription services revenue.
non-GAAP sales and marketing expenses increased $1 million or 3% year over year to $33 million as a percentage of total revenues non-GAAP sales and marketing costs were higher by 1% year over year.
Sales and marketing costs continue to normalize compared to the last few years due to higher demand for in person customer meet customer meetings and events such as our successful micro strategy World event in Q2.
non-GAAP research and development expenses were $27 million, a decrease of $1 5 million or 5% year over year, which reflects continuing cost efficiencies from our global tech delivery centers.
non-GAAP G&A costs were $21 million, a decrease of $1 million or 4% year over year or a slight decrease of 1% as a percentage of revenue.
Our cost focus is on growing our cloud business prioritizing revenue generating and customer facing activities and optimizing tech R&D globally, while prioritizing strategic innovation on our platform.
And we remain disciplined and overall cost controls, including including closely managing our head count and salary costs to minimize our controllable expenses.
Yeah.
Turning to slide 18, we reported a total non-GAAP operating loss in the second quarter of 2023 of $11 million.
Of which the loss on the digital asset impairment charge as mentioned a moment ago was $24 million for the quarter.
The digital asset impairment charge continues to be the primary driver impacting the comparison of our operating results year over year.
And it's worth noting that in the first two quarters of 2023, the bitcoin impairment charges have.
Then some of the lowest charges since launching our strategy in Q3 of 2020, which we believe reflects the continuing maturity of the overall bitcoin asset class.
Part of the volatility in our reported earnings has been due to current GAAP accounting as you know, which treats our bitcoin holdings as indefinite intangible assets, which in turn results in recognizing impairments each quarter. If there is any decrease in the fair value below our carrying value at any point during the quarter.
At the end of 2022, the FASB unanimously voted to recommend a change to the adoption of fair value accounting for measuring certain digital assets, including bitcoin.
If finalized and we are able to recognize both decreases and increases in the fair value of Bitcoin. We believe our reported earnings will be far more transparent to investors and far more relevant and reflecting changes in market prices.
This past May micro strategy submitted a response letter to the FASB on the proposed change. So we noted there was an overwhelming response from interested parties, which included support from sophisticated institutional asset managers large accounting and audit firms crypto exchanges and banks.
As the largest publicly traded corporate holder of big win in the World Micro strategy remains fully supportive of the proposed rules and the improved investor transparency, we hope that brings.
On slide 19 as of June 32023, the carrying value of our Bitcoin holdings was approximately $2 3 billion compared to approximately $4 6 billion in market value based on the big corn price at the end of Q2.
The $2 $3 billion difference between the carrying value and the fair market value of our total bitcoin would be recognized under our fair value model.
And as of market close on Friday July 28, the market value of our 152800 bitcoins was approximately $4 $5 billion.
Now turning to slide 20.
In Q2, we continued to execute on our aftermarket or ATM equity offering and raised $335 million in gross proceeds through the sale of class a common stock.
We issued an aggregate of approximately $1 1 million shares at an average gross price per share of approximately $310.
We have since terminated the prior $625 million ATM of which approximately $290 million of the capacity remained.
And today, we announced a new $750 million at the market program, establishing a net incremental issuance capacity of $460 million.
As with prior programs, maybe we may use the proceeds for general corporate purposes, which include the purchase of bitcoin as well as the repurchase or repayment of our outstanding debt.
Micro strategy stock outperformed of bitcoin in Q2, reflecting a high demand for institutional bitcoin exposure, especially following the additional positive momentum from increasing institutional interest and potentially new bitcoin Etfs and exchanges.
The incremental ATM capacity will allow us to benefit from this increased demand and will allow us to opportunistically raise capital based on market conditions.
Our outstanding debt and convertible notes remain unchanged at a total of $2 2 billion with a blended weighted average interest rate of approximately one 6%.
This is compared to the blended weighted average interest rate of two 1% at the end of 2022, which equates to a decrease of over $15 million in annualized interest expense strengthening our overall liquidity position.
And at the end of the second quarter, we held $66 million in cash on our balance sheet, which is more than enough overall liquidity to manage our ongoing working capital needs and debt service obligations.
Since the third quarter of 2021, we have raised a total of $1 $7 billion in gross proceeds through our ATM programs with the average price over all issuances of approximately $424 per share.
The primary use of prior ATM proceeds has been to acquire additional bitcoin, increasing bitcoin per share for our shareholders in.
In Q1 2023, we also used ATM proceeds to deleverage our balance sheet by repaying our bitcoin backed secured term loan at an attractive discount.
Okay.
On slide 22.
In Q2, we increased our net bitcoin position by 12333 big coin using.
Using net proceeds from ATM mission issuances as well as excess cash from operations sub.
Subsequent to the end of the quarter, we acquired an additional 467 bitcoins are $14 $4 million again, using excess cash from our operations.
And as of July 31, we now hold a total of 152800 gig coins on our balance sheet of which 15731 big coins are held at micro strategy at the parent and are pledged as collateral securing our 2028 secured notes.
The remaining 137069 bitcoins are held at the macro strategies subsidiary all of which are fully unpledged and unencumbered, representing 90% of our total bitcoin holdings or $4 billion in current market value.
Yeah.
Despite the recent macro headwinds we continue to remain optimistic for the remainder of the year.
We anticipate total revenue this year similar to last year.
We will continue to focus on innovation in cloud and artificial intelligence as we innovate our products and increased demand from our customers.
We expect to grow cloud subscription revenue and strengthen our recurring revenue continuing to transform our platform to the cloud.
We will remain disciplined and continue to manage costs and head count effectively.
And we will continue to execute on our dual strategy of growing our software business and acquiring and holding bitcoin.
With that thank you for your time today and for your continued support of micro strategy.
I'll now turn the call over to Michael for his remarks.
Okay.
Thank you Andrew.
I'd like to take this time to review our corporate strategy with regard to Bitcoin and then.
Talk about.
Our going forward strategy.
So first I thought it would be appropriate to do a review of the results of our strategy since August 10th 2020.
We're now we're nine days away from the three year anniversary.
Awesome Barking on a bitcoin strategy and I think it is very significant because August was the doldrums of the summer in 2020, when we were just a few months post COVID-19.
And the entire world was thinking about how to react to these unprecedented times.
We started out with a you know.
A thought how does one preserve wealth in the face of what is likely to be monetary inflation.
As you all recall interest rates were zero percent there.
Lots of stocks had adjusted lots of assets were moving around.
If we look at the on the chart in front of Us.
What you'll see is the S&P 500 appreciated 37% since then so.
Call it on average about 12% a year for three years.
NASDAQ underperformed the S&P, but 37% is really the hurdle rate for wealth preservation. If you underperformed, 37% then presumably you are destroying shareholder value and you're destroying wealth and if you can outperform the 37% year, creating wealth.
So as we look at these various asset classes.
We can see that.
Bitcoin is the winner of the asset class almost four acts.
What the S&P 500 dead for Bitcoin performed 100 are returned 145% in that three year timeframe.
So that's a that's a pretty stunning performance really in fact bitcoins performance. Our dies every other asset class and every big Tech stock and every enterprise software stock.
And so of course.
Ben Cohen is the most thermodynamically sound asset in our thesis has always been there.
That bitcoin is perfected gold and has all of the attributes of coal, but none of the liabilities of gold.
But the coin is also a dominant big Tech network with all of the attributes of our assets of our Big Tech company, but none of the liabilities of our Big Tech company.
And you can see on the chart that corn is performing like that.
Gold is down 3% and that was three years or so of all the money that was created and you could make the argument that the monetary supply worldwide.
In the Western World expanded by 37% over that time period. If so are the S&P captured its pro rata fair share of that monetary inflation, the NASDAQ fell a bit behind but gold didn't capture any of it called is down 3% and we had a decision to make.
Company should we actually convert $250 million worth of our of our cash into gold or $250 million of our cash in to bitcoin.
And of course for those of you who have followed us on this entire journey.
And you play it out you want you can see is that if we had actually chosen the path of gold, we would have less than $250 million intangible assets in our treasury right now and it seems very very unlikely we would have been able to raise any more capital R or develop any any shareholder.
Consensus or investor concern sense to continue with the strategy. So gold gold gold does not bear coin.
The coin as digital call, but as you can see the difference between the digital thing in analog thing is plus 145% versus minus 3%.
Silver has underperformed gold because silver is less scarce than gold more of a manufacturer more commodity.
And bonds have been the worst investment in this asset class in and of course, there's a simple reason why right interest rates were zero and and our thinking was they would stay very very low for a long time and long term interest rates were very low.
And of course as the interest rates increased over the last three years that undermined the performance bond portfolios.
We all know the story from a from the insolvent banks that had been under pressure earlier this year.
So key assets in and access tell a story and the story is bitcoin is the winning strategy S&P as status quo S&P has a strategy to not lose.
Every other strategy with assets is a losing strategy.
When you see the big Tech companies, you would've been better off to invest it in a very tight portfolio of big Tech stocks like Google Apple and Microsoft.
Invest in the S&P in.
That's because there are digital global monopolies in and they're just as powerful today as they were three years ago and they just keep getting more powerful.
But it's.
It's not always risk free to be in big Tac as a as the results of meta and Netflix and Amazon indicate that you can underperformed the S&P because their companies.
The big winner in the enterprise software spaces, Oracle and Oracle is very is you know the primary enterprise software company always has been the most powerful and dominant one as you can see IBM salesforce dot com and assay pay of all suffered our underperformed the S&P. So.
Against all of those as the comps as a business intelligence company, we're an enterprise software company. So we compare ourselves to enterprise software Socs.
And and of course, the best companies in the World The Big Tech companies. So we compare ourselves to the big Tech stocks.
And the question is how does the mid size.
Mid size Enterprise software company.
Managed to outperform them all.
And the idea was bitcoin.
But as you know.
As you can see and I'm delighted to announce micro strategies not only outperformed.
All assets all big tack on all enterprise software Socs micro strategy over that three years is actually outperformed that corn itself.
Now that's despite the fact that on August 10th we bought $250 million worth of Bitcoin and bitcoin was a small or a a fraction of our enterprise value.
20, 25%, probably a 20% of enterprise value as a bitcoin at that time.
And somehow we've managed to get more than 100% performance.
The way, we do that is via via intelligent active management of our balance sheet by taking on intelligent.
Leverage.
And so that that conclusion here is.
The bitcoin strategy is working.
There really isn't any strategy conceivable that could've worked better for us.
And of course on a risk adjusted basis.
Given all of the possible other strategies and the risk. They would imply then bitcoin actually appears to be the least risky.
<unk> strategy to outperform the S&P.
There are certain number of characteristics of micro strategy that have allowed us to outperform bitcoin and I'd like to delve into that a little bit more on the next slide.
The question that Pops up a lot.
Is well if microstrategy is going to own bitcoin or so much of it then why don't I just buy bitcoin why do I need to buy micro strategy.
And so that's the first question to ask yourself in and.
I could give an analogy.
The analogy is <unk>.
Compare buying a house.
And the best neighborhood.
That you can find that you can purchase today with no money down have all the cash advance to you by the bank.
And then you can rent it out as an investment property for investment income.
Versus.
Buying the identical house that might be priced 20% cheaper but.
But it is located in a scary neighborhood, it's going to take more than a year to purchase.
And.
It's going to have to be paid foreign cash you can't finance it.
And and if you think about those two propositions you can see the houses are identical, but a 20% discount Ah doesn't doesn't adjust for all of the other headaches and acquiring a house.
And given a choice between the 298% or some overwhelming number of homebuyers would buy the house, that's easy to buy that they can finance at the bank.
So micro strategy is a security.
And so when we say a good neighborhood. What we mean is you can buy it on the buy it from your your broker your your Big Bulge bracket Bank, maybe it's a Morgan Stanley or J P Morgan or Goldman Sachs. So an investor.
<unk> worked through the banking relationship they've had for 20 years.
And the second thing is the bank will allow them to finance it so they can buy it for no money down.
They can buy it in a matter of minutes.
And with Bitcoin you would have to establish a whole new set of relationships, new costed us custodian relationships new processes for crossett <unk> you'd have to find a new exchange it fell a little bit of a scary process. It's a and it takes a lot of work it'll take you a year.
And you have to pay for it all in cash upfront because you can't finance the purchase.
So when we talk about ease of access microstrategy versus bitcoin.
You can see that for an investor that just wanted to make an investment quickly one of them is a a quake compliance process that takes a minute with no cash or origin or or just.
Very very convenient convenient routine.
All all their compliance procedures are are the same all of their compensation structure is the same the accounting is the same.
Charter allows it it's very easy.
As buying the bitcoin means you have to rethink all of those things and it's going to take a long time and it's going to be difficult.
So the second.
You know element of the situation is.
Stability downside protection bitcoin is simply linear or up and down but micro strategy has a non bitcoin business the business intelligence business. So it's an enterprise software company.
And that means the revenues of the software company and the cash flows of the enterprise software company and the ability to sell equity or to finance things via equity and debt financing against the enterprise software company. They are not correlated to bitcoin.
So you've got an uncorrelated business to provide.
Some stability and downside protection, if you're an investor.
I mean, the third the third element is is can you actually take an intelligent leverage with bitcoin of course, it's just one to one you invest $1 billion, you get a million of bitcoin, but with Microstrategy.
We're actually carrying leverage we have $2.2 billion of leverage against $4.6 billion of bitcoin assets. So call. It a loan to value that's approaching 50%, but all of the underlying assets, but the difference is intelligence leverage would be defined as.
I pay a very low interest rate 1.6%.
Whereas the federal funds rate is 5% right now and long term interest rates for you know junk bonds can be 8%. So one 6% as good interest rate as you know the mortgage rate on a 30 year mortgages something like 7%. So we like low interest the second element of intelligent leverage is no.
Mark to market or margins call potential.
You could say that we had the silver gate lawn, we decided it wasn't it wasn't optimal to keep it. So we repaid and retired it because we didn't want to have that mark to market question and so all of the debt that we have the senior secured debt or the the convertible debt.
It's an asset is not marked.
To market and we don't have to worry about a margin call right in and with regard to the converts its junior.
And our unsecured debt.
So that's a second really nice element to intelligent leverage and and so.
There really isn't.
Any easy way to go and get unsecured low interest non mark to market debt against bitcoin.
It used to be you could get mark to market expensive margin loans against bad coin, but but the.
The great majority of all the companies that offered mark to market margin loans against bad coin have all gone out of business or been bankrupted.
So right now micro strategy is fairly unique and the ability that we can.
We can very efficiently and safely borrow.
Against this asset and then use that.
Financing in order to buy more bitcoin.
I think.
I think any any consumer if if they had.
100000 of Bitcoin and someone said would you like to be able to borrow 50000 against it and pay 1% interest with no margin call and have it come due in five years.
They would say well yeah were assigned me out how do I get that one right and so microstrategy offers people the ability to get that kind of intelligent leverage on a bitcoin strategy that you can't get just by buying a bitcoin.
You can see in my next column generate yield.
Micro strategy actively manages its business, we're an operating company and so we generate cash flow and.
Just like we were able to take $14 $4 million of organic cash flow in July and use it to buy bitcoin.
Yeah.
Our objective is to find ways to generate incremental bitcoin for our shareholders and do that with our with either cash flow from the business or or do it through intelligent accretive financings of equity or debt.
Or other other intelligent operations.
And of course, if you just buy the bitcoin you can't generate yield.
And we go to risk management.
The thing about risk management is micro strategy has a two different convertible bonds and senior secured bond and those are different ways that you can actually get back coin exposure without actually having direct linear upside downside and so.
Their risk management options and then of course micro strategy has a.
A set of options there.
The trade against our stock puts and calls in a pretty deep option tree and a lot of open interest and now as options and <unk>.
For the most part people that own the bitcoin itself. They don't have those risk management options to trade in the derivatives.
It's tricky to find that and you certainly can't I can't find it easily in the United States. It is true there are some bitcoin derivatives on the CME, but but the market is is not nearly so well developed.
As the market and and stock options for well understood NASDAQ traded software companies and so that's another advantage to our investors.
And of course, the last thing you want is you want for performance to attract the price and of course, yes, Bitcoin, obviously tracks the price of Bitcoin and micro strategy has been able to outperform the price of bitcoin, but generally at least perform at the at that level or better.
Now the question that people are next ask US is well how does microstrategy compare the bitcoin ETF.
Now and so you got to start with the futures ETF, while the futures ETF is available or they are available right now.
But as you can see they don't have an uncorrelated operating business attached to them for downside protection.
They can't use intelligent leverage they can't issue junk bonds or they can't issue convertible bonds in order to lever up intelligently and cheaply without a mark to market risk.
They don't generate yield in fact, they charge a fee.
And so your your.
Micro strategy, you know doesn't charge a fee to our investors to manage the $4.6 billion of bitcoin.
But you know at a at a 100 basis point fee.
$4.6 billion generates $46 million a year of cost and so the fees can be expensive and and our our goal was don't you don't charge the fei generate the yield.
And then of course, if you go to risk management. There. There are some some options that you can trade on the futures ETF, but you don't have you don't have nearly the depth of the derivatives market or open interest and you don't have all the convert so that they don't quite have that kind of risk management opportunity.
And then in terms of performance.
That's the challenge and the open secret in this industry right now is futures Etf's arent tracking bitcoin in fact, they are underperforming our bitcoin performance this year I think.
30% year to date.
So the future's Etf's have underperformed the bitcoin index, 30% year to date Bitcoin is up 76% as I'm speaking to you right now and these futures were up 44%.
So so that's a challenge if you're an institutional investor.
No one's going to want to underperform, the index by 10 or 15%.
The spotty T office is clearly in demand right and you can see the you can see why you would want a spot ETF, but they're not available yet if they're if they do become available then presumably there'll be able to track performance much better and they'll they'll still have the other challenges of a downside protection intelligent leverage.
And they won't generate yield no charge a fee.
And there on the horizon, but as you can see.
The spot Etf's when they come along they won't they won't offer the same kind of leverage yield at micro strategy offers are the other options that are interesting to institutional investors.
Grey scales very famous but it's an over the counter only instrument and fairly unique.
And of course, they're not they're not an operating company. So they can't actively manage the business to generate yield in ne.
They don't have a healthy open interest in derivatives and they can't take on leverage.
And that just leaves you bet coin miners the coin miners, giving your exposure there theyre just extremely highly levered exposure on the upside or downside because.
Because their revenues on the upside in our cost of all all of them are very very volatile and very highly levered.
So they are a way for institutions to get involved in the business, but they.
They don't have the same mixture of options that microstrategy has because we're an operating company.
So.
You can see when you look at this chart, how its possible for micro strategy to outperform bitcoin.
But I think you can also see by looking at the chart that micro strategies, a unique investment option for any institutional investor that once bitcoin exposure, that's that's different than.
Our spot Bitcoin ETF and so we are we expect that will be a differentiated investment option for bitcoin going forward.
When or if the spot Etf's are approved and I think generally if we look at the out outlook for bitcoin.
It's never been better and.
The environment is and is providing clarity that bitcoin as a global.
Asset that's and demand from institutions, all around the world and it's fully decentralized and so I think that the next 12 months will bring a good set of milestones for bitcoin adoption.
And one of them would be the spot ETF all approvals. If those are approved I think generally that will be good for the entire asset class in and Bitcoiners will benefit there.
There are a whole class of institutional investors that will need a spot E. T F to get involved with their coin in micro strategy wouldn't be the right option for them because they really just need to be able to buy an unlimited amount of bitcoin without <unk> without <unk>.
Worrying about not tracking that bitcoin pricing.
And with clarity and transparency.
So I think that are that will expand the pie I think all of these options generally expand the pie.
And micro strategy is going to continue to be thoughtful and responsible about managing our business in order to find ways to get incremental bitcoin for our investors.
And so thank you for your support I guess I'll pass the floor back to <unk> for questions now.
Great. Thank you Michael Yeah going to jump right into questions and the first question is for Michael.
How would a spot E. P. S impact your strategy of serving as a vehicle to gain exposure to bitcoin and how would an approval a rejection of our spot EDF impact micro strategy.
I think I think the big milestones for institutional adoption of bitcoin over the next year will be a one a fair value accounting to.
The spot ETF.
Three.
Having.
Or.
You know any particular regulatory regulatory rules that come out of Washington D. C. So we're waiting for all of those the spotty T. F isn't approval isn't necessary for us to continue to be successful I think in general there's a class of investors.
Say, a sovereign wealth fund if they want to buy a billion dollars of bitcoin and a week or billions of dollars of bitcoin and win 10 or 100 of them all want to do it they're going to need the spot etf's because micro strategy doesn't have the room in our capital structure, you know for someone to buy.
Much of our stock.
So I think that that.
The spot Etfs will expand the entire asset class dramatically it will be.
It will create a very convenient path for mass adoption of retail.
And mass adoption of institutional investors in mass adoption of sovereign Walt and alike and solves the I think Larry Fink made the point on CNBC. He said it'll drive the fees down by a factor of 10 to 100 like the trade the acquisition fees. It solves the problem of do I need to stop.
A new account with the crypto exchange or can I, just call up my existing banker banking relationship or my existing wealth manager and existing broker.
So it's going to smooth access to.
Too many many types of investors.
Going to democratize access it's going to allow size that now currently the market doesn't allow this kind of size because because.
The futures Etf's and the futures market is not is not an effective vehicle, it's not deep enough and broad enough to allow someone to take on many many billions of dollars of exposure without.
Paying a 10 or 20% annualized fee or more and no no rational investor is going to do that for any material amount of time, So I I think.
It'll be good I do believe at some point, we will have spotty Etfs I just can't tell you when they will arrive and when they do arrive a micro strategy will still be differentiated as a particular bitcoin operating strategy, but the spot atf's will serve another set of customers.
And a synergistic fashion to grow the entire asset class.
Okay.
Okay. Thanks, Mike I think you might be having some technical difficulties from Sharif. So I'll maybe ask the next question.
For Fang.
Fang.
How should we be thinking about the AI AI partnership with Microsoft.
And its monetization are you expecting any kind of incremental boost from that in 'twenty three or is it more of a 'twenty four growth driver.
Thanks, Andrew.
First I'm pretty excited about our AI type capabilities that we're bringing to market in Q3. So in September .
And part of the capabilities will include a new product or a new SKU, if you will that.
That will sell separately from our existing platform and sort of on top of that so I do.
Space and incremental revenue you know whether it comes in Q4, whether it comes in 2024, I think time will tell as to how quickly the markets willing to adopt and pay for AI capabilities I do think Theres a couple of things that we're doing that's pretty unique from the rest of the beer market. If you will one is.
We're directly embedding open AI into the Microstrategy platform, which means you do not need to go and have a separate Microsoft agreement or a separate open AI agreement it will be fully embedded.
In the Microstrategy platform and second as you mentioned, we're going to the market and partnering directly with Microsoft which are there are a lot of companies who are trying to build their own AI capabilities or use a different platform. That's in theory at this point in time to open AI. So I think what we're gonna rollout is quite <unk>.
<unk> and I am excited about the revenue opportunity that O'brien.
Thanks, Paul next question is for Andrew.
Yeah.
We are projecting the company to improve its cash position and 2023 and beyond.
Bearing in mind, the company strategy to purchase bitcoins with excess cash above working capital needs is there a minimum cash balance that the company.
Targets and what is a reasonable number to anchor to.
I'd say just to comment on kind of our Treasury reserve policy or how we think about cash.
Our goal is to always be as efficient as possible with our cash and then really minimize any excess cash in the business.
Since we operate globally, we ensure we maintain adequate clash cash in each region and country.
We operate in and we manage our cash in the U S primarily to take into account mean working capital needs as well as our debt interest payments.
Needs as well.
I would say.
Probably anywhere between $40 million based on the calendar to may be as high as $50 million.
Probably has a little bit high but.
I think about those ranges being kind of where are we what do we think our working capital needs are that being said, sometimes you'll see cash balances that are slightly higher as we build towards working capital needs.
Times Youll see them lower when we were operating efficiently as possible. So.
Hopefully that answers the question.
Thanks, Andrew.
So thanks, everyone for your questions received a lot of good questions.
We are at the top of our time for today.
So we will be available offline for any other questions.
This concludes the Q&A portion of the webinar and I will now turn the call over to phone for final closing remarks.
Here on the phone.
Thanks, Krish and I want to thank everyone for being with US today and we appreciate your support where in theory as enthusiastic as ever with both of our strategies are enterprise software strategy and our bitcoin strategy and we wish everyone a good quarter.
<unk> a good rest of your summer and look forward to seeing you again in 12 weeks. Thank you.
They are recording has stopped.