Title

Presentation

MicroStrategy Incorporated beats earnings expectations. Reported EPS is $30.59, expectations were $-1.28.

Shirish Jajodia: Hello, everyone, and good evening. I’m Shirish Jajodia, Vice President of Investor Relations and Treasury at MicroStrategy. I will be your moderator for MicroStrategy’s 2023 First Quarter Earnings Webinar. Before we proceed, I will read the Safe Harbor statement. Some of the information we provide during today’s call regarding our future expectations .

Phong Le: Thank you, Shirish. Hello, everyone. I’d like to welcome you all to our 2023 first quarter earnings call. We’re excited to be reporting live for MicroStrategy World 2023 in Orlando, Florida. We’ve had a successful day one of the event today, and we’re excited to see our customers, partners and employees all in person for the first time since 2020 and share our passion for BI, bitcoin and innovation. The business intelligence track tomorrow will feature MicroStrategy One and features keynotes, including how we are integrating augmented analytics, artificial intelligence to drive innovative experiences. We’ll also showcase how some of the world’s best brands use MicroStrategy to break through and achieve extraordinary results.

This includes keynote presentations from Hilton, Sony and Amica Insurance. The Bitcoin for Corporations track on Wednesday and Lightning for Corporations track on Thursday will feature keynotes from notable institutions and industry luminaries highlighting the advantages of integrating Bitcoin and Lightning as a part of their corporate treasury and product offerings. It will be a unique gathering of corporations looking to adopt Bitcoin and Lightning strategies, and we are very excited to host this event. The conference also includes workshops, training, dedicated networking opportunities and some fun too. For those of you attending the conference in Orlando, we look forward to seeing you in person. Turning to our business results for Q1. We continue to see strong demand for MicroStrategy software, both on-premise and in the cloud with total revenue growing despite a continuing challenging macroeconomic environment.

Total revenue was $121.9 million, representing an increase of 2% year-over-year or 6% on a constant currency basis. Total software licenses revenues, which consists of total product licenses and subscription services revenue and our consolidated statement of operations were $36.2 million, representing an increase of 23% year-over-year or 29% on a constant currency basis. Total subscription services revenue was $18.8 million, an increase of 46% year-over-year or 52% on a constant currency basis. Our Q1 subscription billings growth was 19% year-over-year, lower than our 2022 annualized subscription billings growth of 39%. We had a good overall revenue results in Q1 2023 and the durability of our enterprise BI platform and the depth of our existing customer base are a testament to our resiliency.

However, it’s important to note that difficult macro conditions continue to persist and they impact our revenue in the coming quarters. In addition to the revenue results, we also had a successful quarter with our Bitcoin strategy. We acquired 7,500 Bitcoin in Q1, the most in a single quarter since the fourth quarter of 2021 for a net aggregate purchase amount of $179 million or $23,900 per Bitcoin. As of March 31, 2023, we held a total of 140,000 Bitcoins at an aggregate cost of $4.2 billion or average cost of approximately $29,800 per Bitcoin. As you all know, our strategy is to acquire and hold Bitcoin and we plan to continue to accumulate Bitcoin over time using our excess cash and with the net proceeds of capital markets transactions. Our core business is not impacted by near-term bitcoin price fluctuations.

MicroStrategy is the largest publicly traded corporate holder of Bitcoin in the world, and we remain committed to our Bitcoin acquisition strategy with a high degree of conviction, long-term focus in a risk-managed approach. To conclude our business highlights, I’d like to highlight that in Q1, we repaid our $205 million Bitcoin back loan at a 22% discount. With this transaction, we recognized a $45 million gain on extinguishment of debt and eliminated annualized interest costs of more than $15 million per year. It has also released 34,619 Bitcoins that serve as collateral for this loan and which are now unencumbered. As of March 31, 2023, only 11% of our total Bitcoin holdings are pledged as collateral for debt. Next, I would like you to introduce you to MicroStrategy One.

Eight years and over 2.5 million hours of engineering have resulted in MicroStrategy One, a modern, open cloud-native BI platform that can serve all the analytics needs of large enterprises. MicroStrategy One is highlighted by a modern product suite, including dossier, library, workstation and Hyperintelligence. It is fully open, built on restful APIs and Python. And because we are an independent analytics company, work seamlessly with any data sources and clients. Similarly, our cloud platform works on AWS, Microsoft Azure and soon the Google Cloud platform, supporting multi-cloud deployments through a container-based architecture. Finally, MicroStrategy One serves all major categories of analytics, self-service, business reporting, advanced applications and embedded analytics.

We’re the only analytics software company with this combination of capabilities which enable enterprises to get value from their customers. We’re extremely proud of the work done to build MicroStrategy One and will actively migrate this innovative platform. The platform is intended to be a one-stop shop for all of our business intelligence customers and prospects. The next-generation platform is built to unleash new levels of efficiency and creativity for users. Organizations are looking to consolidate vendors to save costs, simplify deployment and maximize impact. That’s where we stand out and the ability to provide a comprehensive solution. We enable migration off legacy out-of-support analytics tools and also provide a modern experience that offers enterprise great security and scalability, a reusable object model and open architecture to avoid vendor lock-in.

Now while the one platform is a powerhouse that delivers on all core competencies of modern analytics, it’s also a new way of talking about what MicroStrategy can do and how we can compete. MicroStrategy One is our most advanced platform to-date, it’s a result of the immense dedication of the MicroStrategy teams that got us to this point, and it’s the foundation for all of our future innovation. With the completion of the MicroStrategy One platform and focus on rebuilding much of our platform in the last eight years, we’re now able to increasingly focus on MicroStrategy’s hallmark product innovation. Our innovation is focused on four areas: one, core analytics; two, augmented analytics; three, artificial intelligence; and four, Lightning network.

On the innovation side, MicroStrategy’s core differentiators that position us to lead the next innovation age of analytics in a modern and open business world, our semantic graph with object reusability, enterprise-grade security and scalability, open architecture multi-cloud. We believe the future of core analytics is going to center on three key themes: empowered self-service, productivity and data personalization. One area we’ve heard about a great deal from our customers to self-service. Self-service is long overdue for disruption. The notion that business users have interest, let alone time to learn that offering interface is a non-starter. End users typically have no concept of your data structures and sources on your schema, providing end users with basic authoring tools may result in nonperforming dashboards and inaccurate data combinations.

The shift away from single-use analysis results in true self-service through reusable content. Governed authoring is a new way, authoring experience a library that allows business users to build their own dossiers by using predefined assets in a vastly simplified experience while removing the complexities of data important blending. Our AI engine will suggest additional visualizations that may be useful to relevant or relevant to users based on ones they’ve already selected or based on topics they are researching. It will also ensure that the assets they are combining and their design are compatible and performing. Next is innovation on augmented analytics. MicroStrategy Insights released in September 2022 was our first set of products released in the area of artificial intelligence and machine learning to augment more traditional reporting capabilities and provide contextual and immediate insights.

Now integrated with MicroStrategy One, the insights feature accelerates decision-making and 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 action. This is the basis on which we are combining MicroStrategy semantic layer, Hyperintelligence and open architecture to provide data tracking alerts, forecasting and recommendations. We believe this is something MicroStrategy is uniquely positioned to provide, and we expect to release more functionality in this area every quarter. Next is further innovation and generative artificial intelligence.

MicroStrategy with our semantic graph, including our metadata and platform analytics is well positioned to leverage AI-driven technologies like chat bots to drive productivity across all of personas. How AI is leveraged to integrate in organizations will become the business differentiator. Generative AI can use the semantic layer to better understand the data and its relationships, resulting in more accurate predictions, better data quality and faster actionable insights. On the Bitcoin innovation side, MicroStrategy Lightning is the new product we are developing, which utilizes the Lightning network, a second layer network. This is a top the Bitcoin network. We envision MicroStrategy Lightning as an enterprise platform designed to leverage the power of the Bitcoin Lightning network to enable new e-commerce use cases and tackle modern cybersecurity challenges.

The first use case in the MicroStrategy Lightning platform is Lightning rewards. Lightning Rewards is intended to allow any enterprise to reward their employees, customers, partners and prospects for their engagement. Companies spend vast amounts of time and energy and digital marketing, driving engagement with their brand and their customers and for some monetizing online content. We believe a platform like MicroStrategy Lightning to enable them to drive that engagement rewarding their customers with that engagement directly rather than aligning the pockets of marketing or financial intermediaries. We expect future capabilities as the Lightning platform will provide opportunities for new business models to monetize online content or minimize threats in the uses of bots and other malicious actors.

While we envision MicroStrategy Lightning as an independent product offering, it builds on our core strength and deep experience, building highly available, easy-to-use software delivered in the cloud. As mentioned in the last earnings call, we’re taking a very disciplined investment approach such that our lighting development efforts currently occupy less than 1% of our R&D capability. While our core focus remains on BI innovation, we believe we are uniquely positioned to bring value here. We will talk about MicroStrategy Lightning further in our Lighting for Corporations event on Thursday. These incremental areas of product focused and inhibition will drive MicroStrategy’s strategy of being at the forefront of analytics. I cannot be more excited about our product road map, which we will share more about tomorrow and MicroStrategy World.

Last but not least, I want to take a moment to recognize our former Chief Technology Officer, Tim Lang, who retired after 8.5 years from the position of CTO with MicroStrategy. It’s been my privilege to work with him over the past seven years, and we wish him the best. With Tim’s departure, we’ll be splitting his former responsibilities as CTO and to do two distinct organizations within our technology team. Product and engineering, both of which I will oversee. Leading our engineering organization will be Cezary Raczko, our Executive Vice President of Engineering. Cezary has been with MicroStrategy for 24 years, starting as a software engineer and growing to lead teams that have built much of our platform. I’m excited for Cezary to step into this leadership role and focus more and more on customer satisfaction as well as product innovation.

I’ll now turn the call over to Andrew to discuss our financials for the quarter in further detail.

Andrew Kang: Thank you, Phong. It’s great to be my first MicroStrategy world. There’s a ton of energy and buzz here, and I’m definitely looking forward to meeting many of our customers as well as those interested in learning more about Bitcoin for Corporations. But let me get to our financial results. Our first quarter enterprise analytics business results were strong, showing total year-over-year revenue growth. This was in light of persisting macroeconomic headwinds, as Phong mentioned earlier, which reflects our deep customer base and the durability of our platform during economic volatility. GAAP total revenues for the quarter were $121.9 million, up $2.6 million or 2% year-over-year and up 6% year-over-year at constant currency.

Total software license revenues, which made up — make up product license revenues and subscription services revenues were $36.2 million, up 23% year-over-year and up 29% at constant currency, outperforming last year’s Q1 year-over-year results. Subscription services revenues, which reflect recurring revenues from our cloud business were $18.8 million, an increase of 46% year-over-year or an increase of 52% at constant currency. Product licenses revenues were $17.4 million for the quarter, up 5% year-over-year, which reflected strong performance in our international business. Product support revenues were $65.5 million, down $1.7 million year-over-year, but were flat at constant currency. Renewal rates have remained high at over 90% in Q1, and for the last six consecutive quarters.

Finally, other services revenues were $20.2 million, an increase of 11 — sorry, 11% decrease year-over-year or a decrease of 8% at constant currency, primarily due to a decrease in our consulting revenues. On Slide 15, total current software license billings were $28.7 million in the first quarter, a slight increase of 2% year-over-year. Current subscription billings were $13.7 million, an increase of 19% year-over-year, our 12th straight quarter of double-digit growth. We continue to focus our efforts on transitioning customers to our cloud solution which includes converting existing on-premise customers and selling incremental cloud licenses. Incremental licenses will continue to come from new deployments by existing customers as well as new licenses purchased by customer prospects.

We are also increasing our focus on partnerships with hyperscalers that will drive incremental cloud license opportunities in the future. In 2022, approximately 2/3 of our total revenue was recurring, and we expect this trend to improve in 2023. The transition to a subscription model will help establish high-quality annual recurring revenues that will allow us to scale and continue growing our business. Turning to Slide 16. Total non-GAAP expenses, which shown here excludes share-based compensation costs were $125 million in the first quarter compared to $275 million in the first quarter of 2022. Our total non-GAAP costs this quarter were significantly lower compared to the same quarter last year, primarily due to higher Bitcoin impairment charges in Q1 of 2022.

For this quarter, Bitcoin impairment charges were $19 million, in contrast to $170 million in Q1 of last year. Non-GAAP cost of revenues was $27 million in the first quarter, an increase of $2.2 million or 9% year-over-year. As a percentage of total revenues, however, non-GAAP cost of revenues increased approximately 1% year-over-year, primarily due to the increase in cloud hosting costs, which is a result of the increased usage by new and existing cloud subscription services partially offset by favorable currency exchange impacts. Non-GAAP sales and marketing expenses increased $2 million or 7% year-over-year to $31 million. As a percentage of total revenues, non-GAAP sales and marketing costs were higher by 1% year-over-year. You may recall that in Q1 of 2022, we capitalized certain commissions, which resulted in lower variable compensation costs last year.

That being said, we are closely managing our headcount and salary costs, and we also revamped our sales commissions plan this year, which may shift cost to later in the year based on meeting and beating sales targets. Non-GAAP research and development expenses were $27 million, a decrease of $2.8 million or 9% year-over-year. The cost savings we are realizing now represent the benefits in investing in lower cost global delivery centers last year, such as in India, Poland, Argentina and China. And through those strategic initiatives, we are now able to further optimize spend without sacrificing on technology, talent or product development. Non-GAAP G&A costs were $20 million, a modest decrease of $500,000 or 2% year-over-year. On Slide 17, total non-GAAP operating loss in the first quarter of 2023 was $3 million, of which the loss on the digital asset impairment charge was $19 million for the quarter.

The digital asset impairment charge continues to be the primary impact driver when reporting our operating results. I have highlighted in the past that today GAAP accounting policy treats our Bitcoin holdings as indefinite-lived intangible assets, which results in continuing — and results is now continuing to recognize impairments each quarter, if there is any decrease in the fair value at any point during the quarter below our carrying value. Late last year, the Financial Accounting Standards Board, or FASB, unanimously voted to recommend the adoption of fair value accounting for measuring certain digital assets, which includes Bitcoin. We have only recognized impairments regardless of whether the price of Bitcoin increases as it did in Q1.

However, a fair value accounting is finalized and we are able to recognize both decreases and increases in the fair market value of Bitcoin, we believe our reported earnings will be far more transparent to investors and far more relevant in how we report changes in the market price of Bitcoin and its impact on our reported quarterly results. As of March 31, 2023, the carrying value of our Bitcoin holdings was approximately $2 billion compared to approximately $4 billion in the market value of our holdings based on the Bitcoin price of approximately 28,500 as of the last day of Q1. As Bitcoin prices have continued to rally this year, as of market close on Friday, April 28, the market value of our 140,000 Bitcoins has increased to approximately $4.1 billion.

That is a difference of $2.1 billion between the carrying value of our total Bitcoin holdings and the fair market value of our holdings, which could be recognized under a fair value model. On March 23, the FASB issued an exposure draft for comments that would cause an in-scope digital — that would cause in-scope digital assets, which includes Bitcoin to be measured at fair value. The deadline for comment on the exposure draft runs through June 6. MicroStrategy is fully supportive of the newly proposed rules and improved investor transparency it brings. We plan to provide a response to FASB during the comment period, and we encourage others to voice their support as well. As the largest publicly traded corporate holder of Bitcoin, we believe we have a responsibility to share what we have learned since embarking on our Bitcoin strategy to make it easier for other companies to diversify their balance sheet with this important and innovative asset class.

We remain committed as we have in the past to supporting these efforts and supporting other companies with a playbook and shared experiences to leverage Bitcoin as a treasury asset and to continue and support its adoption as a store of value for corporate balance sheets. Turning to Slide 19. In Q1, we repaid the $205 million Bitcoin backed loan at a 22% discount, recognizing a $45 million gain on the extinguishment of that debt. In addition to reducing the Company’s leverage, we eliminated our highest interest rate debt, which had floated up to an annualized rate of 8.26% just prior to repayment due to the rapidly rising interest rate environment last year. By retiring the debt, we also released all of the bitcoins that were pledged as collateral securing the loan.

This was an important and strategic transaction for us and our liability management goals. We now have a total of $2.2 billion of outstanding debt in convertible instruments with a blended, weighted interest rate of approximately 1.6%. This is compared to the prior blended weighted interest rate of 2.1% as of the end of 2022. The convertible senior notes carry a very low cost of capital with the earliest debt maturity not until December 2025. These notes are the most attractive in terms of cost and with over two years remaining until the earliest maturity, our outstanding long-term capital continues to be valuable and accretive to our shareholders. Lastly, our now fully fixed great annualized interest expense is $35.5 million compared to over $50 million of annualized expense prior to the end of Q1.

This strengthens our overall liquidity position. As of the end of the first quarter, we had $94 million in cash on our balance sheet and our overall liquidity remains robust in order to manage our ongoing working capital needs as well as our debt service expense. Also in Q1, we continued to execute on our at-the-market or ATM equity offering and raised approximately $339 million in net proceeds through the sale of Class A common shares. We issued an aggregate of approximately 1.35 million shares of Class A common stock at an average gross price per share of $252.85. Since then, we terminated the prior $500 million ATM program, of which approximately $112 million of capacity remained. And today, we announced a new $625 million ATM program. As with the prior program, we may use the proceeds for general corporate purposes, which include the purchase of Bitcoin or for debt repayment or redemption.

We will continue to opportunistically raise capital and use those proceeds in a way that we believe will be the most accretive to our shareholders. No shares have been issued under this new program to date. Our asset liability management efforts have pushed our earliest debt maturity from Q1 2025 to December of 2025, with no debt maturities coming due in the next two-plus years giving us more flexibility in managing our liabilities with additional time to navigate the challenges in the macroeconomic environment as well as the price fluctuality in the Bitcoin markets. In Q1, we increased our net Bitcoin position by 7,500 Bitcoins. And as of March 31, 2023, we now hold a total of 140,000 bitcoins on our balance sheet. Of our total Bitcoin holdings, 14,890 Bitcoins are held by MicroStrategy the parent and are pledged as collateral securing our 2028 secured notes.

The remaining 125,110 Bitcoins are held at the MicroStrategy subsidiary, all of which now are fully unpledged and unencumbered. At the end of the quarter, 89% of our total Bitcoin holdings were unencumbered compared to 63% at the end of 2022. It’s worth mentioning again and reinforcing that we only buy Bitcoin in U.S.-based markets. We only custody Bitcoin with institutional grade, U.S.-based regulated custodians in cold storage, and we have never lent out our big coin. Since the adoption of our Bitcoin acquisition strategy, we have taken a simple approach to buy and hold Bitcoin. We continue — we conduct throughout due diligence on all of our custodians and execution partners and we take steps along the way to minimize risk and ensure the highest level of compliance.

We only buy Bitcoin in U.S.-based markets. Turning to Slide 22. Our outlook for 2023 remains optimistic but with a cautious eye. We anticipate modest total revenue growth this year. We expect to continue to grow cloud subscriptions as a percentage of total revenue and strengthen the quality of our recurring revenue as we continue to transform our platform. We remain disciplined on costs while investing in growth, and we will continue to execute our dual strategy of growing our business intelligence software business and acquiring Bitcoin for the future. As Phong mentioned, difficult macro conditions continue to persist, which may impact our results this year. However, we are extremely encouraged that even in this environment, an environment of constant change, MicroStrategy continues to serve its customers with an agile one-stop analytics platform with open architecture and modern cloud capabilities.

Thank you for your time today and for your continued support of MicroStrategy. I’ll now turn the call over to Michael for his remarks.

Michael Saylor: Thank you, Andrew. I would like to start with one quick review of our Bitcoin strategy. As you know, in the third quarter and the second — the third quarter of 2020, we embarked on a strategy and an analysis to determine what we thought would be the best treasury reserve asset. And we adopted a Bitcoin strategy at that point. And we adopted Bitcoin because we thought of it as digital gold, but without any of the liabilities or imperfections of gold, and with all of the more compelling characteristics of a dominant big tech network. So we kind of — we were looking for a Google or Facebook or Apple of digital gold. And we looked at all possibilities we considered investing in bonds, we consider silver, and we considered gold, and we considered if we could invest in big tech and we consider that we could invest in real estate or collectibles.

And our conclusion at that point was that the fundamentals of Bitcoin were superior to all these other asset classes. If we wanted a non-sovereign store of value asset, then that was provably scarce that would scale as technology improved that would serve as a hedge against monetary expansion, then Bitcoin was the best choice. So you can see on this chart, the result I think I make the first point, I’m proud to say Bitcoin is the winner. Bitcoin has outperformed all the competing assets over this time period. It has outperformed all of the big tech stocks. It has outperformed all of the major enterprise software stocks. And again, I think the reason why it is a dominant digital network, and there is no dilution. It is never going to be more than 21 million Bitcoin and as the world gets educated and as they become more aware of the than Bitcoin is accreting.

And you can see this is some 32 months ago and in 32 months, Bitcoin has accreted 143%. I’m happy to announce to our shareholders that MicroStrategy stock has outperformed Bitcoin. We actually started the day after August 10, with about 25% of our capital structure exposed to Bitcoin, but we have managed through a succession of disciplined and accretive capital market activities in Bitcoin investments to get full Bitcoin exposure and actually outperform the underlying Bitcoin. And so, I would attribute our performance to disciplined execution and focus both in the enterprise software business, where we’ve been very focused on disciplined execution and also in our Bitcoin strategy, where we’ve picked the right strategy, I believe, but we have also been very disciplined in our use of debt and equity and when we buy Bitcoin and how we cut it in, we manage Bitcoin.

So ultimately, it’s not easy to see what better strategy there might be. And so we are strong proponents of a Bitcoin strategy. And as you can see from this chart, simply acquiring and holding Bitcoin in a prudent fashion is a pretty good way to outperform the market. And we don’t feel that we need to pursue other types of risk, certainly rehypothication in lending out your assets or chasing after yield constitutes additional risk and many in the crypto industry have suffered by pursuing that yield or taking those risks. We found it simply by acquiring and holding Bitcoin, we could outperform our peers and the enterprise software business. And we could even perform in a superior fashion versus big tech monopolies like Apple or Google or Microsoft.

So with that, I thought I’d just share a few comments on Bitcoin in general. I would say, we’re pleased with our strategy. The retirement of the Silvergate loan dramatically improved our balance sheet. Our cash position has improved. We’ll continue to pursue balance sheet opportunities and financial opportunities as long as we deem them to be accretive. With regard to Bitcoin, we see Bitcoin adoption continues. The regulatory environment for Bitcoin is improving. This is not the case for the entire crypto industry, but as capital flows out of the crypto industry, it is flowing into Bitcoin. So as investors exit cryptocurrencies like the stable coins, we expect they are and they will continue to convert and invest that capital into Bitcoin. And as investors exit cryptosecurities like the crypto tokens, the other crypto asset securities that are currently they are currently under the microscope in the regulatory environment.

We believe that, that capital will flow into Bitcoin. So, all of the regulatory changes in the crypto industry right now are really creating a tailwind for Bitcoin. Markets are being educated about the benefits of Bitcoin via — or due to the banking crisis right now. And so although the banking prices and uncertainty isn’t good for banks in general, it has resulted in a lot more awareness of Bitcoin’s value proposition as a non-sovereign store value asset and a better instrument without counterparty risk and without the need to trust an intermediary. So Bitcoin is getting a tailwind from banking crisis. It’s getting a tailwind from the crypto crisis. And the network continues to strengthen. Network security at Bitcoin is at an all-time high.

Bitcoin in essence, is secured by digital power, and you can measure that power in terms of exahash and the Bitcoin network trailing exahash rate is about 346 exahash. This is the all-time high. And this is — this indicates that despite the crypto winter and despite all of the regulatory uncertainty and all of the travails of the crypto market in general, Bitcoin continues to strengthen and network security and the security capital invested in the network has never been higher. It turns out that the demand for transactions on the Bitcoin network continues to accrete as well. Transactions in the past 30 days are nearing $11 million, and this is also an all-time high. So did demand for creating transactions on the Bitcoin network has never been greater.

The result of that demand for transaction bandwidth is driving up transaction fees. We view this as a good thing. Transaction fees are beneficial to Bitcoin miners, and over time, as block rewards decreased, the transaction fee revenue streams are going to increase. And as they increase, they create a very fertile and a very healthy environment for miners to secure the network. There is — there are two trends. There is a strong trend of capital flowing from the crypto industry, cryptocurrencies, cryptosecurities and crypto exchanges, into Bitcoin, the Bitcoin network and the Bitcoin asset class. And I think that, that is certainly one of the drivers of the rally in Bitcoin over the past few months. The second major trend is a flow of development efforts from the crypto community onto the Bitcoin network and lots of developers interested in smart contracts, interested in NFTs, interested in other sorts of crypto applications, cryptosecurity, crypto functionality in general, they have started to focus upon developing on top of the Bitcoin protocol and some — and there are a number of different ways they’re doing it, but they’re creating a layer two protocols and probably the most famous of those layer two protocols is the Lightning protocol.

And Lightning itself is emerging as an open permissionless secure transaction protocol for the world. And of course, Lightning is based upon the underlying Bitcoin blockchain, and Lightning allows potentially unlimited scaling of Bitcoin such that you can send micro transactions of $0.01, almost instantly for a fraction of a penny. And because Lightning enables micro transactions and it enables very, very speedy transactions and it enables scalable transactions, Lightning itself is the basis for all types of applications. And holds out the promise of supporting billions of users and billions of transactions a day and allowing hundreds of thousands or millions of companies, applications and websites to interoperate, and this is something that’s really, really important.

We, as a company, are very enthusiastic about Lightning as technologists. And so this week, we’re hosting a Bitcoin and Lightning for Corporation’s conference. Turnout is really compelling. We’re excited to see all of the various companies showing up and also the various Lighting application providers, Lightning wallet providers, Lightning service providers showing up to the conference with very, very interesting offerings. Lightning itself is an ecosystem and you could think of it as money over IP. But I think over time, it will be more compelling than that. It really is an open permissionless secure transaction protocol. And if you wish to integrate Apple’s blue checks, with Facebook blue checks, with Twitter’s blue checks, with Google’s verified checks, you need an open protocol, and you need a secure protocol.

And right now, there has not been one in the absence of Lighting and lighting is emerging as that protocol for any tech company to integrate value exchange, authentication, exchange, and secure transactions. So, we’re really excited about the opportunity for us in the space with our MicroStrategy Lightning offering. And we’re going to continue to explore that opportunity in a disciplined and thoughtful fashion, but we also expect there’ll be hundreds and then thousands and then tens of thousands of other applications that are tapping into the Lightning protocol. And each of those applications creates demand to open and close lightning channels, it creates functionality and value. It creates demand for the underlying bitcoin. And if you combine that with the other bitcoin-related applications that are beginning to grow at a faster rate right now, we see this as being very auspicious for demand for Bitcoin as the asset demand for Satoshis as the gas to run the network.

And it’s very auspicious for support of the network. It’s going to draw technology VC. It’s drawing big tech and technology companies. It’s drawing mainstream financial companies to take an interest in the space. Mainstream energy companies are taking a greater interest in the space as well as Bitcoin mining becomes more commercial and better understood. And as the regulatory environment clarifies and as a large portion of the crypto industry moves offshore, there is less confusion in the market, and this is beneficial to Bitcoin, Bitcoin is the primary winner of this regulatory clarity because at this point, people that weren’t quite — they don’t quite understand the difference between all these cryptos are starting to see that Bitcoin is the commodity and Bitcoin is the true decentralized asset without an issuer.

And from that follows an awareness of Bitcoin as being the superior commodity because it is a scarcity. It is absolutely capped. And when you combine the observation that Bitcoin is the commodity and the Bitcoin is superior to all other commodities because it is a scarcity and then you layer on to that, the Bitcoin layer two open protocols like Lightning. And then you layer on to that, the layer three applications that utilize Lightning like MicroStrategy Lightning like Cash App like the various exchanges that actually support Lightning. At that point, I think that you see that the coin has emerged as a mainstream macroeconomic asset for macro traders, but it’s also emerged as an exciting new technology opportunity for technology investors.

And it is both a treasury strategy for corporations. It is also a technology strategy to create compelling and exciting new products and services to differentiate a company from its competitors. And so as you can see, we’re very optimistic about the outlook for Bitcoin, and we’re looking forward to the coming year. We think it’s going to be a good one. With that, I think we can go ahead and take questions and answers.

Phong Le: Thanks, Shirish. I think as everyone saw, our cloud revenue results continue to progress in a pretty good direction with growth nearing 50% on a year-over-year basis. As far as our product evolution, big highlights this year, we’ve launched on AWS and on Azure. Second half of last year, we launched our FedRAMP cloud, which we actually brought on our first customer this quarter in Q1. And later in this year, we plan to also offer Google Cloud Platform in MicroStrategy Cloud Enterprise too. And obviously, we’re doing a lot on the automation side. We’re continuing to work on micro services and our container-based strategy. But it’s a big area of continued innovation. And obviously, our multi-cloud strategy is very attractive to large enterprises.

Looking forward to continued growth, we had a little bit of a slowdown in cloud billings, 19% year-over-year growth in Q1. I think that speaks a little bit to the macroeconomic environment and a little bit of a slowdown in some deals. But I do anticipate cloud is going to be a big driver of growth going forward. And you probably see the positive impact it’s having on our revenue already.

Shirish Jajodia: Great. Thank you, Phong. Next question is for Michael. In light of the recent events and the broader crypto market, what do you think are the key catalysts for more adoption of Bitcoin by institutions? And how does the recent volatility in the banking markets intersect with potential Bitcoin adoption?

Michael Saylor: I think that the FASB fair accounting determination will be an important catalyst I think there are a lot of very conservative corporations that will be reluctant to put material amounts of Bitcoin on their balance sheet as long as they have the current indefinite intangible treatment. So, I think fair value is important milestone. I think that when there is — when there is a national security exchange, a regulated national securities exchange trading Bitcoin, I think that will be a big milestone. So when the uncertainty lifts around crypto exchanges in the U.S., I think when we get more clarity on stable coin usage from regulators, I think that will be a big milestone. I expect that will probably drive a lot of Bitcoin adoption.

I think that with regard to the banking environment, all of the uncertainty in the banking environment is driving awareness of Bitcoin’s value proposition. And there’s a set of mainstream investors that have not really understood Bitcoin or they haven’t understood what Bitcoin was good for until now. And it’s beginning to — it’s very clear that it’s resonating with lots of mainstream investors that Bitcoin is a bank in cyberspace, that offers an alternative to those that don’t have a bank they can trust. And there’s — most American investors haven’t really been focused upon the problem of unreliable currency and an unreliable bank because they’ve always had reliable banks and a reliable currency. But of course, everywhere in South America, everywhere in Africa, most places in Asia, the population doesn’t have a reliable currency and it doesn’t have a reliable bank.

They can’t buy dollars even if they wanted to buy dollars. And if they did buy dollars, if they have to buy them from a bank and the bank is under the control of a government, when the government gets in trouble, they freeze all the dollars in the bank. They convert the dollars back into local currency. They devalue the local currency. And so, the plight of investors in Lebanon or Syria or in Argentina or whatever has been not on the radar of mainstream investors. But of course, with the failure of First Republic and Silicon Valley Bank and other banks, it’s now on the radar of Wall Street. And I think the Wall Street is now realizing that if they’re insecure about their money in a U.S. bank, then maybe they empathize more with the end securities of foreigners with their money in foreign banks and foreign currencies.

So all of these things are driving awareness and awareness drives adoption. Because as soon as a mainstream investor acknowledges that Bitcoin is an asset class, a legitimate asset class, then they’re already underexposed. All we need to do in order to be successful is simply to get a mainstream investor to acknowledge that Bitcoin is an asset, whether it’s a correlated asset, an uncorrelated asset or not, doesn’t really even matter. It doesn’t matter if they’re long or short. If they view it as a legitimate asset class, they’re underexposed. And the combination of all these developments in the crypto market and regulatory advances as well as all of the struggles of the banking sector have an impact of educating people on Bitcoins, differentiating and unique characteristics.

Shirish Jajodia: Thank you, Michael. The next question is for Andrew. Can you explain the significantly large swing in the GAAP earnings? It looks like there was a tax impact this quarter as it relates to Bitcoin. Can you please clarify how that all works?

Andrew Kang: Shirish. You should give me the fun one, I guess. Sure. The general accounting and tax concepts is as we’ve seen are not very easily understood as it exists today, which is why we welcome some of the anticipated changes in the accounting rules that Michael just mentioned. That being said, I’ll try and walk you through some high-level math. We had a deferred tax asset on 3/31, which was $653 million, and it is mostly based on the tax effect of a cumulative impairments that we’ve taken on our Bitcoin holdings over time. If you recall, at the end of last year, we recognized a large valuation of allowance, which was about $500 million because the coin prices were at the lows of about $16,500 at the time versus a cost basis of just over $30,000.

Fast forward to 3/31, as Bitcoin price increased to about $28,500 we released about $456 million of that valuation we took at the end of last year, which in turn drove the large tax benefit line item in our Q1 income statement. I mean, look, we saw Bitcoin prices decline last year. We are on the receiving end of a lot of focus on reported losses we took. We now see the coin price drive higher. I think this is an example of the reversal of those hits. We took last year and a benefit as we see prices continue to improve. Hopefully, we’ll get the similar recognition for these types of improvements as we did when Bitcoin price was trending downward. Hopefully, that helps.

Shirish Jajodia: Thanks, Andrew. Next question is for Phong. So Phong, lots of great commentary in the presentation today on the innovation side, can you please provide some guidance on if there’s any expectation around when the new areas of innovation start to contribute to the revenues?

Phong Le: Yes. I think it would be premature to anticipate any direct revenue attribution for our innovations. We’re doing a lot in the core BI side. We’re doing a lot on augmented analytics. We’re doing a lot on artificial intelligence and Lightning those are sort of the four big areas beyond sort of what we’ve been working on in the cloud. As we release these products to market and experience the uptake and solidify how we’re going to price them, we’ll figure out more, but I think it’s a little early right now to attribute any of the innovation directly to revenue. But in the next 6 to 12 months, we’ll be able to answer that question better.

Shirish Jajodia: Great. Next one is for Phong as well. If it has been different or difficult to sell expansion deals in the current macro environment as tech companies change their head counts.

Phong Le: Yes. I think it’s hard to say exactly what’s happening from a macroeconomic side. But I would say, if you look at our financials, there’s a couple of indicators. One is we’re seeing our services revenue slow down a little bit and that’s usually an indication of financial belt tightening by IT groups and companies in general, especially in technology focused companies. And the second is we did see a little bit of a slowdown in cloud growth. Now I think that’s probably more seasonal and potentially not going to continue, but it did indicate delayed sales cycles, some belt tightening of budgets. So, how the rest of the year will go is hard to anticipate. But I do think at this point in time, as Andrew said, it’s to be cautious, good to be prudent overall.

Shirish Jajodia: Thanks, Phong. And we’ll take one last question here for Andrew. So as a follow-up to the change in the accounting rules you mentioned, can you please provide any thoughts on the impact of FASB’s decision and whether you have an expected time line for the rule implementation?

Andrew Kang: Sure. Thanks, Shirish. As I mentioned on the call, we believe the rule will — changing the fair value is the right change. We support the draft that the FASB has put out. I think it provides the better transparency that we’ve been advocating for since we took on our Bitcoin strategy, and we think it will open the door to more people thinking about Bitcoin on their balance sheet. As for timing, I certainly can’t speculate when the rule will become final, but the comment period ends in early June, and we certainly hope that this is something that will hopefully take place before the end of the year. So, we — I guess we have our fingers crossed, but thanks for the question.

Shirish Jajodia: Great. So thank you, everyone, for the question. And this concludes the Q&A portion of the webinar. I will now turn the call over to Phong for his closing remarks.

Phong Le: I want to thank everyone for being us with us today. I appreciate your support. For those who are here with us at MicroStrategy World, live in person. I look forward to having an opportunity to meet you in person live also. We’re as enthusiastic as ever about our enterprise software strategy as well as our Bitcoin strategy. And we wish you a good quarter and look forward to seeing you again in 12 weeks. Thanks, everyone.