Good day, ladies and gentlemen, and welcome to the MicroStrategy Q1 2015 Earnings Call. [Operator Instructions] I would now like to introduce your host for today's conference call, CEO Michael Saylor. Sir, you may now begin.

Thank you. This is Michael Saylor, I'm the Chairman and CEO of MicroStrategy. I want to welcome you all to today's conference call regarding our 2015 first quarter financial results. I'm here with Jonathan Klein and Paul Zolfaghari, and our CFO Douglas Thede. First, I'd like to pass the floor to Doug who's going to read the safe harbor statement and make some comments on our results for the first quarter.

Thank you, Michael, and good evening. So, various remarks we may make about our future expectations, plans and prospects may constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent annual report on Form 10-K filed with the SEC. These statements reflect our views only as of today and should not be reflected upon as representing our views of any subsequent date. We anticipate that subsequent events and developments will cause the Company's views to change. While the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so. Also, during the course of today's call we may refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release issued after the close of market today, which is located on our website at www.microstrategy.com. Now I'd like to turn to our financial results for the first quarter. As I assume that you've seen the press release from earlier today, I thought it was best to simply make some brief observations on our first quarter results. As stated in the press release, our total revenue of close to $124 million reflects a decline of 10% from the first quarter of 2014. Consistent with many multinational corporations, we too experienced strong foreign currency headwinds this quarter, which impacted our revenue by almost 6%. Our product license and subscription services revenue were $27.4 million, declining $4.9 million from the first quarter of 2014. While our North American region saw an increase of almost 10% on a…

Thanks, Doug. In the first quarter, as we review the results year over year, I would summarize it by observing that we cut costs approximately $3 for every $1 in revenue we lost. So we made some restructuring changes over the last 12 months that were highly accretive to the business. We did tighten up our operational focus to top markets and we've tightened our product focus to analytics, mobility and security for the enterprise. I would attribute the lack of revenue growth to our decision to exit low-margin business lines, to the decision to consolidate our operations to strategic markets where we expect that we will be more profitable and be able to grow more efficiently and scalably over time, and to some distraction from the restructuring effort over the past nine months, and of course to foreign currency headwinds and the dramatic strengthening of the U.S. dollar. These are all business challenges that we need to deal with, but we also think that over the long term these are challenges that we're going to grow out of. And we think that the core business is much more scalable and is going to be much more profitable going forward because of the restructuring investments that we've made and some of the strategic decisions we've made during the past year. In the first quarter we launched our enterprise security platform Usher, and we obtained our first quarters. We made sales in the retail sector, in the government, in the airport sector, and we have ongoing exciting sales cycles across many other industries: the defense industry, the higher education industry, the commercial and banking industry, the insurance industry. And we're optimistic about these things and have gotten auspicious response from most of our major customers in these areas. So we're enthusiastic…

[Operator Instructions] Our first question comes from the line of Karl Keirstead from Deutsche Bank. Please proceed with your question.

Thank you. And Michael and Doug, congrats on the turnaround progress. I've got a couple to start for you, Mike. One is just on the state of the organizational turnaround, I noted that your quarter-end headcount was down another 10% from the yearend. I would have thought it would begin to stabilize now. Do you feel like your current headcount level of, call it, 2,200 is now right-sized and do you think the vast majority of headcount reductions are now behind you such that the organization can start stabilizing here in 2Q? Thank you.

Thanks, Karl. I think the majority of the heavy lifting with regard to restructuring is behind us now. We are looking forward to stabilizing in 2015 and building from what we see is a much more efficient, more profitable, more stable base. I do think, with that said, there are always opportunities for us to find new efficiencies, and I wouldn't characterize it as we're moving substantially from cost control to substantially back to growth, but I think that we're moving from primarily cost control restructuring to primarily revenue generation and growth at this point. But I think we're always going to have our eye on our cost structure and our efficiency. And I believe that, as we move forward, it's very important for us to always be thinking about high-quality and profitability and efficiency. And I think that quality is better than quantity, and we can certainly grow the business or we cannot grow the business in terms of headcount. But that's not really what we're looking at. What we're looking at is growing the revenues in a high-quality, profitable, scalable, transparent fashion.

Got it. Okay, thank you. And I've got a second one. On MicroStrategy 10, I think a lot of investors on this call are paying a lot of attention to XGA 8 [ph] and the impact that it might have on the second half and in 2016. I think 9.0 went GA [ph] way back in 2009. So this is the first major release in, it feels like, six years. Michael, can you help us frame what kind of an impact it might have on the revenue growth in the second half and in 2016? I know if you're a maintenance paying client, you'll have rights to the new version, but obviously there's an opportunity for you to expand your seat counts, to act as a pull-through to other products. Is there a way, without giving firm guidance, to frame the lift it might have?

We certainly think that MicroStrategy tend to be [ph] a shot in the arm for the analytics business and we expect that it will open up revenue opportunities for us in the second half of the year.

Okay. No more specific than that? That's fine. If not, then I'll ask one last one and then I'll go to the back of the queue. On Usher, Michael, is there a way to give us a current paying customer count and/or any sense for what the revenue contribution from Usher could be in 2016 even if you put a very broad range on it?

We're not ready to break out our enterprise security business from the overall business yet. And as soon as we feel that it's useful and provides a good degree of insight to the investors, we'll begin to provide that sort of transparency. But otherwise, I can't give you a clear answer.

Got it. I understand. I'll go back in the queue, I've got a few more. Thank you.

Our next question comes from the line of Greg McDowell from JMP Securities. Please proceed with your question.

Hi. This is Richie Deluria [ph] dialing in for Greg McDowell. Thank you for taking my question, and a couple of these are going to be follow-ups from what Karl just asked. In terms of -- first one is in terms of MicroStrategy 10. I know there's not -- you don't want to give too much color, but I'm wondering, is there any issue of pent-up demand, especially with 9SS [ph] having come out and people maybe waiting for MicroStrategy Version 10, any sort of pent-up demand that might be in there? And what sort of -- I guess what are the biggest areas of improvement with 10 and maybe if you could provide a little more color on that version?

I think that our customers are enthusiastic about the arrival of 10. So they have been waiting for it. It does meet a number of needs. I think in the area of scalability we've got much better support and direct support for things like Hadoop and for in-memory analytics. In the area of data discovery and ad hoc, we've got much more powerful tools for ad hoc, and agile application development. We also believe there are a lot of advantages for deployment. And it's certainly plan of our plan and expectation that we're going to be able to use this to cross-sell and upsell and find new opportunities. And I think there are some customers that probably will be enthusiastic about what we've got to provide. Paul, do you have any other commentary on that?

Well, I think -- no, I think functionally you've made the high points. What we think it does, MicroStrategy does -- 10 does, is really bring together and bring to the market really a substantial increase in our ability to satisfy both the enterprise requirements and also the requirements of agile visualizations and data discoveries that, as you see in the current buying environment, sometimes begin at the departmental level and then move up to the enterprise. So we feel very good about how 10 really allows MicroStrategy present really a consolidated vision of having both historical strength in enterprise analytics, but marrying it really to the agility that a lot of business users are looking to, to build faster, cleaner, more powerful applications, and then to scale those up over time through enterprise in nature.

Okay, great. Thanks. And my next question's around the channel. When do you think you'll see impact from working with the channel? What are you doing to drive channel sales? And then alongside that, what other services are you deemphasizing and, you know, tying it back to Usher, I mean is Usher 8 channel-friendly product? It kind of seems to us, maybe a couple of investors, that it definitely could be a very good product to work the channel with.

Yeah. Well, with regard to our expectations, we think in the second half of the year we'll start to see revenue opportunities coming to us via the channel. And with regard -- for Usher that is. With regard to how it sits with them, it is a much more channel-friendly product because there are some straightforward use cases, for example, open, you know, the door of a million buildings in the country using software, and we already know where the buildings are, we know already what the gateway is, we need to open it up. So there's an immediate opportunity for companies that are hardware-based to become software friendly and mobile friendly. And then there are companies -- there's immediate opportunity for companies that are very mobile-based to become very building friendly. And there's an opportunity for companies that are very consumer-based to start to look enterprise friendly. And of course if we take all the general system integrators, this is one of the benefits of Usher to them versus more sophisticated enterprise application tools, is that you can actually get an application solution up and running and deployed within the enterprise within a week to two weeks using Usher, and then you've got a long tail of system integration as you integrate additional systems. So the ability to get a quick win and then integrate more and more systems over time is a very channel-friendly thing. It's much better than having to take six months to a year before you build the app and then deploy it. The other major thing that we've accomplished with Usher this quarter, which we don't really talk a lot about but is worth pointing out on this call, is that, at the request of some of our larger channel partners and banks and…

Okay, great. And I'm going to ask one more question and then I'll jump back into the queue as well. But just wanted another question around Usher. So I understand certain customers may be a little sensitive about being referenceable and, you know, in the same way that Georgetown was. But can you provide any color on the number of customers, the number of trials going on, and maybe any particular use cases?

Well, I'd say it's keeping us really, really busy right now, but we're not ready to break out the exact number on our counts quite yet. We do look forward to sharing more of that as the year progresses.

Okay, great. I'll jump back into the queue. Thank you.

Great. And our next question comes from the line of Frank Sparacino from First Analysis. Please proceed with your question.

Hi. This is David Owen [ph] for Frank. I just had one question. So you mentioned renewed focus on revenue growth. I was wondering, specifically you mentioned in the last call that you're optimistic about revenue growth for 2015. Now with the current results, do you still feel, based on your comments earlier, that it's feasible?

I think that we've moved pretty diligently through a nine-month restructuring exercise in order to find a solid base to grow from. And that required that we, in some cases, exit businesses where we were spending $2 to make $1, or spending $1 to make $1. We've done that as we looked through a major macro change with the dollar and the strength of the U.S. currency. So it has created a bit of volatility in our top line number. But I think that the result of the restructuring is that we found a pretty solid base that we're going to go from and we look forward to growing from here.

Okay. Thank you.

[Operator Instructions] Our next question is a follow-up question from the line of Karl Keirstead. Please proceed.

Yeah, thank you. This one's for Doug. Obviously the restructuring and currency weighed pretty heavily on the P&L, but some of the numbers that MicroStrategy posted tonight on the cash flow and balance sheet are way above what I was estimating. And I'd like to ask you about two of them. One was, your operating cash flow of $56 million, I don't remember a quarter when it's been that high. Could you talk a little bit about whether there was any unusual factors there and how sustainable that kind of operating cash flow margin is. And then the second was on the DR or deferred revenue line, it was up 20% sequentially, also way above my estimate. What boosted that? Thank you.

Well, I would say that -- thanks for asking, appreciate that. Most of the thing is somewhat related, if you recall, how our deferred revenue is booked. But as it relates to the cash flow, I mean really it's -- the key thing there really has to do with the cutting of costs, to be honest with you. So when you look at, on a year-over-year basis, right, we've cut $45 million out of our costs on a GAAP basis. So, generally speaking, Q1 you do have a lot of cash inflow coming in from the Q4 deals, especially for maintenance renewals. So it really is -- it really is a cost reduction effort that generated a lot of that cash flow. And coming off of a Q4 maintenance renewal period. Those are the two key factors. And then, so as a result, when you look at our deferred revenue, you're talking about the sequential increase on the face of [ph] the balance sheet?

That's right.

Right. So on the face of [ph] the balance sheet, if you recall, if you look at the footnotes to our filings, we grossed down our deferred revenue to get to the face of [ph] the balance sheet. So, collections from our customers will actually have the result of increasing our deferred revenue that we show on the face of [ph] the balance sheet. So what I'd say is I'd refer you to the one of the attachments that we had in the earnings release earlier today where it breaks out the current and non-current deferred revenue to show the movement of the, really, the cash payments that had been made that therefore reduces the growth down.

Got it. Okay. Good. And then I've got a follow-up -- yup, go ahead, Doug.

No. I was going to say is that, and then when I -- the one thing I mentioned earlier in my remarks was that that March 31st balance sheet is also impacted by the foreign currency, so there is actually a decline element on a year-over-year and even a period from December 31st because of the decline in the foreign currencies versus the U.S. dollar.

Okay, perfect. And then my last one is just on the geo mix. Doug, you mentioned North America up 10%, which is extraordinary given what's gone on in the last nine months, but international down 47%. Obviously a part of that is currency. But even on a constant currency basis, the gap in performance between North America and international seems very large, and I'm wondering why that is, if you experienced some macro weakness in Europe or did the restructuring weigh a little bit more heavily in international, or was it that you guys basically shut down some non-U.S. regions and that hit the international growth rate pretty hard? Any additional color might be helpful.

Let me give you a few suggestions on that and then Doug may have follow-up. I mean the first macro effect obviously is the dollar strengthened by 30%, right, and just about everywhere else in the world is euro driven or close to that. And every other currency weakened against the dollar. So that's the number one effect. The second effect is the middle of last year we took a long hard look at the business, and we concluded that ultimately the -- there's a reason that the dollar strengthened, right? The reason the dollar strengthened is because the United States is and in fact a super-tanker economy and it's working very well, it's firing on all cylinders. And when you go to the rest of the world, you've got the second-tier and the third-tier economies. The third-tier economies in some cases have imploded, and we pulled out of places like Russia and threw in the towel and decided it didn't make sense to be in certain places, there's going to be five or ten years before they stabilize, it was just too difficult to do business. But then we looked at the second-tier economies and there are a lot of places where you can generate revenue, but instead of investing $0.50 to make $1, you invest $0.80 or $0.90 or $1 to make $1. And of course the worst is to invest $1.50 to make $1. So I would say that the international revenue line has been affected disproportionately by the strengthening of the dollar, A; and it's been affected disproportionately by our restructuring decisions, B. We're just not investing in second and third-tier markets to the extent we might have in the past. And I think we've decided strategically that we're better off to be overweight America and…

Got it. Makes sense. Thanks for taking my questions.

Great. Thank you.

And our next question is a follow up from the line of Greg McDowell from JMP Securities. Please proceed.

Hi. This is Richie Deluria again. Thank you for letting me back in. I have a couple more of questions. So, first, as you talk about focusing on quality revenue with high margins and scalability, what services have you been deemphasizing?

We think a couple. One, for example, would be what we think of as low-margin consulting business or outsourced IT labor, things that system integrators might be known for. You know, the companies that are large integration partners of us that manage to hire hundreds of thousands of people and put them to work at reasonable rates that are viewed to be a bargain by large western companies. We've been working to shift our mix toward premium consulting or trusted advisory services. And that will continue to be a theme of ours as we go forward. And at the very least, we didn't really see a benefit to growing a low-margin integration business. I think another area of revenue that we've deemphasized a bit is custom education offerings. It's possible to actually build custom education courses customer by customer and the like, but it's like custom manufacturing, you really want to, you know, create an all -- a one-size-fits-all offering and you want to develop one course and teach it 10,000 times. You don't want to create 100 courses and teach them 100 times. And so we've cut back on our investments in those kind of custom lower-margin services. And I think, although we don't qualify it a service, right, the act of being engaged in sales engineering and piloting and aggressive technical sales in markets where the average dollar size of the deal or end-markets where the economic buying potential of the customers are lower, those tend to be low-margin activities. So we've tended to focus upon the richer, more lucrative markets where our offering has higher value and use. And we've drawn back from consulting services, education services, support services, other types of services that we don't think will be as lucrative. I think one other area, as…

Okay, great. And to follow up on an early question, generated a lot of free cash flow in the quarter, almost $50 million, and I know you talked a little bit about the drivers. But what do you intend to do with that cash that you're generating?

I think we're pleased with the cash flow that the Company is being able to generate. And our plan has been to return the Company to a healthy profitability and also a healthy cash generation status so that we have options. And clearly the options for the cash flow are to invest it in sales and marketing activities. And I think the -- I think as people always ask me and generally ask me, will we ever do a buyback or will we it in any other way? I think that our options to actually use the cash open up if we have a strong balance sheet and we also have strong operating cash flow. So our general view towards this is keep the balance sheet strong, get the business to operating profitability that's strong, work toward revenue visibility and growth visibility that we can see. And then we're in a good position to take advantage of whatever macro opportunities or micro opportunities present themselves. And you just never know what that's going to be in this environment. But I think that we feel that we have more options today and we'll be more facile and more agile in taking advantage of those options today than I would have said a year ago.

Okay, great. And can you talk a bit about changes to your compensation structure? If I remember correctly, sales reps aren't getting comped on services anymore. Do you think that these changes can help make MicroStrategy more channel-friendly as a company?

That's a good question. The short answer to the question is, yeah, I do think it makes us more friendly as a company. We really think about the business now in three pieces. One part of the business is the product business, which is all about selling product licenses. And our direct sales organization is focused upon maximizing licenses and they get paid based upon the product licenses. If they're necessary or their support is necessary to drive any channel sale, then we actually cross-commission them when we find it that they're integral to the channel. And when they're not, we sell direct. With regard to the second part of the business, we have a consulting professional services business, and that's run by a set of service directors, and their incentive is to sell high-margin trusted advisory business and not to just grow the revenue of the business to whatever level they can. So their compensation has shifted to be margin-based, not revenue based. And this field sales organization is no longer commissioned on the consulting business. So that makes us a bit more channel-friendly in two ways. Our professional services organization isn't trying to get big, they're trying to get high quality. And in fact, we encourage them not to do long engagements at lower prices and lower margins, but rather to do shorter engagements as experts and specialists at a higher rate and then move from customer to customer and not loiter. I'd rather have -- I'd rather have $200 an hour across 100 customers than have $100 an hour across 10 customers. So you have to work a bit harder and you have to touch and pollinate a lot more accounts. But as they do that, they open up the opportunity for our channel partners to go…

Okay, very helpful. Thank you so much for answering my questions.

You're welcome. I think we have time for one more question.

Yes. And our last question comes from the line of Frank Sparacino. Please proceed with your question.

Hi. David Owen [ph] again for Frank. I just one additional question. You mentioned that mobile you see as a very favorable trend for MicroStrategy, and I was wondering if you in that regard just would comment on how you are currently penetrated with your mobile platform in your existing base and what you see is left there.

I think our high-level observation is that we're about 20% to 25% penetrated in our existing base and that the growth opportunity for mobile is to drive toward 100% attachment ratio and also to upsell because someone that wants to use mobile is potentially going to use -- have a lot more users and a lot more use cases for it. So we think that we could increase the number of users within existing customers and then we can go and sell our mobile product to new customers within our installed base.

All right. Thank you.

Thank you for your time. We appreciate the support of everybody on the call. Thanks for being a shareholder. And we look forward to speaking with you again in 12 weeks.

Today's conference -- this concludes today's program. You may all disconnect. Have a wonderful day.