Good day, ladies and gentlemen, and welcome to the Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host for today's conference Michael Saylor, Chairman, President and CEO. Sir, you may begin.

Hello. This is Michael Saylor, I'm Chairman, President and CEO of MicroStrategy. I want to welcome you all to today's conference regarding our 2016 second quarter financial results. I'm here with our CFO, Phong Le. First, I'd like to pass the floor to Phong who's going to read the Safe Harbor statement and make some comments on our results for the second quarter.

Thank you, Michael, and good evening, everyone. Various remarks that 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 Quarterly Report on Form 10-Q filed with the SEC. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may 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 will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today, which is located on our website at www.microstrategy.com. So, overall Q2 results continued to be within the range of our financial expectations as we progressed through our company's transformation. Revenue excluding services decreased 4% year-over-year, product license revenue decreased 20% year-over-year, growth deferred product license revenue increased $2.7 million quarter-over-quarter. If this will be recognized as product license revenue in Q2, the decreases would have been 2% and 11% respectively. Operating expenses were up 8% year-over-year excluding the effects of capitalized software development costs which were $4.2 million in Q2 2015 and zero in Q2 2016. Operating expenses would have increased 2% which corresponds to a 2% increase in headcount over the same period. Operating income was $21 million, operating margin was 17% and diluted…

Thanks Phong. We are now in the middle of our three year turnaround plan for MicroStrategy. We spent Q3 and Q4 of 2014 restructuring and consolidating the business around single enterprise software platform and centralizing our operations to Northern Virginia. We made significant reductions in our cost structure and clarified our technology focus while embarking on a path toward a more transparent, efficient, integrated company that's designed to provide the platform for organic profitable growth in the years ahead. 2015 was the first year of our strategic plan and we adjusted to some dramatic changes and introduced some bold new initiatives including the following. In 2015 we put in place new business unit structures across the entire corporation of reorganizing many, many profit and loss business units. And then we aligned the compensation of the executives running these business units on a margin basis. And that affected on the order of a hundred executives in the company. We introduced revenue based compensation plans for professionals in our professional service areas and other parts of the company in 2015.We centralized our global sales operations in 2015 and we also brought in new CXOs in the sales, marketing, technology, services, IT and finance departments. So there was a dramatic change in the senior leadership team. We also made a dramatic change with the product architecture in 2015.We introduced Version 10 which was our first major platform release in many, many years. And we introduced a quarterly performance and compensation review process for all employees in the company resulting in 2000 quarterly reviews every quarter. So this was also dramatic change. So 2016 is our second year of this turnaround plan and having restructured our business and introduced the reforms, we felt necessary to provide the foundation for long-term success. We continued with…

[Operator Instructions] And our first question comes from Karl Keirstead with Deutsche Bank. Your line is now open.

Thanks. Michael I know you mentioned you are managing for the longer term but most folks on the line probably want to zero in on the 20% license decline in the second quarter. Phong mentioned maybe it was some large deals coming up a little lighter or lumpy and I am wondering if you could provide a little more context to that, is it just sort of normal end of quarter moves or was there anything in the environment that struck you as a little tougher especially in the U.S. and do you think you need to change anything in terms of sales structure or anything else to boost the U.S. performance. Thank you.

Well my opinion is that this is just normal volatility on the enterprise software industry. Any given quarter we have some deals that we close but we can’t necessarily recognize and we had at least one of those this quarter. Other times we have deals that we expect to close that slip and they close in the following quarter and we have some of that but in general there is going to be volatility in our business and it will plus or minus some factor. I don’t think we’re disturbed by anything we see. We think it’s kind of normal for the business and I don’t we have any need or any plan to change what we’re doing. We’re pretty happy with our sales and marketing and product initiatives and we believe that all the underlying fundamentals that we put in place are working the way we expected. Phong?

Yes, and just the way I look at it Karl in terms of just the numbers, you are right it was about 20% drop year-over-year about $6 million in product license revenue. As I mentioned about $2.7 million of that was just increased deferred product license revenue similar to what you saw in the first quarter and we have talked we have more activity in our original equipment manufacturer business unit or segment if you will and the health there drives more deferred product revenue. Half of the year-over-year difference comes from that. The other pieces were some – another piece was our second quarter last year was tough compare and so that’s a component of the difference too. And then the last piece Mike talked about was just volatility in the quarter most of it with big deals. We had a large number of big deals in the second quarter of last year. We didn’t have nearly as many this year. Nothing specific about the overall business that drives that. Some of it just deal execution, some of it just timing but we overall we don’t look at the second quarter product license revenue as particularly an issue or disturbing. Obviously we would like to have it been higher but overall it doesn’t cause us any pause in the direction of the business.

Okay, that’s helpful. And then maybe my follow-up back to you Michael is on the ability of the new version 10.3 and most recently 10.4 to create some revenue list for MicroStrategy whether it’s enhancing the ability to your reps to pitch replacements of Object, Cognos or seat expansions maybe desktop sales maybe you could update us on how confident you feel that the new 10.4 can be a revenue event for MicroStrategy in the second half and in 2017 because I think that’s the bet that most investors need to feel good about.

We put 10 out in the market in the second quarter of 2015 and then we went through a number of releases, 10.1, 10.2 and 10.3 in order to address some functional deficiencies and some bug concerns that our customers had. 10.4 is the latest of them and our new head of tech support and our reviewing all of the catalogues of our activity with our customers felt confident enough to designate 10.4 as our primary platform release for the next 36 months. So we haven’t given explicit guidance to our customer about our previous releases but right now our position and our comfort level is the 10.4 is a version that would be worth deploying to production with and we intend to support 10.4 over the next 36 months which means we’ll making bug fixes and we’ll patching it and we recommend it to our customers to deploy on. So I think many people have waiting for us to actually provide that kind of guidance I think that’s a positive sign for the company. I believe that as we go into 2017 the product line is dramatically more stable, our support policy is more mature. We’ve addressed most of the concerns that our customers brought to us with our earlier releases and our perception is that 10.4 code is much more stable and solid and we’re ready to pursue more aggressive sales and marketing programs based on that platform.

Good stuff. Thank you both.

Thank you. And our next question comes from Walter Pritchard with Citi. Your line is now open.

Hi, thanks. A question Michael on - I guess Michael and Phong on the large deals. Can you talk about your pipeline of large deals and is there something up the way you are selling or with version 10 with faster releasing software that have us likely to see more the revenue show up in smaller deals and this change with fewer large deals is going to be more permanent?

I don't see any particular trend that I can put my hand on or my fingers on with regard to Q2 of this year. And nor do we see any substantial change in the nature of the character of the pipeline, right now.

I think Walter one thing is, we’re seeing overall the pipeline for the business is strengthening as we put more marketing efforts in the first half of the year and we hired more business development representatives. I think one dynamic you see is, some of the close cycles on those deals tend to be smaller with smaller deals and larger deals. So you tend to see returns earlier on from the pipeline with the smaller deals. And so we’re seeing strength there in that business. I think that’s the good indicator. In the larger deals, it will just take a little bit more time to close as we invest more in marketing and businesses out there.

Great, thank you.

Thank you. And the next question comes from Abhey Lamba with Mizuho Securities. Your line is now open.

Yes. Thank you. Mike, have you engaged with customers that are on the globe recently how you were out last few weeks. What was the feedback from them in terms of where do you see near-term opportunity and where is the long-term opportunity for MicroStrategy?

Yes, I had the opportunity to travel to 13 different cities over the first 13 days of July and I met with customers and partners in each one of those cities. About five of them were in Europe and the other eight were in the U.S. from the East Coast and the West Coast. So it was a pretty decent cross-section. We saw and I have heard from all of them a lot of enthusiasm about mobile. There's a lot of just about every single place I go there is a renewed vigor - reinvigorated interest in deploying mobile analytics and mobile productivity applications. I think we also have observed that there is a lot of demand and a lot of enthusiasm about taking advantage of the big data Spark, Presto and other open source data structures now. And that momentum is building I think it will continue.

Got it. And in terms of 10.4, are there any killer features or killer applications that can be done with 10.4 if they can help extrapolate deployments of people's upgrades in calendars?

10.4 was exciting in a couple of ways. One is that when we released 10.4 we dramatically improved the server capacity and scalability by incorporating a devoted to scale to eight nodes instead of four nodes and workload fencing and user fencing. And so that's a big enterprise benefit to many of our customers. We also incorporated real-time telemetry into 10.4. So you can configure the platform to support real-time analytics and real-time analytics is increasingly popular in the marketplace. We incorporated the open source Costco real-time a venting platform directly into our platform. And that's a very, very exciting topic for many customers. The third thing we did is we improved the parity and fit and finish of our mobile analytics interfaces in 10.4, it just makes it quicker and easier for customers to deploy full mobile dashboards and mobile dossiers of information. And I think that that's been accepted very enthusiastically. As I said before we really think 10.4 is the best product we put in the market and we're confident enough in it to designated as a long-term platform release.

Got it. And Phong just one housekeeping and how much was the small deal revenue up by and how does it compare with growth rates in that segment over the last few quarters? And also we had this increase just well of $2 million in Q1 and now this quarter we have $2.7 million when will these things reverse and is this going to be a trend or these just happen to be two – we’ve had these one-off items two quarters in a row?

So a couple of things, and the small deal revenue I think year-over-year - I don’t have the exact numbers in front of me. But I believe it was up by about 11% year-over-year and that’s the pretty positive trend for us overall. I think if you look back across all of our quarter releases primarily that's been flat and we’ve been seeing growth and declines depending on the quarter in a large deal revenue. So I think it's a good leading indicator and things to come overall for the business. As far as some of these quarterly changes, the big one is the R&D capitalization. If you look back last year, we actually stopped capitalizing our R&D after we release Version 10 of our software in Q2 of 2015. So as you go into Q3 of 2015, there is zero capitalization costs in going forward to Q2 of 2016 there is zero. So that will be a pretty clean compare on the R&D cost as going into Q3 of this year. So that will make our life explaining the cost and your lives understanding them a lot simpler. On the deferred product license revenue, we had a pretty good quarter in Q4 where we were able to minimize that number and then we saw in Q1 and Q2 of this year OEM business really starting to grow. And in the world of large deals our OEM business drives, some of the largest deals in the company. As we sign up with these large manufacturers to embed our software into their hardware software solution. So it's not a very consistent business. It’s just happened to be that. We closed a very large one in Q1 and one that was twice as large in Q2.And so it's hard to sort of say are those going to continue or not because one or two deals make a very large swings in our revenue numbers. It’s the business that we're excited about and I think we’re finding more traction in. But I don’t think we can predict that going up or down but we’ll try to be very transparent as those deals come through in the financials and talk about them openly. Q – AbheyLamba: Got it. Thank you. And they will be recognized ratably or will they reverse in any particular quarter? That’s it. Great, thank you.

Yes, on that last one Abhey for the most part they will recognize ratably over the term of the contract which could be somewhere three years, four years, five years it depends on the deal in the contract.

Thank you. And our next question comes from Greg McDowell with JMP Securities. Your line is now open.

Great, thank you. Just one question in the early part of the business transformation and as headcount was going down, we were asking a lot about how high you're going to let operating margins go. And I guess now that you’re hiring again and we're not yet seeing a huge revenue increase. I was just wondering how you’re thinking about how low you're going to let operating margins go? Thank you.

Yeah, I think - although we are hiring we've got our eyes on the bottom line pretty closely and we’ve managed to keep the overall operating expenses under control. So even when we’re hiring we’re not thinking that we're going to go ahead and drive costs without some visibility and clarity with regard to where the revenues going to come from. Our view in general is you ought to be a little operator enterprise software company with consistent operating margins. And so I would say that we wouldn't want them to be moving lower and we're not expecting that we're going to continue to hire and drive cost north unless we actually see revenues coming along for the ride.

Great, thank you.

The other piece around operating margins and operating expenses in general is, again taking out that effective R&D capitalization. For the most part our costs were our operating expenses were exactly the same year-over-year. Our cost of revenues were a little bit higher year-over-year and piece of that is when you're able some of these deals that we talked about these OEM deals that get recognized ratably over time. We’re still paying the commissions upfront. So there tends to be a little bit higher cost and a little bit of disconnect between the costs and the revenues. But we've been pretty disciplined about our costs and trying to keep them stable. And I think we’ll continue to do so. Again as I mentioned in the prepared remarks, we saw a increasing headcount overall in the organization while keeping our operating expenses relatively flat. And again that I think is a sign of good financial discipline. So we had 17% operating margin in Q1 on a GAAP basis, 17% in Q2, Q3 and Q4 tend to be higher revenue quarters for us while Q4 especially. So we would like to see margin expansion overtime beyond where we were in the first half.

Great, thank you.

Thank you. And our next question comes from John Rizzuto with SunTrust. Your line is now open.

Good afternoon, everyone. I wanted to go back a little bit and try to get a feel for how MicroStrategy 10 is the type of traction it is seeing and looking at these we’re one year anniversary now it’s been in the market these license revenues their pent up demand and what it is, these are levels that are near six year lows for license. So we went through, we know the difficult times that we had but we’re still balancing a long levels here looking at this year not really being a return to growth. If you can update us on what is adoption at this stage of 10, what’s the right time frame to look at 10 as to start being accelerated your typical software cycle 18 months after the release and just a more of a feel for what's out there and that slow or evidentially seemingly recovery by 10 not showing up in the license number at this stage.

I think we’re on the version 9 platform for something in the order of like seven or eight years. It was a reasonably long period and so it had a chance to stabilize. With version 10 I think it’s not uncommon when there is a dramatic new release of an enterprise software platform that it takes anywhere from 12 to 24 months before the product stabilize and season. So I think that we’re moving into the zone right now 12 months after we released it where we could expect it to start to stabilize. We have factored that into our thinking. I certainly think that in the 2017 time frame we’ve got a great product to take out to the market and I would expect that we’re going to find new applications, new customers and new sources of revenue from the product at that time.

Are you finding that you – are you doing anything at this stage or any sorts of incentives being a little bit more aggressive getting customers out there or it really just going along as the time cycle just trying to get a feel for what you are seeing, what you are having to do or thinking about doing in the market?

Right now we’re thinking really hard about various ways that we can expand our addressable market and grow the business and some of our initiatives include our worldwide symposiums where we’ve got about hundred of them scheduled over the next 12 months and we’re enthusiastic about those. The second is a jump start program in our education where we’re actually going out and offering an intro to MicroStrategy in about 29 different metro markets around the world every month and that’s a new program that we think will pay dividends for us. And we’re reevaluating our desktop product and the way the way that we’ve been distributing it. We’re considering some new innovative marketing programs to use the desktop product to seed both new accounts and existing accounts and other institutional areas like education and alike in order to create lift and a viral effect. We’ll probably have more to say about that in time.

All right, fair enough. Thanks.

Thank you. [Operator Instructions] And our next question comes from Yun Kim with Brean Capital. Your line is now open.

Thank you. Thanks for taking my question. Michael just going back on the OEM question can you just talk about little more details regarding the uptick that you are seeing in your OEM business given that you closed a large transaction there over the last couple of quarters. You see OEM channels something that you think will become more strategic going forward and just curious on what really drove that large OEM deal in the quarter, was it like a Usher a security or was it mobile a big component of it?

If you look at the enterprise analytics business in general over the past 10 years the barriers to entry continue to go up and the demand of enterprise customers are becoming greater. If you are going to compete in the market you need to be able to support relational data structures OLAP data structures, big data structures. You need to have deployability and security and scalability and of late you need to support more interfaces. 10 years ago you could have a product that ran on the web. Today you need a product that runs on a PC, a Mac, three different web browser, IOS and Android and you also need a brand new set of APIs, addressable APIs. And so what you had five, six, seven, eight years ago is probably obsolete. Now if you look at the most successful embedded analytics tool I can remember was Crystal Reports. The guy who was at Crystal Reports who make that entire program successful is Tim Lang, he is our CTO and he’ll tell you that Crystal Reports lost their verb and their mojo many, many, many, many ago. So you’ve got lots and lots of organizations that embedded some kind of reporting a long time ago and they reaching end of life and as they reach the end of life in these various embedded repot solutions they start to look around and ask the question what’s going to take me in to the next decade and I think MicroStrategy is really well positioned there because we basically support all the various document types. We check the box on banded reported and OLAP and analytics and transactions and alike but we’ve also supported all the interfaces. Five years ago you could have been an OEM and said we’re going to providing…

Okay great. It seems like a very strategic opportunity for you guys given your strength in technology and the platform. And then Michael just going back to your three-year-old transition plan, you are half way through. In your point of view how has your marketing and selling strategy may have changed or evolved or do you have a better sense of the market trends over the last several years obviously overall spending remains, continues to be somewhat challenging. And obviously along with that some of the product achievements, development achievements that you have so far is there way for or do you expect your sales model could potentially evolve perhaps to be more higher volume lower ASP driven for instance like kind of we’ve been seeing somewhat over the last couple of quarters or do you think the picture will remain a big component of your overall business model?

In the last three years we’ve been progressively more and more engaged at the detail level with every one of our customers and partners, listening very hard to what it is they want from us. And after the hundreds and hundreds of conversations that we've had I think it's strengthened our profits and resolve to be to be driving a single unified platform. I think our unique differentiating advantage of MicroStrategy is we're the one company that can deliver to the enterprise a platform that combines both analytics and mobility. And mobility is where all the hot new interesting exciting things are going on but analytics is the core source of all intelligence and competitiveness for many, many of these companies. So we're taking this single enterprise platform for analytics and mobility into the marketplace. I think that we see more demand for than ever. In our technology strategy, we're really focused upon the desktop and a unified toolset. And as our desktop product gets better I believe it will expand the footprint and the addressable market for us and allows us to go from the large long scale enterprise analytics deployments to get to them to the middle of the market to the departments to the quicker and more agile deployments. And I think that will increase the number of installations and probably increase the deal volume. And it may in fact cause the average size of the deal to decrease but it should expand the overall addressable market. So I'm enthusiastic about the opportunities that that we’ve got ahead of us, as we continue down the path of generating successful more powerful desktop tools.

That sounds great. So just want to make sure so obviously if a customer is committed to your platform thinking they're more likely to rollout for instance desktop or mobile first rather than doing all of it at once, right?

Well, I think we have many types of customers and so if they are new customer then they really have their option to deploy via the desktop first or to deploy via the web or deploy via mobile or to deploy via custom application using one of our APIs. And I really think that that the decision of which of those to use is more function of the customer than it is whether they’re not new or older the like. What we’re really doing is increasing the options that they have at their disposal. I rarely see anybody in the marketplace that would say we really only want your platform for one of these things. It's very difficult to find a big customer, a big enterprise that doesn't have a suite of custom applications that they’re going to code using Java and deploy via android iOSor the web. It's very rare they want also option and enterprise web reporting apps. They just want to deploy over the web. And its - and those same customers have mobile applications that they want to deploy and of course they have armies of desktop analyst that would like to get their hands on an agile data discovery titles. So you'll find all of those use cases. And look our best customer is one that is deploying dozens of applications on our architecture and we pride ourselves on giving them the choice. They can use any of those things and they can share common data model and the common object model and that's what makes us special.

Okay, great. Thank you so much.

Thank you. And we do have a follow-up question from Greg McDowell with JMP Securities. Your line is now open.

Yes, thank you. A real quick, I was just wondering if you could make a quick comment on Usher and maybe talk a little bit about how the pipeline looks in the back half of the year and maybe just comment on how close you guys are to referenceable Usher customers and live deployments? Thanks.

We made some great strides with Usher in version 10.4.On the back end we incorporated this Costco real-time a venting tool which means that we can now deliver real-time telemetry from the Usher digital wallet directly into our analytics logs and we can join it with enterprise data and that’s an exciting feature. And on the front end, we upgraded the digital wallet so that we now have a fast batch capability and we can do things like automatically log into website just by having the mobile phone with the badge on it in our possession, you don’t actually have to click or type or do anything. So people like the idea of having fast badgeon the front end, they definitely like the idea of analytics that are real-time and can be integrated. We are still in development phase with the Usher product but what we see is, is an increase in the number of pilots we're running and an increase in the enthusiasm of our customers. Especially, with regard to using the security wallet as a way to integrate their networks of mobile applications so that a salesperson can identify or can communicate with the customer quickly and also using that digital badge as the source of telemetry to actually enrich their analytics So I think, as we go forward we will see more and more opportunities for us to deploy and I look forward to be able to discuss some big reference accounts sometime in the coming year.

Great. Thank you.

And I’m showing no further questions at this time. I’d like to hand the call back over to Michael Saylor for closing remarks.

I want to thank all of you for your time today. We appreciate your support. We look forward to speaking with you in 12 weeks and for that have a good rest of the summer.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.