Good day, ladies and gentlemen, and welcome to the MicroStrategy third quarter 2016 earnings call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would 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 am the chairman, president, CEO of MicroStrategy. I’d like to welcome all of you to today's conference call regarding our 2016 third quarter financial results. I'm here with our CFO Phong Le. First, I’d like to pass the floor to Phong who is going to read the Safe Harbor statement and make some comments on our results for the third 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. Let me turn to our financial results for the quarter. Overall we're pleased with our Q3 financial results. Total revenue of $130 million increased year over year for the first time since our restructuring began in Q3 2014, with increases in product license subscription and support revenue offsetting decreases in services revenue. Revenue excluding services increased 4% year over year and product license revenue increased 8% year over year. Operating expenses were up 4% year over year while headcount increased 9% year over year. Operating income was $30 million, operating margin was 23% and diluted earnings per share were $2.31. Let’s start with more detail on revenues. Total revenue for Q3 2016 was $130 million which was…

Thank you, Phong. Overall with regard to the quarter I am happy with our results. I was pleased with the growth in product revenues. We did some very very large deals with the government agency. We had another large deal with a big medical company and a third one with a very large finance company and then we had retailers and professional services companies. So I was happy to see that the large deals were coming across a breadth of industries and I feel that MicroStrategy 10 is an excellent value proposition in most major industry vertical segments and we're getting really good feedback in that regard. I was pleased with the margin performance as well and we're working very hard on managing costs, we’re managing efficiency while we are actually laying in place the framework to grow the business. Our services declined -- our professional services declined, it’s something that I note. I think it's consistent with our refocus and retooling of the consulting business as we pursue a strategy of transforming toward expert services and we shift away from -- shift project work and system integration work toward our partners. So it's noticeable but I'm not troubled by it. I had a chance in the past three weeks to meet with many customers. I flew 40,000 miles, in essence like 1.5 times around the world and I went to thirteen of our symposiums including ones in India and the UAE and New Zealand and Germany and France and Italy and then also all throughout the U.S. and Canada. And I got a chance to meet with our customers and hear their feedback. We rolled out a number of new programs this quarter, one of them is the free desktop initiative. That's making our desktop analytics tools available for…

[Operator Instructions] And our first question comes from Karl Keirstead from Deutsche Bank.

Thank you. I've got two questions. Michael, I will start with the question on the geographic performance. I noticed from the 10-Q that just came out that there was a pretty sharp divergence domestic and international, the plus 8% license growth was made up of I think plus 48% domestic but minus 40% international, a bit of a reversal from the prior quarters. Maybe that's just deal lumpiness but I just wanted to ask you if there's anything else maybe Brexit or something going on in Europe. Thank you.

I spend a huge amount of my time internationally more so than ever before. And we're very bullish on the business. I don't think there's anything systemic that I would highlight. I do think that the business is volatile and we do have -- we do have a number of large deals. So the timing of them and a geographic distribution of them all make those percentile comparisons, the percentage comparisons a little bit volatile from time to time.

Okay, got it. That's fine. And then maybe a second question, one of the numbers that stood out to me from the Sprint [ph] is the 13% growth in your sales and marketing headcount. And I'm wondering if you could elaborate a little bit on that number. Are they young, are they seasoned or are they quota caring reps or are they more marketing folks? And I think that the spirit of the question is the likelihood that that 13% uptick in sales and marketing headcount might translate into growth next year. Thank you.

Well, the least expensive professionals in the sales and marketing organization that we can scale the fastest are generally business development representatives and they're kind of entry level inside sales reps and it’s their first job in sales. And we've been working to bring in a bunch of those in the organization and we pair them with senior account executives. A senior account executive might have ten or twenty years experience and they are customer facing in the inside, while the BDR is normally at corporate and they are spending their time on the phone pursuing leads and the like. So we have grown our, call it, telemarketing function at a very rapid rate because we saw that was working and there's been a lot of enthusiasm for that. We haven't grown our senior account executive team at a similar rate. So probably there's a slight skew in that direction as you see those numbers. So when you're building sales and marketing, there are senior marketing people that are very talented and more expensive than there are junior marketing people that are entry level that can be very valuable. And then there are senior account executives that are also instrumental and talented and then there are senior vice presidents and directors in the organization as well. And then there is administrative staff and operational analysts who sometimes are the glue that hold everything together. We've had a mixture of all those things. I don't think there's any area where we’d say we're not growing but I think we tend to make sure that we choose our professionals carefully in order to maximize the output we get for a given cost.

And our next question comes from Walter Pritchard from Citi.

Thank you very much. This is Tyler Radke on for Walter. I was wondering if you could share any metrics around sales force productivity. It looks like it picked up year over year in this quarter. Just wanted, if there's any metrics you can provide and maybe how that compares in the U.S. versus Europe.

I don't think we have any productivity metric that we're publishing right now. And also when we're running them we actually look at productivity across both sales and account planning and business development processes as well as a few financial metrics and metrics related to customer satisfaction and customer retention. So there's a number of different things. I would say anecdotally sales productivity is probably up a bit year over year. I feel it's trending on the right direction but I wouldn’t want to give you a percentage at this point.

Great. And then a follow up on the operating expense growth and headcount, it looks like you grew headcount about 9% year over year this quarter but as you mentioned operating expenses were only up 4%. Do you kind of expect over time the operating expense growth to better correlate with that headcount growth or are you making more structural changes where we should kind of expect operating expenses at this level to grow around the 4% range or or less?

Tyler, as you know we don't really project the exact or precise cost growth on operating expenses. But I think what you saw happened in the third quarter is indicative of how we want to grow the business overall which is growing headcount at a certain rate and growing cost at a lower rate. Good example that Mike just talked about was the sales and marketing where we're introducing more junior level inside sales, so we can build pipeline for a more senior level account executives with those deals. We really ramped up our campus recruiting across technology and other areas which is another great way to invigorate the organization with new folks and also do it in a very cost effective way. So that’s generally been in overall strategies to make sure we're very conscious about our cost increases as we start to grow the organization overall.

And our next question comes from Abhey Lamba from Mizuho Securities.

Yes thank you. Mike, contacts, it was a good quarter. Based on your comments what made this quarter special – what was special about this quarter that made your product message [indiscernible] at the symposiums you talked about and what changed in the last kind of six months that kind of got people more excited?

We do think there is quarter over quarter volatility in the business. On our last conference call we had numbers that were slightly less than some people expected. In this conference call we have numbers that are somewhat more than people expected. On a longer term basis, over the course of a year or more we typically get what we expect but from quarter to quarter there is going to be some volatility. I wouldn't want to put my finger on anything that I thought happened in Q3 that we weren't doing in Q2 and Q1 because I think that we're pretty consistent and our focus to the product, the process and the messaging, I would say that the product gets consistently better and the product in Q3 was better, I think that we made a lot of improvements in our support policy. We announced our platform release, we changed management and tech support function and I think that was a positive. I think we've made some positive improvements with regard to people throughout the world. I think our execution was tight and I think that our systems are continuing to be refined and our processes are seasoning. And just like anything in life if you continually focus upon training your people, building team work, improving the process of making the product a bit better every single quarter and I think the results would come. Customers, they have a particular need and the more efficient we are in our sales and service and product development, I think then better results it will be and easier it will be for us to fulfil that need.

And how should we think about your run rate business of smaller beans [ph] of ability to sign up new locals. The last years can be choppy so if you can talk about some of the initiatives that you’re undertaking to make your business [indiscernible]?

That's a good question. We're very interested in expanding the base of our pyramid and one thing that we're doing is providing this desktop analytics offering for free. We've gotten thousands of downloads of that just in the past few weeks since we announced that. I expect that we’ll get many many thousands of downloads and that's taking us into departments and into small and midsize businesses. And when people build the MicroStrategy application, using a desktop product and they want to deploy it via mobile application or via the web, they come back and they buy our entire enterprise platform. So the desktop is kind of like it's like giving away the razor to sell the razor blades. And I think it's a really good marketing strategy for us to build a larger pipeline small and mid-size deals that eventually will trickle up to be larger deals for us. The Jump Start is a similar idea for all of those departments and small and midsize companies or prospects that aren't ready to make a mega commitment, they can make a quick easy commitment and the Jump Start paired with a desktop is a way for us to incubate a lot more MicroStrategy application development efforts. Because the platform is so valuable eventually anybody that takes a one or two day Jump Start and builds an application in MicroStrategy is going to decide they want an industrial strength server or they want to deploy it in the cloud or they want to deploy it via mobile or web, or they want to plug into their enterprise directory and when they do that they're going to come back and buy from us. So both of these are good incubation strategies. And so those are things we've announced and we're executing on…

That’s very helpful, Mike. My last question is any update on use of cash especially as we are getting into the last quarters – any updated thoughts on that.

We're really pleased with the cash generation of the business. I mean I think at the end of the day the fact that we're able to generate the cash is indicative of a good operational discipline and says that we’re in sync with and aligned with the needs of the marketplace. And we're responsible custodians of the resources it's granted us. I think certainly as the cash balance builds it creates us a lot more options than we would have otherwise. And we're continually evaluating options for usage – one option is to buy back the stock. There are other options. I think that collectively the management opinion is we should use the cash in the way that best builds enterprise value and shareholder value.

And our next question comes from Greg McDowell from JMP Securities.

Great, thank you. Hello gentlemen. Phong, you've gotten off easy so far with no model question. So I think I'll start with a question about Q4 and maybe just discussing some of the different puts and takes we should be thinking about is we try to be responsible custodians of this model. On the one hand it's wonderful to see revenue growth for the first time in two years. But I think we're very cognizant of the fact that on the license line in Q4 you faced a difficult comp, the services revenue or the consulting run rate this time last year was much higher than it is today. And overall it just feels like it might be tough to grow again in Q4. So I guess my first question is if you could just maybe help us think through some of the different puts and takes as we think through modeling Q4 on the top line. And then I do have one follow up.

Yeah, thanks Greg. So I think you're right, we had faced a much tougher compare in Q4 than we did in Q3. And I think as we stressed and as you probably observed over the last year of MicroStrategy’s return to or transformation and gradual return to growth that there's a lot of choppiness in our business still, as can be seen by sort of Q2 versus Q3 of this year. So it's hard to predict at this point product license growth or not growth going into Q4. A few areas that we feel better about is as we look at product support, for example, we're starting to see that turnaround with better renewal rates and better overall result. Even a 1% increase than a year over year basis in product support won’t do that. It’s hard to achieve given the structure of that business and the longevity of some of the core contracts that we have in place. Consulting, we're starting to see, as the declines stabilize we saw that sort of in Q1 through Q3 of this year. And as we add headcount back into the business in consulting and start to focus a lot more on utilization expert services, we hope to see that start to turn around over time. But you're right. Overall Q4 is going to be a tough compare. On the cost side we're definitely starting to invest in the business more, you're seeing the headcount increase, we're trying to be very cognizant about the actual cost structure itself. But the gradual increases in costs that you're seeing on a quarter over quarter basis, year over year we will continue to invest where it makes sense. As we said technology, sales and marketing are the primary areas. That's sort of how I would look at sort of the future overall right now.

Great, that's very helpful. Thank you. And my quick follow up is in your prepared remarks, Phong, you mentioned the tax rate and I know there are some discrete stuff in there. And I think it was maybe the lowest tax rate in 10 quarters or so and certainly as you mentioned helped with the EPS. But maybe how we should think about modeling the tax rate going forward and do you anticipate any other discrete items over the next few quarters?

Yeah, as you know taxes, especially on the effective tax rate ultimately is an estimate for the first three quarters of the year till we get to a final number at the end of the year. So it's one of the things that change pretty significantly every quarter depending on the discrete items. Couple trends that we've seen where we saw sort of probably for the last four quarters or so strength in our international business which effectively has a lowering impact on our tax rate. For Q3 specifically we saw strength in our North American business, for Q3 we saw a little bit of a raise of our tax rate. But overall we’ve seen an increase this year versus last year primarily for that reason, the change in the mix of our international versus domestic. The discrete items did have an impact this quarter. Whether we have them going forward or not, it’s hard to predict and specific to those items it's really just the changing estimates that we have associated with items related to the change in the international structure and some of the regulations that are out there right now may change their estimate. So we have seen improvements this year but I would necessarily extrapolate or predict any discrete items going forward because what we saw.

And our next question comes from Yun Kim from Brean Capital.

Thank you first. First, congrats on a solid quarter Michael and Phong. Michael, following up on the commentary regarding the cloud based deployment options that you guys are offering on AWS. When do you expect that to ramp and do you see an opportunity for both channel partners and maybe even ISV to be involved in that type of deployment scenario?

When you're putting a brand new capability in the market, it’s difficult to make a forecast quarter by quarter but I do think it's a really good tool set, it will be the first time we've given our partners, ISV partners or our channel partners or customers the ability to take control of this themselves. So I actually do expect good things to come from it. I would expect it will have an impact on our business in 2017 and will be out in the market in 2017 highlighting this as a key feature. We've already previewed it with a number of our channel partners and they’re very enthusiastic about this because this means that they could in fact now expand hundreds or thousands of environments that they administer on behalf of their customers and it's a great increase to their value proposition. So it's a win win for everybody. We think that that should help us scale and I don't think there's really anybody in the marketplace that that isn't a bit interested in deploying on the AWS cloud right now. So most of the customer base you'll find someone that has an interest and most partners and then even the other enterprise technology companies, database companies, application companies and the like, they all see the appeal of being able to create these cloud based instances for their customers very rapidly. So I can't see anything but goodness coming out of this and I can't quantify the number right now but I kind of will wait till we get a few data points like the two or three before we try to draw the line or try to draw the line there. But I do think we'll start to get some nice data points in 2017.

Now sounds like something interesting and very new that's out there for you guys. Could there be a chance looking out maybe several years that you may start to see some of more traditional legacy on-prem deployments, once you have this up and running [indiscernible] scale?

There is a chance, in fact, that's certainly part of our strategy. I'm not expecting that half or all will migrate to the cloud but I am thinking that we have lots and lots of customers that are running on premise and generally the common refrain is we're not nearly as agile as we'd like to be and it takes a long time to get our hardware upgraded, that it's a little bit cumbersome bureaucratic process and the company in general would like to be decreasing its data center footprint not increasing it. So there's a general sentiment to migrate up locations to the cloud. The reason that people don't migrate faster is because the tools make it cumbersome and so when you come along, let's say I think Microsoft is a great example of a company managing this well. If you come along with a set of tools, and let someone to go from operating their own exchange servers and outlook servers and they migrate an Office 365 and they can do that seamlessly, then there's a lot of enthusiasm to migrate to the Office 365 and our company did it. It took us some number of months but we did it seamlessly without interrupting anybody's work and we’re very enthusiastic to move into that cloud. For MicroStrategy to get its legacy customers in the cloud, we need to do the same thing which provides -- which is to provide them with a set of tools that make the migration of an existing production application that's on premise smooth and seamless. So the release 10.6 is going to represent a set of tools for creating a cloud deployment instance and it's going to make it an order of magnitude easier for someone to create that cloud instance. We have…

Okay, great. Looking forward to getting the updates on that part of the business. Real quickly, can you just give us an update on your OEM part of the business which saw strengths in the first half the year, how is the OEM business progressing so far and then what you expect to see going forward for that part of the business?

Sure. We've enthusiastic about the OEM business. And one of the reasons why is because the MicroStrategy platform represents the full spectrum of what they need, they want the mobile, they want the open embeddable analytics, they also want the sophisticated documents. This upgraded 10.5 where we came out with a dramatically improved RESTful API set that supports sophisticated filter queries on JSON and Java is a really big thing for the OEM business and we had a lot of requests for it, I think a lot of enthusiasm for that. So the product we've got in the market is in my opinion the best product in the world for an OEM that's in our industry. And we do have a lot of enthusiasm [indiscernible] sales cycles right now that we're working. I anticipate that that will be a good business for us in 2017.

And our next question comes from Frank Sparacino from First Analysis.

Hi guys, so just one question for me. Mike, maybe on the desktop product initiative that you have. You've had a desktop product for a few years in the marketplace. I don't know what type of adoption or traction you've seen with that. But I am curious the differences today versus maybe some of the prior releases absent the price point, obviously being free today but maybe from a technology standpoint relative to the closest peer in the market, if you think you've sort of closed the gap there and why you're optimistic.

I mean great technology companies keep trying until they succeed and we're like The Little Engine That Could in the enterprise analytics space. If I look back I would say that a few years ago we created something called MicroStrategy analytics desktop and it was a complete standalone implementation of our platform. We found that we didn't have a huge amount of commercial success with it and the reason why is because it didn't integrate with the enterprise capabilities. Within enterprise -- it didn't integrate with enterprise directory and data model and enterprise servers so we were just shipping a standalone thing that competed with Excel or competed with another standalone tool. And so we learned from that and we realized that we couldn't just ship a standalone product. The strength of MicroStrategy is the enterprise. I went all around the world and I met all these customers and I would have customers say, yeah, we have 60,000 users and there's 92 applications. I met one retailer that has 16 different mobile applications. So this desktop thing if it's just a standalone tool, it’s one of a hundred and we're not necessarily the best one of the hundred, no point competing against a standalone tool from Microsoft. So then we kind of rethought that and we implemented the version 10 architecture with the desktop product. And we put out the first version of the desktop and the first version allowed you to do some simple things but it functionally was pretty constrained and it was buggy. So then we tried it again and it got better and then we kept fixing the bugs and then around 10.3 we got to the point where you could open lots of different functional reports in the MicroStrategy server architecture with a desktop. And…

[Operator Instructions] We have a question from John Rizzuto from SunTrust.

Michael, just a follow-on on the desktop strategy, very interesting. Because I don't think it's a temporary measure, it sounds like part of what it is that you want to do. And we see a billion of dollars, over billions of dollars every year being spent on desktop tools, to people who have no need to go to an enterprise solution. And when you do make this move, even Microsoft, Gateway, Power BI, as long as you buy Office. So there's attachments to different types of things out there and you're kind of saying, do you think that market doesn't need to exist if there is a standalone market people willing to pay X number of dollars to do individual specific set of questions on a specific set of data for one user, is that just not a real long term viable market, is that what is the judgment or by giving it away for free is it something for the -- if you could just comment on that?

Well, I mean if you look at our business we've been generating consistent profits over the past two years. And if you look at what Tableau has done in order to build this desktop analytics market, they're just spending godawful amounts of money to do it. I mean if you were to ask me how enthusiastic am I about trying to sell 100 copies of a desktop analytics product to a corporation, I would just say selling a desktop product to the propeller heads of the data scientist of the world is going to be a thankless proposition and I don't expect you'll ever make any money in it. I might be wrong. I'm not a financial analyst but I think in the history of Tableau they haven't made any money, right? I mean If you add up the last decade and maybe I'm wrong but regardless I will say in a different way. I don't really think -- the only company that's going to make money in that space is going to be Microsoft and they've been making money by doing this since they put Excel out in the market. And I will leave that to them. I think it's reasonable for Microsoft to pursue this kind of strategy. I think that a much better idea is to give away the Swiss Army knife or give away the tool that lets you build the application files and then you sell the enterprise services that enterprises are going to need, I don't think I'm going to convince any data scientist to give me $10,000 for my desktop when Microsoft's out there with Power BI. But nor do I need to. What I do think is that the world is full of people that would love to grab a tool quickly…

Do you -- have you done on your own -- let's just start with your installed base, look out there, where you see you might be the enterprise standard or you're the primary vendor for BI, had there been a lot of overlap where you see individual business users within your installed base using another company's individual desktop tools? Is that something –

No, it’s very common that we will have a base of enterprise architecture and the IT organization that own the enterprise BI mission that are very strong MicroStrategy adherents and fanatics and then they'll say to us, well you know such and such is dabbling with Domo or such and such is dabbling with Tableau or such and such is dabbling with Quick-Tech and I don't want to let them into the enterprise architecture because it'll be a security nightmare or there will be 13 different versions of the P&L statement and I can't. I can't guarantee that employees won't take the data home with them when they leave the company, or all these things that concern them. And that refrain is what caused us to focus on my MicroStrategy 10 re-architect our platform and then focus on this desktop product and also Usher. What they want is they want to be able to deploy governed data discovery or provide self-service but they want to do it with the shared enterprise data model and shared enterprise security model. I think that's why there's so much popularity with Jump Start. A lot of times it'll be five people at a retailer and they'll say we've got to actually get 100 people to the Jump Start, we're going to give them all this desktop product and plug into our architecture now and that way they won't need to go look for the Power BI or the whatever fill in the blank. There's a hundred different things that might be dabbling with, which there's probably ten usual suspects that are most common. Obviously it's very important that we take some motivation from this and keep improving our desktop tools but we've also got I think a very strong franchise here at the enterprise level, because a lot of those desktop tools and individual tools are run by technologists, that don't have the same appreciation or enthusiasm for investing in the really intricate administrative task and security capabilities that we've implemented and that the enterprises need.

And just one final question, when you talk about having thousands of downloads since you first announced, do you expect that to accelerate? It’s just a prequalification process before you send people on this, in other words, do you rely on the user to qualify himself as to whether or not it's an enterprise opportunity or what could be the implication there for whether it be an inside sales strategy or develop its development resources [ph] and the bandwidth there?

In all of our marketing tests, we find in terms of the hierarchy of entrants, if you advertise to somebody, hey I'll have a salesperson call you, then that's like one. And if you say I'll give you free information or put you into an event, that's a 10 and if you say I'll give you free education that's 100. But if you say I'm going to give you a tool that's free that will let you build your own stuff, that's a thousand. So that everybody really wants to download that free tool and get started today and decide for themselves whether they like it and that has implications to expand our footprint within our mega accounts and also get us into prospects as well as partners, people get themselves enthusiastic. We have a pretty good transparency to who's actually downloading this and the like. And so we feed that directly into the business development process that we run at the company and we're enthusiastic that that's going to be a source of electricity and energy for us in business development the over the mid-term.

Okay, great. That’s all from me. End of Q&A

Okay. I’d like to thank everybody for their time today and again thank you for your support. We'll look forward to seeing you again in 12 weeks. Have a great holiday season.

Ladies and gentlemen thank you for your participation in today's conference. This includes the program. You may now disconnect. Everyone have a great day.