Good day, ladies and gentlemen and welcome to the MicroStrategy First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later there will a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d like to turn the conference over to Michael Saylor, Chairman, President and CEO. Sir, you may begin.

Thank you. Hello, this is Michael Saylor. I am the Chairman, President and CEO of MicroStrategy. I’d like to welcome all of you to today's conference call regarding our 2017 first 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 first 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. Now on to our financial results for Q1. Overall, our Q1 financial results were general in line with our expectation. We saw year-over-year growth in total revenue and debt. Our product support business continues to grow while we started a turnaround in our services business. Product license revenue declined year-over-year but were within our range of expectations given seasonal volatility in Q1. Costs remained stable with continued investments in sales and marketing as well as research and development. Last week we hosted our 20 Annual MicroStrategy World Conference in Washington DC. We had nearly 2900 attendees, a greater than 35% jump from last year. The energy from our customers, partners and employees was excellent and a sentiment…

Thanks Phone. I guess I would like to make a few high-level comments. First of all, I thought we started off the year with a solid quarter and then our revenues were up, our EPS is up. We thought our cash flow was solid. The support and services business performed well. We got some really nice offer wins with some very promising enterprises. We have focused our marketing message and focused our enterprise message on the MicroStrategy enterprise analytics and mobility platform and that is resonating extraordinarily well with customers and partners. In my recent symposium series, I took that message to the road to thousands of our customers and our partners and we communicated and showed great examples of how they can deploy enterprise analytics, mobility, custom apps, cloud apps and IOT apps on top of the MicroStrategy platform. I also met with many, many customers and got enough feedback from them to ascertain that we've hit a had a resonating sweet spot in the market. Lots of our customers want to deploy new analytics apps, lots of our customers want to deploy mobility apps. Lots of our customers are very enthusiastic about our embedded analytics capability. Our cloud offering has been revitalizing given a shot in the arm with the MicroStrategy for AWS platform that we're bringing to market and there is a lot of enthusiasm for deploying applications to the enterprise out of the AWS cloud especially with the continued success of Amazon and the AWS offering. I am also pleased to say that we've integrated our Usher Digital Identity offering right into our platform and it's resonating very well as an IOT solution and that we see lots of customers everywhere in the world that have enthusiasm for deploying IOT apps that have real-time telemetry and…

[Operator Instructions] Our first question comes from Greg McDowell with JMP Securities. You may begin.

Great, thank you very much. Michael, first question for you, certainly you know the discussion for the last couple of minutes on the competitive environment, it feels you're getting a little more aggressive in how you're talking about the competitive dynamics. And I do appreciate you being blunt with opinions whether some of us agree with you or not, I do appreciate the frankness with which you echo your opinion. But I guess a few questions, first we’ll try to take a cloud approach to the analytics market. So, I guess number one, what are some of the lessons we can pull away from that story with respect to the cloud and how analytics is going to move to the cloud environment? And then I have one or two follow-up. Thank.

I think the most important point here is that, cloud - supporting the cloud having a liquid elastic on demand capability is important to grow in the marketplace but the cloud itself is just a buzzword. So, you have to deliver the full range of platform functionality out of the cloud and an industrial strength enterprise instance of the cloud. I think burst failed as a business because it was delivering a subset of the functionality enterprise needed and a limited cloud offering that wasn't flexible enough and what you find when you deal with enterprises is, they don’t want to sacrifice anything in particular. They want all the functionality they could have one premise. They want all the control and they want to be able to do it out of the clouds. So, if you end up taking shortcuts in order to implement something in the cloud, you get people a one-size-fits-all, you're going to fail and even the burst can had the perfect cloud implementation and there's defective in many ways. If they had the perfect cloud of limitation, they still didn't have the full range of enterprise, analytics and mobility capabilities that you need in order to deploy compelling applications in the enterprise. And so, it doesn't help you to have a defective application that runs perfectly in the cloud. You have to a have great location that runs in a cost-effective secure elastic enterprise instance of the cloud. And I think a lot of people learn that sometimes the hard way.

And we did enjoy learning about the cloud last week at your conference and thank you for us and we did note the increased attendance there. Michael, may be a couple model related questions, one around services growth, great to see a return on the growth on the services line. I was just wondering how sustainable that return to growth is going to be in your opinion based on certain continued high utilization rates. And part B sort of the model question is that you know is building out product bookings proxy and recognizing that you had a really tough compare from a year ago but maybe you can walk us through some of the dynamics for wide deferred product license was down sequentially and wide deferred subscription went down and how we should maybe think about that product bookings proxy for the rest of year. Then I’ll get back in queue. Thanks.

Sure, thanks Greg. On the first question around services, if you go all the way back to 2014, we really at that point in time started after post-restructuring to change our strategy with services which was to go towards a higher bill rate expert services strategy. And as a result, we started the strip away a lot of our low bill rate, low value add work. And that really took all of 18 to 24 months to accomplish and as a result, revenue started to decline over that two-year period. I think we have seen it to start to bottom out, really starting in the second half of last year and are hoping that'll start to accelerate now into increased bill rates, increased margins and so I think Q1 we hope to be an indication of things to come. But we're still going through a lot of changes in that organization and so we'll see how it flows for the rest of the year. On your question on the deferred product license and deferred subscription services revenue, we did see a decrease in the deferred product license. Two things really result in that. One is we had what we call revenue runoff from deals that occurred in Q4 and that really is a result of the nature of certain deals we do and certain quarters we see that number go up, certain quarters we see that number go down. Fortunately, we were able to runoff some revenue and unlike if you take us back to Q1 of last year, we had a couple of OEM deals that occurred which are very large bookings deals, but we weren’t were able to recognize revenue and those add up in the overall deferred product license revenue line. Some of those started to run off too and so those show up in revenue we had fewer of those deals this quarter Q1 specifically. So overall, a lot of things play in our favor but I wouldn't necessarily say that that creates a trend. It really just depends on the nature of what deals occur in any particular quarter.

Great. Thank you.

Thank you. Our next question comes from Karl Keirstead with Deutsche Bank. You may begin.

Thanks. I've kept one for Michael and one for Phong. Michael, on the cloud front, I think most people on the line would agree that enterprise interest in AWS and all things cloud related seems to be up into the right. A number of your incumbent rivals Teradata and Tableau are all making bigger pushes to the cloud and subscription models, but in terms of your cloud or subscription revenue line it's been in the $7.5 million to $8 million per quarter range for a little while and I'm wondering what it'll take to break out of that and if we're close to the point where you want to press your customers a little bit more towards that subscription model? So that was the question for you Michael. And then Phong I just wanted to take your temperature on the prior lose target of mid-20s operating margin for 2017. First half you're running a little bit closer to 20, do you still feel good about that four your goal, thanks so much?

Yes, so regarding the cloud question, MicroStrategy for AWS is what we think is a fairly exciting offering because it represents the MicroStrategy platform deployable and AWS as a cloud offering by our partners and by our customers. The cloud business that we have had in the last few years represents business where we actually provided the support agreement and hosting and managed it for the customer. And that inherently is not nearly as scalable as the cloud business if we have dozens of partners or dozens or hundreds of customers that are able to operate their own instances out in the cloud. So, we feel that looking forward in the common year we'll be able to grow that business more effectively by putting our technology in the hands of more customers and more partners and getting out of the way and so we're not on a critical path of the hosting agreement or a critical path of the support agreement or so. So that is our strategy for growing the cloud business, Phong?

Yes, Karl on the question around our operating margins and I assume you're referring to non-GAAP numbers, I think last year we did about 23% non-GAAP operating margins. First quarter we were at 19%. As you know first quarter is historically our lowest revenue quarter and also therefore our lowest operating margin quarter and that would be our expectation with this year too is that the first quarter is typically a low watermark. But all that said, I think looking at mid-20s would be a reasonable estimate. However, one thing that I would also mention, we talked about is we are starting to invest more in certain areas of the business, marketing being one of them and so depending on the performance and what we see as far as our return on investment with marketing, we may increase that level even as we get throughout the year.

Got it. Okay. Thank you both.

Thank you. Our next question comes from Abhey Lamba with Mizuho Securities. You may begin

Yes. Thank you. Michael, you talked about the competitive landscape and it seems like this lack of focus by other and we understand your comments about the significant opportunity that's out there, but you license revenue growth is not materializing. Can we talk about what needs to happen for you to capitalize on that opportunity and related to that, what needs to happen for you to get more new customers to adopt the platform?

We think business performances is pretty solid and consistent over time, but obviously license revenue is volatile from quarter-to-quarter and we think that over the course of a year or two, it's going to tell out. Our primary focus to grow the license revenue is twofold. One is we're focused on our sales and marketing programs and improving the tools, the techniques and the programs we're executing. That means a number of additional improvements to our field marketing and we're beginning to drive our advertising and our branding much harder with online digital campaigns. We're driving a number of innovative programs with regard to technology like the jump start and the free desktop which seem to be promising. And of course, I think there are a number of partner programs that are pretty promising. I'm pretty enthusiastic about our current conversations with partners to grow the business, especially where we have overlapping interest in cloud or IOT, embedded analytics. So, continued focus on sales and marketing I think is a big part of this. I think the other part of this is continual improvement to the product, which comes in a pretty consistent fashion quarter-by-quarter and as the product gets better and it gets more productive, I think that makes it easier for us to grow the license number. So, we'll just continue to focus on that and innovate and I think our customers understand that we're here for the long term and we continue to keep improving the offering we put in the market and I think that our focus upon these programs is very comforting to our partners as well and we're seeing increased interest and increase support in the partner channel for MicroStrategy as some of these other incumbents lose momentum. And so, I think the combination of partners defecting from or losing focus upon our competitors and then us redoubling our efforts to improve our own sales and marketing programs will result in growth and benefits over time.

That's helpful Michael and you balance sheet continues to become stronger, can you give us an update on your plans for the cash and also Phong can you talk about are we still looking to see revenue growth this year for the full year, that's it for me. Thank you.

Yes, we're pleased with our cash flow and we're pretty pleased to see the balance sheet continue to strengthen and I think that's a great source of comfort to everybody involved in the corporation. We continue to consider best uses of the cash and there are a number of different factors we take into account including the macro environment and the currency environment and the tax environment and that combined with investor sentiment and certain opportunities that we have are taken into account on a pretty routine quarter-by-quarter basis. So, we don't have any particular announcements to make at this point, but we're comforted by the fact that we have a really strong balance sheet and we're always thinking about the best way to take advantage of that asset for the benefit of the business.

As far as revenue growth goes by, we're pretty overall satisfied with Q1, which saw a modest revenue increase 1% on a year-over-year basis, 2% on a constant currency basis and our objective is still to grow revenue this year.

Thank you.

[Operator instructions] Our next question comes from Walter Pritchard with Citi. You may begin.

Hi. Thank you. This is Tyler Radke on for Walter. I noticed on the 10-Q disclosure that the large deals were down pretty substantially year-over-year but the smaller portion of the deals under $500,000 was actually up. I guess two questions. One, can you just talk about some of the weakness you saw on the large deal segment and then on the smaller deals that did grow, is there any kind of takeaway that we can have from this suggesting that maybe you're getting more the net new customers, kind of more the land and expand type deal. Thank you.

Hi Tyler. Thanks for the question, I wouldn't read into the deal sizes too much especially in Q1 going from somewhere like four to one large deal, it really just is -- it's such a small number and the likelihood that we closed two or three extra-large deals in a quarter really swing do we go up or down on our large deals and Q1 as I had mentioned sort of historically lowest quarter and therefore the number of deals and their effect on the overall income statement and revenue is just further magnified and amplified. So, I wouldn't read into that too much. Similarly, I wouldn't read too much into the small deal volume. It's just a lot of volatility that occurs in Q1 and so we don't over interpret those numbers.

Great. And then as a follow-up, you mentioned Michael a lot of positive things about AWS and the cloud business but it sound like there is some moving parts in that business you have some hosting business that's more legacy combined with some of these newer opportunities on AWS. Is there any way to help us think about this business better any way to quantify the mix of what's in that cloud segment and then maybe when will we get to a point where that mix shift to the higher growth AWS segment? And then just a separate question on the cloud, are your current customers that are adopting AWS, are these net new or are there people shifting kind of an on-prem MicroStrategy installments to the cloud, thank you?

We have a cloud business that consists of us providing cloud application and hosting support service and some of it we still operator out of our data centers although more of it I believe we operate on the AWS environment now. That's a stable business. I really think the MicroStrategy for AWS offering, which is the 2017 upgrade to our platform, is really all upside and so the best way to think about this business is MicroStrategy for AWS is all upside. And we believe we have the best enterprise analytics platform on AWS in the world bar none and we think that our platform is far better than the competitions not just because the platform is better, but we think our cloud implementation is better, it's a flexible elastic, single tenant, secure API enabled platform. And our customers like that and I think that that opens up the opportunity for us to acquire large chunks of business that otherwise would have been closed off to us. So, as we look forward, I think the way to look forward is to say here's a company with an enterprise analytics and mobility platform that's bringing to market the ability to deploy it directly to AWS in an extremely liquid, productive fashion that is a competitive advantage, versus other companies that have some AWS capability and it's a mega strategic advantage over companies that don't have any AWS capability are going to suffer dramatically. So, we view it as being a competitive edge, a productivity edge and it’s a new value proposition for us, for our partners and our customers and as I look out in terms of revenue opportunities for us, one revenue opportunity is people that are really committed to deploying analytics out of AWS now and when they see…

Thanks Michael and just quickly following up on that, of the three opportunities, revenue opportunities you mentioned, do you have a view as to which of them is biggest anyway you can you rank order this?

My intuition tells me that feeding the partner ecosystem with a set of cloud enablement tools that allows them to spin up thousands of instances in the cloud and then sell the complete datacenter hosted offering plus the analytics application platform integration services and application development services is just the real benefit to them and they're going to be great allies to us because we're solving a problem for them and getting them into a revenue proposition that they didn't have previously. And they of course have many, many relationships everywhere in the world. So, I feel like we're going to get great benefits in our partnering and our channel business because we're bringing this AWS offering to marketplace.

Great. Thank you.

Thank you. Our next question comes from Yun Kim with Benchmark. You may begin.

Thank you. Michael, just questions on AWS again, so can you update us so far on what products are today available on AWS and what are your plans for the product release going forward? And then is there a specific plan to introduce just a product that's only going to AWS and if you plan to offer only subscription terms on AWS and what not, thanks?

Yeah, good question. In 2016 MicroStrategy had -- the MicroStrategy 10 platform for Windows and MicroStrategy 10 for Linux and we could get those to a customer and partner and they could actually deploy the platform in their own datacenter on one of those two platforms with the full entirety of features. If you wanted to deploy MicroStrategy on AWS, we didn't sell it as a product. We sold it as a hosted service and support agreement and we would actually create the instance for you and then we would run administered for you and so that was a professional service and a hosted service we offer. In 2017, we expanded our offering by offering MicroStrategy 10 and for Windows for Linux and then we added MicroStrategy 10 for AWS. So, it's a third part of our product offering and what that means is now we provide all of the tooling for any partner or customer to install our software in the dedicated instance of AWS that they control where they will be billed for and they will administer it. And we took ourselves out of the position of having to provide the hosting or the support agreement. That of course is a much more scalable model and we're basically putting purer intellectual property into the marketplace and it makes it possible for 1,000 entities to spin up a hundred of these instances each and have 100,000 instances in AWS that are administered, managed and maintained by personnel other than MicroStrategy professional services people. So, in terms of what that does, what it does everything that MicroStrategy for Linux or MicroStrategy for Windows does. So, it's the full enterprise suite of analytics and mobility capabilities. Any analytics or mobility app that you build on MicroStrategy platform that could be deployed…

Great. Thanks for that detail, but I do want to ask is that -- so I am assuming the AWS that's available only on licensing terms or can that be also purchase on a subscription terms?

Yeah, the MicroStrategy for AWS is sold right now as a term license, but we sell it as a license as opposed to as a service. So, we're licensing software. It is different than the license we would give for MicroStrategy on top of Windows for example. So, it's a new product offering with new licensing potential for us.

Okay. Great. And then…

It shows up in our subscription services revenue.

Okay. Great. And then just want to make sure so when you deploy like that you core product on AWS, is that -- is it fair to characterize that as a single tenant model rather than a multi-tenant just because it looks like there are instantly built for each customer.

If a customer were to license and deploy MicroStrategy on AWS, it would be single tenant with regard to them that is the bank would be running their own instance and their own secure environment of AWS, but they might choose to make that available to hundreds of their customers and it's multitenant with regard to their customers. So, the bank has complete control of the instance and they can choose to support multiple of their downstream customers or multiple instances of applications, but they're not sharing any bandwidth with any other MicroStrategy customer. So, they can tailor it however they like and they secured it to their own specifications if that helps.

Okay. Great. That does help to better understand what you're doing on the AWS and then just curious is Usher part of the available today on AWS or is that part of the plan at all?

Yeah first of all, the entire MicroStrategy analytics and mobility platform includes Usher, includes the mobile approximately, includes the web, includes the desktop, includes the backend servers, the gateways and drivers. So, when you punch the button to install this, you have all of that functionality and it's tightly integrated and that's I think one of our great advantages. But there's another nuance that may be picked up on and I'm glad you did which is that a lot of the appeal of MicroStrategy for AWS is that you've got so much elastic power on demand and so if you wanted to deploy a 10,000 user Digital Identity Solution or IOT solution where you're actually generate telemetry from all 10,000 mobile apps in real time, then it's really great to be able to spend that up in the AWS cloud and then to be able to elastically adjust it. One of the critical shortcomings of some of our other competitors approach to the cloud is, they would actually offer you a fixed slice of bandwidth and a fixed amount of memory and they would run the entire environment for you, but of course some customers are going to need a small amount of bandwidth because they’ve got a limited used case. Other customers are going to need a huge amount of bandwidth because they want to run a real time Internet of Things applications with massive amounts of data. And so that kind of cookie-cutter one-size-fits-all cloud model just won't work. You need to be able to spin up a different instance and a different amount of bandwidth depending upon the application and indeed you might even need to change the bandwidth depending upon the time of day or the day of the week depending upon what you're trying to accomplish. And so, when we talk about having a single tenant industrial strength enterprise cloud, we really mean the ability to control your own destiny, to tailor it to whatever your organization needs to have done and to scale it up and scale it down from time to time and even to automate the -- automate the configuration via APIs or triggers. So, you might integrate it into your other enterprise applications. That's what's appealing to our customers and our partners, that kind of an enterprise grade technology.

Sounds great. It sounds like it's a perfect fit for AWS type of solution that also there. Phong, real quick maintenance revenue declined sequentially, which is consistent with your prior Q1, can you just remind us what are the dynamics behind the revenue declining sequentially in Q1?

First of all, with maintenance revenue, I would prefer to look at on a year-over-year basis since it's sequential. In any particular quarter, we may have a late renewal and some of our customers pay as much as $1 million to $2 million in maintenance revenue. A late renewal in any particular quarter means we can't recognize that revenue for that quarter and it pushes up to the next quarter. And Q4 happened to be a little bit higher on maintenance revenue. As a result of that we had some revenue that was diverted into Q4. It causes a little bit of a peak and then we came down again in Q1. So that's the dynamic on why it's better to look at either on a year-over-year basis or also a trailing 12-month basis is a good way to look at maintenance revenue.

Okay. Got it and so you're breaking that maintenance revenue on cash basis, is that the dynamics to them?

We recognize it on a cash basis yes.

Okay. Thank you so much.

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Michael Saylor for closing remarks.

Okay. I want to thank everybody for their support and thanks for being here today. We're looking forward to the rest of 2017 and we'll speak to you in 12 weeks.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.