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

Hi, 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 second 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 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. On to our financial results for second quarter. Overall, our product license revenue results in Q2 2017 were below our expectations. However, we continued to see strength in other areas of our business including cloud, maintenance renewal and consulting and education. A shortfall in product license revenue contributed to declines in overall revenue, operating income and diluted earnings per share. Product license revenues declined 19% year over year. Total revenues declined 2% year over year. Operating income declined 26% year over year and diluted earnings per share declined 41% year over year. Description services revenue grew 7%, services revenue increased 9% year over year and we continued to experience strong maintenance renewal rate. We managed our cost…

Thanks Phong. I have comments in four different areas. So I thought I'd start with a review of the last three years of our restructuring plan and then some observations over the course of that time and my travels, and then a financial assessment for our Q2 results, and then I’m going to talk about our three-year growth plan going forward. So first of all a post-mortem on the last three years. Over the last three years putting everything in perspective we rationalized our product lines to a single platform, we centralized our corporate operations at Tysons Corner. We overhauled and integrated our corporate systems that we used to run the business across account planning, sales, HR, recruiting, consulting tech support, product development and our overall employee portal. We modernized our core product moving from version nine to version ten and reengineered substantially that platform to open it up to be open in modern to new APIs and new data sources. We implemented an enterprise analytics architecture called [indiscernible] on top of MicroStrategy 10 using version 10 dashboards. We rebuilt the management team and refocused on a single mission. We built up for 50 new corporate programs to drive business performance. We implemented a new BU business strategy on a worldwide basis and rolled it out. We implemented a new set of financial controls to drive strong margins. We generated 300 million in cash and almost doubled our balance sheet strength. And as a CEO I reengaged with customers traveling to just about every major city in the United States, Europe, Middle East and the Pacific region, probably about 100 places and met with nearly a thousand customers one-on-one. So my observations from that time and from that travel. After having met with those thousand customers and spent so much…

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

So just to drill in on some of these drivers to the growth challenges. Michael, you talk about the competitive noise, but haven't you been experiencing this for the last year, 18 months. What's really changed from the gang that you just described because it feels like they've been creating noise for a little while and for a long time MicroStrategy was successful in delivering your message around a more enterprise great solution, what's changed really in the last couple of months or quarter or two.

I think what's changed is of course they've been - the marketplace has been noisy environment. And we haven't been growing in that environment in the past 12 months. So in fact I believe that the noise is actually impediment for us to grow the business, but I don't think we come to the conclusion that we are going to have to spend substantially more money on marketing and business development programs and technology programs. Until we’d actually see it play out. So what’s changed is one more year and in a year we've got a year of information about how our programs are going to work in the market. And also we've got a year during which we have furthered our product transition and installed the systems and the programs wanted to install. So I don't think we were ready to spend a lot more in marketing or technology development a year ago because we were busy tooling the business and putting in place all these programs. So we couldn't have even if we wanted to. But we also - I don't think we were sure that we needed to. I think what's happened now is that we have one more year of experience, we've got the results from Q1 and Q2 that are telling us that it’s a difficult market, it is not getting any easier. And we've also got the chassis, the product chassis and the corporate chassis tuned to the level where we believe they can bear a bit more investment and more intensity. And I would say it's kind of like a - if you want to use an athlete analogy, we’ve been exercising really hard and now we want to build big muscles and we need to eat more and maybe where we're not putting out protein in the system. Protein and this analogy is feed money to the marketing program and feed intelligent engineers into technology program so that we can build the brand and build the product.

And maybe as a follow up, as you think about this three-year plan, I know you probably don't want to get cornered into a growth target, but obviously the flip side of taking your margins from what - in the first half were sort of high teens down to potentially less than 10%, is that, with a lag completely understand, you should see a revenue growth acceleration. So when you look at couple years out, let's say to 2019, you pick the timeframe. What kind of revenue growth rate are you aspiring to on the back of this greater spending level?

I think that our goal with regard to growth is we want to have a company that's growing revenue on a double digit. We want to be north of 10%. I think if we're in the single digits, I don't think we’d satisfied with that long term, I think we want to be in the teens.

I'll sneak in one more. We didn't touch on it too much in your comments, Michael, but Phong you mentioned, there was a little bit of a sector weakness maybe in the retail industry. Can you just remind us what I know you don't typically break out your vertical exposure, but how big is that retail sector and maybe a little color on how tough it was during 2Q?

Yes Karl, our retail is anywhere about 10% to 20% of our bookings depending on the quarter in our maintenance revenue. And what we’re finding more and more with retail customers is willing to spend but no money to spend. And so, we’ll have deals in any particular quarter, where the customer really does want to expand on MicroStrategy, but doesn't have the budget and therefore is kicking the can down two, three quarters, even to the following year. And we're seeing that happen more and more. Now on the other hand there is large retail customers who are the ones who are taking the share from the other ones, the more digitized customers who have an appetite to spend on the other side. So there's an opportunity there, but we're definitely feeling the retail weakness, we saw it in Q2 for sure.

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

Can you elaborate on, as you’re making these investments, some of those competitors who are making noise are also moving in that direction. And you’re coming from a little bit behind in some categories, so what is it that you're seeing in your product, in your customer base or in your ecosystem that gives you confidence that with these increased investments, you will be able to beat the competition and get back to double digit growth?

Yeah. Good question. Well, I think that we've got a very strong franchise in the area of analytics and mobility and we've got a good story, but it turns out the nominee people are hearing the story and not nearly as many as we'd like are aware of the story. So I believe that we’ll win if we can get invited into the dance and we're just not getting into as many. If we look at our competition, I think there's two aspects to this. One is, the companies like Tableau and the like are just spending gargantuan amounts of money to be out in the trade and they're in places where we're just not showing up, and if we simply show up, I think that our product will compare favorably to theirs, but if we don't show up, we don't actually get a prospect at all and so we don't get a chance to compete. And so I think in that particular case, we have to make sure that we're in the same channels and that means we need to spend money and the trade marketing to get there. I think there's another source of noise, not from direct inclined [ph] competitors, if someone is marketing a new cloud thing or a new analytic app or a new data source, they're not an inclined competitor, but they're making a lot of noise to get attention of a buyer and they're grabbing a portion of the budget share and the budgets at the enterprise IT level are fixed and so they could go to an integrator, they could go to a data provider, they can go to an analytics provider or a platform provider depending upon who's got the ear and the attention of the buyer. So, in that respect,…

There's another piece that gives us confidence in our solution and our ability to grow is our existing customer base. Customer satisfaction continues to increase. Our maintenance renewal rates continue to be at an all-time high and so there's power in our platform for our customers and they're choosing to stay with MicroStrategy, because they believe it's a superior technical solution for the enterprise and that we’re the best alternative out there. The challenge as Mike says is with folks who are not our existing customers and you do find in competitive situations, we're losing and being told, you are the better solution, but the business users wanted something that they've touched and played with and felt before, heard of before. And that's where an aggressive field marketing campaign and brand activity will allow us to compete better in those types of situations, where we believe we should be able to win and can be able to win from a technical perspective.

Got it. Just two quick follow-ups, you highlighted a lot of good marketing initiatives where you plan to invest and as part of that, you had -- a couple of quarters ago, you started the free download thing to attract new customers. So what was the feedback or what was the bottleneck in getting that strategy to get the desired results. And secondly, Michael, I think you also mentioned large investments in the product. Can you talk a little bit about which areas of product do you need to be more competitive in this space? That's it for me.

Yeah. Good question. I think the desktop download program has worked well. What we're providing as a desktop analytics tool and you can create a desktop dashboard, but the desktop analytics space is kind of a low margin commodity space. There is not a lot of revenue to be had there and so where the real money is, is in the enterprise. So if I'm able to build a dashboard and deploy it via an enterprise platform to hundreds or thousands of people with a shared enterprise dataset and a shared security model, that's a revenue generator. If I can deploy it to mobile devices from a shared enterprise platform, that's a revenue generator. Now, the challenge for us right now is that our desktop download doesn't allow you to build and deploy web and mobile applications. It simply allows you to build dashboards that are standalone. And so our technical strategy in order to dramatically increase our footprint is to create -- to upgrade that desktop product by creating something called workstation. And workstation is an enterprise grade tool that will allow you to build an analytic application, you can deploy to your enterprise via the web and via mobile, all from a single workstation product that you download. So to say in another way, if I have a few hours, I can download the desktop product today, I can build a dashboard, I've got standalone analytics. But when we put the workstation in the marketplace, I would be able to download the workstation and in a few hours, maybe a few days, build an application I deploy to the entire enterprise. That would represent a dramatic increase in productivity for our enterprise development community and we've been hard at work on that and we're expecting to bring the first version of that to market place sometime this year and to substantially finish the feature set of that next year. And as we put the workstation into the marketplace, I think we'll take the amount of energy it takes to deploy MicroStrategy full featured enterprise applications dramatically down. We’ll simplify and accelerator that process and that will help us to build and to grow our customer base.

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

I think a lot of investors are going to understand I believe, sort of ask how this is going to transpire over the next three years, because I think some of your investor base went through this already when you took operating margins down before and we didn't see sort of the revenue growth return and then we saw the spike in operating margins through the transformation you went to, starting in 2015. And I think a lot of investors are going to ask, well, what happens at the end of the next three years if we don't see the double digit revenue growth and [indiscernible] operating margins in the single digits. I mean what's next and I don't mean to sound like the skeptic, I'm just trying to sort of anticipate what questions we're going to get tomorrow and what questions you will get as members of the leadership team. I don't know, I guess those are my comments and my question is, what happens to this business if this change doesn't happen in the way you anticipate?

Well, it’s a good business and we've got very, very deeply loyal customers and they've got great applications and I meet customers all the time that they tell me they started work with us 20 years ago and they've got 65,000 MicroStrategy reports distributed to tens of thousands of users. That's not going away any time soon and they're waiting for us to take them to the next level. So I actually think it's going to work and I think that it's pretty clear there's a lot of technology investments we need to make and while this course of action is to move full speed ahead and make them. I think it's also clear that just about everywhere we go, where people saying you're a really well-kept secret and why don't people know about this and you should get out and spread the gospel a bit more. So I expect that our investments in marketing and technology are going to result in the growth of the business and obviously just like everything, we do here -- we review it every single quarter, we review it every single quarter internally and we review it every single quarter externally with the investors. So in three years, the investors will have had 12 quarterly updates during which they're going to have a very, very intricate, blow-by-blow, deeply analyzed breakdown of exactly what's working and what's not working, right and I think that it will be pretty clear what we do next.

And then, Greg, you're asking a very fair question and it's one I ask myself not having been here during the year 2010, 2011 where the operating margins started to decrease, [indiscernible] revenue increases and from an objective point of view, looking back at those years of MicroStrategy, it's almost an entirely different company at this point in time. And so the market is in a different place for sure, but our company in terms of our software platform, in terms of the leadership and the people we have in place, terms of the processes and the intensity of the processes and transparency into our systems and frankly, as Mike pointed out, the transparency you get into watching us every single quarter is quite different this time around. So where from afar, it may seem like same story being played over again on a very different company that would occur.

One quick follow-up. The message I'm hearing is that you're going to essentially double down on the analytics market when I think everyone on the call recognizes some of the competitive noise in the market and just how crowded the market is and you've, MicroStrategy as a company, has had some success in the past going in to some adjacent markets like, you know, I think Alarm.com was an investment for you guys many years ago. The security business with Usher is something. So I guess, given the cash flow generation profile of this business and the strong balance sheet, how do you think about sticking to your knitting in the analytics market versus using this cash and trying to go after a different market that's not as crowded.

Well, I think that with regard to our balance sheet, we've been very conservative and responsible because we wanted to make sure that that served as a source of stability for the business over the long term. I think what we're really talking about here is increasing the degree of focus of the business on the core business and I think that's the least risky, most prudent thing for us to do right now and in a way, you could characterize it as increasing the expenditure, the scope of these areas, but the truth is, we’re really building back our technology, our technology, we're building them back on top of the version 10 chassis after having restructured or reengineered the product. And it's an appropriate thing to do and we're building back some of our marketing intensity that we cut back on three years ago in the interest of being prudent like things like some of the tradeshow, marketing and the rest. We used to do a lot more of that and we pulled back on it because we couldn't get a clear transparency, we didn't feel like we had the controls over that we wanted to have. And so now that we've actually built new systems and controls and marketing new systems and controls and technology. I think we've got a matrix and a transparency that allows us to spend more money and be more comfortable with it.

[Operator Instructions] And our next question comes from Walter Pritchard of Citi. Your line is now open.

This is Tyler Radke on for Walter. I just wanted to clarify your commentary on the competitive environment and it seems like Phong, you mentioned that that was a source of potential weakness here in Q2 and if I just contrast your commentary this quarter with what you said in Q1 with Burst getting bought and Tableau and Qlik kind of having some of their challenges. I was just wondering if you could kind of provide some context as to what's changed since then and then if you've seen anyone in particular, maybe making more noise relative to last quarter that would be helpful as well. Thanks.

I think the universe is full of a lot, if not certainly not dozens, but could be even 100 enterprise technology vendors in the data analytics mobility space that all want to get noticed, especially in the analytics space. Some of them public, a lot of them private and privately funded and all of them desperately spending money in order to get their story heard whatever the story might be. I think the great majority of all of them will disappear. They're all going to either be bought or amalgamated or merged out of existence up to and including even Tableau I think will eventually disappear. It will be bought by somebody because they don't have committed shareholder basis and they operate with extremely aggressive, more near term goals, but that doesn't change the fact that they're still spending lots of money creating lot of noise in the market and you have to fight your way through that. You've got the lookers of the world and the domos of the world and looker will say, you know you have to do this thing and domos, you have to do that thing. They've all got their narrative whatever their narrative is and typically the narrative is, here's the new thing and the old stuff is no longer relevant and then you have to work your way through that and get into those sales cycles. I think if we contrast ourselves to Tableau, they must be spending, if not 5x, 10x as much money on marketing as we're spending, some gargantuan amount of money and that means that they just can drench and they can pour money and pour people just in every event, everywhere all the time and it's becoming clear based on what we've seen that we're going to have to step up our game and increase the volume if we want to be noticed in that cacophony of noise. It’s not that I'm worried that we're going to not win, I actually think that one of our strategies that has been very successful for the past 15 years is wait for our competitors to implode and 99 of the last 100 have imploded, it’s just a matter of time. But what we're talking about here is growth. I'm sure we’ll be standing, but the question is how big will we be and if we -- if we're more conservative, I think we'll see the parts of the market and market share to all these various players and if we get louder, I think we’ll grab our fair share of the market and will be better for everybody associated with MicroStrategy for us to do that So that's what I think about that right now.

Got it. And then if I look at your sales and marketing headcount, that's grown for about two years in a row and you don't split out the composition of sales versus marketing, but I guess if you were to kind of evaluate your progress over the last two years and seeing where your headcount growth has been, would you just say that kind of some of the challenges have been more on kind of generating the pipeline versus the actual execution and related to that, can you talk about your plans to improve productivity on the sales side?

I think we've got a really strong enterprise sales team right now and we're pleased with it and I think we've grown marketing a bit. We’ll probably grow the marketing account a bit more than we grow sales headcount and I think the big moving part in marketing is discretionary expenditures with advertising and trade shows and other programs and co-marketing and partner programs as opposed to headcount related. You need a few people to execute these programs, but really what you need is dollars to execute the program. I believe that we will move the needle on headcount and I expect we’ll add hundreds of heads to the company over the course of a year or so. But they'll be primarily in the area of technology. So where we need heads and where we need talent is in engineering and product development. We actually just need more dollars, a little bit of executive talent, but really a lot more dollars in the area of sales and marketing because the team is pretty complete for the most part.

In terms of the increases in the headcount we've had in sales over the last year, as you know we've built up our sales team a reasonable amount. We're happy with the team we have in place. We'd like to see improved execution, improved productivity and the best way to improve their productivity is by providing through a marketing engine, better quality leads and better quality opportunity. So that that's where we think we’ll start to see some real improvement in the productivity of the sales team.

And if I could just sneak in two quick ones on the quarter here. If I look at the maintenance revenue Phong, if I'm doing my math correctly, it looked like well it did grow on a sequential basis; it was down just slightly year-over-year on a constant currency basis. What was driving that, I think you mentioned something along the lines of retail impacting the maintenance revenue?

It wasn’t so much retail, I mean there's really a few components to maintenance revenue, Tyler, as you know, one is the renewal of maintenance of our existing customer base and that continues to be quite strong. And the second is, adding new customers to the maintenance revenue. And as we see slowdown in our bookings, which we saw for the last three quarters on a year over year basis, booking is going down that then a lagging dampening effect on the overall maintenance revenue. So that's the reason we've seen it go down on a year-over-year basis.

And then last question just on international, I noticed that was - it was probably weaker than the US, especially on kind of the mid and large deal size. What was driving that?

I wouldn't call that anything in particular about international this quarter that was weaker than any other segment, weaker than North America. So I would say that’s most just general volatility and we expect international to still be an important part of the growth.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session, I‘d now like to turn the call back over to Mr. Saylor for any further remarks.

I want to thank everybody for being with us today and for all of our shareholders we appreciate your support and we’ll look forward to speaking with you again in 12 weeks, all the best.

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