Good day ladies and gentlemen, and welcome to the MicroStrategy, Second Quarter 2018 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 follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Michael Saylor, Chairman, President and CEO. Sir, you may begin.

Thank you. Hello! This is Michael Saylor. I’m Chairman, President and CEO of MicroStrategy. I’d like to welcome all of you to today’s conference call regarding our 2018 second quarter financial results. I’m here with our Chief Operating Officer and Chief Financial Officer, Phong Le. First, I’d like to pass the floor to Phong, who’s going to read the safe harbor statement and make some statements 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’ll 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 the market today, which is located on our website at www.microstrategy.com. One year after sharing our plan to invest in MicroStrategy to drive growth, we’re starting to see initial signs of improvement. For the first time in seven quarters we saw product license revenue increase by 9% or $1.6 million year-over-year. Total revenue also increased by 1% or $1.4 million year-over-year. Total revenue excluding services increased by 4% to $3.7 million year-over-year. We continue to see success in the area of customer service. This is a result of improvement and investments in our product support team, where we grew headcount 5% year-over-year and as a result of our proactive customer outreach and company-wide emphasis on the customer. The result has been increased to 4% or $2.9 million year-over-year…

Thanks Phong. Now that we’re one year into our three year growth plan, I thought it would be reasonable to provide an update on progress against that plan and talk about observations to provide everybody on the call with some color. Let’s start with the plan itself. It’s four pronged; make targeted, focused investments in sales; make investments in marketing; make investments in our services programs; and make investments in our technology programs. So to take them one at a time, with regard to sales, over the past year I’m pleased with the way that we have focused our energies on an account basis. We’ve identified a clear set of named accounts, both prospects and customers; segmented of those accounts, assigned those accounts and begun to drive more sophisticated, more mature account planning and customer support and account based set of processes. We have organized our sales organization into regions around the world, and in each region we’ve put in place a field marketing manager, and we’ve put in place a global alliances manager and we’ve aligned them with the general managers in each of the various regions. This has been a popular change, and I think the result has been an improvement in our local field marketing activities and the engagement of marketing with sales, and we’ve also been able to improve our relationship with our partners and our engagement with our partner ecosystem as a result of these investments. We’ve implemented a general manager structure and a 360 degree review processes that are meant to improve teamwork and drive transparency, while encouraging coordination at a local level, and so these investments I believe are starting to pay off in the form of focus, alignment and engagement everywhere in the world. If we move on to the second prong…

Thank you. (Operator Instructions). Our first question comes from Karl Keirstead with Deutsche Bank. Your line is now open.

Thank you. Hey Michael, Phong articulated a continued, sort of reaffirmed plan for product license growth in 2018. I think in the first half you’re minus 9%. So you’re going to need actually some fairly solid growth in the second half to hit that aspirational target, and I’m just wondering how you feel about that and if it’s a function really of the sales changes and marketing changes you’ve made bearing fruit. Are you sensing that perhaps the end market demand is picking up on the back of a better economy and you can benefit from that as well? Maybe a little color on the second half to give us some comfort that you can hit that target on product license. Thank you.

Hey Karl. I’ll start and I’m sure Mike will add to this. You know we had a stronger second quarter when it comes to product license revenue growth and a tougher first quarter as you mentioned. Michael walked through all the things that we’ve done in the organization from a sales and services and marketing and technologies perspective, and we’re seeing improvement in our pipeline as a result of those activities. So, you know we’re going to go into the second half feeling good about growing our revenue, but as I mentioned, it is always volatility that is more difficult to predict in any particular quarter. But I think the positivity is more related to what we’ve done internally than any external factors.

Okay, thank you. And then maybe one for you Phong, just to follow up. Most of the metrics were actually pretty good revenue growth; maintenance support growth of 4% as you guys have highlighted, license growth of 9%. The deferred revenue balance or DR balance was minus 7% and I’m wondering why we would see some good growth on a lot of the income statement metrics, but the DR balance might have been down. Maybe there’s something funky in terms of the billing invoicing to call out. Thank you.

Yes, part of that, the deferred revenue balance drop was actually because of our product support line item, not so much our product license. And we tend to see that happen in the second quarter of the year, because we have a large amount of maintenance revenue that comes in in the first quarter and so that’s the biggest driver. Nothing specific about the business that concerns me when I look at deferred revenue. There are some in’s and out’s that are hard to follow because of the 606 implementation from 2017, and if you look at our Q we actually line item out, the impact on each of the deferred revenue line items related to 606.

Got it. Okay, thank you and congrats to you both for the return to growth on the license side.

Thank you.

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

Hey, thank you. Good evening. I was wondering if you could talk about the large deals in 2Q. It seems like from your disclosure in the 10-Q that those ticked up. I’m just curious if there was anything to call out there, whether it’s changes that you’ve been making to the organization or what drove that outperformance?

Yes, I think Tyler, I mean if you look at it on a year-over-year basis, we had a pretty tough quarter in Q2 of last year as it relates to large deals, and so what you saw this quarter should be more indicative of the type of business we want to run. That said, we had very good activity internationally as it relates to deals over 500k and over $1 million, so that bolstered our business. A lot of that is due to the hard work of the sales and marketing teams and the field teams over the last few years. So we were happy with their large deal output this quarter.

And as you think about heading into next year, obviously there’s still some uncertainty. You know, in the next two quarters you’ll see the positive overall revenue or licensed growth. Just what are your thoughts, high level, heading into next year? I mean obviously I imagine that the plan is to grow, but could we expect something in terms of double-digit license growth or is it the kind of high single digits like we saw in 2Q?

Yes, we don’t provide any particular guidance as it comes to revenue growth in 2019. I think what we’ve talked about is as we enter this three year journey. Our aspiration is to get to greater than double-digit revenue growth over the period of time, but I think it would be premature to predict anything in particular as it relates to 2019.

Got it. So three years would be more of a 2020 comment, given you started the initiatives in 2017?

Somewhere along that three year journey.

Okay. And then just a follow up on the – and I apologize if this was answered. On the deferred revenue, it looked like the maintenance deferred. It declined year-over-year, and then also if you kind of calculate maintenance billings, it looks like that was down as well. Was there anything you’d call out there? Any change in maintenance renewal rate?

No. In fact – and Karl had asked a similar question. I think there’s two factors there; one is related to our implementation of the new accounting standard, and the second is, you know our first quarter is our largest maintenance renewal quarter, and so as we close out a lot of sort of back renewals in the first quarter, it causes our product support deferred revenue balance to drop in the second quarter. So there’s a bit of seasonality there when you go from Q1 to Q2. Overall, as I mentioned, our maintenance business has been extremely strong, and in fact Q1 of this year we’ve had some of our best renewal rates that I’ve seen in my tenure here, and so we’re pretty happy about the results of our renewal rates at this point. And that points to a lot of the work that we’ve done improving our product, improving how we service our customers holistically across sales, marketing and our support team and the continued importance of our product in the operations of many of our customers’ businesses.

Okay. And last question, just on the services, I think you talked about lower bookings that contributed to lower revenue. Are you proactively doing something to address that? Just trying to understand how high in the priority list services are? Obviously they are lower gross margin and you’d prefer to sell software all day. Just curious if you think like that had an impact on either your growth outlook or potentially signing more license deals?

I don’t think it’s a predictor so much of license deals or revenue. Obviously, we want to grow across all line items of our business, including services. We weren’t happy with our results in Q2, and we’re doing everything we can to try to understand what’s driving that and how to improve it. That said, our bill rates are improving, and so I believe we’re providing the right types of services to our customers. And one potential view is our focus on improving bill rates and margins is impacting our revenue slightly. But it’s an important part of our business and I think we’ll continue to focus on ways to improve that part.

Thank you.

Thank you. (Operator Instructions) Our next question comes from Frank Sparacino with First Analysis. Your line is now open.

Hi Phong, hi Michael. Just two questions for me. First is on the domestic performance this quarter; I recognize the business is lumpy quarter-to-quarter, but in terms of the product license number which was just under $8 million, which is fairly low going back, I think a couple of years. Is there anything you would call out just in terms of you know potential disruption in North America versus international internally or is it just all external market related?

You’re right Frank. Our domestic business has been declining at a rather steady rate in the last two years or so. I wouldn’t point out anything in particular internally that’s driving that. There are some – the competitive factors in our business are challenging, especially North America, and I think that’s a factor. But we’re doing everything we can along with our sales leadership and our services leadership to identify ways to turn around that business, and it’s a big focus of ours.

And maybe just one follow-up, in terms of the goal of getting back to at some point kind of double digit overall software growth, you know I’d be curious. I mean you can obviously look at external industry reports and get a sense of where the overall market is growing. I’d be curious from your perspective, right. I mean where you think the markets at, you know where it’s growing, and obviously you guys are going to be below that now, but I don’t know what that delta is and I don’t know what kind of the internal view is.

Yes, I think when we look at the marketplace, where we see a lot of excitement and enthusiasm in the mobile space its building. There’s a lot of enthusiasm with regard to embedding analytics into existing applications, what we call embedded intelligence and the like. When you look at the overall market numbers, you know you could say, "Well, the market’s growing. We’re not growing as fast." I think the key to keep in mind too you know is the market is also fragmenting and there’s lots of new entrants coming into the marketplace and they’re all getting their piece of the pie. So it tends to be a fairly complicated dynamic between all that various entrants and also the shifting of value up and down the value chain between all the various types of service providers, infrastructure providers and the like. We have confidence in our plan. I think nothing takes place in 12 weeks. You normally have to be committed to something for about three years before you start to see the impact of it, and we’re starting to see the impact of some investments we’re making in technology and investments we’re making in services that are both enhancing our relationship with our customer and they are also increasing opportunities for us to go and sell more product and more services. So I think the real key here is to stay committed to delivering an integrated package of product and services and stay focused on our particular segment of the market and our particular value proposition, and maybe not get distracted by other things that could be noisy, because you know there’s certainly more noise in the marketplace today than there was 10 years ago or 20 years ago and there’s more energy, and so I think it’s important for us every single day just to stay focused and keep all of our people focused on the same mission, on the same platform, on the same programs.

And Mike, just following up on that. I mean, if you look at the win rates today versus six months ago or 12 months ago, is there a discernible improvement in those win rates?

I think if we look at where we’re winning, there’s a lot of things to be very excited about, enthusiastic about, because we have been seeing large wins that are indicative of customers enthusiasm about the investments we’re making in the platform. We’re seeing large wins over existing analytic tool, vendors like Tableau. We’re seeing large wins to extend applications by embedding intelligence into custom apps and we’re seeing large wins to deploy large analytics installations on top of the AWS cloud. So we’re getting serious commitments from sophisticated, world-class customers after extremely competitive buy cycles where they are buying into our vision and our value proposition and our actual product and service mix. So I got to figure if you can do a million dollar plus deal with one, then you can do many, many more. So that just means that we’ve got the right thing. We just need to focus upon scaling it up, and that’s what our operational initiatives are meant to do.

Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to Michael Saylor, Chairman, President and CEO for closing remarks.

I want to thank all of our shareholders on the call and thanks everybody for your support. We’ll look forward to speaking with you again in 12 weeks. Have a good evening.

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