Good day, ladies and gentlemen and welcome to the MicroStrategy quarter one 2019 earnings conference 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 call will be recorded. I would now like to introduce your host for today's conference, Michael Saylor, Chairman, President and CEO. Please go ahead, sir.

Hello. This is Michael Saylor. I am the Chairman, President and CEO of MicroStrategy. I would like to welcome all of you to today's conference call regarding our 2019 first quarter financial results. I am here with our Chief Operating Officer and CFO, Phong Le. First, I would like to pass the floor to Phong, who's going to read the safe harbor statement and make some comments on our results for the 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 the 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. It 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. Reconciliation of the GAAP versus non-GAAP results can be found in our press release issued after the close of market today and the supplementary information, both of which are available on our Investor Relations page, ir.microstrategy.com. MicroStrategy made significant progress executing on the strategic objectives during the first quarter. As Michael will discuss in more detail, the highlight of the quarter was the successful introduction of MicroStrategy 2019, which we believe is the most innovative platform release in the company's nearly 30-year history. MicroStrategy 2019 is a modern analytics, open architecture, enterprise platform that, for the first time, brings together federated analytics, transformational mobility and HyperIntelligence capabilities in a single offering. We believe MicroStrategy 2019 provides the most powerful and flexible analytics platform in the market that allows customers to leverage existing DI desktop tools while utilizing our enterprise-grade platform. MicroStrategy 2019 was a key area…

Thank you Phong. We just came off of MicroStrategy World 2019. That was the most successful MicroStrategy World we have had in a long time. Our headcount or our attendees was up dramatically over 2018. I think we had about 250 more attendees in 2019 than 2018. I had a chance to meet with lots of customers and lots of our partners and get their feedback directly on the 2019 product launch. I will also just finished a wide round of meetings with customers and all of our employees around the world. And I have been gathering their feedback on our product and the market in general. And I can say that going into 2019, I have never been happier and more comfortable with our technology portfolio. MicroStrategy 2019 is really the strongest analytics platform we have ever put in the market. We are getting really good response to the architectural approach. Everybody likes the open architecture and the ability to support all different types of tools. We are delivering connectors for Tableau, for PowerBI, for Microsoft Office for data science tools, R and Jupyter and Python and for the new set of REST APIs. And that's generated enormous excitement. I think likewise being completely open on the back and also it's data technologies is generating a lot of excitement. And what's really special about 2019 and I am getting this feedback from customers and prospects is, MicroStrategy's cloud platform has turned the corner and has achieved a new degree of commercial appeal. Because for the first year and for the first time, we are now able to offer an integrated cloud platform that you can instantiate in an AWS environment or in an Azure environment. And the fact that customers can spin up MicroStrategy cloud in Amazon or the…

[Operator Instructions]. And our first question comes from the line of Tyler Radke with Citi. Your line is now open.

Hi. Thank you. Maybe we could start with you, Michael, just as you think about the 2019 product cycle and the ability for that to influence the pipeline and demand, just kind of where are we in that product cycle? What do you think kind of some of the timing looks like as it relates to closing some of the opportunities you have out there? And how does that excitement around the product and what you are hearing from customers translate into improved license revenue performance?

I think that most of our customers think in terms of three-year plans. I think over the next 12 to 24 months, we will see a decent number of our enterprise customers upgrade to 2019. And as they upgrade, I think we will see a number of different pilots and extension use cases evolve and each of those will serve as opportunities for us to increase our software and our services footprint within the accounts.

Great. And then for you Phong, maybe just help us understand some of the moving pieces in the, I guess, unofficial guidance for 2019. But it sounds like you are anticipating overall revenue to grow on a constant currency basis but you do have some near term headwinds from the force.com billing system that's impacting your maintenance revenue and it sounds like services will be declining year-over-year. So just kind of back-the-envelope math suggests that you are going to need a really strong license performance, here in 2019. Could you just help us understand kind of the moving pieces there?

Yes. Tyler, I think overall, as we have stated last quarter and we still feel reasonably confident this quarter that we have an objective of growing our overall revenue for the year. I think you are correct in pointing out some of the headwinds that we have in other services. Although as you look to 2018, we had a fairly steep drop-off from Q1 to Q2. And so some of those comp headwinds, if you will, start to dissipate as we look throughout the course of the rest of the year. And on product support, we still feel that we have a strong maintenance renewal rate, which is our best leading indicator of our support revenues. The biggest headwind we had in product support is really currency and FX. As you know, the dollar has been strengthening over the course of the last year. But as it relates to support overall, we still feel pretty good about the trajectory of our business and our revenue. And as we mentioned product license, we have seen three out of four quarters now are product license growth. And so that is a reasonable trend that we have been seeing for that line item.

Great. And maybe one last one. Now it's the second quarter in a row doing buybacks and I know in the past, you have talked about doing buybacks when you have more confidence in the business. Is there anything that was behind the decision to do buybacks again this quarter? And how are you thinking about the use of cash going forward here in 2019?

Yes. As you know, Tyler, we have several factors that go into whether we decide to do a buyback. You are right, we have had the second quarter in a row now of returning value to our shareholders via buybacks. And as we look forward, right, our capital allocation strategy is multi-pronged. But a return to shareholders continues to be sort of a primary use of our cash. And then, we generally have a fairly conservative strategy when it comes to cash in general.

Okay. Thank you.

Thank you. And our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is now open.

Hi. So first off, I wanted to ask you was, could you talk about those product licenses within the U.S. market declining by double-digits since last year? And what's the headwind you are facing in this market?

Yes. Hamed, what I would say, it's a little bit the law of small numbers. And so I wouldn't look at any particular quarter when it comes to product license fluctuations. So if you take a number that falls into sort of the $18 million to $20 million range and then you split it by two between North America and International and you say $10 million roughly in North America and we talk about some of our deals coming in at $1 million or $2 million. Ultimately, a slipped deal or a deal that comes in at the end of the quarter can fluctuate our international or domestic revenue by 10%, 20%. And so we had an outstanding product license quarter for North America in Q4. We had a little bit of a drop-off in Q1. But I wouldn't say that there is anything broadly that I would point to. In fact, Q4 was one of our strongest North American product license quarters, when you look on a year-over-year basis, that we have had in, I believe, eight quarters. So a slight drop-off in Q1 isn't necessarily a trend into future quarters.

I am just trying to understand if you have a new product coming out and domestic market is like hesitant. Is there a reason why? Are they just slow in adopting and looking at using it?

No. Actually, I would say it's probably the contrary. I think if you look at demand, we tend to see that drive sort of closer to our core headquarters location first and then start to expand internationally. So I don't think the demand indicators, pipeline, et cetera would point to a weaker North American business.

And then as far as the customers that have upgraded during the quarter, are you seeing any expanded use within the workforce in the matter of seats? Or is it still too early in the adoption curve?

I think it's early to tell as far as expansion. But the fact that our customers are upgrading at the pace we are seeing, I would say, indicates quite a bit of interest in MicroStrategy across the enterprise. And then as Michael talked about, the big opportunity for seat expansion in addition to just more users is really with HyperIntelligence. And the opportunity set that we have created in the first quarter indicates a lot of interest there and an expansion across the enterprise.

And lastly, your deferred revenue went up this quarter compared to fourth quarter. Is this primarily just related to these upgrades? Or is there something else moving these numbers up?

Yes. There's a few things in there, Hamed. The biggest driver of an increase in overall deferred revenue quarter-over-quarter is the fact that Q1 is our largest product support renewal quarter. And so when we see higher renewals just coming through in Q1 by volume, then that causes our deferred revenue to go up. And then the second big piece is, we had talked about some of the drop in deferred product support revenue in Q4 as a result of introduction of our new quoting system. And so we are starting to catch up on that in Q1. And so we are seeing an increase from that. But the primary driver, if you look quarter-over-quarter, is seasonality.

Okay. Thank you.

Thank you. And our next question comes from the line of Frank Sparacino with First Analysis. Your line is now open.

Thank you. Hi guys. Maybe just two questions from me. First is, with respect to the comments around cloud, it would seem obviously that as customers look to deploy in the cloud, that may create a headwind from a license revenue standpoint. But Phong, maybe just from a contracting standpoint, how are the majority of those contracts being structured? I assume they are long-term subscription. But any color there would be helpful.

Yes. Frank, we have a MicroStrategy cloud platform and we license it to customers however they want to buy it. So if a customer wanted a 1,000 named user perpetual license to the MicroStrategy cloud platform so that they could run it in AWS, we would sell them a 1,000 named user perpetual license. And it would be similar to selling a 1,000 named user perpetual license of the MicroStrategy enterprise platform running on Linux in their enterprise data center. If the customer said that they wanted a term license to a 1,000 named user license, then we would sell them a term license in the cloud. And it's more common to ask for a term license in the cloud than it is to ask for a term license for an on-premise deployment. But if a customer were to want to license MicroStrategy enterprise platform for Linux as a term license, we would do that too. So the simple answer is, if the customer wants a term license, we sell it on them. If they want a perpetual license, we sell it to them. We don't require that the customer convert from a perpetual to a term license. And my experience, they don't demand that they only buy a term license. Although I would say, it feels like it's like half and half. Like half the time, I see people wanting a term license and half the time I see a perpetual license. It really just depends upon how they are running their other IT operations. And I think our goal is to be really easy to do business with. So I wouldn't forecast any major shifts in licensing practices other than the fact that this is an opportunity for us to go back and sell additional value to existing customers because the cloud platform is much more functional and much more elastic than the on-premise platform.

Yes. One other thing I would point out, Frank, is as you look at our financials and you look at the subscription services line, that is primarily for what we call our hosted cloud platform, right. And so a customer is buying our cloud solution, deploying on AWS or Azure and we are providing cloud operations and cloud support and cloud hosting services. And so that's what you see in that line. What's included in product license, which I had mentioned and Mike has pointed out too, includes a customer who buys MicroStrategy licenses and deploys it in their own cloud, right, their own VPC. We refer to that as Bring Your Own License. And that's an area where we have seen a lot of increase in demand as we have improved our product in the last year or so. But that still shows up in product license revenue. And to Mike's point, that could be bought as term licenses or as perpetual licenses. The trend has been more towards perpetual licenses, is our observation.

And maybe just one follow-up as it relates to the cloud. It would seem MicroStrategy has been sort of lagging the peers and the overall industry in that transition to the cloud. And I don't know if that's a fair statement, but either way, just any thoughts on, I know you alluded, Mike, I think earlier some of the hesitancy by customers, but the commentary from the peers is a little bit different than yours.

Yes. Well, I think that we have got a slightly different approach to the cloud than some of our peers. There are some people that have created stripped-down platform offerings. So they actually have stripped down functionality and put memory constraints. So they put hardware constraints or user functionality constraints in the cloud offering in order to make it a simple, multi-tenant type environment. There are others that have focused upon a particular cloud environment. Our approach is to allow the customer to create any type of environment, deploying any kind of application with any amount of memory or CPU and in their own single-tenant environment and to make it possible to port it between AWS and Azure and back again. So there will be some offerings that are limited to Azure. And that's going to be a pretty big liability if you want to arbitrage the two public cloud providers in order to get the best price. And there are other offerings that limit you in the degree or complexity of the application you might build like a Domo or something like that. And our cloud platform is pretty much a single-tenant do-anything-you-want. If you wanted to deploy 16 production environments mirrored and 32 backup environments across eight continents for hundreds of thousands of users running 400 different applications on AWS, you could do that. Obviously, that would cost more money. If you found out that you were going to be paying Amazon $32 million a year in hardware expenses and you got an offer from Microsoft for $4 million a year and you wanted to save the money, you could actually back up that entire system and deploy on Microsoft, in some cases, without missing a step. It also go back the other way. So we have focused…

Thank you. Very helpful.

[Operator Instructions]. And I am not showing any further questions at this time. So I would now like to turn the call back to Mr. Michael Saylor, Chairman, President and CEO for any further remarks.

I want to thank everybody for being with us today. We appreciate your support and we 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 does conclude today's program. You may all disconnect and everyone have a great day.