Good afternoon, ladies and gentlemen, and welcome to the MicroStrategy Q3 2019 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 call is being recorded. I would now like to turn the conference over to your host, Mr. Michael Saylor, Chairman, President and CEO. You may begin.

This is Michael Saylor. I'm the Chairman, President and CEO of MicroStrategy. I'd like to welcome all of you to today's conference call regarding our 2019 third quarter financial results. I'm here with our Chief Operating Officer and CFO, Phong Le. First, I'd 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 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 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 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. Reconciliation schedules showing GAAP versus non-GAAP results are available in the Form 10-Q we file with the SEC after the close of market today and in our press release that was also issued today, which is located on our website at www.microstrategy.com. We delivered solid third quarter results that reflect the positive impacts from our new product introductions and improvements in our go-to-market and demand generation efforts. In particular, we continue to be pleased with the results we have seen from MicroStrategy 2019 HyperIntelligence and our MicroStrategy Cloud offerings. In Q3, we closed about 40 HyperIntelligence deals which brings us to about 120 since the launch of the product 10 months ago. Major wins include Clarin, Dallas Fort Worth International Airport, Freddie Mac, Gilbane Building Company, and Skechers. We believe this diverse list reflects the significant interest of organizations across industries and driving 100% adoption of…

Thanks, Phong. I'd like to highlight a few key things. First of all, HyperIntelligence is the most compelling innovation in the BI market in the past decade. Conventional BI tools provide answers to questions in three minutes, and many clicks. MicroStrategy has invented a technique to deliver insight in three seconds and zero clicks. That's HyperIntelligence. Our technology revolutionizes business processes by embedding analytics, suggestions and actions directly into the email, spreadsheets, calendars and ERP systems that end-users are living in every hour of the day. Information and options are flowing 100 times faster, and that makes the business users, not just hyper intelligent, but hyper productive. If we look back over the last 30 years, the last big paradigm was mobile, and before that the web, the HyperIntelligence paradigm shift is possible because of new technologies, the new mobile operating systems while you embed intelligent applets right into the flow of messaging and communication. The new Chrome-based browsers both Chrome and Edge that allow you to embed extensions right into the HTML experience. The new office productivity tools like outlook that let you embed extensions right into the flow of the email or the calendar. You couldn't have done it two or three years ago. You couldn't even imagined it a decade ago. But this is a 100 times faster and not just 100 times faster to get to the insight, but with the HyperCard, you can click on a trigger and be launched into a system of record, and once you're in that system of record take action. So these -- as I'm reading through 100 names in an email, when one of the 100 -- when the 67th name triggers a thought I'm literally one click from taking action to exploit that, either rectify an issue or…

[Operator Instructions] We have a question from the line of Hamed Khorsand from BWS Financial. Your line is now open.

Could you first start off talking about, was there a resources issue or customer issue that your upgrades for MicroStrategy 2019, it was only went up about 100, the last two quarters you were adding at a rate of about 200 a quarter?

Yes, Hamed, thanks for the question. It was neither a resource nor a customer issue. I think it's just natural volatility as we get through the upgrade cycle with our customers. We are seeing some customers choose to delay their upgrades depending on the time of year and their seasonal cycles as we get toward the latter half of the year. Many customers are saying, let's wait until Q1 when we get past, for example, retail companies' busy period. So there is a little bit of a driver there, and so we still have good pacing and good activity with our upgrades, and I wouldn't take sort of a number of upgrades delivered in Q3 as any indication of a slowdown or interest in our 2019 product.

And could you elaborate on this commentary out of Europe that there you saw slippages? Did those customers sign up in early Q4 or are they still hanging on because of the regulatory concerns?

That's correct. The vast majority of our slipped deals occurred in the very last few days of Q3 and had been signed since then. But we did have some operational and contractual challenges that didn't let them get completed in the very last few days of the quarter.

Okay. And then my last question is what kind of revenue are you -- did you think you missed out on because of this conversion to cloud from license?

Yes, I mean, I won't talk specifically to our actual cloud bookings versus our perpetual license bookings, just because we don't disclose that number. I do anticipate over the next few quarters, we will disclose more of our financial model and our transition timing to the cloud. I can say as you probably understand, when the customer buys the license on the cloud, it tends to be a term license, meaning it's a one-year term license versus a multi -- a perpetual license. So a term license tends to be smaller than a perpetual license, but it's recurring in nature, so we get paid back over time. So that's point one. And point two that term license that a customer buys in the cloud has recognized ratably over the course of the contract. So you don't get that in-quarter revenue recognition that you may with a perpetual license. So, it has a pretty significant impact on our product license revenue. But as I mentioned, for a variety of reasons as you've probably seen in the software industry overall, we consider it to be higher quality revenue, and which is one of the reasons why we're pushing our customers that are willing to take the product to a cloud for a strategy, and we're pushing our sales folks to propose cloud more often.

Next question is from the line of Tyler Radke from Citi. You may ask your question.

Hey, thank you. And congratulations on the CFO hire. Phong, I know you're stepping out of the role there, but maybe you could just share us some thoughts on how you're thinking about Q4 here and how you expect to finish 2019? Obviously you had some execution challenges in Europe in Q3, but it sounds like a lot of those deals have gotten closed. Just curious how you're thinking about Q4 and finishing up the rest of the year?

Hey, Tyler, thank you, and thanks for the question. Look we generally feel very positive about our ability to finish the year strong. We don't provide guidance, so I don't want to get in particulars about where we're going to close the year specifically around revenue. The trends that we're seeing overall continued strong bookings. We are seeing a movement of our bookings from perpetual licenses to cloud licenses, which does create a slight dislocation in our product license revenue, but overall good bookings performance. And so, the proportion of our bookings in Q4 that come from cloud will be seen in our product license revenue and deferred subscription revenue. So that's point one. Support revenue continues to be strong. We have some FX headwinds of about 2% in any particular quarter, but our renewal rates continue to be strong, so we feel positive there. And as you heard me indicate our services revenue is really starting to turnaround, and we believe we've reached an inflection point. So overall, I feel positive and optimistic about our revenue performance and our ability to grow overall. However, some of the shift to cloud may have a drag in product license revenue. But that's on a top line perspective. From a cost perspective, I think you're seeing what we're generally trying to do, gradually which is get more leverage out of our existing cost structure. I was very satisfied with our quarter-over-quarter and year-over-year cost trajectory, and I think we'll continue to move in that direction, which then lead to an ability to create positive operating margin, operating income and cash flow of the Company. So I expect Q4 to be a continued evolution of what we're seeing from the first few quarters of the year.

Do you have a sense on how much the product mix is trending towards cloud? Is there any way to quantify what percent of bookings are coming in cloud and maybe how that compares historically?

Yes, it's a pronounced increase versus what we've seen in previous years, and we're purposely doing that. If you look at our pipeline, we also see a pronounced increase in our pipeline with our cloud offering. I don't -- sort of I'm not prepared to talk about the exact distribution. I think that's something that we'll start to provide more details into as we get more comfortable with the pace of our transition. A lot of it is driven by MicroStrategy, the quality of our product, how we train and compensate our sales team, but a lot of it, even more so is driven by the desires of our customers. And as I mentioned, and Mike mentioned especially as some of our larger enterprise customers are taking up cloud data warehouse solutions, cloud analytics follows right behind that. So even though we may have pipeline and ability to predict, in the end, it's still a customer decision for MicroStrategy. We want to offer them both great solutions on-prem and in cloud. And so in that regard, our strategy is slightly different than you may have seen in other cloud transitions where it was a forced transition. Here we want the product to speak for itself and let the customer make the decision, and the change you've seen in our tones since the first quarter or a year ago is primarily driven by the customer.

Great. And last question for me is, looks like maintenance revenue did decline year-over-year on a constant currency basis. I know you talked about it growing for the full year, but how should we think about that growth rate going forward, especially if you are starting to see some higher mix shift towards cloud?

Yes. So that's a good question. As we see a higher mix shift toward cloud, what you'll see is what would go typically into support revenue be replaced with what goes into subscription revenue. That will take a little bit of time, as you can imagine, right, like what drives most of our support revenue is our renewal rates, and those continue to be strong. So I think using sort of our historical constant currency growth, which you've seen, I think last year -- the 2% to 3% range is a reasonable precedence for what we'll see in the future. I think as you get into 2020, you're right. You'll start to see a mix shift occur. For existing customers -- we have an existing customer that replaces their maintenance and move to cloud and subscription revenue. We would expect that to be or we would try to drive that to be revenue neutral and then increase in revenue.

[Operator Instructions] I am showing no further questions at this time. I would like to turn the conference back to Mr. Michael Saylor Chairman, President and CEO for closing remarks.

I want to thank everybody for their support and their attention today. Wish you a happy holiday season, and we'll look forward to speaking with you again with the New Year.

Ladies and gentlemen, this completes today's conference call. Thank you for participating. You may now disconnect.