Ladies and gentlemen, thank you for standing by, and welcome to the MicroStrategy Q4 2019 Earnings Call. At this time all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, Michael Saylor, Chairman, President and CEO. Please go ahead sir.

Hello. 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 fourth quarter financial results. I am here with Phong Le, our Chief Operating Officer; and Lisa Mayr, our Chief Financial Officer. First, I'd like to pass the floor to Lisa, who is going to read the safe harbor statement.

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 vary materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in our most recently 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 our earnings release that was issued after the close of market today, which is located on our website at www.microstrategy.com. I would now like to turn the call over to Phong, who will provide a summary of our fourth quarter operational performance.

Thanks, Lisa, and thanks to all of you for joining us today. MicroStrategy delivered solid fourth quarter results that capped an important year for the company. As you recall, we made significant investments in our product and people and we saw positive results from these investments. In particular, we introduced the most innovative set of products in our 30 year history with the release of MicroStrategy 2019 and HyperIntelligence improved our go-to-market and customer experience and drove operational efficiency across the business. MicroStrategy has established itself as one of the largest independent enterprise business intelligence companies in the world, is entering 2020 with a much stronger products, teams and financial position than in previous years. Our primary goal in 2019 was to drive adoption of our newest products including MicroStrategy 2019, HyperIntelligence and our managed cloud platform. We ended the year with 740 customers having upgraded to MicroStrategy 2019 and 175 who have purchased HyperIntelligence. We added 71 HyperIntelligence customers during the fourth quarter alone including the Co-operators, a large Canadian financial services company, Saint-Gobain, a large French building materials manufacturing and distribution company and Swiss medical, a leading organization of hospitals and medical service providers in Latin America. We've also seen a strong penetration of HyperIntelligence into our Fortune Global 500 customers. We're seeing growing interest in HyperIntelligences and Zero-Click analytics that delivers insights and triggers actions in seconds. We believe HyperIntelligence is solving a critical problem in the analytics market and revolutionizing business processes by embedding analytics, suggestions and actions into e-mails, spreadsheets, calendars and ERP systems that employees already used to do their jobs. Overall, we are pleased with our progress in this area. We see opportunity for greater adoption in 2020. Our other major area of focus for us in 2019 was our fully managed cloud…

Thanks Phong. I'm very excited to be with you today as MicroStrategy’s new CFO. I was drawn to this company because of its world class products and people and I've been very impressed with what I've learned in the three months that I've been with the company. I look forward to meeting and working with many of you in the investment community in the months ahead. Turning to our financial results revenues for the quarter were up 1% and almost 3% on a constant currency basis. Growth came from product support, subscription services, and our consulting business, which is classified as other services on the financial statement. I'd like to reiterate each of the revenue categories, but before I do, I want to remind listeners as to how we sell the MicroStrategy platform. We do it in two basic ways. The first way is we sell our product to customers for them to deploy it on their infrastructure. And the second way is we sell customers a subscription to access our products, which is hosted and managed by MicroStrategy in the cloud. Currently the vast majority of our product sales are conducted the first way and revenues related to these license sales makeup the product licenses line item under revenues in our financial statements. Customers who buy our product license also buy an annual product support subscription and with our excellent renewal rates for product support, this is a strong recurring revenue stream for us. In 2019 product support revenues represented almost $300 million in what is similar to annual recurring revenue. A small but growing part of our business is selling a fully hosted and managed cloud subscription. The revenue from our cloud platform is contained in the subscription services line item under revenues in our financial statements. Subscription…

Thanks, Lisa. With the closing of the Salesforce Tableau acquisition, MicroStrategy is now the largest independent public business intelligence company in the world. We're excited to assume the mantle of industry leadership and look forward to the opportunities that the consolidated market is offering us. We are the leading modern open enterprise platform and that means we're open to all client interfaces no matter what tool or what technology they might use. We're open to all clouds and it might be AWS, it might be Azure or another. We're open to all the databases and we split about 200 data sources as of now and there are more coming every day. We're open to all the enterprise applications like SAP or Salesforce or Workday and we support them all without bias. Salesforce, Microsoft, Oracle, IBM, SAP, Amazon, they all have conflicting business interest that prevent them from tailoring their offerings to support the full stack of technologies that most enterprises demand. They either have a massive interest in a particular application like SAP or in a database like Oracle or of course a cloud like AWS or they have a particular client interface that they tend to favour that puts MicroStrategy in an enviable position of being the Switzerland in this market. Large companies, the large enterprises we do business with, they never want to be locked into a sole source. They would always like to have options. I like to keep their options open and the ability to switch or the ability to run multiple platforms at the same time is integral to a responsible IT strategy and a business strategy in general. We have been the beneficiary of this trend in the enterprise for the past 20 years and I expect that we’ll continue to be the beneficiary.…

[Operator Instructions] And our first question will come from the line of Hamed Khorsand from BWS Financial. You may begin.

Hi, this is actually Vahid calling in for Hamed. First question on subscription revenue, could you provide some color on whether the subscription revenue is down quarter-over-quarter and on the cloud growth?

So subscription revenue is up just slightly on a constant currency basis and then we're also as one of our indicators, we look at the deferred revenue. So you can look at the different revenue related to subscription revenues, which is up year-over-year. So would your question around sequential or year-over-year?

Sequential.

Yeah. So, as I mentioned in my prepared remarks, in Q3, we did have a one-time catch-up, so you saw that increase in Q3 and then back down in Q4. So we had a late renewal for our customer that we caught up for in Q3. So that was a bit of a onetime pickup. So it is where we expected it to be.

Okay. And what is the resistance from customers you're seeing from upgrading to MicroStrategy?

We're not seeing resistance from customers upgrading. So we have about 740 customers who have upgraded and that represents somewhere between 20% and 25% of our total customers and a greater percentage of our enterprise customers have upgraded to 2019. As with any upgrade cycle, our customers see it to be a large effort. And what we've done is by moving to an annual release cycle, which we started in 2019 with the 2019 release and going forward with 2020 and 2021, we've reduced significantly the barrier to upgrade. So, I think we're going to train our customers overtime that an upgrade is something very simple and straightforward, as opposed to what they're used to historically in the enterprise software industry. As we move more customers to cloud to the upgraded experience, is generally completed by us and the customer only has to do regression testing. So, I'm pleased with the progress of our upgrade cycle and I think we'll continue to accelerate it over time.

Let me ask you that question in a different way, but I think you hit on the answer, you're probably going to repeat. But if you're rolling out a new strategy of doing upgrades on an annual basis, can customers maintain the prior year's product and not upgrade? And essentially, how do you get them upgrade over?

Yes. A customer can maintain their previous year release. Typically, we provide products support for products as much as three years old. The primary reason a customer is going to want to upgrade to the latest release, whether it be 2019 or now 2020 is that product will perform faster. Some of our benchmark show that certain reports and certain dashboards perform two to three times faster with our new product. And they also can avail themselves a new functionality as part of product support, so some of the things that Michael mentioned, like the free-form canvas as an example. So, yes, a customer can stay at a previous release, but because of the ease of upgrade and the new feature functionality and the improved performance we think customers will want to upgrade more aggressively and we'd like them to send it to a clock, right? Like if the customer upgrades, every April they'll just know it's upgrade time. We come in, we help them with the upgrade and they move on. And an upgrade, can take as little as a few days to a week if planned properly.

Okay. Thank you, so much.

Thank you. And our next question comes from the line of Tyler Radke from Citi. You may begin.

Hey, good evening Phong and Lisa and Michael. I had a question on the cloud business just to help frame, when you are doing the migrations of existing on-premise customers to the cloud, is there some type of typical uplift that you see? I think many your peers sometimes call up as much as 2x to 3x uplift as you take on kind of the cloud hosting and support services. And then, a follow-up to that is just obviously we have the subscription revenue would you say that the deferred subscription revenue is kind of a leaning indicator of business signed in that business or how would you kind of encourage us to evaluate the performance of the subscription business, whether it be on a subscription revenue line year-over-year sequentially or deferred subscription revenue. Thank you.

I'll answer the first question – part of the question on the impact on revenues and migrating a customer from on-prem to the cloud and Lisa will answer the second one. When we take a customer who is an on-premise support paying customer product support revenue and we move into the cloud, we have an expectation that we increase revenue through two main drivers. The first is they'll convert from a perpetual license paying support to a term license. And we do expect that the customer sees more value in our cloud product. It's something that we've tooled and we perfected over the course of the last three years. And it's something that provides additional automation and security features for our customer. And so we expect that they'll pay more for that and they'll also decrease their cost overall as a result so the ROI is pretty compelling. So that's piece one. And then piece two is we do expect to receive more revenues from the customers, as you pointed out, for managing their environment and managing their infrastructure. A cloud environment or cloud support is what we call it. So it can be as much as, I'll call it, sort of 1.25x to 1.5x as much as 2x on a customer. And then the other piece that I think I've mentioned before and Lisa has mentioned also is the next logical add-on is then to sell the customer services to run their platform to run their system and to go build applications for them. A customer that is likely willing to outsource their infrastructure and their support are also much more likely to be willing to outsource some of their development work and their application work. So yes, we starting to experience that and we have some good examples of some name brand Fortune 500 customers who've made that transition with us.

And the second part of your question, I think the simple answer is yes, we would continue to expect to see a quarter sequential growth in subscription revenues as we're amortizing the new subscription revenues into – our contracts into revenues. Unless we had an example like we had in Q3 where I mentioned that we had a one-time pickup actually it was related to a one-time pickup for a customer. And so, and then yes, absolutely we look at change in deferred revenue related to subscription that to continue to increase as well. So I think if we keep our eyes on both of those, we can indicate where the business is going. And as I mentioned in my prepared remarks that we definitely are thinking about ways to provide greater insight for now – but for now as we're going through this gradual shift those would be the two things I would look at.

Great and a follow-up for you, Lisa. Now that you're kind of your first full quarter to – with the CFO title under your belt, I'm curious, how you're thinking about potentially optimizing the business. It looked like operating expenses did decline pretty meaningfully on a year-over-year basis and just curious I think in the past Phong had talked about potentially double-digit revenue growth with double-digit margins and I think the framework around margins and revenue growth has evolved over time, I'm just curious, kind of what your thoughts are there and how you're looking at the business from a potential revenue growth perspective and the cost base needed to support that. Thank you.

Sure. Well, first of all, I wish I could claim credit for any of the great optimization work in the fourth quarter. But, I – this is only my eleventh or twelfth week here. So, there was a lot in motion. I think we did a, I think from a cost perspective, as I said in the remarks, we feel good about what we have in place that we can deliver on some revenue growth for 2020. We’re going to be consistent in not providing guidance, we haven't done it in the past and so that's not going to change. But based on, I think what we said in the prepared remarks is the right level of commentary. We feel good about the revenue growth. We have the right product pipeline. I've been very impressed with what I've found, in terms of making sure we're allocating our assets correctly, that we're looking at pipeline very carefully and so I think a modest revenue growth for 2020 on a constant currency basis and this current operating cost structure is how we're thinking about the business and we'll continue to think about more ways to provide insight.

Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Frank Sparacino from First Analysis. You may begin.

Hi guys. Just one question for me. In the cloud, the deployment situation do you feel like anything has changed from a competitive sales cycle standpoint good or bad for you? Thanks.

Hi, Frank. Good to hear from you. In cloud in general, I would say most of the dynamic, externally that we’ve seen and we talked about it at the beginning of 2019 and it's further accelerating in 2020, is a plan with pretty much every one of our customers to move some sort of BI load to the cloud. There isn't one that isn't contemplating it or asking for us to participate in a road mapping or an upgrade process. The second dynamic I would say that we've seen increase significantly in 2019 and leading into 2020 is the advent of enterprise grade cloud data warehouse providers, and the increased interest in moving data warehousing loads to the cloud has had definitely a halo effect on customers wanting to move their BI workloads to the cloud. From a competitive perspective, I wouldn't say we've seen any significant changes as it relates to cloud. Mike had mentioned the – or the change of ownership of Tableau over to Salesforce. And we're still in the early stages of seeing how that impacts customer reaction. We are seeing a lot of noise and some competition from Power BI. And some of your more traditional cloud data warehouse, I'll call it, our BI niche players, we're seeing less traction and less noise from – I think it's Power BI takes over market share from them. But that's what we're seeing overall in cloud. And we're definitely happy to be part of the leading edge and getting our customers upgraded fairly rapidly to the cloud.

Thank you, Phong.

Thank you. And I'm not showing any further questions at this time. I like to turn the call back over to Michael for any closing remarks.

Again I'd like to thank everybody for their support and we look forward to speaking with you again in 12 weeks, until then, all the best.

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