Thank you for standing by, and welcome to the MicroStrategy Second Quarter 2020 Earnings Call. At this time, all participants 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 over to your speaker today, Mr. Michael Saylor, Chairman and CEO. Thank you. Please go ahead.

Hello. This is Michael Saylor. I'm the Chairman and CEO of MicroStrategy. I'd like to welcome all of you to today's conference call regarding our 2020 second quarter financial results. I'm here with Phong Le, our President and Chief Financial Officer. First, I'd like to pass the floor to Phong, who's going to read the Safe Harbor statement.

Thank you, Michael, and good evening, everyone. Some of the information we provide during today's call regarding our future expectations, plans and prospects may constitute forward-looking statements. Actual results may differ materially from those forward-looking statements due to various important factors, including the risk factors discussed in our most recent 10-Q filed with the SEC. We assume no obligation to update these forward-looking statements which speak only as of today. Also, during today's call, we'll refer to certain non-GAAP financial measures. Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and our new presentation, which were issued today and are available on our website at www.microstrategy.com. There's a lot to cover on today's call. I'll begin by providing a high level overview of our performance in the second quarter and provide our updated thinking regarding our strategic focus going forward. I'll then close with a more detailed review of our second quarter financial results, before turning the call over to Michael for his comments. Overall, we delivered solid second quarter results given the challenging global economic backdrop due to the COVID-19 pandemic. We continued to see healthy deal pipeline activity, and the selling dynamics at the end of June were somewhat better than what we experienced in March, at the height of the pandemic. However, there still is a great deal of uncertainty in the market, which has had an impact on our close rates. This impact shows that most notably in our product license revenue, which was down year-over-year, but did show improvement relative to the first quarter. We believe we will see further improvement in this area over time to the extent the macroeconomic environment improves. In the second quarter, we continued to see revenue growth from HyperIntelligence. And we signed a number of HyperIntelligence…

Thank you, Phong. I have a few things to add regarding Q2 and our results. I expected our license execution to be choppy due to the degree of uncertainty in the quarter. But, I was pleased to see the support cloud and consulting revenues holding up strong. Given the currency headwinds and the lockdown challenges, I think our team performed well. The Company's doing a good job of managing expenses and transitioning into a more digital firm. We have adopted Zoom as corporate standard, our systems are holding up well as we work remotely, productivity is improving. I often times point out to the executives of the firm and the virtual age. You can now fly anywhere at the speed of light and you can bend time and space. When you Zoom somewhere, what would have been a one day travel trip, becomes a one hour meeting. And when you record the meeting, a meeting with one person might become a video watched 500 times, and of course, the video might be watched 300 times while you're sleeping. And so, shifting into a Zooming environment with streaming video in order to do sales, marketing and services is just one of the profoundly interesting dividends of the year 2020. And it's driving changes in the way we do our sales, the way we do our marketing, the way we think about support, the way we think about all of our internal reviews and our corporate activities. And I am -- I think based upon these new approaches, we'll continue to see improvements to sales, marketing, service and corporate productivity going forward. We're learning new things -- new ways to do things every day. We're getting more efficient. We're getting higher velocity. We're injecting more automation content into our business processes. I'd…

For our first question we have Tyler Radke with Citi. Your line is now open.

Hey. Thanks and good evening, Michael and Phong. Phong, I appreciate all the clarity you've given us on some of the efforts you've put into reducing expenses, both from workforce reductions and sizing down your global footprint. Maybe help us understand some of the assumptions into that $60 million to $90 million op income range next year. Obviously, op income’s a combination of revenue and operating expenses. So, just how should we think about kind of the trajectory of those two items to get us to that $60 million to $90 million range that you put out there?

Yes. Tyler, good to hear from you, as always. A lot of that range between 60 and 90 is dependent on where we think revenues will go next year. And the dependency on revenue is primarily based on the speed of adoption of cloud. The speed with which we move existing customers, who are paying maintenance to cloud platform could actually be accretive to revenue moving from product support to subscription services. But, the speed which we move customers from the new customers or new product license revenue to subscription services, as you know, could, in the short-term, be dilutive to revenue, but improve our overall balance sheet and deferred revenue. So, that uncertainty is what's going to drive that differential between sort of $60 million to $90 million. And of course, also, in addition to that, just sort of what are our assumptions on revenue growth overall. The parts that we're fairly certain about is where we think we can take our cost structure, right? You've seen in the course of this quarter a roughly 15% year-over-year decrease in our operating expenses. I think, we can continue with that type of a pace on a go forward basis. And, realizing a full year of that could be quite beneficial to our operating income. So those are the two components. I would say the revenue is what creates the range and a cost, we have greater certainty. And as Michael mentioned, we really thought long and hard in the last three months about how we want to run our business. And we think we can do it in a more economic fashion. And I do want to stress, it's not -- this is not sort of harvesting the business for cash. We can be more economic but still be able to grow the business.

I appreciate that. And maybe just to help clarify a little bit. So, just to say to get to the $60 million, maybe just talk about the OpEx assumptions for next year. Would you expect another kind of double-digit decline in terms of OpEx growth next year?

Probably not off of this year, or like -- I don't think we're going to get necessarily that aggressive, although we can, we'll start to look at the business overall. But, I think what we're assuming is what you saw sort of on a year-over-year basis in Q2. We can project that out for a full year and then realize the full year benefits of that. So, there are still other things that we can do, especially as we move more customers to cloud, I think we can get better economies of scale. Mike talked about some of our new product initiatives. To the extent that those take, those will require even lower sort of cost to serve, cost to sell, cost to market. And so, there is still additional things we can do that could create more cost savings that we'll evaluate over time.

Got it. And on the product support revenue, obviously that declined a little bit year-over-year. Maybe just help us understand when you think that starts to return to growth. I know, there were some timing issues -- or maybe the answer is with the subscription transition, it doesn't return to growth and you just see growth in subscription. But, maybe just help us understand the differences in growth in the product support versus subscription?

Yes. I think the objective there is, as you see customers move from paying perpetual maintenance over to cloud that we see an uplift as we move them over. So, product support will decline over time, depending on the speed that we move customers to the cloud. But, they'll pick up and be revenue accretive over on the subscription services side. So, it's hard to project sort of how fast that will happen. As I mentioned in my prepared remarks, we're starting to incent our sales force to move customers from on-prem to the cloud, at the extent, obviously that they increase our ARR. And that's been our observation to date is when we move customers from on-prem to the cloud, we do see an increase in ARR, and it's fairly significant. Right? Anywhere from, I'll call it, 20% to 50%. So, predicting the product support revenue going forward, the primary function of that is how quickly we move that revenue over to subscription services. And then, we see an uplift come out of it. So, overall, it should be accretive to total revenue by moving customers over.

And then, last question for me is just, obviously, these cost cuts are very positive in terms of returning to profitability and generating positive free cash flow. But, just how are you thinking about the impact on returning to revenue growth? I mean, I imagine you look at your sales and marketing expenses are down pretty significantly year-over-year. So, just how confident are you that you can return to revenue growth, despite making some pretty big cost reductions in areas that would generally be viewed as revenue generating?

Yes It's interesting, and Mike talked about this. The world has really changed. Right? So, big primary, like sort of things that have reduced, like in-person marketing events. We've moved it to digital. We haven't seen a substantial decrease in pipeline, as a result. In fact, in some regions of the world, we've seen an increase in pipeline. So, we were spending significantly less money, if not impacting our ability to market to our customers and our prospects. Right? T&E expenses, there is always been a historical point of view that you need to be in front of a customer to -- for that initial meeting for the POC to close the deal. We've seen that hasn't been the case. And we think that we don't need to return to previous levels. Now, are we going to be operating at zero T&E post-COVID? Probably not, but we think that we can be much less than we've ever been in the past, without an impact to revenue again. And those are probably the two big buckets on the marketing side. And then, just in terms of sales productivity, our view is, if people aren't traveling, if they aren't going to these physical events and they're not spending time on an airplane, they're able to take more meetings, meet with more customers, advanced deal cycles. And so, we're able to do more with less over time, and we're seeing this. Generally speaking, in the enterprise software world happen pervasively, we have a good portion of being a pretty agile company. We move quickly. We make fast decisions. So, we think that all these cost changes -- and then, as we move to cloud, like when we are able to attract customers through digital channels, consume -- get them to trial on the web, get them to buy very quickly after a trial, and click wrap agreements, very standard agreements, standard upgrades. Like, a lot of the back office expenses over time will be able to reduce too, and we're seeing some of that. So, it's all sort of this digital transformation that the Company is going through. And so, the reason we're able to start providing guidance about operating income next year is, we have a lot of conviction and the ability to make these changes to the business. And a year from now or two or three years from now, not necessarily have to reintroduce these costs as a means to generate revenue. We think we can generate revenue growth without these costs for the foreseeable future.

Thank you.

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

Hi. So, first, I want to start off with, have you already implemented your asset investment strategy?

No, we haven't. We're announcing our strategy today as part of our earnings, and we'll start to implement over the course of the next 12 months.

Okay. And then, what do you see in terms of the customer base as far as the adoption is concerned on your cloud products, that gives you conviction over this guidance and the OpEx cut that you're expecting?

Yes. So, the conviction we have on the guidance and the OpEx cuts is partially related to the implementation of our cloud platform. But, as I mentioned to Tyler, it's also related to things that we're able to do to change our marketing, our productivity, et cetera. On the cloud side, we've definitely seen a wave in the last year or two years of customers, especially leading with cloud data warehouses and Cloud BI of the interest in moving the cloud. And so, conversations that we've had have been pretty pervasive throughout the world, the customers uptick in cloud. You're seeing it initially show up in our subscription services revenue, increasing 13% to 15%, depending on the quarter that you're looking at. So, that sort of initial traction on our cloud subscription services revenue is an indication of where we think we can take this. And remember, this is before we've fully implemented, what I would call, more of a Platform as a Service solution. This is running what we've been running for the last few years now, more of a private cloud. So, we have seen initial indications of interest from our customers. We've seen initial buying activity, customers buying into the cloud, both migrating existing customers and new prospects, and we expect this will accelerate. The other thing I'd mention is sort of post-COVID, a lot of our customers are coming back and asking for -- to move to the cloud in even a more rapid way. So, there is definitely a lot of data points that point to the increased adoption of our Cloud Platform.

And because of this pandemic, what are you seeing from customers as far as anything from a budget cut standpoint or elongated sales process?

Yes. And that's the primary reason for our Q1 and Q2 decreases in product license revenue. I think, we're seeing two factors. One, at the end of Q1, what we were seeing was a distraction, customers not willing to have conversations and buying BI software because they're trying to figure out business continuity. In Q2, what we're seeing is either budget freezes or escalation of budget authority to more senior levels. We are starting to see some relaxation on that. But, you know that not long enough that we can predict what will happen in Q3 or Q4. But, we do expect a turnaround once the global pandemic starts to ease and the economic situation becomes more-clear for everyone. But, in the short term, it surfaces itself in longer deal cycles, unexpected escalations of authority required to sign on a deal. And so, we're putting in things in place more precision on our deal side to predict for that.

And if today was Q3 quarter-end, how much of a benefit or impact would you see from the weaker U.S. dollar?

You mean on our balance sheet or on our income statement?

Income statement.

I don't think we would see a lot of a benefit from the weaker U.S. dollar. I mean, it just really depends on the extent that we have our earnings sort of in the U.S. versus international. And as you probably know, there’s a lot of volatility quarter-to-quarter on our product license revenue, whether it's happening in the U.S. versus international. One quarter, it might be 40% U.S., 60% international; the next quarter, it might be 70% U.S., 30% international. So, that distribution will be what affects sort of U.S. dollar translation of our international income into our income statement. And when we move to cloud, when we move to subscription services, we'll see less volatility in that distribution. But, while a large part of our revenues is coming from product license, there will be a lot of volatility still.

Okay. Thank you.

And there are no further questions. Please proceed.

Okay. So, are there no further questions?

There are no further questions.

Okay, great. I want to thank everybody for tuning in today to our call and to all of our shareholders on the call. Thank you for your support. We’ll look forward to speaking with you again in 12 weeks. Until then, be safe.

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