Strategy Inc (MSTR) Earnings Call Transcript & Summary

Sure. I'll start, and then Phong can add on as necessary. I think that as we move through the second quarter, we realized that we were undergoing a virtual transformation, we call it the virtual wave. And what the virtual wave means is, although the software is creating the same value, we can sell it and market it and service it much more efficiently. And we can run the company much more efficiently. And that caused us to realize that we were going to have margins that are going to improve, and our cash flow generation will improve. And we came to the conclusion that we were going to generate more cash and consistently generate more cash going forward. That was the first part of the puzzle, a change to our view in the P&L. And then we looked at our treasury, and we saw $500 million worth of cash on the treasury. And we realized that not only were we going to have more cash coming in, but we weren't really going to need that cash to grow the business. In fact, we got the sense that it probably wouldn't even be a good idea to be throwing money at the problem of growth. Like, the days of buying, advertising and entering into marketing events and hiring tons of people to ring the phones, I think, those are long past. We've adopted a new approach. And I think the world has. It's like, build a product that's virtualized. Give it away for free as a trial period. Let people try it out and let it spread virally. And so the sales and marketing strategy of the company has become much more efficient. And that means the cash generation capability of the company has been improved. And that means that we can't necessarily expect to use that treasury to reinvest in sales and marketing. And then we started thinking, what do we need to do with it. Now coincidentally, the Federal Reserve changed their policy, and they began -- they began the quantitative easing and printing more money. And the purchasing power of cash began to deteriorate as measured in NASDAQ stocks or in gold or silver or other tangible assets that you might want. And so that, combined with the prospect of getting 0% interest on that money and watching its purchasing power degrade over time, quickened our decision-making process. We realized that we needed to do something. And the 2 ideas we had are, we should buy our own stock back faster and quicken our rate. And then whatever we didn't use to buy our stock back that we needed as a treasury reserve, we should put into some kind of tangible asset that's going to accrete in purchasing power, rather than depreciate in purchasing power. So that kicked us into a decision-making process, and we considered buying a market basket of equities, and we considered buying a market basket of precious metals. And eventually, we settled upon buying Bitcoin. And the reason we decided to buy Bitcoin is, because Bitcoin represents a form of digital gold. It's harder than gold. It's smarter, it's stronger, it's faster than gold. We -- in my opinion, it's beyond the speculative stage. It's a $200 billion digital monetary network. And it is 50x bigger than its next biggest competitor, say, Bitcoin Cash. And so it looks to be the 90% plus dominant player in the space. A $200 billion, it's big enough to think that it's not going away, and yet it only represents 2% or 3% of the market cap of actual gold. And digital gold is orders of magnitude better than actual gold. You can move it 1,000x faster. You can audit it every 10 minutes. You could liquidate it any minute of the day, any day of the week, anywhere in the world. There are a lot of tangible advantages that make it a stronger form of collateral. And the fact that they're locked in a 21 million Bitcoin means that even if the price goes through the roof, all that's going to do is incentivize miners to make the network more secure. If the price of gold goes through the roof, they're going to mine more gold, and people are going to melt down their jewelry to sell it on the market. So the upside for physical gold, starting from a $10 trillion base is not nearly the kind of upside of digital gold starting from a $200 billion base. So if you boil it down, over the midterm, we think that the Bitcoin investment could yield us a 10x upside, if we're right. If we're wrong, we'll trade sideways or we'll lose a bit of money. But the 10x upside over the midterm is pretty compelling. Over the long term, if the digital gold thesis works out, digital gold will be more valuable than gold, and you're looking at 100x upside. And over the near term, which is very interesting, we're offering institutional investors the ability to get exposure to Bitcoin by buying the MSTR ticker. And that makes our story much more interesting. There are thousands of institutions that can't buy charter, buy Bitcoin as an asset directly. They don't have the relationships. They couldn't do it if they wanted to. If they decided they wanted to, tomorrow, it will take them 3 months of compliance work to get through it. It might take them years to get through it. On the other hand, the idea of the Bitcoin ETF is incredibly compelling thing. And that catapults us to the top of 3,500 publicly traded companies as being the top 1 to allow them to do that. So our balance sheet strategy is, don't hold cash if it's going to be a liability. Invest it back into ourself. If we can't invest it in our own stock, invest it in Bitcoin. And provide institutional investors with an on-ramp to Bitcoin, which is going to be a benefit to them. We wouldn't get that same kind of differentiating or unique characteristic, if we simply invested it in gold or in a market basket of equities. And we would have -- I think less upside and just the same downside. And of course, we need to keep some kind of treasury in order to assure our counterparties, our customers, our employees, our investors and our vendors, who will be around for the long term. And so this strategy allows us to do two good things at the same time: To make our own stock more scarce, and to put our tangible assets as the scarce asset, and that's why we did that.

Okay. That's a very deep explanation. I appreciate that. I guess since the announcement, I mean, as you've spoken with some of your larger investors or prospective investors, I mean, obviously, to your point, Michael, like Bitcoin is not something that most investors can readily access from an institutional perspective. I guess what's been the feedback thus far? And I guess, the counterpoint would be, why wouldn't you just put all the money you're putting towards Bitcoin into buying back stock?

Why don't I let Phong answer the question first, and then I'll add on to whatever his thoughts are.

Yes. In terms of investor sentiment and in general sentiment about our capital allocation strategy, I think it's been very positive, right? And I think you said it yourself. This is a big shift for two reasons. One is, we have historically held on to our cash balance, and it's been a large amount anywhere between $550 million to $700 million. And we've methodically, in the last 18 months, bought back $180 million of stock on the open market. But we haven't been as transparent about our cash flow plans or our capital allocation plans. So I think that's been very positive. I think the tender and the reaction to the fact that we're going out aggressively, buying back MicroStrategy stock, I think that's been very positive. And I think to the extent people understand the Bitcoin story, you'd be probably surprised the number of people who come out and say, "Oh, I own Bitcoin" or that's actually a really interesting and unique sort of strategy, and we think it can work. So it's been mostly positive. Now I think there has been some negative sentiment that's similar to what you're sort of echoing, Tyler, around sort of why wouldn't we just buy all of our stock back as opposed to putting some of our excess capital in the Bitcoin. And Mike laid out some of those reasons, but I'm sure, Mike, you can sort of explain some of those more, too. So I'll pass it over to you.

Yes. The company needs to have a capital structure or some kind of treasury against the rainy day. If we drained ourselves down to $50 million of net cash, then I think that, ultimately, our competitors might use that against us. And anybody that becomes unsecured in other crisis might think that we're undercapitalized. So it's not practical, I think, for us to purchase that much stock in a hurry, and it's not prudent for us to do it either. And so we've taken a measured stance of purchasing back some stock and then purchasing some Bitcoin. And we'll adjust that over time subject to market conditions in order to do the right thing.

Okay. And one of the conclusions that it seemed like you had as you were formulating the capital return strategy, which is kind of almost like a more sustainable level of margins in cash flow. And I'm wondering, Phong, obviously, I think most software companies had experienced lower-than-expected expenses this year, just as -- we can't travel and we're quarantined for lower office space. But how much of the operating expense savings that you've incurred this year, do you think is sustainable? And I guess, in terms of what you've learned, which sounds like you're seeing a lot of productivity from the work-from-home environment, like how much kind of incremental cost savings have you kind of started to think about, as you think about what MicroStrategy looks like from a long-term cost perspective, and taking into account facilities and travel and those types of things?

Yes, there's a lot of interesting -- I'll call it, software industry behavioral norms that were challenging. That typically might take 10 to 20 years to change are now taking 10 weeks to change, right? And so this idea that to close $1 million deal, you have to go meet the customer, break bread over a steak dinner with a bottle of wine or to effectively do a demo, you have to be in a conference room, fiddling, with trying to figure out how to project to the screen for 10 minutes before you can actually do a demo, or and I would say a more sacred norm that we held sacred was to be an effective technology software engineer, you have to be in an office building, sitting next to your Scrum team and meeting for a daily stand-up, in-person every morning. The first two, I would say nobody really enjoyed, right, like, following a few folks, most account executives and most buyers didn't really want to have to negotiate the $1 million deal over dinner and rather just do it over a 15-minute Zoom session. Nobody wanted to figure out how to call it the AV team to get the projector to work to do the demo. And besides that, get on the airplane, take the subway, show up at the front desk, talk to security, get your badge, go up in elevator, talk to the receptionist and then go to the conference room, right, like, nobody really wanted to do that. So in those particular scenarios, I don't think we have to return to those norms. There may be certain customers that are going to want to do that. There may be as 10% to 20% of interactions. But if we can get to what's best for the employee and best for the customer, it's accelerating the conversation in a transaction, so you can actually get value out of our software. And that's really what we want for everybody. On the technology side and the office work side, it's a more interesting one, right? And we've moved to a policy that says post-COVID, we think most of our employees can work from home, but we'll give them an office environment, if they wanted. If you're trying to avoid the screaming kids, you are trying to deal with online school, and you want do the office, we'll make that available, right, but we're not going to require it by 1-day a week. So even in that particular case, we're hearing from our technologists and from our employees that they can be more productive working from home. We were skeptical going into it, right? Mike and I were probably 2 of the biggest skeptics. But we've proven over the last 3 to 6 months it is absolutely possible. So I do think that the cost reductions and the margin improvements will be sustainable. Like I don't think we'll ever get back to the level of T&E or the level of real estate cost or the level of field marketing, events marketing spend that we were at before. And I think for the most part, that's better for everybody, right? I guess the only people that it's not better for are events companies, airlines and hotels; but for the software company and the customer, it's a better outcome.

Okay. I wanted to touch on the competitive environment. And especially, as you've seen -- to the extent you've seen changes during the COVID pandemic, I think in the past, I mean, certainly, downturns have hurt the smaller, less capitalized private companies. We've seen a lot of headlines in terms of layoffs at some of your smaller competitors. But just curious, what you're seeing when you're talking to customers or even from a hiring perspective, you're seeing more resumes flowed in from some of the competitors. But just -- how do you think the competitive landscape has evolved during this crazy time?

Yes. I think it's pretty much what you summarized, Tyler, which is, the strong will get stronger and the weak -- the ones with less market share, lower -- less capitalization, who are not turning to profitability, but really buying a share through marketing will get weaker, which I think we've seen this happen in 2008, and it boded well for us because we offer a full enterprise-grade platform, where people can build Business Intelligence applications that are embedded into the operations of the organization. Specifically, I think Power BI will -- and Microsoft will get stronger over time. Salesforce will get stronger. Uncertain on the Tableau side. I think we are seeing some of the smaller niche players get weaker over time. It doesn't mean that it's less competitive for us. It's just a different set of competitors. And so the BI space is an area that is central to sort of a business and an enterprise, especially post-COVID. So I still think that budgeting and the funding and the market will grow. And that, by itself, will keep the industry very competitive and keep people interested in new entrants coming in. But I think it's a reasonable summary to say that the strong can get stronger and the weak will get weaker.

Got it. And then if -- Phong, if we were to just think about your kind of medium- to long-term goals. Obviously, improving the company's cost structure and driving efficiency in the sales force has been a big priority for you. But what -- I mean in the past, you've kind of thrown out, you'd like to grow double digits with a double-digit margin. And I know from time-to-time that's kind of evolved a bit depending on which one you're emphasizing more growth or margins. But how do you kind of think about medium- to long-term goals in the context of the profitability versus growth tradeoffs?

I think growth is still our #1 priority, right, growing our software business and doing it via Enterprise, Business Intelligence and a strong HyperIntelligence offering, a strong cloud offering and a strong focus on Embedded Intelligence. And I think some of the things that we're doing in terms of improvements in productivity are in the interest of growth and the things that we're doing in transitioning to the cloud are in the interest of long-term sustainable growth. So that focus has not changed. We hit a little bump in the first half of the year due to COVID. Hope to see us recover from that going forward. But that's still our #1 priority, growing as a business. If anything, our profitability goals that we had originally established, we can be more aggressive on. We can be more productive. We can be more efficient. We can have better marketing productivity in ROI, better sales productivity in ROI. Our G&A expenses can be reduced over time. And so that has been an advantage of COVID is we think we can see better margins, which is why in our Q2 earnings call, really for the first time, we talked about what we think we can see in terms of non-GAAP operating margins. And we're reasonably bullish on that for the reasons that Mike talked about, too. So as a summary, growth is still our priority and profitable growth is still our priority, but perhaps, we can see even more profits. We're not going to go for incremental profits to sacrifice growth.

Yes. Yes. And how should investors kind of think about the key drivers of growth? I mean obviously, you've been in the market for a while. You have a pretty robust enterprise-grade customer base and some interesting new products around the version 2020 and HyperIntelligence and some of the stuff you're doing in the cloud. But I mean, do we get growth by adding net new customers? Is it HyperIntelligence? Like how -- could you just kind of rank order the biggest drivers or opportunities that you see to growing the company over the next few years?

Yes, there's 3 drivers. One is just organically growing through our existing Enterprise BI business, right? And in that driver, we have 3 major product focuses, right? We have our HyperIntelligence product focus, we have our Business Intelligence product focus, and we have our Embedded Intelligence product focus. And through all 3 of those, we think, we can drive material growth just organically through our Enterprise BI product. The second big driver is migrating customers to the cloud, right? And so as we migrate customers from paying us perpetual maintenance to subscription revenue, we think we can see an uplift in the recurring revenue because we're providing more value to the customers, right? We're providing them cloud infrastructure, we're providing them cloud support, we're providing them software that is more agile, easier to support, easier to run. And so we think that can create material growth in the short term. The longer-term piece is the SaaS business, right, and that's the third driver, right? Getting customers and prospects, especially people who are new to MicroStrategy because they're in a company that doesn't have a MicroStrategy installation, or there any department of a large enterprise that doesn't have a MicroStrategy installation, trialing the software, buying the software and then expanding their deployment of the software. So we're better positioned than we have been before. I would say, if you rewind 2 years ago, we're primarily looking at that first piece, which is driving growth traditional Enterprise, Business Intelligence, using Hyperintelligence, Business Intelligence and Embedded. Now we have 2 additional levers that we can count on to drive growth going forward.

Right. Right. Okay. And then, I guess, just -- we got about 5 minutes left here. But maybe we could just talk about the product side a little bit more. I think I wanted to touch just on HyperIntelligence. I think we're now almost into year 2 of that release and just kind of how the -- any way to quantify impact there, I mean, to talk about that as being potentially a key driver of growth. But what else -- I know, Mike, you've been spending a lot of time on the product side, but what -- maybe kind of give us a preview of some of the stuff in the works that you're excited about.

I think that HyperIntelligence is really maturing as an offering. It's clearly differentiating for us. And everywhere we go, I think we're getting positive response from our customers, and we have yet to see any competitor offer anything similar. So those are -- that's a very good auspicious sign. We've done a lot of work polishing it, to make it faster, stronger, smarter. It's really critical to get the fit-and-finish right, because when it works well, it's being injected right in the stream of HTML pages. And if you inject it just right, you get instant friction-free intelligence experience. And when I look at the product right now, I feel like, we've really matured it to the point where we can inject HyperIntelligence into most Enterprise applications. And I would say probably the single most exciting thing going on with HyperIntelligence in the coming 6 months is that we've got an SDK that allows you to build a HyperIntelligence application and then to embed it into the code of your own proprietary website. So that means that, say, Amazon could build HyperIntelligence into the Amazon website in an hour or 2 hours, and embed it and then hundreds of thousands of people would be getting HyperCards in hour 3, without installing any extensions or going through any security protocols. And so we think that, that's going to be a big breakthrough in the deployment of HyperIntelligence.

Great. Great. All right. Well, I know we're approaching the top of the hour, and I want to thank you both for joining us today and for supporting our conference. And for the investors that joined, we'll talk to you later. So thank you very much.

Thank you, Tyler. Thank you, everyone.