MicroStrategy Incorporated (NASDAQ:MSTR) Q3 2023 Earnings Call Transcript

This feature is standalone and customizable for deployment by any user and the use cases are myriad. For example, internal users can deploy and FP&A chatbot to answer questions related to budget, or users can develop a product Q&A chatbot for customers on their website. We currently expect to build your own bot capability to be available in December of this year. We’re excited about our initial AI offerings to the market and for the future as we continue to tap into the potential of AI/BI solutions in our product roadmap. Now, moving to developments on our cloud offer. We continue to build modern, scalable, resilient and cloud native applications that can transition customers from monolithic BI configurations to a microservices architecture that embraces flexibility, agility, and technological diversity.

Microservices architecture and containerized structure enables applications to be deployed and scaled independently. These design features are necessary to meet the technological demands of AI, and to maintain the highest level of platform functionality. MicroStrategy Cloud architecture is designed in the cloud for multi-cloud. In Q4, we plan to deploy our Google Cloud implementation, increase your functionality to all three primary hyperscalers and further driving integration of AI and BI to every part of a customer’s business. This is a fully containerized microservices based solution, which is the base modern cloud architecture for our MicroStrategy platform. MicroStrategy is now also available on both Azure and AWS marketplaces, firming up our partnership with these hyperscalers.

We’re also innovating the way we sell our product via partner sales channels with strategic focus aimed to unlock growth, enhance customer success and deepened market penetration in a rapidly evolving AI and BI market. We’ve announced recent partnerships with Microsoft Azure, including with open AI, AWS, and Snowflake. Key highlights of our Expanded Partner program include a newly launched streamline partner portal that centralizes MicroStrategy sales marketing technical assets to facilitate increased partner engagement, expanded training resources to empower partners and the necessary tools to excel and increase incentives and sales motions to grow synergy between MicroStrategy’s and its partners’ growth objectives. I’m very excited about our product in the direction of the company.

Our goal is to be the innovation leader in AI and BI, and BI in the cloud. And we believe we’re delivering on this objective. In Q4, we’re continuing to work through plans to transform our sales organization to be cloud focused and capitalize on our innovation and the strength of our cloud platform. We’re also creating customer success organization they’ll be focused on better supporting customers, as they attempt to innovate and maximize value for the organization and customers. I look forward to sharing more details on these initiatives and our next earnings call. I’ll now turn the call over to Andrew to discuss the updates on our Bitcoin holdings and our financials for the quarter in further detail.

Andrew Kang: Thank you, Phong. I’ll start with our third quarter operating results, which reflected year-over-year total revenue growth. And while macroeconomic headwinds have persisted over the past year, our Q3 results demonstrate, both the depths of our customer base and our ability, to generate revenue despite longer sales cycles, and tighter customer spend. GAAP total revenues for the quarter were $129.5 million, up $4.1 million or 3% year-over-year, or up 1% year-over-year at constant currency. Total software license revenues with which consists of product license revenues and subscription services revenues were $45 million, up 16% year-over-year, or up 14% at constant currency. Product licensed revenues were $24 million for the quarter of 8% year-over-year, or up 6% at constant currency.

The growth in product license revenue in Q3 was primarily attributable to the execution of several large international deals during the quarter, and partially offset by lower domestic license revenues. We continue to expect our mix of revenue will continue to shift from product license to subscription services over time as we continue to transition to the cloud. However, this past quarter demonstrates that demand for our software remains strong across all platforms. Subscription services revenues, which reflect recurring revenues from our cloud business were $21 million, an increase of 28% year-over-year or 25% at constant currency. Product support revenues were $66.9 million, up 1% year-over-year or down to 1% at constant currency. Customer renewal rates remain high at 94% for the quarter, and have been consistently above 90% in the seven most consecutive quarters, illustrating the durability of our customers even in spite of the ongoing challenges in the macroeconomic environment.

Finally, other services revenues were $17.6 million, which was a 15% decrease year-over-year, or 17% lower at constant currency. While we are seeing higher average consulting build rates worldwide, lower customer demand for consulting projects in the current and macroeconomic environment remain a headwind to customer spend on professional services. On Slide 13, total current software license billings were $42.7 million in the third quarter, an increase at 17% year-over-year, and current subscription billings were $16.8 million and an increase at 17% year-over-year our 14th straight quarter of double-digit growth. Transitioning customers to MicroStrategy Cloud remains one of our highest priorities, focusing on both new customer wins as well as migrating existing customers.

As Phong mentioned earlier, we are well positioned to capitalize on first to market AI integrated features already available on MicroStrategy’s platform. And our go-to-market strategy will be highly focused on driving cloud growth, AI/BI adoption and increasing partner enabled deployments and driving further marketplace integration with hyperscalers. We believe this will translate to new logos, faster migrations and accelerated cloud transition in the coming year. Shifting to costs on Slide 14, total non-GAAP expenses were $138 million in the third quarter, compared to approximately $102 million in the third quarter of 2022. $34 million of the expenses were due to the Q3 Bitcoin impairment charge, compared to – $1 million in Q3 of last year.

Non-GAAP cost of revenues was $25 million in the third quarter, which was an increase of $1.2 million or 5% year-over-year, primarily driven by higher cloud hosting costs as we grow our cloud business. However, as a percentage of total revenues, non-GAAP cost of revenues remained flat year-over-year. Non-GAAP sales and marketing expenses increased $1.9 million, or 6% year-over-year to $32.4 million. As a percentage of total revenues non-GAAP sales and marketing costs were just 1% higher year-over-year. Non-GAAP research and development expenses were $26 million, a slight 1% decrease year-over-year, and non-GAAP G&A costs were $20 million in Q3, which was flat year-over-year. Spending on cloud growth and investing in sales and marketing activities are directly targeted towards growing revenue and acquiring new customers.