MicroStrategy Incorporated (NASDAQ:MSTR) Q2 2022 Earnings Conference Call August 2, 2022 5:00 PM ET
Company Participants
Shirish Jajodia – Head of Investor Relations & Treasury
Michael Saylor – Chairman & Chief Executive Officer
Phong Le – President
Andrew Kang – Senior Executive Vice President & Chief Financial Officer
Conference Call Participants
Shirish Jajodia
Hello, everyone, and good evening. I am Shirish Jajodia, Head of Investor Relations and Treasury at MicroStrategy. I will be your moderator for MicroStrategy’s 2022 Second Quarter Earnings Webinar.
Before we proceed, I will read the Safe Harbor statement. 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 these 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 will refer to certain non-GAAP financial measures. Reconciliations showing GAAP versus non-GAAP results are available in our earnings release and presentation, which were issued today and are available on our website microstrategy.com.
I would like to welcome you all to today’s webinar and let you know that we will taking questions using the Q&A feature at the bottom of your screen. You can submit questions throughout the webinar, and Michael, Phong or Andrew will answer questions at the end of the session. Please be sure to provide your name and your company’s name when submitting your questions.
Now I will walk you through the agenda for today’s call. First, Michael Saylor will provide a strategic review and discuss our recently announced executive transition. Second, Phong Le, we’ll cover the operational results for second quarter 2022. Then Andrew Kang will cover the financial results for second quarter 2022. And lastly, we will open up to Q&A.
With that, I will turn the call over to Michael Saylor, Chairman and CEO of MicroStrategy. Michael?
Michael Saylor
Thank you, Shirish. I’m Michael Saylor. I’m the Chairman and CEO of MicroStrategy. I’d like to welcome all of you to today’s webinar regarding our 2022 second quarter financial results. First, I’d like to provide a strategic review.
As you know, MicroStrategy has two corporate strategies. The first is to operate and grow our enterprise analytics business. The second is to acquire a whole Bitcoin. We’ve made great strides in both areas over the past two years. We’ve digitally transformed our sales, marketing and services. We’ve upgraded our enterprise BI platform and we’ve migrated many of our customers to our integrated cloud intelligence offering.
We’ve also established a trusted network of digital asset service providers. We’ve developed a set of corporate procedures for acquiring and holding Bitcoin in custody and executed multiple equity debt and convertible debt offerings in order to expand our balance sheet.
We are now the largest independent publicly traded business intelligence company, as well as the largest public holder of Bitcoin. MicroStrategy represents a new kind of firm. which generates cash flow based on enterprise software products and cloud intelligence services and has a balance sheet based on Bitcoin, a digital commodity that we believe is superior to traditional physical commodities, like energy, metals or agricultural products.
This hybrid corporate strategy represents a paradigm shift. What started as a defensive strategy and intended to protect our balance sheet rapidly evolved into an opportunistic strategy as we sought to create shareholder value during the pandemic crisis.
We no longer view Bitcoin acquisition is opportunistic. It is simply our second corporate strategy. Our future now depends on how we manage and develop our intellectual property, that is software, as well as how we manage and develop our digital property that is Bitcoin.
I’d like to talk a bit about our performance in these two strategies. It’s now over two years — about two years since we embarked on our Bitcoin acquisition strategy. And while I think a minimum holding period for a long-term investment would be four years, it seems fitting that we should do a midterm review of results so far.
Since August 11, 2020, our stock has outperformed Bitcoin as well as every major asset class, along with every major big tech stock. Now why do we choose August 11, 2020? That was the day we announced our Bitcoin strategy, and we’ve coupled it with the Dutch auction where we offered to buy back $250 million of our shares. So we embarked upon this strategy on August 11.
When we looked back at where did MicroStrategy close the day before? It’s up 123% since we embarked on that strategy. Where is Bitcoin gone? Bitcoin is up 94% since we announced our Bitcoin strategy. So MicroStrategy has actually outperformed it quite. We’ve captured more than 100% of the alpha of Bitcoin. From a standing start, the S&P index is up 23% in that same time frame. NASDAQ is up 13%. So as you can see, we’ve outperformed by a factor of 10 NASDAQ stocks in general. We’ve outperformed the entire S&P by a factor of 5.
The option that we had when we chose Bitcoin was gold. We said digital gold or gold. Gold is down 13% since that fateful day. So Bitcoin plus 94%, gold down minus 13%; MicroStrategy up 123%. We could have held our $500 million plus of treasury assets and bonds. And the conventional view is to hold bonds. Well, we could have held short-dated bonds that generated 0% interest or we could have bought midrange bonds.
And if we look at the PIMCO BOND Index, B-O-N-D, that index is down 14% since August 11, 2020. And of course, for those who believe in silver instead of gold, silver is down 29%. So as you can see, when we’re choosing a treasury reserve asset, Bitcoin outperformed all other reasonable treasury reserve assets.
Now we actually considered MicroStrategy performance and Bitcoin’s performance against big tech, too. For those of you who know me, you know I wrote the mobile wave and I’ve been a big advocate of big tech digital monopolies like Google, Apple, Amazon, Facebook. You can see Google in this time period is up 54%. MicroStrategy more than doubled it. Apple, up 43%; Microsoft, up 34%. So we managed to beat those three digital monopolies.
But the other interesting thing is that half of big tech is down in that same period. Amazon has lost 14% of its value, Meta Group or Facebook down 39%, and Netflix down 53%. So if we look at all these numbers, and if you recall, when we announced our strategy, we said we were considering all possible treasury reserve options. We managed to choose the single one, bitcoin that’s plus 94% to beat everything. And MicroStrategy executed on that. We basically started by buying $250 million of bitcoin. We executed on that, so as to not just capture a fraction of the Bitcoin return, but actually more than 100% of the bitcoin return for our shareholders in that time period.
During this period, we’ve successfully raised $2.4 billion in debt and $1 billion in equity. And we expanded our enterprise valuation from approximately $666 million to $5.6 billion, an increase of approximately $5 billion or over 730% in those two years. These results probably come as a surprise to many, since there’s a tendency to focus on short-term volatility of bitcoin and its related impact on our share price.
As a publicly traded operating business that holds digital property, MicroStrategy unlike any other enterprise software company. With our deep knowledge of business intelligence, rich enterprise analytics software platform and distributed network of loyal global providers — sorry, loyal global customers providing us with a stream of revenues and cash flow, we’re unlike any conventional holder of digital assets. That means we need to think differently about how we manage our firm and maximize shareholder value overtime.
For an analyst, considering how to value a hybrid software digital asset firm such as MicroStrategy, it makes sense to consider the value of each of the components of the business and then calculate the sum of the parts. The software business can be valued as a revenue – as a multiple of revenue or earnings with consideration given to the likely growth rate, the customer loyalty and the quality of those recurring revenues.
The digital asset business can be valued at net asset value with a premium based on an assessment of, A, the ability of the management team to execute effectively; and B, the prospects of the digital asset. Adopting this framework, we’ve organized our firm in order to maximize the performance of both elements of our business, while using finance to identify and capitalize on synergies that come from pairing, a stable enterprise software business with a large, potentially high-growth admittedly volatile digital asset holding.
Now I’d like to talk about the outlook. We are still early in the adoption cycle of digital assets and Bitcoin in general. There is clearly a strong demand around the world for a number of things. First of all, A, a digital property to serve as a long-term store of value asset; B, a digital commodity to service a trading alternative to energy, metals and other physical commodities.
C, a digital payments network that’s open, neutral, fast and free for all to use. D, a digital currency that can serve as a medium of exchange for those unable to access dollars via the traditional banking system or for those who wish to trade at the speed of light, friction-free on mobile phones and websites. Stable coins like US DC are examples of such a currency. E, digital exchange that allows anyone to trade all currencies and all assets 24/7, 365. These five things are the clear innovations and there’s extraordinary excitement and enthusiasm around those ideas. Global consensus has built over the past two years that the world would benefit from these technologies, and we need these digital assets to build the economy of the 21st century.
Bitcoin serves as the ethical, technical and economic foundation of this emerging digital economy due to its macular conception, it’s recognition as a commodity without an issuer, global brand recognition and worldwide network of mining operators with tens of billions in special purpose hardware and energy contracts that provide unmatched security and network integrity.
The current wave of crypto rationalization, regulation and innovation is healthy for this industry over the mid and the long time frame. And we expect Bitcoin will be the prime beneficiary of all these trends. The demise of Celsius, Voyager and 3 eras has removed unhealthy business practices and dangerous leverage from the system, educating millions of market participants on the merits of holding an asset like Bitcoin without counterparty risk and taking self-custody or placing that asset in cold storage.
Regulators have been catalyzed by the crypto market meltdown and accelerated plans for regulating exchanges, cryptosecurities and stable coins. We should see regulatory clarity come earlier than we would otherwise expected, and it is clear from communications, from Congress and regulatory bodies, the more focus is going to be placed on the digital assets industry and the rules and related initiatives will be fast tracked. Many large institutional investors have yet to make substantial allocations of capital to this new asset class because they’re waiting for this regulatory clarity. So the focus that regulators are placing on the crypto industry is welcome news to us, and we believe a net positive for Bitcoin.
Even while there is market turmoil, innovation and adoption continue in the digital asset space. The Bitcoin network has settled more than 17 trillion transactions this year, and the Lightning Network continues to expand at a rapid pace, reaching record levels of liquidity and scale each quarter. Every week, new banks announced Bitcoin custody services, no derivative products are coming to market, and new financial service providers continue to enter the space, offering trading, analysis and banking services to the swelling population of investors.
The growing interest in Bitcoin from banks, such as Goldman Sachs, Citigroup, JPMorgan, Santander, as well as Fidelity’s initiatives to offer 401(k) services that include Bitcoin are indicative of this trend. Macroeconomic trends continue to favor and drive the adoption of digital assets as well.
In the past two years, numerous currencies in South America, Africa and Asia have collapsed. And even traditional strong economies are suffering from currency weakness. The Great British pound, the Korean won, the South African rand are all down 12% in the last 12 months. The euro is down 14% against the dollar. The Polish zloty and the Japanese yen are down 17% against the dollar, and the Turkish lira is down 54%. The strengthening dollar has created a demand around the world for digital currency. Since many people outside the US would prefer to trade their local currency for US dollars and many people outside the traditional banking system can install a digital bank on their mobile phone in a few minutes and enter the global economy using the US dollar as a medium of exchange and Bitcoin as a store of value.
We believe that Bitcoin should be the primary beneficiary of these trends. Since it is still a small fraction of the market capitalization of gold commodities, property, currency, bonds and commercial real estate.
Continued inflation will create a need for a non-sovereign store value asset that is neutral and globally available. Technology will make it easier and more functional to use, and ongoing education and regulation efforts will introduce more investors to this new asset class each year and make them more comfortable holding wealth in the form of digital property.
MicroStrategy has ambitious plans to grow both parts of our business. There’s a continuing need for enterprise analytics everywhere, and we are well-positioned to grow with our best-in-class integrated business intelligence platform. We expect to accelerate our transition to cloud-based intelligent services and exploit our increasing brand awareness and global reach to gain new customers and deepen our relationships with existing clients.
We also have a unique opportunity to continue growing our Bitcoin holdings via more acquisitions financed by cash flows, debt, and equity. We’re one of the few operating companies in the world that has the technical capability and the corporate mandate to acquire and own Bitcoin as well as issue Bitcoin-backed financings.
We’re also uniquely positioned to develop enterprise software that leverages the Bitcoin network. We expect more opportunities will come our way and we intend to be ready to take advantage of our leadership position in the bitcoin industry when the time is right.
Given this dramatic increase in the scope of our ambitious plans and the scale of our balance sheet assets. We’ve decided that the firm would be best served by expanding and reorganizing the management team.
Andrew Kang recently joined our team as Chief Financial Officer, assuming responsibilities that were previously handled by Phong Le. Many of you will be hearing from Andrew for the first time on our earnings review call today and we’re delighted to have him aboard.
For the past two years, Phong Le has served as our President and CFO. Now, we feel it is the right time to elevate him to the role of President and CEO responsible for all of our corporate operations. Phong’s the ideal candidate to take the CEO role. He joined our firm in 2015 as CFO, progressively assuming responsibility for Human Resources, Facilities and Information Systems. And later expanded his scope to manage sales and services as our Chief Operating Officer.
Two years ago, he assumed responsibility for Marketing and Technology as well when he was elevated to President. In all of these roles, he’s been successful and he’s gained the respect of the Board as well as the respect of our employees, customers, partners, and vendors. So, the progression to CEO is both natural and well-deserved. Phong will also join our Board of Directors as a member of the Board.
I will assume a new full-time role as Executive Chairman of MicroStrategy. I will remain an Executive Officer and Employee of the company and Chairman of the Board of Directors as well as assuming the role of Chair of our Investments Committee, where I will continue to provide oversight for our Bitcoin acquisition strategy.
My focus will be on our corporate strategy, our innovation efforts, our Bitcoin strategy and related Bitcoin advocacy and education initiatives, such as my work with the Bitcoin Mining Council. I will continue to act as an enthusiastic spokesperson for MicroStrategy and as our envoy to the Global Bitcoin community.
As global adoption of digital assets accelerates, this is becoming an ever more expansive job, and I’m comforted increasing the scope of my advocacy efforts knowing that the execution of the MicroStrategy business plan rests in the capable hands of Phong, Andrew and the rest of our executive team.
These changes will take place as of August 8, 2022. At that time, the company will have a dedicated Chief Financial Officer, Andrew Kang; a dedicated President and CEO, Phong Le; and a dedicated Executive Chairman and myself. This represents a welcome strengthening of our management team as we prepare for the next phase of corporate growth at MicroStrategy.
I’m personally excited about this news. The three of us make a great team. We work together well and possess mutually complementary skills and experience. This will be a benefit to our shareholders, customers, employees, partners as well as to the broader community as we continue to lead the way in Business Intelligence and Bitcoin corporate adoption.
Now I would like to pass the floor to Phong Le, our President and soon-to-be CEO to provide an operational review of our business results.
Phong Le
Thank you, Michael. I’m honored and looking forward to leading this truly innovative organization in my new role as President and CEO. MicroStrategy has founded 33 years ago as a technology innovator with a vision of intelligence everywhere. Since then, we’ve become a global leader in business intelligence serving the largest, most respected enterprises and government organizations in the world.
We’ve also been a technology pioneer in the fields of relational, web, mobile and cloud analytics. Our employees and executives are the foundation upon which our strength in enterprise analytics was built, and I’m enthusiastic to work with them to continue to grow this business going forward.
More recently, MicroStrategy has pioneered the use of digital assets as a core component of corporation’s treasury policy. We believe it’s still early and further adoption of Bitcoin globally can have a positive effect on the Bitcoin price, which has the potential to offer upside to our shareholders. Bitcoin is the right long-term store value for MicroStrategy, enterprises, institutions, individuals and the world.
Our history of innovation has allowed MicroStrategy to be successful for a sustained period of time. I plan to continue to build a culture and a company where innovation thrives. In addition, our ecosystem of customers, partners, shareholders and employees are essential to our success.
Our commitment and focus on this group will strengthen under my leadership. I look forward to leading the organization for the long-term health and growth of our enterprise software and Bitcoin acquisition strategies.
I’d also like to thank Michael Saylor. Following Mike’s footsteps, our founder and a pioneer in enterprise analytics Bitcoin for institutions and CEO of MicroStrategy for 33 years is a great honor and a great responsibility. I’ve learned a tremendous amount for Mike over the last seven years, and I’m honored to build upon his foundation at MicroStrategy. I look forward to continuing to work with him in my new role as President and Chief Executive Officer; and as a member of the Board and his new role as Executive Chairman.
I’ll now focus on the Q2 2022 business results. Overall, we are pleased with our results in Q2. Despite a challenging macroeconomic environment due to high inflation, weakening foreign currencies and the ongoing war in Ukraine, we achieved total revenue growth at constant currency on the strength of our cloud business. We had strong growth in our subscription revenue and billings driven by both existing customer migrations to the cloud and new customer wins. Our customer revenue renewal rates continue to be among the highest we’ve ever experienced.
To summarize our second quarter software results. Revenues increased 2% year-over-year on a constant currency basis. Total software license revenues, which we consider to consist of total product licenses and subscription services revenues and our consolidated statement of operations increased 8% year-over-year on a constant currency basis.
We benefited from the increased adoption of our cloud platform, partially offset by a decrease in product license revenues. Over time, we expect our revenue profile to continue to shift towards recurring subscription revenue. Subscription revenue increased 40% year-over-year on a constant currency basis. Current subscription billings grew 51% year-over-year, our ninth straight quarter of double-digit growth and our second best quarter ever.
We’re also seeing growing adoption of our cloud platform in our international customers with several major wins in Q2. We continue to focus on three key areas of growth that represent core MicroStrategy differentiators; enterprise analytics, embedded analytics and the cloud. Our customers depend on these differentiating capabilities to build mission-critical applications to run their field forces, store operations, risk analysis groups, corporate operations and much more.
For our first growth area, I’m pleased to share the MicroStrategy ranked number one in the enterprise analytics use case in Gartner’s 2022 Critical Capabilities report for the second year in a row. We found that during volatile economic times, organizations rely heavily on their analytics and look to enhance how they get that information in the hands of their end users effectively. The ability to deliver data analytics at scale with high performance and security remains a critical success factor for our thousands of customers worldwide. So we’re proud to receive this designation once again.
Moving on to enterprise analytics. We continue to see growth with customers who build MicroStrategy into the software solutions that they sell to end users, leveraging our open embedded analytics capabilities. Our focus on innovation and research and development has enabled us to continue to modernize our platform with improved immersive interactive user interfaces, simple no-code and low-code application development with open APIs and innovative capabilities like mobile and HyperIntelligence.
Finally, as MicroStrategy Cloud continues to be a growing part of our business mix, we expect to accelerate growth through increased cloud adoption by both new and existing customers.
New customers are increasingly cloud first and choose to deploy directly on MicroStrategy Cloud. At the same time, more and more existing on-premise customers are migrating to the cloud, and expanding their MicroStrategy usage to new departments and user groups. We also expect to launch in Q3 this year, MicroStrategy Cloud for government, our new cloud offering with FedRAMP authorization.
This product is our first generally available release of our cloud platform that relies on a modern cloud-native architecture utilizing containers and microservices. It also continues to deliver the enterprise-grade security, stability and scalability that our customers have grown to expect.
This combination of FedRAMP authorization, enterprise-grade capabilities and managed service delivery will help us further differentiate our solutions with government, large enterprises and embedded analytics customers worldwide.
Our combined focus on enterprise analytics, embedded analytics and cloud services has resulted in more customers relying on us for an end-to-end business intelligence strategy. Off a decommissioning and consolidating legacy platforms in favor of an enterprise-wide adoption of MicroStrategy. This has led to increasing revenue renewal rates every year in the last three years.
In summary, our outlook for the software business remains positive with our continued transition to cloud and our expectation of further increases in subscription billings. Overall, we’re very pleased with the pace of product innovation. And we feel confident in our ability to achieve our long-term sales growth and profitability targets.
Turning to our Bitcoin acquisition strategy, we purchased 481 Bitcoins for $10 million in Q2, and an average purchase price of $20,790 per Bitcoin, net of fees and expenses. We’ve not sold any Bitcoin to date. To reiterate, our strategy, we seek to acquire and hold Bitcoin long term, and we do not currently plan to engage in sales of Bitcoin.
As of June 30, 2022, the company owned an aggregate of approximately 129,699 Bitcoins that we acquired for a total cost of $4 billion or $30,000 an 30,664 per bitcoin net of fees and expenses. We have a long-term time horizon and the core business is not impacted by the near-term price fluctuations of Bitcoin.
As I mentioned earlier, we’re a technology company with more than 30 years of history of innovation and are going to remain laser-focused on technology innovation. We prudently manage our capital allocation strategy and people strategy.
As seen in the current markets, many software and crypto exposed companies have had to adjust a periods of rapid cost and headcount growth by rightsizing their teens or freezing hiring.
In contrast, we have the benefit of a long history with our product and our customers, a stable, experienced executive team, and a long-term focus. We’re in a strong position from a people and product perspective, and will strategically hire and invest in our people, while at the same time being cognizant of the current macroeconomic environment and careful in managing our costs.
Finally, I’d like to introduce our CFO, Andrew King. He joined the company in May. I’m thrilled to see Andrew step into this critical leadership role, where he will be able to contribute from his 20-plus years of experience in banking finance, treasury and capital markets.
I’ll now turn the call over to Andrew to discuss our financials for the quarter in further detail.
Andrew Kang
Thank you, Phong. I am delighted to be with everyone today and would like to start by turning to our second quarter 2022 financial results in more detail. GAAP revenues for the quarter were $122 million, down 3% year-over-year. While weakening foreign currencies impacted our revenues this quarter when isolating FX impacts, total revenue increased 2% on a constant currency basis. Total software license revenues, which consist of both product license revenues and subscription services revenues were in total $34 million, up 5% year-over-year or up 8% year-over-year on a constant currency basis. The growth in total software license revenues this past quarter reflects our strategic focus on the migration of our platform to the cloud, which Phong highlighted earlier.
In the second quarter, cloud subscription service revenues were $14 million, an increase of 36% year-over-year or up 40% on a constant currency basis. Total product license revenues were $20 million, a decrease of 9% year-over-year or a decrease of 6% on a constant currency basis. And product support revenues were $66.5 million, a decrease of 6% year-over-year or 2% lower on a constant currency basis. Both product license and product support revenues are impacted when new and existing customers convert to our cloud model. And as a result, we expect those revenues to modestly decline alongside a corresponding increase in cloud subscription revenues and billings.
It is important to note that even in light of this transition, our on-prem customers continue to reflect the durability of our business as demonstrated with a Q2 support renewal rate of 95% among the highest we’ve ever experienced. Finally, other services revenues, which largely reflect our consulting business, were $21.4 million this quarter, a decrease of 2% year-over-year but an increase of 4% on a constant currency basis. We continue to see positive trends in our consulting business through increased billable rates and our worldwide while optimizing costs through a global and highly skilled technology-consulting workforce. The 4% constant currency growth year-over-year is a strong indication of the desire from our customers to modernize and grow their deployment of MicroStrategy.
Moving to billings. Our current total software license billings were $39.9 million, an increase of 12% year-over-year. In the second quarter, current subscription billings were $20.1 million, an increase of 51% year-over-year, reflecting the same strong growth momentum we saw at the end of last year. This increase was driven by solid results in both subscription service revenues as well as current deferred subscription service revenues. Also worth noting, our largest cloud billings in Q2 were sold as multiyear contracts with an average term of over 24 months of which only 12 months are reflected on our balance sheet. We believe the demand to migrate MicroStrategy to the cloud remains very strong with additional pipeline being added from both our domestic and international customers.
Shifting to costs. Total non-GAAP expenses, which exclude share-based comp, were $1.02 billion in the second quarter compared to $529 million in the second quarter of 2021. Aside from the bitcoin impairment expense that I will discuss in a moment, our costs this quarter reflect modest increase in areas specific to building out our cloud platform, retaining and attracting talent while focusing on efficiencies and corporate cost areas.
Starting from the left of the chart, non-GAAP cost of revenues were $24 million in the second quarter of an increase of $1.6 million or 7% year-over-year. As a percentage of the total revenues, these costs, which are still scaling up to support the build-out of cloud reflect an increase of 2%, which was largely attributed to higher hosting fees and investments in technology talent.
Non-GAAP sales and marketing expense was $32 million, a decrease of $4.6 million or 13% year-over-year. As a percentage of total software license revenues, the second quarter decrease of 19% year-over-year continues to reflect improvements in the productivity of our sales and marketing teams, along with an increase in capitalized commissions compared to last year.
Non-GAAP R&D expense was $29 million, which was an increase of $2.6 million or 10% year-over-year. This was an increase of 3% as a percentage of total revenues driven by the ongoing competitive environment for talent across the tech sector. We are anticipating that this trend will continue in the near term. However, as we prioritize overall spend in the second half and into next year, we will continue to be strategic and opportunistic in investing in R&D to attract and retain engineering talent and to drive innovation that creates demand for our products.
Non-GAAP G&A expense was $22 million, an increase of $3.8 million or 20% year-over-year. As a percentage of total revenue, this reflects an increase of 3%. The overall macroeconomic environment and inflation challenges continue to create headwinds for our bottom line. The fact is, though, our business is operating well and our cost structure is stable. However, in the coming quarters, we will be intentional in prioritizing spend while focusing on areas that drive profitability, while continuing to promote a strong workplace culture.
The largest non-GAAP expense for the quarter was the Bitcoin impairment charge of $918 million. You will recall that the GAAP treatment of Bitcoin impairment charges treats our Bitcoin holdings as indefinite wealth intangible assets under the applicable accounting rules, which means that any decrease in the fair value below our carrying value at any time subsequent to acquisition, requires us to recognize an impairment charge.
Due to the bitcoin price volatility in Q2, the impairment on our Bitcoin holdings was measured against a low watermark Bitcoin price of approximately $17,600, if the future of Bitcoin prices remain above the low watermark, under the current accounting rules, we would not recognize any additional impairment against a substantial portion of our June 30, 2022 Bitcoin holdings.
On Slide 18, total non-GAAP operating loss in the second quarter of 2022 was $903 million, which includes the $918 million Bitcoin impairment charge I just spoke about. I’d like to highlight that since the adoption of our Bitcoin strategy in Q3 2020, the digital asset impairment charges we have incurred in every quarter since inception have always been greater than our non-GAAP operating losses.
While our Bitcoin holdings are impaired when the price drops below the carrying value under current accounting rules, conversely, when the price increases, accounting rules do not allow the carrying value to be revised upward. We feel optimistic that the financial accounting standards board recently unanimously agreed to review the accounting rules for exchange-traded digital assets and commodities as part of their upcoming technical agenda, which could lead to a change in how digital assets are accounted for in the future.
As of June 30, 2022, the carrying value of our Bitcoin holdings was approximately $2 billion, which reflects approximately $2 billion in cumulative impairment charges. As you can see in the chart, the market value of our Bitcoin holdings as of each quarter end has always been greater than the carrying value under the current rules.
The capital markets have established us — enabled us to be agile and access both the equity and debt markets in an efficient way to grow our enterprise value. As you can see on Slide 20, the earliest of our debt maturities are not due until March 2025 and the blended interest rate of our total $2.4 billion in debt is only 1.9%.
As of quarter end, we had $69 million in cash on our balance sheet, and we expect cash flows from operations will be sufficient to cover our ongoing interest expense needs. Going forward, subject to market conditions, we will continue to evaluate opportunities that we believe will be accretive to our shareholders that further our Bitcoin strategy or optimize our existing capital structure.
As of June 30, 2022, we held a total of 129,699 Bitcoins, of which 14,589 Bitcoins were held directly at MicroStrategy, the parent, all of which secure our 2028 notes. The remaining approximately 115,000 Bitcoins are held at our subsidiary macro strategy. Of the Bitcoins held at the sub, approximately 30,000 bitcoins are pledged as collateral to the Silvergate loan and just over 85,000 Bitcoins remain unpledged and available for use. These unencumbered Bitcoin is equivalent to approximately $2 billion, assuming a market price of about 23,000 per Bitcoins.
Our Bitcoin strategy remains simple, buy and hold for the long term, and that is it. In Q2, the amount of Bitcoin pledge of macro strategy increased by 10,585 Bitcoins to support the Silvergate loan as Bitcoin prices fell to the Q2 lows. Our $205 million Bitcoin back loan requires us to maintain a loan-to-value or LTV of 50% or less, and we have the ability to contribute additional Bitcoin to meet the requirement as needed, which we did in Q2.
If the price of Bitcoin appreciates and the LTV ratio is less than 25% at any time, we are also then able to withdraw any of the excess collateral at that time. With approximately 85,000 available unpledged Bitcoin, we have more than sufficient collateral to meet the ongoing requirements of the loan through any foreseeable price volatility.
Finally, before I open up the call for Q&A, I would like to say that I’m extremely honored to be part of the MicroStrategy team and excited to be working with Mike and Phong in their new roles, where we are all aligned on executing on the corporate strategies of operating and growing our enterprise analytics business and acquiring and holding Bitcoin for the long-term.
I believe MicroStrategy is truly in a category of one; having successfully combined a long-standing software business with a successful track record and deep customer base with a pioneering corporate treasury strategy to acquire Bitcoin as a store of value to become the largest corporate holder of the Bitcoin in the world. Thank you for your time today.
And with that, I’ll now turn the call over to Shirish for Q&A
Question-and-Answer Session
A – Shirish Jajodia
Thank you, Andrew. We have received a lot of good questions, so we are going to jump right into the questions. The first question is for Michael. Is the CEO succession a recent development, or that is something that had been in works for a while?
Michael Saylor
Okay. Can you hear me? Yes. The matter of CEO succession has been carefully considered and planned for at the Board level for many years. We believe in proactively developing our leadership team, and we realize the future of the firm is dependent upon our ability to cultivate successive generations of executives and promote from within. I had seven years of closely working with Phong on a day-to-day basis on IT projects, sales activities, on technology, on marketing, on services, on facilities, on finance initiatives. And the Board had seven years of experience with him because he was the CFO throughout that time, and he was closely involved with the Board every single quarter. When Phong was promoted to President of the company two years ago, I think it was pretty clear to company watchers that he was my era parent. So in summary, this is a decision seven years in the making when we finally got to the point that seemed right. It was an easy one to execute on.
Shirish Jajodia
Thank you, Michael. Next question is for Phong. What changes do you plan to make as a CEO?
Phong Le
Well, I think Mike stated, we’ve been working together for seven years now in my capacity as CFO on and off, two years as President. I think we’re fairly aligned in how to run both an enterprise software company and very aligned, working very closely together in the last two years in our Bitcoin acquisition strategy. So, I would sort of see this as a business-as-usual transition, where we get to even further clarify our roles in the organization, with our employees, with customers, with partners, with shareholders in the media, and I don’t have any significant changes planned. Probably the biggest changes that we’ve observed is really Andrew’s arrival two months ago and him now running the finance organization very credibly. And professionally, it gives me more time to run the company and gives Mike more time to focus on corporate strategy, innovation and the Bitcoin strategy.
Shirish Jajodia
Thanks, Phong. Next question is for Andrew. Do you anticipate any further capital markets activity and what is your long-term debt strategy?
Andrew Kang
Thank you for the question, Shirish. I believe the company has executed so far in a very prudent and well thought out capital structure framework. Really since 2020 and it has been extremely successful, as evidenced earlier, when Mike explained our stock performance over the last year compared to our comps. Our approach to debt or equity will remain the same as it has. We will continue to evaluate access to the markets that are most accretive, and we will look to obtain the most premium for dollars generated.
That being said, right now in the current market, we are continuing to evaluate all the various opportunities and really have the luxury of continuing to be thoughtful on any future balance sheet execution. So, for the moment we’re a bit of evaluate wait and see, but I can assure you that whatever we do in the future, we will continue to do so in a prudent and safe manner.
Shirish Jajodia
Thanks, Andrew. Next question is for Phong. Phong congratulations on your promotion to CEO. Can you talk about your growth outlook for the software business for the second half of this year? There are significant macro crosswinds flowing, how do you expect this to impact the growth rate of your license and subscription billings in the second half?
Phong Le
Thanks, Shirish. It’s a good question. We were able to — in my opinion withstand some of these macroeconomic challenges in the second quarter, as you saw, primarily by growing in the cloud. I think the second half, we’ll see more macroeconomic changes, challenges, the strong dollar, unpredictability the War in Ukraine, etcetera. So, I think there will be more challenges.
Our intent is to try to continue to grow. I think cloud will help us. As you all know, and as I and Andrew explained, growing in the cloud does have a short-term negative impact on product license revenue and also has a short-term negative impact on total revenue. So that will create probably more distraction in our revenues than the macroeconomic challenges.
But I think we’ll be able to continue to grow. I’m optimistic about it. That said, we’re going to be prudent and thoughtful. We’re not going to get out ahead of our skis on cost. And we’ll see how the business continues. But things have been going fairly well when we see macroeconomic challenges, given our sort of — given our strength in enterprise analytics and embedded analytics in the cloud and we’ll be cautious but optimistic in the second half.
Shirish Jajodia
Next question is for Michael. Has the recent Bitcoin price volatility accompanied with large accounting adjustment impacted your view on your Bitcoin strategy going forward?
Michael Saylor
Yes, it’s a great question. We anticipated bitcoin volatility and we understood the accounting implications when we embarked on our Bitcoin strategy. I view both of these as competitive advantages for our firm. The volatility means that, A, bitcoin is more interesting than less volatile assets. And B, MicroStrategy is more interesting than companies holding less volatile assets.
The phrase that comes to mind is volatility is vitality. We believe one of the reasons Bitcoin is the best-performing asset class of the last decade is because the volatility attracts interest, capital trading, it creates opportunities — it’s very special. Our firm visibility has been increased by 1 to 2 orders of magnitude since we embarked on our Bitcoin strategy. And interest in our securities has also increased by 1 to 2 orders of magnitude.
We don’t have to try to convince companies to want to cover our stock and explain why we’re unique? They’re hearing from lots and lots of other channels that were unique and the fact that Bitcoin is volatile means that, on the weekend, Bitcoin spikes up 20% or 10% then our stock might be mispriced and all of a sudden, there’s someone that’s thinking about it and obsessing about what to do on Monday morning and maybe the opposite.
And the fact that they’re obsessing means they have to discover us, and they notice us. And when they notice us, they started asking questions, what does MicroStrategy do? Oh, software, Tell me more about that. So, every CFO, CEO, CXOs, the C-suite, they’ve heard of us, the media they’ve heard of us. Traders have an economic incentive to invest in MicroStrategy.
And I used to joke with people. If you like Bitcoin, then you’ll like us. But if you hate Bitcoin, you’ll still like us, because people that hate Bitcoin, they want to trade our stock and people do like Bitcoin want to trade our stock and everybody’s got to have an opinion on it. So, the volatility just attracts attention and attracts capital, and it makes the company much more interesting.
As for — and the interest is important, because the thing you don’t want is to be irrelevant to the world. When nobody knows you and nobody cares whether you succeed or don’t, and no one knows what you do, that’s the kiss of death. And so, our company has really emerged on this world scene, and it has helped us to sell to market, to recruit, to retain employees to find shareholders, et cetera.
And so, I see those as all positives. I think the accounting treatment also benefits our firm, because we decided to adopt the Bitcoin standard. So, in an accounting treatment, that’s indefinite and intangible, it’s kind of challenging to be 3% committed or 2% committed or 18% committed.
But when you’re all in, all committed and people know they can multiply the price of bitcoin times 129,699 in any given day and then add in what they think the software business is worth, it actually — it makes things easy, and we were able to do this because we launched that Dutch auction on August 11, 2020.
Most other firms would find this a very daunting corporate transition and they wouldn’t be able to sort of completely transform the corporate balance sheet with the support of the shareholders and the way that we did it with that transformational deal.
So, as a result of that, because people are afraid of volatility and sometimes, they’re off put by the accounting, we have been able to develop a lead in the digital asset space as the first and the largest public operating company on a Bitcoin standard, and I think that has given us a sustainable competitive edge and a differentiator that we can use to continue to build shareholder value going forward.
Shirish Jajodia
And Phong, would you like to add any further color?
Phong Le
No, I think Mike said it very well.
Shirish Jajodia
Great. Next question is also for Michael. How should investors evaluate the new executive work structure? Are there any tangible benefits from it that will become evident over time, for example, a further development of the digital asset strategy beyond Bitcoin holding?
Michael Saylor
Well, I think the executive structure is going to be a benefit to all of us. First of all, we’re actually expanding the management team with the addition of Andrew. And that gives us a full-time finance executive, and as you know, our balance sheet has grown with our debt offerings and our ability to issue equity and the explosion of our enterprise value from $666 million to $5.5 billion, means that the finance function has become a full-time job in its own.
And so Andrew has arrived and brought some new skills with him, but also Andrew has made it possible for us to promote Phong to President and Chief Executive Officer, and Phong is just an incredibly gifted operating executive and with the support of Andrew and with the CEO role and the unambiguous power that comes with it, Phong will be more effective and able to move more efficiently and drive the corporate mission.
And I feel comfortable with Phong and Andrew in place as well as with the — we haven’t mentioned the rest of the executive team, but we have an awesome CXO team, right, our Head of Technology, our Head of IT, our Head of Consulting, our Head of Sales, right? And our Head of Marketing, they’re the unsung heroes that aren’t on this call right now.
But that team is just very accomplished, very stable. And this new executive structure means that I can even more enthusiastically focus upon communications and strategy and Bitcoin advocacy and evangelism knowing that I’m not ignoring the nuts and bolts day-to-day operations of the business, of which there’s 100,000 things you have to do well every year in a software company, and they need to get done, and they will get done.
But the world of Bitcoin is exploding. And everywhere in the world, people are interested in how they plug into this network, and how can MicroStrategy integrate with them? And so that’s a job that’s actually growing in scope.
So I feel like I’ll be more effective, Phong will be more effective. Andrew’s welcome addition. It’s just a win-win-win.
Shirish Jajodia
Thanks, Michael. Next question is for Phong. Given the macroeconomic risk, can you update us on how you think about balancing revenue growth versus margin expansion?
Phong Le
We’re focused on growing the revenue. I think we have the right cost structure in place to do it. So I don’t believe we need to sacrifice revenue growth by reducing if we were to reduce our costs, I think we can continue to grow at the current cost structure. And I think that will also start to result in margin expansion. So they’re not direct trade-offs in my opinion.
Shirish Jajodia
Another one for Phong. So good to see growth in core software, can you give us an idea on where we stand now in mix between license and SaaS? When might we expect to see SaaS growth begin to move the growth needle more materially?
Phong Le
Yeah. On a recognized revenue basis, our cloud subscription revenue is about 15% of our recurring revenue. On a billings basis, it’s about 20%. So we haven’t reached that an inflection point where our SaaS business gets to, I would say, north of 40%, whereas we continue to grow, it’s fully accretive to revenue in the short-term. Right now it’s accretive to revenue in the long-term, but not quite the short-term.
So I think we have some time left. Obviously, all of you — many of you have seen companies go from a perpetual license to a subscription revenue transition in the past. And I think you’re familiar with that short-term dip in product license revenue and its impact on total revenue, and how that comes out on the other end with an acceleration of revenue.
So we’re going through right now — there’s high demand for cloud, which is exciting. Our customers understand the value proposition. Our marketers understand how to explain. Our salespeople understand how to sell it. And we are learning better-and-better how to operate at scale. So it’s, I would say, full speed ahead with the cloud transition.
Shirish Jajodia
Thank you. Next question is for Andrew. Would you like to elaborate further on managing expenses in the second half of 2022?
Andrew Kang
Sure. I think tagging on to what Phong said earlier, our cost structure is very stable. And I think that’s the benefit of being a long-standing company in business for over 30 years. And we haven’t had this massive growth in head count.
Head count has been very stable. We haven’t over hired as we’ve seen many in the market do recently. So I think from a cost perspective, we will continue to focus on areas that are accretive to profitability. We’ll look to be opportunistic where we can on bringing in new talent, in fact, around key areas like tech and cloud and sales.
And we’ll really scrutinize the other costs that we think we can be more efficient. And I’ve got the benefit of coming in and getting to ask a lot of new questions on certain expenses and costs. And so I think that will be helpful and understanding where we can be more efficient.
But ultimately, I think we’re going to be opportunistic and spend in areas that will help our business grow.
Shirish Jajodia
Thanks, Andrew. We’ll just take one last question for Phong here. On the demand environment, what are you seeing in the demand environment for BI software, on the uncertainty on macro? And what is your demand outlook for the rest of 2022? And have any deal cycles elongated, or any view from customers on their, spend?
Phong Le
Yeah. Thanks, Shirish. I do think we’re seeing choppier demand, elongated deal cycles more challenges in our selling environment, especially in international. All that said, as I mentioned before, if we can push through and execute, leverage our expertise in enterprise analytics, the fact that we build applications that large enterprises rely on, especially in turbulent times and leverage our cloud transition, I think we can work through this and grow in the second half and in the future.
But there’s certainly more volatility, we have to be better at execution. We have to be more precise in managing our pipeline, and our sales cycles, and our opportunities, and our customer engagements, and our conversations. So look, it requires better execution in these types of times. And this is what we’re good at. We’re a company that has great product, great strategy and great execution. So it’s hard, but we’ll work through it.
Shirish Jajodia
Great. So we are at the end of time for today’s call. Thank you, everyone, for the questions. This concludes the Q&A portion of the webinar. I will now turn the call over to Michael for closing remarks.
Michael Saylor
I want to thank everybody for your support, and Phong, Andrew, Shirish and I will all look forward to seeing you again in 12 weeks, and we wish you a happy summer. Have a good day.
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