Strategy Inc (MSTR) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MicroStrategy third quarter 2016 earnings call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference Michael Saylor, Chairman, President and CEO. Sir, you may begin.

Hello, this is Michael Saylor. I am the chairman, president, CEO of MicroStrategy. I’d like to welcome all of you to today's conference call regarding our 2016 third quarter financial results. I'm here with our CFO Phong Le. First, I’d like to pass the floor to Phong who is going to read the Safe Harbor statement and make some comments on our results for the third quarter.

Thank you, Michael. And good evening everyone. Various remarks that we may make about our future expectations, plans and prospects may constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent Quarterly Report on Form 10-Q filed with the SEC. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may cause the company's views to change. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of market today, which is located on our website at www.microstrategy.com. Let me turn to our financial results for the quarter. Overall we're pleased with our Q3 financial results. Total revenue of $130 million increased year over year for the first time since our restructuring began in Q3 2014, with increases in product license subscription and support revenue offsetting decreases in services revenue. Revenue excluding services increased 4% year over year and product license revenue increased 8% year over year. Operating expenses were up 4% year over year while headcount increased 9% year over year. Operating income was $30 million, operating margin was 23% and diluted earnings per share were $2.31. Let’s start with more detail on revenues. Total revenue for Q3 2016 was $130 million which was a slight increase year over year and 5% increase quarter over quarter. We experienced minor foreign currency headwinds in Q3 2016 which negatively impacted our revenues by $1.1 million or 1%. Revenue, excluding services which are primarily consulting, was $110 million in Q3 2016, a 4% increase year over year and foreign currency changes negatively impacting such revenue by $0.9 million or 1%. Product license revenue was $30 million in Q3 2016, an 8% increase year over year with minimal foreign currency impact. Our North American business was strong in Q3 2016 representing 74% of our total product license revenue, compared to 54% for the same period in 2015. We saw a $2 million decrease in quarter over quarter gross deferred product license revenue. This represents the net effect of the recognition of previously deferred product license contracts, partially offset by new deferred product license contracts. Our Q3 product license deal is at a lower deferral rate than we have seen in the last year. We also saw a shrink in our large deals particularly in North America with revenue from deals greater than $1 million in product license revenue growing by 31% year over year. Our subscription services revenue primarily driven by our cloud customers was $7.6 million in Q3 2016, a 17% increase over Q3 2015. Our support revenue was $72 million in Q3 2016. This represents a 1% increase year over year. We continued to see improvements in our maintenance renewal rates in Q3 2016 compared to the same period a year ago, driven by improvements in our product as well as our technical support and renewal process. Our services revenue was $20 million in Q3 2016 compared to $24 million in Q3 2015. This represents a 16% decrease year over year. Within our services business we're seeing a shrink in education which grew 21% year over year. Although our consulting revenues decreased 20% year over year we're hoping a destabilization going forward as we look to increase headcount and grow consulting revenues with the rest of our revenue going into 2017. Turning to costs, we continue to steadily invest in our business. We ended Q3 2016 with 2,120 people, an increase of 9% year over year and 3% quarter over quarter. Headcount increases in sales and marketing and research and development made up 71% of the year over year increase, but overall those areas represent 52% of our employees. One key area of investment has been in building out our business development channel. Sales and marketing expenses were up 8% year over year with 13% higher headcount. General and administrative expenses were down 1% year over year with 5% higher headcount and research and development expenses were up 2% year over year with 14% higher headcount. This reflects our focus on strategically growing headcount while managing our costs. We’ve not capitalized R&D costs since Q2 2015 when we first released our MicroStrategy 10 product due to our agile development model, with new software version of the generally [ph] released quarterly. As a result, we have a more straightforward comparison in our year over year R&D expenses. In addition, the amortization of our software development cost was $2 million in Q3 2016, a 22% decrease year over year as previously capitalized software becomes fully amortized. Total operating expenses were $77 million in Q3 2016, up 4% year over year and down 1% quarter over quarter. We had income from operations of $30 million in Q3 2016 and an operating margin at 23%. This represents a 2% decrease in operating income from the same period a year ago. Our net income was $27 million in Q3 2016, an increase of 11% from the same period a year ago. The year to date net income benefited from an effective tax rate of 17% for the nine months ended September 30, 2016 compared to 26% for the nine months ended September 30, 2015. The change in the effective tax rate for the nine months ended September 30, 2016 was mainly due to the change in the mix between U.S. and foreign income and discrete tax benefits recorded in the third quarter of 2016. Improvements in operating income as well as improvements in effective tax rate helped us achieve a higher diluted earnings per share at $2.31 in Q3 2016 compared to $2.06 during the same period a year ago. We had cash, cash equivalents and short term investments of $579 million at the end of Q3 2016 and continue to have no debt. Net cash provided by operating activities for the nine months ended September 30, 2016 was $94 million compared to $123 million during the same period a year ago. Turning to the remainder of 2016 we will continue to deliver in accordance with our product process and people strategy, improving on our MicroStrategy 10 product, the focus [ph] on desktop, hardening our internal processes focusing in the area such as marketing technology and sales and improving our workforce through recruiting and employee development. As we continue to work on transforming our business we expect continued quarterly unevenness in our key financial metrics. But we're optimistic that our changes would put us on the path to profitable organic growth in 2017. Now I'd like to turn it back to Michael Saylor.

Thank you, Phong. Overall with regard to the quarter I am happy with our results. I was pleased with the growth in product revenues. We did some very very large deals with the government agency. We had another large deal with a big medical company and a third one with a very large finance company and then we had retailers and professional services companies. So I was happy to see that the large deals were coming across a breadth of industries and I feel that MicroStrategy 10 is an excellent value proposition in most major industry vertical segments and we're getting really good feedback in that regard. I was pleased with the margin performance as well and we're working very hard on managing costs, we’re managing efficiency while we are actually laying in place the framework to grow the business. Our services declined -- our professional services declined, it’s something that I note. I think it's consistent with our refocus and retooling of the consulting business as we pursue a strategy of transforming toward expert services and we shift away from -- shift project work and system integration work toward our partners. So it's noticeable but I'm not troubled by it. I had a chance in the past three weeks to meet with many customers. I flew 40,000 miles, in essence like 1.5 times around the world and I went to thirteen of our symposiums including ones in India and the UAE and New Zealand and Germany and France and Italy and then also all throughout the U.S. and Canada. And I got a chance to meet with our customers and hear their feedback. We rolled out a number of new programs this quarter, one of them is the free desktop initiative. That's making our desktop analytics tools available for free to anyone. This is comparable to a standalone full use license of Tableau, except again it's available to anyone for free from the MicroStrategy website. I would encourage you to about [ph] anybody that you know they can go and grab it. We're very proud of it. It's been extraordinarily well received by customers and the result is that that most if not all the customers I spoke to are in an unsolicited way ready to go and promote the extension of the MicroStrategy desktop within their enterprise. And I think that's going to help us to expand our footprint. We rolled out a Jump Start program which is free basic training, the first five days of training on the MicroStrategy platform. It was another extraordinarily popular highly regarded program, we've had thousands and thousands of registrations, extraordinary enthusiasm and customer sponsoring us and putting rooms of people together, so that they can hear the MicroStrategy story and get up and running on the MicroStrategy platform. So those two programs give me a lot of enthusiasm and I've gone and done these symposiums every quarter for about the past four or five quarters. And so I can compare this to my previous experience and while there's never been a quarter where the customers weren’t enthusiastic to see us and the prospects didn't like what we were offering. I felt this quarter was particularly special in that our marketing message and our product message was resonating even better with customers than in the past. So that made me happy. We've also done a lot of work in order to more tightly integrate our Usher digital credential capability with our enterprise mobile apps and our enterprise analytics platform. And as we've demonstrated to our customers how we can unify analytics and mobility in a single platform, I found that to be a very compelling marketing message and a very compelling offering. I feel that that's resonating with our customers and our partners more effectively than the way we've communicated in the past. And so that was another nice bright point in the past few months. And the latest version of our product 10.5 we made material advances by supporting OData and SAS data files and this is a great thing for many of our customers. We upgraded our RESTful APIs which has created enthusiasm for people that want to use us for embedded analytics and I think it makes us really best in class there and opens up many opportunities for us. And we made dramatic improvements to our big data drivers for organizations like Cloudera and MapR Technologies in Spark and we continue to be enthusiastic about getting a lift off of this wave of energy that's pursuing big data technologies. So our product offering is squarely in the sweet spot of analytics platform open to data sources able to harness industrial strength big data technologies. One thing that I did in my symposiums and this was -- this is something I did with thousands of customers in the room, about 250 at times about thirteen times, is I would actually demonstrate for them the two way messaging capability that we've deployed in our Usher product. So we actually issued Usher badges to our customers and they're able to use them to get in the symposium and then I actually messaged them and took polls interactively with the audience and I showed them real time response in real time messaging. And I got a lot of smiles, I got to say in every single audience everywhere in the world, lots of smiling happy faces as they realized that this entire enterprise mobile network will come to life with the power of MicroStrategy. And so the electricity and the magic of the platform I think started to show itself and people are a lot more enthusiastic, that’s winning over converts in our partner base with system integrators and I think it's generating and kindling increased levels of enthusiasm within our customers to get more deeply engaged with us. And ultimately I think everybody realizes that they're hearing MicroStrategy as a great platform for deploying an enterprise mobility network and enterprise mobility network is something that every enterprise needs and we're really good at providing you with an integration between mobile identity, mobile communications, mobile analytics, mobile transactions and underlying analytics and intelligence on an enterprise grade server platform. So that's a great differentiator for us. As I look forward we're going to continue to focus upon building our sales and marketing rhythm and momentum. We will maintain our quarterly symposiums strategy, it’s working very well for us. And we've got probably 100 or more scheduled for 2017 and I'm looking forward to being at half of them or so. We’ll continue to focus on our operational disciplines. They’ve worked well for us, continue with our quarterly product releases. And I feel that as you look at 2017 we've got and we are building more momentum in our product offering and in our sales and marketing activities at a time when many of our competitors I think are less focused than they were a year or two years ago. So I think that's an auspicious situation. So I want to thank everybody who's a shareholder on the call, we appreciate your support. A lot of shareholders have been out there spreading the message Please continue to spread the message especially free desktop, free Jump Start training. And with that, I'd be happy to open the floor for questions from the analysts. So why don't we go ahead with that?

[Operator Instructions] And our first question comes from Karl Keirstead from Deutsche Bank.

Thank you. I've got two questions. Michael, I will start with the question on the geographic performance. I noticed from the 10-Q that just came out that there was a pretty sharp divergence domestic and international, the plus 8% license growth was made up of I think plus 48% domestic but minus 40% international, a bit of a reversal from the prior quarters. Maybe that's just deal lumpiness but I just wanted to ask you if there's anything else maybe Brexit or something going on in Europe. Thank you.

I spend a huge amount of my time internationally more so than ever before. And we're very bullish on the business. I don't think there's anything systemic that I would highlight. I do think that the business is volatile and we do have -- we do have a number of large deals. So the timing of them and a geographic distribution of them all make those percentile comparisons, the percentage comparisons a little bit volatile from time to time.

Okay, got it. That's fine. And then maybe a second question, one of the numbers that stood out to me from the Sprint [ph] is the 13% growth in your sales and marketing headcount. And I'm wondering if you could elaborate a little bit on that number. Are they young, are they seasoned or are they quota caring reps or are they more marketing folks? And I think that the spirit of the question is the likelihood that that 13% uptick in sales and marketing headcount might translate into growth next year. Thank you.

Well, the least expensive professionals in the sales and marketing organization that we can scale the fastest are generally business development representatives and they're kind of entry level inside sales reps and it’s their first job in sales. And we've been working to bring in a bunch of those in the organization and we pair them with senior account executives. A senior account executive might have ten or twenty years experience and they are customer facing in the inside, while the BDR is normally at corporate and they are spending their time on the phone pursuing leads and the like. So we have grown our, call it, telemarketing function at a very rapid rate because we saw that was working and there's been a lot of enthusiasm for that. We haven't grown our senior account executive team at a similar rate. So probably there's a slight skew in that direction as you see those numbers. So when you're building sales and marketing, there are senior marketing people that are very talented and more expensive than there are junior marketing people that are entry level that can be very valuable. And then there are senior account executives that are also instrumental and talented and then there are senior vice presidents and directors in the organization as well. And then there is administrative staff and operational analysts who sometimes are the glue that hold everything together. We've had a mixture of all those things. I don't think there's any area where we’d say we're not growing but I think we tend to make sure that we choose our professionals carefully in order to maximize the output we get for a given cost.

And our next question comes from Walter Pritchard from Citi.

Thank you very much. This is Tyler Radke on for Walter. I was wondering if you could share any metrics around sales force productivity. It looks like it picked up year over year in this quarter. Just wanted, if there's any metrics you can provide and maybe how that compares in the U.S. versus Europe.

I don't think we have any productivity metric that we're publishing right now. And also when we're running them we actually look at productivity across both sales and account planning and business development processes as well as a few financial metrics and metrics related to customer satisfaction and customer retention. So there's a number of different things. I would say anecdotally sales productivity is probably up a bit year over year. I feel it's trending on the right direction but I wouldn’t want to give you a percentage at this point.

Great. And then a follow up on the operating expense growth and headcount, it looks like you grew headcount about 9% year over year this quarter but as you mentioned operating expenses were only up 4%. Do you kind of expect over time the operating expense growth to better correlate with that headcount growth or are you making more structural changes where we should kind of expect operating expenses at this level to grow around the 4% range or or less?

Tyler, as you know we don't really project the exact or precise cost growth on operating expenses. But I think what you saw happened in the third quarter is indicative of how we want to grow the business overall which is growing headcount at a certain rate and growing cost at a lower rate. Good example that Mike just talked about was the sales and marketing where we're introducing more junior level inside sales, so we can build pipeline for a more senior level account executives with those deals. We really ramped up our campus recruiting across technology and other areas which is another great way to invigorate the organization with new folks and also do it in a very cost effective way. So that’s generally been in overall strategies to make sure we're very conscious about our cost increases as we start to grow the organization overall.

And our next question comes from Abhey Lamba from Mizuho Securities.

Yes thank you. Mike, contacts, it was a good quarter. Based on your comments what made this quarter special – what was special about this quarter that made your product message [indiscernible] at the symposiums you talked about and what changed in the last kind of six months that kind of got people more excited?

We do think there is quarter over quarter volatility in the business. On our last conference call we had numbers that were slightly less than some people expected. In this conference call we have numbers that are somewhat more than people expected. On a longer term basis, over the course of a year or more we typically get what we expect but from quarter to quarter there is going to be some volatility. I wouldn't want to put my finger on anything that I thought happened in Q3 that we weren't doing in Q2 and Q1 because I think that we're pretty consistent and our focus to the product, the process and the messaging, I would say that the product gets consistently better and the product in Q3 was better, I think that we made a lot of improvements in our support policy. We announced our platform release, we changed management and tech support function and I think that was a positive. I think we've made some positive improvements with regard to people throughout the world. I think our execution was tight and I think that our systems are continuing to be refined and our processes are seasoning. And just like anything in life if you continually focus upon training your people, building team work, improving the process of making the product a bit better every single quarter and I think the results would come. Customers, they have a particular need and the more efficient we are in our sales and service and product development, I think then better results it will be and easier it will be for us to fulfil that need.

And how should we think about your run rate business of smaller beans [ph] of ability to sign up new locals. The last years can be choppy so if you can talk about some of the initiatives that you’re undertaking to make your business [indiscernible]?

That's a good question. We're very interested in expanding the base of our pyramid and one thing that we're doing is providing this desktop analytics offering for free. We've gotten thousands of downloads of that just in the past few weeks since we announced that. I expect that we’ll get many many thousands of downloads and that's taking us into departments and into small and midsize businesses. And when people build the MicroStrategy application, using a desktop product and they want to deploy it via mobile application or via the web, they come back and they buy our entire enterprise platform. So the desktop is kind of like it's like giving away the razor to sell the razor blades. And I think it's a really good marketing strategy for us to build a larger pipeline small and mid-size deals that eventually will trickle up to be larger deals for us. The Jump Start is a similar idea for all of those departments and small and midsize companies or prospects that aren't ready to make a mega commitment, they can make a quick easy commitment and the Jump Start paired with a desktop is a way for us to incubate a lot more MicroStrategy application development efforts. Because the platform is so valuable eventually anybody that takes a one or two day Jump Start and builds an application in MicroStrategy is going to decide they want an industrial strength server or they want to deploy it in the cloud or they want to deploy it via mobile or web, or they want to plug into their enterprise directory and when they do that they're going to come back and buy from us. So both of these are good incubation strategies. And so those are things we've announced and we're executing on with thousands of people actually taking us up on those offers right now and of course we're very focused upon starting to study who's doing that and trying to – we’re plugging that right into our business development process. As we look forward, I think one of the exciting tech initiatives we have is in our next release to release a set of tools for deploying our MicroStrategy platform directly to the cloud if you are a prospect, a customer or a partner of ours. And so that means it will be just as easy to install our platform in the AWS cloud as it would be to install our platform on a local data center Linux or Windows machine. And that's a big initiative for us to grow and expand the base of our pyramid. Because if you can deploy MicroStrategy and its own single tenant dedicated instance in the AWS cloud, then that opens up the possibility for partners and customers to deploy thousands and thousands of these instances and that's going to create demand for our platform. And it's going to allow us to get into markets like agencies and midsize businesses and departmental applications that traditionally wouldn't be out shopping for an enterprise analytics platform or enterprise BI platform. There are a lot of organizations with money but they don't have a data center and they don't have a big IT organization but they do have money and a need for an enterprise mobility network or the like. And so the combination of free desktop to get started and free Jump Start to learn how to do this along with an easier to deploy platform, plus this great set of cloud tools, I think that's a really compelling value proposition, it’s a compelling strategy and I would expect that over time we're going to ride that strategy into lots of new sales cycles that otherwise we would be excluded from.

That’s very helpful, Mike. My last question is any update on use of cash especially as we are getting into the last quarters – any updated thoughts on that.

We're really pleased with the cash generation of the business. I mean I think at the end of the day the fact that we're able to generate the cash is indicative of a good operational discipline and says that we’re in sync with and aligned with the needs of the marketplace. And we're responsible custodians of the resources it's granted us. I think certainly as the cash balance builds it creates us a lot more options than we would have otherwise. And we're continually evaluating options for usage – one option is to buy back the stock. There are other options. I think that collectively the management opinion is we should use the cash in the way that best builds enterprise value and shareholder value.

And our next question comes from Greg McDowell from JMP Securities.

Great, thank you. Hello gentlemen. Phong, you've gotten off easy so far with no model question. So I think I'll start with a question about Q4 and maybe just discussing some of the different puts and takes we should be thinking about is we try to be responsible custodians of this model. On the one hand it's wonderful to see revenue growth for the first time in two years. But I think we're very cognizant of the fact that on the license line in Q4 you faced a difficult comp, the services revenue or the consulting run rate this time last year was much higher than it is today. And overall it just feels like it might be tough to grow again in Q4. So I guess my first question is if you could just maybe help us think through some of the different puts and takes as we think through modeling Q4 on the top line. And then I do have one follow up.

Yeah, thanks Greg. So I think you're right, we had faced a much tougher compare in Q4 than we did in Q3. And I think as we stressed and as you probably observed over the last year of MicroStrategy’s return to or transformation and gradual return to growth that there's a lot of choppiness in our business still, as can be seen by sort of Q2 versus Q3 of this year. So it's hard to predict at this point product license growth or not growth going into Q4. A few areas that we feel better about is as we look at product support, for example, we're starting to see that turnaround with better renewal rates and better overall result. Even a 1% increase than a year over year basis in product support won’t do that. It’s hard to achieve given the structure of that business and the longevity of some of the core contracts that we have in place. Consulting, we're starting to see, as the declines stabilize we saw that sort of in Q1 through Q3 of this year. And as we add headcount back into the business in consulting and start to focus a lot more on utilization expert services, we hope to see that start to turn around over time. But you're right. Overall Q4 is going to be a tough compare. On the cost side we're definitely starting to invest in the business more, you're seeing the headcount increase, we're trying to be very cognizant about the actual cost structure itself. But the gradual increases in costs that you're seeing on a quarter over quarter basis, year over year we will continue to invest where it makes sense. As we said technology, sales and marketing are the primary areas. That's sort of how I would look at sort of the future overall right now.

Great, that's very helpful. Thank you. And my quick follow up is in your prepared remarks, Phong, you mentioned the tax rate and I know there are some discrete stuff in there. And I think it was maybe the lowest tax rate in 10 quarters or so and certainly as you mentioned helped with the EPS. But maybe how we should think about modeling the tax rate going forward and do you anticipate any other discrete items over the next few quarters?

Yeah, as you know taxes, especially on the effective tax rate ultimately is an estimate for the first three quarters of the year till we get to a final number at the end of the year. So it's one of the things that change pretty significantly every quarter depending on the discrete items. Couple trends that we've seen where we saw sort of probably for the last four quarters or so strength in our international business which effectively has a lowering impact on our tax rate. For Q3 specifically we saw strength in our North American business, for Q3 we saw a little bit of a raise of our tax rate. But overall we’ve seen an increase this year versus last year primarily for that reason, the change in the mix of our international versus domestic. The discrete items did have an impact this quarter. Whether we have them going forward or not, it’s hard to predict and specific to those items it's really just the changing estimates that we have associated with items related to the change in the international structure and some of the regulations that are out there right now may change their estimate. So we have seen improvements this year but I would necessarily extrapolate or predict any discrete items going forward because what we saw.

And our next question comes from Yun Kim from Brean Capital.

Thank you first. First, congrats on a solid quarter Michael and Phong. Michael, following up on the commentary regarding the cloud based deployment options that you guys are offering on AWS. When do you expect that to ramp and do you see an opportunity for both channel partners and maybe even ISV to be involved in that type of deployment scenario?

When you're putting a brand new capability in the market, it’s difficult to make a forecast quarter by quarter but I do think it's a really good tool set, it will be the first time we've given our partners, ISV partners or our channel partners or customers the ability to take control of this themselves. So I actually do expect good things to come from it. I would expect it will have an impact on our business in 2017 and will be out in the market in 2017 highlighting this as a key feature. We've already previewed it with a number of our channel partners and they’re very enthusiastic about this because this means that they could in fact now expand hundreds or thousands of environments that they administer on behalf of their customers and it's a great increase to their value proposition. So it's a win win for everybody. We think that that should help us scale and I don't think there's really anybody in the marketplace that that isn't a bit interested in deploying on the AWS cloud right now. So most of the customer base you'll find someone that has an interest and most partners and then even the other enterprise technology companies, database companies, application companies and the like, they all see the appeal of being able to create these cloud based instances for their customers very rapidly. So I can't see anything but goodness coming out of this and I can't quantify the number right now but I kind of will wait till we get a few data points like the two or three before we try to draw the line or try to draw the line there. But I do think we'll start to get some nice data points in 2017.

Now sounds like something interesting and very new that's out there for you guys. Could there be a chance looking out maybe several years that you may start to see some of more traditional legacy on-prem deployments, once you have this up and running [indiscernible] scale?

There is a chance, in fact, that's certainly part of our strategy. I'm not expecting that half or all will migrate to the cloud but I am thinking that we have lots and lots of customers that are running on premise and generally the common refrain is we're not nearly as agile as we'd like to be and it takes a long time to get our hardware upgraded, that it's a little bit cumbersome bureaucratic process and the company in general would like to be decreasing its data center footprint not increasing it. So there's a general sentiment to migrate up locations to the cloud. The reason that people don't migrate faster is because the tools make it cumbersome and so when you come along, let's say I think Microsoft is a great example of a company managing this well. If you come along with a set of tools, and let someone to go from operating their own exchange servers and outlook servers and they migrate an Office 365 and they can do that seamlessly, then there's a lot of enthusiasm to migrate to the Office 365 and our company did it. It took us some number of months but we did it seamlessly without interrupting anybody's work and we’re very enthusiastic to move into that cloud. For MicroStrategy to get its legacy customers in the cloud, we need to do the same thing which provides -- which is to provide them with a set of tools that make the migration of an existing production application that's on premise smooth and seamless. So the release 10.6 is going to represent a set of tools for creating a cloud deployment instance and it's going to make it an order of magnitude easier for someone to create that cloud instance. We have in 2017 technology projects at work to dramatically improve our toolset and one thing we like to see is a workstation and a marketplace where you could take a MicroStrategy application running on premise in a Windows instance and you could just drag it into a cloud instance and we would dynamically move the application from one to the other in a seamless way. We’re not there yet and so when you say in a few years I'm sure that we'll get there in less than a few years out but I think in 2017 is part of our agenda and as we improve our tools for migration and deployment and administration of MicroStrategy app, then the option to move to the cloud becomes a less painful, more enticing one. And of course the benefit to the customer is either going to be I can decommission my data center. Or it's going to be I can go from a fixed cost that’s inelastic to variable cost which is elastic, or it may be I can just go from fixed bandwidth that’s not enough to elastic bandwidth where I get 10X to 100X the performance. And so those are three really compelling things, nobody would not want that. And so the reason that people wouldn't do that immediately is just is this a difficult or easy transition, will it take a week, a day, a minute, a month or a year? And so we're working on the tools to make it easy as possible transition for the customer. As you can imagine that's something that would be received very enthusiastically by AWS as well as by us. It's a great set of tools for them, if they can get people to migrate into their cloud more easily. And of course, it's also a business opportunity for our partners and system integrators, they can go and migrate customers into cloud and take on that kind of business. So I think these are -- you're right to point this out. It's an electric possibility. It generates value for the customer. It would generate license revenue for us and it would generate services revenue for our partners and it all comes down to the quality of the tools we put in place and the functional spectrum of them but we feel like we have a really good plan there, and we’re moving head at a rapid cliff.

Okay, great. Looking forward to getting the updates on that part of the business. Real quickly, can you just give us an update on your OEM part of the business which saw strengths in the first half the year, how is the OEM business progressing so far and then what you expect to see going forward for that part of the business?

Sure. We've enthusiastic about the OEM business. And one of the reasons why is because the MicroStrategy platform represents the full spectrum of what they need, they want the mobile, they want the open embeddable analytics, they also want the sophisticated documents. This upgraded 10.5 where we came out with a dramatically improved RESTful API set that supports sophisticated filter queries on JSON and Java is a really big thing for the OEM business and we had a lot of requests for it, I think a lot of enthusiasm for that. So the product we've got in the market is in my opinion the best product in the world for an OEM that's in our industry. And we do have a lot of enthusiasm [indiscernible] sales cycles right now that we're working. I anticipate that that will be a good business for us in 2017.

And our next question comes from Frank Sparacino from First Analysis.

Hi guys, so just one question for me. Mike, maybe on the desktop product initiative that you have. You've had a desktop product for a few years in the marketplace. I don't know what type of adoption or traction you've seen with that. But I am curious the differences today versus maybe some of the prior releases absent the price point, obviously being free today but maybe from a technology standpoint relative to the closest peer in the market, if you think you've sort of closed the gap there and why you're optimistic.

I mean great technology companies keep trying until they succeed and we're like The Little Engine That Could in the enterprise analytics space. If I look back I would say that a few years ago we created something called MicroStrategy analytics desktop and it was a complete standalone implementation of our platform. We found that we didn't have a huge amount of commercial success with it and the reason why is because it didn't integrate with the enterprise capabilities. Within enterprise -- it didn't integrate with enterprise directory and data model and enterprise servers so we were just shipping a standalone thing that competed with Excel or competed with another standalone tool. And so we learned from that and we realized that we couldn't just ship a standalone product. The strength of MicroStrategy is the enterprise. I went all around the world and I met all these customers and I would have customers say, yeah, we have 60,000 users and there's 92 applications. I met one retailer that has 16 different mobile applications. So this desktop thing if it's just a standalone tool, it’s one of a hundred and we're not necessarily the best one of the hundred, no point competing against a standalone tool from Microsoft. So then we kind of rethought that and we implemented the version 10 architecture with the desktop product. And we put out the first version of the desktop and the first version allowed you to do some simple things but it functionally was pretty constrained and it was buggy. So then we tried it again and it got better and then we kept fixing the bugs and then around 10.3 we got to the point where you could open lots of different functional reports in the MicroStrategy server architecture with a desktop. And 10.4 was the first version where you could combine multiple dashboards at the same time. And so we started to implement this new ecosystem where the desktop can write MSTR files or read them or combine them and you could then navigate the entire MicroStrategy meta data ecosystem used in the desktop tools. So if I download that -- if you think about it, if I download the desktop tool and I got to go find my own data and build my own app that's like a one. And if I download the desktop tool and I can open in the existing enterprise ecosystem and I can access any of a thousand reports or one hundred data cubes right, then that's hundred times better. And then finally if I could actually open my desktop tool and I could access the existing enterprise dashboards and cubes and then grab them and edit them and save them back and republish them or share them, then that's like a hundred. And so I feel that the desktop tool we've had didn't have the ability to functionally integrate with the enterprise data model and the enterprise analytic model. So that teams of people could work together in a flexible easy environment and we just keep getting better at that functionality and we're refining it. So if you look at the free desktop we offer today, when you download that it plugs directly into our community and our dashboard gallery. So when you download the desktop you can go grab a pre-existing dashboard application to make it work and then you can also upload your dashboard back to the community. And of course it's the existing dashboard application that has the value, if I can download a Google Analytics dashboard, plug it into my Google Analytics instance and have a functioning personalized application in a matter of minutes or an hour, then the MicroStrategy ecosystem is really productive for me. If I have to download it and build the entire thing from scratch in two weeks and maybe I fail on the process of path of building the thing in two weeks. So I would say that the product is better and the way that you're able to work with other analysts and other micro-strategists is better than it was a year ago. And that's what caused us to be more optimistic about its prospects in the market. The other thing that we've done by the way is we're positioning the free desktop as a free dashboard reader. So if an organization wanted to deploy a 10 tab sophisticated analytics application to 100,000 people, they could generate the MSTR files, e-mail them out and people can click on the MSTR file and open it in our desktop product. This is kind of like a PDF on steroids, right? Instead of sitting you on a Adobe PDF file or a simple Excel file, I can send you an MSTR file and MSTR files are 100 times as functional. So they do a lot of things you can't do in PDF and you can't do in Excel. So we're opening up our architecture to make it easier for companies to spread functionality much more broadly. The old MicroStrategy Analytics desktop would have taken you hours and hours to install and there really wasn't a simple ability to consume a file, it was just too heavy and cumbersome. The new desktop you can install in a matter of a minute or two minutes and the files open in a couple of seconds. So I feel like we've got just a much higher quality agile flexible product here. And that's what's different about it.

[Operator Instructions] We have a question from John Rizzuto from SunTrust.

Michael, just a follow-on on the desktop strategy, very interesting. Because I don't think it's a temporary measure, it sounds like part of what it is that you want to do. And we see a billion of dollars, over billions of dollars every year being spent on desktop tools, to people who have no need to go to an enterprise solution. And when you do make this move, even Microsoft, Gateway, Power BI, as long as you buy Office. So there's attachments to different types of things out there and you're kind of saying, do you think that market doesn't need to exist if there is a standalone market people willing to pay X number of dollars to do individual specific set of questions on a specific set of data for one user, is that just not a real long term viable market, is that what is the judgment or by giving it away for free is it something for the -- if you could just comment on that?

Well, I mean if you look at our business we've been generating consistent profits over the past two years. And if you look at what Tableau has done in order to build this desktop analytics market, they're just spending godawful amounts of money to do it. I mean if you were to ask me how enthusiastic am I about trying to sell 100 copies of a desktop analytics product to a corporation, I would just say selling a desktop product to the propeller heads of the data scientist of the world is going to be a thankless proposition and I don't expect you'll ever make any money in it. I might be wrong. I'm not a financial analyst but I think in the history of Tableau they haven't made any money, right? I mean If you add up the last decade and maybe I'm wrong but regardless I will say in a different way. I don't really think -- the only company that's going to make money in that space is going to be Microsoft and they've been making money by doing this since they put Excel out in the market. And I will leave that to them. I think it's reasonable for Microsoft to pursue this kind of strategy. I think that a much better idea is to give away the Swiss Army knife or give away the tool that lets you build the application files and then you sell the enterprise services that enterprises are going to need, I don't think I'm going to convince any data scientist to give me $10,000 for my desktop when Microsoft's out there with Power BI. But nor do I need to. What I do think is that the world is full of people that would love to grab a tool quickly and then build an application, test it out and then be able to deploy it on iOS and Android or be able to deploy it over the web or be able to plug it into their enterprise directory and synchronize it on their 18,000 employees. And I think that at the point that they're ready to deploy it to 18,000 employees over iOS and Android they'll be happy to pay you hundreds of thousands or millions of dollars because they’re enterprise, they would pay you the money just for the security and the tech support, right? And that's really -- that's what makes companies cool, right. Why is Cloudera a cool company or why are all these open source companies a cool companies, is because all of the entry level practitioners they can go and they can download the initial thing they can get going. They can build something and then when they're ready to go to industrial strength deployment, they call up the Red Hats or the Clouderas, or the MapRs of the world in order to get an enterprise grade support and an enterprise grade servers or enterprise grade tool set that augments what they started with. So in our case I expect there are a lot of small and mid-size companies and departments that would like to get started easy and cheap and that's what Jump Start and desktop are all about. I think if all you ever do is get 25 users to build an app, they deploy 25 more users that's never going to be a profitable market. And for me to invest lots of money when my upside is just to solve the propeller heads is probably not a wise use of funds. I think that when we get that that analyst that works for the Boy Scouts of America to download the thing and build an application and then decide to plug into our platform and burst out a mobile app to 18 million Boy Scouts. I don't know how many Boy Scouts there are, millions of Boy Scouts and tens of thousands or hundreds of thousands of volunteers and scout masters and parent and they plug that into the cloud architecture. Well they'll pay us at some point large sums of money but they wanted to start easy and quick. So what we've got is is a simple proposition to get going and we've got a very big value proposition once you build that application. And ultimately that's what distinguishes us from the other players in the space. When we go into a retailer our play is we want every employee, every customer and every executive and every supplier attached to that retail network to be running MicroStrategy software that's an exciting enterprise proposition. If your best idea was get 50 analysts to pay you $2000 each, right, that just strikes me is just being a little bit too parochial and I can't get enthusiastic about spending money or investing in that relationship since it's kind of a dead end.

Do you -- have you done on your own -- let's just start with your installed base, look out there, where you see you might be the enterprise standard or you're the primary vendor for BI, had there been a lot of overlap where you see individual business users within your installed base using another company's individual desktop tools? Is that something –

No, it’s very common that we will have a base of enterprise architecture and the IT organization that own the enterprise BI mission that are very strong MicroStrategy adherents and fanatics and then they'll say to us, well you know such and such is dabbling with Domo or such and such is dabbling with Tableau or such and such is dabbling with Quick-Tech and I don't want to let them into the enterprise architecture because it'll be a security nightmare or there will be 13 different versions of the P&L statement and I can't. I can't guarantee that employees won't take the data home with them when they leave the company, or all these things that concern them. And that refrain is what caused us to focus on my MicroStrategy 10 re-architect our platform and then focus on this desktop product and also Usher. What they want is they want to be able to deploy governed data discovery or provide self-service but they want to do it with the shared enterprise data model and shared enterprise security model. I think that's why there's so much popularity with Jump Start. A lot of times it'll be five people at a retailer and they'll say we've got to actually get 100 people to the Jump Start, we're going to give them all this desktop product and plug into our architecture now and that way they won't need to go look for the Power BI or the whatever fill in the blank. There's a hundred different things that might be dabbling with, which there's probably ten usual suspects that are most common. Obviously it's very important that we take some motivation from this and keep improving our desktop tools but we've also got I think a very strong franchise here at the enterprise level, because a lot of those desktop tools and individual tools are run by technologists, that don't have the same appreciation or enthusiasm for investing in the really intricate administrative task and security capabilities that we've implemented and that the enterprises need.

And just one final question, when you talk about having thousands of downloads since you first announced, do you expect that to accelerate? It’s just a prequalification process before you send people on this, in other words, do you rely on the user to qualify himself as to whether or not it's an enterprise opportunity or what could be the implication there for whether it be an inside sales strategy or develop its development resources [ph] and the bandwidth there?

In all of our marketing tests, we find in terms of the hierarchy of entrants, if you advertise to somebody, hey I'll have a salesperson call you, then that's like one. And if you say I'll give you free information or put you into an event, that's a 10 and if you say I'll give you free education that's 100. But if you say I'm going to give you a tool that's free that will let you build your own stuff, that's a thousand. So that everybody really wants to download that free tool and get started today and decide for themselves whether they like it and that has implications to expand our footprint within our mega accounts and also get us into prospects as well as partners, people get themselves enthusiastic. We have a pretty good transparency to who's actually downloading this and the like. And so we feed that directly into the business development process that we run at the company and we're enthusiastic that that's going to be a source of electricity and energy for us in business development the over the mid-term.

Okay, great. That’s all from me. End of Q&A

Okay. I’d like to thank everybody for their time today and again thank you for your support. We'll look forward to seeing you again in 12 weeks. Have a great holiday season.

Ladies and gentlemen thank you for your participation in today's conference. This includes the program. You may now disconnect. Everyone have a great day.