Michael Saylor - President, Chairman, and Chief Executive Officer Phong Le - Senior Executive Vice President and Chief Financial Officer

Karl Keirstead - Deutsche Bank Walter Pritchard - Citigroup John Rizzuto - SunTrust Abhey Lamba - Mizuho Securities Frank Sparacino - First Analysis Securities Yun Kim - Brean Capital Greg McDowell - JMP Securities

Good day, ladies and gentlemen, and welcome to the MicroStrategy’s First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] And now, I would like to turn the call to Mr. Michael Saylor, Chairman, President and CEO of MicroStrategy. Please go ahead, sir.

Hi. I want to welcome all of you to today’s conference regarding our 2016 first quarter financial results. I’m here with our CFO, Phong Le. First, I’d like to pass the floor to Phong who’s going to read the Safe Harbor statement and make some comments on our results for the first quarter.

Thank you, Mike, 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 reflected upon as representing our views 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 on 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. Overall, our first quarter results were generally in line with our expectations. We continue to deliver growth in the strategic areas of our business and continue to closely manage our cost structure, while investing in key department. We experienced lower operating income year-over-year as a result of capitalization of R&D cost, lower net income year-over-year, as a result of foreign exchange related losses. As a summary, year-over-year, product license revenues increased 8%, operating expenses increased 3%, operating income decreased 13%, and diluted earnings per share decreased from $1.79 to $1.24. I’ll first focus on revenues. Total revenue for Q1 2016 was a $119 million, 4% decrease year-over-year. We continue to experience foreign currency headwinds in Q1, which negatively impacted our revenues by $2.8 million, or 2%. Revenue, excluding the services, which are primarily consulting was $98 million in Q1 2016, a 2% increase year-over-year with foreign currency changes negatively impacting such revenue by $2.3 million, or 2%. Product license revenue was $22 million in Q1 2016, an 8% increase year-over-year with foreign currency changes negatively impacting such revenue by $0.5 million, or 2%. Our international business continues to show strength. In Q1 2016, it represented 44% of our total product license revenue compared to 32% for the same period in 2015. In addition to our 8%, or $1.6 million increase in year-over-year product license revenue growth, we saw $1.8 million increase in quarter-over-quarter growth deferred product license revenue. This number represents the net effect of new deferred product license contracts, partially offset by the recognition of previously deferred product license contracts. We’re able to continue to grow our product license revenue with the sales and marketing team at 8% smaller in Q1 2016 compared to Q1 2015. Our subscription services revenue primarily driven by our cloud customers was $7.4 million in Q1 2016. This is a 10% increase over Q1 2015. Our support revenue was $68 million in Q1 2016. This represents a 1% decrease year-over-year with foreign currency changes negatively impacting such revenue by $1.8 million, or 3%. Our services business continue to decline in Q1. Services revenue was $21 million in Q1 2016 compared to $27 million in Q1 2015. This represents a 24% decrease year-over-year with foreign currency changes negatively impacting such revenue by $0.5 million, or 2%. We’ll continue to focus on improving the key metrics in that business, bill rate, utilization, and gross margin. Turning to costs, we continue to remain discipline as we start to grow our business. In year-over-year comparisons, we should note that Q1 2015 was our first full quarter after our 2014 restructuring effort. Sales and marketing expenses as well as general and administrative expenses for Q1 2016 were flat year-over-year. Research and development expenses were $18 million in Q1 2016, up 14% year-over-year. However, removing the impact of $5.4 million in capitalized research and development costs in Q1 2015 would have resulted in a 15% decrease in R&D expenses year-over-year. Total operating expenses were $76 million in Q1 2016, up 3% year-over-year, but down 4% while removing the impact from capitalized research and development costs, as previously described. Our headcount growth has been focused on key areas of the business. We ended Q1 2016 with 2005 employees, a 3% increase since the end of 2015. This increase was driven by an 8% increase in a number of research and development employees and a 4% increase in the number of sales and marketing employees. We had income from operations of $20 million in Q1 2016, and an operating margin of 17%. This represents a 13% decrease in operating income from the same period a year ago, but would have been an increase of 14%, while removing the impact of capitalized research and development costs. We had net income of $14 million in Q1 2016, which is a 30% decrease year-over-year. In addition to the impacts of R&D capitalization in 2015, this figure is also impacted by foreign exchange gains in Q1 2015, compared to foreign exchange losses in Q1 2016. Moving to the balance sheet. We had cash, cash equivalents and short-term investments of $536 million at the end of Q1 2016, and continue to have no debt. Net cash from operating activities during the first quarter of 2016 was $51 million compared to $56 million during the same period a year ago. Turning to the remainder of 2016, our financial direction and strategy remains consistent. We’ll focus on growing the strategic areas of our business, investing in a business is appropriate, and executing on product and process excellence to build even stronger foundation for long-term process of growth. Now, I’d like to turn it back to Michael Saylor.

Thanks, Phong. My perspective on the quarter is, I was really happy with the product license growth. This is the second most strategic thing for our company. I think over time, our enterprise value is going to be driven largely by our product licenses and our product support revenues. And the other services category, these are typically lower margin services. And we could grow them or shrink them dramatically without having the same impact on enterprise value that we would have from our product license and our product support revenues, especially since if you want to grow those revenues generally have the stronger with lower margins. And so our focus is to do everything we possibly can to drive product license and subscription services and product support services. And I like to our growth year-over-year in those areas. With regard to earnings, there is some decrease in the EPS number. But I think when you consider the impact of software capitalization and some of the currency hedge impact on our business, I think that it’s not as big an issue as it might be otherwise, those two line items are pretty large swings. And we look pass them then the operating income number looked very healthy $19.7 million in operating income for the quarter. And we’re pleased to see that in the first quarter, which normally is our seasonal and weakest quarter. If we look at the overall financials, it’s within the realm of what we expect in terms of performance. And over the long-term, we expect we’ll have some fluctuation plus or minus, but this was a healthy quarter, and we thought a pretty strong one for our first quarter. Putting all this in perspective, we’re still in the middle of a three-year turnaround. The first-year is a restructuring year, where we cut a lot of costs. We exited a number of businesses and we change and restructured the way we approached large parts of our business, and now it’s challenging. We’re in the middle of the second-year, and the second-year is all about implementing new processes and systems and programs and driving for more efficiency and productivity. And the third-year, we expect to be about disciplined growth. We are making targeted investments in sales and marketing and technology in order to position for growth in the coming year. I’m really pleased with our balance sheet. I think it’s really strong, generally $150 million in cash flow, I think is a great result for the first quarter, and it’s indicative of a number of good and healthy trends in the business. With regard to what actually happened on the technology side and sales and marketing during the first quarter, we released 10.3, and that’s the third upgrade to our Version 10. We’re now on a very comfortable cadence of releasing an upgraded version of our overall platform every 12 weeks and we’re pleased with that. 10.3 was an important event, because it really was the first platform we released in the market, where we could say, it’s a truly unified platform for enterprise, analytics, mobility, and security. In 10.3, we incorporated all of our Usher security, functionality on the server and the client side into our analytics and mobile functionality in a single install that you can install into a datacenter on Windows or on Linux. And that was a big improvement for us and it’s making a big difference to our customer base. I took a tour of the world over the past few weeks. I’ve actually flown 26,000 nautical miles. And I went to Seoul Korea and Tokyo, and then I want to Melbourne, and then Singapore, and then I went to Abu Dhabi, and then onward to Milan, Barcelona, then North France and Frankfurt, Germany and then to London before returning to Washington D.C. And during that tour, I had the opportunity to speak to 2,000 or more of our prospects and customers and partners, and present our 10.3 platform. I had somewhere between 50 or more one-on-one meetings with customers and prospects and 10 dinners with probably 50 or 60 different customers, and lots of one-on-one meetings, both with all of our employees in the various cities and also key strategic partners. And the response to 10.3 is universally positive. We’re seeing more enthusiasm for this than anything we’ve seen in the past. And also we’re seeing a lot of enthusiasm for the mobility and the security portions of our product line and not just analytics. So I was pleased to see that and I was also pleased to see that, there doesn’t seem to be any geographically specific affinities. Our message and our product is just as interesting in the Far East, as it is in the Middle East, as it is in Europe or the U.S. Corporate morale is good, and I think it’s improved dramatically year-over-year. What you can’t see in the numbers is the reaction of the employees, the customers, and the partners to the business. But our attrition is down, morale is up, our excitement is up. And as we start to shift more resources in the sales, marketing and technology area, which you can even see with our headcount numbers, we’re moving from a defensive mode to an offensive mode, and I think a very healthy and constructive yet discipline way. And so we’re looking forward to the rest of the year. We think we’ve got a good corporate organization. We’ve got better processes and systems in place than ever before. And we’ve got the best product that we’ve ever had, and enthusiasm is high. So that is my summary for the quarter. And with that, we’ll go and take questions from the analysts.

Thank you. [Operator Instructions] And we have a question from the line of Karl Keirstead with Deutsche Bank. Please go ahead.

Thank you. Michael, I have one for you and then, Phong, a follow-up. Michael, just on the revenue growth outlook in prior calls you expressed a desire to grow total revenues in 2016, you’re not that far off in Q1, I guess, you were negative two in constant currency. But I wanted to ask you, if you’re still as comfortable as you were before around growing the business in 2016? And then maybe a follow-up for you. On the services line, that’s where I think maybe MicroStrategy quote missed the street number in Q1. Just so all the analysts on the call are sort of level said on, how we should model that line item going forward? Could you offer a little color on whether this is a trough on services, or do you expect to – the company to sort of move off of the services a little bit more hence we might see that line item decelerate a little further going forward? Thank you.

Well, I think, we’re comfortable shifting low-margin services to our partners, when it presents itself. I think, we are enthusiastic about building a high-margin expert services business. And that means transitioning out of long-term staffing engagements and focusing more on expert services. Where we have any decisions to focus, our job priority is to focus upon product licenses and subscription revenues. And it’s our intent to grow the product license and subscription business, and of course, to over time grow the product support business. And we were taken opportunistic view towards the other services areas. And we’ll grow them to the extent we think it’s prudent, we can manage it well, but it’s not, we will allow that to go to partners.

Okay. So [Multiple Speakers] yes, go ahead, Phong.

Yes, one thing I’ll point out is is, if you look at where we’re deploying our headcount, especially in Q1. The consulting sort of headcount is the one area we always continue to see a decrease from Q4 to Q1 versus other areas of the business, where we’re seeing headcount increase. And that that’s a conscious decision in the business as far as where we wanted to play our resources in the short-term. I think to Mike’s point, yes, as we look longer-term and we see the product license get very healthy. It will inevitably drive more growth in the consulting business. But we see product license as a strategic place to invest and drive growth rates on.

Got it. Makes sense, okay. And my follow-up to you Phong is just on the margins and the seasonality, last year, obviously 2015 Q1 marked the low point on non-GAAP operating margins and then it ramped to 3Q and then you had your highest operating margin percentage in 4Q. Do you expect 2016 to play out in a similar manner in terms of margin percentage by quarter? Thank you.

Yes, I think looking at 2015 as an indicator of sort of how our margins change and particularly how our revenues change from quarter-to-quarter is a pretty good indication. I think if you go back further, you will see the same thing. Q1 is definitely our lightest quarter overall, historically speaking. Q2 and Q3 are interchangeable depending on the year and then Q4 is the strongest. And even if, we’ve talked about and I talked about with a bunch of folks through the choppiness in our business, if you will. One way to look at is, if you combine Q4 and Q1 and then you combine Q2 and Q3, it takes a little bit of choppiness the way overall. But I think the way you’re looking at it, Karl, makes sense.

Got it. Thank you both.

And our next question is from the line of Walter Pritchard with Citi. Please go ahead.

Hi, thanks. Maybe just to put a finer point on the services side, could you quantify how – what percentage of the services do you consider these expert services?

What percentage of our services right now, we can turn to be extra services?

Yes.

I couldn’t give you a number on that right now, because I just don’t have that prepared.

Magnitude is in a majority, or is it a minority or any sense?

It’s a reasonable mix of the two.

Okay. And then just –maybe for both of you on your forecasting and I know you put in the systems in the last 12, 18 months to help with predictability and forecasting. Could you help us understand kind of where you are along your evolution of the in-state there and your ability to kind of forecast within a quarter some of the deals or kind of your large deals in the past have been a challenge and they always remain a challenge. But just generally your forecasting ability and kind of where you are in that evolution?

Yes, we started an official, I’ll call it budgeting and planning process of forecasting really at the end of last year, and Q1 was the first time we started using it. As you can imagine, the cost side is a lot easier to predict than the revenue side. And on the cost side, I think we came in pretty much about where we expected overall as a business in Q1. On the revenue side, the recurring revenue items, cloud subscription have less volatility. As you know, and those are easier to predict within a quarter. And then the product license revenue is a little bit of a, I’ll call it wildcard, but it’s definitely something that’s hard to predict, especially because of the size of $1 million or $2 million deals is coming significantly from a percentage perspective and a dollar perspective our product license revenue. So we look at pipeline. We look at opportunity stages. But the predictability, the best forecast in the world we’re still not necessarily like that that predictable.

Got it. Okay, thank you.

And our next question is from the line of John Rizzuto with SunTrust. Please go ahead.

Hi. Good afternoon, folks. Just a couple of questions, and really about this return to growth. If you have a look at where you are as far as restructuring the new product release going forward? And is trying to get the transition in MicroStrategy 10, right? Where do you think the inflection point in the upgrade cycle might be? Have you hit it already, or it still ahead of us, and how do you think about that?

Yes. I think it’s sometime in the coming year, if I had to take an inflection point. We feel like this is – this year is the year for us to be driving the message throughout the market. We – and I think we’re doing a decent job of that. We’ve got probably 80 symposiums. We’re doing around the world over the course of four quarters. The product, we’re getting pretty good response on. We’ve been retooling all of our education courses. We’ve been tooling all of our sales engineers and all our salespeople, and we’ve been retooling all of our processes. So I feel like allowing that to run over the course of a decent year should allow us to find the inflection point.

Okay. The change in your marketing program and the more effect as I’ve noticed it, with that marketing emphasis, and this might be for Phong. It seems, I mean, it seems you are doing a more aggressive job. It seems from my perspective to be a more effective job of marketing, certainly you’re out there a lot more is, you waited modestly in the first quarter. Do you think the marketing sales expense, how can I think about that going forward?

Yes. So, if you think about marketing in general, the big piece is that, we end up spending money on our field marketing, which is where our symposiums are and also our world event in the first quarter, digital marketing. And I just headcount associated with marketing, whether it would be business development folks or product marketing folks, et cetera. I think as we go through the course of the year, just to give you a sense on each of these items, every couple of weeks we sit down and review the progress, especially something like digital marketing, and then we decide how much we want to spend for the next two weeks. But I think it’s fair to say that over the course of the year that we expect that expense associated with marketing in general. We’ll start to increase, as we want to develop more pipeline and get more sales out of the business.

Okay, thanks. That’s a quite agile to change your budget every two weeks. But I know you were telling us about all your dashboards being in place. Just one more question on product license and this is like is a two-part question. Can you – do you know, or can you characterize how much of that license revenue was actually driven by 10? And the second part is, Phong, I’m trying to – or Michael, is trying to match your foreign installed base versus your domestic. In other words you said about 40% of your license growth was from the – with some foreign accounts. I’m just curious, is that pretty much match your mix of your installed base being more foreign than domestic, or just there out hitting the weight, if you will?

Yes. So we don’t have an explicit breakdown of licenses that are driven by 10 versus driven by Version 9, although there is healthy demand across both platforms. Generally, net new wins or winning new customers is driven by 10. So I would have to say a good portion of our license – our new new license sales is driven by 10. But I wouldn’t want to give you an exact number for fear of being wrong. I – with regard to the international versus domestic issue, you want to talk to that?

Yes, I can talk to that. John, I think, roughly, if you look at our product support basis as an indicator in terms of dollars, in terms of – as an indicator of domestic versus international, roughly about 40% of our product support is coming from our international business. So it is pretty similar to the distribution that we’ve seen. I think the last three quarters, we’ve seen greater reading and product license revenue from the international business. So that’s driving that up to that 40% level. So that gives you a bit of a sense of how we break that out.

Great. Thanks, Phong, and congratulations on a return to growth.

Thank you.

And our next question is from the line of Abhey Lamba with Mizuho Securities. Please go ahead.

Yes, thank you. Mike, you just mentioned the inflection point with Version 10 customers, you’re expecting what a year or so from now? What type of revenue uptick do you think you can get with that? And as you are getting into some of those conversations, what type of competitive environment are you seeing?

Yes, we actually think that we’ve got good revenue growth opportunity, because as people adopt Version 10, they tend to both be deploying that more broadly on the desktop for desktop analytics. And also Version 10 has built into it our identity management and our security wallet. And that has an impact on our mobile application deployment. So 10 is driving mobile applications and 10 is also driving some security applications, so that also differentiates us against most of the competition. In terms of how we said versus the competition, right now, we have a sort of enterprise BI companies we compete against the divisions of Oracle, SAP, and IBM. And they don’t really have a cutting-edge new message being delivered to the marketplace. So 10 helps us compared to those businesses and it’s positioned us as being a tech leader. And most companies like to buy from a technology leader and someone it’s going to be progressing forward as opposed to just buying from an enterprise software company that’s maintaining the same product line year after, year after year. And I think the other benefit of 10 is, against the [open commerce, the Qlik text,] [ph] and the tableaus, 10 positions us pretty strongly, because we have the mobility and the security components that they don’t have. And we also have in 10 a decent desktop analytics environment, which is the appeal that they do have. So those two things allow us, I think, to get market share from one part of the market to desktop analytics players and also to get market share from the enterprise analytics players, while pursuing a third market, which is kind of Greenfield. This is enterprise mobility, enterprise security market, where people were very enthusiastic about deploying mobile apps to store managers, salespeople, and service managers, and integrating those tight land to their customers, and that’s all what 10 does quite nicely.

Got it, that’s helpful. And Phong on the capitalization of R&D expense, what were the factors that kind of – because of which you couldn’t – you didn’t capitalize this quarter. And how should we expect it to continue for rest of the year?

Yes, as you know, in the first quarter of last year, we were really working on the culmination of the release of our Version 10 software. And at that point in time, we were releasing major incremental versions of software on a multi-year basis, where now we’ve changed to an agile development methodology, which releases software incrementally every three month. So at this point in time, we don’t expect significant capitalization of software R&D cost going forward. If and at what point – at some point in time, we see a major release of new feature of functionality in a 11 or 12 or something like that, we consider capitalization at that point, but it’s not in the immediate future.

Got it. Thank you.

And our next question is from the line of Frank Sparacino with First Analysis. Please go ahead.

HI, guys, two questions. Phong, maybe first with you. Just on the G&A line, I mean I understand world was in Q1, as it was a year ago, I believe. But that number was a much higher than I expected. Is there any one-time items in that?

Yes, there were a couple of, I’ll sort of call them one-time items, but they’re one-time items that go up and down. I think, as you go through our Q, which we have and also released today, it does outline some of the details of the one-time items that occurred.

Okay. And then maybe, Mike, just and looking through the Q, it looks like on the product side international was up very strong nearly 50%, but on the domestic side down a 11%. And I’m just curious, Mike, when you look at the U.S., how would you characterize sort of overall demand D.C. caution or points maybe softness in the overall market in any particular vertical? Thanks.

Yes. I look at where we’re selling first [indiscernible] with, there is volatility quarter-to-quarter in our business. And second, Phong was talking about forecasting. We actually – we have a good handle on every deal we’re doing and even sometimes we have a good handle on where we think it’s going to close. But it’s possible, you can close a real mega deal. And in the last two hours of the negotiation agreed or concession, which causes the deal to get recognized a year from now or six months from now, or ratably over 12 months as opposed to upfront. And so that’s the thing we don’t always forecast very well, where you could actually have a perfectly fine quarter and find that you’ve got a few deals that you recognize in a more conservative fashion because of some other nuance of the business. And I just throw that out there, because sometimes when you’re looking at a quarter like Q1, which is always a seasonally light one. If you had a few large deals, they got recognized differently, it would change the results and you might come to some conclusion like, you like international, you don’t like America, but in fact, you can’t really come to any conclusion like that if you’re looking at overall flow of the business over 12 months. When I look at our business, I think America is a good market and we’re just doing fine here. And I think that we did some of our best deals on America and we’re generating nice revenue. I think international is working well too. We are seeing strength in markets like the Far East and the Middle East that normally software companies don’t get strengthen. We saw some nice deals in Europe. We saw some really nice large deals in the U.S. But in some cases, we don’t recognize them as aggressively, in other cases, we do. With regard to the mixture across various markets, good demand, and the insurance businesses, some great insurance deals, some great business we’re doing in the airline business, some really good business in retail and banking and government. So I feel like the product has good enterprise appeal across all the various marketplaces and all the various industrial segments. But as the nature of our business, you’re going to have some choppiness from quarter-to-quarter, and I think we’re comfortable with that. I think, Jeff Bezos [ph] is a famous line, he says and he wrote it in his Annual Report, he said, when we have to choose between maximizing revenue and cash flow, we’ll always off to maximize 36-month cash flows. And I think the way we run our business when we’re actually doing deals, we look at the business and we try to maximize our cash flows over 36 months. So in some cases, if we were desperately trying to get a deal to be all recognizable upfront in the quadrant question. We have to sacrifice some business and we have to sacrifice lot of financial terms. We might make him look better in the near-term, but we be sacrificing a long-term. So I think we have a very balanced view to the business. I think that’s why we generated more than $50 million in cash flow in the quadrant question. And it’s a matter of substance being the most important thing. And I think the substance is the U.S. is a good market. International is good market, and most industries are really good customers for us, and the product is a great product.

Thank you, Mike. That’s helpful.

And our next question is from the line of Yun Kim with Brean Capital. Please go ahead.

Thank you. Hi, Michael and Phong. Following-up on the question asked two callers ago, is there anyway you guys can quantify the license revenue mix between new and existing customers and how that’s been trending?

We don’t have a concrete number for you there. But we got some good business with new customers, we’re pleased with it. But we’re also pleased with the business we’re getting from existing customers.

Yes, I think we talked about in the past and we don’t disclose it on a quarterly basis. But we talked about in the past roughly about a third of our software business is coming from new customers versus existing. But we don’t break it down on a quarter-to-quarter basis.

Okay, thanks. And, Michael, you highlighted certain verticals that are you’re seeing strength such as aerospace and insurance as such. Are you at all interested in pursuing a more vertically focused solution and maybe marketing those vertically focused solution, for instance, I think that one of your largest vertical is retail and obviously that are based on secular spending trend around our niche channel going on in that vertical. Is there anyway for you guys to kind of write on that quote and perhaps provide the analytics around the platform as such?

Well, first of all, we have a unified platform for enterprise, analytics, mobility, and security. And the very compelling position that I think all of our customers and prospects like is that, you can use our platform to deploy any mixture of unique applications to your enterprise. And that’s that would be our technology strategy going forward. We like the niche we’re in, which is we are an enterprise software platform for building unique applications that you can’t buy off the shelf. With regard to marketing and sales, the theme of our worldwide symposium series earlier this quarter was product solutions that you can implement with the MicroStrategy platform. But the theme of our symposium series next quarter, where we’ll go to 20 or 25 different cities around the world is industry solutions, and particularly in a smart retail solutions you can deploy with our platform out-of-the-box, and smart healthcare solutions, and smart city solutions, and smart banking solutions. And so, we actually have some really good story to tell around the full suite of security, mobility, and analytics applications you can build on our platform, if you are a bank, or if you are a retailer. But what makes it powerful is that, we give you the platform. You integrate it with your enterprise, and you deploy custom unique solutions rapidly. And so we won’t be selling a product, which is vertical. We’ll be selling a platform to build unique solutions for your enterprise. But we will actually be driving our marketing message and our industry solutions marketing messages, because the CEOs of retail would like to see the dozen retail apps they can build on MicroStrategy. And the CEOs of healthcare companies want to see the dozen healthcare apps they can build on MicroStrategy. And we have seen that that resonates very well, and we’re gearing up on our third quarter marketing to go change after that.

That sounds great. Good luck. Wish you a lot of success on that. Phong, just – can you just talk about the drop at the stock-based comp? We saw a pretty big drop on our – from last year to this quarter on a quarterly basis and where do you expect that to normalize here?

Sorry, I didn’t quite catch the question what line item – what line item you said?

Stock-based compensation, I think you guy were – saw about $1.5 million in the quarter. I think that you guys were doing about somewhere in the $4 million plus three quarters of last year?

Yes, that’s right. The big drop there was an adjustment we took related to caustic rules for stock options for certain members of our executive team, who are no longer here, and so we backed out the cost in those…

Do you expect that number to come back up to $4 million plus this quarter?

I expect the number to normalize again back what we did previously.

Yes, okay, great. Thank you. And then lastly, in terms of headcount growth, do you expect to continue to show modest growth in your sales and marketing and product development, as you continue to show revenue growth, especially in your license business?

Yes, I think we expect to modestly grow the organization still going forward on a quarter-over-quarter basis. And I think your question around sort of doing it, as we grow product license revenues is the right thought process we have.

Okay, great. Thank you so much.

And our next question is from the line of Greg McDowell from JMP Securities. Please go ahead.

Great. Thank you very much. A couple of questions. First, one of the themes at the Analyst Day at MicroStrategy world this year was sales productivity. And I was just wondering, if you could comment on sales productivity in Q1, and whether or not it met your expectations in light of all the structural changes in the sales origination last year? That’s my first question.

Yes, I think we continue to make strides on improving sales productivity. And as Phong had pointed out, our sales organization is really focused upon the product license and the subscription sales. And we were – we had an increase year-over-year in that line item in Q4. And on the other hand, we’re doing it with the smaller, tighter sales organization that I think is running more efficiently. So if I would have look at raw productivity numbers, I’m sure we see that our productivity per account executive for sales professional is improving pretty consistently and that is – it’s also consistent with all of the corporate process initiatives we have. We’ve had a lot of process initiatives to improve sales management, account management, business development and field sales and of course marketing initiatives to increase productivity. So those things were all working together to drive productivities up.

Also if you look at the headcount level, Greg, we decreased our sales headcount year-over-year by about 46 people. Yes, we continue to increase both our product license revenue number and also is like convertible that are product bookings number with even more of a increase when we look at booking per sales person.

Great, and then my last question that, just any commentary you can provide on MicroStrategy security or Usher, and maybe the progress you’re seeing on more security standalone deals where customers are just adopting security, but maybe on adopting the entire analytics platform. I think that was, yes, something you guys were pretty laser focused on in 2014 and 2015 and pipeline was building strong and there were lot much improved concepts out there. Anything you could comment around the security business would be helpful? Thanks.

I think we saw our early enthusiasm and customer success and markets like Singapore and UAE and some in New York and East Coast United States. But what I can see right now is I feel like there’s great enthusiasm is starting to bubble up from grassroots level in Korea and Japan, and Australia and parts of Europe and other parts United States. So I feel good that the entire offering is spreading throughout our installed base and start to spread throughout our sales organization in a more broad-based fashion. And whereas – whereas last year we had our specialized sales organization driving, specialized salespeople and specialized sales engineers and you had to be a specialist to install this. This year we roll this out broad-based or entire sales organization and our entire sales engineering group, so that all of the field engineers are now qualified to install and start to build pilots and decoy applications. And so I expect it will continue to see a healthy spread of this technology to the benefit of our entire sales organization and our customer base.

Thank you very much.

And we have a follow-up from the line of Karl Keirstead with Deutsche Bank

Hi, thanks. I just want to ask a follow-up Michael on the subscription line, if you could offer an update on the transition of your cloud BI product to AWS and that number, the growth rate has slowed a little bit. Do you think there is any demand issue with cloud hosted BI maybe a perceived performance, latency issue or maybe it’s just a sales execution and cloud hosted products, just taking time to garner enterprise adoption? Thanks for any thoughts.

Yes, we used to operate the cloud business as a single business unit and we split it into enterprise cloud unit and into an AWS based cloud unit. And so the AWS cloud unit operates wholly in AWS cloud and the enterprise unit is still running certain hosted applications on our own hardware and our own datacenter for customers. And we shifted some of our more talented executives to start running the AWS part of the business and we dedicated to it and so we have been gearing for more growth. We see a steady migration out of the enterprise and AWS and steady increase in activity and the AWS cloud. 10.3 was a dramatic improvement in the Secure Cloud offering over the previous version. We’ve been doing a lot of work to automate our creation of AWS instances. And I would say one of the important objectives of ours is to provide our customers with a single tenant managed environment where – if you were a retailer, you could create your own cloud instance, where you have complete control over the resources and the elasticity and the power, and the location of that instance or even a number of them. And that that is distinguished from our competition, because competitors like Tableau and Qlik, and alike, while they sometimes offer a cloud opportunity, they don’t give you the same degree of elasticity or configurability of the cloud environment that I think are very serious enterprise would require. There is no way that a real mission critical application is going to be deployed out of the cloud if the enterprise doesn’t feel that they can completely control and tailor that configuration based upon their enterprise needs over time that might mean scaling it down, but it might need scaling it up, it might be placed in a different place. With regard to 10.3, we released a lot of upgraded administrative capabilities and automation tools to make it easier for enterprises to do that. And I think that we’ll continue to add some cutting-edge enterprise cloud capabilities with future releases as well. And as we do that, I think that accelerates the migration into the cloud certainly in terms of creating demand, the most useful thing we could do to create demand is to make it easy and easier for enterprise customers to migrate MicroStrategy applications into the cloud that they’re running in the enterprise. And we were steadily improving that toolset as quarters go by.

Okay, great. Thanks a lot for that.

And we have a follow-up from the line of John Rizzuto with SunTrust. Please go ahead.

Thanks for taking the follow-up, Phong if you could just work through a little bit for us than the dynamics around the deferred revenue and why that number was strong and what that actually meaningful?

Yes, sure John. If you look at our deferred revenue detail in our press release and also in our 10-Q, the way I look at is just simplify really is looking at the total current and noncurrent. So you will see there from September 31, 2015 to December 31, 2016, our deferred product license revenue increased by roughly $1.7 and $1.8 million. So that increase effectively is revenue that was booked in Q1, but not recognized minus revenue that was booked in previous quarter that was recognized in Q4. And so a positive number there implications that we had more bookings that we’re not recognized it. And so that’s what – that’s why Mike alluded to a little bit. Some of the deals that we end up closing. They don’t show up on the product license revenue line, show up that change in deferred revenue line, and we had a few substantial deals that looks like that.

Okay.

That really depends on the kind of customer that we’re selling to. It depends on the contract arrangement what they do – we defer the revenue line.

Right. And that’s offer new products, right, that’s new product license, correct?

Yes, yes. Yes, and there’s other lines, there are subscription services, product support, and other services.

All right.

So the changes are less meaningful, because they’re not necessarily just because of revenue recognition. So I would focus on that first row there the deferred product license revenue to indicate sort of an additional color on the shrink of the quarter.

Okay, great. Thanks for that.

And ladies and gentlemen, this concludes our Q&A for today. I’ll turn the call to Michael Saylor for any final remarks.

Well, I would thank all of you for your time today and we’ll look forward to speaking with you again in 12 weeks. All the best.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.