Palladyne AI Corp. Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Company Positioning: MicroStrategy is the largest corporate holder of bitcoin in the world and the world's largest independent publicly traded business intelligence company. It is positioned as the world's first bitcoin development company, committed to developing the bitcoin network through financial markets, advocacy, and technology innovation while also pursuing growth in AI and cloud-powered BI software.
• Software Business Transformation:
  • 2023 saw progress in shifting to cloud offering with annual subscription services revenue of $81.2 million, an increase of 34% year-over-year, driven by existing customer migrations to the cloud and new customer wins.
  • 2024 strategic focus:
    • Grow with cloud: Expand MicroStrategy Cloud's flexibility, scalability, and security. Deployed Google Cloud platform integration, and will provide private cloud deployment later in 2024. Expect a decrease in product license revenues but increase in subscription services revenues as customers move to cloud.
    • Innovate with AI: Continue to focus on product innovation and AI-powered BI in the cloud. Released MicroStrategy AI in September and a standalone bot feature in December. AI capabilities drive cloud migration.
    • Increase profitability: Optimize internal organizational structure, reduce dependence on low margin consulting, and leverage leadership team to target non-GAAP operating income of $70 million to $90 million in 2024.
• Bitcoin Activity: In Q4 2023, acquired 30,905 bitcoins, the largest single quarter increase since Q4 2020. After the quarter, purchased an additional 850 bitcoins using excess cash. Committed to using excess cash from operations and proceeds from capital markets activities to acquire more bitcoin.

Segment Performance

• Software Business:
  • Fourth quarter total revenues were $124.5 million, down 6% year-over-year. Full year 2023 total revenues were $496.3 million, down slightly 1% year-over-year.
  • Product license revenues: Fourth quarter $18.4 million, down 33% year-over-year; full year $75.4 million, down about 13% year-over-year.
  • Subscription services revenues: Fourth quarter $21.5 million, an increase of 23% year-over-year; full year $81.2 million, an increase of 34% year-over-year. Current subscription billings grew 33% in the fourth quarter to $41.3 million and 23% year-over-year for the full year, marking the 15th straight quarter of double digit growth in cloud bookings. For the first time in both fourth quarter and full year, subscription services revenues were higher than product license revenues.
• Bitcoin: As of February 5, 2024, the company held a total of 190,000 bitcoins, acquired for an aggregate cost of $5.93 billion, or $31,224 per bitcoin. In 2023, acquired 56,650 bitcoins for a total purchase cost of $1.9 billion. In 2024 so far, acquired an additional 850 bitcoins for a total purchase cost of $37 million. As of yesterday, the total bitcoin market value was $8.1 billion.

Guidance

• 2024 is expected to see the revenue mix continue to shift from product license to subscription services as the company focuses on delivering AI-based products in the cloud.
• Cloud bookings have been in double-digit growth for 15 straight quarters, and this trend is expected to continue.
• For the software business in 2024, aim to increase overall top-line revenue compared to 2023 and target non-GAAP operating income of $70 million to $90 million, excluding impairment losses.
• Plan to use excess cash from operations and proceeds from capital markets activities to acquire more bitcoin in 2024.

Risks

• Macro-economic headwinds impacting overall customer spend, which may affect revenue.
• Volatility in bitcoin prices, which can impact the carrying value of bitcoin holdings.
• Uncertainties related to debt management and capital markets activities, such as the impact of upcoming debt maturities.

Question and Answer

Q: Phong, if you can elaborate on the company's new positioning as the bitcoin development company? And does this mean any different allocation of R&D? And will you be allocating more R&D into Lightning and Layer 2 applications?

A: Thanks, Shirish, and thanks for the question. I think our press release and our prepared remarks, and Mike actually did a really nice job of explaining our positioning as a bitcoin development company. I suggest everyone take a quick look or a long look at that. On the R&D piece, we will invest more in R&D into bitcoin software development. It will not be at the expense of our business intelligence and AI and cloud-based software development. Some of the things that we've been doing, you've seen at our Bitcoin and Lightning for Corporations MicroStrategy World event last year, where we implemented a Lightning Rewards program on the Layer 2 network. We're also looking at some things that will leverage the native bitcoin blockchain technology, some security applications that we'll reveal at our next MicroStrategy World Conference. So we're excited about bitcoin overall, but very excited about some of the software development capabilities that we'll be able to create coming out of it.

Q: Andrew, you talked about excess cash and leverage, highlighting the value proposition for MicroStrategy. How do you plan to acquire more Bitcoin in 2024?

A: Thanks for the question. I think Michael summed it up really well in the last few minutes of his remarks. I believe we have all options available to us, which includes excess cash, but also all the different forms of capital that we could issue through debt and equity markets. I think as we've done in the past, those are the levers that we'll use to acquire more bitcoin. I think 2024 will offer some opportunities for us to do so. I think as our market value increases with the increasing price of bitcoin, I think there will be additional opportunities to access the capital markets. And similar to what we've always said, we will look to assess which is the most accretive. We've issued debt in certain markets, we've issued equity in different types of markets. I think we've demonstrated the track record of our ability to think through those complex ideas. And so as Michael alluded to, I think we have all of those options available to us to acquire more bitcoin in 2024.

Q: Can you please elaborate on the progress of converting software clients to cloud from license? And how is the timing of transition looking overall?

A: Yes, 2023 is a pretty pivotal year for us. One, our subscription services revenue has now surpassed our product license revenue. And two, our subscription services revenue has surpassed our other services revenue. And so that was a pretty big transition. It's now the second biggest revenue line item behind product support, which represents the maintenance that on-prem customers pay us. Another data point I'll give you is, we are near or exceeding the $100 million of ARR in the cloud, which is a pretty major milestone for any software company and a very major milestone for us as we're transitioning from on-prem to the cloud. That said, we still have less than 25% of our recurring revenue in the cloud. So there's still a pretty major opportunity, and there are greater than 75% of on-prem revenue that we need to move. I think 2024 is going to be an acceleration year in terms of moving existing customers to the cloud and getting more new customers to move the cloud. Reasons for that I talked about, one is our partnerships with our hyperscalers including Microsoft, Azure, Amazon, AWS, and Google, GCP. Another reason is the maturity of our technology offering, container-based, microservices-based, and the fact that we're going to roll out a private cloud offering this year. So a lot of progress, but more opportunity to move to the cloud. And I would say 2024 will be probably the most important year for our transition we've seen in the history of the company in terms of moving to the cloud. And we have the entire organization aligned behind it and we have our customers ready to roll.

Q: How is the initial reception of the AI product, and what do you think this will contribute to product mix or profit margins?

A: We went GA with our AI plus BI product in September. So essentially four months ago, end of September, four months ago. And we were the first in the BI space to have done so. And we have a lot of customers who are starting to kick the tires, play around with it, getting excited about it. And what we're really doing is trying to understand what are the production use cases that are going to drive further growth in AI plus BI. The exciting side effect, if you will, is because our AI product is build cloud native and therefore only available in the cloud is accelerating our cloud migration even further. So while the revenue impact of AI directly may not be extremely significant in 2024, it could be, but we're not positive yet. What will be significant is how it's driving our customers to migrate to the cloud. And back to the previous question, that'll show up in our revenues and our transition to subscription services revenue and our increase in cloud ARR. And we're seeing that happen already. We're seeing CIOs, CEOs, COOs saying this gives us a real important reason to want to move MicroStrategy in all of our workloads to the cloud.

Q: How do you plan to address your upcoming 2025 convert maturity? And what are the different ways the company can pursue?

A: Thanks, Shirish. I guess first to note, we still have a good amount of time before that maturity arises in December 2025. We've always managed our maturities from a timing perspective that gives us ample time to figure out these types of questions. But that being said, I think we are getting closer and we're continually evaluating the market opportunities in regards to 2025s. We could of course -- they could equitize at the conversion price, that's clearly one option. I think other options out there exist and potentially being able to refinance those converts, which could allow us to even stand out maturities further. Of course, all that would be based on market conditions. But the point is, I think we're evaluating everything. And I think it's something that we'll keep very close consideration in the coming months.

Q: How important is the SEC acceptance of Spot Bitcoin ETPs in terms of eventual mainstreaming of Bitcoin as a legitimate form of money?

A: Yes, I think it's tremendously important. I think the approval of the Spot ETPs marked an inflection point in the history of bitcoin and it demarcates the era of retail offshore unregulated crypto adoption versus the era of onshore regulated institutional bitcoin adoption by the mainstream investors and investment community. We can already see these ETPs have been a screaming success as a launch. They're sucking all the oxygen out of the room, getting all the attention in the ETF industry. They've already marched up the leaderboard amongst the top commodity ETFs in the world very rapidly. It's pretty clear that bitcoin is now on a path to eat gold, to subsume gold's monetary value and of course it's a fairly easy trade for someone now to sell their gold ETF and buy a Bitcoin ETF. It just takes a matter of 30 second phone call. And so the amount of the frequency with which people are comparing bitcoin to gold is dramatically increasing. The frequency of bitcoin in a conversation with a registered financial advisor is going up by orders of magnitude. So this has catalyzed the adoption and the normalization of bitcoin throughout the traditional finance industry. I think the implication is bitcoin will become everybody's favorite commodity investment because the other investments like gold, silver, basic commodities, natural gas, oil, they have not been terribly successful strategies and bitcoin has an order of magnitude more enthusiasm behind it. So first bitcoin takes over commodities, but then bitcoin spreads throughout the entire traditional finance industry in the US. And as it's doing that, it's entering with legitimacy into the political conversation, the banking conversations, the regulatory conversations into mainstream media. It's coming onto college campuses and education institutions, and it's beginning to be talked about much more frequently in technology organizations, startups, and big tech companies. So in general, this is just a massive catalytic event for bitcoin throughout the United States. And that leads to global acceptance and a surge in global interest. We're already seeing a lot more talk about bitcoin outside of the US, and many other countries take their lead from US regulators. So we already have seen discussions of bitcoin Spot ETFs in Hong Kong, but I think you'll see any resistance to a similar product in South America, Africa, Europe, Asia is going to decrease dramatically in the aftermath of the SEC approval.