MicroStrategy Incorporated (filing metadata identifies Strategy Inc.) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is for MicroStrategy Incorporated; the company-name difference from the request metadata should be verified. Financial statements are unaudited, and 2017 comparatives were retrospectively adjusted for adoption of ASC 606.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions where appropriate.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $122.2m | $126.0m | $365.7m | $367.5m |
| Gross profit / margin | $98.8m / 80.9% | $101.6m / 80.6% | $292.1m / 79.9% | $295.6m / 80.4% |
| Operating income / margin | $7.2m / 5.9% | $21.2m / 16.8% | $6.1m / 1.7% | $56.1m / 15.3% |
| Net income | $12.7m | $18.2m | $19.2m | $43.7m |
| Diluted EPS | $1.10 | $1.58 | $1.67 | $3.78 |
| Operating cash flow | Not separately presented by quarter | $23.2m | $49.3m |
- Q3 product license revenue was $20.3m, down 9.4%; subscription services were $7.2m, down 6.3%; product support was $74.5m, up 2.2%; and other services were $20.2m, down 12.4% year over year.
- At September 30, cash and cash equivalents were $112.1m and short-term investments were $587.1m; together they totaled approximately $699.2m. Current assets were $838.5m versus current liabilities of $211.9m. The filing states management believes available liquidity and expected cash generation will meet needs for at least 12 months.
- Total assets were $913.5m and total liabilities $278.1m. The balance sheet does not present material borrowings; the company says it has no material capital leases. Other long-term liabilities include $28.9m of unpaid U.S. transition tax.
- Nine-month investing cash outflow was $330.0m, principally reflecting purchases of short-term investments. Cash, cash equivalents, and restricted cash fell by $308.2m to $113.0m; this largely reflects the movement of funds into investments, not equivalent operating cash burn.
Material changes and management commentary
- Revenue declined 3.1% in Q3 and 0.5% for the first nine months. Product support growth partly offset weaker product licenses, subscriptions, and services. Domestic product license revenue fell 24.0% in Q3; international product license revenue rose 12.6%.
- Operating expenses rose 13.8% in Q3 and 19.4% for the nine-month period, led by higher sales and marketing and research and development spending. R&D expense increased 33.4% in Q3 and 29.9% year to date; management attributed the increases to investment in personnel and products.
- Operating income fell sharply as expense growth outpaced revenue. Nine-month operating cash flow also declined 52.8% year over year, primarily due to lower net income and changes in non-cash items.
- Deferred revenue and advance payments totaled $156.0m at September 30, down $49.2m from December 31, 2017. Management expected to recognize approximately $151.0m within 12 months, while cautioning that deferred balances do not necessarily predict succeeding-period revenue.
- International operations generated 42.2% of Q3 revenue and 42.4% of nine-month revenue. Management cited foreign-exchange exposure; a hypothetical 10% unfavorable average-rate change would have reduced nine-month revenue by 3.8%.
Outlook, risks, contingencies, and unusual items
- The filing provides no financial forecast and states that the company does not give guidance on anticipated future financial performance. Management expected sales and marketing spending to continue at its current pace and R&D investment to increase further.
- A Brazilian subsidiary may have failed to comply with local procurement rules in business with government entities. Management considers a loss probable, but says the amount or range cannot currently be reasonably estimated; a material earnings impact cannot be ruled out, although management does not expect a material effect on financial position.
- The company recorded a $3.1m reduction to its provisional Tax Act transition-tax estimate in Q3. It reported a nine-month income tax benefit of $0.7m and an effective tax rate of negative 3.8%; tax estimates remained subject to refinement. The company had $4.5m of unrecognized tax benefits.
- The January 2018 amendment extended the Northern Virginia headquarters lease through December 2030. Future minimum operating-lease and other arrangement payments were $190.4m as of September 30; transition-tax installments were separately estimated at $28.9m.
- Other principal disclosed risks include intense analytics competition, fluctuating quarterly results and long sales cycles, customer and retail-sector spending weakness, foreign exchange and international compliance, cybersecurity and privacy regulation, and dependence on key personnel and the installed customer base. The company also has dual-class voting control: Class B shares represented 68.3% of total voting power as of October 15, 2018, with the CEO beneficially owning 67.5%.
- Management concluded disclosure controls were effective at a reasonable-assurance level. A new quoting and contract-management system was introduced late in Q3; additional procedures and manual reconciliations were used while management assessed its effects on financial-reporting controls.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is MicroStrategy Incorporated, although the request metadata says Strategy Inc.
- Assess whether product-license declines and higher operating expenses persist, and whether planned sales, marketing, and R&D spending produces revenue growth.
- Track operating cash generation, deferred-revenue trends, and the composition and accessibility of cash and short-term investments, including funds held outside the United States.
- Monitor the Brazilian procurement matter and any changes to the company’s Tax Act estimates or unrecognized tax exposures.
- Consider the lease commitments, the implementation of the new contract system, and the implications of concentrated voting control.