Business context and reporting period
This is MicroStrategy Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The filing identifies the registrant as MicroStrategy Incorporated, not “Strategy Inc.” The company sells business intelligence software and related support and services; its “Other” segment is Angel.com, a cloud-based customer experience management business.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise stated.
- Second-quarter revenue: $141.8, up 2.7% from $138.2 a year earlier. Product-license revenue declined 4.6% to $31.9; product support and other services rose 5.0% to $109.9.
- Six-month revenue: $286.9, up 10.3% from $260.2. Product licenses increased 14.0% to $69.3, and product support and other services rose 9.1% to $217.6.
- Profit: Q2 net income was $7.3 versus $2.9; diluted EPS was $0.65 versus $0.26. Six-month net income was $7.5 versus $4.0; diluted EPS was $0.68 versus $0.36.
- Margins: Q2 gross margin was approximately 74.2% versus 75.0%; operating margin was 6.7% versus 2.5%. For six months, gross margin was 73.6% versus 74.0%, and operating margin was 3.5% versus 1.7%.
- Cash flow: Six-month operating cash flow was $19.8, down from $31.5. Investing used $25.7, including $23.9 of property and equipment purchases and $5.1 of capitalized software development costs. Cash declined $4.1 to $195.5.
- Balance sheet and liquidity: At June 30, cash and equivalents were $195.5; current assets were $314.9 and current liabilities $193.8 (current ratio approximately 1.62). Total liabilities were $255.1 and equity $179.2. The balance sheet presents no borrowings or debt line; lease commitments are separately disclosed.
- Deferred revenue: Net current and non-current deferred revenue and advance payments totaled $115.9 after offsets. Management expected to recognize approximately $162.7 of deferred revenue and advance payments over the next 12 months; this gross figure includes amounts offset against receivables.
Material changes versus the prior comparable period
- Q2 revenue growth was modest, while six-month growth was stronger; domestic product-license revenue increased, but international product-license revenue fell 15.7% in Q2.
- Operating income improved in both comparisons, helped by lower sales and marketing expense in Q2. Research and development expense rose 22.4% in Q2 and 48.6% for the first half, reflecting investment and increased staffing.
- Six-month operating cash flow fell 36.9%, which management attributed primarily to changes in operating assets and liabilities, despite higher non-cash expenses and net income.
- Cash and equivalents were down from $199.6 at December 31, 2011. Total assets declined to $434.3 from $453.9, while total liabilities fell to $255.1 from $284.9.
Outlook, commentary, risks and unusual items
- Management gave no financial-performance guidance and stated that it does not provide guidance. It expected 2012 R&D expense growth to be slower than in 2011, while noting that revenue shortfalls could pressure profitability because many costs are relatively fixed.
- Management considered existing cash and expected operating cash sufficient for at least 12 months and did not expect to need borrowing for operations, but was evaluating borrowing in the second half of 2012 to take advantage of favorable credit-market pricing.
- New social-intelligence offerings had not generated significant revenue in the first half. MicroStrategy 9.3 was expected to become generally available in Q3 2012; $5.1 of development costs had been capitalized and would then begin amortization.
- Key exposures include intense competition, long and variable sales cycles, reliance on the BI platform, international and foreign-exchange exposure, uncertain customer spending, and the risk that investment in new offerings may not generate sufficient revenue. A 10% unfavorable currency move was estimated to reduce first-half 2012 revenue by 3.6%; the company did not hedge foreign-currency exposure.
- Three patent matters were ongoing: the Acacia/DAS dispute, with trial scheduled for February 2013, and claims by Datatern and Vasudevan. Outcomes and possible losses were not estimable, and no liabilities were accrued for these matters.
- The owned aircraft damaged in 2010 returned to service in May 2012. The company recorded $9.6 of impairment charges through June 30 and received $10.3 of insurance proceeds for aircraft damage and related costs; it did not expect further material charges, repair costs, or proceeds.
- Other items to monitor include $17.1 of unrecognized tax benefits, a German tax examination, and the potential tax cost of repatriating foreign earnings. The company also disclosed $144.7 of future minimum operating and capital lease payments, including its headquarters lease and aircraft fractional-interest lease.
- Class B shares carry ten votes per share; the filing states that the CEO held 65.3% of total voting power as of July 24, 2012. The company did not repurchase shares in Q2.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for MicroStrategy Incorporated, notwithstanding the request metadata naming Strategy Inc.
- Track whether revenue growth, particularly product-license sales outside the U.S. and Canada, continues and whether deferred revenue converts to recognized revenue.
- Assess whether rising R&D and other operating costs translate into durable product demand and profitability, and whether operating cash flow recovers.
- Monitor the patent cases, tax examination and unrecognized tax positions for changes in estimated exposure or expense.
- Review planned borrowing, lease commitments, foreign cash and potential repatriation taxes, and the implications of concentrated voting control.