Business context and reporting period
This is MicroStrategy Incorporated’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012; the December 31, 2011 balance sheet is derived from audited statements. The company provides business intelligence software and related services, with Angel.com as a smaller cloud-based customer experience management business. The filing does not identify the registrant as Strategy Inc.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and margins.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $143.2 | $141.7 | $430.2 | $401.9 |
| Gross profit / margin | $105.7 / 73.8% | $105.0 / 74.1% | $317.0 / 73.7% | $297.5 / 74.0% |
| Operating income / margin | $6.7 / 4.7% | $1.5 / 1.1% | $16.7 / 3.9% | $6.1 / 1.5% |
| Net income / margin | $4.8 / 3.3% | $4.9 / 3.5% | $12.3 / 2.9% | $8.9 / 2.2% |
| Diluted EPS | $0.43 | $0.44 | $1.10 | $0.81 |
| Operating cash flow | Not separately provided | Not separately provided | $41.2 | $32.4 |
Cash and cash equivalents were $216.6 million at September 30, 2012, up from $199.6 million at year-end 2011. Current assets were $335.5 million versus current liabilities of $205.1 million. The company reported no material investments beyond cash and cash equivalents, and no material off-balance-sheet arrangements. The filing does not report conventional borrowings; capital lease obligations were $3.3 million, and future operating and capital lease payments totaled $142.0 million.
Material changes versus comparable periods
- Q3 revenue increased 1.1%, but product-license revenue fell 19.2% to $31.7 million, mainly due to weaker domestic license sales. Product support and other services rose 8.1% to $104.3 million.
- For the first nine months, revenue rose 7.0%; services growth of 9.0% offset nearly flat product-license revenue. Operating income increased substantially in both comparisons as operating expenses grew more slowly than gross profit in the quarter and nine-month period.
- Q3 net income edged down from $4.9 million to $4.8 million despite higher operating income. The prior-year quarter included a $3.4 million investment-sale gain, while Q3 2012 had a higher tax provision. Nine-month net income rose 37.7%, although the effective tax rate increased to 29.6% from 7.1%, partly because the 2011 period included a favorable U.K. tax settlement.
- Research and development expense increased 34.9% for the nine months to $67.9 million. Sales and marketing expense declined 7.6% to $160.6 million, while general and administrative expense rose 7.0% to $71.9 million.
- Cash from operations increased to $41.2 million from $32.4 million. Investing used $32.9 million, including $28.0 million of property and equipment purchases and $8.1 million of capitalized software development costs. Cash increased by $17.0 million over the nine-month period.
Outlook, commentary, risks and unusual items
- Management gave no financial guidance and states it does not provide guidance on anticipated future financial performance. It expects 2012 R&D investment to continue, but at a lower rate of expense growth than in 2011. Management says existing cash and expected cash generation should cover working capital, anticipated capital spending and contractual obligations for at least 12 months; it was evaluating borrowing options to take advantage of favorable credit-market pricing.
- Management expects to recognize approximately $158.7 million of deferred revenue and advance payments over the next 12 months. Additional customer purchase commitments through 2017 total approximately $110.4 million, but depend on customer purchases and performance obligations and are not included in deferred revenue.
- Management cited intense competition, long and variable sales cycles, dependence on the BI product platform, customer budget uncertainty, and the risk that operating expenses cannot be reduced quickly if revenue falls. International revenue was 40.1% of nine-month revenue; unfavorable currency movements reduced nine-month revenue by 3.2% year over year. The company had not hedged foreign-exchange exposure.
- The company reported three patent-related matters with outcomes and possible losses not reasonably estimable: the Acacia/DAS dispute, a Datatern case stayed pending another action, and ongoing Vasudevan litigation. No estimated liabilities were accrued for these matters. The Acacia/DAS summary-judgment arguments were scheduled for November 8, 2012, with trial scheduled for February 2013.
- The company recorded a cumulative $9.6 million impairment related to damage to its corporate aircraft through June 2012; it recorded no additional impairment in Q3. It received $10.3 million in insurance proceeds by September 30. The fractional aircraft lease ended in September 2012. Management also reorganized the executive team in October 2012.
- Unrecognized tax benefits, including accrued interest, totaled $17.4 million; management expected the liability to decrease by about $12.9 million over the next 12 months, primarily as statutes of limitation expire. The company was under tax examination in Germany. Most cash was held outside the U.S. ($176.3 million of $216.6 million); management intends to indefinitely reinvest certain foreign earnings and does not anticipate needing repatriation for U.S. operations.
Important facts for investors to verify
- Whether domestic license sales recover after the sharp Q3 decline, and whether service growth and deferred-revenue conversion continue.
- Whether increased R&D spending and new cloud, mobile and social offerings generate sufficient revenue; management said new social-intelligence offerings had not generated significant revenue in the first nine months.
- Developments and potential financial exposure in the Acacia/DAS, Datatern and Vasudevan matters, for which losses were not estimable.
- The timing and tax consequences of foreign cash repatriation, changes in unrecognized tax benefits, and the German tax examination.
- Management’s borrowing evaluation, cash deployment and substantial lease commitments, alongside its statement that no borrowing is currently expected to be needed for operations.