MicroStrategy Incorporated (filed as MicroStrategy, Inc.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparative periods ended June 30, 2010. Unaudited interim results. The filing describes a business intelligence software and services company, with Angel.com as a smaller interactive voice response and call-center business.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Percentages are approximate.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $138.2 | $107.5 | $260.2 | $200.9 |
| Gross profit / margin | $103.6 / 75.0% | $83.2 / 77.4% | $192.5 / 74.0% | $155.0 / 77.1% |
| Operating income / margin | $3.5 / 2.5% | $14.3 / 13.3% | $4.6 / 1.7% | $21.9 / 10.9% |
| Net income | $2.9 | $11.6 | $4.0 | $18.5 |
| Diluted EPS | $0.26 | $0.97 | $0.36 | $1.52 |
- Revenue mix and growth: Q2 product license revenue increased 15.6% to $33.4 million; core BI product support and other services grew 32.5% to $98.7 million; Angel.com revenue rose 47.2% to $6.0 million. International product licenses were a notable growth driver, up 46.2% in Q2 and 53.3% in the first half, with favorable currency effects contributing.
- Cash flow: First-half operating cash flow was $31.5 million, essentially flat year over year. Investing cash outflow was $18.7 million, mainly reflecting $18.8 million of property and equipment purchases and $5.4 million of capitalized software development, partly offset by $5.7 million of aircraft insurance proceeds. Financing provided $3.4 million, compared with $41.6 million used in the first half of 2010, when the company repurchased $41.7 million of stock. Cash increased $18.9 million to $193.0 million.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $193.0 million; current assets were $305.3 million and current liabilities $192.2 million. Total assets were $403.1 million, liabilities $246.6 million, and stockholders’ equity $156.5 million. The balance sheet presents no interest-bearing debt line. Management said cash and expected operating cash generation were sufficient for at least 12 months and that it did not expect to borrow to finance operations.
- Deferred revenue: Net current and non-current deferred revenue and advance payments totaled $112.5 million at June 30, up from $97.2 million at December 31, 2010. The company expected to recognize approximately $159.4 million of deferred revenue and advance payments over the next 12 months; this amount is not a revenue forecast. Additional customer purchase commitments through 2016 totaled approximately $113.8 million and were not included in deferred revenue.
Changes versus the prior comparable period
- Revenue grew 28.5% in Q2 and 29.5% in the first half, but profitability weakened sharply: first-half operating income fell to $4.6 million from $21.9 million, and net income fell to $4.0 million from $18.5 million.
- Operating expenses grew faster than revenue. In Q2, total operating expenses rose 45.4% to $100.1 million, led by sales and marketing and R&D investment. Cost of revenues also rose, and gross margin declined by about 2.4 percentage points.
- First-half other expense was $0.9 million versus $5.0 million of other income in 2010. The 2011 tax line was a $0.3 million benefit, compared with an $8.5 million provision in 2010; management attributed the lower effective tax rate partly to a favorable U.K. tax settlement and tax-return adjustments.
- Cash was up from year-end 2010, while accounts receivable declined to $71.0 million from $82.1 million. Property and equipment increased to $78.9 million from $65.0 million, reflecting investment and the aircraft asset.
Outlook, commentary, and risks
- Management expected continued investment in R&D, sales and marketing, and consulting during the rest of 2011. It warned that costs and expenses would continue to increase and that the company could incur operating losses in the second half if revenue did not offset those increases.
- The company did not provide financial guidance and stated that it does not give guidance on anticipated future financial performance. Management cautioned that quarterly results can fluctuate and that quarter-to-quarter comparisons may not indicate future performance.
- In July 2011, the company announced MicroStrategy 9.2.1, MicroStrategy Cloud, Gateway for Facebook, and Alert, targeting mobile, cloud, social media, and large-data opportunities. Execution, customer adoption, and returns on these initiatives remain uncertain.
- Aircraft damage and insurance dispute: The corporate aircraft was damaged when its leased hangar collapsed in 2010. The company recorded $6.5 million of impairment through Q1 2011, but said estimated damage could range from $6.5 million to $45.8 million and recorded the minimum because it could not identify a better estimate. It is suing its insurers over a rejected $50.0 million claim; the outcome was not determinable, and trial was scheduled for February 2012. Further impairment could affect results.
- Other contingencies: Litigation involving Acacia Research and Database Application Solutions over a patent and a prior settlement remained unresolved; no liability was accrued because the outcome was not determinable. The company also reported $16.7 million of gross unrecognized tax benefits and an ongoing German tax examination. It did not expect a significant tax payment on these positions within the next year.
- Subsequent events: In July, the company sold an investment for approximately $3.4 million and planned to record a gain in Q3 2011. It also entered a three-year lease for a 37.5% fractional aircraft interest, terminable after year one; estimated cost for one year was approximately $4.2 million.
- Key risks include intense competition and bundled offerings, long and variable sales cycles, dependence on the core BI platform, foreign currency exposure, international and tax risks, hiring and retention, and concentrated voting control. Class B holders held 75.2% of voting power as of July 27, 2011; CEO Michael Saylor held 65.5%. Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth can outpace rising operating costs and restore margins; note management’s warning of possible second-half operating losses.
- The durability and composition of revenue growth, particularly international license sales, services growth, currency effects, and deferred revenue conversion.
- The aircraft’s final damage assessment, any additional impairment, insurance recovery, litigation outcome, and costs of the replacement fractional aircraft lease.
- How the Acacia/DAS litigation and tax examinations or unrecognized tax benefits develop, including any resulting expense or cash payment.
- The availability of cash held overseas: $161.8 million of the $193.0 million cash balance was held by non-U.S. entities, and repatriation could create U.S. tax.