MicroStrategy Incorporated — Form 10-Q for Q2 2016
Business context and period: The filing is for the quarter ended June 30, 2016, with six-month year-to-date comparisons to 2015. The registrant named in the filing is MicroStrategy Incorporated; the request metadata identifies the company as Strategy Inc. MicroStrategy sells enterprise analytics, mobility, security and cloud software, with related product support and services. It reports one operating segment. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $123.1m | $132.9m | $242.2m | $256.8m |
| Gross profit / margin | $99.0m / 80.4% | $107.0m / 80.5% | $195.2m / 80.6% | $203.8m / 79.4% |
| Operating income / margin | $21.1m / 17.1% | $34.8m / 26.1% | $40.9m / 16.9% | $57.4m / 22.4% |
| Net income | $18.9m | $22.5m | $33.2m | $42.9m |
| Diluted EPS | $1.64 | $1.95 | $2.88 | $3.74 |
| Operating cash flow | Not separately presented for the quarter | $66.5m | $92.0m |
- Q2 revenue fell 7.4% year over year; six-month revenue fell 5.7%. For the first half, product licenses declined 8.5% and other services declined 22.1%; subscription services grew 10.2%, while product support was nearly flat.
- Q2 operating income declined 39.3% and net income declined 15.9%. Six-month operating income declined 28.8% and net income declined 22.8%.
- Q2 license revenue decreased 20.1%, principally reflecting weaker domestic sales and fewer large transactions. Consulting revenue fell 23.6% in Q2 and 24.4% in the first half, primarily due to fewer billable hours. The company said subscription growth reflected new customers and increased usage by existing customers.
- Operating expenses rose 7.9% in Q2 and 5.4% for the first half. Research and development expense rose 28.9% and 21.4%, respectively; the company capitalized no software development costs in 2016, versus $4.2m in Q2 2015 and $9.6m in the first half of 2015.
Financial position and liquidity
- At June 30, 2016, cash and cash equivalents were $347.4m and short-term investments were $202.7m, totaling $550.1m, compared with $485.7m at December 31, 2015. Current assets were $621.0m and current liabilities $189.1m.
- Total liabilities were $220.0m. The balance sheet does not show conventional borrowings; future minimum capital lease and other financing payments were $2.2m. Operating lease commitments totaled $87.4m, for total disclosed lease and financing commitments of $89.6m.
- Six-month operating cash flow was $66.5m, down 27.7% year over year. Investing activities used $9.9m and financing activities used $2.6m; cash increased $55.0m to $347.4m.
- Net deferred revenue and advance payments were $132.5m at quarter-end, up from $109.7m at December 31, 2015. Management expected to recognize approximately $186.3m of deferred revenue and advance payments over the next 12 months, while cautioning that timing depends on performance obligations and is not a reliable indicator of future-period revenue.
- Management said available cash, investments and expected cash generation were sufficient for working capital, anticipated capital expenditures and contractual obligations for at least 12 months. About $310.0m of cash and investments was held by non-U.S. entities; the company intended to indefinitely reinvest undistributed foreign earnings.
Outlook, risks and unusual items
- The company does not provide financial guidance, and its stated policy is not to give guidance on anticipated future financial performance. Management warned that quarterly comparisons may not indicate future performance because large transactions, sales timing, revenue mix and relatively fixed costs can make results volatile.
- Key risks include intense competition in analytics and mobile software, dependence on its core analytics products and related services, long and unpredictable sales cycles, customer shifts from perpetual licenses to subscriptions affecting revenue timing, foreign-exchange exposure, and cybersecurity, privacy and service-disruption risks. International revenue represented 40.0% of Q2 revenue and 39.7% for the first half.
- In January 2016, the company reorganized executive management, eliminating the Office of the President; two executives departed. It accrued approximately $3.4m for potential departure-related payments. Management described the reorganization as intended to streamline the business and support profitable growth.
- DataTern patent litigation remained unresolved. The company could not estimate a possible loss range and recorded no liability. It also had $3.8m of unrecognized tax benefits, including accrued interest, and was under U.S. tax examination for 2011 and 2012.
- No foreign currency forward contracts were outstanding at June 30, 2016. The company reported foreign-currency transaction gains in Q2, versus losses in the comparable 2015 quarter. It cautioned that a 10% unfavorable exchange-rate change would have reduced first-half 2016 revenue by 3.7%.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. The company was evaluating new accounting standards for revenue recognition and leases; it expected to adopt the share-based compensation standard on January 1, 2017.
Most important facts for investors to verify
- Whether the decline in domestic license sales and consulting activity persists, and whether subscription growth can offset it.
- How large-deal volume, sales-cycle timing and customer adoption of cloud subscriptions affect revenue and cash generation.
- The sustainability of operating margins and operating cash flow, particularly given higher R&D expense and no software-cost capitalization in 2016.
- The timing and collectability of deferred revenue, and the liquidity and tax implications of cash held outside the United States.
- Developments in the DataTern litigation, U.S. tax examination and other tax exposures; potential losses are not quantified clearly in the filing.