MicroStrategy Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed April 29, 2014. The filing is for MicroStrategy Incorporated, not a company identified in the filing as Strategy Inc. Financial figures below are in U.S. dollars; income and cash-flow figures are for the quarter, while balance-sheet figures are as of the stated dates.
Business context
MicroStrategy develops and sells enterprise analytics software, mobile and cloud offerings, and related support and services. Product support and services remained major revenue sources; the newer Loyalty and Identity platforms generated no significant revenue. The company operates as one segment. Angel.com was sold in March 2013 and is reported as discontinued operations.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $137.9 million | $130.2 million |
| Gross profit / gross margin | $104.9 million / 76.1% | $94.3 million / 72.4% |
| Operating expenses | $113.2 million | $102.9 million |
| Loss from continuing operations | $8.3 million | $8.7 million |
| Net income (loss) | $(6.5) million | $51.6 million |
| Cash from operating activities | $10.8 million | $(10.2) million |
- Revenue grew 5.9% year over year. Product licenses and subscription services rose 4.8% to $32.3 million, including subscription revenue growth of 80.9% to $4.4 million. Product support increased 9.4% to $71.5 million; other services were nearly flat at $34.1 million.
- Gross margin improved about 3.6 percentage points, as cost of revenue fell 8.1% despite higher revenue. Operating expenses rose 10.0%, led by sales and marketing (+16.1%) and research and development (+8.7%). Operating loss narrowed modestly to $8.3 million.
- Q1 2014 net loss contrasts with 2013 net income, which included a $57.4 million after-tax gain from the Angel.com sale. Continuing-operations losses were comparable; Q1 2014 also included $1.1 million of other expense, mainly foreign-currency losses.
- Cash and cash equivalents were $214.8 million and short-term investments $151.1 million at March 31, totaling $365.8 million, excluding restricted cash. Total current assets were $462.4 million versus current liabilities of $228.7 million (current ratio about 2.0). No material conventional borrowings were reported; capital leases and other financing arrangements totaled $3.7 million in future contractual payments.
- Operating cash flow improved by $21.0 million year over year, with working-capital movements including deferred revenue growth contributing. Investing cash flow was $(16.1) million, principally reflecting purchases and redemptions of short-term investments; cash and cash equivalents declined $5.4 million during the quarter.
Changes, outlook and risks
- Management said 2014 investment and related expenses were expected to exceed 2013 levels, following increased hiring and spending on research and development, sales and marketing, cloud, mobile, loyalty and identity initiatives. It warned that insufficient revenue growth or delayed expense reductions could prolong operating losses. The company did not provide quantitative revenue or earnings guidance and stated that it does not give financial-performance guidance.
- Management said existing cash, investments and anticipated cash generation should cover working capital, capital expenditures and contractual obligations for at least 12 months. It expected to recognize approximately $207.2 million of deferred revenue over the following 12 months, while cautioning that timing depends on service performance and is not a reliable forecast of future-period revenue. Additional customer purchase commitments through 2019 totaled approximately $126.3 million and were not included in deferred revenue.
- Operating leases and financing arrangements required $124.3 million of future minimum payments as of March 31; this excludes a subsequent April lease expansion with $12.4 million of minimum rent payments through 2020. The company also reported foreign-currency exposure: international operations represented 41.5% of continuing revenue, and a hypothetical 10% unfavorable exchange-rate move would have reduced Q1 revenue by 3.8%.
- Patent litigation remained unresolved. The DataTern appeal and related customer/reseller indemnification requests had no estimable loss range; the Vasudevan case had been dismissed and patents found invalid, but an appeal was pending. No liability was accrued for these matters. Management did not expect other ordinary-course litigation to materially affect results.
- Additional risks include intense analytics competition, dependence on the analytics platform, volatile large-deal timing and long sales cycles, execution and monetization of newer offerings, tax and deferred-tax-asset uncertainty, data privacy and cybersecurity, foreign exchange, and concentrated voting control. Management reported disclosure controls effective and no material quarterly change in internal controls.
Important facts for investors to verify
- Whether recurring product-support and subscription growth can continue to offset weak or uneven license revenue and support sustained total revenue growth.
- Whether higher sales, marketing and R&D spending generates enough revenue to reduce continuing-operations losses; monitor share-based compensation, expected at about $1.6 million per quarter over a weighted-average 3.3-year vesting period.
- Whether operating cash generation is repeatable, given the quarter’s working-capital effects, and how cash held by non-U.S. entities affects accessible liquidity and potential repatriation taxes.
- Developments in the DataTern and Vasudevan appeals, indemnification exposure, tax examinations and unrecognized tax benefits ($1.6 million recorded at quarter-end).
- Lease commitments, including the subsequent $12.4 million expansion, and whether customer commitments and deferred revenue convert into recognized revenue as expected.