MicroStrategy Incorporated — Q3 2014 Form 10-Q
The supplied filing is for MicroStrategy Incorporated, for the quarter and nine months ended September 30, 2014; it does not identify the registrant as Strategy Inc. Interim financial statements are unaudited, except the December 31, 2013 balance sheet derived from audited statements. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $151.2 | $141.9 | $431.0 | $410.0 |
| Gross profit / margin | $116.2 / 76.9% | $108.7 / 76.6% | $327.4 / 76.0% | $304.4 / 74.2% |
| Operating income (loss) from continuing operations | $(7.0) | $11.6 | $(28.1) | $0.9 |
| Net income (loss) | $(0.8) | $17.1 | $(17.7) | $67.2 |
| Diluted earnings (loss) per share | $(0.07) | $1.52 | $(1.56) | $5.95 |
- Q3 revenue rose 6.5%; nine-month revenue rose 5.1%. Product support and subscription services grew, while nine-month product license revenue and other services declined.
- Operating costs increased faster than revenue. Q3 and nine-month operating expenses were $123.2 million and $355.5 million, respectively, including $11.6 million of restructuring costs in each 2014 period.
- Nine-month cash from operating activities was $16.3 million, versus $15.3 million. Investing activities used $96.4 million, largely reflecting purchases and maturities of short-term investments; financing activities used $2.0 million.
- At September 30, cash and cash equivalents were $136.0 million and short-term investments were $218.6 million, totaling $354.6 million; restricted cash was $1.6 million. Current assets were $464.3 million and current liabilities $222.5 million. Cash and cash equivalents fell from $220.2 million at year-end 2013, while short-term investments increased from $137.2 million.
- Total liabilities were $260.7 million and stockholders’ equity $299.1 million. The filing does not report conventional borrowings; it discloses $1.9 million in capital lease and other financing obligations and $125.7 million in future minimum operating lease payments.
Material changes and management commentary
- The September 2014 restructuring plan targets approximately 800 job cuts worldwide. About 270 had been terminated by quarter-end; approximately 530 further reductions were expected by year-end. The company recorded $11.6 million of charges and expected another $6.8 million in Q4, with total plan costs estimated at $18.4 million.
- Management estimated annualized pretax savings of approximately $73.4 million from the plan, plus additional savings from other planned cost initiatives. Savings and implementation are forward-looking and not assured.
- Q3 product license and subscription revenue increased 7.7%, including subscription revenue growth of 78.0%; product support grew 5.3%. Domestic product license revenue fell 22.4% in Q3, offset by 56.5% growth internationally. The identity platform had not generated significant revenue.
- Nine-month 2013 results included a $57.4 million after-tax gain from the Angel.com sale; there was no corresponding discontinued-operations income in 2014. This makes the reported net-income comparison especially significant.
- The company stated it does not provide guidance on anticipated future financial performance. Management said existing cash, investments, and expected cash generation should cover working capital, capital expenditures, restructuring and contractual obligations for at least 12 months.
Risks, contingencies and other notable items
- Key risks include ongoing operating losses, uncertain revenue timing and large transactions, intense analytics competition, execution risks from workforce reductions, and the possibility that expected cost savings or profitability will not be achieved. The company cautioned that failure to achieve profitability could require a larger deferred-tax valuation allowance.
- Two patent matters remained unresolved: DataTern’s appeal was scheduled for argument in November 2014, and the company was awaiting a Federal Circuit decision in the Vasudevan appeal. Outcomes and possible losses were not estimable; no liability was accrued. Management did not expect other ordinary-course proceedings to have a material adverse effect.
- Foreign exchange is a material exposure. International revenue represented 40.7% of Q3 and 41.3% of nine-month 2014 revenue. The company used non-hedge-accounted currency forwards; their reported fair value was a net asset of approximately $0.9 million.
- Approximately $132.8 million of future customer purchase commitments through 2019 were disclosed, separate from deferred revenue; realization depends on customer commitments and company performance. Management expected to recognize approximately $176.5 million of deferred revenue and advance payments over the next 12 months, while cautioning that timing is uncertain.
- Operating lease commitments totaled $125.7 million. The company reported no material off-balance-sheet arrangements. It had $2.1 million of gross unrecognized tax benefits, including accrued interest, and was under U.S. and German tax examinations.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported. The company made no share repurchases in the quarter.
Important facts for investors to verify
- Whether restructuring is completed on schedule and delivers the stated $73.4 million annualized savings, and how actual costs compare with the $18.4 million estimate.
- Whether revenue growth—particularly subscriptions, product support and international licenses—can offset domestic license weakness and elevated operating expenses.
- Cash generation, the composition and availability of cash and investments across U.S. and foreign entities, and the effect of any repatriation taxes.
- Developments and potential exposure in the DataTern and Vasudevan patent appeals, and the status of tax examinations and deferred-tax-asset realizability.
- That 2013 comparative net income included the Angel.com disposal gain, and that the filing provides no company-issued earnings guidance.