Business context and reporting period
MicroStrategy Incorporated (now identified in the request as Strategy Inc) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company sells enterprise analytics software through product licenses and cloud subscriptions, along with product support, consulting, and education services. It reports one operating segment.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $111.4 | $115.4 |
| Gross profit / margin | $86.9 / 78.0% | $89.2 / 77.3% |
| Operating income (loss) | $(0.1) | $(10.4) |
| Net income (loss) | $0.7 | $(7.9) |
| Diluted EPS | $0.07 | $(0.77) |
| Operating cash flow | $29.1 | $26.5 |
| Cash and cash equivalents | $429.3 | $456.7 at Dec. 31, 2019 |
| Short-term investments | $109.9 | $108.9 at Dec. 31, 2019 |
| Total assets / stockholders’ equity | $849.3 / $461.4 | $916.6 / $508.6 at Dec. 31, 2019 |
Revenue declined 3.4% year over year. Product licenses fell 31.2% to $12.6 million; subscription services rose 11.5% to $8.0 million; product support declined 0.4% to $71.2 million; and other services rose 6.7% to $19.7 million. Operating expenses were $87.0 million, down 12.7%, including sales and marketing of $39.5 million, R&D of $26.1 million, and G&A of $21.3 million. The operating margin was approximately -0.1%, compared with -9.0%; net margin was approximately 0.6%, compared with -6.9%.
Operating cash flow increased to $29.1 million. Investing activities used $0.6 million, while financing activities used $50.4 million, primarily for $50.7 million of share repurchases. Cash, cash equivalents, and restricted cash decreased $25.8 million during the quarter, to $432.0 million. Cash plus short-term investments totaled $539.2 million at quarter end; the company also reported $2.7 million of restricted cash.
The filing does not present a conventional borrowings or debt balance in the balance sheet. It does report operating lease liabilities, including $100.3 million of long-term lease liabilities, and $28.9 million of unpaid U.S. Transition Tax. Current liabilities were $252.6 million and current assets were $693.1 million. Management said available cash, investments, and expected cash generation should cover working capital, anticipated capital expenditures, and contractual obligations for at least 12 months.
Material changes versus the prior comparable period
- Revenue fell $3.9 million, primarily reflecting lower product license sales; management attributed first-quarter license delays in part to customers shifting priorities because of COVID-19.
- Lower operating expenses, especially sales and marketing, helped reduce the operating loss from $10.4 million to $0.1 million and move the company to modest net income.
- Operating cash flow rose $2.6 million. The cash decline also reflected share repurchases and foreign-exchange effects.
- The company repurchased 354,633 Class A shares for $50.7 million at an average $143.10 per share. At quarter end, $220.3 million remained authorized for repurchases under the program.
- Effective January 1, 2020, the company adopted the new credit-loss accounting standard; it said adoption had no material financial impact.
Outlook, risks, contingencies, and unusual items
The filing provides no formal financial guidance; the company says it does not give guidance on anticipated future financial performance. Management expected sales and marketing expenses to remain below prior-year levels because of reduced travel and in-person events. It cautioned that COVID-19 could further delay license deals, reduce consulting activity, affect support renewals or payment terms, and impair customer payment capacity. The company was shifting employees to remote work and moving sales and marketing events online.
A Brazilian subsidiary matter is a significant contingency. The company said it believed a loss was probable, but the amount or range was not reasonably estimable. Brazilian authorities froze subsidiary bank accounts up to BRL 10.0 million (about $2.3 million), recorded as restricted cash. The company said it was not itself a subject of the investigation and was not aware of allegations that it or its former employee paid government officials. Management said the matter could materially affect earnings when a liability is accrued, but did not expect a material effect on financial position.
Other notable items include a 70.4% effective tax rate in Q1 2020, attributed mainly to discrete items and the expected mix of U.S. and foreign income; the resulting tax provision was $1.6 million. The company also reported $2.6 million in unrecognized tax benefits. No material off-balance-sheet arrangements were reported. After quarter end, CFO Lisa Mayr resigned; COO Phong Le was appointed CFO effective immediately. The company disclosed a $275,000 severance payment and retention of previously paid bonuses for Ms. Mayr.
Key risks include uncertain COVID-19 effects, volatile and deal-dependent license revenue, intense analytics-market competition, foreign-currency exposure, international compliance and tax risks, and the Brazilian matter. The company also disclosed that CEO Michael Saylor controlled approximately 71.6% of total voting power as of April 20, 2020.
Important facts for investors to verify
- Whether COVID-19-related delays and customer spending reductions persist, and how they affect license sales, consulting, support renewals, and collections.
- Developments and potential financial exposure in the Brazilian investigation; no loss estimate was available in the filing.
- Cash generation and liquidity after substantial share repurchases, including the remaining $220.3 million authorization.
- Revenue mix and underlying trends in license, subscription, and support businesses; deferred revenue was $188.6 million, but the filing cautions it is not necessarily indicative of future-period revenue.
- Effects of the CFO transition, tax obligations, lease commitments, and concentrated voting control on governance and financial flexibility.