MicroStrategy Incorporated — Q2 2018 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2018. MicroStrategy provides enterprise analytics and mobility software, cloud subscriptions, product support, consulting, and education services. Prior-year comparisons reflect retrospective adoption of ASC 606. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $120.6 | $119.2 | $243.6 | $241.5 |
| Gross profit / margin | $95.6 / 79.2% | $94.8 / 79.6% | $193.3 / 79.4% | $193.9 / 80.3% |
| Operating income (loss) / margin | $(1.8) / (1.5)% | $14.1 / 11.8% | $(1.1) / (0.4)% | $34.9 / 14.5% |
| Net income | $4.8 | $10.0 | $6.5 | $25.5 |
| Diluted EPS | $0.42 | $0.86 | $0.57 | $2.20 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $23.3 | $37.1 |
Q2 revenue rose 1.2% year over year; six-month revenue rose 0.9%. Q2 product-license revenue increased 8.8%, led by international sales, while subscription services fell 9.1%, product support grew 4.1%, and other services declined 10.4%. For the first half, product licenses and subscription services together fell 8.2%, while product support rose 4.8%.
Profitability weakened as operating expenses increased 20.5% in Q2 and 22.3% in the first half, substantially faster than revenue. Sales and marketing and R&D spending rose as the company expanded marketing and staffing and invested in products. Management also presented non-GAAP operating income excluding share-based compensation: $1.6 million for Q2 and $7.0 million for the first half, versus $17.9 million and $41.8 million, respectively, in the adjusted prior-year periods.
Liquidity, cash flow, and obligations
At June 30, cash and cash equivalents were $90.4 million and short-term investments were $609.2 million, totaling approximately $699.6 million; restricted cash was $1.0 million. Cash plus short-term investments increased from $675.2 million at year-end 2017. Current assets were $853.5 million against current liabilities of $236.6 million. No conventional borrowings are shown on the balance sheet; the filing reports operating-lease and other obligations.
First-half operating cash flow was $23.3 million, down from $37.1 million, reflecting lower net income and changes in non-cash items, partly offset by working-capital movements. Investing cash outflow was $353.3 million, primarily because purchases of short-term investments exceeded redemptions; this largely reflects cash being placed in investments, not operating expenditure. Financing cash inflow was $2.5 million. Deferred revenue and advance payments totaled $181.2 million, of which $175.4 million was expected to be recognized within 12 months.
Contractual obligations included $178.3 million of operating-lease payments and $32.5 million of remaining transition tax payments. The Northern Virginia headquarters lease was extended through December 2030. Management stated that available cash, investments, and expected cash generation should cover working capital, capital expenditures, and contractual obligations for at least 12 months.
Changes, outlook, and risks
- Operating income moved from profit to loss in both the quarter and first half; net income and EPS declined sharply year over year.
- Management expects sales and marketing spending to continue at the current pace and R&D investment to increase in future periods. The company says it does not provide guidance on anticipated financial performance.
- ASC 606 adoption changed revenue timing for term licenses and OEM sales and required capitalization of certain sales commissions. Prior periods were restated; the filing reports a $13.0 million increase to 2016 beginning retained earnings from adoption.
- The 2018 six-month effective tax rate was 7.7%, versus 21.4% in 2017, reflecting the lower U.S. corporate tax rate and expected mix of domestic and foreign income. Accounting for parts of the Tax Act remained provisional; the company expected to refine estimates during 2018.
- Key risks include intense analytics-market competition, dependence on MicroStrategy 10 and the installed customer base, long and variable sales cycles, foreign-currency exposure, privacy and cybersecurity obligations, and the possibility that expenses cannot be reduced quickly if revenue falls. Management cited normal-course legal proceedings but did not expect them to have a material adverse effect.
Important facts for investors to verify
- Whether product-license growth, particularly internationally, can offset domestic license weakness and declining subscription-service revenue.
- Whether higher sales and R&D spending translates into revenue growth and improved operating profitability.
- How much of reported liquidity is held by non-U.S. entities: $399.5 million of cash and short-term investments, versus $300.1 million at U.S. entities; management intends to indefinitely reinvest undistributed foreign earnings.
- Final Tax Act calculations and the timing of the remaining transition-tax installments; the filing states $32.5 million remained unpaid at quarter-end.
- The future balance-sheet impact of lease-accounting adoption, scheduled for January 1, 2019, and the continued distinction between GAAP results and measures excluding recurring share-based compensation.