Business context and reporting period
This is MicroStrategy Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The filing describes its business as enterprise analytics and mobility software, sold through licenses, subscriptions, support, and services. The company is reported as one operating segment. The filing registrant is MicroStrategy Incorporated, notwithstanding the request metadata’s “Strategy Inc” label.
Key financial metrics
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $120.6 | $123.1 | $241.2 | $242.2 |
| Gross profit / margin | $96.2 / 79.8% | $99.0 / 80.4% | $193.7 / 80.3% | $195.2 / 80.6% |
| Operating income / margin | $15.7 / 13.0% | $21.1 / 17.1% | $35.0 / 14.5% | $40.9 / 16.9% |
| Net income | $11.1 | $18.9 | $25.9 | $33.2 |
| Diluted EPS | $0.96 | $1.64 | $2.24 | $2.88 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $37.1 | $66.5 |
At June 30, 2017, cash and cash equivalents were $379.7 million, short-term investments $252.7 million, and restricted cash $0.8 million. Current assets were $715.2 million against current liabilities of $181.6 million. Total liabilities were $207.4 million; the balance sheet shows no conventional borrowings. Future minimum capital-lease and other financing payments totaled $1.1 million. Stockholders’ equity was $589.7 million.
Material changes versus prior comparable periods
- Q2 revenue declined 2.1%; first-half revenue was essentially flat, down 0.4%. Q2 product-license revenue fell 18.5%, while subscription services rose 7.2% and other services rose 9.4%. First-half product-license revenue declined 12.5%; subscription services and other services grew 6.5% and 6.0%, respectively.
- Q2 operating income declined 25.6% and net income 41.3%; first-half operating income declined 14.3% and net income 21.7%. Higher sales and marketing costs contributed: up 9.9% in Q2 and 8.8% for the half. Management attributed the Q2 license-revenue decline in part to fewer mid-sized transactions.
- First-half operating cash flow decreased 44.2% to $37.1 million, reflecting lower net income and less favorable changes in operating assets and liabilities. Investing cash outflow was $66.2 million, principally reflecting net purchases of short-term investments; cash, cash equivalents, and restricted cash fell $22.2 million from year-end.
- Cash and short-term investments increased to $632.4 million from $589.4 million at December 31, 2016, while total liabilities decreased to $207.4 million from $216.1 million. Current deferred revenue and advance payments increased to $123.1 million from $105.5 million.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance was provided; the company stated it does not give guidance on anticipated financial performance. Management expects higher sales and marketing spending and increased investment in technology products and personnel in future periods, and cautioned that quarterly results may fluctuate.
- The company expects to recognize approximately $193.7 million of deferred revenue and advance payments over the next 12 months, but cautioned that timing depends on service obligations and is not necessarily indicative of future-period revenue.
- Management planned to adopt the new revenue-recognition standard on January 1, 2018, expecting full retrospective adoption, subject to readiness. It anticipated earlier recognition for some term-license and reseller/OEM sales and capitalization of certain sales commissions; the overall financial impact remained under evaluation. Lease-accounting and intra-entity tax standards were also pending evaluation.
- Key risks include intense competition, reliance on a core product suite, long and variable sales cycles, foreign-currency exposure, customer and retail-sector spending, cloud-service and cybersecurity risks, and dependence on channel partners. International operations generated 38.4% of Q2 revenue and 38.7% for the first half. A 10% unfavorable average exchange-rate movement would have reduced first-half revenue by 3.6%, according to the filing.
- The DataTern patent case remained unresolved after remand; the company could not estimate a possible loss and recorded no liability. It also disclosed indemnification obligations whose maximum amount could not be reasonably estimated, though it did not expect material future obligations. Management did not expect other routine legal proceedings to have a material adverse effect.
- Unrecognized tax benefits were $3.6 million, including accrued interest; management did not expect a material change over the next 12 months. The company intends to reinvest undistributed foreign earnings and noted that repatriation could create U.S. tax. It reported no material off-balance-sheet arrangements and no share repurchases in the quarter.
- The filing says disclosure controls were effective at a reasonable-assurance level. It also reports completion of a worldwide finance-function reorganization and implementation of a professional-services automation system, with no material adverse effect on internal control over financial reporting identified.
Important facts for investors to verify
- Whether the decline in product-license revenue and earnings reflects timing and deal mix or a sustained change in demand; monitor large-license transactions and the subscription business.
- Whether increased sales and marketing and product investment can support growth without further margin deterioration.
- The cash-flow decline, deferred-revenue trends, and the distinction between gross deferred revenue ($209.7 million) and net deferred revenue ($133.8 million).
- The quantified effects and adoption execution for the 2018 revenue-recognition standard, particularly the timing shifts in license revenue and commission capitalization.
- Developments in the DataTern litigation, foreign-currency exposure, tax positions, and the potential tax consequences of repatriating foreign funds.