MicroStrategy Incorporated (now identified in the request as Strategy Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. The filing is by MicroStrategy Incorporated, not Strategy Inc. Financial statements are unaudited except the December 31, 2016 balance sheet. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
The company sells enterprise analytics and mobility software through licenses, cloud subscriptions, support, and services. Analytics and related support/services generated most revenue; Usher had no significant revenue in either quarter. The company reports one operating segment.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $120.6 | $119.0 | Up 1.3% |
| Gross profit / margin | $97.4 / 80.8% | $96.2 / 80.8% | Gross profit up 1.3% |
| Operating income / margin | $19.4 / 16.0% | $19.8 / 16.6% | Down 2.2% |
| Net income | $14.9 | $14.3 | Up 4.2% |
| Diluted EPS | $1.28 | $1.24 | Up 3.2% |
| Operating cash flow | $26.5 | $50.8 | Down 47.8% |
- License revenue declined 6.2% to $21.0 million; subscription services rose 5.7% to $7.8 million. Product support increased 2.9% to $70.5 million, and other services rose 2.6% to $21.3 million.
- Sales and marketing expense increased 7.7% to $39.4 million; research and development increased 4.8% to $18.4 million. General and administrative expense fell 8.8% to $20.3 million, primarily reflecting a prior-year executive departure accrual that was later reversed, partly offset by higher share-based compensation.
- Income tax provision was $3.5 million, at an 18.9% effective rate, compared with $4.3 million and 23.0% in Q1 2016. The filing attributes the lower rate chiefly to the expected U.S./foreign earnings mix and discrete tax benefits.
Balance sheet, liquidity, and cash flow
- At March 31, cash and cash equivalents were $358.7 million and short-term investments were $259.8 million; total current assets were $704.5 million against current liabilities of $186.0 million. The company said existing liquidity and expected cash generation should cover working capital, capital expenditures, and contractual obligations for at least 12 months.
- Total assets were $786.5 million, total liabilities $214.5 million, and stockholders’ equity $572.0 million. No conventional borrowings are listed on the balance sheet; capital leases and other financing arrangements require $2.2 million of future minimum payments. Operating lease commitments total $80.4 million, and combined lease/financing commitments are $82.6 million.
- Cash, cash equivalents, and restricted cash decreased $43.2 million during the quarter to $359.5 million. Investing activities used $73.1 million, principally reflecting net purchases of short-term investments; operating cash generation fell mainly because changes in operating assets and liabilities provided less cash than in the prior year.
- Net deferred revenue and advance payments were $144.7 million, up from $119.5 million at year-end 2016. Gross deferred revenue was $223.4 million, offset by $78.7 million of unpaid deferred revenue. Management expected to recognize approximately $206.6 million over the following 12 months, while cautioning that deferred revenue is not necessarily indicative of future-period revenue.
Material changes, outlook, risks, and unusual items
- Revenue growth was modest and driven by support and services, while licenses declined. Transactions with more than $0.5 million in recognized license revenue fell to five from eight; management cited fewer and smaller large license deals, particularly internationally.
- Management does not provide financial guidance and cautions that quarterly comparisons may not indicate future performance. It identifies competition, long sales cycles, large-deal timing, customer spending, execution of new offerings, and fixed operating costs as factors that can make results volatile.
- The company planned to adopt the new revenue standard on January 1, 2018, expecting full retrospective adoption, subject to readiness. Initial assessments indicated earlier revenue recognition for some term licenses and reseller/OEM sales, and capitalization of certain sales commissions; the impact remained under evaluation and could change.
- Foreign currency remains a risk: international revenue was 39.1% of the quarter’s total. Management estimated that a 10% unfavorable exchange-rate change in average rates would have reduced Q1 2017 revenue by 3.6%; actual currency movements reduced revenue by 0.9% year over year.
- A patent-infringement case brought by DataTern remains unresolved following a February 2017 claim-construction ruling. The potential loss cannot currently be estimated, and no liability was accrued. Other ordinary-course litigation was not expected by management 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 or a significant related tax payment during 2017. The company intends to indefinitely reinvest most undistributed foreign earnings; repatriation could create additional U.S. tax.
- The company adopted accounting guidance on share-based payments and restricted cash in 2017. Management reported effective disclosure controls and no material effect on internal controls from its substantially completed finance/accounting reorganization.
- Class B shares carry ten votes per share. As of April 18, 2017, CEO Michael Saylor beneficially owned 67.6% of total voting power, creating concentrated control. No shares were repurchased in Q1 under the authorized repurchase program.
Investor verification priorities
- Confirm the issuer identity and corporate-name history: this 2017 filing is for MicroStrategy Incorporated.
- Review the Q1 cash-flow decline and the split between operating cash, short-term investments, and restricted cash; distinguish investment purchases from operating cash consumption.
- Track license revenue, large-deal activity, support growth, and deferred-revenue conversion in subsequent quarters.
- Assess the eventual financial-statement and comparability effects of adopting the new revenue-recognition standard.
- Monitor the DataTern litigation and any change in the company’s ability to estimate or accrue a potential loss.
- Consider foreign-earnings repatriation and tax exposures, currency sensitivity, lease commitments, and the governance implications of concentrated voting control.