MicroStrategy Incorporated — Form 10-Q for Q2 2014
Entity note: The supplied filing is for MicroStrategy Incorporated, not Strategy Inc. It covers the quarter and six months ended June 30, 2014; financial statements are unaudited except the December 31, 2013 balance sheet. Amounts below are in U.S. dollars.
Business context and reporting period
MicroStrategy provides enterprise analytics software, mobile and cloud offerings, and related services. Analytics, mobile, cloud, product support, and consulting generated the core business; its newer loyalty and identity platforms had not generated significant revenue. The company reports one operating segment.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $141.9 million | $137.9 million | $279.8 million | $268.1 million |
| Gross profit / margin | $106.2 million / 74.9% | $101.5 million / 73.6% | $211.1 million / 75.5% | $195.7 million / 73.0% |
| Operating income (loss) | $(12.7) million | $(2.0) million | $(21.1) million | $(10.7) million |
| Net income (loss) | $(10.3) million | $(1.6) million | $(16.8) million | $50.0 million |
| Basic and diluted EPS | $(0.91) | $(0.14) | $(1.49) | $4.43 |
- Q2 revenue rose 2.9% year over year; first-half revenue rose 4.4%. Product support and subscription services grew, while other services declined.
- Q2 operating expenses increased 14.9% to $119.0 million, outpacing revenue growth. Sales and marketing rose 15.7% and R&D rose 35.2%; G&A declined 5.0%.
- First-half operating cash flow from continuing operations was $14.4 million, versus cash use of $16.0 million a year earlier. Investing activities used $122.7 million, chiefly reflecting purchases of short-term investments; financing activities used $0.3 million.
- Cash and cash equivalents were $111.9 million and short-term investments $255.7 million at June 30, totaling $367.5 million. Current assets were $466.5 million and current liabilities $230.9 million. Cash plus short-term investments decreased from $357.4 million at year-end, although cash alone fell from $220.2 million as funds shifted into investments.
- Total liabilities were $270.2 million; the filing reports no material off-balance-sheet arrangements. Capital leases and other financing arrangements totaled $3.6 million in future minimum payments. Operating lease commitments were $142.2 million.
Material changes versus comparable periods
- Q2 revenue growth was led by product support (+9.0%) and product licenses and subscription services (+5.7%); other services fell 11.3%. Subscription services revenue more than doubled, from $2.8 million to $5.9 million, while product license revenue fell 4.0%.
- Higher sales and marketing and R&D investment drove a larger operating loss despite improved gross profit and margin. Headcount increased notably in sales and marketing and R&D.
- First-half 2014 net loss contrasts with 2013 net income, which included a $57.4 million after-tax gain on the 2013 Angel.com sale. Continuing-operations losses widened from $6.7 million to $16.8 million for the first half.
- Share-based compensation was $4.7 million in the first half of 2014, versus none in 2013; $54.1 million of additional expense remained to be recognized over a weighted-average 3.6 years.
Outlook, commentary, risks, and unusual items
- In July 2014, the company said it was developing a workforce and spending restructuring plan. It expected substantial implementation in Q3 and the remainder in Q4 2014, annualized pretax savings of at least $40 million, and charges of approximately $3 million to $5 million.
- Management said 2014 investment and related expenses were expected to exceed 2013 levels, and warned that insufficient revenue or an inability to adjust costs could lead to continued operating losses. The company’s stated policy was not to provide financial guidance.
- Approximately $196.4 million of deferred revenue was expected to be recognized over the next 12 months, subject to service performance and other recognition criteria. Additional customer purchase commitments through 2019 totaled approximately $123 million and were not included in deferred revenue.
- Key risks include intense analytics competition, variable timing and size of license transactions, long sales cycles, fixed costs, international and foreign-exchange exposure, and execution of cloud, mobile, loyalty, and identity initiatives. Loyalty and identity offerings had not generated significant revenue.
- Patent matters remained unresolved: DataTern litigation and related customer/reseller indemnification requests had no estimable loss; a Vasudevan appeal was pending, with oral argument scheduled for September 12, 2014. No related estimated liabilities were accrued.
- The company recorded $1.6 million of other expense in the first half, including foreign-currency transaction and forward-contract losses and an internal-use software impairment. It also adopted a new income-tax presentation standard; the impact was not material. A new revenue recognition standard was issued, and the company was evaluating its effects.
Most important facts for investors to verify
- Whether the restructuring achieved the stated savings, on the expected schedule, and at the estimated charge.
- Whether recurring support and subscription growth can offset declining license and services revenue and higher operating costs.
- Cash generation and the composition and accessibility of cash and investments, including the substantial non-U.S. balance and potential repatriation tax implications.
- Recognition timing and collectability of deferred revenue and customer commitments, and any changes in large-deal activity.
- Developments in the patent cases, tax examinations, deferred-tax-asset realizability, and the eventual impact of the new revenue standard.