MicroStrategy Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited, except the December 31, 2012 balance sheet. The filing reports the company as MicroStrategy Incorporated.
Business context and results
MicroStrategy’s continuing business is business intelligence software and services, including its BI, mobile, and cloud platforms. On March 15, 2013, it sold Angel.com and classified that business as discontinued operations.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Continuing-operations revenue | $130.2 million | $138.3 million |
| Product license revenue | $28.4 million | $37.5 million |
| Product support and other services revenue | $101.8 million | $100.9 million |
| Gross profit / gross margin | $94.3 million / 72.4% | $102.6 million / 74.2% |
| Operating income (loss) from continuing operations | $(8.7) million | $1.6 million |
| Continuing-operations net income (loss) | $(5.2) million | $1.1 million |
| Net income, including discontinued operations | $51.6 million | $0.3 million |
| Basic and diluted EPS | $4.57 | $0.03 basic; $0.02 diluted |
Cash flow, liquidity, and balance sheet
- Cash and cash equivalents were $330.2 million at March 31, 2013, up from $223.0 million at year-end 2012. Cash increased $105.8 million during the quarter, including $100.7 million of net cash proceeds from the Angel.com sale.
- Continuing-operations operating cash flow was $(9.5) million, compared with $22.0 million a year earlier. Total operating cash flow, including discontinued operations, was $(10.2) million versus $20.8 million.
- Continuing-operations investing cash flow was $(5.6) million; financing cash flow was $23.8 million, including $23.6 million of excess tax benefits related to share-based compensation.
- Total assets were $546.1 million and total liabilities $271.3 million. The balance sheet lists no borrowings; capital lease obligations were $1.9 million. Current assets were $431.4 million and current liabilities $216.6 million.
- Net current and non-current deferred revenue and advance payments totaled $128.1 million. Management expects to recognize approximately $182.0 million of deferred revenue and advance payments over the next 12 months, but cautions that this balance is not necessarily indicative of future-period revenue.
Changes versus the prior comparable period
- Revenue fell 5.9%, chiefly because product license revenue declined 24.3%; services revenue increased 0.9%. License revenue fell in both domestic and international markets.
- Gross profit declined $8.3 million. Operating expenses rose 1.9% to $102.9 million: research and development increased 16.4% and general and administrative expenses increased 11.6%, while sales and marketing decreased 8.0%.
- Reported net income rose sharply because the quarter included a $57.4 million after-tax gain on the Angel.com sale. Excluding discontinued operations, the company recorded a continuing-operations loss.
- Subscription services revenue increased to $2.5 million from $0.4 million, while consulting revenue declined 9.0%. The filing attributes the consulting decline primarily to fewer international billable hours.
Outlook, commentary, and risks
- The company does not provide financial guidance, citing a policy not to give guidance on anticipated future performance. Management expects 2013 research and development investment and related expenses to exceed 2012 levels; it does not expect significant near-term increases in sales and marketing or general and administrative headcount.
- Management said existing cash and expected cash generation should fund working capital, anticipated capital expenditures, and contractual obligations for at least 12 months; it does not expect to need borrowing to finance operations. Net proceeds from the Angel.com sale are for general corporate purposes.
- Key risks include volatile quarterly results, long and variable sales cycles, reliance on license transactions and the BI platform, intense competition, execution and monetization of newer offerings, and exposure to international operations and currency movements. The company reported no significant revenue from MicroStrategy Express, Wisdom, Alert, or Usher in the quarter.
- International revenue represented 40.6% of continuing-operations revenue. The company does not hedge foreign-currency exposure; it estimated that an unfavorable 10% exchange-rate movement would have reduced Q1 revenue by 3.6%.
- Legal contingencies include a DataTern patent case in which the company obtained summary judgment and DataTern appealed, as well as a Vasudevan patent case scheduled for trial in November 2013. Outcomes and possible losses were not estimable, and no liabilities were accrued for these matters. Management does not expect other ordinary-course proceedings to materially harm results.
- Unrecognized tax benefits were $17.6 million; the company was under tax examination in Spain. Management expected the unrecognized-tax-benefit liability to decrease by about $15.4 million over the following 12 months, primarily due to statute expirations.
- The board extended the $800 million share-repurchase program through April 29, 2018. No shares were repurchased under the program in Q1. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether license revenue and total revenue stabilize, and whether the decline in large license transactions persists.
- Underlying operating performance and cash generation apart from the Angel.com gain and stock-compensation tax benefit.
- Progress in growing cloud and subscription revenue, including its costs and contribution to margins.
- Final Angel.com sale adjustments, tax examination developments, and outcomes of the pending patent matters and appeal.
- Use of sale proceeds and any future share repurchases, alongside the company’s substantial lease commitments and foreign-currency exposure.