MicroStrategy Incorporated — Q2 2013 Form 10-Q
Business context and reporting period. This filing covers the quarter and six months ended June 30, 2013. MicroStrategy provided business intelligence software and services, including analytics, mobile and cloud offerings. Its Analytics and Mobile platforms and related support services generated the vast majority of revenue. The filing identifies the registrant as MicroStrategy Incorporated.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $137.9 | $135.3 | $268.1 | $273.7 |
| Gross profit / margin | $101.5 / 73.6% | $101.3 / 74.8% | $195.7 / 73.0% | $203.9 / 74.5% |
| Operating income (loss) from continuing operations | $(2.0) | $10.5 | $(10.7) | $12.1 |
| Continuing operations net income (loss) | $(1.6) | $7.9 | $(6.7) | $9.0 |
| Net income (loss), including discontinued operations | $(1.6) | $7.3 | $50.0 | $7.5 |
| Basic EPS | $(0.14) | $0.67 | $4.43 | $0.70 |
- Revenue mix and changes: Q2 license revenue fell 4% year over year to $30.6 million, while support and other services rose 3.7% to $107.3 million. For the first half, total revenue declined 2.0%, with license revenue down 15% to $59.0 million and support and other services up 2.3% to $209.1 million. Subscription services revenue grew rapidly from a small base, to $2.8 million in Q2 and $5.2 million in the first half.
- Profitability: Higher operating expenses—up 14.0% in Q2 and 7.7% for the first half—more than offset gross profit. Research and development expense increased 27% in Q2 and 22% for the first half. The first-half reported net income principally reflects the $57.4 million after-tax gain on the Angel.com sale; continuing operations remained loss-making.
- Cash flow: First-half operating cash flow from continuing operations was $(16.0) million, versus $22.4 million provided in 2012. Total operating cash flow, including discontinued operations, was $(16.6) million. Total investing cash flow was $(40.6) million, including $129.0 million used to purchase short-term investments and $99.1 million of investing inflows from discontinued operations. Financing cash flow was $23.6 million, largely reflecting $23.6 million of excess tax benefits.
- Liquidity and obligations: At June 30, cash and cash equivalents were $188.7 million and short-term investments were $129.1 million, for $317.8 million combined, versus $223.0 million cash and no held-to-maturity short-term investments at year-end 2012. Current assets were $422.2 million and current liabilities $209.2 million. The company reported no material off-balance-sheet arrangements and stated it expected available liquidity and anticipated cash generation to cover working capital, capital expenditures and contractual obligations for at least 12 months. No conventional borrowings are shown on the balance sheet; lease and other financing payments totaled $5.8 million in future minimum contractual obligations.
Material changes, outlook, and risks
- MicroStrategy sold Angel.com on March 15, 2013 for approximately $111.2 million, receiving $100.7 million net of transaction costs. The sale generated a $57.4 million after-tax gain and shifted the business to discontinued operations. The company said the proceeds would support general corporate purposes and strategic focus on business intelligence.
- Management expected 2013 research and development investment and related expense to exceed 2012 levels. It did not provide financial guidance and noted that its policy was not to guide anticipated future financial performance. Management cautioned that quarterly results may vary materially and that continuing-operations losses could persist if revenue does not cover expenses.
- Management cited competitive pressure, bundled offerings from larger vendors, lengthy and variable sales cycles, reliance on the core Analytics platform, and the risk that a shift from perpetual licenses to subscriptions could change revenue timing. MicroStrategy Express, Loyalty and Identity offerings had not generated significant revenue in the periods reported.
- Other material exposures include foreign exchange and international operations, tax estimates and examinations, privacy and cybersecurity, intellectual property claims, and the company’s ability to recruit and retain personnel. The company used short-duration foreign currency forwards, not designated for hedge accounting, to manage certain exposures.
- Litigation: DataTern patent litigation had resulted in summary judgment against DataTern, which appealed; the company also disclosed reseller indemnification requests. In the separate Vasudevan patent case, summary judgment motions had been filed and trial was scheduled for November 2013. Outcomes and potential losses were not estimable, and no liabilities were accrued.
- Tax and governance: The company recorded a $2.3 million first-half tax benefit using the cut-off method because it could not reliably estimate its annual effective tax rate. It had $16.2 million of unrecognized tax benefits and was under tax examination in Spain. Class B holders had 71.1% of voting power as of July 23, 2013; CEO Michael Saylor beneficially owned 64.2% of total voting power.
Most important facts for investors to verify
- Whether license revenue stabilizes and the growth in support and subscription revenue offsets continued weakness in licenses.
- Whether expense growth, particularly in R&D, translates into stronger revenue and a return to profitability from continuing operations.
- Underlying cash generation: distinguish operating cash flow from continuing operations from the Angel.com sale proceeds, investment purchases and the $23.6 million tax benefit recorded in financing activities.
- The quality and timing of deferred revenue: $117.6 million net deferred revenue and advance payments, plus $111.4 million of customer purchase commitments not yet included in deferred revenue, remain subject to performance and customer conditions.
- Developments in the patent matters, tax examinations and unrecognized tax benefits, and any effects on financial results or liquidity.
- The allocation and accessibility of cash: $211.5 million of cash and short-term investments was held by non-U.S. entities, and repatriation could have tax consequences.