MicroStrategy Incorporated (now Strategy Inc.) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing reports the company’s enterprise analytics software, subscriptions, and related services business. Financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $110.6 | $117.7 | $222.0 | $233.1 |
| Gross profit | $86.6 | $92.4 | $173.5 | $181.6 |
| Gross margin | 78.3% | 78.5% | 78.1% | 77.9% |
| Operating income (loss) | $6.3 | $(4.8) | $6.3 | $(15.2) |
| Net income | $3.4 | $20.4 | $4.0 | $12.5 |
| Diluted EPS | $0.35 | $1.98 | $0.41 | $1.21 |
| Operating cash flow | Not separately stated | Not separately stated | $26.5 | $49.2 |
Revenue declined 6.1% in Q2 and 4.8% in the first half year over year. Product license revenue fell 26.4% in Q2 and 28.7% in the first half; subscription services revenue grew 12.9% and 12.2%, respectively. Product support revenue decreased 4.0% in Q2 and 2.2% for the first half. Operating expenses fell 17.4% in Q2 and 15.0% in the first half, with the largest reduction in sales and marketing.
Prior-year Q2 and first-half net income included a $29.8 million gain from selling the Voice.com domain name, partially offset by a related tax provision. Excluding the after-tax gain, the company reported non-GAAP net loss of $1.4 million for Q2 2019 and $9.3 million for the first half of 2019; these are company-presented non-GAAP measures.
Liquidity, cash flow, and obligations
At June 30, 2020, cash and cash equivalents were $420.9 million, restricted cash $1.2 million, and short-term investments $110.0 million. Current assets were $672.8 million and current liabilities $239.9 million. The filing lists no borrowings or other interest-bearing debt; it reports operating lease liabilities and other obligations. Operating lease liabilities were approximately $108.3 million in aggregate in the lease note. Total liabilities were $374.6 million.
For the first half, operating cash flow was $26.5 million, investing cash outflow $1.1 million, and financing cash outflow $60.0 million, primarily reflecting $61.9 million of share repurchases. Cash, cash equivalents, and restricted cash declined $35.7 million to $422.1 million. Operating cash flow was lower than the prior year, reflecting changes in operating assets and liabilities and lower net income; the prior-year period also included cash related to the domain sale.
The company stated it expected existing cash, short-term investments, and anticipated cash generation to cover working capital, capital expenditures, and contractual obligations for at least 12 months. It planned over the next 12 months to return up to $250 million to stockholders and invest up to $250 million in alternative investments or assets. The $800 million share repurchase authorization had $209.1 million remaining at quarter-end.
Material changes and management outlook
- Management attributed weaker product license revenue to COVID-19-related macroeconomic disruption, delayed purchasing decisions, and longer sales cycles. It said delayed deals from Q1 did close in Q2, while other deals were delayed.
- Management expected product license revenue could remain below prior-year levels until pandemic effects subsided. It also warned that product support renewals and consulting revenue could weaken as customers reduce spending or extend payment terms.
- Management expected sales and marketing, research and development, and general and administrative expenses to remain lower than prior-year periods, citing virtual selling and marketing, lower travel and event costs, and further personnel reductions.
- No numerical revenue or earnings guidance is provided. The company cautioned that quarterly comparisons may not indicate future performance.
Risks, contingencies, and unusual items
- Brazil matter: The company said it was probable that resolution of matters concerning its Brazilian subsidiary’s potential noncompliance with local procurement rules would result in a loss, but the amount or range was not reasonably estimable. The subsidiary’s bank accounts, temporarily frozen up to approximately $2.3 million, were unfrozen pending an appeal. The company said it was not a subject of the investigation.
- COVID-19: The filing describes uncertainty around customer demand, payment timing, sales cycles, consulting work, and the company’s financial estimates and assumptions.
- Tax and lease commitments: $28.9 million of Transition Tax remained unpaid, payable in installments; operating leases and purchase obligations totaled $162.1 million. The filing also reports $2.7 million of unrecognized tax benefits, including accrued interest.
- Other risks: Competition, reliance on a single software platform and installed customer base, foreign currency exposure, cybersecurity and privacy compliance, and significant control by the CEO through the dual-class share structure.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether license sales recover as COVID-19 disruption and longer sales cycles ease, and whether subscription growth can offset license declines.
- The timing and potential financial impact of the Brazilian procurement matter; the loss estimate was not available in the filing.
- Execution of the stated capital allocation plans: up to $250 million for stockholder returns and up to $250 million for alternative investments or assets.
- Cash generation and liquidity after buybacks, lease payments, and Transition Tax installments; the filing reports no financial debt but material lease obligations.
- Comparability of year-over-year earnings, given the $29.8 million Voice.com sale gain in Q2 2019 and the company’s use of non-GAAP measures.