MicroStrategy Incorporated (identified in the request as Strategy Inc) — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018. Unaudited results; prior-year comparisons reflect retrospective adoption of ASC 606.
Business context
The company develops, licenses, and supports enterprise analytics and mobility software, with cloud subscriptions and related services. It reports one operating segment.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $123.0 million | $122.2 million |
| Gross profit / margin | $97.8 million / 79.5% | $99.1 million / 81.1% |
| Operating income / margin | $0.7 million / 0.6% | $20.8 million / 17.0% |
| Net income | $1.7 million | $15.6 million |
| Diluted EPS | $0.15 | $1.34 |
| Operating cash flow | $18.7 million | $26.5 million |
- Revenue was nearly flat (+0.6%). Product licenses declined 23.6% to $17.3 million; subscription services declined 1.4% to $7.7 million. Product support rose 5.5% to $74.4 million and other services rose 10.7% to $23.6 million.
- Operating expenses increased 24.0% to $97.1 million, led by sales and marketing (+29.7%) and research and development (+27.9%). The company cited increased marketing, travel, compensation, and staffing costs.
- Cash provided by operations fell 29.4% year over year. Investing used $288.9 million, mainly reflecting purchases of short-term investments; financing cash flow was immaterial. Cash, cash equivalents, and restricted cash ended the quarter at $153.2 million.
- At March 31, current assets were $876.5 million and current liabilities $261.7 million. Cash and cash equivalents were $152.2 million and short-term investments $543.3 million. The filing lists no material capital leases and presents no conventional borrowings on the balance sheet.
- Current and non-current deferred revenue totaled $207.4 million; the company expected to recognize $201.7 million within the next 12 months.
Changes, outlook, and risks
- Profitability fell sharply despite slightly higher revenue: operating income dropped from $20.8 million to $0.7 million. Management attributed higher expenses to investment in sales and marketing, product development, and personnel. It expected these spending categories to increase further.
- Management gave no specific financial guidance and stated it does not provide forward guidance. It cautioned that quarterly results may fluctuate and that fixed costs can make revenue shortfalls consequential.
- ASC 606 was adopted effective January 1, 2018, with prior periods restated. It changed the timing of recognition for term licenses and OEM sales and the presentation of receivables and deferred revenue. Adoption increased 2016 beginning retained earnings by $13.0 million; reported prior-period comparisons are adjusted.
- The Tax Act produced a provisional $40.3 million transition-tax expense in 2017; $36.8 million remained unpaid at quarter-end. The company was still refining certain tax estimates and intended to pay the transition tax over eight years beginning in 2018. Q1 2018 included a $0.5 million income-tax benefit, versus a $4.3 million provision in Q1 2017.
- Management considered existing cash, investments, and anticipated operating cash generation sufficient for working capital, capital expenditures, and contractual obligations for at least 12 months. Operating lease commitments totaled $174.7 million; the transition-tax balance was $36.8 million.
- Principal disclosed risks include intense analytics competition, long and variable sales cycles, dependence on the product platform and installed support base, foreign-currency exposure, cybersecurity and privacy regulation, and uncertainty in tax estimates. International revenue was 41.4% of total revenue. Management did not expect the disclosed ordinary-course legal proceedings to materially adversely affect results.
- Subsequent developments: the share-repurchase program was extended through April 29, 2023. A sales executive’s post-quarter departure agreement included paid leave through October 3, 2018, continued benefits and option vesting subject to terms, and a $100,000 payment.
Investor verification priorities
- Assess whether product-license declines and materially higher operating costs persist, and whether planned sales and R&D spending produces growth.
- Review cash-flow trends separately from investment portfolio purchases and maturities; confirm liquidity and the location of cash and investments.
- Track ASC 606 comparability and revenue mix, particularly license recognition, support renewals, and deferred-revenue conversion.
- Monitor final Tax Act calculations, the transition-tax payment schedule, and recoverability of deferred tax assets.
- Verify the terms and execution of the extended repurchase authorization, lease commitments, and executive departure agreement.