Business context and reporting period
MicroStrategy Incorporated’s unaudited Form 10-Q covers the three months ended March 31, 2015, with comparisons to the three months ended March 31, 2014. The company provides enterprise analytics, mobile and security software, cloud subscriptions, support and related services. The filing identifies the registrant as MicroStrategy Incorporated; this differs from the request metadata naming Strategy Inc.
Financial performance and position
Amounts below are in millions of U.S. dollars unless stated otherwise.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $123.9 | $137.9 |
| Gross profit / margin | $96.8 / 78.1% | $104.9 / 76.1% |
| Operating income (loss) / margin | $22.6 / 18.3% | $(8.3) / (6.1)% |
| Net income (loss) | $20.5 | $(6.5) |
| Diluted earnings (loss) per share | $1.79 | $(0.57) |
| Operating cash flow | $55.8 | $10.8 |
- Revenue declined 10.2% year over year. Product licenses fell 25.5% to $20.8 million; subscription services rose 50.1% to $6.7 million. Product support declined 3.0% to $69.3 million, and other services declined 20.5% to $27.1 million.
- Operating expenses fell to $74.1 million from $113.2 million, principally reflecting lower staffing-related and other costs following the 2014 restructuring. Q1 2015 also included $3.6 million of share-based compensation and $0.1 million of restructuring costs.
- Other income was $4.8 million, primarily from $3.7 million in foreign-currency transaction gains and $0.9 million in unrealized forward-contract gains.
- Cash and cash equivalents were $165.1 million and short-term investments were $226.7 million at March 31, 2015, totaling $391.8 million, compared with $345.5 million at December 31, 2014. Current assets were $483.4 million and current liabilities $197.3 million. The filing reports no material borrowing debt; capital leases and other financing arrangements totaled $1.5 million.
- Operating cash flow was $55.8 million; investing cash outflow was $35.1 million, including $5.4 million of capitalized software development costs; financing cash inflow was $1.8 million. Cash and cash equivalents increased $18.2 million during the quarter.
Material changes versus the prior comparable period
- The company moved from an operating and net loss to operating income of $22.6 million and net income of $20.5 million, despite lower revenue. The improvement primarily reflects substantially lower operating expenses after workforce and cost reductions.
- International product-license revenue declined 49.7%; management cited fewer and smaller transactions. International product support was also affected by currency movements and slower growth in EMEA renewals. Subscription revenue growth reflected new customers and increased use by existing customers.
- Management said unfavorable exchange-rate changes reduced Q1 2015 revenue by 6.2% compared with the prior year. International revenue represented 36.3% of total revenue, versus 41.5% a year earlier.
- Headcount was 2,232 at March 31, 2015, down from 3,221 a year earlier. Research and development expense also reflects $5.4 million capitalized for MicroStrategy 10, which was not yet generally available.
Outlook, risks, contingencies and unusual items
- MicroStrategy stated that it does not provide financial guidance. Management expected restructuring-related and other cost savings to continue reducing operating expenses in 2015 and did not expect significant near-term increases in sales and marketing, R&D or general and administrative headcount. The company said available cash, investments and anticipated cash generation should cover requirements for at least 12 months.
- The company expected to recognize approximately $199.1 million of deferred revenue and advance payments over the next 12 months, subject to service performance and other revenue-recognition conditions. It also disclosed approximately $130.7 million of future customer purchase commitments through 2020, not included in deferred revenue.
- Foreign-exchange exposure, intense analytics-market competition, variable deal timing, customer adoption of subscription offerings, restructuring execution, and the ability to sustain profitability are key risks. Management noted that quarter-to-quarter results may not indicate future performance.
- Two patent disputes remained unresolved. DataTern proceedings were remanded for further proceedings, with the company’s summary-judgment hearing scheduled for May 2015. In the Vasudevan matter, the Federal Circuit affirmed non-infringement but remanded for proceedings on the company’s invalidity claim. Possible losses could not be reasonably estimated, and no liabilities were accrued.
- Disclosure controls and procedures were reported as ineffective at the reasonable-assurance level because of a material weakness involving a third-party service organization’s failure to provide an adequate SOC 1 Type 2 report. Management said substantive testing supported the fair presentation of the statements; no material change in internal control over financial reporting occurred during the quarter.
- Other notable items include $49.7 million of unrecognized share-based compensation expected to be recognized over a weighted-average 3.1 years; $2.7 million of unrecognized tax benefits; and $110.4 million of future operating-lease payments. The company said it does not expect material remaining restructuring costs.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for MicroStrategy Incorporated, not a registrant named Strategy Inc.
- Assess whether the sharp expense reductions and resulting return to profitability are sustainable as revenue declines, and account for recurring share-based compensation and capitalized software development costs.
- Monitor product-license trends, especially international demand, subscription growth, renewals and foreign-exchange effects.
- Review remediation of the disclosed material weakness in controls and developments in the DataTern and Vasudevan cases.
- Consider the company’s dual-class voting structure: the filing reports that the CEO beneficially owned 67.9% of total voting power as of April 23, 2015.