MicroStrategy Incorporated — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2013. The supplied filing is for MicroStrategy Incorporated, not a company identified as Strategy Inc. Financial figures below are in U.S. dollars; amounts are shown in millions unless stated otherwise.
Business context and reporting period
MicroStrategy develops and sells enterprise analytics software, mobile and cloud offerings, and related support and services. Its results primarily reflect the Analytics Platform, Mobile and Cloud businesses; Loyalty and Identity offerings generated no significant revenue. The company sold Angel.com on March 15, 2013 and presents it as discontinued operations.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $141.9 | $136.1 | $410.0 | $409.7 |
| Product license revenue | $33.8 | $31.7 | $92.7 | $101.1 |
| Support and other services revenue | $108.2 | $104.3 | $317.3 | $308.7 |
| Gross profit / gross margin | $108.7 / 76.6% | $101.2 / 74.4% | $304.4 / 74.2% | $305.1 / 74.5% |
| Income from continuing operations before tax | $8.5 | $7.2 | $(0.5) | $20.3 |
| Income from continuing operations, net of tax | $17.1 | $5.1 | $10.4 | $14.1 |
| Net income | $17.1 | $4.8 | $67.2 | $12.3 |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $15.3 | $43.4 |
- Q3 operating income from continuing operations was $11.6 million, versus $7.3 million; nine-month operating income was $0.9 million, versus $19.4 million. Approximate operating margins were 8.2% and 5.4% for Q3, and 0.2% and 4.7% for the nine-month periods.
- Nine-month net income included a $57.4 million after-tax gain on the Angel.com sale; continuing-operations earnings were $10.4 million. Q3 net income was entirely from continuing operations.
- At September 30, cash and cash equivalents were $163.8 million and short-term investments $180.2 million, totaling $343.9 million. Current assets were $441.6 million and current liabilities $219.4 million. Total liabilities were $260.6 million and stockholders’ equity $292.1 million.
- The filing reports no material debt balance; capital leases and other financing arrangements totaled $4.2 million in future minimum payments. Operating lease commitments totaled $123.4 million, with total lease and financing commitments of $127.6 million.
- Nine-month total cash decreased $60.6 million. Investing used $195.6 million in continuing operations, primarily reflecting $209.1 million of short-term investment purchases; financing provided $21.9 million. Purchases of property and equipment and capitalized software development totaled about $15.4 million, making continuing-operations operating cash flow less those expenditures approximately negative $0.2 million.
Material changes versus prior comparable periods
- Q3 revenue increased 4.3%; nine-month revenue was essentially flat. Q3 license revenue rose 6.4%, but nine-month license revenue fell 8.3%, with international license revenue down 24.5% amid weaker larger international deals. Domestic licenses strengthened, especially in Q3.
- Support revenue grew 8.3% in Q3 and 6.1% year to date, while consulting revenue fell 11.6% and 8.6%, respectively. Subscription services revenue rose to $3.4 million in Q3 and $8.6 million year to date from low prior-year levels.
- Nine-month operating expenses increased 6.2% to $303.5 million, including higher R&D and G&A spending. Gross profit was slightly lower year to date despite near-flat revenue.
- Cash and short-term investments rose from $223.1 million at December 31, 2012 to $343.9 million, while cash alone declined as excess funds were moved into short-term investments. Current deferred revenue, net, rose to $117.8 million from $101.2 million.
Outlook, commentary, risks and unusual items
- Management said existing cash, investments and expected cash generation should fund working capital, anticipated capital expenditures and contractual obligations for at least 12 months. It expects 2013 R&D investment and related expenses to remain above 2012 levels. The filing states the company does not provide guidance on anticipated future financial performance.
- Management cited competition, long and unpredictable sales cycles, reliance on analytics products, international exposure and currency movements as business risks. It cautioned that fixed costs may limit its ability to respond quickly to revenue shortfalls and that quarter-to-quarter comparisons may not predict future performance.
- The nine-month 2013 income tax benefit was $10.9 million, versus a $6.1 million tax provision in 2012. Because management could not reliably estimate the annual effective tax rate, it used a year-to-date “cut-off” method; the reported nine-month effective tax rate was 2,012.1%. The benefit reflected tax-reserve releases, a favorable German tax settlement and reinstated R&D credits. The company released $14.1 million of unrecognized tax-benefit liabilities.
- The Angel.com sale generated approximately $111.2 million of consideration and $100.7 million of net cash proceeds after transaction costs; the after-tax gain was $57.4 million. The company said proceeds would support general corporate purposes.
- In September 2013, the company granted executives options for 600,000 Class A shares, subject to stockholder approval of the 2013 plan. It recorded $0.4 million of share-based compensation and estimated about $24.8 million of unrecognized expense; management expected approximately $1.6 million of expense per quarter over four years.
- Foreign currency transaction losses and settled forward-contract losses contributed to Q3 other expense of $3.2 million. The company uses short-term foreign currency forwards for risk management, not speculation.
- DataTern’s patent case remained on appeal, and the company could not estimate a possible loss. After quarter-end, a court dismissed the Vasudevan case, found the patents invalid and entered judgment of non-infringement; an appeal was considered likely. Management did not expect other routine proceedings to materially harm results.
- Other stated risks include potential tax exposures, cybersecurity and privacy incidents, economic weakness, and the company’s controlled-company governance structure. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether subsequent quarters show recovery in international license sales and continued growth in support and cloud subscription revenue.
- How sustainable operating profitability and cash generation are after excluding the Angel.com sale gain and unusual tax benefits.
- Actual tax cash payments and the effects of tax examinations, unrecognized tax benefits, and any repatriation of foreign-held funds.
- Whether the 600,000 executive options receive stockholder approval and the resulting recurring compensation expense and dilution.
- Developments in the DataTern appeal and any appeal or other outcome in the Vasudevan matter.
- How cash deployment, operating-lease commitments and investment maturities affect liquidity; short-term investments are primarily U.S. Treasury securities intended to be held to maturity.