MicroStrategy Incorporated — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed October 29, 2019. The filing entity is MicroStrategy Incorporated. Unless noted otherwise, amounts below are in millions of U.S. dollars. Comparative periods were not restated for the January 1, 2019 adoption of the lease accounting standard.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $119.7 | $122.2 | $352.8 | $365.7 |
| Gross profit / margin | $95.9 / 80.1% | $98.8 / 80.9% | $277.5 / 78.6% | $292.1 / 79.9% |
| Operating income (loss) / margin | $4.6 / 3.8% | $7.2 / 5.9% | ($10.6) / (3.0%) | $6.1 / 1.7% |
| Net income | $9.7 | $12.7 | $22.2 | $19.2 |
| Diluted EPS | $0.94 | $1.10 | $2.15 | $1.67 |
| Operating cash flow | Not separately provided | Not separately provided | $52.3 | $23.2 |
Q3 revenue declined about 2.0% year over year and net income fell about 23.6%. Nine-month revenue declined about 3.5%, while reported net income increased about 15.6%; the increase includes a one-time domain sale gain. Nine-month operating results moved to a loss, despite higher reported net income. No conventional financial borrowings are shown on the balance sheet.
Liquidity, cash flow and balance sheet
- At September 30, cash and cash equivalents were $375.1 and short-term investments were $203.2, totaling $578.3, compared with $576.1 at December 31, 2018. Current assets were $721.8 and current liabilities $230.7.
- Cash, cash equivalents and restricted cash increased $265.1 during the first nine months. Operating activities provided $52.3; investing activities provided $259.5, mainly reflecting net redemptions of short-term investments; financing activities used $42.8, including $48.2 of share repurchases.
- Operating cash flow increased from $23.2 in the comparable period, with management citing changes in operating assets and liabilities, non-cash items and higher net income. Deferred revenue contributed $23.6 to operating cash flow during the period.
- Operating lease liabilities totaled $114.6, of which $9.3 was current; undiscounted lease payments were $154.7. The largest lease is the corporate headquarters lease, expiring in December 2030.
- Deferred revenue and advance payments totaled $164.7, down from $183.0 at year-end 2018. The company expected to recognize $160.2 within the following 12 months. Total contractual obligations shown were $213.6, including leases, purchase obligations and $28.9 of unpaid transition tax.
Material changes and operating trends
- Q3 product license revenue declined 6.4%, product support declined 2.1%, and other services declined 1.2%; subscription services increased 9.0%. Nine-month other services revenue fell 12.3%, primarily reflecting lower consulting activity and education revenue.
- Nine-month product support costs increased 47.8%, while research and development expense rose 12.0% as staffing and investment increased. Management described higher R&D spending as part of its product investment strategy.
- Foreign exchange was a headwind: management estimated that unfavorable currency movements reduced nine-month revenue by 3.1% versus the prior-year period. International revenue represented 43.2% of nine-month revenue.
- On May 30, 2019, the company sold the Voice.com domain for $30.0 cash, recording a $29.8 gain in Q2 and an $8.1 discrete tax provision. The gain lifted nine-month other income; it did not affect Q3 results. Company-presented non-GAAP nine-month net income, excluding the after-tax gain, was $0.4, versus GAAP net income of $22.2.
Outlook, risks and unusual items
- The company stated it does not provide guidance on anticipated financial performance. Management said cash, investments and expected cash generation should cover working capital, capital expenditures and contractual obligations for at least the next 12 months.
- Management cautioned that quarter-to-quarter results may fluctuate, sales cycles can be lengthy, many costs are relatively fixed, and revenue shortfalls could materially affect results. Competition, technology changes, customer adoption and the mix between perpetual licenses and subscriptions are identified risks.
- Disclosure controls and procedures were reported ineffective at the reasonable-assurance level because of previously disclosed material weaknesses in internal control over financial reporting. Management expected remediation before year-end 2019; it was not yet considered complete.
- The company said it believed a loss related to its Brazilian subsidiary’s apparent or likely noncompliance with local procurement regulations was probable, but the amount or range was not reasonably estimable. It warned the matter could materially affect earnings in the period a liability is accrued, while not expecting a material effect on financial position.
- Other risks include foreign currency exposure, tax uncertainty, cybersecurity and privacy obligations, and the company’s concentrated voting control. The filing also notes unrecognized tax benefits of $3.8 and a $28.9 unpaid transition-tax liability.
Important facts for investors to verify
- Whether underlying operating performance improves, particularly license, product support and consulting trends, apart from the Voice.com gain.
- How much operating cash flow is sustained by recurring earnings versus timing changes in deferred revenue and other working-capital balances.
- Progress and testing supporting management’s stated remediation of the material weaknesses, and any subsequent disclosure-control updates.
- Developments in the Brazilian procurement matter, including any estimate, accrual or regulatory outcome.
- Lease, transition-tax and purchase-obligation cash requirements, and whether liquidity remains adequate across domestic and international entities.