MicroStrategy Incorporated — Form 10-Q Summary
Business context and period. This filing is by MicroStrategy Incorporated, the enterprise analytics software, cloud subscription and related-services provider. It covers the quarter and nine months ended September 30, 2016; the financial statements are unaudited except for the December 31, 2015 balance sheet. Usher had not generated significant revenue. The filing provides no formal financial guidance; the company says it does not give guidance on anticipated future financial performance.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $129.9m | $129.5m | $372.1m | $386.3m |
| Gross profit / margin | $107.0m / 82.3% | $104.9m / 80.9% | $302.2m / 81.2% | $308.7m / 79.9% |
| Operating income / margin | $30.0m / 23.1% | $30.7m / 23.7% | $70.9m / 19.0% | $88.1m / 22.8% |
| Net income | $26.6m | $23.9m | $59.8m | $66.8m |
| Diluted EPS | $2.31 | $2.06 | $5.20 | $5.80 |
| Operating cash flow | Not presented quarterly | $94.0m | $123.4m |
Revenue mix and changes. Q3 product licenses and subscription services rose 9.4% to $37.3m, including subscription services growth of 16.7%; product support increased 1.5% to $72.5m. Other services fell 16.3% to $20.2m, primarily as consulting revenue declined. For the nine-month period, total revenue decreased 3.7%: other services fell 20.3%, product licenses fell 2.8%, and product support grew 0.5%. Subscription services grew 12.3% but remained a relatively small revenue stream.
Cash, liquidity and obligations. At September 30, cash and cash equivalents were $365.6m and short-term investments were $213.3m, for combined cash and investments of $578.9m; current assets were $649.1m versus current liabilities of $183.1m. Total liabilities were $215.6m and stockholders’ equity was $519.9m. The balance sheet presents no conventional debt balance; it reports capital lease and other financing obligations, with $2.2m of future minimum payments. Nine-month operating cash flow was $94.0m, investing cash outflow $20.9m, and financing cash outflow $1.5m. Cash increased $73.2m from year-end 2015. Management said available cash, investments and expected cash generation should cover working capital, capital expenditures and contractual obligations for at least 12 months.
Material changes and management commentary
- Q3 revenue was nearly flat year over year, while nine-month revenue and operating income declined. Nine-month net income also declined, despite a lower tax provision.
- Nine-month operating cash flow decreased 23.8%, partly reflecting lower net income and changes in non-cash items. Deferred revenue and advance payments, net of unpaid amounts, were $130.8m, up from $109.7m at year-end 2015. The company expected to recognize about $174.0m of deferred revenue and advance payments over the next 12 months, while cautioning that the balance is not necessarily indicative of future-period revenue.
- Nine-month effective tax rate was 16.9%, down from 26.5%, reflecting a changed expected mix of U.S. and foreign earnings and Q3 discrete tax benefits, including releases related to foreign tax credits and a settled U.S. tax examination.
- The January 2016 executive reorganization eliminated the separate Office of the President. The company recorded an approximately $3.4m accrual for potential payments related to two executive departures. It also began consolidating finance and accounting operations into three regional centers, with completion expected by the end of Q1 2017; management said controls remained effective.
- Management highlighted competitive pressure, long and variable sales cycles, possible customer shifts from perpetual licenses to subscriptions, foreign-exchange exposure and relatively fixed expenses. International revenue represented 36.5% of Q3 revenue and 38.6% for the nine-month period. Currency movements reduced nine-month revenue by 1.3% year over year.
Risks, contingencies and unusual items
- Patent litigation: DataTern’s patent-infringement case remained unresolved after a September 2016 claim-construction hearing. The company said the outcome and any potential loss could not be determined or reasonably estimated; no liability was accrued. Certain customer and channel-partner cases were stayed pending resolution.
- Foreign cash and taxes: $317.9m of cash and short-term investments was held by non-U.S. entities. The company intended to indefinitely reinvest undistributed foreign earnings; repatriation could create U.S. tax. Unrecognized tax benefits were $3.4m, and the filing said no material change was expected over the next 12 months.
- Market and execution risks: The filing cites analytics competition, potential price and margin pressure, reliance on its analytics product suite, security and privacy risks, international operations and currency volatility. Usher had not generated significant revenue despite investment.
- Governance: Class B shares carried ten votes per share. Michael Saylor beneficially owned 67.6% of total voting power as of October 19, 2016, giving him substantial control.
- Other items: No shares were repurchased in Q3. The company had $31.0m of unrecognized share-based compensation expense expected over a weighted-average 2.3 years. It was evaluating new revenue and lease accounting standards and expected to adopt the stock-compensation standard in 2017.
Most important facts for investors to verify
- Whether subscription growth can offset weakness in consulting and the nine-month decline in license revenue.
- Whether operating cash flow recovers, and how deferred revenue converts into recognized revenue and cash collections.
- The sustainability of the lower effective tax rate and the potential tax cost of repatriating foreign earnings.
- Developments in the DataTern litigation, including potential indemnification exposure to customers and channel partners.
- Progress and costs of the finance-function transformation, and any effect on internal controls.
- The effects of foreign exchange, competitive pricing, customer purchasing delays and the company’s controlled-company governance structure.