Business context and reporting period
MicroStrategy Incorporated’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. The filing describes a single operating segment focused on analytics, mobility, security software, cloud subscriptions, and related services. Although the request identifies Strategy Inc, the registrant named in this 2015 filing is MicroStrategy Incorporated.
Key financial metrics
Amounts are in U.S. dollars; financial statement figures below are rounded to millions except per-share data.
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $132.9m | $141.9m | $256.8m | $279.8m |
| Gross profit / margin | $107.0m / 80.5% | $106.2m / 74.9% | $203.8m / 79.4% | $211.1m / 75.5% |
| Operating income (loss) / margin | $34.8m / 26.1% | ($12.7m) / (9.0%) | $57.4m / 22.4% | ($21.1m) / (7.5%) |
| Net income (loss) | $22.5m | ($10.3m) | $42.9m | ($16.8m) |
| Diluted EPS | $1.95 | ($0.91) | $3.74 | ($1.49) |
- Six-month operating cash flow was $92.0m, versus $14.4m in 2014. Investing cash outflow was $41.0m, versus $122.7m; financing cash inflow was $6.2m, versus a $0.3m outflow.
- Cash and cash equivalents were $201.1m and short-term investments were $226.7m at June 30, totaling $427.9m. Current assets were $513.4m against current liabilities of $188.2m. The filing states existing liquidity and expected cash generation should cover requirements for at least 12 months.
- Total liabilities were $230.4m. No conventional borrowings are separately presented on the balance sheet; future minimum capital lease and other financing payments were $1.5m. Operating lease commitments were $101.1m.
Material changes versus the prior comparable period
- Second-quarter revenue declined 6.3%; six-month revenue declined 8.2%. Product-license revenue was essentially flat for the quarter but down 12.4% for six months; subscription revenue grew 20.2% and 33.1%, respectively.
- Product support fell 5.1% in the quarter and 4.1% over six months, with management attributing much of the decline to unfavorable foreign exchange. Other services revenue declined 19.6% and 20.0%, primarily reflecting lower consulting billable hours and education activity.
- International product-license revenue fell 26.9% in the quarter and 38.5% in six months. Management cited fewer smaller and mid-sized transactions; currency movements also weighed on international results. Six-month revenue was 6.4% lower due to a 15.5% unfavorable change in weighted-average exchange rates.
- Operating expenses fell substantially following the 2014 restructuring and other cost reductions. Headcount declined from 3,411 at June 30, 2014 to 2,026 at June 30, 2015. Lower costs drove the return to GAAP operating and net income despite lower revenue.
Outlook, commentary, risks and unusual items
- The company did not provide financial guidance and stated it does not give guidance on anticipated future financial performance. Management expected restructuring-related and other cost savings to continue reducing operating expenses in 2015, and said remaining restructuring costs were not expected to be material.
- MicroStrategy 10 Secure Enterprise became generally available in June 2015. The company had capitalized $9.6m of software development costs in the first half, with $20.3m of net capitalized software costs on the balance sheet. Usher had not generated significant revenue.
- Gross deferred revenue and advance payments were $194.7m at June 30; net of unpaid deferred revenue, the balance was $130.1m. The company expected to recognize approximately $177.8m over the next 12 months. Additional customer purchase commitments through 2020 totaled approximately $128.0m and were not included in deferred revenue; realization depends on customer purchases and the company’s performance.
- Foreign currency forward contracts generated net expense in the second quarter; none were outstanding at June 30. Management identified foreign exchange and interest-rate exposure as market risks. A 10% unfavorable movement in average exchange rates over the first half would have reduced revenue by 3.2%.
- The DataTern patent case remained unresolved after remand; the company was awaiting rulings on its summary-judgment motions, and the possible loss could not be reasonably estimated. The Federal Circuit affirmed a judgment of non-infringement in the separate Vasudevan case in April 2015.
- Disclosure controls and procedures were reported as not effective 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 fair presentation of the financial statements.
- Other notable risks include intense analytics competition, revenue concentration in the analytics platform and related services, long and variable sales cycles, foreign-exchange exposure, restructuring execution, tax uncertainty, and cybersecurity and privacy risks. The filing also notes the CEO’s concentrated voting control through Class B shares.
- The company was evaluating the impacts of new revenue-recognition guidance (effective for it beginning in 2018) and cloud-computing arrangement guidance (effective beginning in 2016); impacts were not yet determined.
Most important facts for investors to verify
- Whether the steep reductions in operating expenses and headcount can be sustained without impairing product development, sales execution, customer service, or revenue generation.
- Whether international license and support revenue stabilizes, and how much future reported performance remains exposed to currency movements.
- Whether growth in subscription services can offset declines in product licenses, support, and consulting, while considering the different revenue-recognition and cash-collection timing of subscription contracts.
- Progress in remediating the third-party service-provider control weakness and obtaining an adequate SOC 1 Type 2 report.
- Developments in the DataTern litigation, tax examinations and unrecognized tax benefits, and realization of deferred tax assets.
- How much of deferred revenue and customer purchase commitments converts to revenue as expected, given service obligations and customer purchasing conditions.
- Execution and market acceptance of MicroStrategy 10 Secure Enterprise and the company’s ability to generate meaningful revenue from Usher and cloud offerings.