MicroStrategy Incorporated (now Strategy Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The filing is under the name MicroStrategy Incorporated. Unless noted, financial figures below are in millions of U.S. dollars.
Business context and results
The company sells enterprise analytics and mobility software through licenses, subscriptions, support, consulting and education. It reported one operating segment. Management highlighted product and cloud-platform enhancements and said it expects research and development spending to continue at its current pace.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $115.4 | $123.0 |
| Gross profit / margin | $89.2 / 77.3% | $97.8 / 79.5% |
| Operating income (loss) / margin | $(10.4) / (9.0)% | $0.7 / 0.6% |
| Net income (loss) | $(7.9) | $1.7 |
| Basic and diluted EPS | $(0.77) | $0.15 |
| Cash from operations | $26.5 | $18.7 |
Financial position and liquidity
- At March 31, cash and cash equivalents were $258.7 and short-term investments were $292.3, totaling $551.1; the comparable year-end total was $576.1. Current assets were $718.4 and current liabilities $264.0.
- Operating cash flow was $26.5; capital expenditures were $6.0. Investing activities provided $170.3, primarily reflecting short-term investment redemptions net of purchases. Financing activities used $46.7, including $48.2 of share repurchases.
- No conventional borrowings are identified in the supplied financial statements. Adoption of lease accounting brought $115.8 of operating lease liabilities onto the balance sheet, including $106.7 non-current. The company also reported $28.9 of unpaid U.S. transition tax in long-term liabilities.
- Management said available cash, investments and expected cash generation should meet working-capital needs, capital expenditures and contractual obligations for at least 12 months. Of cash and investments, $427.0 was held by non-U.S. entities at quarter-end.
Changes versus the prior comparable period
- Revenue declined 6.2%. Product licenses and subscriptions together rose 1.9%, as license revenue increased 5.7% while subscription revenue fell 6.8%. Product support declined 4.0%; other services fell 21.7%, primarily reflecting lower consulting revenue and billable hours.
- Gross profit fell $8.6. Operating expenses increased $2.5: research and development rose 19.8% to $28.2, while sales and marketing declined 5.0% to $48.8. The company attributed higher R&D spending principally to increased staffing and investment in technology.
- Operating results swung from $0.7 of income to a $10.4 loss, and net results swung from $1.7 of income to a $7.9 loss. Management cautioned that quarterly results can fluctuate and may not indicate future performance.
- Deferred revenue and advance payments were $194.6, up $11.6 from December 31, 2018 but down $12.8 from March 31, 2018. The company expects to recognize $190.1 within 12 months; the filing cautions that deferred revenue is not necessarily indicative of future-period revenue.
Outlook, risks and unusual items
- The company does not provide guidance on anticipated financial performance. It expects R&D spending to continue at the current pace and said it does not expect material software development costs to be capitalized in the near term.
- Effective January 1, 2019, it adopted the new lease standard without restating prior periods. It recorded $88.8 of right-of-use assets and $116.9 of lease liabilities in opening balances; management said adoption did not materially affect results of operations. Comparisons involving leases are therefore not directly comparable.
- Following an internal review, the company said its Brazilian subsidiary failed or likely failed to comply with local procurement regulations in certain government business. A loss is considered probable, but the amount or range is not reasonably estimable; the company said financial-position impact is not expected to be material, while earnings impact cannot be assured.
- Disclosure controls were not effective at quarter-end because of previously reported material weaknesses in internal control. Management expected remediation before year-end 2019, subject to controls operating effectively and testing.
- Foreign exchange adversely affected reported revenue; the filing estimates revenue was 4.1% lower due to a 7.9% unfavorable change in weighted-average exchange rates versus Q1 2018. The company also identified currency, competitive, customer-spending, tax and execution risks.
- The company repurchased 362,148 Class A shares for $48.2 at an average $133.21 per share. $295.5 remained available under its $800.0 million repurchase authorization.
- A U.K. tax on certain offshore intangible-property receipts took effect April 6, 2019 and was not reflected in Q1 statements; the company planned to begin accruing it from that date. It also intends a one-time repatriation of foreign earnings in 2019 and expects only immaterial related U.S. state tax expense.
Key facts for investors to verify
- Progress and testing of remediation for the disclosed material weaknesses in internal controls.
- Developments, potential loss range and accounting treatment for the Brazilian procurement matter.
- Whether license growth can offset declines in product support, consulting and subscription revenue, and the effect of continued R&D investment on profitability.
- Cash availability by jurisdiction, the planned foreign-earnings repatriation, and payment timing for the $28.9 transition-tax liability.
- Operating-lease obligations and the impact of the new U.K. tax as additional guidance becomes available.