MicroStrategy Incorporated — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The filing identifies the registrant as MicroStrategy Incorporated, not Strategy Inc. Dollar amounts below are in millions unless noted.
Business context and results
The company sells enterprise analytics, mobile and security software, cloud subscriptions, product support, and related services. Analytics, mobile, cloud, and related support generated most revenue; Usher had not generated significant revenue. The company reported one operating segment.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $119.0 | $123.9 | -3.9% |
| Gross profit / gross margin | $96.2 / 80.8% | $96.8 / 78.1% | Profit -0.6% |
| Operating expenses | $76.4 | $74.1 | +3.1% |
| Operating income / margin | $19.8 / 16.6% | $22.6 / 18.3% | -12.6% |
| Other expense (income), net | $(1.7) | $4.8 | Unfavorable swing |
| Net income / margin | $14.3 / 12.0% | $20.5 / 16.5% | -30.2% |
| Diluted EPS | $1.24 | $1.79 | -30.7% |
| Operating cash flow | $50.8 | $55.8 | -9.0% |
Financial position and liquidity
- At March 31, cash and cash equivalents were $308.9 million and short-term investments were $227.4 million, totaling $536.3 million. Total current assets were $608.1 million against current liabilities of $195.9 million; the current ratio was approximately 3.1.
- Total assets were $693.2 million, total liabilities $225.3 million, and stockholders’ equity $467.8 million. The balance sheet lists no borrowings; capital lease and other financing obligations totaled $0.1 million. Operating lease commitments were $88.8 million.
- Cash increased $16.5 million during the quarter. Investing activities used $34.2 million, largely reflecting net purchases of short-term investments; financing activities used $2.4 million.
- Net deferred revenue and advance payments were $141.6 million, up from $109.7 million at year-end. Management expected to recognize approximately $202.8 million of deferred revenue and advance payments over the next 12 months, while cautioning that timing depends on performance obligations.
Material changes versus prior year
- Product license and subscription revenue increased 8.5% to $29.8 million: licenses rose 7.9% and subscription services rose 10.3%. International licenses grew 47.9%, while domestic licenses fell 11.3%.
- Product support revenue declined 1.2% to $68.5 million. Other services revenue fell 23.5% to $20.8 million, chiefly from a 25.2% decline in consulting revenue, reflecting fewer billable hours worldwide.
- Cost of revenue decreased 15.8%, supporting a higher gross margin, but operating expenses rose 3.1%; research and development expense increased 14.1% to $17.6 million.
- Other expense was $1.7 million in 2016, mainly foreign-currency transaction losses, versus $4.8 million of other income in 2015, which included currency gains and forward-contract gains. This contributed to the decline in pretax income.
- Operating cash flow declined despite a $30.1 million increase in deferred revenue and advance payments; management attributed the overall cash-flow decrease to lower net income and changes in noncash items, partly offset by working-capital movements.
Outlook, commentary, risks, and unusual items
- Management said existing cash, short-term investments, and anticipated cash generation should cover working capital, expected capital expenditures, and contractual obligations for at least 12 months. The company does not provide financial performance guidance.
- Management described a competitive, rapidly changing analytics market and highlighted opportunities and execution challenges in cloud, mobile, security, and big-data offerings. It cautioned that quarterly results can fluctuate, sales cycles can be lengthy, and many expenses are relatively fixed.
- In January 2016, the company reorganized executive management, eliminating the separate Office of the President. It accrued approximately $3.4 million for potential payments related to the departures of two former executives; the departures also resulted in a reversal of some previously recorded share-based compensation.
- International revenue was 39.5% of total revenue. Management reported that unfavorable exchange-rate movements reduced Q1 2016 revenue by 2.3% year over year; a hypothetical 10% unfavorable average-rate change would have reduced quarterly revenue by 3.7%.
- The DataTern patent-infringement case remained unresolved after the court denied the company’s summary-judgment motions in 2015. The company could not reasonably estimate a possible loss and recorded no liability. It also disclosed $3.7 million of unrecognized tax benefits and an ongoing U.S. tax examination; no significant 2016 tax payment was expected for those benefits.
- Key disclosed risks include competitive pressure and pricing, dependence on core analytics products, currency exposure, cybersecurity and privacy requirements, revenue-recognition timing, customer and deal concentration, tax uncertainty, and the effects of restructuring. The filing states disclosure controls were effective at the reasonable-assurance level and reports no material quarterly change in internal control over financial reporting.
- New accounting standards discussed include revenue recognition (effective beginning in 2018), leases (2019), and share-based compensation (2017); the company was evaluating their impact.
Most important facts for investors to verify
- Whether license and subscription growth can offset declining support and consulting revenue, particularly in the domestic market.
- Whether the unusually large year-over-year decline in net income is primarily explained by the prior-year currency-related gains and the current-year currency losses, alongside lower operating income.
- The quality and sustainability of cash generation, including the effect of deferred revenue, receivables, and short-term investment purchases.
- The timing and collectability of deferred revenue, and the extent to which foreign-held cash could be accessed without additional tax cost.
- Developments and potential exposure in the DataTern litigation, executive departure payments, and tax examinations or unrecognized tax benefits.
- How effectively the company competes in analytics and cloud markets, and whether Usher and other initiatives can produce meaningful revenue.