MicroStrategy Incorporated (now Strategy Inc.) — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012; comparative period is Q1 2011. The filing identifies the registrant as MicroStrategy Incorporated. Financial statement amounts below are in U.S. dollars; amounts are in millions unless stated otherwise.
Business context and results
The company provided enterprise business intelligence software and related support, consulting, and education services. Its other segment was Angel.com, a cloud-based customer experience management business. Management highlighted investment in big data, mobile, cloud-based BI, and social intelligence offerings; social intelligence products had not yet generated significant revenue.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $145.1 | $122.0 | +18.9% |
| Product licenses revenue | $37.5 | $27.4 | +36.8% |
| Product support and other services revenue | $107.6 | $94.6 | +13.7% |
| Gross profit / gross margin | $106.1 / 73.1% | $88.9 / 72.8% | Margin +0.3 percentage points |
| Operating income / operating margin | $0.5 / 0.3% | $1.1 / 0.9% | Income down 57.5% |
| Net income / net margin | $0.3 / 0.2% | $1.1 / 0.9% | Net income down 76.0% |
| Diluted EPS | $0.02 | $0.10 | Down $0.08 |
| Cash from operating activities | $20.8 | $28.2 | Down 26.4% |
Financial position and liquidity
- Cash and cash equivalents were $211.1 million at March 31, versus $199.6 million at December 31, 2011. The company also reported $0.3 million of restricted cash and short-term investments.
- Current assets were $332.8 million and current liabilities $218.4 million, for a current ratio of approximately 1.52. Total assets were $448.5 million; total liabilities were $277.9 million; stockholders’ equity was $170.5 million.
- The balance sheet presents no separate interest-bearing debt balance. Management said available cash and expected cash generation were sufficient for at least the next 12 months and that it did not expect to need borrowing to finance operations.
- Investing activities used $11.7 million, including $13.5 million of property and equipment purchases, partly offset by $1.8 million of aircraft insurance proceeds. Financing activities provided $1.0 million. Cash increased $11.5 million during the quarter.
- Operating cash flow fell despite higher revenue, reflecting working-capital movements including lower accrued compensation; the filing reports a $17.7 million cash outflow from accrued compensation and benefits.
Material changes and management commentary
- License revenue growth reflected more and larger transactions: 11 transactions recognized at least $0.5 million of license revenue, versus 7 in Q1 2011. The top three transactions contributed $9.1 million, or 24.3% of license revenue, compared with $3.5 million, or 12.8%.
- Support revenue increased 11.1%, with more support contracts partly offset by lower average prices. Consulting revenue grew 21.9%, primarily from increased billable hours. Angel.com revenue declined 0.7% to $6.8 million.
- Operating expenses rose 20.3% to $105.6 million. Research and development expense increased 82.6% to $23.7 million, including the absence of $3.8 million of software-development cost capitalization recorded in the prior-year quarter. Sales and marketing increased 11.5% to $57.4 million.
- Management expected further investment in research and development, sales and marketing, and consulting during 2012, but expected the rate of expense increases to be lower than in 2011. The company does not provide financial-performance guidance, according to its risk disclosures.
- Gross deferred revenue and advance payments were $190.2 million; net of amounts offset against unpaid receivables, recorded deferred revenue was $131.4 million. Management expected approximately $176.3 million of deferred revenue and advance payments to be recognized over the next 12 months, subject to performance obligations. Separate customer minimum purchase commitments through 2017 totaled approximately $112.5 million and were not included in deferred revenue.
Risks, contingencies, and unusual items
- The company recorded a $0.7 million additional impairment charge in Q1 for damage to its owned corporate aircraft, bringing the estimated cumulative loss to $9.3 million. It recorded a corresponding $0.7 million insurance receivable; repair work was complete and management expected the aircraft to return to service in Q2 2012. Use of both the owned and leased aircraft was expected to add approximately $1.0 million of non-recurring 2012 general and administrative expense.
- Patent disputes involving Acacia/DAS, Datatern, and Vasudevan remained unresolved. Management could not reasonably estimate potential losses and recorded no estimated liability for these matters. The Acacia/DAS trial was scheduled for December 2012; discovery was ongoing in the Vasudevan case.
- Unrecognized tax benefits, including accrued interest, totaled $17.0 million; the company was under tax examination in Germany. Management did not expect a significant tax payment on these obligations within the next year. Most cash was held outside the U.S.; repatriating foreign earnings could result in additional U.S. tax.
- International revenue was 40.9% of total revenue. Management reported that unfavorable currency movements reduced Q1 2012 revenue by 1.3% year over year and identified foreign-exchange volatility as a risk.
- Key operating risks include quarterly revenue volatility and dependence on large deals, intense competition and bundled offerings, fixed operating costs, long sales cycles, reliance on the core BI platform and channel partners, and execution risks from new product initiatives. The company also disclosed that Class B shares held 72.7% of total voting power as of April 24, 2012.
Important facts for investors to verify
- Whether license growth and large-deal activity are sustainable, given that the top three deals represented 24.3% of license revenue.
- Whether expense growth—especially R&D and services staffing—can be matched by revenue growth and improved operating profitability.
- The quality and timing of deferred revenue conversion and the realization of the $112.5 million in future customer purchase commitments.
- Updates on the patent cases, aircraft insurance recovery and return to service, and the German tax examination and unrecognized tax benefits.
- The accessibility and potential tax cost of foreign-held cash, and the effect of currency movements on revenue, cash, and reported results.