MicroStrategy Incorporated (10-Q) — Third Quarter 2017
Reporting period: Quarter and nine months ended September 30, 2017. Interim financial statements are unaudited. The filing registrant is MicroStrategy Incorporated.
Business context and financial performance
MicroStrategy provides enterprise analytics and mobility software, sold through product licenses, subscriptions, product support, and services. Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $125.2 | $129.9 | $366.4 | $372.1 |
| Gross profit / margin | $100.8 / 80.5% | $107.0 / 82.4% | $294.5 / 80.4% | $302.2 / 81.2% |
| Operating income / margin | $20.6 / 16.4% | $30.0 / 23.1% | $55.6 / 15.2% | $70.9 / 19.0% |
| Net income | $17.9 | $26.6 | $43.9 | $59.8 |
| Diluted EPS | $1.56 | $2.31 | $3.79 | $5.20 |
- Q3 revenue declined 3.6% year over year; nine-month revenue declined 1.5%. Product license revenue fell 27.3% in Q3 and 18.3% for the nine months, while support and other services grew modestly. Subscription revenue rose 1.1% in Q3 and 4.7% year to date.
- Operating income fell 31.4% in Q3 and 21.6% for the nine months. Lower license revenue and higher operating expenses contributed; nine-month sales and marketing expense rose 8.1% and R&D rose 4.6%.
- Net income was also affected by higher other expense, primarily foreign-currency transaction losses: $1.9 million in Q3 and $6.4 million year to date in 2017.
Cash flow, liquidity, and obligations
- Nine-month operating cash flow was $49.3 million, down from $94.0 million. Management attributed the decline to lower net income and less favorable changes in operating assets and liabilities.
- Investing cash outflow was $73.0 million, mainly reflecting purchases of short-term investments net of redemptions; purchases of property and equipment were $2.3 million. Financing provided $1.7 million.
- At September 30, cash and cash equivalents were $386.9 million and short-term investments were $259.2 million, or $646.1 million combined. Current assets were $730.9 million versus current liabilities of $176.8 million. The balance sheet shows no conventional borrowings; capital lease and other financing payments totaled $1.1 million.
- Total assets were $813.7 million and stockholders’ equity was $612.3 million. Operating lease commitments were $75.6 million; total lease and other financing commitments were $76.7 million.
- About $362.0 million of cash, cash equivalents, and short-term investments were held by non-U.S. entities. The company said it did not anticipate needing to repatriate these funds for U.S. operations and intended to indefinitely reinvest undistributed foreign earnings.
Material changes, outlook, and risks
- Domestic product license revenue was a key weakness, down 43.6% in Q3; international product license revenue increased 19.6% in Q3. Consulting revenue increased 16.8% in Q3, primarily due to higher average bill rates.
- Management expects sales and marketing spending and investment in technology products and personnel to increase in future periods. The filing provides no financial forecast and states that the company does not give guidance on anticipated financial performance. Management cautions that quarterly results may fluctuate and that revenue shortfalls can materially affect results because some costs are relatively fixed.
- Management expected to recognize approximately $176.6 million of deferred revenue and advance payments over the next 12 months, but cautioned that timing and performance obligations mean this balance is not necessarily indicative of future revenue.
- The company planned to adopt the new revenue standard (ASC 606) on January 1, 2018, expecting full retrospective adoption, subject to system readiness and completion of assessments. It anticipated earlier recognition for certain term licenses and reseller/OEM sales, capitalization and three-year amortization of certain sales commissions, and changes to receivable/deferred-revenue offsets. The financial impact was still under evaluation.
- DataTern’s patent case against the company was dismissed on October 20, 2017, after the plaintiff failed to obtain replacement counsel. Related customer and channel-partner proceedings remained stayed, and the company said their outcomes were not determinable; no estimated liability was accrued.
- Key disclosed risks include intense analytics competition, dependence on product licenses and the installed customer base, long and variable sales cycles, foreign exchange and international operations, privacy and cybersecurity exposure, and uncertainty in revenue recognition and tax estimates. A dual-class share structure gives Class B holders ten votes per share; Michael Saylor held 67.6% of total voting power as of October 16, 2017.
Important facts for investors to verify
- Whether product license revenue, particularly domestic license sales, stabilizes after the reported declines.
- Whether operating cash flow recovers and whether margins withstand planned higher sales, marketing, and R&D investment.
- The eventual quantified effect and implementation readiness of ASC 606, including any retrospective revenue adjustments.
- Cash availability by jurisdiction and any tax consequences if foreign funds are repatriated.
- Developments in the stayed indemnification matters and other legal proceedings; also monitor the $4.3 million of unrecognized tax benefits and the company’s deferred tax asset assumptions.
- The company had made no repurchases under its share repurchase program during the quarter; confirm any subsequent activity and the status of the authorization, which ran through April 29, 2018.