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MSTR > SEC Filings for MSTR > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for MICROSTRATEGY INC


30-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed under "Part II. Item 1A. Risk Factors," among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations.

Overview

MicroStrategy® is a leading worldwide provider of enterprise software platforms. The Company's mission is to provide the most flexible, powerful, scalable, and user-friendly platforms for analytics, mobile, identity, and loyalty, offered either on premises or in the cloud.

The MicroStrategy Analytics Platform enables organizations to analyze vast amounts of data and distribute actionable business insight throughout an enterprise. Our analytics platform delivers reports and dashboards, and it enables users to conduct ad hoc analysis and share insights anywhere, anytime, via mobile devices or the Web. The MicroStrategy Analytics Platform is comprised of MicroStrategy Analytics EnterpriseTM, MicroStrategy Analytics ExpressTM, and MicroStrategy Analytics DesktopTM. MicroStrategy Analytics Enterprise lies at the core of the MicroStrategy Analytics Platform and combines the productivity of self-service visual data discovery with the security, scalability, and governance features of production-grade business intelligence. MicroStrategy Analytics Express is a cloud-based service that is designed to be the fastest way for companies, departments, and small businesses to build and deploy MicroStrategy-caliber analytics with little or no assistance from IT professionals. MicroStrategy Analytics Express guides business people through a streamlined flow - from data-to-discovery-to-dashboard-to-distribution. MicroStrategy Analytics Desktop is a standalone desktop tool designed to enable business users to analyze and understand their data. With MicroStrategy Analytics Desktop, business users can create stunning data visualizations and dashboards that provide new insight and new understanding in just minutes.

MicroStrategy Mobile is designed to allow organizations to rapidly build information-rich applications that combine multimedia, transactions, analytics, and custom workflows. The powerful code-free platform approach is designed to reduce the costs of development and enable organizations to get powerful mobile business apps quickly and cost-effectively. MicroStrategy Mobile is an easy, fast, and cost-effective way to mobilize an organization's information systems, including its data warehouses, business intelligence, ERP, CRM, and web applications that are currently accessible only on the desktop. MicroStrategy Mobile is available both as on-premises software and hosted as a service offering in MicroStrategy Cloud. Using MicroStrategy Mobile, customers can transform their entire workforce into a connected and more productive mobile workforce with mobile apps that are significantly more robust than their web-only counterparts. With mobile access to critical corporate data and systems that drive the business, employees can have a virtual office in their hands at all times.

MicroStrategy Cloud brings together enterprise analytics, analytical databases, and data integration capabilities in a high performance integrated environment. MicroStrategy Cloud offers the full breadth of the MicroStrategy Analytics Platform capability on-demand and is optimized for a variety of enterprise applications. Compared to traditional on-premises approaches, MicroStrategy Cloud is quicker to deploy, is more flexible, delivers consistent high-level performance, and offers significant financial advantages.


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We offer MicroStrategy Cloud as a managed service to organizations that want the power of enterprise analytics and the ability to quickly build and deliver enterprise mobile apps and harness the potential of Big Data analytics.

The MicroStrategy Loyalty Platform, branded as MicroStrategy Alert, is a next-generation, mobile customer loyalty and engagement solution. It is designed to help companies compete effectively in the new mobile world by providing a powerful, new channel for targeted marketing, commerce, and consumer engagement. MicroStrategy Alert is offered as a cloud-based service for fast start-up and includes a branded mobile app for consumers, a campaign management system that allows marketers to design and launch campaigns and publish content, and an intelligence system that allows marketers to analyze campaign performance and design target segments.

The MicroStrategy Identity Platform, branded as MicroStrategy Usher, is a mobile identity platform that enables enterprises to render digital credentials, or "badges," on users' mobile devises and to verify these credentials in as little as seconds. MicroStrategy Usher is designed to increase enterprise security and safety by allowing organizations to extend the security of biometrics to the entire enterprise. With MicroStrategy Usher, organizations can provide mobile keys to employees to enable safe and secure access to buildings and restricted areas. MicroStrategy Usher replaces passwords with time-limited access codes that can be used to log on to networks and systems, providing increased protection against fraud, identity theft, hacking, and data loss. Furthermore, MicroStrategy Usher supports comprehensive behavior monitoring, allowing organizations to quickly detect and respond to abnormal activity, and leverages the power of the MicroStrategy Analytics Platform to provide both real-time alerting and trend analysis capabilities. MicroStrategy Usher is offered as a cloud-based service and can be deployed as a branded application for each customer.

The MicroStrategy Analytics Platform, MicroStrategy Mobile, and MicroStrategy Cloud together with related product and support services, continue to generate the vast majority of our revenue. During each of the three and nine months ended September 30, 2013 and 2012, we did not generate significant revenues from the MicroStrategy Loyalty Platform or the MicroStrategy Identity Platform.

We previously operated Angel.com, a provider of cloud-based Customer Experience Management (CEM) solutions for Interactive Voice Response (IVR) and contact centers. On February 25, 2013, in connection with our consideration of strategic alternatives relating to our Angel.com business, we committed to a plan to sell the business. We made the decision to sell the business in order to focus on our analytics software and services offerings. On March 15, 2013, we completed the sale of our equity interest in Angel.com to Genesys Telecommunications Laboratories, Inc. As a result of the transaction, we received consideration of approximately $111.2 million, resulting in a net cash inflow of $100.7 million after $10.5 million in transaction costs. The sale of our ownership interest in Angel.com resulted in us recognizing an after-tax gain of approximately $57.4 million, which included the cost of terminating all outstanding Angel.com employee stock options prior to the closing of the transaction and other costs associated with the sale. Accordingly, on our Consolidated Balance Sheets, we have classified the associated assets and liabilities of the Angel.com business as held-for-sale as of December 31, 2012. In our Consolidated Statement of Operations, we classified operations of the Angel.com business as Loss from Discontinued Operations, net of tax, because we have no continuing involvement with or cash flows from this business following its divestiture. All assets and liabilities that are reported in these financial statements as held-for-sale as of December 31, 2012 are reported at the lower of the carrying cost or fair value less cost to sell.


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The following table sets forth certain operating highlights (in thousands) for the three and nine months ended September 30, 2013 and 2012:

                                          Three Months Ended           Nine Months Ended
                                             September 30,               September 30,
                                          2013          2012          2013          2012

   Revenues
   Product licenses                     $  33,753     $  31,736     $  92,726     $ 101,079
   Product support and other services     108,166       104,344       317,281       308,659

   Total revenues                         141,919       136,080       410,007       409,738


   Cost of revenues
   Product licenses                         1,336         1,059         4,550         4,187
   Product support and other services      31,917        33,788       101,050       100,450

   Total cost of revenues                  33,253        34,847       105,600       104,637

   Gross profit                           108,666       101,233       304,407       305,101


   Operating expenses
   Sales and marketing                     50,798        49,551       154,198       153,385
   Research and development                21,977        21,920        72,021        63,111
   General and administrative              24,265        22,460        77,271        69,192

   Total operating expenses                97,040        93,931       303,490       285,688


   Income from continuing operations    $  11,626     $   7,302     $     917     $  19,413

The analytics market is highly competitive and our results of operations depend on our ability to market and sell offerings that provide customers with greater value than those offered by our competitors. Organizations recently have sought, and we expect may continue to seek, to standardize their various analytics applications around a single software platform. This trend presents both opportunities and challenges for our business. It offers us the opportunity to increase the size of transactions with new customers and to expand the size of our analytics installations with existing customers. On the other hand, it presents the challenge that we may not be able to penetrate accounts that a competitor has penetrated or in which a competitor is the incumbent analytics provider.

The market for mobile business apps is rapidly changing, highly competitive, and complex with many competitors and different offerings ranging from fully custom-coded applications to plug-and-play solutions. While organizations vary greatly in their approach to, and pace of adoption of, mobile solutions, they are increasingly accelerating the transition of their businesses onto mobile devices, such as tablets and smartphones. Over the next few years, we expect that organizations will continue to construct their information and systems to take advantage of the efficiencies and cost savings of mobile computing. Ultimately, we expect that the majority of routine business tasks and workflows will become available as mobile-optimized touch-enabled apps.

In addition, companies with industry leading positions in certain software markets, such as Microsoft, Oracle, IBM, and SAP, have incorporated analytics capabilities into their product suites. We also face competition from various independent analytics software providers, such as QlikTech, Tableau Software, TIBCO, Actuate, Information Builders, and the SAS Institute. As a result, our offerings need to be sufficiently differentiated from both the bundled software offerings as well as the offerings of independent analytics software providers to create customer demand for our platform, products, and services and to maintain and grow our market share.


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We have undertaken a number of initiatives to address these opportunities and challenges, including:

• enhancement of our ability to support new enterprise-scale requirements for analytics, where we are currently a technology leader, with a focus on supporting more varied database platforms, providing higher performance, and providing greater ability to manage and administer large-scale analytics operations;

• extension of the analytic breadth of our technology with greater statistical and predictive capabilities through integration with the "R" open source project, a widely-used statistical programming language;

• extension of our technology to provide greater support for the latest trend in self-service analytics, which is often referred to as "visual data discovery" or "agile analytics", by adding new user interface flows, new visualizations, new exploration features, and new capabilities for the importation of end-user data;

• introduction of new channels to enable customers to access our analytics capabilities in the form of MicroStrategy Analytics Desktop and MicroStrategy Analytics Express;

• enhancement of our mobile application platform for creating and deploying analytics applications to the expanding community of mobile device users;

• expansion of our offerings to include new platforms derived from our software technology base, such as the MicroStrategy Loyalty Platform and the MicroStrategy Identity Platform;

• increased sales and marketing activities to enhance corporate branding, obtain new customers, expand and strengthen our existing customer base, and establish MicroStrategy as a solution for mobile apps that extends significantly beyond mobile analytics, while retaining all of the benefits of our analytics platform heritage;

• maintenance of a dedicated performance engineering team and conduct of research and development focused on providing our customers with the highest levels of performance for analytics applications of all sizes; and

• investing in software engineering to further enhance the MicroStrategy Mobile product suite to empower our customers with a toolset to enable them to build consequential and durable mobile business apps.

As part of these initiatives, we continue to make additional investments in research and development capabilities. We expect the level of investments and related expenses in 2013 to continue to be higher than in 2012. We generated income from continuing operations, net of tax, for each of the three and nine months ended September 30, 2013. However, if our revenues are not sufficient to offset our operating expenses or we are unable to adjust our operating expenses in response to any shortfall in anticipated revenue in a timely manner, our profitability may decrease or we may cease to be profitable or incur operating losses on a quarterly or annual basis.

We believe that effective recruiting, education, and nurturing of human resources are critical to our success, and we have traditionally made investments in these areas in order to differentiate ourselves from our competition, increase employee loyalty, and create a culture conducive to creativity, cooperation, and continuous improvement.

As of September 30, 2013, we had a total of 3,179 employees, of whom 1,416 were based in the United States and 1,763 were based internationally. Of our 3,179 employees, 824 were engaged in sales and marketing, 947 in research and development, 943 in technical support and other services, and 465 in finance, administration, and corporate operations.


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We lease approximately 190,000 square feet of office space at a location in Northern Virginia that began serving as our corporate headquarters in October 2010. The term of the lease expires in December 2020. We recognize lease expense ratably over the term of the lease.

In July 2011, we entered into a lease for a 37.5% fractional interest in a corporate aircraft owned and managed by a fractional interest program operator. During the three and nine months ended September 30, 2012, we incurred approximately $0.5 million and $2.0 million, respectively, in general and administrative expenses for the fractional interest lease. We terminated the fractional interest lease in September 2012 following the return to service of our owned corporate aircraft in the second quarter of 2012. No such expenses were incurred for the three and nine months ended September 30, 2013.

In September 2013, the Board of Directors approved, subject to stockholder approval, the Company's 2013 Stock Incentive Plan (the "2013 Plan"). Also in September 2013, the Compensation Committee of the Board of Directors approved, subject to stockholder approval of the 2013 Plan, the grant of stock options to purchase an aggregate of 600,000 shares of the Company's class A common stock to certain of the Company's executives. We estimate that related share-based compensation expense will be recognized at a rate of approximately $1.6 million per quarter over the next four years. Share-based compensation expense (in thousands) was recognized in the following operating expense line items in our Consolidated Statements of Operations for the periods indicated:

                                                  Three months ended               Nine months ended
                                                     September 30,                   September 30,
                                                  2013             2012           2013             2012

Research and development                       $        74         $   0       $        74         $   0
General and administrative                             370             0               370             0

Total share-based compensation expense         $       444         $   0       $       444         $   0

We base our internal operating expense forecasts on expected revenue trends and strategic objectives. Many of our expenses, such as office leases and certain personnel costs, are relatively fixed. We may be unable to adjust spending quickly enough in any particular period to offset any unexpected revenue shortfall in that period. Accordingly, any shortfall in revenue may cause significant variation in our operating results. We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance.

Non-GAAP Financial Measures

We are providing a supplemental financial measure for income from continuing operations that excludes the impact of our share-based compensation arrangements. This financial measure is not a measurement of financial performance under generally accepted accounting principles in the United States ("GAAP") and, as a result, this financial measure may not be comparable to similarly titled measures of other companies. Management uses this non-GAAP financial measure internally to help understand, manage, and evaluate our business performance and to help make operating decisions. We believe that this non-GAAP financial measure is also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis because it excludes a significant non-cash expense that we believe is not reflective of the Company's general business performance. In addition, accounting for share-based compensation arrangements requires significant management judgment and the resulting expense could vary significantly in comparison to other companies. Therefore, we believe the use of this non-GAAP financial measure can also facilitate comparison of our operating results to those of our competitors.

Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from our non-GAAP financial measure, will continue to be a significant recurring expense over the next four years and is an important part of the compensation provided to certain executives. Our non-GAAP financial measure is not meant to be considered in isolation and should be read only in conjunction with our Consolidated Financial Statements, which have been


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prepared in accordance with GAAP. We rely primarily on such Consolidated Financial Statements to understand, manage, and evaluate our business performance, and use the non-GAAP financial measure only supplementally.

The following is a reconciliation of our non-GAAP financial measure to its most directly comparable GAAP measure (in thousands) for the periods indicated:

                                                       Three months ended            Nine months ended
                                                         September 30,                 September 30,
                                                       2013           2012          2013           2012

Reconciliation of non-GAAP income from
continuing operations:
Income from continuing operations                   $    11,626      $ 7,302      $     917      $ 19,413
Share-based compensation expense                            444            0            444             0

Non-GAAP income from continuing operations          $    12,070      $ 7,302      $   1,361      $ 19,413


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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates, particularly estimates relating to revenue recognition, allowance for doubtful accounts, valuation of property and equipment, litigation and contingencies, and valuation of net deferred tax assets, have a material impact on our financial statements and are discussed in detail throughout our analysis of the results of operations discussed below. In some cases, changes in accounting estimates are reasonably likely to occur from period to period.

In addition to evaluating estimates relating to the items discussed above, we also consider other estimates and judgments, including, but not limited to, those related to derivative financial instruments, share-based compensation expense, software development costs, provision for income taxes, and other contingent liabilities, including liabilities that we deem not probable of assertion. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities, and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.

MicroStrategy does not have any material ownership interest in any special purpose or other entities that are not wholly-owned and/or consolidated into our Consolidated Financial Statements. Additionally, MicroStrategy does not have any material related party transactions.

The section "Critical Accounting Policies" included in Item 7 and the section "Summary of Significant Accounting Policies" (Note 2) included in Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2012 provide a more detailed explanation of the judgments made in these areas and a discussion of our accounting estimates and policies. There have been no significant changes in such estimates and policies since December 31, 2012, other than the addition of our accounting policies related to "Fair Value Measurements," "Derivative Financial Instruments," "Short-term Investments," and "Share-based Compensation" as disclosed in Note 1 "Summary of Significant Accounting Policies."


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Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations

We conduct a significant portion of our business in currencies other than the U.S. dollar, the currency in which we report our Consolidated Financial Statements. As currency rates change from quarter to quarter and year over year, our results of operations may be impacted. The table below summarizes the impact (in thousands) of fluctuations in foreign currency exchange rates on certain components of our Consolidated Statements of Operations by showing the increase (decrease) in revenues or expenses, as applicable, from the same period in the prior year. The term "international" refers to operations outside of the United States and Canada.

                                                    Three Months Ended             Nine Months Ended
                                                      September 30,                  September 30,
                                                   2013            2012           2013           2012

International product licenses revenues          $    (66 )      $ (1,610 )     $   (952 )     $ (3,162 )
International product support revenues                 33          (2,990 )         (692 )       (6,794 )
International other services revenues                (129 )        (1,481 )         (713 )       (3,611 )

Cost of product support revenues                      (39 )           (85 )         (120 )         (198 )
Cost of other services revenues                       (70 )        (1,336 )         (190 )       (3,681 )
Sales and marketing expenses                         (240 )        (2,240 )         (859 )       (4,740 )
Research and development expenses                     181              15            342            192
General and administrative expenses                   (78 )          (401 )         (204 )       (1,095 )

For example, if there had been no change to foreign currency exchange rates from 2012 to 2013, international product licenses revenues would have been $10.0 million rather than $9.9 million and $35.0 million rather than $34.0 million for the three and nine months ended September 30, 2013, respectively. If there had been no change to foreign currency exchange rates from 2012 to 2013, sales and marketing expenses would have been $51.0 million rather than $50.8 million and $155.1 million rather than $154.2 million for the three and nine months ended September 30, 2013, respectively.


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