MicroStrategy Sales Slip and Earnings Plummet in the Second Quarter

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MicroStrategy Incorporated (NASDAQ: MSTR) reported its second-quarter results on July 27, and the company saw sales drop by just over 2% year over year, mainly from falling revenue for its product licenses, subscription services, and product support.

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MicroStrategy results: The raw numbers

Metric Q2 2016 Q2 2017 Year-Over-Year Change
Sales $123.1 million $120.6 million (2.1%)
Net income $18.9 million $11.1 million (41.2%) 
Adjusted earnings per share $1.64 $0.96 (41.4%)

What happened with MicroStrategy this quarter?

  • Revenue from the company's product licenses and subscription services came in at $27.5 million in the second quarter, down 12.1% year over year.
  • Product support revenue slipped by 1% year over year, to $70.8 million.
  • One bright spot was MicroStrategy's "other services" revenue, which includes consulting and education and grew by 9.4% year over year, to $22.4 million.
  • Operating expenses increased 3.3% year-over-year in the second quarter to $80.6 million.
  • Income from operations was $15.7 million in the second quarter, versus $21.1 million in the year-ago quarter.
  • MicroStrategy ended the quarter with cash, cash equivalents, and short-term investments totaling $632.4 million, up from $589.4 million in the second quarter of last year.

What management had to say

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MicroStrategy CFO Phong Le provided a little more detail on the company's earnings drop, saying that product licensing revenue fell below the company's expectations.

"A shortfall in product license revenue contributed to declines in overall revenue, operating income and diluted earnings per share. Product license revenues declined 19% year-over-year ... " he said.

He attributed the decline to "competitive noise" from companies in the business intelligence market, "insufficient traction" attracting new business prospects, and "sector weakness." The stock dropped on Friday.

Looking ahead

MicroStrategy didn't provide any forecasts for the third quarter, but CEO Michael Saylor spent a significant amount of time on the earnings call explaining a new three-year plan to grow the company through an expansion in marketing and technology. 

Saylor said MicroStrategy will use its strong cash flow in order to fund the new pursuits:

We are in the lucky position of having a strong balance sheet, and what that means is we don't really need to generate our cash. What we need to do is take the cash that we generate going forward and invest it in improving the product, the offering and the brand so that we can continue to find new customers and expand our footprint.

He specifically noted that marketing expenses will increase by a factor of two to three, compared to their current levels. He also thinks the company will boost its technology and engineering headcount by 30% to 50% in order to further pursue technology endeavors like big data, financial reporting, artificial intelligence and the Internet of Things. 

All of this should help grow revenue in the coming year, and Saylor expects growth in the double digits down the road. "We want to be north of 10%. I think if we're in the single digits ... I don't think we would be satisfied with that long term. I think we want to be in the teens," he said.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends MicroStrategy. The Motley Fool has a disclosure policy.