MicroStrategy Aims to Grow in 2019
Enterprise software company MicroStrategy (NASDAQ: MSTR) reported its fourth-quarter results after the market closed on Jan. 29. Revenue declined once again, and adjusted earnings fell off a cliff. The company has been hiring employees and spending heavily as it looks to take advantage of market opportunities. A return to growth and margin improvement in 2019 is the plan as it wraps up this cycle of investments.
MicroStrategy's fourth-quarter results: The raw numbers
Metric | Q4 2018 | Q4 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $131.9 million | $136.4 million | (3.3%) |
GAAP net income | $3.3 million | ($25.5 million) | N/A |
GAAP earnings per share | $0.30 | ($2.23) | N/A |
Non-GAAP earnings per share | $0.30 | $1.62 | (81.5%) |
Data source: MicroStrategy. GAAP = generally accepted accounting principles.
What happened with MicroStrategy this quarter?
MicroStrategy disclosed that it expects to report a material weakness in its internal controls over financial reporting in its annual report. The material weakness is related to general information technology controls. The company has not identified any issues with its financial statements, and it expects to file its 10-K in a timely fashion and fix the material weakness by the end of fiscal 2019.
Foreign currency fluctuations had an unfavorable impact on fourth-quarter revenue. Currency also hurt third-quarter results.
Product licenses revenue was $31.2 million, up 2.2% year over year.
Subscription services revenue was $7.1 million, down 16.9% from the year-ago period.
Product support revenue was $73.7 million, decreasing 1.8% year over year.
Other services revenue was $20 million, down 10.5% from last year's Q4.
Operating expenses rose 14.5% in the fourth quarter to $108.2 million. The company continues to increase its sales and marketing spending, as well as its research and development spending, to take advantage of market opportunities.
MicroStrategy had cash, cash equivalents, and short-term investments of $576.1 million at the end of the fourth quarter, down from $675.2 million at the end of 2017.
It spent $111 million on share buybacks during 2018. The company's weighted average diluted share count declined by 2.6% in that time.
Image source: Getty Images.
What management had to say
Phong Le, MicroStrategy's CFO and COO, laid out the plan for 2019 during the earnings call: "As we enter 2019, our objective is to grow revenue across all areas of our business and scale back the pace of investments, maintaining generally flat operating expenses to expand operating margin."
The company increased its employee head count by 14% in 2018, pushing up costs as revenue was declining. MicroStrategy is starting to see some benefits, with product license revenue growing in the fourth quarter.
"Yes, we had good large deal activity in North America. And it obviously was a positive for us to see that business start to rebound," Le said in response to an analyst question about the product license business.
Le also commented on the company's decision to buy back shares during the fourth quarter: "There's quite a few different factors that would address our decision making on the buyback, and I wouldn't point to any particular factor. I mean, the most important part is, we wanted to return capital to our investors."
Looking ahead
Much like in recent quarters, MicroStrategy's revenue edged lower, and its adjusted earnings plummeted. The company aims to return to revenue growth this year, driven by the investments it made in 2018.
The first glimpse of that growth arrived in the fourth quarter, with the product license business expanding slightly. The market hasn't responded well to the company's strategy -- the stock is down about 36% since the start of 2017. It will take a convincing return to growth in 2019 to change minds.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends MicroStrategy. The Motley Fool has a disclosure policy.
