MicroStrategy Incorporated
MICROSTRATEGY INC (Form: 10-Q, Received: 11/02/2009 06:05:38)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 000-24435

 

 

MICROSTRATEGY INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

51-0323571

(I.R.S. Employer

Identification Number)

1861 International Drive, McLean, VA

(Address of Principal Executive Offices)

22102

(Zip Code)

(703) 848-8600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The number of shares of the registrant’s class A common stock and class B common stock outstanding on October 23, 2009 was 9,144,731 and 2,770,244, respectively.

 

 

 


Table of Contents

MICROSTRATEGY INCORPORATED

FORM 10-Q

TABLE OF CONTENTS

 

          Page

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (unaudited except for Consolidated Balance Sheets as of December 31, 2008)

  
  

Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

   1
  

Consolidated Statements of Operations for the Three Months Ended September 30, 2009 and 2008

   2
  

Consolidated Statements of Operations for the Nine Months Ended September 30, 2009 and 2008

   3
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

   4
  

Notes to Consolidated Financial Statements

   5

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   14

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   30

Item 4.

  

Controls and Procedures

   31

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   32

Item 1A.

  

Risk Factors

   33

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   44

Item 6.

  

Exhibits

   44


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

MICROSTRATEGY INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     September 30,
2009
    December 31,
2008
 
     (unaudited)     (audited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 200,670      $ 122,915   

Restricted cash and investments

     321        619   

Accounts receivable, net

     56,010        49,670   

Prepaid expenses and other current assets

     10,145        9,518   

Deferred tax assets, net

     14,857        26,743   

Assets held-for-sale

     —          4,964   
                

Total current assets

     282,003        214,429   

Property and equipment, net

     7,220        8,978   

Capitalized software development costs, net

     15,161        14,823   

Deposits and other assets

     36,414        36,804   

Deferred tax assets, net

     5,767        17,105   
                

Total assets

   $ 346,565      $ 292,139   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 26,191      $ 27,697   

Accrued compensation and employee benefits

     39,607        42,634   

Deferred revenue and advance payments

     73,045        66,495   

Deferred tax liabilities

     556        —     

Liabilities held-for-sale

     —          6,325   
                

Total current liabilities

     139,399        143,151   

Deferred revenue and advance payments

     3,848        1,679   

Other long-term liabilities

     10,869        9,268   
                

Total liabilities

     154,116        154,098   
                

Commitments and Contingencies

    

Stockholders’ Equity

    

Preferred stock undesignated, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding

     —          —     

Class A common stock, $0.001 par value; 330,000 shares authorized; 14,192 shares issued and 9,145 shares outstanding, and 14,167 shares issued and 9,120 shares outstanding, respectively

     14        14   

Class B common stock, $0.001 par value; 165,000 shares authorized; 2,770 issued and outstanding

     3        3   

Additional paid-in capital

     451,705        450,953   

Treasury stock, at cost; 5,047 shares

     (366,191     (366,191

Accumulated other comprehensive income

     831        1,471   

Retained earnings

     106,087        51,791   
                

Total Stockholders’ Equity

     192,449        138,041   
                

Total Liabilities and Stockholders’ Equity

   $ 346,565      $ 292,139   
                

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

1


Table of Contents

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

     Three Months Ended
September 30,
     2009     2008
     (unaudited)     (unaudited)

Revenues:

    

Product licenses

   $ 34,443      $ 24,787

Product support and other services

     69,574        65,841
              

Total revenues

     104,017        90,628
              

Cost of revenues:

    

Product licenses

     1,947        422

Product support and other services

     14,592        16,304
              

Total cost of revenues

     16,539        16,726
              

Gross profit

     87,478        73,902
              

Operating expenses:

    

Sales and marketing

     31,489        35,888

Research and development

     11,400        5,922

General and administrative

     14,204        14,744
              

Total operating expenses

     57,093        56,554
              

Income from continuing operations before financing and other income and income taxes

     30,385        17,348
              

Financing and other (expense) income:

    

Interest income, net

     121        623

Other (expense) income, net

     (422     694
              

Total financing and other (expense) income

     (301     1,317
              

Income from continuing operations before income taxes

     30,084        18,665

Provision for income taxes

     8,730        7,593
              

Income from continuing operations

     21,354        11,072
              

Discontinued operations:

    

Income from discontinued operations, net of tax provision ($0 and $53, respectively)

     —          52
              

Discontinued operations, net of tax

     —          52
              

Net Income

   $ 21,354      $ 11,124
              

Basic earnings per share (1):

    

From continuing operations

   $ 1.79      $ 0.93

From discontinued operations

   $ —        $ 0.01
              

Basic earnings per share

   $ 1.79      $ 0.94
              

Weighted average shares outstanding used in computing basic earnings per share

     11,909        11,887
              

Diluted earnings per share (1):

    

From continuing operations

   $ 1.73      $ 0.90

From discontinued operations

   $ —        $ —  
              

Diluted earnings per share

   $ 1.73      $ 0.90
              

Weighted average shares outstanding used in computing diluted earnings per share

     12,311        12,306
              

 

(1) Basic and fully diluted earnings per share for class A and class B common stock are the same.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

2


Table of Contents

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

     Nine Months Ended
September 30,
 
     2009     2008  
     (unaudited)     (unaudited)  

Revenues:

    

Product licenses

   $ 71,897      $ 67,966   

Product support and other services

     200,120        197,422   
                

Total revenues

     272,017        265,388   
                

Cost of revenues:

    

Product licenses

     4,523        1,442   

Product support and other services

     42,614        45,898   
                

Total cost of revenues

     47,137        47,340   
                

Gross profit

     224,880        218,048   
                

Operating expenses:

    

Sales and marketing

     93,376        100,060   

Research and development

     30,407        24,449   

General and administrative

     41,348        47,055   
                

Total operating expenses

     165,131        171,564   
                

Income from continuing operations before financing and other income and income taxes

     59,749        46,484   
                

Financing and other (expense) income:

    

Interest income, net

     516        2,081   

Other expense, net

     (1,626     (269
                

Total financing and other (expense) income

     (1,110     1,812   
                

Income from continuing operations before income taxes

     58,639        48,296   

Provision for income taxes

     18,673        20,365   
                

Income from continuing operations

     39,966        27,931   
                

Discontinued operations:

    

Gain from sale of discontinued operations, net of tax provision ($11,190 and $0, respectively)

     14,437        —     

Loss from discontinued operations, net of tax (benefit) provision (($54) and $176, respectively)

     (107     (383
                

Discontinued operations, net of tax

     14,330        (383
                

Net Income

   $ 54,296      $ 27,548   
                

Basic earnings (loss) per share (1):

    

From continuing operations

   $ 3.36      $ 2.35   

From discontinued operations

   $ 1.20      $ (0.03
                

Basic earnings per share

   $ 4.56      $ 2.32   
                

Weighted average shares outstanding used in computing basic earnings per share

     11,898        11,890   
                

Diluted earnings (loss) per share (1):

    

From continuing operations

   $ 3.26      $ 2.26   

From discontinued operations

   $ 1.17      $ (0.03
                

Diluted earnings per share

   $ 4.43      $ 2.23   
                

Weighted average shares outstanding used in computing diluted earnings per share

     12,262        12,332   
                

 

(1) Basic and fully diluted earnings per share for class A and class B common stock are the same.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

3


Table of Contents

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Operating activities:

    

Net income

   $ 54,296      $ 27,548   

Plus: (Income) loss from discontinued operations, net

     (14,330     383   
                

Income from continuing operations

     39,966        27,931   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     7,681        4,825   

Bad debt expense

     1,153        1,074   

Deferred taxes

     14,294        13,655   

Stock-based compensation

     —          45   

Excess tax benefits from stock-based payment arrangements

     (200     (241

Other, net

     (10     49   

Changes in operating assets and liabilities:

    

Accounts receivable

     (7,900     3,617   

Prepaid expenses and other current assets

     (445     176   

Deposits and other assets

     254        (218

Accounts payable and accrued expenses

     (1,948     2,034   

Accrued compensation and employee benefits

     (4,224     (1,740

Deferred revenue and advance payments

     7,085        6,071   

Other long-term liabilities

     1,572        568   
                

Net cash provided by operating activities from continuing operations

     57,278        57,846   

Net cash (used in) provided by operating activities from discontinued operations

     (472     1,399   
                

Net cash provided by operating activities

     56,806        59,245   
                

Investing activities:

    

Purchases of property and equipment

     (1,860     (2,972

Capitalized software development costs

     (4,218     (8,078

Decrease in restricted cash and investments

     504        1,062   
                

Net cash used in investing activities from continuing operations

     (5,574     (9,988

Net cash provided by (used in) investing activities from discontinued operations

     24,546        (158
                

Net cash provided by (used in) investing activities

     18,972        (10,146
                

Financing activities:

    

Distribution to Alarm.com minority shareholders

     (60     —     

Proceeds from sale of class A common stock under exercise of employee stock options

     565        2,073   

Excess tax benefits from stock-based payment arrangements

     200        241   

Purchases of treasury stock

     —          (8,387
                

Net cash provided by (used in) financing activities from continuing operations

     705        (6,073

Net cash provided by financing activities from discontinued operations

     —          —     
                

Net cash provided by (used in) financing activities

     705        (6,073

Effect of foreign exchange rate changes on cash and cash equivalents

     1,272        (933
                

Net increase in cash and cash equivalents

     77,755        42,093   

Cash and cash equivalents, beginning of period

     122,915        85,194   
                

Cash and cash equivalents, end of period

   $ 200,670      $ 127,287   
                

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

4


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis of Presentation

Except for the consolidated balance sheet of MicroStrategy Incorporated (“MicroStrategy” or the “Company”) as of December 31, 2008, which is derived from audited financial statements, the accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair statement of such financial position and results of operations have been included. All such adjustments are of a normal recurring nature unless otherwise disclosed. Interim results are not necessarily indicative of results for a full year.

The consolidated financial statements and notes are presented as required by Form 10-Q and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The Company evaluated its September 30, 2009 financial statements for subsequent events through October 30, 2009, the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

The Company must classify a business line as discontinued operations once the Company has committed to a plan to sell the business, as determined pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 360. “Property, Plant and Equipment” (“ASC 360”) (formerly Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment of Long-Lived Assets”, or SFAS 144). In March 2008, the Company committed to a plan to sell its Alarm.com business, which focused outside of the business intelligence software and services market. The Alarm.com business provided web-enabled residential and commercial security and activity monitoring technology. Historical financial information presented in the consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the current year presentation.

(2) Recent Accounting Standards

Effective July 1, 2009, the Company adopted ASC 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). The Codification superseded all existing non-SEC accounting and reporting standards and all references in this Quarterly Report on Form 10-Q now reflect corresponding topics of the Codification.

(3) Restricted Cash and Investments

Restricted cash and investments consists of cash and investment balances restricted in use by contractual obligations with third parties.

On March 15, 2005, the Company entered into a security agreement with a bank under which the Company posted cash to secure existing letters of credit. These letters of credit are used as security deposits for office leases, including the office lease for the Company’s corporate headquarters, as well as collateral for performance bonds. The Company may invest the cash collateral under the security agreement in certain permitted investments. As of both September 30, 2009 and December 31, 2008, the Company had $1.0 million in cash collateral posted under the security agreement, all invested in money market funds that are included in restricted cash and investments or deposits and other assets in the accompanying balance sheets, depending on whether the contractual obligation for which the collateral is posted is short term or long term, respectively.

 

5


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

(4) Accounts Receivable

Accounts receivable, net of allowances, consisted of the following, as of (in thousands):

 

     September 30,
2009
    December 31,
2008
 

Billed and billable

   $ 114,868      $ 115,316   

Less: billed and unpaid deferred revenue

     (55,094     (62,648
                
     59,774        52,668   

Less: allowance for doubtful accounts

     (3,764     (2,998
                
   $ 56,010      $ 49,670   
                

The Company offsets its accounts receivable and deferred revenue for any billed and unpaid items included in deferred revenue and advance payments.

(5) Deferred Revenue and Advance Payments

Deferred revenue and advance payments from customers consisted of the following, as of (in thousands):

 

     September 30,
2009
    December 31,
2008
 

Current:

    

Deferred product licenses revenue

   $ 9,414      $ 6,024   

Deferred product support revenue

     103,750        105,123   

Deferred other services revenue

     12,357        13,249   
                
     125,521        124,396   

Less: billed and unpaid deferred revenue

     (52,476     (57,901
                
   $ 73,045      $ 66,495   
                

Non-current:

    

Deferred product licenses revenue

   $ 291      $ 696   

Deferred product support revenue

     6,073        5,690   

Deferred other services revenue

     102        40   
                
     6,466        6,426   

Less: billed and unpaid deferred revenue

     (2,618     (4,747
                
   $ 3,848      $ 1,679   
                

The Company offsets accounts receivable and deferred revenue for any billed and unpaid items included in deferred revenue and advance payments.

(6) Litigation

On November 8, 2007 Diagnostic Systems Corp. (DSC), a subsidiary of Acacia Research Corporation, filed a complaint for patent infringement against MicroStrategy and a number of other unrelated defendants in the United States District Court for the Central District of California, Southern Division. The case has been consolidated with Case No. SA CV 07-896 AG (MLGx) pending against other unrelated defendants. The consolidated complaint accuses MicroStrategy of infringing U.S. Patent No. 5,537,590 (the’590 patent) directly, contributorily and by inducement by making, using, selling and offering for sale in the United States the MicroStrategy 8 Business Intelligence Platform, when used with an appropriate database. The consolidated complaint accuses MicroStrategy of willful infringement and seeks damages, a finding that

 

6


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

the case is exceptional and an award of attorneys’ fees, and preliminary and permanent injunctive relief. In its initial disclosures on December 28, 2007, DSC declined to disclose the amount of its alleged damages, but disclosed that its alleged damages are based on a reasonable royalty theory. MicroStrategy answered the consolidated complaint on December 28, 2007, denied infringement, asserted affirmative defenses of non-infringement, invalidity and unenforceability, among others, and counter-claimed for declaratory judgment that the ‘590 patent is not infringed, is invalid, and is unenforceable. The Court has set a trial date of February 23, 2010. On April 27, 2009, MicroStrategy filed an amended answer and counterclaims, asserting that it is entitled to relief against Acacia Research Corporation, Acacia Patent Acquisition Corporation, and Acacia Technology Services Corporation, as well as Diagnostic Systems Corp. Discovery is underway. The outcome of this litigation is not presently determinable. Accordingly, no provision for this matter has been made in the accompanying consolidated financial statements.

On December 10, 2003, MicroStrategy filed a complaint for patent infringement against Crystal Decisions, Inc. in the United States District Court for the District of Delaware. The lawsuit alleged that Crystal Decisions willfully infringed three patents issued to MicroStrategy relating to: (i) asynchronous control of report generation using a web browser (the ‘033 patent); (ii) management of an automatic OLAP report broadcast system (the ‘796 patent); and (iii) providing business intelligence web content with reduced client-side processing (the ‘432 patent). Following the filing of the complaint, Crystal Decisions was acquired by Business Objects Americas, Inc. Business Objects Americas, Inc. answered the complaint, denying infringement and seeking a declaration that the patents in suit are invalid and not infringed by Business Objects Americas, Inc. MicroStrategy filed a motion for summary judgment of infringement of the ‘432, ‘796, and ‘033 patents on October 13, 2005. Business Objects filed motions for summary judgment of non-infringement and invalidity of the ‘432, ‘796, and ‘033 patents on October 13, 2005. The Court granted Business Objects’ motions for summary judgment of non-infringement of the ‘033 patent and of invalidity of the ‘432 and ‘796 patents. The Court denied Business Objects’ motion for summary judgment of invalidity of the ‘033 patent and denied as moot Business Objects’ motion for summary judgment of non-infringement of the ‘432 and ‘796 patents. On February 23, 2006, the Court entered judgment in favor of Business Objects and against MicroStrategy. MicroStrategy filed a notice of appeal to the Federal Circuit on March 24, 2006. On June 25, 2007, the Federal Circuit affirmed the District Court’s judgment in favor of Business Objects and against MicroStrategy on each of the ‘432, ‘796, and ‘033 patents. MicroStrategy did not file a request for rehearing before the Federal Circuit or file a petition for a writ of certiorari before the United States Supreme Court.

On March 9, 2006, Business Objects filed a motion seeking reimbursement from MicroStrategy of Business Objects’ attorneys’ fees and costs in the amount of $4.7 million. On March 25, 2008, the Court issued a memorandum opinion and an order. The Court awarded partial fees and expenses to Business Objects as the prevailing party. Business Objects was awarded reasonable fees and expenses for its defense after March 14, 2005 against the ‘796 patent, the ‘033 patent and claims 1, 2, 4, and 5 of the ‘432 patent. Business Objects’ motion for fees and expenses related to claims 6, 9, 10 and 13 of the ‘432 patent was denied. On November 20, 2008, the Court awarded Business Objects attorneys’ fees and costs of $2,245,263.87 for its defense of the ‘796 patent, the ‘033 patent and claims 1, 2, 4 and 5 of the ‘432 patent after March 14, 2005 and $138,399.02 for the preparation of the petition. On December 17, 2008, the Company filed a notice of appeal. On April 24, 2009, the Company filed its opening brief in the Federal Circuit. A mediation session with the Chief Federal Circuit Mediator was held on May 1, 2009 . The case was not settled. Business Objects’ response brief was filed on July 23, 2009. The Company filed its reply brief on August 27, 2009, and briefing is now complete. The Federal Circuit has not yet scheduled oral argument. During the first quarter of 2008, the Company recorded a $2.3 million accrued liability related to this claim. The $2.3 million accrual is included in accounts payable and accrued expense in the Company’s consolidated balance sheets, and was recorded as a general and administrative expense in the Company’s consolidated statements of operations for the first quarter of 2008. The ultimate liability to the Company resulting from this proceeding may differ materially from the accrued amount.

The Company also is involved in various other legal proceedings arising in the normal course of business. Although the outcomes of these other legal proceedings are inherently difficult to predict, management does not expect the resolution of these other legal proceedings to have a material adverse effect on its financial position, results of operations or cash flows.

 

7


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

(7) Commitments and Contingencies

On January 31, 2007, the Company entered into an agreement to purchase a corporate aircraft which it expects to begin operating during the 2009 calendar year. The aggregate purchase price for the aircraft is $46.3 million, payable in installments on various dates related to the completion of manufacturing and delivery of the aircraft. To date, the Company has made payments totaling $32.5 million toward the purchase price of the aircraft. The Company expects to pay the remaining $13.8 million of the purchase price upon delivery of the aircraft, which is expected to occur during the fourth quarter of 2009. The Company expects to meet its payment obligations under this purchase commitment using working capital.

The Company made payments of $5.0 million, $2.5 million and $25.0 million with regards to this aircraft in January 2007, September 2007 and October 2008, respectively, and recorded the amount of these payments in deposits and other assets.

In March 2009, the Company arranged the issuance of a standby letter of credit in the amount of $2.4 million, which was used to guarantee the potential liability related to the Business Objects attorneys’ fees and costs claim.

From time to time, the Company enters into certain types of contracts that require it to indemnify parties against third party claims. These contracts primarily relate to agreements under which the Company has agreed to indemnify customers and partners for claims arising from intellectual property infringement. The conditions of these obligations vary and generally a maximum obligation is explicitly stated. Because the conditions of these obligations vary and the maximum is not always explicitly stated, the overall maximum amount of the Company’s indemnification obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and as such has not recorded an indemnification liability on its balance sheets as of September 30, 2009 or December 31, 2008. In July 2009, the Company received a letter from a customer asserting that the customer was entitled to indemnification from the Company in connection with patent infringement claims brought against the customer by a third party. The Company has not yet received information sufficient to allow the Company to determine whether the customer may be entitled to indemnification.

(8) Treasury Stock

On July 28, 2005, the Company announced that its Board of Directors had authorized the Company’s repurchase of up to an aggregate of $300.0 million of its class A common stock from time-to-time on the open market (the “2005 Share Repurchase Program”). On April 29, 2008, the Company’s Board of Directors amended the 2005 Share Repurchase Program to increase the amount of class A common stock that the Company is authorized to repurchase from $300 million to $800 million in the aggregate. The term of the 2005 Share Repurchase Program was also extended to April 29, 2013, although the program may be suspended or discontinued by the Company at any time. The timing and amount of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. The 2005 Share Repurchase Program may be funded using the Company’s working capital, as well as proceeds from any credit facilities and other borrowing arrangements which the Company may enter into in the future. During the nine months ended September 30, 2009, the Company did not repurchase any shares of its class A common stock pursuant to the 2005 Share Repurchase Program. As of September 30, 2009, the Company had repurchased an aggregate of 2,469,473 shares of its class A common stock at an average price per share of $95.69 and an aggregate cost of $236.3 million pursuant to the 2005 Share Repurchase Program.

 

8


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

All of the amounts above relating to average price per share and aggregate cost include broker commissions.

(9) Income Taxes

The Company and its subsidiaries conduct business in the U.S. and various foreign countries and are subject to tax in numerous domestic and foreign jurisdictions. As a result of its business activities, the Company files tax returns that are subject to examination by various federal, state, local, and foreign tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examination by tax authorities for years before 2000; however, due to its federal and state net operating loss (“NOL”) carryovers, the federal and state tax authorities may attempt to reduce or fully offset the amount of NOL or tax credit carryovers from tax years ending in 1999 and forward that were used in later tax years. The Company is currently under tax audit in Germany and the United Kingdom.

As of September 30, 2009, the Company has recorded in other long term liabilities an amount for uncertain income tax positions in the amount of $10.4 million. If recognized, the entire balance of these unrecognized tax benefits would impact the effective tax rate. Over the next 12 months, the amount of the net liability for unrecognized tax benefits could increase between $1.0 and $2.0 million related to our international operations. The Company recognizes estimated accrued interest related primarily to unrecognized income tax benefits in the provision for income taxes accounts. Penalties relating to income taxes, if incurred, would also be recognized as a component of the Company’s provision for income taxes. As of September 30, 2009, the amount of accrued interest expense on unrecognized income tax benefits was not material.

The following table summarizes the Company’s deferred tax assets, net, and valuation allowance, as of (in thousands):

 

     September 30,
2009
    December 31,
2008
 

Deferred tax assets, net of deferred tax liabilities

   $ 26,052      $ 49,518   

Valuation allowance

     (5,984     (5,670
                

Deferred tax assets, net of valuation allowance

   $ 20,068      $ 43,848   
                

The valuation allowance as of September 30, 2009 and December 31, 2008 relates to foreign net operating loss carryforwards and other foreign deferred tax assets. The Company has determined that there is insufficient positive evidence that it is more likely than not that such deferred tax assets will be realized in accordance with the rules under ASC 740, “Income Taxes” (formerly SFAS No. 109, “Accounting for Income Taxes”).

The Company has estimated its annual effective tax rate for the full fiscal year 2009 and applied that rate to its income before income taxes in determining its provision for income taxes for the nine months ended September 30, 2009. The Company also records discrete items in each respective period as appropriate. For the nine months ended September 30, 2009 and 2008, the Company’s consolidated annualized effective tax rate from continuing operations was 31.8% and 42.2%, respectively. The Company’s effective tax rate from continuing operations during the nine months ended September 30, 2009 decreased as compared to the nine months ended September 30, 2008, due to an increased proportion of foreign income taxed at lower rates, a decrease in foreign withholding taxes, an increase in research and development credits, and the absence in the 2009 period of a correction to the carrying value of the Company’s deferred tax asset for state net operating losses of $1.1 million that the Company recognized in the second quarter of 2008.

 

9


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The Company intends to indefinitely reinvest its undistributed earnings of certain foreign subsidiaries, in accordance with ASC 740 (formerly APB 23, “Accounting for Income Taxes, Special Areas”). Therefore, the annualized effective tax rate applied to the Company’s pre-tax income does not include any provision for U.S. federal and state income taxes on the amount of the undistributed foreign earnings. U.S. federal tax laws, however, require the Company to include in its U.S. taxable income certain investment income earned outside of the U.S. in excess of certain limits (“Subpart F deemed dividends”). Because Subpart F deemed dividends are already required to be recognized in the Company’s U.S. federal income tax return, the Company regularly repatriates to the U.S. Subpart F deemed dividends and no additional tax is incurred on the distribution.

In determining the Company’s provision for income taxes, net deferred tax assets, liabilities and valuation allowances, management is required to make judgments and estimates related to projections of domestic and foreign profitability, the timing and extent of the utilization of net operating loss carryforwards applicable tax rates, transfer pricing methods, and prudent and feasible tax planning strategies. As a multinational company, the Company is required to calculate and provide for estimated income tax liabilities for each of the tax jurisdictions in which it operates. This process involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, changes in tax laws particularly related to the utilization of net operating losses in various jurisdictions, and changes resulting from tax audits can all affect the overall effective income tax rate which, in turn, impacts the overall level of income tax expense and net income.

Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections. The timing and manner in which the Company will use the net operating loss carryforwards, research and development tax credit carryforward tax assets, alternative minimum tax credit carryforward tax assets, and foreign tax credit carryforward tax assets in any year, or in total, may be limited by provisions of the Internal Revenue Code regarding changes in the Company’s ownership. Currently, the Company expects to use the tax assets, subject to Internal Revenue Code limitations, within the carryforward periods. Valuation allowances have been established where the Company has concluded that it is not more likely than not that such deferred tax assets are realizable.

(10) Share-Based Compensation

The Company has share-based compensation plans under which directors, officers, employees and other eligible participants have previously received stock option awards. All stock options granted under the Company’s stock plans have terms of five to ten years and generally vest ratably over five years. Upon exercise, the Company generally issues new shares in the amount of the award exercised. The Company had 2.4 million shares of class A common stock available for issuance under its share-based compensation plans as of September 30, 2009. The Company has not issued any material stock option or other share-based compensation awards since the first quarter of 2004.

On July 10, 2009, Angel.com Incorporated (“Angel.com”), a wholly owned subsidiary of the Company, adopted a 2009 Stock Incentive Plan. On September 2, 2009, Angel.com amended and restated such plan (as amended and restated, the “Amended Plan”) to modify the categories of participants eligible to receive awards under such plan. Under the Amended Plan, employees, officers, directors, consultants and advisors of (i) Angel.com, (ii) any present or future parent and subsidiary corporation of Angel.com, (iii) any present or future subsidiary corporation of any present or future parent corporation of Angel.com, and (iv) any other business venture in which Angel.com or any present or future parent corporation of Angel.com has a controlling interest are eligible to be granted options, restricted stock awards and other awards with respect to, in the aggregate, up to 1,500,000 shares of the class A common stock of Angel.com. During the quarter ended September 30, 2009, options to purchase 904,500 shares of class A common stock of Angel.com, representing 6.6% of the outstanding equity of Angel.com on a fully diluted basis, were granted to eligible participants under the Amended Plan.

 

10


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Share-based compensation expense during the three and nine months ended September 30, 2009 and 2008 was not significant.

(11) Comprehensive Income

Comprehensive income includes foreign currency translation adjustments and unrealized gains and losses on short-term investments, net of related tax effects that have been excluded from net income and reflected in stockholders’ equity as accumulated other comprehensive income.

The Company’s comprehensive income consisted of the following for the periods indicated (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Net income

   $ 21,354      $ 11,124      $ 54,296      $ 27,548   

Foreign currency translation adjustment

     (181     (1,213     (639     (404

Unrealized loss on short-term investments,net of applicable taxes

     (2     (8     (1     (2
                                

Comprehensive income

   $ 21,171      $ 9,903      $ 53,656      $ 27,142   
                                

(12) Common Equity and Earnings per Share

The Company has two classes of common stock: class A common stock and class B common stock. Holders of class A common stock generally have the same rights, including rights to dividends, as holders of class B common stock, except that holders of class A common stock have one vote per share while holders of class B common stock have ten votes per share. Each share of class B common stock is convertible at any time, at the option of the holder, into one share of class A common stock. As such, basic and fully diluted earnings per share for class A and class B common stock are the same. The Company has never declared or paid any cash dividends on either class A or class B common stock.

Potential common shares are included in the diluted earnings per share calculation when dilutive. Potential common shares consisting of common stock issuable upon exercise of outstanding employee stock options are computed using the treasury stock method.

(13) Discontinued Operations

In March 2008, in connection with its consideration of strategic alternatives relating to its non-core Alarm.com business, the Company committed to a plan to sell this business. The Company made the decision to sell Alarm.com in order to focus its resources on its core competency of business intelligence software and services. Accordingly, the financial results for Alarm.com were reclassified as discontinued operations in the quarter ended March 31, 2008.

 

11


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

On February 13, 2009, the Company completed the sale of its equity interest in Alarm.com for consideration to the Company of $24.5 million in cash net of post-closing purchase price adjustments and transaction costs totaling $3.3 million in the aggregate, resulting in a gain of $14.4 million, net of tax. As of December 31, 2008, the associated assets and liabilities of the Alarm.com business were classified as held-for-sale in accordance with ASC 360, and are presented in the following table (in thousands):

 

     December 31,
2008
 

Assets:

  

Accounts receivable

   $ 4,522   

Prepaid expenses and other current assets

     222   

Property and equipment, net

     220   
        

Total assets

   $ 4,964   
        

Liabilities:

  

Accounts payable and accrued expenses

   $ 1,868   

Accrued compensation and employee benefits

     1,008   

Deferred revenue and advance payments

     3,449   
        

Total liabilities

   $ 6,325   
        

Net assets and liabilities of disposal group

   $ (1,361
        

The following table summarizes the revenues, pre-tax gain on sale and pre-tax income (loss) generated by the Alarm.com business during the three and nine months ended September 30, 2009 and 2008, respectively, (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
     2009    2008    2009     2008  

Revenues

   $ —      $ 5,941    $ 2,217      $ 16,391   

Pre-tax gain on sale

   $ —      $ —      $ 25,628      $ —     

Pre-tax income (loss)

   $ —      $ 105    $ (161   $ (207

 

12


Table of Contents

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

(14) Segment Information

The Company operates in one reportable segment with two business units – business intelligence software and services, and other. The business unit “Other” includes the Company’s Angel.com business, which provides interactive voice response services. The following summary discloses total revenues and long-lived assets, excluding long-term investments and long-term deferred tax assets, according to geographic region (in thousands):

 

     Business Intelligence Software and
Services
   Other     
     Domestic    EMEA    Other
Regions
   Domestic    Consolidated

Geographic regions:

              

Three months ended September 30, 2009

              

Total revenues

   $ 60,742    $ 30,706    $ 8,716    $ 3,853    $ 104,017

Long-lived assets

     52,535      3,029      1,972      1,259    $ 58,795

Three months ended September 30, 2008

              

Total revenues

   $ 48,408    $ 31,460    $ 8,072    $ 2,688    $ 90,628

Long-lived assets

     47,608      5,012      2,122      687    $ 55,429

Nine months ended September 30, 2009

              

Total revenues

   $ 156,307    $ 82,869    $ 23,172    $ 9,669    $ 272,017

Long-lived assets

     52,535      3,029      1,972      1,259    $ 58,795

Nine months ended September 30, 2008

              

Total revenues

   $ 147,974    $ 86,676    $ 22,945    $ 7,793    $ 265,388

Long-lived assets

     47,608      5,012      2,122      687    $ 55,429

The domestic region consists of the United States and Canada. The EMEA region includes operations in Europe, the Middle East and Africa. The other regions include all other foreign countries, generally comprising Latin America and the Asia Pacific region. For the three and nine months ended September 30, 2009 and 2008, no individual country outside the United States accounted for 10% or more of total consolidated revenues.

As of September 30, 2009 and 2008, no more than 10% of consolidated assets were concentrated in any one country outside of the United States. For the three and nine months ended September 30, 2009 and 2008, no individual customer accounted for 10% or more of the Company’s total consolidated revenues.

 

13


Table of Contents
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. 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 below under “Item 1A. Risk Factors,” among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein. 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

We are a worldwide provider of business intelligence software that enables companies to analyze the raw data stored across their enterprise to reveal the trends and insights needed to develop solutions to manage their business effectively. Our software delivers this information to workgroups, the enterprise and extranet communities via e-mail, web, fax, wireless and voice communication channels. Businesses can use our software platform to develop user-friendly solutions, proactively refine revenue-generating strategies, enhance cost-efficiency and productivity and improve customer relationships.

The MicroStrategy software platform enables users to query and analyze the most detailed, transaction-level databases, turning data into business intelligence and delivering boardroom quality reports and alerts about the users’ business processes. Our web-based architecture provides reporting, security, performance and standards that are critical for web deployment. With intranet deployments, our products provide employees with information to enable them to make better, more cost-effective business decisions. With extranet deployments, enterprises can use the MicroStrategy software platform to build stronger relationships by linking customers and suppliers via the Internet. We also offer a comprehensive set of consulting, education, technical support and technical advisory services for our customers and strategic partners.

Our core business intelligence (“BI”) business derives its revenues from product licenses and product support and other services. Product licenses revenues are derived from the sale of software licenses for our MicroStrategy 9™ business intelligence platform and related products. We license our software to end users through our direct sales organization and through indirect sales channels, such as resellers, systems integrators and original equipment manufacturers, or OEMs. Our arrangements with customers typically include: (a) an end-user license fee paid for the use of our products in perpetuity or over a specified term; (b) an annual maintenance agreement that provides for software updates and upgrades and technical support for an annual fee; and (c) a services work order for implementation, consulting and training, generally for a fee determined on a time-and-materials basis or, in certain circumstances, a fixed-fee.

During the nine months ended September 30, 2009, we operated two non-core businesses, Alarm.com and Angel.com, which focus outside of the BI software and services market. Alarm.com is a provider of web-enabled residential and commercial security and activity monitoring technology, and Angel.com is a provider of interactive voice response services. In March 2008 we committed to a plan to sell our Alarm.com business. Accordingly, the financial results for Alarm.com were classified as discontinued operations in the nine months ended September 30, 2008.

On February 13, 2009, we completed the sale of our equity interest in Alarm.com for consideration of $24.5 million in cash net of post-closing purchase price adjustments and transaction costs totaling $3.3 million in the aggregate, resulting in a gain of $14.4 million, net of tax. Accordingly, on our Consolidated Balance Sheets, we classified the associated assets and liabilities of the Alarm.com business as held-for-sale in accordance with Accounting Standards Codification (“ASC”) Topic No. 360, “Property, Plant and Equipment”, or ASC 360 (formerly Statement of Financial Accounting Standard (“SFAS”) No. 144,

 

14


Table of Contents

“Accounting for the Impairment of Long-Lived Assets ”, or SFAS 144). In our Consolidated Statements of Operations, we classified the operations of the Alarm.com business as Income (Loss) from Discontinued Operations, net of tax, because we do not expect to have significant continuing involvement or cash flows from this business after the divestiture. All assets and liabilities that are reported in these financial statements as “held-for-sale” are reported at the lower of the carrying cost or fair value less cost to sell.

The following table sets forth certain operating highlights for the three and nine months ended September 30, 2009 and 2008 (in thousands):

 

     Core BI Business    Angel.com     Consolidated
     Three Months Ended
September 30,
   Three Months Ended
September 30,
    Three Months Ended
September 30,
     2009    2008    2009     2008     2009    2008

Revenues

               

Product licenses

   $ 34,443    $ 24,787    $ —        $ —        $ 34,443    $ 24,787

Product support and other services

     65,721      63,153      —          —          65,721      63,153

Angel.com services

     —        —        3,853        2,688        3,853      2,688
                                           

Total revenues

     100,164      87,940      3,853        2,688        104,017      90,628
                                           

Cost of revenues

               

Product licenses

     1,947      422      —          —          1,947      422

Product support and other services

     13,048      15,908      —          —          13,048      15,908

Angel.com services

     —        —        1,544        396        1,544      396
                                           

Total cost of revenues

     14,995      16,330      1,544        396        16,539      16,726
                                           

Gross profit

     85,169      71,610      2,309        2,292        87,478      73,902
                                           

Operating expenses

               

Sales and marketing

     30,364      33,767      1,125        2,121        31,489      35,888

Research and development

     10,443      5,234      957        688        11,400      5,922

General and administrative

     13,817      14,679      387        65 (a)      14,204      14,744
                                           

Total operating expenses

     54,624      53,680      2,469        2,874        57,093      56,554
                                           

Income (loss) from operations

   $ 30,545    $ 17,930    $ (160   $ (582   $ 30,385    $ 17,348
                                           

 

(a) An insignificant amount of general and administrative services was provided to the Angel.com business unit by MicroStrategy’s core business operations during the three months ended September 30, 2008.

 

15


Table of Contents
     Core BI Business    Angel.com     Consolidated
     Nine Months Ended
September 30,
   Nine Months Ended
September 30,
    Nine Months Ended
September 30,
     2009    2008    2009     2008     2009    2008

Revenues

               

Product licenses

   $ 71,897    $ 67,966    $ —        $ —        $ 71,897    $ 67,966

Product support and other services

     190,451      189,629      —          —          190,451      189,629

Angel.com services

     —        —        9,669        7,793        9,669      7,793
                                           

Total revenues

     262,348      257,595      9,669        7,793        272,017      265,388
                                           

Cost of revenues

               

Product licenses

     4,523      1,442      —          —          4,523      1,442

Product support and other services

     38,780      44,602      —          —          38,780      44,602

Angel.com services

     —        —        3,834        1,296        3,834      1,296
                                           

Total cost of revenues

     43,303      46,044      3,834        1,296        47,137      47,340
                                           

Gross profit

     219,045      211,551      5,835        6,497        224,880      218,048
                                           

Operating expenses

               

Sales and marketing

     90,012      93,962      3,364        6,098        93,376      100,060

Research and development

     27,582      22,229      2,825        2,220        30,407      24,449

General and administrative

     40,077      46,840      1,271        215  (a)      41,348      47,055
                                           

Total operating expenses

     157,671      163,031      7,460        8,533        165,131      171,564
                                           

Income (loss) from operations

   $ 61,374    $ 48,520    $ (1,625   $ (2,036   $ 59,749    $ 46,484
                                           

 

(a) An insignificant amount of general and administrative services was provided to the Angel.com business unit by MicroStrategy’s core business operations during the nine months ended September 30, 2008.

The business intelligence market is highly competitive and our results of operations depend on our ability to market and sell product 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 business intelligence applications around a single software platform. This trend presents both opportunities and risks for our business. It offers us the opportunity to increase the size of transactions with new customers and to expand the size of our business intelligence installations with existing customers. On the other hand, it presents the risk that we may not be able to penetrate accounts where a competitor currently is or may become the incumbent business intelligence application provider. In addition, companies with industry leading positions in certain software markets, such as Microsoft, Oracle, IBM and SAP AG, have incorporated business intelligence capabilities into their product suites. As a result, our products need to be sufficiently differentiated from these bundled software offerings to create customer demand for our platform and products.

To address these opportunities and challenges, we are implementing a number of initiatives, including:

 

   

concentrating our research and development efforts on maintaining our position as a technology leader by continuing to innovate and lead in enterprise business intelligence, improving the capability of our products to efficiently handle the ever increasing volume of data and user scalability needs of our current and future customers, and adding analytical and end user features to support the increasing levels of sophistication in our customers’ business intelligence needs and applications, such as the incorporation of “dynamic enterprise dashboards” to our interfaces;

 

   

widening the availability of our business intelligence software through the launch of MicroStrategy Reporting Suite™, a free reporting software bundle targeted at departmental reporting applications, which features sophisticated reporting capabilities that enable the rapid deployment and delivery of operational and analytical reports, and also adopting new licensing and product configuration policies to give small and departmental users an easy point of entry into MicroStrategy tools; and

 

16


Table of Contents
   

realigning our global sales and services organizations and focusing on building new customer relationships, as well as expanding and strengthening our existing customer base.

General worldwide economic conditions have experienced a significant downturn. These conditions could cause our customers to slow spending on our products and services, which may delay and lengthen sales cycles. In addition, customers may delay or cancel information technology projects or seek to lower their costs by renegotiating vendor contracts. Customers with excess information technology resources may seek to develop in-house software solutions rather than obtain those solutions from us. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers.

On January 31, 2007, we entered into an agreement to purchase a corporate aircraft with an aggregate purchase price of $46.3 million, payable in installments on various dates related to the completion of manufacturing and delivery of the aircraft. To date, we have made payments totaling $32.5 million toward the purchase price of the aircraft. We expect to pay the remaining $13.8 million of the purchase price upon delivery of the aircraft, which is expected to occur during the fourth quarter of 2009. We intend to utilize this aircraft to assist us in, among other purposes, managing our global business, and believe that such use will facilitate more effective communication and more rapid coordination with our employees, partners, and customers around the world. Upon delivery of the aircraft, the depreciation expense of the capitalized cost of acquiring the aircraft and operating expenses relating to the aircraft will be included in general and administrative expenses. As a result, assuming the aircraft is delivered in the fourth quarter of 2009, we expect our general and administrative expenses to increase in future periods beginning in the fourth quarter of 2009.

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.

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 net deferred tax assets, and litigation and contingencies, have a material impact on our financial statements and are discussed in detail throughout our analysis of the results of operations discussed below.

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 software development costs, intangible assets, 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.

 

17


Table of Contents

MicroStrategy does not have any material ownership interest in any special purpose or other entities that are not wholly-owned or consolidated into our consolidated financial statements. Additionally, MicroStrategy does not have any material related party transactions as defined under ASC 850, “Related Party Disclosures” (formerly SFAS No. 57, “Related Party Disclosures.”)

For a more detailed explanation of the judgments made in these areas and a discussion of our accounting estimates and policies, refer to “Critical Accounting Estimates” included in Item 7 and “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, 2008. Since December 31, 2008, there have been no significant changes to our critical accounting estimates and policies.

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. Historically, we have generated a significant portion of our revenues and incurred a significant portion of our expenses in euro and the British pound sterling. 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 prior year.

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009     2008    2009     2008

International product licenses revenues

   $ (513   $ 463    $ (2,664   $ 2,218

International product support revenues

     (1,693     1,265      (8,509     5,632

International other services revenues

     (489     444      (2,810     2,023

Cost of product support revenues

     (97     33      (480     190

Cost of other services revenues

     (534     512      (2,518     1,704

Sales and marketing expenses

     (840     747      (5,704     3,777

General and administrative expenses

     (308     284      (1,519     1,126

The term “international” refers to operations outside of the United States and Canada. For example, if there had been no change to foreign currency exchange rates from 2008 to 2009, international product licenses revenues would have been $12.1 million rather than $11.6 million and $30.9 million rather than $28.2 million for the three and nine months ended September 30, 2009, respectively. If there had been no change to foreign currency exchange rates from 2008 to 2009, sales and marketing expenses for our core BI business would have been $31.2 million rather than $30.4 million and $95.7 million rather than $90.0 million for the three and nine months ended September 30, 2009, respectively.

 

18


Table of Contents

Results of Operations

Comparison of the three and nine months ended September 30, 2009 and 2008

Revenues

Except as otherwise indicated herein, the term “domestic” refers to operations in the United States and Canada, and the term “international” refers to operations outside of the United States and Canada.

Product licenses revenues. The following table sets forth product licenses revenues (in thousands) and percentage changes for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Product Licenses Revenues:

                

Domestic

   $ 22,819    $ 12,220    86.7   $ 43,699    $ 39,748    9.9

International

     11,624      12,567    -7.5     28,198      28,218    -0.1
                                

Total product licenses revenues

   $ 34,443    $ 24,787    39.0   $ 71,897    $ 67,966    5.8
                                

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period:

           

Above $1.0 million of licenses revenue recognized

   4    2    6    6

From $500,000 to $1.0 million of licenses revenue recognized

   11    8    21    17
                   

Total

   15    10    27    23
                   

Domestic:

           

Above $1.0 million of licenses revenue recognized

   3    1    4    5

From $500,000 to $1.0 million of licenses revenue recognized

   7    3    14    8
                   

Total

   10    4    18    13
                   

International:

           

Above $1.0 million of licenses revenue recognized

   1    1    2    1

From $500,000 to $1.0 million of licenses revenue recognized

   4    5    7    9
                   

Total

   5    6    9    10
                   

 

19


Table of Contents

The following table sets forth the recognized revenue attributable to product licenses transactions, grouped by size, during the periods indicated (in thousands):

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Product Licenses Revenue Recognized in the Applicable Period (in thousands):

                

Above $1.0 million of licenses revenue recognized

   $ 8,549    $ 5,102    67.6   $ 12,869    $ 12,160    5.8

From $500,000 to $1.0 million of licenses revenue recognized

     7,642      5,065    50.9     14,231      11,286    26.1

Below $500,000 of licenses revenue recognized

     18,252      14,620    24.8     44,797      44,520    0.6
                                

Total

     34,443      24,787    39.0     71,897      67,966    5.8
                                

Domestic:

                

Above $1.0 million of licenses revenue recognized

     7,472      2,332    220.4     9,615      9,390    2.4

From $500,000 to $1.0 million of licenses revenue recognized

     4,936      1,977    149.7     9,402      5,506    70.8

Below $500,000 of licenses revenue recognized

     10,411      7,911    31.6     24,682      24,852    -0.7
                                

Total

     22,819      12,220    86.7     43,699      39,748    9.9
                                

International:

                

Above $1.0 million of licenses revenue recognized

     1,077      2,770    -61.1     3,254      2,770    17.5

From $500,000 to $1.0 million of licenses revenue recognized

     2,706      3,088    -12.4     4,829      5,780    -16.5

Below $500,000 of licenses revenue recognized

     7,841      6,709    16.9     20,115      19,668    2.3
                                

Total

   $ 11,624    $ 12,567    -7.5   $ 28,198    $ 28,218    -0.1
                                

For the three months ended September 30, 2009 and 2008, product licenses transactions with at least $500,000 in recognized revenue represented 47.0% and 41.0%, respectively, of our product licenses revenues. During the nine months ended September 30, 2009, our top three product licenses transactions totaled $8.3 million of recognized revenue, compared to $9.1 million during the nine months ended September 30, 2008, or 11.6%, and 13.4% of total product licenses revenues, respectively.

Product licenses revenues increased 39.0% during the three months ended September 30, 2009, as compared to the same period in the prior year, primarily due to an increase in the average deal size of domestic transactions and an increase in the number of large domestic transactions, partially offset by a decrease in the number of large international transactions, a decrease in the average deal size of international transactions, and unfavorable changes in foreign currency exchange rates.

Product licenses revenues increased 5.8% during the nine months ended September 30, 2009, as compared to the same period in the prior year, due to an increase in the number of product licenses transactions with between $500,000 and $1.0 million of recognized revenue and an increase in the average deal size of product licenses transactions with at least $500,000 of recognized revenue.

Domestic product licenses revenues. Domestic product licenses revenues increased 86.7% during the three months ended September 30, 2009, as compared to the same period in the prior year, primarily due to an increase in the average deal size of domestic transactions and an increase in the number of domestic transactions with at least $500,000 of recognized revenue.

Domestic product licenses revenues increased 9.9% during the nine months ended September 30, 2009, as compared to the same period in the prior year, primarily due to an increase in the average deal size of domestic transactions and an increase in the number of domestic transactions with at least $500,000 of recognized revenue.

International product licenses revenues. International product licenses revenues decreased 7.5% during the three months ended September 30, 2009, as compared to the same period in the prior year, due to a decrease in the number of international transactions with at least $500,000 of recognized revenue, and unfavorable changes in foreign currency exchange rates.

International product licenses revenues remained relatively flat during the nine months ended September 30, 2009, as compared to the same period in the prior year, primarily due to an increase in the number of

 

20


Table of Contents

international transactions with more than $1.0 million of recognized revenue, offset by a decrease in the number of international transactions between $500,000 and $1.0 million of recognized revenue and unfavorable changes in foreign currency exchange rates.

Product support and other services revenues. The following table sets forth product support and other services revenues (in thousands) and percentage changes for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Product Support and Other Services Revenues:

                

Domestic

   $ 27,963    $ 26,480    5.6   $ 82,335    $ 77,982    5.6

International

     21,114      20,060    5.3     58,350      59,921    -2.6
                                

Total product support revenues

     49,077      46,540    5.5     140,685      137,903    2.0
                                

Consulting

     13,164      12,818    2.7     39,168      40,150    -2.4

Education

     3,480      3,795    -8.3     10,598      11,576    -8.4
                                

Total product support and other services revenues

   $ 65,721    $ 63,153    4.1   $ 190,451    $ 189,629    0.4
                                

Product support revenues. Product support revenues are derived from providing technical software support and software updates and upgrades to customers. Product support revenues are recognized ratably over the term of the contract, which in most cases is one year.

Domestic product support revenues increased during the three months ended September 30, 2009, as compared to the same period in the prior year. Contributing to this increase was a 14.8% growth in the number of technical support contracts which includes a high percentage of maintenance renewals from existing contracts partially offset by a decrease in average annual prices.

Domestic product support revenues increased during the nine months ended September 30, 2009, as compared to the same period in the prior year. Contributing to this increase was a 15.6% growth in the number of technical support contracts which includes a high percentage of maintenance renewals from existing contracts partially offset by a decrease in average annual prices.

International product support revenues increased during the three months ended September 30, 2009, as compared to the same period in the prior year, due to an increase in the number of technical support contracts, partially offset by unfavorable changes in foreign currency exchange rates.

International product support revenues decreased during the nine months ended September 30, 2009, as compared to the same period in the prior year, due to unfavorable changes in foreign currency exchange rates.

Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased during the three months ended September 30, 2009, as compared to the same period in the prior year, due to an increase in billable systems integration hours, partially offset by a decrease in the average hourly rate and unfavorable changes in foreign currency exchange rates.

Consulting revenues decreased during the nine months ended September 30, 2009, as compared to the same period in the prior year, due to a decrease in the average hourly rate and unfavorable changes in foreign currency exchange rates, partially offset by an increase in billable systems integration hours provided to our customers.

Education revenues. Education revenues are derived from the education and training that we provide to our customers to enhance their ability to fully utilize the features and functionality of our software. Education revenues decreased during the three months ended September 30, 2009, as compared to the same period in the prior year, primarily due to a decrease in the number of students trained partially offset by an increase in average training prices and unfavorable changes in foreign currency exchange rates.

 

21


Table of Contents

Education revenues decreased during the nine months ended September 30, 2009, as compared to the same period in the prior year, primarily due to a decrease in average training prices and unfavorable changes in foreign currency exchange rates.

Angel.com revenues. The following table sets forth Angel.com revenues (in thousands) and percentage change for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Angel.com services

   3,853    2,688    43.3   9,669    7,793    24.1

Angel.com services revenues increased during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, primarily due to an increase in the number of customers, an increase in the number of higher-value contracts and additional services offered.

Costs and Expenses

Cost of revenues. The following table sets forth cost of revenues (in thousands) and percentage changes in cost of revenues for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Cost of Revenues:

                

Product licenses

   $ 1,947    $ 422    361.4   $ 4,523    $ 1,442    213.7

Product support

     2,410      3,326    -27.5     7,557      10,001    -24.4

Consulting

     9,137      10,678    -14.4     26,854      29,069    -7.6

Education

     1,501      1,904    -21.2     4,369      5,532    -21.0

Angel.com services

     1,544      396    289.9     3,834      1,296    195.8
                                

Total cost of revenues

   $ 16,539    $ 16,726    -1.1   $ 47,137    $ 47,340    -0.4
                                

Cost of product licenses revenues. Cost of product licenses revenues consists of amortization of capitalized software development costs and the costs of product manuals, media, and royalties paid to third-party software vendors. Capitalized software development costs are amortized over a useful life of three years.

The increase in cost of product licenses revenues during the three and nine months ended September 30, 2009 of $1.5 million and $3.2 million, respectively, as compared to the same periods in the prior year, was primarily attributable to the increase in amortization of capitalized software development costs related to the release of MicroStrategy 9 in March 2009. We expect to amortize the balance of $14.6 million of capitalized software development costs related to the development of our MicroStrategy 9 platform ratably over the three year period following the release.

Cost of product support revenues. Cost of product support revenues consists of product support personnel and related overhead costs.

The decrease in cost of product support revenues during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, was primarily attributable to a decrease in staffing levels. Product support headcount decreased 14.5% to 106 at September 30, 2009 from 124 at September 30, 2008.

 

22


Table of Contents

Cost of consulting revenues. Cost of consulting revenues consists of personnel and related overhead costs. The decrease in cost of consulting revenues during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, was primarily attributable to the decrease in expenses related to greater utilization of personnel in lower cost regions and a decrease in travel and entertainment expenditures. Consulting headcount decreased 4.0% to 312 at September 30, 2009 from 325 at September 30, 2008.

Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. The decrease in cost of education revenues during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, was primarily attributable to a decrease in staffing levels. Education headcount decreased 36.1% to 39 at September 30, 2009 from 61 at September 30, 2008.

Cost of Angel.com services revenues. Cost of Angel.com services revenues includes hardware, telephony costs, personnel and related overhead costs. The increase in cost of Angel.com services revenues during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, was primarily due to an increase in staffing levels and increased costs related to additional consulting services offered. Angel.com consulting and technical support headcount increased to 10 at September 30, 2009 from no employees at September 30, 2008.

Sales and marketing, general and administrative, and other operating expenses for core BI business. The following table sets forth (in thousands) sales and marketing, general and administrative and other operating expenses for our core BI business and percentage changes for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Sales and marketing

   $ 30,364    $ 33,767    -10.1   $ 90,012    $ 93,962    -4.2

General and administrative

     13,817      14,679    -5.9     40,077      46,840    -14.4
                                

Total

   $ 44,181    $ 48,446    -8.8   $ 130,089    $ 140,802    -7.6
                                

Sales and marketing expenses for core BI business. Sales and marketing expenses consists of personnel costs, commissions, office facilities, travel, advertising, public relations programs and promotional events, such as trade shows, seminars and technical conferences.

Sales and marketing expenses decreased during the three months ended September 30, 2009, as compared to the same period in the prior year, with 30.2% of the decrease attributable to a reduction in travel and entertainment expenditures, 24.6% of the decrease attributable to a decrease in marketing costs from decreased sponsorships and a reduction in advertising campaigns, 13.1% of the decrease attributable to a decrease in compensation and related costs, 11.5% of the decrease attributable to decreases in recruiting costs, 11.5% of the decrease attributable to a decrease in facility and other related support costs, and 7.7% of the decrease attributable to the release of a reserve for sales taxes. Sales and marketing headcount decreased 11.6% to 557 at September 30, 2009 from 630 at September 30, 2008.

Sales and marketing expenses decreased during the nine months ended September 30, 2009, as compared to the same period in the prior year. Excluding a $1.0 million increase in compensation and related costs due to an increase in the hiring of upper level management personnel in order to focus our sales efforts, sales and marketing expenses decreased by a total of $4.9 million during the nine months ended September 30, 2009, as compared to the same period in the prior year, with 47.2% of such decrease attributable to a reduction in travel and entertainment expenditures, 26.9% of the decrease attributable to a decrease in marketing costs from decreased sponsorships and a reduction in advertising campaigns, and 22.2% of the decrease attributable to decreases in recruiting costs.

 

23


Table of Contents

General and administrative expenses for core BI business. General and administrative expenses consists of personnel and other costs of our executive, finance, human resources, information systems and administrative departments, as well as third-party consulting, legal and other professional fees.

General and administrative expenses decreased during the three months ended September 30, 2009, as compared to the same period in the prior year. Excluding a $0.6 million increase in consulting and advisory services, general and administrative expenses decreased by a total of $1.5 million during the three months ended September 30, 2009, as compared to the same period in the prior year, with 64.4% of the decrease attributable to a decrease in recruiting costs, 21.4% of the decrease attributable to a decrease in facility and other related support costs, and 11.2% of the decrease attributable to a reduction in travel and entertainment expenditures. General and administrative headcount decreased 8.0% to 324 at September 30, 2009 from 352 at September 30, 2008.

General and administrative expenses decreased during the nine months ended September 30, 2009, as compared to the same period in the prior year, with 34.3% of the decrease attributable to a decrease in recruiting costs, 33.9% of the decrease attributable to a decrease in legal costs due to a non-recurring $2.3 million expense accrual related to a litigation matter made during the nine months ended September 30, 2008, 19.7% of the decrease attributable to a decrease in facility and other related support costs, and 9.4% of the decrease attributable to a reduction in travel and entertainment expenditures.

Angel.com sales and marketing and general and administrative expenses. The following table sets forth sales and marketing and general and administrative expenses (in thousands) for our Angel.com business and percentage changes for these expenses for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
   %
Change
 
     2009    2008      2009    2008   

Sales and marketing

   $ 1,125    $ 2,121    -47.0   $ 3,364    $ 6,098    -44.8

General and administrative

     387      65    495.4     1,271      215    491.2
                                

Total

   $ 1,512    $ 2,186    -30.8   $ 4,635    $ 6,313    -26.6
                                

The decrease in Angel.com sales and marketing expenses during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, was primarily attributable to a decrease in compensation and related costs due to a decrease in staffing levels, partially offset by the absence in 2009 of certain costs related to compensation paid to Angel.com management in connection with the exploration of strategic alternatives for the Angel.com business during the three and nine months ended September 30, 2008. Sales and marketing headcount decreased 45.9% to 20 at September 30, 2009 from 37 at September 30, 2008. The increase in Angel.com general and administrative expenses during the three and nine months ended September 30, 2009, as compared to the same periods in the prior year, was primarily attributable to Angel.com’s entry into a new services agreement with the Company pursuant to which Angel.com is charged a fee for general and administrative services provided on its behalf by our core BI business. Our core BI business allocated an insignificant amount of general and administrative services expenses to Angel.com during the three and nine months ended September 30, 2008.

Research and development expenses. Research and development expenses consists of the personnel costs for our software engineering personnel, depreciation of equipment and other related costs.

 

24


Table of Contents

The following table summarizes research and development expenses and amortization of capitalized software development costs (in thousands) and percentage changes in those costs for the periods indicated:

 

     Three Months Ended
September 30,
    %
Change
    Nine Months Ended
September 30,
    %
Change
 
     2009    2008       2009     2008    

Gross research and development expenses:

             

Core research and development activities

   $ 10,443    $ 10,450      -0.1   $ 31,800      $ 30,307      4.9

Angel.com research and development activities

     957      688      39.1     2,825        2,220      27.3
                                   

Total research and development expenses before capitalized software development costs

     11,400      11,138      2.4     34,625        32,527      6.5

Capitalized software development costs

     —        (5,216   -100.0     (4,218     (8,078   -47.8
                                   

Total research and development expenses

   $ 11,400    $ 5,922      92.5   $ 30,407      $ 24,449      24.4
                                   

Amortization of capitalized software development costs included in cost of product licenses revenues

   $ 1,729    $ 247      600.0   $ 3,881      $ 845      359.3
                                   

Research and development expenses increased during the three months ended September 30, 2009, as compared to the same period in the prior year, primarily since no software development costs were capitalized during the period after the general release of our MicroStrategy 9 software in March 2009 as compared to $5.2 million in software development costs that were capitalized in the same period in the prior year. Excluding capitalized software development costs, core research and development expenses remained flat during the three months ended September 30, 2009, as compared to the same period in the prior year. Research and development headcount increased 6.7% to 382 at September 30, 2009 from 358 at September 30, 2008.

Research and development expenses increased during the nine months ended September 30, 2009, as compared to the same period in the prior year, due primarily to increases in expenses relating to the hiring of staff in our China technology center and staff for our Angel.com research and development activities, offset by $4.2 million in software development costs that were capitalized in the nine months ended September 30, 2009 as compared to $8.1 million in software development costs that were capitalized in the same period in the prior year. During the nine months ended September 30, 2009, our development efforts related to new products resulted in a higher percentage of our research and development costs being expended on developments that do not qualify for capitalization compared to the nine months ended September 30, 2008. We expect research and development expenses to continue to increase during the remainder of 2009 as compared to 2008 as we will no longer capitalize software development costs associated with MicroStrategy 9 due to its general release in March 2009. Excluding capitalized software development costs, core research and development expenses increased 4.9% during the nine months ended September 30, 2009, as compared to the same period in the prior year, primarily due to the increase in expenses relating to the hiring of staff in our China technology center and staff for our Angel.com research and development activities.

As of September 30, 2009, our research and development resources were allocated to the following projects: 68.7% to MicroStrategy 9, 3.1% to MicroStrategy 8, 13.0% to new project initiatives, and 15.2% to other research and development, including our Angel.com business and internal information technology initiatives .

Provision for Income Taxes . During the nine months ended September 30, 2009 and 2008, we recorded a provision for income taxes from continuing operations of $18.7 million and $20.4 million, respectively, resulting in an effective tax rate for such periods of 31.8% and 42.2%, respectively. Our effective tax rate from continuing operations decreased during the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, primarily due to an increased proportion of foreign income taxed at lower rates, a decrease in foreign withholding taxes, an increase in research and development credits, and the absence of a correction to the carrying value of our deferred tax asset for state net operating losses of $1.1 million in the second quarter of 2008.

 

25


Table of Contents

As of September 30, 2009, we had fully utilized our U.S. Federal net operating loss carryforwards and had foreign net operating loss carryforwards of $13.5 million and other temporary differences, carryforwards, and credits, which resulted in net deferred tax assets of $20.1 million. Also, as of September 30, 2009, we had a valuation allowance of $19.2 million (pre-tax) primarily related to certain foreign net operating loss carryforward and other deferred tax assets that we have concluded are not more likely than not of being realized.

We intend to indefinitely reinvest the undistributed 2009 earnings of certain foreign subsidiaries. Therefore, the annualized effective tax rate applied to our pre-tax income for the period ended September 30, 2009 did not include any provision for U.S. federal and state taxes on the projected amount of these undistributed 2009 foreign earnings. U.S. federal tax laws require us to include in our U.S. income tax return certain investment income earned outside of the U.S. in excess of certain limits (“Subpart F deemed dividends”). Because Subpart F deemed dividends are already required to be recognized in our U.S. federal income tax return, Subpart F deemed dividends are distributed currently; however, no additional tax is incurred on the distribution.

Discontinued Operations. In March 2008, we committed to a plan to sell our Alarm.com business, which focuses outside of the business intelligence software and services market. On February 13, 2009, we completed the sale of our equity interest in Alarm.com and received consideration of $24.5 million in cash net of post-closing purchase price adjustments and transaction costs totaling $3.3 million in the aggregate, resulting in a gain of $14.4 million, net of tax. ASC 360 requires that we report this business as “discontinued” on our Consolidated Statements of Operations, because we do not have continuing involvement in, or cash flows from, this operation after its divestiture.

As such, we reclassified revenues and costs associated with the Alarm.com business to discontinued operations for all periods represented. The following table summarizes the gain from the sale of discontinued operations, net of tax, and income (loss) from discontinued operations, net of tax, (in thousands) for the periods indicated:

 

     Three Months Ended
September 30,
   %
Change
    Nine Months Ended
September 30,
    %
Change
 
     2009    2008      2009     2008    

Gain on sale of discontinued operations, net of tax

   $ —      $ —      n/a      $ 14,437      $ —        n/a   

Income (loss) from discontinued operations, net of tax

     —        52    -100.0     (107     (383   72.1

Deferred Revenue and Advance Payments . Deferred revenue and advance payments represent product support and other services fees that are collected in advance and recognized over the contract service period and product licenses revenues relating to multiple element software arrangements that include future deliverables.

 

26


Table of Contents

The following table summarizes deferred revenue and advance payments (in thousands), as of the dates indicated:

 

     September 30,
2009
    December 31,
2008
    September 30,
2008
 

Current:

      

Deferred product licenses revenue

   $ 9,414      $ 6,024      $ 4,524   

Deferred product support revenue

     103,750        105,123        92,321   

Deferred other services revenue

     12,357        13,249        13,345   
                        
     125,521        124,396        110,190   

Less: billed and unpaid deferred revenue

     (52,476     (57,901     (40,433
                        
   $ 73,045      $ 66,495      $ 69,757   
                        

Non-current:

      

Deferred product licenses revenue

   $ 291      $ 696      $ 713   

Deferred product support revenue

     6,073        5,690        1,595   

Deferred other services revenue

     102        40        180   
                        
     6,466        6,426        2,488   

Less: billed and unpaid deferred revenue

     (2,618     (4,747     (919
                        
   $ 3,848      $ 1,679      $ 1,569   
                        

We offset our accounts receivable and deferred revenue for any billed and unpaid items included in deferred revenue and advance payments.

The decrease in billed and unpaid deferred revenue as of September 30, 2009, as compared to December 31, 2008, was primarily attributable to the seasonally large volume of product support invoices generated during the three months ended December 31, 2008 that subsequently were paid. The increase in deferred revenue and advance payments as of September 30, 2009, as compared to September 30, 2008, was primarily attributable to the growth in the number of technical support customers and a high percentage of technical support renewals from our existing customers.

Including billed and unpaid deferred revenue, we expect to recognize $125.5 million of deferred revenue and advance payments over the next 12 months. However, the timing and ultimate recognition of our deferred revenue and advance payments depend on our performance of various service obligations, and the amount of deferred revenue and advance payments at any date should not be considered indicative of revenues for any succeeding period.

During the three and nine months ended September 30, 2009, we entered into certain agreements that include future minimum commitments by our customers to purchase products, product support or other services over multi-year periods through 2013 totaling $76.5 million. Revenue relating to such future commitments by our customers is not included in our deferred revenue balances.

Revenue relating to such agreements will be recognized during the period in which all revenue recognition criteria are met. The timing and ultimate recognition of any revenue from such customer purchase commitments depend on our customers’ meeting their future purchase commitments and our meeting our associated performance obligations related to those purchase commitments.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents and on-going collection of our accounts receivable. On September 30, 2009 and December 31, 2008, we had $200.7 million and $122.9 million, respectively, in cash and cash equivalents. On February 13, 2009, we completed the sale of our equity interest in Alarm.com for consideration of $24.5 million in cash net of post-closing purchase price adjustments and transaction costs totaling $3.3 million in the aggregate, resulting in a gain of $14.4 million, net of tax. Management believes that existing cash and cash anticipated to be generated by operations will be sufficient to meet working capital requirements and anticipated capital expenditures, including the expenditures set forth in the table below, for at least the next 12 months. Based upon our cash position, we do not currently expect to borrow money to finance our operations.

 

27


Table of Contents

On March 15, 2005, we entered into a security agreement with a bank under which we posted cash to secure existing letters of credit. These letters of credit are used as security deposits for office leases, including the office lease for our corporate headquarters, as well as collateral for performance bonds. We may invest the cash collateral under the security agreement in certain permitted investments. As of September 30, 2009, we had $1.0 million of cash collateral posted under the security agreement, all invested in money market funds. In March 2009, we arranged the issuance of a standby letter of credit in the amount of $2.4 million, which was used to guarantee the potential liability related to the Business Objects attorneys’ fees and costs claim discussed in Part II, “Other Information”, Item 1. “Legal Proceedings.”

On July 28, 2005, we announced that our Board of Directors had authorized our repurchase of up to an aggregate of $300.0 million of our class A common stock from time to time on the open market (the “2005 Share Repurchase Program”). On April 29, 2008, our Board of Directors amended the 2005 Share Repurchase Program to increase the amount of class A common stock that we are authorized to repurchase from $300 million to $800 million in the aggregate. The term of the 2005 Share Repurchase Program was also extended to April 29, 2013, although the program may be suspended or discontinued by us at any time. The timing and amount of any shares repurchased will be determined by our management based on its evaluation of market conditions and other factors. The 2005 Share Repurchase Program may be funded using our working capital, as well as proceeds from any credit facilities and other borrowing arrangements which we may enter into in the future. During the nine months ended September 30, 2009, we did not repurchase any of our class A common stock pursuant to the 2005 Share Repurchase Program. As of September 30, 2009, we had repurchased an aggregate of 2,469,473 shares of our class A common stock at an average price per share of $95.69 and an aggregate cost of $236.3 million pursuant to the 2005 Share Repurchase Program.

All of the amounts above relating to average price per share and aggregate cost include broker commissions.

On January 31, 2007, we entered into an agreement to purchase a corporate aircraft which we expect to begin operating during the fourth quarter of 2009. The aggregate purchase price for the aircraft is $46.3 million, payable in installments on various dates related to the completion of manufacturing and delivery of the aircraft. We expect to meet our payment obligations under this purchase agreement using working capital. To date, we have made payments totaling $32.5 million toward the purchase price of the aircraft. We expect to pay the remaining $13.8 million of the purchase price upon delivery of the aircraft, which is expected to occur during the fourth quarter of 2009.

We lease office space and computer and other equipment under operating lease agreements. In addition to base rent, we are responsible for certain taxes, utilities and maintenance costs, and several leases include options for renewal or purchase. The following table shows future minimum payments under noncancellable operating leases and agreements with initial terms of greater than one year, net of total future minimum rentals to be received under noncancellable sublease agreements, and future payments under the aircraft purchase agreement, based on the currently expected due dates of the various installments (in thousands):

 

     Twelve Months Ended September 30,          
     2010    2011    2012    2013    2014    Thereafter    Total

Contractual Obligations:

                    

Operating leases

   $ 11,530    $ 4,315    $ 3,247    $ 2,762    $ 2,115    $ 3,814    $ 27,783

Purchase obligations

     13,823      —        —        —        —        —        13,823
                                                

Total

   $ 25,353    $ 4,315    $ 3,247    $ 2,762    $ 2,115    $ 3,814    $ 41,606
                                                

 

28


Table of Contents

As of September 30, 2009, we had $10.4 million of total gross unrecognized tax benefits. The timing of any payments which could result from these unrecognized tax benefits will depend on a number of factors, and accordingly the amount and period of any future payments cannot be estimated. We do not expect a significant tax payment related to these obligations within the next year.

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $56.8 million and $59.2 million during the nine months ended September 30, 2009 and 2008, respectively. The major components of net cash provided by operating activities for the nine months ended September 30, 2009 were $40.0 million of net income from continuing operations, a $14.3 million decrease in deferred taxes, a $7.9 million increase in accounts receivable, $7.7 million of non-cash depreciation and amortization charges, a $7.1 million increase in deferred revenue and advance payments, a $4.2 million decrease in accrued compensation and employee benefits, and a $1.9 million decrease in accounts payable and accrued expenses. The decrease in net cash provided by operating activities during the nine months ended September 30, 2009, as compared to the same period in the prior year, was primarily attributable to an $11.5 million increase in accounts receivable and a $2.5 million decrease in accrued compensation and employee benefits, partially offset by a $12.0 million increase in net income from continuing operations.

Net Cash Provided by (Used in) Investing Activities. Net cash provided by investing activities was $19.0 million during the nine months ended September 30, 2009. Net cash used in investing activities was $10.1 million during the nine months ended September 30, 2008. The major components of net cash provided by investing activities for the nine months ended September 30, 2009 consisted of $1.9 million of purchases of property and equipment, a $4.2 million increase in capitalized software development costs, and a $24.5 million increase in cash provided by discontinued operations. The increase in net cash provided by investing activities during the nine months ended September 30, 2009, as compared to the same period in the prior year, was primarily attributable to the $24.5 million increase in cash provided by discontinued operations, which consisted of the proceeds from the February 2009 sale of our equity interest in Alarm.com.

Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $0.7 million during the nine months ended September 30, 2009. Net cash used in financing activities was $6.1 million during the nine months ended September 30, 2008. Net cash provided by financing activities for the nine months ended September 30, 2009 consisted of proceeds from the sale of class A common stock from the exercise of stock options of $0.6 million and a $0.2 million increase in excess tax benefits from stock-based arrangements, partially offset by a distribution to minority shareholders of our former Alarm.com subsidiary of $60,000. The increase in net cash provided by financing activities during the nine months ended September 30, 2009, as compared to the same period in the prior year, was primarily attributable to a decrease in the purchases of treasury stock of $8.4 million.

Off-Balance Sheet Arrangements. On March 15, 2005, we entered into a security agreement with a bank under which we posted cash to secure existing letters of credit. These letters of credit are used as security deposits for office leases, including the office lease for our corporate headquarters, as well as collateral for performance bonds. We may invest the cash collateral under the security agreement in certain permitted investments. As of September 30, 2009, we had $1.0 million of cash collateral posted under the security agreement.

In March 2009, we arranged the issuance of a standby letter of credit in the amount of $2.4 million, which was used to guarantee the potential liability related to the Business Objects attorneys’ fees and costs claim discussed in Part II, “Other Information”, Item 1. “Legal Proceedings.” As of September 30, 2009, we did not have any off-balance sheet arrangements that had or were reasonably likely to have a current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

29


Table of Contents

Recent Accounting Standards

Effective July 1, 2009, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification superseded all existing non-SEC accounting and reporting standards and all references in this Quarterly Report on Form 10-Q now reflect corresponding topics of the Codification.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk exposures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.

We are exposed to the impact of both interest rate changes and foreign currency fluctuations.

Interest Rate Risk. Our exposure to risk for changes in interest rates relates primarily to our investments. We generally invest our excess cash in short-term, highly-rated, fixed rate financial instruments. These fixed rate investments are subject to interest rate risk and may fall in value if interest rates increase.

As of September 30, 2009, we did not have any material investments.

Foreign Currency Risk . 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. International sales accounted for 37.9% and 43.6% of our total revenues for the three months ended September 30, 2009 and 2008, respectively, and 39.0% and 41.3% of our total revenues for the nine months ended September 30, 2009 and 2008, respectively. We anticipate that international revenues will continue to account for a significant portion of our total revenues. The functional currency of each of our foreign subsidiaries is the local currency.

Assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the applicable balance sheet date and any resulting translation adjustments are included as an adjustment to stockholders’ equity. Revenues and expenses generated from these subsidiaries are translated at average monthly exchange rates during the quarter in which the transactions occur. Gains and losses from transactions in local currencies are included in net income.

Historically, we have generated a significant portion of our revenues and incurred a significant portion of our expenses in euro and the British pound sterling. As a result of transacting in multiple currencies and reporting our financial statements in U.S. dollars, our operating results may be adversely impacted by currency exchange rate fluctuations in the future. Further information on the impact of foreign currency exchange rate fluctuations on current and comparable periods is further described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We cannot predict the effect of exchange rate fluctuations upon our future results. We attempt to minimize our foreign currency risk by converting our excess foreign currency held in foreign jurisdictions to U.S. dollar denominated cash and investment accounts. To date, we have not hedged the risks associated with foreign currency exchange exposure. Although we may do so in the future, we cannot be sure that any hedging techniques will be successful or that our business, results of operations, financial condition and cash flows will not be materially adversely affected by exchange rate fluctuations.

As of September 30, 2009, a 10% adverse change in foreign currency exchange rates versus the U.S. dollar would have decreased our aggregate reported cash and cash equivalents and restricted cash and investments by 0.4%.

 

30


Table of Contents
Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2009. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

31


Table of Contents

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

On November 8, 2007, Diagnostic Systems Corp. (DSC), a subsidiary of Acacia Research Corporation, filed a complaint for patent infringement against MicroStrategy and a number of other unrelated defendants in the United States District Court for the Central District of California, Southern Division. The case has been consolidated with Case No. SA CV 07-896 AG (MLGx) pending against other unrelated defendants. The consolidated complaint accuses MicroStrategy of infringing U.S. Patent No. 5,537,590 (the ‘590 patent) directly, contributorily and by inducement, by making, using, selling and offering for sale in the United States the MicroStrategy 8 Business Intelligence Platform, when used with an appropriate database. The consolidated complaint accuses MicroStrategy of willful infringement and seeks damages, a finding that the case is exceptional and an award of attorneys’ fees, and preliminary and permanent injunctive relief. In its initial disclosures on December 28, 2007, DSC declined to disclose the amount of its alleged damages, but disclosed that its alleged damages are based on a reasonable royalty theory. MicroStrategy answered the consolidated complaint on December 28, 2007, denied infringement, asserted affirmative defenses of non-infringement, invalidity and unenforceability, among others, and counter-claimed for declaratory judgment that the ‘590 patent is not infringed, is invalid, and is unenforceable. The Court has set a trial date of February 23, 2010. On April 27, 2009, MicroStrategy filed an amended answer and counterclaims, asserting that it is entitled to relief against Acacia Research Corporation, Acacia Patent Acquisition Corporation, and Acacia Technology Services Corporation, as well as Diagnostic Systems Corp. Discovery is underway. No provision for this matter has been made in the accompanying consolidated financial statements.

On December 10, 2003, MicroStrategy filed a complaint for patent infringement against Crystal Decisions, Inc. in the United States District Court for the District of Delaware. The lawsuit alleged that Crystal Decisions willfully infringed three patents issued to MicroStrategy relating to: (i) asynchronous control of report generation using a web browser (the ‘033 patent); (ii) management of an automatic OLAP report broadcast system (the ‘796 patent); and (iii) providing business intelligence web content with reduced client-side processing (the ‘432 patent). Following the filing of the complaint, Crystal Decisions was acquired by Business Objects Americas, Inc. Business Objects Americas, Inc. answered the complaint, denying infringement and seeking a declaration that the patents in suit are invalid and not infringed by Business Objects Americas, Inc. MicroStrategy filed a motion for summary judgment of infringement of the ‘432, ‘796, and ‘033 patents on October 13, 2005. Business Objects filed motions for summary judgment of non-infringement and invalidity of the ‘432, ‘796, and ‘033 patents on October 13, 2005. The Court granted Business Objects’ motions for summary judgment of non-infringement of the ‘033 patent and of invalidity of the ‘432 and ‘796 patents. The Court denied Business Objects’ motion for summary judgment of invalidity of the ‘033 patent and denied as moot Business Objects’ motion for summary judgment of non-infringement of the ‘432 and ‘796 patents. On February 23, 2006, the Court entered judgment in favor of Business Objects and against MicroStrategy. MicroStrategy filed a notice of appeal to the Federal Circuit on March 24, 2006. On June 25, 2007, the Federal Circuit affirmed the District Court’s judgment in favor of Business Objects and against MicroStrategy on each of the ‘432, ‘796, and ‘033 patents. MicroStrategy did not file a request for rehearing before the Federal Circuit or file a petition for a writ of certiorari before the United States Supreme Court.

On March 9, 2006, Business Objects filed a motion seeking reimbursement from MicroStrategy of Business Objects’ attorneys’ fees and costs in the amount of $4.7 million. On March 25, 2008, the Court issued a memorandum opinion and an order. The Court awarded partial fees and expenses to Business Objects as the prevailing party. Business Objects was awarded reasonable fees and expenses for its defense after March 14, 2005 against the ‘796 patent, the ‘033 patent and claims 1, 2, 4, and 5 of the ‘432 patent. Business Objects’ motion for fees and expenses related to claims 6, 9, 10 and 13 of the ‘432 patent was denied. On November 20, 2008, the Court awarded Business Objects attorneys’ fees and costs of $2,245,263.87 for its defense of the ‘796 patent, the ‘033 patent and claims 1, 2, 4 and 5 of the ‘432 patent after March 14, 2005 and $138,399.02 for the preparation of the petition. On December 17, 2008, we filed a notice of appeal. On April 24, 2009, we filed our opening brief in the Federal Circuit. A mediation session with the Chief Federal Circuit Mediator was held on May 1, 2009. The case was not settled.

 

32


Table of Contents

Business Objects’ response brief was filed on July 23, 2009. We filed our reply brief on August 27, 2009, and briefing is now complete. The Federal Circuit has not yet scheduled oral argument. During the first quarter of 2008, we recorded a $2.3 million accrued liability related to this claim. The $2.3 million accrual is included in accounts payable and accrued expense in our consolidated balance sheets, and was recorded as a general and administrative expense in our consolidated statements of operations for the first quarter of 2008. The ultimate liability to us resulting from this proceeding may differ materially from the accrued amount.

We also are involved in various other legal proceedings arising in the normal course of business. Although the outcomes of these other legal proceedings are inherently difficult to predict, we do not expect the resolution of these other legal proceedings to have a material adverse effect on our financial position, results of operations or cash flows .

 

Item 1A. Risk Factors

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing MicroStrategy. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our class A common stock could decline and you may lose all or part of your investment.

Our quarterly operating results, revenues and expenses may fluctuate significantly, which could have an adverse effect on the market price of our stock

For a number of reasons, including those described below, our operating results, revenues and expenses have in the past varied and may in the future vary significantly from quarter to quarter. These fluctuations could have an adverse effect on the market price of our class A common stock.

Fluctuations in Quarterly Operating Results. Our quarterly operating results may fluctuate, in part, as a result of:

 

   

the size, timing, volume and execution of significant orders and shipments;

 

   

the mix of products and services of customer orders, which can affect whether we recognize revenue upon the signing and delivery of our software products or whether revenue must be recognized as work progresses or over the entire contract period;

 

   

the timing of new product announcements by us or our competitors;

 

   

changes in our pricing policies or those of our competitors;

 

   

market acceptance of business intelligence software generally and of new and enhanced versions of our products in particular;

 

   

the length of our sales cycles;

 

   

seasonal factors, such as our traditionally lower pace of new product license transactions in the summer;

 

   

changes in our operating expenses;

 

   

personnel changes;

 

   

our use of direct and indirect distribution channels;

 

33


Table of Contents
   

utilization of our consulting and education services, which can be affected by delays or deferrals of customer implementation of our software products;

 

   

the quarterly performance of our Angel.com business, which is highly variable and particularly difficult to forecast;

 

   

changes in foreign currency exchange rates;

 

   

our profitability and expectations for future profitability and its effect on our deferred tax assets and net income for the period in which any adjustment to our net deferred tax asset valuation allowance may be made;

 

   

increases or decreases in our liability for unrecognized tax benefits under ASC 740, “Income Taxes” (formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”); and

 

   

changes in customer budgets.

Limited Ability to Adjust Expenses. We base our operating expense budgets on expected revenue trends. Many of our expenses, such as office leases and certain personnel costs, are relatively fixed. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any quarter.

Based on the above factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the trading price of our class A common stock may fall.

The trading price for our class A common stock has been and may continue to be volatile

The trading price of our class A common stock historically has been volatile and may continue to be volatile. The trading price of our class A common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include, but are not limited to:

 

   

quarterly variations in our results of operations or those of our competitors;

 

   

announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;

 

   

the emergence of new sales channels in which we are unable to compete effectively;

 

   

our ability to develop and market new and enhanced products on a timely basis;

 

   

commencement of, or our involvement in, litigation;

 

   

any major change in our board or management;

 

   

changes in governmental regulations or in the status of our regulatory approvals;

 

   

recommendations by securities analysts or changes in earnings estimates;

 

   

announcements about our earnings that are not in line with analyst expectations, the likelihood of which may be enhanced because it is our policy not to give guidance relating to our anticipated financial performance in future periods;

 

   

announcements by our competitors of their earnings that are not in line with analyst expectations;

 

   

the volume of shares of class A common stock available for public sale;

 

   

sales of stock by us or by our stockholders;

 

34


Table of Contents
   

short sales, hedging and other derivative transactions involving shares of our class A common stock; and

 

   

general economic conditions and slow or negative growth of related markets.

In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our class A common stock, regardless of our actual operating performance.

Current economic uncertainties, and particularly the downturn in the financial services and retail industries, could adversely affect our business and results of operations

General worldwide economic conditions have experienced a significant downturn. These conditions make it extremely difficult for our customers and us to accurately forecast and plan future business activities, and they could cause our customers to slow spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our results would be negatively impacted.

We have a significant number of customers in the financial services and retail industries. The significant downturn in these industries may cause firms to react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their spending on information technology. In addition, customers in these industries may delay or cancel information technology projects or seek to lower their costs by renegotiating vendor contracts. Customers with excess information technology resources may choose to develop in-house software solutions rather than obtain those solutions from us. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in the financial services industry may result in reduced overall spending on our products.

We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, generally or in the financial services and retail industries. If the downturn in the general economy or markets in which we operate persists or worsens from present levels, our business, financial condition and results of operations could be materially and adversely affected.

Revenue recognition accounting pronouncements may adversely affect our reported results of operations

We continuously review our compliance with all new and existing revenue recognition accounting pronouncements. Depending upon the outcome of these ongoing reviews and the potential issuance of further accounting pronouncements, implementation guidelines and interpretations, we may be required to modify our reported results, revenue recognition policies or business practices, which could have a material adverse effect on our results of operations.

We may have exposure to greater than anticipated tax liabilities

We are subject to income taxes and non-income taxes in a variety of domestic and foreign jurisdictions. Our future income taxes could be adversely affected by earnings that are lower than anticipated in jurisdictions where we have lower statutory rates and earnings that are higher than anticipated in jurisdictions where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, changes in the amount of unrecognized tax benefits under ASC 740, or by changes in tax laws, regulations, accounting principles or interpretations thereof.

Our determination of our tax liability is subject to review by applicable domestic and foreign tax authorities. For example, we are currently under tax audit in the UK and Germany. Any adverse outcome

 

35


Table of Contents

of such a review could have an adverse effect on our operating results and financial condition. The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Moreover, as a multinational business, we have subsidiaries that engage in many intercompany transactions in a variety of tax jurisdictions where the ultimate tax determination is uncertain.

We also have contingent tax liabilities that, in management’s judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, we may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.

As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements and any such difference may materially affect our financial results in future periods in which we change our estimates of our tax obligations or in which the ultimate tax outcome is determined.

If the market for business intelligence software fails to grow as we expect, or if businesses fail to adopt our products, our business, operating results and financial condition could be materially adversely affected

Nearly all of our revenues to date have come from sales of business intelligence software and related technical support, consulting and education services. We expect these sales to account for a large portion of our revenues for the foreseeable future. Although demand for business intelligence software has grown in recent years, the market for business intelligence software applications is still evolving. Resistance from consumer and privacy groups to increased commercial collection and use of data on spending patterns and other personal behavior and governmental restrictions on the collection and use of personal data may impair the further growth of this market, as may other developments. We cannot be sure that this market will continue to grow or, even if it does grow, that businesses will adopt our solutions. We have spent, and intend to keep spending, considerable resources to educate potential customers about business intelligence software in general and our solutions in particular. However, we cannot be sure that these expenditures will help our products achieve any additional market acceptance. If the market fails to grow or grows more slowly than we currently expect, our business, operating results and financial condition would be materially adversely affected.

We face intense competition, which may lead to lower prices for our products, reduced gross margins, loss of market share and reduced revenue

The markets for business intelligence software, analytical applications and information delivery are intensely competitive and subject to rapidly changing technology. In addition, many companies in these markets are offering, or may soon offer, products and services that may compete with MicroStrategy products.

MicroStrategy faces competitors in several broad categories, including business intelligence software, analytical processes, query and web-based reporting tools, and report delivery. Independent competitors that are primarily focused on business intelligence products include, among others, Actuate, Information Builders and the SAS Institute. We also compete with large software corporations, including suppliers of enterprise resource planning software that provide one or more capabilities competitive with our products, such as IBM, Microsoft, Oracle, SAP AG, and Infor, and with open source business intelligence vendors, including Pentaho and JasperSoft.

Many of our competitors have longer operating histories, significantly greater financial, technical, marketing or other resources, and greater name recognition than we do. In addition, many of our competitors have strong relationships with current and potential customers and extensive knowledge of the business intelligence industry. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Increased competition may lead to price cuts, reduced

 

36


Table of Contents

gross margins and loss of market share. We may not be able to compete successfully against current and future competitors and the failure to meet the competitive pressures we face may have a material adverse effect on our business, operating results and financial condition.

Current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others. For example, IBM acquired Cognos in January 2008 and SPSS in October 2009, and SAP acquired Business Objects in January 2008. By doing so, these competitors may increase their ability to meet the needs of our potential customers. Our current or prospective indirect channel partners may establish cooperative relationships with our current or future competitors. These relationships may limit our ability to sell our products through specific distribution channels. Accordingly, new competitors or alliances among current and future competitors may emerge and rapidly gain significant market share. These developments could limit our ability to obtain revenues from new customers and to maintain technical support revenues from our installed customer base.

We depend on revenue from a single suite of products

Our MicroStrategy business intelligence platform and related products account for a substantial portion of our revenue. Because of this revenue concentration, our business could be harmed by a decline in demand for, or in the prices of, our MicroStrategy business intelligence platform software as a result of, among other factors, any change in our pricing model, increased competition, a maturation in the markets for these products or other risks described in this document.

If we are unable to develop and release product enhancements and new products to respond to rapid technological change in a timely and cost-effective manner, our business, operating results and financial condition could be materially adversely affected

The market for our products is characterized by rapid technological change, frequent new product introductions and enhancements, changing customer demands and evolving industry standards. The introduction of products embodying new technologies can quickly make existing products obsolete and unmarketable. We believe that our future success depends largely on three factors:

 

   

our ability to continue to support a number of popular operating systems and databases;

 

   

our ability to maintain and improve our current product line; and

 

   

our ability to rapidly develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements.

Business intelligence applications are inherently complex, and it can take a long time and require significant research and development expenditures to develop and test new products and product enhancements. In addition, customers may delay their purchasing decisions because they anticipate that new or enhanced versions of our products will soon become available. We cannot be sure that we will succeed in developing and marketing, on a timely and cost-effective basis, product enhancements or new products that respond to technological change or new customer requirements, nor can we be sure that any new products and product enhancements will achieve market acceptance. Moreover, even if we introduce a new product, we may experience a decline in revenues of our existing products that is not fully matched by the new product’s revenue. For example, customers may delay making purchases of a new product to permit them to make a more thorough evaluation of the product, or until industry and marketplace reviews become widely available. Some customers may hesitate migrating to a new product due to concerns regarding the complexity of migration and product infancy issues on performance. In addition, we may lose existing customers who choose a competitor’s product rather than migrate to our new product. This could result in a temporary or permanent revenue shortfall and materially affect our business.

Business disruptions could affect our operating results

A significant portion of our research and development activities and certain other critical business operations are concentrated in a single facility in northern Virginia. We are also a highly automated

 

37


Table of Contents

business and a disruption or failure of our systems could cause delays in completing sales and providing services. A major earthquake, fire, act of terrorism or other catastrophic event that results in the destruction or disruption of any of our critical business operations or information technology systems could severely affect our ability to conduct normal business operations and as a result our future operating results could be materially and adversely affected.

We use strategic channel partners and if we are unable to maintain successful relationships with them, our business, operating results and financial condition could be materially adversely affected

In addition to our direct sales force, we use strategic channel partners such as value-added resellers, system integrators and original equipment manufacturers to license and support our products. For the nine months ended September 30, 2009, transactions by channel partners for which we recognized revenues accounted for 16.7% of our total product licenses revenues. Our channel partners generally offer customers the products of several different companies, including products that compete with ours. Because our channel partners generally do not have an exclusive relationship with us, we cannot be certain that they will prioritize or provide adequate resources to selling our products. Moreover, divergence in strategy or contract defaults by any of these channel partners may materially adversely affect our ability to develop, market, sell or support our products.

Although we believe that direct sales will continue to account for a majority of product licenses revenues, we seek to maintain a significant level of indirect sales activities through our strategic channel partners. There can be no assurance that our strategic partners will continue to cooperate with us when our distribution agreements expire or are up for renewal. In addition, there can be no assurance that actions taken or omitted to be taken by such parties will not adversely affect us. Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our strategic partners. If we are unable to maintain our relationships with these strategic partners, our business, operating results and financial condition could be materially adversely affected.

In addition, we rely on our strategic channel partners to operate in accordance with the terms of their contractual agreements with us. For example, our agreements with our channel partners limit the terms and conditions pursuant to which they are authorized to resell or distribute our software and offer technical support and related services. We also typically require our channel partners to represent to us the dates and details of product licenses transactions sold through to end user customers. If our strategic channel partners do not comply with their contractual obligations to us, our business, results of operations and financial condition may be materially and adversely affected.

Our recognition of deferred revenue and advance payments and future customer purchase commitments is subject to future performance obligations and may not be representative of revenues for succeeding periods

Our gross current and long-term deferred revenue and advance payments totaled $132.0 million as of September 30, 2009. We offset our accounts receivable and deferred revenue for any billed and unpaid items, which totaled $55.1 million, resulting in net deferred revenue and advance payments of $76.9 million as of September 30, 2009. The timing and ultimate recognition of our deferred revenue and advance payments depend on various factors, including our performance of various service obligations. We have also entered into certain additional agreements that include future minimum commitments by our customers to purchase products, product support or other services through 2013 totaling $76.5 million. These future commitments are not included in our deferred revenue balances. Because of the possibility of customer changes or delays in customer development or implementation schedules or budgets, and the need for us to satisfactorily perform product support services, deferred revenue and advance payments at any particular date may not be representative of actual revenue for any succeeding period.

We may not be able to sustain or increase profitability in the future

We generated net income for each of the nine months ended September 30, 2009 and 2008; however, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If operating

 

38


Table of Contents

expenses exceed our expectations or cannot be adjusted accordingly or revenues fall below our expectations, we may cease to be profitable and our business, results of operations and financial condition may be materially and adversely affected. As of September 30, 2009, we had $20.1 million of net deferred tax assets, net of valuation allowance, and if we are unable to sustain profitability, we may be required to increase the valuation allowance against these deferred tax assets, which would result in a charge that would adversely affect net income in the period in which the charge is incurred.

Managing our international operations is complex and our failure to do so successfully or in a cost-effective manner could have a material adverse effect on our business, operating results and financial condition

We receive a significant portion of our total revenues from international sales from foreign direct and indirect operations. International revenues accounted for 37.9%, and 43.6% of our total revenues for the three months ended September 30, 2009 and 2008, respectively, and 39.0% and 41.3% of our total revenues for the nine months ended September 30, 2009 and 2008, respectively. Our international operations require significant management attention and financial resources.

There are certain risks inherent in our international business activities including:

 

   

changes in foreign currency exchange rates;

 

   

unexpected changes in regulatory requirements;

 

   

tariffs, export restrictions and other trade barriers;

 

   

costs of localizing products;

 

   

lack of acceptance of localized products;

 

   

difficulties in and costs of staffing, managing and operating our international operations;

 

   

tax issues, including restrictions on repatriating earnings;

 

   

weaker intellectual property protection;

 

   

economic weakness or currency related crises;

 

   

the burden of complying with a wide variety of laws, including labor laws;

 

   

generally longer payment cycles and greater difficulty in collecting accounts receivable;

 

   

our ability to adapt to sales practices and customer requirements in different cultures; and

 

   

political instability in the countries where we are doing business.

On May 4, 2009, President Obama’s administration announced several proposals to reform U.S. tax laws, including a proposal to further limit foreign tax credits and a proposal to defer tax deductions allocable to non-U.S. earnings until earnings are repatriated. It is unclear whether these proposed tax reforms will be enacted or, if enacted, what the scope of the reforms will be. Depending on their content, such reforms, if enacted, could have a material adverse effect on our operating results and financial condition.

In addition, compliance with foreign and U.S. laws and regulations that are applicable to our international operations is complex and may increase our cost of doing business in international jurisdictions, and our international operations could expose us to fines and penalties if we fail to comply with these regulations. These laws and regulations include import and export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Although we have implemented policies and procedures designed to help ensure compliance with these laws, there can be no assurance that our employees, partners and other persons with whom we do business will not take actions in violation of our policies or these laws. Any violations of these laws could subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to offer our products and services to one or more countries, and could also materially damage our reputation, our brand and our international expansion efforts.

 

39


Table of Contents

These factors may have a material adverse effect on our future international sales and, consequently, on our business, operating results and financial condition.

We may lose sales, or sales may be delayed, due to the long sales and implementation cycles for our products, which could reduce our revenues

To date, our customers have typically invested substantial time, money and other resources and involved many people in the decision to license our software products and purchase our consulting and other services. As a result, we may wait nine months or more after the first contact with a customer for that customer to place an order while it seeks internal approval for the purchase of our products or services. During this long sales cycle, events may occur that affect the size and/or timing of the order or even cause it to be canceled. For example, our competitors may introduce new products, or the customer’s own budget and purchasing priorities may change.

Even after an order is placed, the time it takes to deploy our products and complete consulting engagements can vary widely. Implementing our product can take several months, depending on the customer’s needs, and may begin only with a pilot program. It may be difficult to deploy our products if the customer has complicated deployment requirements, which typically involve integrating databases, hardware and software from different vendors. If a customer hires a third party to deploy our products, we cannot be sure that our products will be deployed successfully.

Our results in any particular period may depend upon the number and volume of large transactions in that period and these transactions may involve more lengthy, complex and unpredictable sales cycles than other transactions

As existing and potential customers seek to standardize on a single business intelligence vendor, our business may experience larger transactions at the enterprise level and larger transactions may account for a greater proportion of our business. The presence or absence of one or more large transactions in a particular period may have a material positive or negative effect on our revenue and operating results for that period. During the nine months ended September 30, 2009, our top three product licenses transactions totaled $8.3 million of recognized revenue, or 11.6% of total product licenses revenues, compared to $9.1 million of recognized revenue, or 13.4% of total product licenses revenues, including one transaction with $4.0 million of recognized revenue, during the nine months ended September 30, 2008. These transactions represent significant business and financial decisions for our customers and require considerable effort on the part of customers to assess alternative products and require additional levels of management approval before being concluded. They are also often more complex than smaller transactions. These factors generally lengthen the typical sales cycle and increase the risk that the customer’s purchasing decision may be postponed or delayed from one period to another subsequent or later period or that the customer will alter his purchasing requirements. The sales effort and service delivery scope for larger transactions also require additional resources to execute the transaction. These factors could result in lower than anticipated revenue and earnings for a particular period or in the reduction of estimated revenue and earnings in future periods.

We face a variety of risks in doing business with the U.S. and foreign governments, various state and local governments, and agencies, including risks related to the procurement process, budget constraints and cycles, termination of contracts and audits

Our customers include the U.S. government and a number of state and local governments or agencies. There are a variety of risks in doing business with government entities, including:

Procurement. Contracting with public sector customers is highly competitive and can be time-consuming and expensive, requiring that we incur significant up-front time and expense without any assurance that we will win a contract.

 

40


Table of Contents

Budgetary Constraints and Cycles. Demand and payment for our products and services are impacted by public sector budgetary cycles and funding availability, with funding reductions or delays adversely impacting public sector demand for our products and services.

Termination of Contracts. Public sector customers often have contractual or other legal rights to terminate current contracts for convenience or due to a default. If a contract is terminated for convenience, which can occur if the customer’s needs change, we may only be able to collect for products or services delivered prior to termination and settlement expenses. If a contract is terminated because of default, we may not recover even those amounts, and we may be liable for excess costs incurred by the customer for procuring alternative products or services.

Audits. The U.S. government and state and local governments and agencies routinely investigate and audit government contractors for compliance with a variety of complex laws, regulations, and contract provisions relating to the formation, administration or performance of government contracts, including provisions governing reports of and remittances of fees based on sales under government contracts, price protection, compliance with socio-economic policies, and other terms that are particular to government contracts. If, as a result of an audit or review, it is determined that we have failed to comply with such laws, regulations or contract provisions, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, cost associated with the triggering of price reduction clauses, fines and suspensions or debarment from future government business, and we may suffer harm to our reputation.

Our customers also include a number of foreign governments and agencies. Similar procurement, budgetary, contract and audit risks also apply to our doing business with these entities. In addition, compliance with complex regulations and contracting provisions in a variety of jurisdictions can be expensive and consume significant management resources. In certain jurisdictions our ability to win business may be constrained by political and other factors unrelated to our competitive position in the market. Each of these difficulties could adversely affect our business and results of operations.

We depend on technology licensed to us by third parties, and the loss of this technology could impair our software, delay implementation of our products or force us to pay higher license fees

We license third-party technologies that we incorporate into our existing products. There can be no assurance that the licenses for such third-party technologies will not be terminated or that we will be able to license third-party software for future products. In addition, we may be unable to renegotiate acceptable third-party license terms. Changes in or the loss of third party licenses could lead to a material increase in the costs of licensing or to our software products becoming inoperable or their performance being materially reduced, with the result that we may need to incur additional development costs to ensure continued performance of our products, and we may experience a decreased demand for our products.

If we are unable to recruit or retain skilled personnel, or if we lose the services of any of our key management personnel, our business, operating results and financial condition could be materially adversely affected

Our future success depends on our continuing ability to attract, train, assimilate and retain highly skilled personnel. Competition for these employees is intense. We may not be able to retain our current key employees or attract, train, assimilate or retain other highly skilled personnel in the future. Our future success also depends in large part on the continued service of key management personnel, particularly Michael J. Saylor, our Chairman, President and Chief Executive Officer, and Sanju K. Bansal, our Vice Chairman, Executive Vice President and Chief Operating Officer. If we lose the services of one or both of these individuals or other key personnel, or if we are unable to attract, train, assimilate and retain the highly skilled personnel we need, our business, operating results and financial condition could be materially adversely affected.

 

41


Table of Contents

The emergence of new industry standards may adversely affect the demand for our existing products

The emergence of new industry standards in related fields may adversely affect the demand for our existing products. This could happen, for example, if new web standards and technologies emerged that were incompatible with customer deployments of our products. MicroStrategy currently supports SQL and MDX standards in database access technology. If we are unable to adapt our products on a timely basis to new standards in database access technology, the ability of MicroStrategy’s products to access customer databases could be impaired. In addition, the emergence of new standards in the field of operating system support could adversely affect the demand for our existing products. MicroStrategy technology is currently compatible with most major operating systems, including, among others, Windows Server, Sun Solaris, IBM AIX, HP’s HP-UX, Red Hat Linux AS and SuSE Linux Enterprise Server. If a different operating system were to gain widespread acceptance, we may not be able to achieve compatibility on a timely basis, resulting in an adverse effect on the demand for our products.

The nature of our products makes them particularly vulnerable to undetected errors, or bugs, which could cause problems with how the products perform and which could in turn reduce demand for our products, reduce our revenue and lead to product liability claims against us

Software products as complex as ours may contain errors and/or defects. Although we test our products extensively, we have in the past discovered software errors in our products after their introduction. Despite testing by us and by our current and potential customers, errors may be found in new products or releases after commercial shipments begin. This could result in lost revenue, damage to our reputation or delays in market acceptance, which could have a material adverse effect upon our business, operating results and financial condition. We may also have to expend resources and capital to correct these defects.

Our license agreements with customers typically contain provisions designed to limit our exposure to product liability, warranty and other claims. It is possible, however, that these provisions may not be effective under the laws of certain domestic or international jurisdictions and we may be exposed to product liability, warranty and other claims. A successful product liability claim against us could have a material adverse effect on our business, operating results and financial condition.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand

We rely on a combination of copyright, patent, trade secrets, confidentiality procedures and contractual commitments to protect our proprietary information. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. Any patents owned by us may be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope of the claims we seek, if at all. In addition, the laws of some countries do not provide the same level of protection of our proprietary rights as do the laws of the United States. If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive.

Third parties may claim we infringe their intellectual property rights

We periodically receive notices from others claiming we are infringing their intellectual property rights, principally patent rights. We expect the number of such claims will increase as the number of products and level of competition in our industry segments grow, the functionality of products overlap, and the volume of issued software patents and patent applications continues to increase. Responding to any infringement claim, regardless of its validity, could:

 

   

be time-consuming, costly and/or result in litigation;

 

   

divert management’s time and attention from developing our business;

 

42


Table of Contents
   

require us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable;

 

   

require us to stop selling certain of our products;

 

   

require us to redesign certain of our products using alternative non-infringing technology or practices, which could require significant effort and expense; or

 

   

require us to satisfy indemnification obligations to our customers.

If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be adversely affected.

For example, on November 8, 2007 Diagnostic Systems Corp. (DSC), a subsidiary of Acacia Research Corporation, filed a complaint for patent infringement against MicroStrategy and a number of other unrelated defendants in the United States District Court for the Central District of California, Southern Division. The case has been consolidated with Case No. SA CV 07-896 AG (MLGx) pending against other unrelated defendants. The consolidated complaint accuses MicroStrategy of infringing U.S. Patent No. 5,537,590 directly, contributorily and by inducement by making, using, selling and offering for sale in the United States MicroStrategy 8 Business Intelligence Platform, when used with an appropriate database. The consolidated complaint accuses MicroStrategy of willful infringement and seeks damages, a finding that the case is exceptional and an award of attorneys’ fees, and preliminary and permanent injunctive relief. In its initial disclosures on December 28, 2007, DSC declined to disclose the amount of its alleged damages, but disclosed that its alleged damages are based on a reasonable royalty theory. MicroStrategy answered the consolidated complaint on December 28, 2007, denied infringement, asserted affirmative defenses of non-infringement, invalidity and unenforceability, among others, and counter-claimed for declaratory judgment that the ‘590 patent is not infringed, is invalid, and is unenforceable. The Court has set a trial date of February 23, 2010. On April 27, 2009, MicroStrategy filed an amended answer and amended counterclaims, asserting that it is entitled to relief against Acacia Research Corporation, Acacia Patent Acquisition Corporation and Acacia Technology Services Corporation, as well as Diagnostic Systems Corp. The outcome of this litigation is not presently determinable.

Pending or future litigation could have a material adverse impact on our results of operation and financial condition

In addition to intellectual property litigation, from time to time, we have been subject to other litigation. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that it is probable, we record a related liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. However, because of uncertainties relating to litigation, the amount of our estimates could be wrong. In addition to the related cost and use of cash, pending or future litigation could cause the diversion of management’s attention and resources.

Because of the rights of our two classes of common stock, and because we are controlled by our existing holders of class B common stock, these stockholders could transfer control of MicroStrategy to a third party without the approval of our Board of Directors or our other stockholders, prevent a third party from acquiring MicroStrategy, or limit your ability to influence corporate matters

We have two classes of common stock: class A common stock and class B common stock. Holders of our class A common stock generally have the same rights as holders of our class B common stock, except that holders of class A common stock have one vote per share while holders of class B common stock have ten votes per share. As of October 23, 2009, holders of our class B common stock owned 2,770,244 shares of class B common stock, or 75.2% of the total voting power. Michael J. Saylor, our Chairman, President and Chief Executive Officer, beneficially owned 399,800 shares of class A common stock and 2,429,582 shares of class B common stock, or 66.3% of the total voting power, as of October 23, 2009. Accordingly, Mr. Saylor is able to control MicroStrategy through his ability to determine the outcome of elections of our directors, amend our certificate of incorporation and by-laws and take other actions requiring the vote or consent of stockholders, including mergers, going-private transactions and other extraordinary transactions and their terms.

 

43


Table of Contents

Our certificate of incorporation allows holders of class B common stock, all of whom are current employees or directors of our company or related parties, to transfer shares of class B common stock, subject to the approval of stockholders possessing a majority of the outstanding class B common stock. Mr. Saylor or a group of stockholders possessing a majority of the outstanding class B common stock could, without the approval of our Board of Directors or our other stockholders, transfer voting control of MicroStrategy to a third party. Such a transfer of control could have a material adverse effect on our business, operating results and financial condition. Mr. Saylor or a group of stockholders possessing a majority of the outstanding class B common stock will also be able to prevent a change of control of MicroStrategy, regardless of whether holders of class A common stock might otherwise receive a premium for their shares over the then current market price. In addition, this concentrated control limits stockholders’ ability to influence corporate matters and, as a result, we may take actions that our non-controlling stockholders do not view as beneficial. As a result, the market price of our class A common stock could be adversely affected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2009, we did not repurchase any equity securities registered by us pursuant to Section 12 of the Exchange Act.

On July 28, 2005, we announced that our Board of Directors had authorized our repurchase of up to an aggregate of $300.0 million of our class A common stock from time to time on the open market, pursuant to the 2005 Share Repurchase Program. The timing and amount of any shares repurchased is determined by our management based on its evaluation of market conditions and other factors. The 2005 Share Repurchase Program may be funded using our working capital, as well as proceeds from any credit facilities and other borrowing arrangements which we may enter into in the future. On April 29, 2008, our Board of Directors amended the 2005 Share Repurchase Program to increase the amount of class A common stock that we are authorized to repurchase from $300.0 million to $800.0 million in the aggregate. The term of the 2005 Share Repurchase Program was also extended to April 29, 2013, although the program may be suspended or discontinued by us at any time. As of September 30, 2009, we had repurchased an aggregate of 2,469,473 shares of our class A common stock at an average price per share of $95.69 and an aggregate cost of $236.3 million under the 2005 Share Repurchase Program. As of September 30, 2009, $563.7 million remained available for repurchase of our class A common stock under the 2005 Share Repurchase Program.

 

Item 6. Exhibits

We hereby file as part of this Quarterly Report on Form 10-Q the exhibits listed in the Index to Exhibits.

All other items not included in this Quarterly Report on Form 10-Q are omitted because they are not applicable or the answers thereto are “none.”

 

44


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MICROSTRATEGY INCORPORATED
By:   / S /    M ICHAEL J. S AYLOR        
  Michael J. Saylor
  Chairman of the Board of Directors,
  President and Chief Executive Officer
By:   / S /    D OUGLAS K. T HEDE        
  Douglas K. Thede
  Executive Vice President, Finance & Chief Financial Officer

Date: October 30, 2009

 

45


Table of Contents

INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

  3.1   Second Restated Certificate of Incorporation of the registrant (filed as Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (File No. 000-24435) and incorporated by reference herein).
  3.2   Amended and Restated By-Laws of the registrant (filed as Exhibit 3.2 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 000-24435) and incorporated by reference herein).
  4.1   Form of Certificate of Class A Common Stock of the registrant (filed as Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 (File No. 000-24435) and incorporated by reference herein).
10.1   Angel.com Incorporated Amended and Restated 2009 Stock Incentive Plan (filed as Exhibit 99.1 to the registrant’s Current Report on Form 8-K (File No. 000-24435) filed on September 9, 2009 and incorporated by reference herein).
10.2   Form of Stock Option Agreement (Form A) under the Angel.com Incorporated Amended and Restated 2009 Stock Incentive Plan (filed as Exhibit 99.2 to the registrant’s Current Report on Form 8-K (File No. 000-24435) filed on September 9, 2009 and incorporated by reference herein).
10.3   Form of Stock Option Agreement (Form B) under the Angel.com Incorporated Amended and Restated 2009 Stock Incentive Plan (filed as Exhibit 99.3 to the registrant’s Current Report on Form 8-K (File No. 000-24435) filed on September 9, 2009 and incorporated by reference herein).
31.1  

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Chairman of the Board of Directors,

President and Chief Executive Officer.

31.2   Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Chief Financial Officer.
32   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

46

Exhibit 31.1

CERTIFICATIONS

I, Michael J. Saylor, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of MicroStrategy Incorporated;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: October 30, 2009  

/s/ Michael J. Saylor

  Michael J. Saylor
  Chairman of the Board of Directors,
  President and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Douglas K. Thede, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of MicroStrategy Incorporated;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: October 30, 2009  

/s/ Douglas K. Thede

  Douglas K. Thede
  Executive Vice President, Finance & Chief
  Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of MicroStrategy Incorporated (the “Company”) for the period ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer of the Company and the Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge on the date hereof:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: October 30, 2009  

/s/ Michael J. Saylor

  Michael J. Saylor
  Chairman of the Board of Directors,
  President and Chief Executive Officer
Dated: October 30, 2009  

/s/ Douglas K. Thede

  Douglas K. Thede
  Executive Vice President, Finance & Chief Financial Officer