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Event Summary
On March 20, MicroStrategy announced that they will restate their earnings
for 1998, 1999, and the first quarter of 2000 based on a SEC bulletin
issued in December 1999. Michael Saylor, CEO of MicroStrategy, saw the
value of his shares decrease by $6 Billion dollars in a single day. Shares
of the company decreased 62 percent on Monday 3/20, and had dropped from
a high of $333 eleven days ago to $73 per share as of March 21. At least
four law firms have announced class action lawsuits against the vendor.
After meeting with their auditors, PriceWaterhouseCoopers, MicroStrategy
decided to move the recognition of software revenues for complex contracts
across the multiple years of the contract, and realize less revenue in
the initial year. Correspondingly, deferred revenue for fiscal 1999 has
been increased to around $66 million from less than $17 million.
Software
vendors often have difficulty determining how to realize software revenues,
and this problem is further complicated by the need to recognize service
revenue and software maintenance income according to the rules set by
the Federal Accounting Standards Board (FASB) and the Securities and Exchange
Commission (SEC).
Market
Impact
MicroStrategy is going to be distracted by the need for management to
address upset stockholders and deal with the multiple class action lawsuits
which have resulted from this debacle. Despite their loss of market capitalization,
Mr. Saylor has stated that he plans no changes in other aspects of the
business. As he stated, "I don't think there's any question that we're
going to execute our business plan. At the point you go into defense mode,
you can kiss your company good-bye."
However,
MicroStrategy can expect sales turnover, and a longer sales cycle as prospects
ask tough questions and competitors spread FUD about vendor viability.
In addition, they may be unable to acquire new products due to their loss
of market capitalization. Unless senior management quickly moves to settle
all outstanding lawsuits and revalue existing employee options, it will
face much broader employee departures.
User
Recommendations
Customers evaluating MicroStrategy 6, or any of the vendor's other offerings,
should continue the selection process, but ask tough questions on product
delivery timelines and efforts made to retain key employees. We predict
that product development will be delayed a minimum of one quarter while
this crisis is being dealt with. This could also make it harder for MicroStrategy
to fix product bugs in a timely manner.
Expected
problems with software bugs and issues with timely delivery should be
built into all Microstrategy contracts, as should contingencies for potential
hostile takeovers.
While
we describe this as a speed bump for Microstrategy, (although an extremely
large one, about the size of a Mack Truck), we expect its stock to slowly
recover from its restatement of income. The loyalty of Microstrategy's
employees will be tested, but we believe Mr. Saylor's vision will likely
continue to keep his company focused and dedicated to software and market
development.