MicroStrategy falls on earnings cut
Shares of the data-delivery software maker plummet as much as 61 percent after it says a new way of booking sales will reduce two years of financial results and hurt the first quarter.
The shares plunged $140 to $86.75 by the 1 p.m. PST close of regular trading, slicing about $10.4 billion off the company's market value. The stock has risen about 23-fold in the past year.
"It's a momentum stock, and the momentum guys at any sign of trouble will sell," said Andrew Abrams, a money manager with CWH Associates in New York, which doesn't have a position in the software maker. He said their attitude is, "I don't care what the price is, get it out of the portfolio."
MicroStrategy said it plans to book software revenue over the length of a contract, instead of recording as much as half the revenue when a contract is signed. The change comes after the Securities and Exchange Commission began cracking down on lax accounting standards in December, giving companies specific guidelines on when sales can be booked as revenue.
The company said its 1999 revenue will be cut to between $150 million and $155 million from the originally reported $205.3 million, giving it a loss of 43 cents to 51 cents rather than net income of 15 cents. It will reduce 1998 revenue to between $95.9 million and $100.9 million--down from $106.4 million--and per-share profit to between a penny and 4 cents a share, sliding from 8 cents per share.
It also said earnings in the current quarter won't meet analysts' estimates. The company was expected to earn a penny a share, the average estimate of nine analysts surveyed by First Call/Thomson Financial.
MicroStrategy chief executive Michael Saylor, 35, owned 55.7 percent of the Vienna, Va.-based company, or 43.5 million shares, as of Tuesday, according to documents filed with the SEC. That stake was worth about $13.6 billion on March 10, when the shares closed at a 52-week high of $313. It's worth about $4.29 billion based on today's prices.
The company said it revised its results over the weekend to comply with recent SEC statements regarding the timing of revenue recognition; it will consult with the agency today.
"Since the nature of our business changed, we decided we needed to recast our numbers," Saylor said.
Barrington Research Associates analyst Frank Sparacino, who placed a "long-term buy" rating on MicroStrategy two weeks ago, wouldn't comment on today's stock drop. First Albany's Mark Murphy, who has a "strong buy" rating on the shares, said he was "not yet authorized to comment."
Friedman Billings Ramsey analysts David Hilal and Alan Adler are restricted from commenting, Adler said, because they are working on the company's planned sale of additional shares.
Josephthal analyst Bert Hochfeld, who has a "hold" rating on the stock, said he's not surprised by the restatement.
"I think that all the warning signs have been up for a very long time," said Hochfeld, who prefers competitors Cognos and Hyperion Solutions.
He cited an article in the March 6 issue of Forbes magazine that said MicroStrategy announced sizable contracts days after the past two quarters ended and immediately recognized part of the sales in those periods' results. Shares dropped 28 percent last week.
The stock, which hit $313 earlier this month, up from the single-digits in less than a year, has rocketed on the company's personal Web product, which sends news, weather and traffic information to Internet or wireless devices, Hochfeld said.
"I've always been highly, highly dubious about the revenue potential of their personal Web product," he said.
Because MicroStrategy is selling more software services, it will recognize revenue over the life of a contract instead of in chunks, CEO Saylor said. Previously, it was recognizing half a software contract's revenue up front and half, for example, at the midway point of the agreement, he said.
SEC chairman Arthur Levitt has criticized companies that try to boost their earnings by recognizing revenue prematurely, such as before a product is delivered to a customer or at a time when a customer still has the option to terminate a sales agreement.
Because we revised our revenue recognition policies, it means that simply having the contract in hand does not mean we recognize the revenue," Saylor said.