MicroStrategy to restate results; stock plummets

MicroStrategy Inc. saw its share price plunge more than 60% yesterday after the Vienna, Va.-based data mining vendor announced that it was revising its revenue and operating results downward for both fiscal 1998 and 1999.

The revisions are designed to bring MicroStrategy into compliance with new U.S. Securities and Exchange Commission (SEC) guidelines concerning how software companies report their revenue, company officials said in a statement issued yesterday. The changes will affect the timing of MicroStrategy's reports of sales from large projects but won't affect the net cash flow or amount of revenue the company ultimately expects to report, the officials added.

However, such assurances weren't sufficient to placate Wall Street. MicroStrategy's shares on the Nasdaq Stock Market yesterday fell $140 to close at $86.75, a drop of 61.7% from Friday's closing price.

In addition, the company was slapped with a class-action lawsuit Monday on behalf of all shareholders who bought common stock in MicroStrategy between June 11, 1998 and March 17, 2000. The complaint — filed in U.S. District Court by Bala Cynwyd, Pa.-based Schiffrin & Barroway LLP — alleges that MicroStrategy and some of its executives reported false and misleading financial results over that period, overstating the firm's results during fiscal 1998 and 1999, in particular.

The news comes a few days after Michael Saylor, MicroStrategy's billionaire president and CEO, pledged to donate $100 million to start a free online university. Published reports put Saylor's personal loss at around $3 billion as a result of MicroStrategy's stock slide.

In a statement, Saylor said the revisions in the company's results reflect changes in MicroStrategy's business model, which has shifted toward increasingly complex financial deals that involve both license and services fees. Some sales that include service relationships will be accounted for using "contract accounting," which spreads the recognition of revenue over the entire contract period.

The effect of the alterations will be to defer the time when revenue is recognized for large, complex contracts that combine both products and services, company officials said.

As a result of the changes, MicroStrategy will reduce its fiscal 1999 reported revenue from $205.3 million to between $150 million and $155 million. Results of its operations will be lowered from a diluted net income per share of 15 cents to a diluted loss per share of between 43 cents and 51 cents.

Deferred revenue as of December 31, 1999, will increase from $16.8 million to between $66.5 million and $76.5 million, the company added.

MicroStrategy will also reduce its reported revenue for fiscal 1998 from $106.4 million to between $95.9 million and $100.9 million. Meanwhile, results from its operations will be lowered from a diluted net income per share of 8 cents to a diluted net income per share of between 1 cent and 4 cents, according to the company's statement.

In light of the revisions, MicroStrategy said that its operating results for the first quarter of 2000 are likely to be below analysts' current estimates.

The company also said it will postpone plans for a proposed follow-on public offering.

The revisions follow a recent detailed review of MicroStrategy's larger contracts and future business strategy by the firm's auditor, New York-based PricewaterhouseCoopers, which also worked with the company on the reporting of its fiscal 1998 and 1999 financial results.

"The accounting rules governing the software industry, and, in particular, software revenue recognition, are complicated," according to a statement from MicroStrategy that was attributed to PricewaterhouseCoopers. "This is particularly true in an evolving business like MicroStrategy's. In light of these facts, we agree with the company's decision to take the action announced today."

MicroStrategy will report the details of the revisions to its 1999 year-end results in its annual 10-K report, due to be filed with the SEC on or before March 30.

Copyright © 2000 IDG Communications, Inc.

  
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