MicroStrategy is attempting to revamp its business in an attempt to boost revenues and restore the confidence of Wall Street.
The move follows the business intelligence software supplier's restatement of its 1998 and 1999 financial results on 20 March this year. The revisions mean that, in future, MicroStrategy will recognise revenue from large, complex deals that comprise both products and services over the course of an entire contract period. In the past, it recorded revenues for the software component immediately.
But the restatement meant that the vendor was hit with a raft of class action lawsuits. It also saw its 1999 sales fall from $205.3m to between $150 and $155m, while net income of $0.15 per share turned into losses of between $0.43 and $0.51. For 1998, turnover likewise dropped from $106.4m to between $95.9m and $100.9m, while profits of $0.08 per share became losses of between $0.04 and $0.01.
This situation also led to the cancellation of a proposed public offering of 6.5 million shares of class A common stock that would have netted MicroStrategy around $960m. Some $100m of this was to be spent on boosting the infrastructure and marketing activities of its Strategy.com Personal Intelligence Network.
The public offering was later substituted by a private placement that raised a mere $125m, and it is now attempting to generate a further $75m to $125m from other private investors.
The aim of Strategy.com, which was launched last June, and is now a wholly-owned subsidiary of MicroStrategy, is to deliver personalised information such as finance, weather and news to customers via the internet, telephone or wireless devices.
But all of this uncertainty has led to a slowing of MicroStrategy's revenue growth for its second fiscal quarter (Q2), which ended on 30 June.
At the time, Mike Saylor, the supplier's president and chief executive, said: "While our revenue growth for the first half of the year continued to outpace the growth of the business intelligence market as a whole, the growth in Q2 slowed due to uncertainty created with customers by the publicity associated with our accounting problems."
And insiders believe that it could take at least 18 months before MicroStrategy puts this year's events behind it, although they acknowledge that last month's reorganisation and a change in management style may help the vendor to get back on its feet more quickly.
Martin Jervis, the company's UK managing director, said: "A year ago, this was a company where the average age was 28 and where grey hairs were hard to find. There's a new realism today and more experience in the management ranks."
Saylor was even more blunt. "We don't have a choice. I have to change and the company has to come up with an order of magnitude growth and performance," he said.
As a result, MicroStrategy has recently announced a number of changes. Martin Lynch, its chief financial officer, has been sidelined to the position of chief administration officer and has been replaced by Eric Brown. Following his successes at companies such as Electronic Arts, the firm believes that Brown has the kind of rigour that will engender Wall Street's trust.
The company has also appointed veteran John Sidgmore as chairman of Strategy.com and recruited Timothy Clayton as an internal audit troubleshooter. Clayton's role is to make sure that the company's accounting practices do not lead to another embarrassing financial restatement.
In a further attempt to return to profitability, MicroStrategy will axe about 10 per cent of its workforce by the end of this month. It hopes to save $25m annually by cutting 243 administration staff, including some marketing and consultancy personnel, but it expects to take a restructuring charge of between $4m and $8m in its third quarter as a result.
Some 236 graduate trainee job offers have also been withdrawn, but Jervis confirmed that apart from "tiny tendrils around the edges", the staff reduction has had no impact on MicroStrategy's European headcount.
The supplier has also altered the way it licenses its software in an attempt to make it cheaper to buy. It will now provide users with free 30-day evaluation licences for MicroStrategy 7 and is also adopting an Oracle style server- and CPU-based pricing model. "We're not ditching per seat licensing, but signalling a break with the past," said Saylor.
And in a change from the firm's tradition of focusing almost solely on Global 1000 customers, Saylor also hopes to break into the medium-sized company space - the current sweet spot of the market.
"Online selling, which will be available from 1 October, the bundling of usable solutions for the mid-range, and the use of channel selling will be extensively used to achieve our goals," he explained.
But he does not believe that the installed base will have a problem with the shift in strategy. "I am sure existing customers that have spent a lot on getting an enterprise solution will welcome the means to deploy many more users at significantly lower cost," he said.
Hard times ahead
Unless MicroStrategy can boost volume sales, however, such moves could lead to a drop in both revenues and margins, particularly as it tries to battle against the perception of financial uncertainty.
Carol Brannigan, who heads up MicroStrategy's eCRM (customer relationship management) international business, acknowledged the difficulty. "The first thing I usually have to deal with in any negotiation is to explain the restatement thing," she said.
Stuart Holness, head of international operations at Strategy.com, added: "It has hardly been an easy time for any of us."
And the company's troubles don't end there. While its broadcast technology, which is now being used as the basis of Strategy.com's offering, was unquestionably ahead of the game when it was launched two years ago, a tidal wave of rival products have hit the market over the last year or so.
But Saylor claimed that MicroStrategy has differentiated its offering by adding more intelligence than its rivals and by providing enhanced scalability. "I don't want to be spammed by SMS [short message service] anymore than I do over email. If we provide the intelligence to make sure customers are only receiving the handful of messages they really want, then we have created real value," he said.
Holness also confirmed that Strategy.com expects to reveal the identity of its private investors "soon". The company hopes to gain financial support from interested parties in the telecommunications, networking and financial services sectors, with Siemens, Alcatel, Intel and Cisco believed to be among those considering stumping up anywhere from $25m to $50m for a piece of the Strategy.com action.
If such investment is confirmed, it will be the first bit of good news for MicroStrategy in quite a while.
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