Posted by : trraju on Oct 31, 2003 - 05:47 AM General

MicroStrategy Inc. reported a quarterly loss yesterday, its first in the past seven quarters. Company executives consider that a good thing.
They attributed the $24.4 million loss to their decision to wipe out the last of the debt incurred to pay for the company's settlement of financial fraud charges three years ago.

Chief operating officer Sanju K. Bansal recently said that after the accounting scandal, MicroStrategy had to satisfy customers on two fronts: a technical evaluation of its software, followed by questions about the company's financial stability.

Now when customers look at MicroStrategy, they see a company with strong technology and a dramatically improved balance sheet, chief executive Michael J. Saylor told analysts in a conference call yesterday.

"I think that gives them a greater degree of confidence than at any time in the past few years in making greater commitments to us," Saylor said.

Yesterday, MicroStrategy said revenue from license agreements, the software industry's version of product sales, rose 37 percent to $17.7 million in the quarter ended Sept. 30, from $12.9 million a year ago. Total revenue, which includes fees earned from providing services, jumped 28 percent to $42.8 million from $33.4 million last year.

Its stock closed at $47.70 yesterday, unchanged.

"They are no longer being dropped from the short list [by prospective clients] just based on their financials," said Michael Schiff, an analyst for Current Analysis Inc. "Technology was never an issue with them."

Nearly three years after MicroStrategy settled charges that it overstated its profits by tens of millions of dollars, the firm has emerged from the scandal with an analytical software business that is growing faster than the industry overall.

The company, whose software finds trends in jumbles of data, has slowly rebuilt its business by drawing enthusiastic reviews from executives like Michael Relich, chief information officer of The Wet Seal Inc., a chain of trendy clothing stores.

"Their product is phenomenal," said Relich, whose company uses sales data to keep up with the tastes of teenage girls. Within minutes, he said, the software can tell him that angora sweaters are as hot in Georgetown as they are in Manhattan, but girls here prefer blasted jeans to the black turtlenecks that Manhattan teens crave.

Saylor used to compare the significance of the company's software to Johannes Gutenberg's invention of the printing press, but MicroStrategy in recent years has shied away from grandiose comparisons. Instead, the company has fought to restore its credibility by winning contracts from well-known customers such as eBay and U.S. Postal Service.

One year ago, MicroStrategy's balance sheet was weighed down by $150 million in debt and preferred stock, on which the firm faced $15 million in annual interest payments, Saylor said.

The balance sheet MicroStrategy presented yesterday was free of debt and had positive shareholder equity for the first time in three years. The company considered it an important milestone because some institutional investors are barred from buying the stock of companies with negative shareholder equity.

The company took a $30.5 million charge in July to cover the costs of converting to equity the remaining portion of $80.5 million in notes it issued to plaintiffs in 2000 to settle a shareholder class-action lawsuit. MicroStrategy reported a net loss of $24.4 million, or $1.59 a share, compared to a profit of $3 million, or 18 cents a share, in the same quarter a year ago.

Barring unusual events, analysts say they expect the company's fourth-quarter results to finally reflect the health of the company's core software business. The consensus among analysts is that MicroStrategy's core software business is doing well. The company said yesterday it had signed 166 deals with new and existing customers during the third quarter. .

During the dot-com era, MicroStrategy dabbled in speech-recognition technology and wireless messaging, but it has since hunkered down to focus on its slicing-and-dicing software. The firm has worked to make it useful for industries beyond retail, where it made its name. That flexibility may help MicroStrategy win more customers in the $3.8 billion market for software that analyzes sales data, analysts said. The market is heavily fragmented and even the largest players hold no more than 10 percent, so there is room for both expansion and consolidation, according to Dan Vesset, an analyst with the IDC research firm.

MicroStrategy is less than half the size of the biggest makers of analytical software, such as Cognos Inc. and Business Objects S.A. Both of those companies have a few thousand employees and reported more than $100 million in sales in their most recent quarterly results. They say their size means they can offer customers a greater range of products than MicroStrategy, and that companies prefer to buy their all of their analytical software from one vendor.

Ron Zambonini, chief executive of Cognos, called MicroStrategy's turnaround a "miracle," but said the company is a niche player. "They have a great product but a limited product," he said.

MicroStrategy is trying to expand its product line. In November, the company plans to launch a new program that produces large, systematic reports that can display data in different formats for use in presentations.

MicroStrategy executives seem unruffled by the release of a similar program by Cognos in September. In one sign that some of the company's old swagger survives, employees have nicknamed the new program Project Gutenberg.

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