What happened

Shares of enterprise software provider MicroStrategy (NASDAQ:MSTR) tumbled on Friday after the company's second-quarter results badly missed analyst expectations. Both revenue and earnings fell well short of estimates, sending the stock down 25% by 11:50 a.m. EDT.

So what

MicroStrategy reported second-quarter revenue of $120.6 million, down 2.1% year over year and about $4.6 million below the average analyst estimate. Product licenses and subscription services revenue dropped 12.1% to $27.5 million, while product support revenue fell 1% to $70.8 million and other services revenue rose 9.4% to $22.4 million.

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Earnings came in at $0.96 per share, down from $1.64 per share during the prior-year period and a whopping $0.59 below analyst expectations. A decline in gross margin and an increase in operating costs, coupled with the lower revenue, drove earnings lower.

MicroStrategy CFO Phong Le blamed the revenue decline on "competitive noise" from newer entries in the business intelligence market, as well as a failure to attract prospects and general sector weakness. Le went on to describe the company's 3-year plan, which may have spooked investors:

We expect our next phase to be marked by profitable revenue growth, though we expect to make additional investments in key areas, such as sales, marketing and technology to address the evolving BI market and opportunities for growth, even if this results in single-digit operating margin.

These results and outlook come less than a year after the company sounded an optimistic tone about 2017.

Now what

MicroStrategy managed operating margins in excess of 20% in 2015 and 2016 despite slumping revenue. The revenue slump continued during the second quarter, but it was matched with a steep decline in earnings. With the company planning to invest in growing sales over the next three years, lower earnings may be the new normal.

This prospect led investors to stampede out of the stock, erasing a quarter of the company's market capitalization. Further declines are possible if MicroStrategy continues to fall short of expectations.

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