Enterprise software provider MicroStrategy (NASDAQ:MSTR) reported its second-quarter results after the market closed on July 26. Revenue edged up thanks to currency effects, but profit plunged as spending dramatically increased. The same story played out in the first quarter. The company is spending big to take advantage of growth opportunities, but right now that effort is decimating the bottom line.

MicroStrategy: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$120.6 million

$119.2 million

1.2%

GAAP net income

$4.8 million

$10.0 million

(51.5%)

GAAP earnings per share

$0.42

$0.86

(51.2%)

Non-GAAP income from operations

$1.6 million

$17.9 million

(91.1%)

Data source: MicroStrategy.

What happened with MicroStrategy this quarter?

  • Foreign currency fluctuations pushed up revenue during the second quarter, although the company didn't disclose by how much in its earnings release.
  • Product licenses revenue was $19.3 million, up 8.8% year over year.
  • Subscription services revenue was $7.6 million, down 9.1% year over year.
  • Product support revenue was $73.7 million, up 4.1% year over year.
  • Other services revenue was $20.1 million, down 10.4% year over year.
  • Operating expenses soared 20.5% year over year to $97.4 million. The company had previously announced a plan to boost spending to take advantage of opportunities. Sales and marketing spending jumped 22.5% year over year, while research and development spending was up 28.2%.
  • MicroStrategy's heavy spending led to a GAAP operating loss of $1.8 million during the quarter, down from a profit of $14.1 million in the prior-year period.
  • The bottom line was aided by $4.5 million classified as other income, mostly from foreign currency transaction gains. The company also booked $3.2 million in net interest income.
  • MicroStrategy had cash, cash equivalents, and short-term investments of $699.6 million at the end of the quarter.
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What management had to say

In the 10-Q filing, MicroStrategy's management discussed a major trend affecting its business:

Organizations recently have sought, and we expect may continue to seek, to standardize their various analytics applications around a single software platform. This trend presents both opportunities and challenges for our business. It offers us the opportunity to increase the size of transactions with new customers and to expand the size of our analytics installations with existing customers. On the other hand, it presents the challenge that we may not be able to penetrate accounts that a competitor has penetrated or in which a competitor is the incumbent analytics provider.

The company plans to keep up the heavy spending: "As part of our efforts to take greater advantage of the opportunities in the market and grow our market share, we expect to continue sales and marketing expenditures at the current pace and to further increase research and development expenditures as we invest in our technology products and personnel in future periods."

Looking ahead

With MicroStrategy's revenue barely growing, the company's strategy of investing heavily in sales and R&D may not pay off for multiple quarters, or even years. MicroStrategy has been willing to wipe out its bottom line in the pursuit of growth, but the market doesn't appear convinced that the plan will work. Shares of the software company are down more than 30% in the past year.

MicroStrategy didn't provide guidance in its earnings report, but investors can expect depressed profits for the foreseeable future as the company continues to ramp up spending.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends MicroStrategy. The Motley Fool has a disclosure policy.