[Upside]MicroStrategy fights back

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From: Linda (joelinda1@home.com)
Date: Sun Jun 04 2000 - 05:04:48 PDT

[Another article suggesting they might have some difficulty funding development and expansion
of Strategy.com. Amazingly, MSTR's market cap is now just 1.8B, a 92% drop from its high in March.
Now they want to be an ASP incubator?]



                    MicroStrategy fights back
                    June 01, 2000
                    by Laton McCartney
                    Just a few short months ago, Michael Saylor, the 35-year-old CEO, chairman and founder of MicroStrategy
                    Inc. (MSTR), was on an extraordinary roll. On paper, Saylor's fortune had escalated to $14.5 billion, while his
                    software company was poised to position itself as a major player in the marketplace.

                    Based in Vienna, Va., MicroStrategy was flourishing. This was no Johnny-come-lately dotcom, but a
                    well-established data warehousing and data-mining company with 2,000 employees. Founded 10 years ago, it
                    listed more than 900 of the Global 2000 among its customers.

                    And unlike many of the dotcoms, MicroStrategy was actually generating revenue -- $205 million in 1999.
                    Having gone public in 1998, it was about to launch a secondary offering that was expected to generate $1
                    billion in capital: money the company could use to underwrite expansion.

                    Most of the company's revenue came from its established enterprise software, but for several years Saylor
                    had been hatching an ambitious plan to remake MicroStrategy. His goal: use wireless communications, the
                    Internet and many of the remote online analytical tools MicroStrategy had developed to create a new
                    generation, narrow-cast network as powerful as NBC or ABC in its prime.

                    His first venture in this realm, Strategy.com -- a personal intelligence network that delivered timely information
                    to consumers over the Web, wireless and voice -- had rolled out earlier in the year.

                    Most analysts who track MicroStrategy saw Saylor's venture as another blue chip in the making -- or at least
                    they did before late March, when the company's fortune went terribly awry. Within a space of a few days,
                    MicroStrategy's stock went from a high of $333 down to $72, while its market cap plummeted from $23 billion
                    to about $5 billion. (On Wednesday, the stock closed at $19.06, and its market cap stands at $1.5 billion.)

                    Michael Saylor ended up losing $13.2 billion and saw his company subjected to what one analyst called a Wall
                    Street "high-tech lynching." And that was before the Nasdaq-dotcom meltdown in April. As for the proposed
                    secondary offering, that was shelved.

                    This is the story of what went wrong, why it did, and how Saylor and his largely MIT-educated management
                    team are frantically scrambling to get MicroStrategy back on track.

                    Classmates, partners
                    To a large extent, MicroStrategy is the Michael and Sanju show, Sanju Bansal being Saylor's longtime sidekick
                    and COO. The one-time MIT classmates and fraternity brothers run the company together, with Saylor
                    focusing on the strategic planning and direction for MicroStrategy's software operations as well as its
                    narrow-band broadcasting business, and Bansal dealing with the day-to-day operations.

                    "Mike and I have known each other for 17 years, so our relationship [as CEO and COO] is probably a little
                    unusual," Bansal says. "The long-term strategic issues, especially technology investment issues, are taken by
                    Mike. My team and I provide input, but generally that's his domain and he makes decisions there with authority
                    and somewhat independently. He operates at 100,000 feet while I'm more like 10,000 to 20,000 feet."

                    For his part, Bansal has garnered considerable respect in the investment and research communities. "He's very
                    quick and exceptionally bright," says Robert Moran, who tracks MicroStrategy as an analyst for the Aberdeen
                    Group in Boston.

                    Saylor, however, clearly has star billing. Supremely self-confident and articulate, Saylor has a prodigious
                    intellect, which he gladly displays whenever the opportunity presents itself. He's probably the only CEO in the
                    high-tech sector who can talk about data warehousing, Ghandi as a role model, and Roman war chariots (a
                    source of fascination for Saylor) in the same paragraph.

                    "Mike is a great synthetic thinker, with the ability to take multiple thoughts and pull them together in some kind
                    of coherent way," says Bansal. "He has a broad set of interests, ranging from politics to history, civics and
                    architecture, and a three-dimensional photographic memory. He can seize on an idea and relate it to 50 other
                    ideas almost instantaneously."

                    Saylor's own strong convictions, his technical prescience and the zealousness of his beliefs have made him into
                    something of a high-tech oracle. "He's a superb public speaker who is able to convince people he knows
                    what's going to happen," says Mark Murphy, an analyst with First Albany Corp.

                    While Saylor may operate at stratospheric levels, he keeps tight control of his company, retaining 75 percent of
                    the equity (43.5 million shares). This means Saylor is able to control MicroStrategy by determining the election
                    of its directors. He also makes sure MicroStrategy's culture is thoroughly grounded in his ideals and values.
                    "Intelligence everywhere," an ethical and moral value that Saylor incorporates into his business, is a required
                    standard for all employees (see "Intelligence crusade").

                   After Saylor graduated from MIT, with dual bachelor's of science degrees in Aeronautics & Astronautics and
                   Science, Technology & Society, he went to work for DuPont (DD), where, in 1989, he somehow persuaded
                   his employers to loan him $100,000 so he could start his own company. Bansal, who was consulting at Booz,
                   Allen & Hamilton, joined the company the following year.

                   At first, MicroStrategy functioned as a small consulting outfit, but by the early 1990s, Saylor and Bansal were
                   moving aggressively into what was then known as business intelligence.

                   By 1994, MicroStrategy had 50 people on its payroll and was producing decision-support software it called
                   DSS Agent. The market for DSS Agent was limited to IT types in big, legacy-corporate computer

                   In an effort to expand its market and get a foothold on the client side, MicroStrategy extended its offerings to
                   the desktop with a new offering.

                   "We were selling largely to analysts connected to the IT departments, and at the end of the day we couldn't get
                   beyond 20 to 30 users in a big enterprise because the users had to be connected to LANs or WANs," says
                   Gaurav Rewari, VP of the applications group. "We couldn't extend the offering beyond the boundaries of
                   company headquarters."

                   The Internet changed all that. Suddenly, users could access data warehouses remotely through their browsers,
                   as could a company's suppliers and partners over a corporate extranet. "We could go back to our corporate
                   users and say, 'guess what guys, now you can buy hundreds of user licenses,'" Rewari explains. "Suddenly, this
                   field called data intelligence took center stage."

                   As e-commerce took hold, MicroStrategy began developing tools that enabled companies to provide permission
                   marketing, in which users voluntarily offer personal information in exchange for an added value, such as
                   portfolio analysis.

                   "Our premise is that we will give you the applications and platforms by which to build permission marketing into
                   your CRM and e-business infrastructure," Rewari says.

                   In late 1999, MicroStrategy rolled out Saylor's pet project, Strategy.com. "Strategy.com is a network of
                   proactive, intelligent agents," Saylor says. It allows users to access information about stocks, weather, news
                   and sports using "smart" mobile phones and relies on affiliates, including the Wall Street Journal, Ameritrade
                   (AMTD), Washingtonpost.com and EarthLink (ELNK), to provide content.

                   "We've gone from offering internal back-office operational software to having very clear front-office software
                   and services," says Bansal. "And we've seen a broadening of our constituency from quaint guys to marketing
                   executives and CEOs who care about how they communicate with their customers."

                   Secret weapon
                   Saylor has a theory that most enterprise software companies hit a threshold when they reach a certain level,
                   often the $1 billion plateau. By late 1999, MicroStrategy seemed poised to clear that wall, or at least to
                   circumvent it.

                   With its new focus on marketing and consumer customers, MicroStrategy brought in Joseph P. Payne, who
                   joined the company in April 1999 as vice president of marketing. Payne had some experience in high tech, but,
                   more importantly, he'd come out of the consumer side, having been a brand manager at Coca-Cola (KO) and
                   a marketing vice president at Royal Crown.

                   Payne promptly beefed up MicroStrategy's PR efforts and initiated a national ad campaign that was centered
                   around a big Super Bowl spot. "Of the billion or so people who watch the Super Bowl, we wanted the 1 or 2
                   million who were marketing people to pay attention to our ads," Payne says.

                   To help raise MicroStrategy's visibility where it counted, Saylor went out to spread the word. Suddenly he was
                   everywhere, buttonholing President Clinton at the White House, hosting black-tie dinners in Washington, D.C.,
                   granting interviews to every periodical from Newsweek to the New Yorker, and appearing on "60 Minutes" and
                   "The Charlie Rose Show."

                   Saylor even made headlines, pledging $100 million of his own money to start an online university. From late
                   1999 through the first three months of 2000, probably no other IT executive, with the exception of Bill Gates,
                   got more publicity.

                   "Mike is our greatest marketing asset," says Payne. "We have, and we will always use Mike very aggressively
                   to get out there and talk about technology and vision."

                   While MicroStrategy's CEO was on the campaign trail -- "Being a CEO is a lot like being a politician," Saylor
                   says -- his company was increasingly hard-pressed to support its growing employee ranks and its expanding
                   direct-sales force, global operations and indirect distribution channels.

                   Also, some of its procedures and processes, notably accounting, were failing to keep pace with the changes
                   that were under way.

                   A brief article in Forbes in early March noted that in several instances, MicroStrategy had announced deals
                   after a quarter was closed yet the revenue had somehow found its way back into the previous quarter. Clearly,
                   the company needed a more sophisticated, granular set of accounting techniques.

                   As an enterprise software vendor it had generated a single revenue stream and reported each deal as a single
                   transaction. But with a services and hosting model it was generating multiple ongoing revenue streams that
                   would accrue over the period of the contract.

                   The accounting problems came dramatically to light after PricewaterhouseCoopers executives in New York
                   flew down to Virginia to go over MicroStrategy's books, which were being kept by the regional PwC office.
                   The New York contingent reportedly had been alarmed by the Forbes report, especially with the secondary
                   offering imminent, and wanted to make sure all was kosher.

                   It wasn't. MicroStrategy had finally hit its threshold. At the prompting of PwC National, MicroStrategy
                   announced it was restating its finances.

                   Instead of generating $205 million in revenue for 1999 and a diluted per share net income of 15 cents, it had, by
                   these new measures, only done $151 million with a diluted net loss of 44 cents. The previous year showed
                   similar declines. The stock, which had been pumped way up by the approaching secondary offering and
                   Saylor's evangelism, went into free fall. Soon after, MicroStrategy was hit by myriad class-action suits filed by
                   law firms on behalf of angry shareholders.

                   Then, in late March, the Securities and Exchange Commission (SEC) announced it was launching an
                   investigation into the matter and had requested documents related to the revisions. (The Wall Street Journal
                   reported May 24 that federal prosecutors are monitoring the SEC's civil probe to see if separate criminal action
                   is warranted.)

                   MicroStrategy said it was cooperating with the SEC and stressed that "[t]he SEC indicated that its inquiry
                   should not be construed as an indication by the SEC or its staff that any violation of law has occurred, nor as
                   an adverse reflection upon any person, entity or security."

                   MicroStrategy seemed to be in denial after the collapse. Or perhaps Saylor simply had his "game face" on.
                   "The restatement was unpleasant, unfortunate, but it doesn't change the overarching direction of our business
                   or the mission of our organization," he asserted.

                   Perhaps not, but the restatement certainly doesn't help MicroStrategy's image. The software vendor that prided
                   itself on providing proactive business intelligence to its corporate clients was blindsided after relying on
                   out-of-date accounting information.

                   Certainly, the restatement has slowed MicroStrategy's growth trajectory. Without the $1 billion from the
                   secondary offering, the company may find it difficult to fund a number of growth initiatives, including a plan for
                   an ambitious international expansion. This expansion "will be difficult, and our failure to do so [realize the
                   expansion] successfully or in a cost-effective manner would have a material adverse effect on our business,"
                   MicroStrategy said in one of its SEC filings.

                   Saylor has already spent $30 million, "to develop and market Strategy.com," according to documents filed with
                   the SEC. "This will result in operating losses and will cause us to become unprofitable in 2000."

                   Meanwhile, MicroStrategy must contend with privacy issues both in the U.S. and Europe. Company officials
                   acknowledge these to be serious, but perhaps overblown. "The not-so-secret secret of the Web is that
                   customers are giving up unbelievable information about themselves in exchange for benefits," Bansal says.

                   At the same time, competition in all of MicroStrategy's markets is intensifying. With its intelligent e-business
                   software MicroStrategy comes up against some formidable dotcoms, including Broadvision (BVSN),
                   Epiphany and Broadbase (BBSW).

                   And in the back-office business intelligence market, MicroStrategy now must take on giant Computer
                   Associates (CA), which has acquired Sterling Software and its InformationAdvantage unit.

                   Optimism survives
                   Still, Saylor charges on. He notes that in the next few months, MicroStrategy is planning to come out with a
                   succession of new offerings with far shorter implementation cycles. As for capital, the company has a variety
                   of other sources, he says.

                   It just signed an agreement with Deutsche Bank allowing the financial house to use Strategy.com to roll out
                   electronic brokerage capabilities for its customers throughout Europe. "That was for $35 million in guarantees
                   plus royalties, and that's almost better than an equity offering because we don't have to give up stock," Saylor

                   Another such deal with a telephone company is in the works, Saylor says, noting that MicroStrategy can
                   always borrow money if needed. But the big plan now, the product of Saylor's grand vision, is for the company
                   to become an ASP (applications service provider) incubator along the lines of Internet Capital Group
                   (ICGE). In this instance, however, MicroStrategy will take a major share of the equity in the new companies
                   (ICG takes a minority share) and only focus on a handful of them, instead of 50 or 60 as is the case with ICG
                   or CMGI (CMGI).

                   Ultimately, Saylor says, MicroStrategy will consist of perhaps five companies with five CEOs, each enterprise
                   sharing a common set of technologies and practices, and a common corporate culture. "Over time we'll go to
                   10,000 people," he says.

                   Like MicroStrategy, this new corporate empire will be built on the ethical imperative "intelligence everywhere."
                   On that, Saylor is insistent. "Ultimately, when you're investing in our company, you have to make the decision,
                   'Do you believe in our view that intelligence is going to change the world?' If so, you'll probably want to be with
                   us forever. If you don't, you probably don't want to be with us for a minute."
                   Laton McCartney is an award-winning journalist whose work has appeared in numerous magazines.
                   He was editorial director of InformationWeek magazine and is the author of Friends in High Places: The
                   Bechtel Story (Linden Publishers, 1988)

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