[IndividualInvestor] Should You Trust MicroStrategy?

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From: Linda (joelinda1@home.com)
Date: Thu Jun 22 2000 - 16:50:17 PDT

[Though I rarely use information from analysts and Individual Investor
is hardly my favorite resource, there are some fundamental strengths
that make Microstrategy a company worth following, particularly after the
cash infusion.



Should You Trust MicroStrategy?
Eliot Walsh (6/21/00)

Admit it. When you think of the name MicroStrategy (NASDAQ: MSTR -
Quotes, News,Boards) , you think of a stock that crashed more
than 90% from $333 when investorslearned it had aggressively accounted
for revenue in financial filings and was forced to restate earnings.

Stay away from this one, right? Not so fast.

For one thing, on Monday the company announced it had raised $125
million from the sale of convertible preferred stock to a group of
institutional investors led by Promethean Asset Management, Citadel I
nvestment Group and Angelo Gordon & Co.

Later, at its first shareholder meeting since the March blow-up, CEO
Michael Saylor offered a mea culpa for recording revenue from multiyear
software contracts in the first year, reportedly saying he had "done a
lot of soul searching" to preventa similar "gut wrenching experience."
He then spent three hours assuring shareholders
the company was ready to take off.

Should investors believe him? We think he's worth at least another
chance. Here's why.

This month, MicroStrategy, which makes customer-management software,
releases two important products that analysts believe will significantly
reinforce the company's e-business platform and drive licensing revenue.

On June 13, the company introduced the MicroStrategy Transactor, an
e-commerce platform that enables the buyer to make a purchase from his
or her PC, Personal Digital Assistant, pager, telephone, or data-capable
cell phone, then performs the transaction on the server side, retrieves
the results of the transaction, and confirms it to the buyer. The
platform "learns" from each transaction by recording the customer's
actions for use in targeted advertising. Thus each transaction generates
demographic insight for the seller, while cutting expenses and ultimately
increasing revenue.

The product is designed to complement MicroStrategy's "Intelligent
e-Business Platform," an improved version whose core analytic engine is
slated for release this month, called MicroStrategy 7. It is a complete
rewrite of a comprehensive e-business architecture that, while processing
all facets of e-business transactions, collects and analyzes large amounts
of data and translates it into detailed marketing insight.

Analysts see the Transactor product bringing in very significant
revenue-it lists for $200,000--and is expected see high demand among the
company's 1,000-strong, high-profile customer base.

Indeed, the company's sales have always been strong; last quarter
revenue increased 73% year-over-year, adjusted for the revised accounting
procedures, and last quarter the company bagged 34 deals over $250,000,
20 deals over $500,000, and 9 over $1 million.

Total revenue for the quarter was $50.6 million, split almost evenly
between licensing fees and service and maintenance revenue.

Although revenue is strong, MicroStrategy's spending levels are ramping
sharply. In the last quarter, the company spent almost $42 million on sales
and marketing, and $16.2 million on research and development. All told,
its cash balance declined by about $14 million to $54.8 million in the
first quarter, but net income fell nearly $40 million, to a loss
of $28.9 million.

Thus the timeliness of the $125 million investment announced Monday. The
company said it would use the money for working capital and to help roll
out MicroStrategy 7. "[The deal] affects my outlook positively," says
analyst Mark Murphy of First Albany. "The company had a choice of either
not raising money and scaling back its projects, or raising money and
sticking to its investment plan. I think MicroStrategy will ultimately
meet with great success."

But should investors be wary of management, considering the
"gut-wrenching experience" its accounting practices so recently caused?
"Generally speaking, I don't think so," says Murphy. "I think the criteria
should be the quality of the products, the quality of the employees and
the quality and number of customers the company lists."

Murphy believes the company's auditor, PriceWaterhouse Coopers,
shoulders most of the blame for the fiasco. Yet, at Monday's meeting,
shareholders voted to keep the accounting firm on the job. Is this a
wise move?

"Currently there seems to be no other alternative," says Murphy.
"PriceWaterhouse and MicroStrategy are jointly involved in shareholder
lawsuits, which could make using another firm difficult. Additionally,
while the company is still using the same firm, the individuals involved
in it are different and have more experience in this area."

Like most analysts, Murphy does not see the pending shareholder lawsuits
as a major threat to the company's well being. He imagines that, if the
company is found liable for damaging shareholders, it would probably share
the burden with PriceWaterhouse, possibly pay a one-time charge, and be
done with it. "Ultimately," he concedes, "who knows?"

Recent accounting changes notwithstanding, Murphy admires the company
for many of the same reasons many of his peers do: "The company produces
fantastic software--ultimately customers are voting with their wallets.
People either want it now, or are going to want it," he says.

"But the stock has been extremely volatile. I'm recommending it on the
theory of its past successes. People should own it and just tuck it away
for a couple of years."

He cautions that the stock, which closed Tuesday at $41, may not be
appropriate for those lacking the taste for such a roller coaster ride,
given its extreme and likely continued volatility.

Bottom Line:

With the pain and embarrassment of its accounting woes receding,
MicroStrategy looks poised to flourish as a fast-growing software

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