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MicroStrategy's Second Wind

By Catherine Yang Former tech high-flier MicroStrategy (MSTR) is proving that you can go home again. Four years after a widely publicized accounting run-in with the Securities & Exchange Commission, the McLean (Va.) software maker is showing signs of reviving from that near-death experience. The formula for success: Returning to the solid and profitable business of providing business-intelligence software, its specialty before the dot-com boom threw its focus out of whack.

The stock has rebounded. As recently as August, it was trading at around $36, but it has since climbed above $61. (These prices are adjusted for a 1-for-10 reverse stock split, effective July 31, 2002. The shares closed that day at $6.75.) And more gains may lie ahead, some experts say, as a result of MicroStrategy's return to basics.

LIFE-THREATENING CRUNCH. Business is good. In 2003's fourth quarter, the bread-and-butter strategy yielded its best results yet of this painful comeback period -- with revenue rising a hefty 23%, to $51.7 million, and net income up more than 3.5 times, to $17.5 million. MicroStrategy ended 2003 with $175.6 million in revenue, up 19% from the previous year, and a loss of $3.9 million (a one-time event because it paid down debt), vs. profits of $38 million in 2002.

"Customers are buying from the company again," says Nathan Schneiderman, an enterprise software analyst at Wedbush Morgan Securities. He notes that MicroStrategy added a record 201 corporate customers last quarter to a total roster of 2,500.

That's no mean feat, considering MicroStrategy's dire straits after a March 20, 2000, restatement of the two prior years' financial results to correct for aggressive revenue-recognition practices. Overnight, the stock plunged from $226 to $86, and CEO founder Michael J. Saylor, once lauded as a tech visionary, became a poster child for Net-era accounting excesses. MicroStrategy, which had expanded boldly into money-losing dot-com businesses the previous two years, faced a life-threatening capital crunch.

QUIET CLEANUP. CEO Saylor and COO Sanju Bansal each settled with the SEC in December, 2000, without admitting or denying the regulators' allegations, by agreeing not to violate federal securities law and by paying an undisclosed amount in disgorgement and civil penalties. MicroStrategy consented with the SEC's March, 2000, order, without admitting or denying the findings, by agreeing to enhance corporate governance and to adopt stricter financial controls. It paid no fines or penalties.

Since that massive shock, MicroStrategy quietly set about cleaning up the mess. CFO Eric Brown, who joined in August, 2000, last year finished paying off the entire outstanding debt. That included $80 million it raised to help pay off a $125 million shareholder class-action settlement and a separate $125 million issued during the depths of its troubles to keep operations afloat.

At the same time, longtime COO Sanju Bansal closed down MicroStrategy's four newest, unprofitable business units -- ranging from systems integration and applications hosting to Internet alerts for consumers. Now, it focuses on the product it originally began selling in 1989 -- a software platform to help companies collect and analyze data flowing through their businesses.

"THE EARLY STAGE." With MicroStrategy's financial house in order, would-be customers find it easier to open up their wallets. The tech rebound is helping, and clients no longer have to worry about whether MicroStrategy will still be in business six months down the road.

Today, giant electronics retailer Best Buy (BBY) uses MicroStrategy software to generate 100,000 reports a day for its 16,000 employees on everything from sales results at individual stores to supply-chain updates and human-resources data. The product also allows Best Buy to rate vendors by how often their shipments show up on time and complete. By doing so, it has improved its rate of successful shipments and shaved costs.

As more businesses wake up to the advantages of business intelligence, MicroStrategy is ready to cash in. "We're at the early stage of this market," says COO Bansal. "Customers will have a need for a great number of products over time." Last November, MicroStrategy launched Report Services, a product that renders data analysis into reports readily usable by nongeek execs. This year, it plans to introduce a Unix-compatible software suite to expand its market.

FERRARI SOFTWARE. In designing its software for mega-databases, MicroStrategy has seized the high end of the market, vs. competitors Business Objects (BOBJ) and Cognos (COGN). "MicroStrategy sells Ferraris, while the other two sell Toyotas," says Friedman Billings Ramsay software analyst David Hilal, who expects MicroStrategy to rake in revenue of $194.2 million and profits of $33 million in 2004.

If MicroStrategy continues down this path and sticks to its priorities, investors are likely to discern a company on track for smart growth and substantial share-price gains. Yang is a correspondent in BusinessWeek's Washington bureau

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