MicroStrategy's Saylor: "We Have Been Caught in That Gray Zone"
The CEO talks about the accounting restatement that has pummeled the company's stock

It has been a rough week for MicroStrategy's founder and CEO, Michael Saylor. On Mar. 20, the Vienna (Va.) software giant took a dramatic 62% nosedive in the stock market, plummeting to $86.75 from $226.75 when it announced it would restate 1998 and 1999 financial results. The restatement of earnings turned a 1999 profit into a loss. The company was responding in part to Securities & Exchange Commission guidelines issued in December, requiring companies to practice more conservative accounting of revenues.

For the last 10 years, MicroStrategy had made a business selling software to corporations to mine their databases for marketing and other trends. Last year, it started a business to help companies such as Ameritrade send stock quotes and other information alerts via the Web to consumers' cell phones, computers, and other electronic devices.

The company says it had to change its accounting of revenues because it's moving away from the sale of software as a product -- where revenues are recorded immediately -- to the more complex sale of software as a service -- where revenues may not appear till the end of the contract with a client. In an interview with Business Week Correspondent Catherine Yang on Mar. 21, Saylor laid out the lessons he has learned from this week's plunge. On one point, he's unrepentant: He's scoffs at any notion that the new accounting he's adopted is the most realistically reflective of his business. Here are edited excerpts from the conversation:

Q: Do you think your accounting restatement better reflects your business now?
The accounting rules are very technical, and in some cases, arbitrarily pedantic. I can't imagine a reasonable person would not agree with us [on our original accounting]. An auditor had agreed with us. That's why they signed the opinion at the end of the year.

This is very subjective. If it was to be tried in a court of law with a bunch of educated citizens, we'd probably win. They'd probably say, "You guys were too conservative the first time, and you should increase your revenues in 1999."

Q: So why did you change your accounting? Did the SEC ask you to do it?
No, the SEC had no inquiry. After our secondary offering [was filed on Feb. 24, 2000], our stock went through the roof. We started getting more scrutiny from every which direction. A number of companies had restated their financials in the first quarter following the SEC's [December] bulletin. The issue moved to the top of the radar screen. Because of the heightened scrutiny, our auditors, PricewaterhouseCoopers, scrutinized it again.

Q: What is the best way to account for your revenues then?
It's very difficult to say in this case. The appropriate answer for how to recognize revenues is a function of what senior auditors across accounting organizations, the SEC, CFOs, and the political winds of the press think. That's been shifting over the past six months.

Q: Where do you go from here?
Our secondary offering has been postponed. We're back to business as usual. We continue to aggressively build the business out. The company is cash-flow positive. It's making a lot of money, although these restatements make it look like it's losing money. We're ending up with huge deferred revenues, which is cash in the bank. To the extent we need additional financing, we'll get it through our deferred revenues, our clients, or through our strategic relationships.

Q: What's the lesson you've learned through all this?
I think the lesson we've learned is that, in the public marketplace -- between the stock market, the media, and the other attention -- all of us can get caught up in a huge amount of momentum. The truth of the matter is all the media attention and speculation about the future doesn't necessarily relate to the present.

Within one week, we announced our secondary offering, and our stock doubled. But our company is not twice as good. Yesterday, our stock was chopped in half, but our company was not half as good either. There are interesting forces of nature at work, and it's important to keep your head up and not to let these things distract you.

Ultimately, they're irrelevant in the scheme of things. The motion in the press and stock market doesn't change whether our technology shifts and we put 100 million people on our network. We'll just focus on the business. As we move forward, we'll take more accounting measures to avoid potential controversy in this area in the future and go from there.

Q: How can tech companies reach a more realistic accounting method for their businesses?
Clearly, the market needs very clear guidelines for how to account properly for sophisticated intellectual-property contracts. I don't think they're extraordinarily clear. It certainly wasn't clear in our case. We have been caught in that gray zone. What's important here is to note that these businesses have been invented in the past 12 months. What's important is to bring in intellectual architects who can construct more sophisticated guidelines and contract protocols, so we all have a shared language which makes sense.

Although we're restating [our financial results] to be conservative, I would not accept the conclusion that restatement in this particular case is the best one for someone seeking to understand our business. Deferring all this revenue discounts the value of the contracts we're entering into. The truth of the matter is, it doesn't seem to make any sense whatsoever to collect $30 million and to book nothing. It seems there's something more that needs to be done here.

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Commentary: Earth to Dot-Com Accountants

TABLE: SEC Clampdown

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