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In the heady days of the dot-com revolution, MicroStrategy CEO Michael Saylor was emblematic of the mania that engulfed the New Economy. His company's stock soared from $6 a share to $333 a share in one year. Super Bowl ads, lavish parties, and grand schemes such as proposing the creation of an Internet-based university were the stuff of Saylor's dreams. But that was before MicroStrategy was forced to restate earnings in March of last year, which sent the stock into a tailspin. It now trades at $10 a share, and the company has laid off 10% of its workforce.
Meanwhile, Saylor and his company have settled both a civil lawsuit and Securities & Exchange Commission charges alleging that his once-highflying data-mining software company overbooked revenues by some $66 million from 1997 through 1999. On Dec. 14, 2000, he settled with the SEC, paying $8.3 million of his own money without admitting or denying the charge.
But Saylor isn't giving up. In his first sit-down interview since the SEC settlement, Saylor recently talked with editors and writers in BusinessWeek's Washington Bureau about what lies ahead for MicroStrategy . He declined comment on still-pending investigations against PricewaterhouseCoopers, the company's former auditor. He acknowledges making mistakes and that he has a much more humble vision for his company and its future. Here are edited excerpts of the conversation:
Q: Where is MicroStrategy (MSTR
) now?
A: We beat our earnings estimates for the third quarter by a decent margin and, in the fourth quarter, we just announced that we did it again: beating earnings by a decent margin. Both are good things. The stock slid throughout the time period. It seems to be bottoming at this point and stabilizing. I think the company has stabilized. Certainly the risks to the company throughout 2000 were much bigger than the risks right now.
Now we move onto the more pedestrian running of the business.... Our interesting challenges are threefold. One is, we still have a cost structure which is a bit higher than our revenue structure. We've got about a quarter-of-a-billion-dollar-a-year-in-revenue business, and we've got a pretty good position on the high end of the business-intelligence market. But we're spending about $16 million a quarter on our core business more than we're generating in revenue. We have a plan to get that back to break-even by the end of this year. We cut costs $9 million a quarter from the third quarter to the fourth quarter. In 2001, we're much more focused upon controlling costs and also driving margins and utilization and productivity in our core business.
The No. 2 challenge is, we need to revitalize our brand, and we need to do the things necessary to convince people that we're a good, exciting, up-and-coming company. Twelve months ago, we ran an ad during the Super Bowl and our stock jumped 25 points in one day. We got to a point where we had pure electricity running through the company. Today the stock trades at $10 a share. So we need to some work there and that comes in a variety of ways.
The last thing that everybody is dealing with is that the economy is restructuring. In the technology part of the business, we're in something of a recession, if not a recession then definitely a restructuring. We're going through a rationalization similar to what happened in the auto business at the turn of the 20th century, when you had 1,000 companies that all wanted to be General Motors.
"It's like musical chairs and the music stops"
Q: Well, we all know how that turned out.
A: When the marketplace was exuberant about autos, capital and labor were plentiful. At some point, you realize there's not enough land and engineers and other things to make all these companies succeed, so the markets slide and there's a capital crunch. It's like musical chairs and the music stops. Everybody has to find a chair to sit in. In that particular case, out of a 1,000 companies, only 10 stayed in that business -- and then it ultimately shrunk down to less than 10. Everybody else got squeezed out entirely. And then there's a middle tier of companies who are too good to be pushed out of the market but they're not able to become Ford or GM, and they become components manufacturers. That's what has happened to us.
In the early stages of an industry, customers and capital markets are exuberant about the possibility of technical breakthroughs and are willing to throw huge amounts of capital at the possibility. But at some point the future arrives. At that point, capital markets and consumers shift, and their attitudes goes from "I'll throw any amount of money after the next great thing" to "I've got all the next great things I can digest. Now give them all to me cheaply and efficiently." So the entire emphasis goes to who can manufacture the best component for the least amount of money.
Like what happened in the auto industry, in the tech industry, we went through the same thing from '96 to 2000, and it peaked in '99. We had a point in '99 where everyone was going to be the Amazon of something. I remember there was a company that said it was going to be the Amazon of cell phones. Four months ago, when Amazon announced it was going to sell cell phones, it occurred to me that Amazon is going to be the Amazon of cell phones. Today, we have realized we can't afford to do anything other than the thing we do best, the cheapest in the world, and so we have rationalized our own business plan. That's the transformation we're going through this year.
Q: So you're maturing?
A: It's basically a sobering, maturing template laid over the business. It's not like we haven't been there. The irony of all this is that for nine years, we built a business organically based on our own revenues, and we never had even a bank loan, much less equity injections. So we were profitable from 1990 to 1998, and then we go to the market. Every other stock went to the moon, and our stock stayed at $9 a share. Here we are, we're this trudging, profitable company, and it looks like we're going to fail because we're missing the capital wind! If that wind blows in and your competitor raises $2 billion and you don't, then you're dead.
"[We're now] a profitable, economic, value-added, slower-growing, more humble, more conservative entity"
So we struggled to reform the company into a creature that the capital markets would support, and it took us a year. That culminated in that secondary offering, where we had successfully reformed the company into the image the market wanted. We slightly mis-executed, we tripped, missed that window. And then the market shifted back 180 degrees, and what we had done was exactly the wrong thing.... We spent the past year reforming ourselves back into a profitable, economic, value-added, slower-growing, more humble, more conservative entity.
Q: How much cash and how much debt do you have?
A: We have $100 million in cash, and we don't have any debt.
Q: Could you raise cash for the next wave of product development?
A: We don't need any cash for the next wave. We're spending about $30 million to $40 million a year on research and development, and that's enough. In a horrible market, we raised $53 million for strategy.com last year, selling just 15% of the business.
Q: Weren't you hoping for a lot more?
A: We said we were going to do a deal somewhere between $50 million and $100 million, and we ended up with $53 million. I'm not unhappy. Strategy.com now has an independent board, chair, and president. I think they'll continue to grow. They have about 550,000 users. But they, too, have been retrenching their business model. My focus is on MicroStrategy .
Q: A year ago, your vision for the company really focused on strategy.com. Has that changed?
A: I've refocused my energies on the core business. It's business intelligence, which means extracting insight from large databases either interactively or proactively. That business is booming. The fundamentals are growing. We can create a $5 billion- or $10 billion-a-year company. It's not going to happen next year, but we could make it happen in 5 or 10 years.
"As the stock went up, attention shifted from product...to personality"
Q: What kind of marketing do you in this environment?
A: Clearly, we're not doing Super Bowl ads. I mean, we had a message back in '98, which was "MicroStrategy, we've got these cool ideas, we want to change the world." And everybody ignored us, completely. And then our visibility began to increase as the stock price increased. When the price doubled, the message doubled. But it was the same message. Also, as the stock went up, the attention shifted from product and nuts and bolts to personality and hype-driven.
It worked very well, but there was hell to pay as soon as we had one setback. Every journalist who helped us had to do a mea culpa and explain how bad we were on the way back down. And the negative stuff got personalized the same way. Now we've shifted back to trade marketing. Trade press, presentations, even things such as single-page HTML e-mails that say "MicroStrategy, we have good business intelligence, here's what we do better than any one else," signed by me. It's a very cheap way to market.
Q: What kind of a response rate do you get?
A: It's low, about 1%. Not too bad, especially when the variable cost is free. But the world has changed since last year. My marketing is no longer aimed at Joe Public. My marketing is aimed at a database engineer who has 5 terabytes and who plugged in "business objects," and it broke his database.
Q: Were you and the company complicit in this shift from product to personality?
A: Everybody did their little part. I did my part. I posed for the photos. If I were to do it again, there are a lot of things I wouldn't do. I'm more careful today.
Q: What's the off-the-shelf price for the latest version of your software?
A: You can buy a single-user license for $1,000, or you could buy an unlimited-use version for $100,000.
Q: More than a few critics charge that some surviving dot-coms, like Amazon, still don't have viable business plans, that if they're not bought out, they'll fail. What do you think?
A: Companies like E*Trade, Yahoo!, Amazon, and also Expedia and Travelocity will all be flogged to within an inch of their life. But if the CEOs want these things to be independent companies, they'll succeed. I believe that enough to have invested in all those companies, so I put my money where my mouth is. My reasoning is simple: They're "infomediaries" that sit between a large number of suppliers and a large number of customers, and they add value with their Web technology. They're not just pass-throughs.
People want to buy things online, and yes, these companies need to tweak the way they do things to be profitable -- and they're doing that. The shakeout is happening. Everybody is a little bit correct. Most of the dot-coms did get squeezed out because they were inefficient. Some dot-coms are here because the public wants them, and they are going to be successful.
And then companies like ours, intermediate companies, if they've got strong committed management, a decent shareholder base, and a good core technology, and a willingness to change, and they're not in denial, they will modify their business plan, become a components manufacturers, and they'll thrive.
Edited by Beth Belton
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Copyright 2001, Bloomberg L.P.
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