MicroStrategy Incorporated — FY 2018 Form 10-K
Period and business: This is an annual report for the fiscal year ended December 31, 2018, not a standalone quarterly filing. The company, identified in the filing as MicroStrategy Incorporated, sells enterprise analytics and mobility software, subscriptions, product support, consulting, and education services. It reported one operating segment. Comparative 2017 and 2016 figures were restated for retrospective adoption of ASC 606.
Financial performance and liquidity
| Metric (USD millions, except EPS and percentages) | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $497.6 | $503.8 | Down 1.2% |
| Gross profit / margin | $398.1 / 80.0% | $407.2 / 80.8% | Margin down 0.8 percentage points |
| Operating income / margin | $4.0 / 0.8% | $73.2 / 14.5% | Down $69.2 million |
| Net income / diluted EPS | $22.5 / $1.97 | $18.2 / $1.58 | Net income up $4.3 million |
| Operating cash flow | $10.6 | $78.3 | Down 86.4% |
- Product license revenue fell 5.6% to $88.1 million; subscription revenue fell 8.6% to $29.6 million. Product support revenue rose 2.4% to $296.2 million, while other services revenue fell 5.9% to $83.8 million.
- Operating expenses rose 18.0% to $394.2 million, led by higher sales and marketing ($205.5 million, up 17.4%) and research and development ($102.5 million, up 30.1%). Management attributed the increases to investment in sales, marketing, technology, and personnel.
- Net income increased despite the steep decline in operating income, principally reflecting a $2.0 million income tax benefit in 2018 versus a $53.3 million tax provision in 2017. The 2017 result included a $44.0 million estimated one-time Tax Act charge. 2018 non-GAAP net income, excluding Tax Act adjustments, was $19.4 million; non-GAAP measures are supplemental and exclude recurring share-based compensation from adjusted operating income.
- At year-end, cash and cash equivalents were $109.9 million and short-term investments $466.2 million, totaling $576.1 million, versus $675.2 million a year earlier. Management said available cash, investments, and anticipated cash generation were sufficient for working capital, capital spending, and contractual obligations for at least 12 months.
- Investing cash outflow was $209.1 million, primarily reflecting purchases of short-term investments; financing cash outflow was $108.5 million, chiefly due to $111.0 million of share repurchases. The company repurchased 880,667 shares at an average $126.02. No cash dividends were paid or planned.
- No conventional borrowings are separately reported in the balance sheet; the filing reports $61.3 million of other long-term liabilities, including $28.9 million of unpaid Transition Tax. Operating lease commitments totaled $195.6 million. Current and non-current deferred revenue and advance payments totaled $183.0 million.
Material changes, outlook, and risks
- FY 2018 revenue declined modestly, but operating income and operating cash flow fell sharply. Management linked the cash-flow decline largely to changes in operating assets and liabilities, including a $22.1 million decrease in deferred revenue and advance payments. Product support contract renewals were delayed in Q4, and management cautioned that deferred revenue is not necessarily indicative of future-period revenue.
- Q4 2018 revenue was $131.9 million and net income $3.3 million. Q4 2017 revenue was $136.4 million and net loss $25.5 million, including the Tax Act charge.
- The company does not provide financial guidance. Management expected to increase R&D investment in future periods and described continued development of its analytics platform, cloud deployment options, and HyperIntelligence offerings.
- Material control issue: Management and KPMG concluded internal control over financial reporting was ineffective at December 31, 2018 because of material weaknesses associated with implementation and oversight of CPQ and PSA applications. Affected processes included revenue, consulting receivables, deferred revenue, and related compensation expenses. No related financial-statement misstatement was identified. Management expected remediation before the end of FY 2019; KPMG issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements.
- Contingency: Following an internal review, the company believed its Brazilian subsidiary probably failed to comply with certain local procurement regulations involving government entities. A loss was considered probable, but its amount or range was not reasonably estimable; the filing said financial-position impact was not expected to be material, while acknowledging potential material effects on earnings when accrued.
- Other principal risks include intense competition, reliance on the core analytics platform and installed customer base, long sales cycles, international and foreign-currency exposure, privacy and cybersecurity requirements, and tax uncertainty. The company also disclosed concentrated voting control: Michael Saylor beneficially held 70.4% of total voting power as of February 11, 2019.
- ASC 606 changed timing for term-license and OEM revenue recognition and contract-cost accounting; prior periods were restated. The company also expected lease-accounting adoption in 2019 to add approximately $88 million of right-of-use assets and $117 million of lease liabilities.
Important facts for investors to verify
- Review the remediation progress and subsequent auditor or management assessments of the material weaknesses in financial reporting controls.
- Track product-license and subscription trends, renewal timing, deferred revenue, and operating cash flow to assess whether the 2018 deterioration continued.
- Monitor the Brazilian procurement matter for any loss estimate, accrual, or change in management’s assessment.
- Reconcile liquidity and obligations, including the Transition Tax installments, operating lease commitments, and ongoing share repurchases.
- Confirm the effects of ASC 606 restatements and 2019 lease-accounting adoption when comparing periods.