MicroStrategy Incorporated (now identified in the request as Strategy Inc.) — 2019 Form 10-K Summary
Business context and reporting period. The filing is MicroStrategy Incorporated’s annual report for the fiscal year ended December 31, 2019, filed February 13, 2020. The company sells enterprise analytics software and related cloud subscriptions, product support, consulting, and education services. Its principal platform was MicroStrategy 2020, including HyperIntelligence. The filing reports annual results; selected unaudited fourth-quarter results are also summarized below.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $486.3 million | $497.6 million |
| Gross profit / gross margin | $386.4 million / 79.4% | $398.1 million / 80.0% |
| Operating income (loss) / margin | ($1.0) million / (0.2)% | $4.0 million / 0.8% |
| Net income | $34.4 million | $22.5 million |
| Diluted EPS | $3.33 | $1.97 |
| Operating cash flow | $60.9 million | $10.6 million |
| Investing cash flow | $353.7 million | ($209.1) million |
| Financing cash flow | ($66.2) million | ($108.5) million |
Margins are calculated from reported figures. FY 2019 revenue declined 2.3%; gross profit fell 3.0%, while net income rose 52.7%. Net income included a $29.8 million gain from the sale of the Voice.com domain name and an associated $8.1 million tax provision. Excluding the after-tax domain sale gain, the company reported non-GAAP net income of $12.6 million and diluted EPS of $1.22; these are company-defined non-GAAP measures.
- Revenue mix: Product licenses $87.5 million (down 0.7%); subscription services $29.4 million (down 0.6%); product support $292.0 million (down 1.4%); and other services $77.4 million (down 7.6%). International revenue was 43.7% of the total.
- Quarterly context: Q4 revenue was $133.5 million versus $131.9 million in Q4 2018; net income was $12.2 million versus $3.3 million. Q1 2019 recorded a $7.9 million net loss.
- Liquidity: At year-end, cash and cash equivalents were $456.7 million and short-term investments were $108.9 million, totaling $565.6 million. The company stated that available liquidity and expected cash generation were sufficient for working capital, anticipated capital expenditures, and contractual obligations for at least 12 months.
- Obligations: The filing does not identify interest-bearing borrowings in the presented balance sheet. Reported liabilities include $113.0 million of operating lease liabilities and $28.9 million of unpaid Transition Tax. Total contractual obligations, including leases, purchase obligations, and Transition Tax, were $209.4 million.
- Deferred revenue: Deferred revenue and advance payments totaled $191.5 million, up from $183.0 million; approximately $187.1 million was expected to be recognized within 12 months. Management cautioned that this balance is not necessarily indicative of revenue in a succeeding period.
Material changes versus the prior year
- Revenue declined across product licenses, subscription services, product support, and other services overall. Consulting revenue fell 6.6%, primarily due to fewer billable hours; education revenue fell 15.4%.
- Operating expenses decreased 1.7% to $387.4 million. Sales and marketing fell 7.0%, while research and development increased 6.8% as the company invested in product development. Higher product-support costs partly offset lower consulting costs.
- The operating result shifted from $4.0 million of income to a $1.0 million loss. Net income increased chiefly in the context of the nonrecurring Voice.com sale gain.
- Operating cash flow increased by $50.2 million. Investing cash flow turned positive primarily because purchases of short-term investments declined and redemptions increased; this largely reflects investment portfolio turnover rather than operating growth.
- Cash and short-term investments held by U.S. entities increased to $289.4 million from $173.6 million; non-U.S. holdings decreased to $276.2 million from $402.5 million.
- The company repurchased 521,843 shares for $72.7 million during 2019. At year-end, $271.0 million remained under its $800 million repurchase authorization.
Outlook, risks, contingencies, and unusual items
- Guidance: The company stated it does not give guidance on anticipated future financial performance. Management emphasized that quarterly results can fluctuate and that fixed expenses may make revenue shortfalls consequential.
- Business risks: Key risks include intense competition, dependence on a single software platform and installed customer base, lengthy sales and implementation cycles, customer shifts from upfront licenses to ratable cloud subscriptions, and exposure to foreign currency movements. Management estimated that a 10% unfavorable exchange-rate change would have reduced 2019 revenue by 4.0%.
- Contingency: The company reported that its Brazilian subsidiary failed or likely failed to comply with local procurement rules in certain government business. A Brazilian investigation was ongoing; the company said it was not a subject of the investigation and was unaware of allegations that it or the former employee made payments to officials. The company considered a loss probable but could not reasonably estimate its amount or range. Subsidiary bank accounts were frozen up to BRL 10.0 million (approximately $2.3 million); management did not expect a material effect on financial position but noted earnings could be materially affected when a liability is accrued.
- Other risks and commitments: The filing highlighted privacy and cybersecurity regulation, reliance on third-party cloud and hosting providers, international operations, tax uncertainty, and a newly identified coronavirus outbreak in China as potential risks. It reported $1.7 million of gross unrecognized tax benefits, including accrued interest, and no material off-balance-sheet arrangements.
- Controls and audit: Management and KPMG concluded internal control over financial reporting was effective at December 31, 2019. Material weaknesses identified in 2018 were reported as remediated during 2019. KPMG issued unqualified opinions on the financial statements and internal controls; its critical audit matter concerned estimating standalone selling prices for product support in revenue allocation.
- Governance: Michael Saylor beneficially owned 70.8% of total voting power as of February 3, 2020, principally through high-vote Class B shares. The company has never paid cash dividends and reported no current plan to do so.
Investor verification priorities
- Separate recurring operating performance from the $29.8 million Voice.com gain and review the related tax treatment.
- Reconcile cash-flow improvement to operating activity, the domain sale, and short-term investment purchases and redemptions.
- Assess the Brazilian procurement matter, potential loss exposure, and any subsequent developments.
- Review license and support revenue trends, cloud-subscription growth, customer renewals, and deferred revenue conversion.
- Evaluate lease and Transition Tax payment schedules, share repurchases, and the company’s stated 12-month liquidity outlook.
- Consider foreign-exchange sensitivity, privacy and cybersecurity exposure, and the effects of concentrated voting control.