MicroStrategy Incorporated — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing reports annual results and unaudited quarterly data; Q4 2020 revenue was $131.3 million and net income was $2.7 million. The company operated one reportable segment: enterprise analytics software, subscriptions, and related services. It also adopted a bitcoin-focused treasury strategy in 2020.
Key financial results
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Total revenue | $480.7 million | $486.3 million | Down 1.1% |
| Gross profit / gross margin | $389.7 million / 81.1% | $386.4 million / 79.4% | Gross profit rose 0.9%; margin improved |
| Operating expenses | $403.3 million | $387.4 million | Includes $70.7 million bitcoin impairment |
| Operating income (loss) | $(13.6) million | $(1.0) million | Operating loss widened |
| Net income (loss) | $(7.5) million | $34.4 million | EPS was $(0.78), versus $3.33 diluted in 2019 |
| Cash from operations | $53.6 million | $60.9 million | Down 11.9% |
| Cash used in investing | $1,018.7 million | Cash provided: $353.7 million | Primarily reflects $1.125 billion bitcoin purchases |
| Cash from (used in) financing | $563.2 million | $(66.2) million | Includes $650 million convertible-note issuance |
Revenue mix: product licenses $86.7 million (down 0.8%); subscription services $33.1 million (up 12.5%); product support $284.4 million (down 2.6%); and other services $76.5 million (down 1.2%). International revenue was 41.9% of total revenue. No individual customer represented 10% or more of revenue.
At year-end, cash and cash equivalents were $59.7 million, short-term investments were zero, and current assets were $272.6 million against current liabilities of $285.6 million. Bitcoin was carried at $1.054 billion, net of cumulative impairment losses of $70.7 million; it is accounted for as an indefinite-lived intangible asset. Total assets were $1.466 billion, total liabilities $912.6 million, and stockholders’ equity $553.0 million. The $650 million principal amount of 0.750% convertible senior notes due 2025 was reported at a net carrying value of $486.4 million at year-end; the difference primarily reflects accounting for the conversion feature and issuance costs.
Material changes versus FY2019
- Revenue declined modestly, while gross margin increased. Subscription revenue grew, but product support and international product-license revenue fell.
- The company moved substantially more treasury assets into bitcoin: it bought approximately 70,469 bitcoin for $1.125 billion during 2020. Year-end cash fell from $456.7 million to $59.7 million, while bitcoin was recorded at $1.054 billion.
- Bitcoin impairment losses of $70.7 million contributed to the swing from 2019 net income to a 2020 net loss. Under the stated accounting policy, subsequent price recoveries do not reverse recognized impairment; gains are generally recognized only on sale.
- Operating cash flow decreased, and financing shifted to a net inflow following the convertible-note offering. The company repurchased $123.2 million of its shares in 2020, including $61.3 million through a tender offer.
- Headcount decreased from 2,396 to 1,997. Sales and marketing expense fell 22.1%, partly reflecting reduced staffing, travel, and in-person events.
Outlook, risks, contingencies, and unusual items
- Outlook: Management said cash and cash equivalents, together with anticipated cash generation, should cover working capital, expected capital expenditures, and contractual obligations for at least 12 months. It did not expect to need to sell bitcoin for working capital during that period, but may sell bitcoin for treasury management. The company’s stated policy is not to provide financial guidance.
- Bitcoin strategy and exposure: Bitcoin became the primary treasury reserve asset, subject to working-capital needs and market conditions. Management stated it may raise debt or equity to buy more bitcoin. Bitcoin is volatile, less liquid than cash, concentrated, exposed to regulatory and market-integrity risks, and vulnerable to custody, key-loss, and cyberattack risks. Insurance covered only a small fraction of holdings. As of February 8, 2021, the company held approximately 71,079 bitcoin at an aggregate purchase price of $1.145 billion.
- Debt and liquidity: The $650 million notes mature in December 2025 and carry 0.750% stated interest. Conversion, repurchase-on-fundamental-change, refinancing, and cash-settlement requirements could pressure liquidity. Contractual obligations totaled $870.6 million, including notes, leases, purchase obligations, and Transition Tax payments.
- Operating and market risks: Management cited competition, dependence on a single analytics platform and installed base, long and unpredictable sales cycles, potential shifts from upfront licenses to subscriptions, channel-partner reliance, and COVID-19-related uncertainty. It warned that the pandemic could delay sales and reduce support or consulting revenue in future periods.
- Brazil contingency: The company said its Brazilian subsidiary failed or likely failed to comply with local procurement regulations. An administrative action and related investigation remained unresolved; management considered a loss probable but could not reasonably estimate its amount or range. It said the outcome could materially affect earnings when accrued, though it did not expect a material effect on financial position.
- Other unusual items: The 2019 comparison includes a $29.8 million gain on the Voice.com domain sale. In 2020, a $12.4 million income-tax benefit partially offset the pre-tax loss. The company deferred $4.6 million of U.S. employer Social Security taxes under pandemic relief provisions.
- Controls and audit: Management and KPMG reported effective internal control over financial reporting, and KPMG issued an unqualified opinion on the financial statements. The audit identified bitcoin existence/control, convertible-note liability valuation, and product-support standalone selling price as critical audit matters.
Important facts for investors to verify
- Bitcoin holdings, valuation and impairment accounting, custody arrangements, insurance coverage, liquidity, and the company’s plans for further purchases or sales.
- Cash generation and liquidity relative to the $650 million notes, conversion or repurchase terms, lease commitments, and other contractual obligations.
- Whether subscription growth can offset declines in product support and license revenue, and how customer deployment choices affect revenue timing.
- Developments and potential financial exposure in the Brazilian procurement matter, for which the filing provides no estimable loss range.
- The effects of COVID-19, competitive pressure, cybersecurity and privacy requirements, and channel-partner performance on software operations.