MicroStrategy Incorporated — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 13, 2013. The filing is for MicroStrategy Incorporated, not a company identified in the supplied text as Strategy Inc. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
MicroStrategy provides business intelligence (BI) and mobile software, related support and services, and cloud-based BI subscriptions. BI and mobile products and related services generated the vast majority of revenue. Angel.com, a cloud-based contact-center and interactive voice response business, was reported as a non-core business. The newer Express, Wisdom, Alert, and Usher products did not generate significant revenue in 2012 or 2011.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $594.6 | $562.2 |
| Product license revenue | $147.3 | $154.6 |
| Product support and other services revenue | $447.3 | $407.6 |
| Gross profit | $441.8 | $420.1 |
| Operating income | $30.2 | $15.0 |
| Net income | $20.5 | $17.9 |
| Diluted EPS | $1.84 | $1.62 |
| Cash provided by operating activities | $49.9 | $60.8 |
- Revenue increased 5.8%; services revenue rose 9.7%, while license revenue declined 4.7%. Product support revenue grew 7.6%, consulting 11.2%, and subscription services reached $3.1 million from $0.1 million in 2011.
- Gross margin was approximately 74.3% versus 74.7%; operating margin was approximately 5.1% versus 2.7%; net margin was approximately 3.5% versus 3.2%.
- FY2012 fourth-quarter revenue was $164.5 million, gross profit $124.8 million, and net income $8.2 million. For Q4 2011, the corresponding figures were $160.3 million, $122.6 million, and $9.0 million.
- At year-end, cash and cash equivalents were $224.4 million, current assets $358.1 million, current liabilities $219.1 million, total assets $477.9 million, and stockholders’ equity $200.3 million. The company reported no material off-balance-sheet arrangements and stated it did not expect to need borrowing for operations over the next 12 months. No conventional borrowings are shown in the supplied balance sheet; lease and other liabilities remain.
- Operating cash flow fell 18.0% to $49.9 million, primarily due to changes in operating assets and liabilities. Investing cash outflow was $35.8 million; financing provided $9.8 million. Cash increased by $24.8 million during the year.
- Net current and non-current deferred revenue and advance payments totaled $110.7 million after offsets for unpaid amounts; gross deferred revenue was $194.4 million. Management expected to recognize about $181.0 million over the next 12 months. Additional customer minimum purchase commitments of $110.4 million through 2017 were not included in deferred revenue.
- The filing lists $137.0 million of future minimum operating and capital lease payments, including $26.3 million due in 2013. International operations accounted for 40.3% of FY2012 revenue; $183.8 million of cash was held by non-U.S. entities.
Changes versus prior year and notable items
- Net income increased 14.5%, but remained well below 2010’s $43.8 million. Operating income approximately doubled from 2011, while license revenue declined and services became a larger revenue component.
- Research and development expense increased 30.2% to $94.6 million; gross R&D spending before capitalization rose 30.8%. Management attributed this to staffing and related investment in product development. Sales and marketing expense decreased 9.5%, while general and administrative expense increased 8.7%.
- The effective tax rate increased to 29.7% from 7.0%, partly because 2011 included favorable U.K. tax settlement and foreign valuation-allowance benefits that did not recur.
- Foreign exchange reduced FY2012 revenue by 2.7% versus the prior year, according to management. A hypothetical 10% unfavorable rate change would have reduced FY2012 revenue by 3.7%.
- The company recorded a $1.0 million additional aircraft impairment charge in 2012; cumulative aircraft impairment was $9.6 million. The aircraft returned to service in Q2, and reported insurance receivables related to the damage had been received by year-end. A fractional aircraft lease ended in September 2012; related 2012 expense was approximately $2.0 million.
Outlook, risks, and contingencies
- MicroStrategy stated that it does not give guidance on anticipated financial performance. Management expected 2013 investment-related expenses to be higher than 2012, while warning that profitability could decline if revenue does not cover costs. No numerical revenue or earnings outlook is provided.
- Key risks include intense competition and pricing pressure, dependence on the BI platform and related services, long and variable sales cycles, quarterly revenue volatility, and uncertainty around adoption and monetization of newer products and cloud subscriptions. A shift from perpetual licenses to subscriptions could change revenue timing.
- Other material exposures include privacy and cybersecurity risks, foreign currency and international operating risks, tax uncertainty, reliance on channel partners, recruiting and retention, and potential interruption of critical operations. The company was under tax examination in Germany and disclosed $17.3 million of gross unrecognized tax benefits, including accrued interest.
- Patent matters: a DataTern patent case resulted in summary judgment against DataTern in February 2013, with an appeal expected; reseller indemnification requests remained unresolved. A separate Vasudevan patent case was ongoing, with trial scheduled for November 2013. The company said outcomes and possible losses could not be reasonably estimated and accrued no liability for these cases. The Acacia-related litigation was dismissed in January 2013.
- Class B shares carried ten votes per share; as of February 4, 2013, Class B holders held 71.1% of voting power, and CEO Michael Saylor held 64.2%. The company qualified as a Nasdaq controlled company. No cash dividends had been paid or were planned.
- Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of year-end; the auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether recurring support and services growth can offset declining license revenue, and whether the small cloud subscription base can scale profitably.
- Whether operating cash flow can stabilize as investment spending rises, and how deferred revenue, customer commitments, and lease obligations convert into cash and recognized revenue.
- The location and potential tax cost of overseas cash and undistributed earnings, alongside the resolution of the German tax examination and unrecognized tax benefits.
- Updates on the Vasudevan litigation, DataTern appeal and reseller indemnification matters, and any related financial exposure.
- The practical effects of concentrated voting control, the status of the share repurchase authorization, and the company’s lack of numerical financial guidance.