MicroStrategy Incorporated — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with FY2014. The filing is for MicroStrategy Incorporated, the issuer named in the source text.
Business context
MicroStrategy sold enterprise analytics, mobile and cloud software, plus related product support and services. These offerings generated the vast majority of revenue. Usher, its mobile security product, had not generated significant revenue. The company reported one operating segment.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $529.9 | $579.8 |
| Gross profit; gross margin | $428.8; 80.9% | $444.6; 76.7% |
| Operating income; operating margin | $134.0; 25.3% | $5.1; 0.9% |
| Net income; diluted EPS | $105.9; $9.18 | $5.0; $0.44 |
| Operating cash flow | $149.7 | $14.6 |
| Cash and cash equivalents | $292.3 | $146.9 |
| Short-term investments | $193.3 | $198.5 |
| Total assets; stockholders’ equity | $656.9; $455.3 | $558.8; $324.5 |
- Revenue declined 8.6%. Product license revenue fell 5.4%, product support fell 4.7%, and other services fell 25.5%; subscription revenue grew 24.7% to $27.8 million.
- Gross margin improved as cost of revenue fell faster than revenue. Operating income rose sharply alongside lower operating expenses, particularly sales and marketing and research and development costs.
- Net income also reflects a $31.9 million income-tax provision and $3.6 million of other income. The effective tax rate was 23.2%, versus 54.4% in 2014.
- Cash and short-term investments totaled $485.7 million at year-end. The company said available cash and expected cash generation were sufficient for working capital, anticipated capital expenditures and contractual obligations for at least 12 months.
- The balance sheet reports $19.9 million of other long-term liabilities and $9.0 million of net non-current deferred revenue. Lease commitments totaled $90.1 million, mainly operating leases. No material borrowing balance is identified in the supplied filing text; capital leases and other financing arrangements totaled $0.2 million in future minimum payments.
Material changes and notable items
- Revenue decreased by $50.0 million year over year. Foreign exchange was a major headwind: management said 2015 revenue was 6.3% lower due to an unfavorable 14.3% change in weighted-average exchange rates. International revenue represented 38.3% of total revenue, down from 41.1%.
- Operating expenses fell from $439.5 million to $294.7 million. Headcount declined to 1,947 from 2,470 at year-end 2014; management attributed lower costs in part to the 2014 restructuring and other cost reductions. Restructuring expense was $0.3 million in 2015 versus $14.7 million in 2014.
- The 2015 net-income comparison is affected by the unusually low 2014 result and tax-rate differences. The company also reported non-GAAP income from continuing operations of $151.6 million in 2015 and $31.6 million in 2014, excluding share-based compensation and restructuring costs; share-based compensation is recurring.
- Operating cash flow increased to $149.7 million. Investing cash outflow was $7.7 million, and financing cash flow was $9.2 million. Cash and cash equivalents increased by $145.4 million during the year.
- In January 2016, two senior executives departed following an executive-management reorganization. Their 200,000 unvested options were forfeited; the company expected to reverse about $1.6 million of share-based compensation expense and said severance or related costs could arise.
- A patent-infringement case brought by DataTern remained unresolved: the court denied MicroStrategy’s summary-judgment motions in September 2015. The company said the outcome and possible loss were not estimable and recorded no liability for the matter.
Outlook, risks and contingencies
- The company did not provide financial guidance and said it does not give guidance on anticipated financial performance. Management described cloud subscriptions as growing but warned that a shift from perpetual licenses to subscriptions can change revenue-recognition timing and cash flows.
- Management cited intense competition, dependence on its analytics product suite, long sales and implementation cycles, reliance on channel partners, and the risk that cost reductions or restructuring could affect execution and retention.
- Other disclosed risks include foreign-exchange exposure, privacy and cybersecurity threats, tax examinations and uncertain tax positions, and litigation. A 10% unfavorable currency-rate change would have reduced 2015 revenue by an estimated 3.4%, all else equal.
- Gross deferred revenue and advance payments were $213.1 million, or $109.7 million net of unpaid amounts. The company expected to recognize approximately $197.2 million over the next 12 months, but cautioned that timing depends on performance obligations. Additional future customer purchase commitments of approximately $127.5 million through 2020 were not included in deferred revenue.
- The company reported effective disclosure controls and internal control over financial reporting at year-end; a material weakness reported for 2014 was stated to have been remediated in 2015.
Important facts for investors to verify
- Whether subscription growth can offset continued declines in product licenses, support and services, particularly after foreign-exchange effects.
- How much of the sharp increase in operating income and cash flow reflects sustainable cost improvements versus timing, working-capital changes or other nonrecurring effects.
- The cash location and potential tax cost of repatriating foreign funds: $266.4 million of cash and short-term investments was held by non-U.S. entities, and undistributed foreign earnings were $252.9 million.
- Developments and any potential financial exposure in the DataTern litigation, related indemnification requests, and U.S. tax examination.
- The effect of the January 2016 executive departures, including any severance expense and whether management’s reorganization supports profitable growth.
- The company’s lease obligations, recurring share-based compensation, and deferred-revenue realization relative to future revenue and cash generation.