MicroStrategy Incorporated — FY2013 Form 10-K
Filing identity and period: The filing identifies the registrant as MicroStrategy Incorporated, not Strategy Inc. It covers the fiscal year ended December 31, 2013; quarterly figures below are unaudited. Unless noted otherwise, amounts are USD millions.
Business context
MicroStrategy sells enterprise analytics software, mobile applications, cloud analytics and related support and professional services. These established offerings generated the vast majority of revenue. Its newer Loyalty Platform (Alert) and Identity Platform (Usher) had not generated significant revenue in 2011–2013. The company operated as one reportable segment and completed the sale of Angel.com in March 2013.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Total revenue | $575.9 | $565.7 | Up 1.8% |
| Product licenses and subscription services | $160.1 | $150.5 | Up 6.4%; subscription services rose to $12.2 from $3.1 |
| Product support | $277.5 | $262.0 | Up 5.9% |
| Other services | $138.3 | $153.2 | Down 9.8%, primarily lower consulting and education revenue |
| Gross profit / gross margin | $437.3 / 75.9% | $424.6 / 75.1% | Margin improved |
| Income from continuing operations before taxes | $16.8 | $32.2 | Down 48.0% |
| Income from continuing operations, net of tax | $26.6 | $22.5 | Up 18.1%; includes an unusually large tax benefit |
| Net income / diluted EPS | $83.3 / $7.37 | $20.5 / $1.84 | FY2013 includes $56.8 of net discontinued-operations income, largely the Angel.com sale gain |
| Operating cash flow from continuing operations | $30.6 | $52.2 | Down 41.3% |
| Cash and cash equivalents plus short-term investments | $357.4 | $223.1 | At December 31; FY2013 includes $137.2 of short-term investments |
| Current assets / current liabilities | $479.9 / $233.5 | $362.0 / $219.2 | FY2013 current ratio approximately 2.1 |
Operating income was $19.4 million, or approximately 3.4% of revenue, compared with $33.1 million, or 5.9%, in 2012. The filing reports no borrowings as a separate balance-sheet line; it does report $4.0 million of capital lease and other financing obligations and $126.2 million of future operating lease payments. Management said available liquidity and anticipated cash generation should meet working-capital needs, capital expenditures and contractual obligations for at least 12 months.
Continuing-operations investing cash flow was negative $154.1 million, mainly reflecting purchases of short-term investments; financing cash flow was positive $21.6 million. Total cash and cash equivalents decreased $4.2 million during the year. The Angel.com sale generated approximately $100.7 million net cash proceeds after transaction costs.
Q4 2013: Revenue was $165.9 million versus $156.0 million in Q4 2012; gross profit was $132.9 million versus $119.5 million; and income from continuing operations, net of tax, was $16.1 million versus $8.4 million. Quarterly results are not necessarily indicative of future periods.
Material changes and unusual items
- Angel.com was sold for approximately $111.2 million of consideration, yielding $100.7 million net cash proceeds and a $57.4 million after-tax gain. Its results were presented as discontinued operations. Total FY2013 net income therefore materially exceeds income from continuing operations.
- The continuing-operations tax benefit was $9.8 million, compared with a $9.7 million tax provision in 2012. The company cited releases of uncertain-tax-position liabilities, a favorable German tax examination settlement and the reinstated U.S. R&D tax credit. The resulting effective tax rate was negative 58.5%; it should not be treated as a normalized rate.
- Operating expenses increased to $417.9 million from $391.5 million, including R&D expense up 11.2% and G&A up 12.2%. Management attributed spending growth to strategic investment, staffing and other costs. It expected 2014 investment-related expense levels to be higher than in 2013.
- Cash from continuing operations fell despite higher revenue; management cited changes in non-cash items as the primary driver. Deferred revenue and advance payments were $222.9 million gross, or $122.6 million net of unpaid amounts. Management expected to recognize approximately $210.3 million over the next 12 months; recognition remains subject to performance obligations. Additional customer purchase commitments of $119.7 million through 2018 were not included in deferred revenue.
- The company granted options covering 600,000 shares under its 2013 Stock Incentive Plan, subject to stockholder approval. It recognized $2.1 million of related compensation expense in 2013 and estimated approximately $6.5 million annually over the next four years.
Outlook, risks and contingencies
The company stated it does not provide guidance on anticipated financial performance. Management emphasized continued investment in analytics, mobile and cloud products, while warning that profitability depends on revenue keeping pace with expense growth. Key risks include intense competition and pricing pressure, long and variable sales cycles, reliance on analytics and related services for most revenue, and the possibility that cloud subscriptions change revenue-recognition timing. International operations represented 40.4% of continuing revenue in 2013 and expose results to currency, tax and regulatory risks. The company also highlighted privacy, cybersecurity, product-development and talent risks; Alert and Usher had yet to contribute significant revenue.
Two patent matters remained under appeal with outcomes not determinable: DataTern’s appeal followed a summary judgment against it, and the Vasudevan matter followed rulings of non-infringement and patent invalidity. No estimated liability was accrued for these matters. Management did not expect other ordinary-course legal proceedings to materially affect financial position, results or cash flows. The filing reported effective disclosure controls and internal control over financial reporting, and the auditors issued unqualified opinions.
Investor verification priorities
- Separate the Angel.com disposal gain and tax benefits from recurring continuing-operations earnings and assess a normalized tax rate.
- Reconcile the decline in operating cash flow with earnings, deferred revenue movements and non-cash adjustments; distinguish treasury-investment purchases from operating liquidity.
- Track subscription growth against its rising delivery costs, and test whether product support renewals can offset weaker consulting and education revenue.
- Review the $119.7 million of future customer commitments, deferred-revenue recognition conditions, lease commitments and the company’s actual capital allocation, including share repurchases.
- Monitor the patent appeals, privacy and cybersecurity exposure, and the commercial traction of the Loyalty and Identity Platforms.