Business context and reporting period
MicroStrategy Incorporated’s Form 10-K covers the fiscal year ended December 31, 2011, with quarterly results through Q4 2011. The company provides business-intelligence software and related support and services, with newer mobile, cloud, and social-intelligence offerings. The filing states that new cloud and social offerings generated no significant revenue in 2011.
Financial performance and position
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $562.2 | $454.6 |
| Gross profit / gross margin | $420.1 / 74.7% | $348.5 / 76.7% |
| Operating income before financing and taxes / margin | $15.0 / 2.7% | $50.6 / 11.1% |
| Net income / net margin | $17.9 / 3.2% | $43.8 / 9.6% |
| Diluted EPS | $1.62 | $3.72 |
| Cash provided by operating activities | $60.8 | $75.8 |
- Revenue rose 23.7%. Product-license revenue increased 22.0% to $154.6 million; product support and other services revenue increased 24.3% to $407.6 million. Consulting revenue grew 47.0% to $120.9 million.
- Profitability weakened despite revenue growth: gross margin declined about 2.0 percentage points and operating income before financing and taxes fell about 70%. Operating expenses rose 36.0%, led by sales and marketing and research and development investment.
- FY 2011 net income included a $3.4 million gain on sale of an investment. The effective tax rate was 7.0%, down from 20.3%, reflecting international earnings mix, a favorable U.K. tax settlement, and releases of foreign valuation allowances.
- At year-end, cash and cash equivalents were $199.6 million, current assets $343.2 million, current liabilities $218.4 million, total assets $453.9 million, and stockholders’ equity $169.0 million. The current ratio was approximately 1.57. The balance sheet presents no borrowing line; total liabilities include deferred revenue and other obligations.
- Operating cash flow declined 19.8%. Purchases of property and equipment were $40.7 million and capitalized software development was $5.9 million; operating cash flow less these expenditures was approximately $14.2 million.
- Net deferred revenue and advance payments totaled $114.0 million after offsets; the company expected to recognize approximately $178.4 million of gross deferred revenue over the next 12 months. Separate future customer purchase commitments totaled $112.7 million through 2016 and were not included in deferred revenue.
Material changes versus prior period
- Revenue accelerated, with domestic and international product-license revenue up 24.2% and 19.0%, respectively. The number of recognized license transactions exceeding $0.5 million increased to 57 from 40.
- Sales and marketing expense increased 47.0% to $243.0 million; research and development expense increased 43.6% to $72.6 million. Core BI research and development headcount rose 49.2% to 713.
- Consulting cost growth and expanded staffing contributed to lower margins. Consulting cost of revenue rose 40.4% to $99.0 million.
- Cash increased by $25.5 million to $199.6 million, while operating cash flow decreased. Investing cash use increased to $36.2 million, mainly due to property and equipment spending and aircraft repairs. No shares were repurchased in 2011, compared with $109.0 million of repurchases in 2010.
Outlook, commentary, risks, and unusual items
- Management did not provide financial guidance and said it does not give guidance on anticipated financial performance. It expected 2012 investments in research and development, sales and marketing, and consulting capabilities to be lower than in 2011.
- Management said existing cash and anticipated cash generation should cover working capital, capital expenditures, and contractual obligations for at least 12 months; it did not expect to need borrowing for operations. It may borrow in future if credit-market pricing is favorable.
- Key risks include intense competition and pricing pressure, dependence on the BI product suite, long and variable sales cycles, economic weakness among financial-services and retail customers, execution and revenue conversion for new cloud/social initiatives, foreign-exchange exposure, and the ability to sustain profitability after significant hiring and spending.
- International operations generated 41.4% of revenue. Cash held by non-U.S. entities was $163.9 million; the company intended to indefinitely reinvest certain foreign earnings. Repatriating undistributed foreign earnings of $159.9 million could create U.S. tax.
- The company recorded an $8.6 million cumulative impairment on its aircraft after hangar-collapse damage; repair costs remained uncertain, and further impairment could be recorded. Insurance coverage was up to $50.0 million, with $7.1 million received through year-end. The company also disclosed a $4.2 million estimated annual cost for a leased fractional aircraft interest.
- Patent disputes with Acacia/DAS, Datatern, and Vasudevan remained unresolved; outcomes were not determinable and no estimated liabilities were accrued for the described claims. The Acacia/DAS matter had a trial scheduled for May 2012. A German tax examination was ongoing; gross unrecognized tax benefits, including accrued interest, were $17.3 million.
- Operating lease payments totaled $152.1 million, including $24.0 million due in 2012. The filing reported no off-balance-sheet arrangements with a material impact.
Important facts for investors to verify
- Whether growth in licenses and recurring support revenue can continue to offset substantially higher operating costs and restore margins.
- How much of reported cash is practically available to U.S. operations, given foreign cash balances and potential repatriation taxes.
- Actual repair and insurance recoveries for the aircraft, and any additional impairment or related expense.
- Progress, costs, and revenue contribution from cloud and social-intelligence products, which were not significant revenue sources in 2011.
- Developments in the disclosed patent litigation and German tax examination, including any material change in exposure.
- The filing is for MicroStrategy Incorporated, not a company identified in the request metadata as Strategy Inc; confirm the intended issuer and reporting period.