MicroStrategy Incorporated — FY2017 Form 10-K
Entity and period: The supplied filing is MicroStrategy Incorporated’s annual report for the fiscal year ended December 31, 2017, not a filing under the name Strategy Inc. The figures below are annual unless otherwise noted; the filing also provides unaudited quarterly data.
Business context
MicroStrategy sells enterprise analytics and mobility software, cloud subscriptions, product support, consulting, and education services. Its platform includes MicroStrategy Analytics, Mobile, and Usher. The company reports one operating segment and operates internationally.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $504.5 million | $512.2 million | Down 1.5% |
| Gross profit / gross margin | $407.9 million / 80.8% | $419.0 million / 81.8% | Margin down about 1.0 percentage point |
| Operating income / operating margin | $74.4 million / 14.7% | $107.6 million / 21.0% | Down 30.9% |
| Net income / diluted EPS | $17.6 million / $1.53 | $90.9 million / $7.89 | Net income down 80.6% |
| Cash from operations | $78.3 million | $110.6 million | Down 29.2% |
- Revenue mix: product licenses fell 17.2% to $94.0 million; subscription services grew 5.9% to $32.4 million; product support rose 1.4% to $289.2 million; and other services rose 7.3% to $89.0 million.
- Domestic product license revenue declined 33.2% to $46.3 million, while international product license revenue increased 7.8% to $47.6 million. International revenue represented 41.9% of total revenue, compared with 39.3% in 2016.
- Cash and cash equivalents were $420.2 million, and short-term investments were $254.9 million at year-end, totaling $675.2 million. Total current assets were $763.6 million against current liabilities of $184.9 million.
- The filing does not show material borrowings; it states there were no material capital leases. Other long-term liabilities were $50.1 million, including $36.8 million of the estimated U.S. transition tax liability.
- Net deferred revenue and advance payments were $122.8 million after offsetting unpaid amounts; gross deferred revenue and advance payments were $218.7 million. Management expected to recognize about $205.9 million over the following 12 months, subject to performance obligations.
Material changes and unusual items
- Operating expenses rose 7.1% to $333.5 million, including sales and marketing up 10.0% and research and development up 7.7%. Gross profit declined as revenue fell and costs of revenue rose.
- FY2017 included a $44.0 million one-time tax charge from the Tax Cuts and Jobs Act: $40.3 million estimated transition tax and $3.7 million from remeasuring deferred tax assets. The reported effective tax rate was 75.7%; management’s non-GAAP reconciliation excluded the $44.0 million charge and showed net income of $61.7 million and diluted EPS of $5.34.
- Foreign-currency transaction losses contributed to $7.0 million of other expense, versus $3.2 million of other income in 2016.
- Fourth-quarter 2017 revenue was $138.1 million and net loss was $26.2 million, compared with revenue of $140.1 million and net income of $31.1 million in fourth-quarter 2016. The 2017 quarter included the one-time Tax Act charge.
- Investing activities used $69.7 million, primarily reflecting purchases of short-term investments. The company made no share repurchases in 2017 and paid no cash dividends.
Outlook, risks, and contingencies
- MicroStrategy does not provide financial guidance. Management said it expected to increase sales and marketing and research and development spending in future periods.
- The company planned full retrospective adoption of ASC 606 on January 1, 2018. It estimated a $13.0 million increase to 2016 beginning retained earnings, changes to revenue timing for term licenses and channel-partner sales, and capitalization of certain sales commissions. It estimated the standard would increase reported receivables and deferred revenue because unpaid balances would no longer be offset.
- Key disclosed risks include intense competition, declining perpetual license revenue, long and unpredictable sales cycles, dependence on product support renewals and the installed base, exposure to retail-sector weakness, foreign currency and international regulatory risks, and cybersecurity, privacy, and data-protection obligations.
- The DataTern patent case against the company was dismissed for failure to prosecute in October 2017; related customer and channel-partner proceedings were dismissed with prejudice. Management did not expect other routine legal proceedings to materially affect results.
- Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether core license demand stabilizes, particularly in the U.S., given the steep domestic license-revenue decline and fewer large transactions.
- Whether subscription growth and recurring product-support revenue can offset continued weakness in license sales, and how cloud adoption affects revenue timing and cash flow.
- The final transition-tax amount and subsequent tax effects, including the impact of GILTI rules that took effect for 2018.
- The effects of ASC 606 on reported comparative results, receivables, deferred revenue, and commission capitalization.
- Future operating cash generation, planned increases in sales and R&D spending, and the company’s substantial lease commitments, including its January 2018 headquarters lease extension through 2030.