MicroStrategy Incorporated — FY2016 Form 10-K
Reporting-period note: The filing is MicroStrategy Incorporated’s annual report for the fiscal year ended December 31, 2016, not a standalone quarterly filing. The request identifies “Strategy Inc”; that name does not match the registrant named in the supplied filing.
Business context
The company sells enterprise analytics software and related support and consulting services, offered on-premises and through cloud subscriptions. Product support was its largest revenue category. Usher, its identity and digital-credentials offering, generated no significant revenue in 2016, 2015, or 2014. MicroStrategy operated as one reportable segment.
Financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $512.2 million | $529.9 million | Down 3.3% |
| Gross profit / margin | $419.0 million / 81.8% | $428.8 million / 80.9% | Profit down 2.3% |
| Operating income / margin | $107.6 million / 21.0% | $134.0 million / 25.3% | Down 19.7% |
| Net income | $90.9 million | $105.9 million | Down 14.2% |
| Diluted EPS | $7.89 | $9.18 | Down 14.1% |
| Operating cash flow | $110.6 million | $149.7 million | Down 26.1% |
Revenue mix in FY2016: product licenses $113.5 million, down 4.7%; subscription services $30.6 million, up 9.8%; product support $285.1 million, up 1.2%; and other services $83.0 million, down 17.9%. The decline in other services was chiefly associated with lower consulting revenue.
For Q4 2016, revenue was $140.1 million versus $143.5 million in Q4 2015; net income was $31.1 million versus $39.1 million. Q4 2016 net income included a $3.4 million benefit from reversing an accrual for potential payments related to two executives’ departures.
Liquidity, cash, and obligations
- Cash and cash equivalents were $402.0 million and short-term investments were $187.4 million at year-end, totaling $589.4 million, compared with $485.7 million a year earlier.
- Current assets were $685.0 million and current liabilities were $185.5 million; the reported balance sheet implies working capital of approximately $499.5 million.
- The company reported $4.2 million of cash provided by investing activities and $1.0 million of cash used in financing activities in 2016. It stated that available cash, investments, and expected cash generation were sufficient for working capital and obligations for at least 12 months.
- The filing reports no material off-balance-sheet arrangements. It lists $86.5 million of future operating and capital lease and other financing payments, including $2.2 million for capital leases and other financing arrangements. Long-term liabilities excluding deferred revenue were $16.7 million; the filing does not present a conventional interest-bearing debt balance as a key metric.
- Net deferred revenue and advance payments were $119.5 million at year-end, after offsetting unpaid items. The company expected to recognize approximately $204.1 million of gross deferred revenue and advance payments over the next 12 months, subject to performance obligations.
Material changes and management commentary
- Product licenses and subscription services combined declined 2.0%. Subscription revenue grew, but did not offset lower license revenue. International license revenue fell 9.8%, affected in part by currency movements.
- International revenue was 39.3% of total revenue, compared with 38.3% in 2015. Management said unfavorable currency movements reduced 2016 revenue by 1.5% versus the prior year; a hypothetical 10% unfavorable change in average exchange rates would have reduced 2016 revenue by 3.5%.
- Operating expenses rose to $311.4 million from $294.7 million, as higher sales and marketing and research and development costs offset lower general and administrative expenses. R&D expense increased partly because no software development costs were capitalized in 2016; management said it did not expect material capitalization in the near term.
- Operating cash flow decreased despite positive earnings, with management attributing the year-over-year fall primarily to changes in non-cash items and lower net income. Cash and investments increased, with cash flow also affected by investment purchases and redemptions.
- The 2014 restructuring plan, which included a 777-employee reduction, was substantially implemented by the end of 2014. 2016 restructuring costs were not material, and no further costs under that plan were expected. Headcount was 2,133 at December 31, 2016, up from 1,947 a year earlier.
Outlook, risks, and unusual items
- The company does not provide guidance on anticipated future financial performance. Management described competition, evolving technology, long sales and implementation cycles, and dependence on its analytics product suite as significant business risks.
- Management highlighted the risk that a shift from perpetual licenses to cloud subscriptions could change revenue-recognition timing and cash flows. It also noted that Usher had not yet generated significant revenue.
- Key exposures include foreign currency movements, privacy and data-protection requirements, cybersecurity and service disruptions, customer spending uncertainty—particularly in retail—and tax uncertainty. The company intended to indefinitely reinvest undistributed foreign earnings; those earnings were $322.0 million at year-end.
- The pending DataTern patent case was remanded for further proceedings, with a claim-construction ruling issued in February 2017. The outcome and possible loss were not determinable, and no liability was accrued. The filing says other ordinary-course legal proceedings were not expected to have a material adverse effect.
- The company reported a 19.6% effective tax rate in 2016, down from 23.2% in 2015. Its tax assets and valuation allowance depend on estimates of future profitability; it disclosed $3.5 million of gross unrecognized tax benefits, including accrued interest.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. A global finance and accounting reorganization was underway and expected to be substantially complete by the end of Q1 2017.
Important facts for investors to verify
- Confirm the registrant and requested entity: the supplied filing is for MicroStrategy Incorporated, not “Strategy Inc.”
- Review the causes and sustainability of lower revenue, operating income, net income, and operating cash flow, particularly the sharp decline in consulting revenue.
- Assess the quality and timing of deferred revenue, including the distinction between gross balances and amounts net of unpaid items.
- Track cloud subscription growth against perpetual license trends and the potential effect of revenue-recognition changes expected under Topic 606 adoption in 2018.
- Monitor the DataTern litigation, tax positions, foreign currency effects, and the execution of the finance-function reorganization.