MICROSTRATEGY INCORPORATED Forward-Looking Information
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Exchange Act. For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed under "Part I. Item 1A. Risk Factors," among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations.
Management's Discussion and Analysis for the Year Ended
In accordance with theSEC's recently issued disclosure simplification rules, we have elected to exclude from this Annual Report discussion of our results for the year endedDecember 31, 2017 . Management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2017 , as adjusted to reflect the full retrospective adoption of ASU 2014-09, including comparison of our results for the years endedDecember 31, 2018 and 2017, is included in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2018 . OverviewMicroStrategy is a global leader in enterprise analytics software and services. TheMicroStrategy platform brings together data from our customers' enterprise applications, such as their financial systems, human resources systems, and supply chain management and customer relationship management tools, and provides analytics for actionable insights. Customers can also use our consulting and education offerings to harnessMicroStrategy's innovative technology and empower their workforce to make better decisions. Over recent years, we have invested in innovation by making our platform more usable, powerful, scalable, flexible, and secure. Examples of these innovations include:
• HyperIntelligence products that enable more users in the organization to
access information rapidly by providing cards with contextual
intelligence, suggestions, and workflows directly within the websites,
applications, and mobile devices that people rely on every day.
• Mobile productivity apps that deploy our technology on any standard
device for a variety of business functions and roles.
• Open architecture, including federated analytics, that provides analysts
and data scientists with seamless access to trusted, governed data
directly within their favorite tools, including Excel, Power BI,
Tableau, Qlik, and more. Recent integrations also allow data scientists
to access trusted, governed data, enrich that data with AI, and return
it back to the MicroStrategy platform.
• Flexible deployment methods that allow our customers to deploy our
platform efficiently and securely using their own hardware or in a cloud
environment they manage or via MCE, our cloud subscription service.
Our customers include leading companies from a wide range of industries, including retail, consulting, technology, manufacturing, banking, insurance, finance, healthcare, telecommunications, as well as the public sector.
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The analytics market is highly competitive. Our future success depends on the
effectiveness with which we can differentiate our offerings from those offered
by large software vendors that provide products across multiple lines of
business, including one or more products that directly compete with our
offerings, and other potential competitors across analytics implementation
projects of varying sizes. We believe a key differentiator of MicroStrategy is
our comprehensive, modern, and open enterprise analytics and mobility platform
that uniquely features HyperIntelligence, transformational mobility, and
federated analytics.
The following table sets forth certain operating highlights (in thousands) for
the years ended
Years Ended December 31,
2019 2018
Revenues
Product licenses $ 87,471 $ 88,057
Subscription services 29,394 29,570
Total product licenses and subscription services 116,865 117,627
Product support 292,035 296,216
Other services 77,427 83,795
Total revenues 486,327 497,638
Cost of revenues
Product licenses 2,131 4,864
Subscription services 15,161 13,620
Total product licenses and subscription services 17,292 18,484
Product support 28,317 20,242
Other services 54,365 60,773
Total cost of revenues 99,974 99,499
Gross profit 386,353 398,139
Operating expenses
Sales and marketing 191,235 205,525
Research and development 109,423 102,499
General and administrative 86,697 86,134
Total operating expenses 387,355 394,158
(Loss) income from operations $ (1,002 ) $ 3,981
As discussed in Note 15, Sale of Domain Name, to the Consolidated Financial
Statements, on May 30, 2019 , we completed the sale of our Voice.com domain name
(the "Domain Name Sale"), resulting in a one-time gain of $29.8 million ,
recorded in "Other income (expense), net" in the Consolidated Statements of
Operations and an associated discrete tax provision of $8.1 million during the
second quarter of 2019.
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As discussed in Note 10, Share-based Compensation, to the Consolidated Financial
Statements, we have outstanding stock options to purchase shares of our class A
common stock and certain other stock-based awards under our 2013 Equity
Plan. Share-based compensation expense (in thousands) from these awards was
recognized in the following operating expense line items in our Consolidated
Statements of Operations for the periods indicated:
Years Ended December 31,
2019 2018
Cost of subscription services revenues $ 7 $ 0 Cost of product support revenues
331 293
Cost of consulting revenues 198 72
Cost of education revenues 20 176
Sales and marketing 1,943 3,572
Research and development 2,460 3,078
General and administrative 5,250 7,445
Total share-based compensation expense
As ofDecember 31, 2019 , we estimated that approximately$36.8 million of additional share-based compensation expense for awards granted under the 2013 Equity Plan will be recognized over a remaining weighted average period of 3.2 years. We base our internal operating expense forecasts on expected revenue trends and strategic objectives. Many of our expenses, such as office leases and certain personnel costs, are relatively fixed. Accordingly, any shortfall in revenue may cause significant variation in our operating results. We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP income from operations that excludes the impact of our share-based compensation arrangements, (ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact from the Tax Act in 2018 and the Domain Name Sale in 2019, and (iii) certain non-GAAP constant currency revenues, cost of revenues, and operating expenses that exclude foreign currency exchange rate fluctuations. These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles inthe United States ("GAAP") and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes a significant non-cash expense that we believe is not reflective of our general business performance, and for which the accounting requires management judgment and the resulting share-based compensation expense could vary significantly in comparison to other companies. The second set of supplemental financial measures excludes the impact from the Tax Act, which was a one-time tax charge, and the Domain Name Sale, which is outside of our normal business operations. The third set of supplemental financial measures excludes changes resulting from fluctuations in foreign currency exchange rates so that results may be compared to the same period in the prior year on a non-GAAP constant currency basis. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors. 31 -------------------------------------------------------------------------------- Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the first non-GAAP financial measure, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally.
The following is a reconciliation of our non-GAAP income from operations excluding the impact of our share-based compensation arrangements to its most directly comparable GAAP measures (in thousands) for the periods indicated:
Years Ended December 31,
2019 2018Reconciliation of non-GAAP income from operations: (Loss) income from operations
$ (1,002 ) $
3,981
Share-based compensation expense 10,209
14,636
Non-GAAP income from operations$ 9,207 $ 18,617 The following are reconciliations of our non-GAAP net income and non-GAAP diluted earnings per share, in each case excluding the impact of the Tax Act in 2018 and the Domain Name Sale in 2019, to their most directly comparable GAAP measures (in thousands, except per share data) for the periods indicated: Years Ended December 31, 2019 2018 Reconciliation of non-GAAP net income: Net income$ 34,355 $ 22,501 Measurement-period adjustment related to the Tax Act 0 (3,106 ) Gain from Domain Name Sale, net of tax (21,778 ) 0 Non-GAAP net income$ 12,577
Reconciliation of non-GAAP diluted earnings per share: Diluted earnings per share$ 3.33
0.00 (0.27 ) Gain from Domain Name Sale, net of tax (per diluted share)
(2.11 ) 0.00
Non-GAAP diluted earnings per share$ 1.22 $ 1.70 32
-------------------------------------------------------------------------------- The following are reconciliations of our non-GAAP constant currency revenues, cost of revenues, and operating expenses to their most directly comparable GAAP measures (in thousands) for the periods indicated. As discussed in Note 3, Recent Accounting Standards, to the Consolidated Financial Statements, we adopted ASU 2014-09 effective as ofJanuary 1, 2018 and adjusted our prior period Consolidated Financial Statements to reflect full retrospective adoption. Where applicable, information for the year endedDecember 31, 2017 within the following reconciliations was also adjusted to reflect the full retrospective adoption of ASU 2014-09, as presented in our Annual Report on Form 10-K for the year endedDecember 31, 2018 . No further adjustments for the year endedDecember 31, 2017 have been made in this Annual Report. Years Ended December 31, Non-GAAP Foreign Currency Non-GAAP Constant Exchange Rate Constant GAAP % Currency % GAAP Impact (1) Currency (2) GAAP Change Change (3) 2019 2019 2019 2018 2019 2019 Product licenses$ 87,471 $ (3,642 )$ 91,113 $ 88,057 -0.7 % 3.5 %
revenues
Subscription services 29,394 (333 ) 29,727 29,570 -0.6 % 0.5 % revenues Product support 292,035 (7,110 ) 299,145 296,216 -1.4 % 1.0 % revenues Other services revenues 77,427 (2,091 ) 79,518 83,795 -7.6 % -5.1 % Cost of product support 28,317 (479 ) 28,796 20,242 39.9 % 42.3 %
revenues
Cost of other services 54,365 (1,834 ) 56,199 60,773 -10.5 % -7.5 %
revenues
Sales and marketing 191,235 (5,169 ) 196,404 205,525 -7.0 % -4.4 %
expenses
Research and 109,423 (1,143 ) 110,566 102,499 6.8 % 7.9 %
development expenses
General and 86,697 (1,029 ) 87,726 86,134 0.7 % 1.8 %
administrative expenses
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2018 2018 2018 2017 2018 2018
(as adjusted)
Product licenses $ 88,057 $ (1,692 ) $
89,749
215 29,355 32,368 -8.6 % -9.3 %
revenues
Product support 296,216 1,278 294,938 289,184 2.4 % 2.0 %
revenues
Other services revenues 83,795 856 82,939 89,032 -5.9 % -6.8 %
Cost of product support 20,242 36 20,206 17,481 15.8 % 15.6 %
revenues
Cost of other services 60,773 522 60,251 58,557 3.8 % 2.9 %
revenues
Sales and marketing 205,525 (603 ) 206,128 175,045 17.4 % 17.8 %
expenses
Research and 102,499 396 102,103 78,766 30.1 % 29.6 % development expenses General and 86,134 (22 ) 86,156 80,161 7.5 % 7.5 % administrative expenses
(1) The "Foreign Currency Exchange Rate Impact" reflects the estimated impact
from fluctuations in foreign currency exchange rates on international
components of our Consolidated Statements of Operations. It shows the
increase (decrease) in material international revenues or expenses, as
applicable, from the same period in the prior year, based on comparisons to
the prior year quarterly average foreign currency exchange rates. The term
"international" refers to operations outside of the United States and
Canada .
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(2) The "Non-GAAP Constant Currency" reflects the current period GAAP amount,
less the Foreign Currency Exchange Rate Impact.
(3) The "Non-GAAP Constant Currency % Change" reflects the percentage change
between the current period Non-GAAP Constant Currency amount and the GAAP
amount for the same period in the prior year.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based on our Consolidated Financial Statements, which have been prepared in
accordance with GAAP.
The preparation of our Consolidated Financial Statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
and equity, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. These estimates, particularly estimates relating to
revenue recognition, have a material impact on our Consolidated Financial
Statements. Actual results and outcomes could differ from these estimates and
assumptions.
Revenue Recognition
We recognize revenue using a five-step model:
(i) Identifying the contract(s) with a customer, (ii) Identifying the performance obligation(s), (iii) Determining the transaction price,
(iv) Allocating the transaction price to the performance obligations in the
contract, and
(v) Recognizing revenue when, or as, we satisfy a performance obligation.
We have elected to exclude taxes assessed by government authorities in determining the transaction price, and therefore revenue is recognized net of taxes collected from customers.
Performance Obligations and Timing of Revenue Recognition
We primarily sell goods and services that fall into the categories discussed below. Each category contains one or more performance obligations that are either (i) capable of being distinct (i.e., the customer can benefit from the good or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identifiable from other promises in the contract) or (ii) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Aside from our term and perpetual product licenses, which are delivered at a point in time, the majority of our services are delivered over time.
Product Licenses
We sell different types of business intelligence software, licensed on a term or
perpetual basis and installed either on premises or on a public cloud that is
procured and managed by the customer. Although product licenses are sold with
product support, the software is fully functional at the outset of the
arrangement and is considered a distinct performance obligation. Revenue from
product license sales is recognized when control of the license is transferred
to the customer, which is the later of delivery or commencement of the license
term. We may also sell through resellers and OEMs who purchase our software for
resale. In reseller arrangements, revenue is recognized when control of the
license is transferred to the end user. In OEM arrangements, revenue is
recognized upon delivery of the license to the OEM.
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--------------------------------------------------------------------------------Subscription Services
We also sell access to our software through MCE, a cloud subscription service, wherein customers access the software through a cloud environment that we manage on behalf of the customer. Control of the software itself does not transfer to the customer under this arrangement and is not considered a separate performance obligation. Cloud subscriptions are regularly sold on a standalone basis and include telephone support, monitoring, backups, updates, and quarterly service reviews. Revenue related to cloud subscriptions is recognized on a straight-line basis over the contract period, which is the period over which the customer has continuous access to the software.
Product Support
In all product license transactions, customers are required to purchase a standard product support package and may also purchase a premium product support package for a fixed annual fee. All product support packages include both technical support and when-and-if-available software upgrades, which are treated as a single performance obligation as they are considered a series of distinct services that are substantially the same and have the same duration and measure of progress. Revenue from product support is recognized on a straight-line basis over the contract period, which is the period over which the customer has continuous access to product support.
Consulting Services
We sell consulting services to help customers plan and execute deployment of our software. Customers are not required to use consulting services to fully benefit from the software. Consulting services are regularly sold on a standalone basis and either (i) prepaid upfront or (ii) sold on a time and materials basis. Consulting arrangements are each considered separate performance obligations because they do not integrate with each other or with other offerings to deliver a combined output to the customer, do not modify or customize (or are not modified or customized by) each other or other offerings, and do not affect the customer's ability to use the other consulting services or our other offerings. Revenue under consulting arrangements is recognized over time as services are delivered. For time and materials-based consulting arrangements, we have elected the practical expedient of recognizing revenue upon invoicing since the invoiced amount corresponds directly to the value of our service to date. Education Services We sell various education and training services to our customers. Education services are sold on a standalone basis under three different arrangements: (i) prepaid bulk training units that may be redeemed on training courses based on standard redemption rates, (ii) an annual subscription to unlimited training courses, and (iii) individual courses purchased a la carte. Education arrangements are each considered separate performance obligations because they do not integrate with each other or with other offerings to deliver a combined output to the customer, do not modify or customize (or are not modified or customized by) each other or other offerings, and do not affect the customer's ability to use the other education services or our other offerings. Revenue on prepaid bulk training units and individual course purchases are recognized when the courses are delivered. Revenue on the annual subscription is recognized on a straight-line basis over the contract period, which is the period over which the customer has continuous access to unlimited training courses.
See Note 14, Segment Information, to the Consolidated Financial Statements for information regarding total revenues by geographic region.
Estimates and Judgments
We make estimates and judgments to allocate the transaction price based on an
observable or estimated standalone selling price ("SSP"). We also make estimates
and judgements with respect to capitalizing incremental costs to obtain a
customer contract and determining the subsequent amortization period. These
estimates and judgments are discussed further below.
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--------------------------------------------------------------------------------Determining the Transaction Price
The transaction price includes both fixed and variable consideration. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal will not occur. The amount of variable consideration excluded from the transaction price was not material for the years endedDecember 31, 2019 and 2018. Our estimates of variable consideration are also subject to subsequent true-up adjustments and may result in changes to our transaction prices. Such true-up adjustments have not been and are not expected to be material. We have the following sources of variable consideration:
(i) Performance penalties - Subscription services and product support
arrangements generally contain performance response time guarantees. For
subscription services arrangements, we estimate variable consideration
using a portfolio approach because performance penalties are tied to
standard up-time requirements. For product support arrangements, we
estimate variable consideration on a contract basis because such
arrangements are customer-specific. For both subscription services and
product support arrangements, we use an expected value approach toestimate variable consideration based on historical business practices
and current and future performance expectations to determine the
likelihood of incurring penalties.
(ii) Extended payment terms - Our standard payment terms are generally within
180 days of invoicing. If extended payment terms are granted to
customers, those terms generally do not exceed one year. For contracts
with extended payment terms, we estimate variable consideration on a
contract basis because such estimates are customer-specific, and we usean expected value approach to analyze historical business experience on a
customer-by-customer basis to determine the likelihood that extended
payment terms lead to an implied price concession.
(iii) Sales and usage-based royalties - Certain product license arrangements
include sales or usage-based royalties, covering both product license
and product support. In these arrangements, we use an expected value
approach to estimate and recognize revenue for royalty sales each
period, utilizing historical data on a contract-by-contract
basis. True-up adjustments are recorded in subsequent periods when
royalty reporting is received from the OEMs.
We provide a standard software assurance warranty to repair, replace, or refund
software that does not perform in accordance with documentation. The standard
software assurance warranty period is generally less than one year. Assurance
warranty claims were not material for the years ended December 31, 2019 and
2018.
We do not adjust the transaction price for significant financing components
where the time period between cash payment and performance is one year or
less. However, there are circumstances where the timing between cash payment and
performance may exceed one year. These circumstances generally involve prepaid
multi-year product support and subscription services arrangements where the
customer determines when the service is utilized (e.g., when to request on-call
support services or when to use and access the software in the cloud). In these
circumstances, we have determined no significant financing component exists
because the customer controls when to utilize the service and because there are
significant business purposes behind the timing difference between payment and
performance (e.g., maximizing profit in the case of product support services and
ensuring collectability in the case of subscription services).
Allocating the Transaction Price Based on Standalone Selling Prices (SSP)
We allocate the transaction price to each performance obligation in a contract based on its relative SSP. The SSP is the price, or estimated price, of the software or service when sold on a standalone basis at contract inception. In circumstances where SSP is not directly observable, we estimate SSP using the following methodologies:
(i) Product licenses - Product licenses are not sold on a standalone basis
and pricing is highly variable. We establish SSP of product licenses
using a residual approach after first establishing the SSP of standard
product support. Standard product support is sold on a standalone basis
within a narrow range of the net license fee, and because an economic
relationship exists between product licenses and standard product
support, we have concluded that the residual method to estimate SSP of
product licenses sold on both a perpetual and term basis is a fair
allocation of the transaction price.
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(ii) Subscription services - Given the highly variable selling price of
subscription services, we establish the SSP of our subscription services
arrangements using a similar residual approach after first establishing
the SSP of consulting and education services to the extent they are
included in the arrangement. We have concluded that the residual method
to estimate SSP of our subscription services is a fair allocation of the
transaction price.
(iii) Standard product support - We establish SSP of standard product support
as a percentage of the stated net license fee, given such pricing is
consistent with our normal pricing practices and there exists sufficient
history of customers renewing standard product support on a standalone
basis at similar percentages. Each quarter, we track renewal rates
negotiated when standard product support is initially sold with a
perpetual license in order to determine the SSP of standard product
support within each geographic region for the upcoming quarter. If the
stated standard product support fee falls within the SSP range, the
specific rate in the contract will be used to estimate SSP. If the
stated fee is above or below SSP, the highest or lowest end of therange, respectively, will generally be used to estimate SSP of standard
product support.
(iv) Premium product support, consulting services, and education services -
SSP of premium product support, consulting services, and education
services is established by using a bell-shaped curve approach to define a
narrow range within each geographic region in which the services are
discounted off of the list price on a standalone basis.
We often provide options to purchase future offerings at a discount. We analyze
the option price against the previously established SSP of the goods or services
to determine if the options represent material rights that should be accounted
for as separate performance obligations. In general, an option sold at or above
SSP is not considered a material right because the customer could have received
that right without entering into the contract. If a material right exists,
revenue associated with the option is deferred and recognized when the future
goods or services are transferred, or when the option expires. During the years
ended December 31, 2019 and 2018, separate performance obligations arising from
future purchase options have not been material.
Incremental Costs to Obtain Customer Contracts
Incremental costs incurred to obtain contracts with customers include certain
variable compensation (e.g., commissions and bonuses) paid to our sales
team. Although we may bundle our goods and services into one contract,
commissions are individually determined on each distinct good or service in the
contract. We expense as incurred those amounts earned on consulting and
education services, which are generally performed within a one-year period and
primarily sold on a standalone basis. We also expense as incurred those amounts
earned on product license sales, since the amount is earned when the license is
delivered. We capitalize those amounts earned on product support and
initial-year cloud subscriptions and amortize the costs over a period of time
that is consistent with the pattern of transfer to the customer, which we have
determined to be a period of three years. Although we typically sell product
support and cloud subscriptions for a period of one year, a majority of
customers renew their product support and cloud subscription arrangements. Three
years is generally the period after which platforms are no longer supported by
our support team and when customers generally choose to upgrade their software
platform. Although we pay variable compensation on cloud subscription renewals,
commissions paid on cloud subscription renewals are not considered commensurate
with the initial contract year. We expense as incurred those amounts earned on
all cloud subscription renewals as the renewal periods are generally for one
year and the variable compensation on these renewals are commensurate with each
other. We do not pay variable compensation on product support renewals.
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--------------------------------------------------------------------------------Results of Operations
Comparison of the Years Ended
Revenues
Except as otherwise indicated herein, the term "domestic" refers to operations
in
Product licenses and subscription services revenues. The following table sets
forth product licenses and subscription services revenues (in thousands) and
related percentage changes for the periods indicated:
Years Ended December 31,
2019 2018 % Change
Product Licenses and Subscription Services
Revenues:
Product Licenses
Domestic $ 45,850 $ 48,824 -6.1 %
International 41,621 39,233 6.1 %
Total product licenses revenues 87,471 88,057 -0.7 %
Subscription Services
Domestic 21,453 23,114 -7.2 %
International 7,941 6,456 23.0 %
Total subscription services revenues 29,394 29,570 -0.6 %
Total product licenses and subscription
services revenues $ 116,865 $ 117,627 -0.6 %
The following table sets forth a summary, grouped by size, of the number of recognized product licenses transactions for the periods indicated:
Years Ended December 31,
2019 2018
Product Licenses Transactions with Recognized
Licenses Revenue in the Applicable Period:
More than $1.0 million in licenses revenue recognized 10 9
Between $0.5 million and $1.0 million in licenses
revenue recognized 17 21
Total 27 30
Domestic:
More than $1.0 million in licenses revenue recognized 7 6
Between $0.5 million and $1.0 million in licenses
revenue recognized 10 12
Total 17 18
International:
More than $1.0 million in licenses revenue recognized 3 3
Between $0.5 million and $1.0 million in licenses
revenue recognized 7 9
Total 10 12
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The following table sets forth the recognized revenue (in thousands) attributable to product licenses transactions, grouped by size, and related percentage changes for the periods indicated:
Years Ended December 31,
2019 2018 % Change
Product Licenses Revenue Recognized in the
Applicable Period:
More than $1.0 million in licenses revenue
recognized $ 13,830 $ 14,730 -6.1 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 11,233 13,527 -17.0 %
Less than $0.5 million in licenses revenue
recognized 62,408 59,800 4.4 %
Total 87,471 88,057 -0.7 %
Domestic:
More than $1.0 million in licenses revenue
recognized 8,707 11,156 -22.0 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 6,908 7,548 -8.5 %
Less than $0.5 million in licenses revenue
recognized 30,235 30,120 0.4 %
Total 45,850 48,824 -6.1 %
International:
More than $1.0 million in licenses revenue
recognized 5,123 3,574 43.3 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 4,325 5,979 -27.7 %
Less than $0.5 million in licenses revenue
recognized 32,173 29,680 8.4 %
Total $ 41,621 $ 39,233 6.1 %
Product licenses revenues decreased $0.6 million during 2019, as compared to the
prior year. For the years ended December 31, 2019 and 2018, product licenses
transactions with more than $0.5 million in recognized revenue represented 28.7%
and 32.1%, respectively, of our product licenses revenues. During 2019, our top
three product licenses transactions totaled $5.4 million in recognized revenue,
or 6.2% of total product licenses revenues, compared to $7.7 million , or 8.7% of
total product licenses revenues, during 2018.
Domestic product licenses revenues. Domestic product licenses revenues decreased
$3.0 million during 2019, as compared to the prior year, primarily due to a
decrease in the average deal size of transactions with more than $1.0 million in
recognized revenue and a decrease in the number of transactions with recognized
revenue between $0.5 million and $1.0 million .
International product licenses revenues. International product licenses revenues
increased $2.4 million during 2019, as compared to the prior year, primarily due
to an increase in the number of transactions with less than $0.5 million in
recognized revenue and an increase in the average deal size of transactions with
more than $1.0 million in recognized revenue, partially offset by a $3.6 million
unfavorable foreign currency exchange impact and a decrease in the number of
transactions with recognized revenue between $0.5 million and $1.0 million .
Subscription services revenues. Subscription services revenues are derived from
MCE, a cloud subscription service, that are recognized ratably over the service
period of the contract. Subscription services revenues did not materially change
during 2019, as compared to the prior year.
Product support revenues. The following table sets forth product support
revenues (in thousands) and related percentage changes for the periods
indicated:
Years Ended December 31,
2019 2018 % Change
Product Support Revenues:
Domestic $ 172,124 $ 174,437 -1.3 %
International 119,911 121,779
-1.5 %
Total product support revenues
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Product support revenues are derived from providing technical software support
and software updates and upgrades to customers. Product support revenues are
recognized ratably over the term of the contract, which is generally one
year. Product support revenues decreased $4.2 million during 2019, as compared
to the prior year, primarily due to a $7.1 million unfavorable foreign currency
exchange impact, partially offset by an increase in new product support
contracts and reductions in our estimated sales allowance reserves.
Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:
Years Ended December 31,
2019 2018 % Change
Other Services Revenues:
Consulting
Domestic $ 29,779 $ 35,086 -15.1 %
International 39,880 39,523 0.9 %
Total consulting revenues 69,659 74,609 -6.6 %
Education 7,768 9,186 -15.4 %
Total other services revenues $ 77,427 $ 83,795 -7.6 %
Consulting revenues. Consulting revenues are derived from helping customers plan
and execute the deployment of our software. Consulting revenues decreased $5.0
million during 2019, as compared to the prior year, primarily due to a decrease
in billable hours worldwide and a $1.9 million unfavorable foreign currency
exchange impact, partially offset by an increase in average bill rates.
Education revenues. Education revenues are derived from the education and
training that we provide to our customers to enhance their ability to fully
utilize the features and functionality of our software. These offerings include
self-tutorials, custom course development, joint training with customers'
internal staff, and standard course offerings, with pricing dependent on the
specific offering delivered. Education revenues decreased $1.4 million during
2019, as compared to the prior year, primarily due to a decrease in overall
contract values.
40
--------------------------------------------------------------------------------Costs and Expenses
Cost of revenues. The following table sets forth cost of revenues (in thousands) and related percentage changes for the periods indicated:
Years Ended December 31,
2019 2018 % Change
Cost of Revenues:
Product licenses and subscription services:
Product licenses $ 2,131 $ 4,864 -56.2 %
Subscription services 15,161 13,620 11.3 %
Total product licenses and subscription services 17,292 18,484 -6.4 %
Product support 28,317 20,242 39.9 %
Other services:
Consulting 47,664 53,605 -11.1 %
Education 6,701 7,168 -6.5 %
Total other services 54,365 60,773 -10.5 %
Total cost of revenues $ 99,974 $ 99,499 0.5 %
Cost of product licenses revenues. Cost of product licenses revenues consists of
amortization of capitalized software development costs, referral fees paid to
channel partners, the costs of product manuals and media, and royalties paid to
third-party software vendors. Capitalized software development costs are
generally amortized over a useful life of three years.
Cost of product licenses revenues decreased $2.7 million during 2019, as
compared to the prior year, primarily due to a $2.5 million decrease in
amortization of capitalized software development costs related to MicroStrategy
10™, which became fully amortized in May 2018 . As of December 31, 2019 , all
previously capitalized software development costs have been fully amortized.
Cost of subscription services revenues. Cost of subscription services revenues
consists of equipment, facility and other related support costs, and personnel
and related overhead costs. Cost of subscription services revenues increased
$1.5 million during 2019, as compared to the prior year, primarily due to a $1.8
million increase in third-party hosting service provider fees, partially offset
by a $0.6 million decrease in equipment, facility, and other related support
costs. Subscription services headcount increased 23.2% to 69 at December 31,
2019 from 56 at December 31, 2018 .
Cost of product support revenues. Cost of product support revenues consists of
personnel and related overhead costs. Cost of product support revenues increased
$8.1 million during 2019, as compared to the prior year, primarily due to a $7.7
million increase in compensation and related costs due to an increase in
services provided by our consulting personnel under our Enterprise Support
program and an increase in product support staffing levels. Our Enterprise
Support program utilizes primarily consulting personnel to provide product
support to our customers at our discretion. Compensation related to consulting
personnel providing Enterprise Support services is reported as cost of product
support revenues. Product support headcount increased 8.4% to 219 at December
31, 2019 from 202 at December 31, 2018 .
Cost of consulting revenues. Cost of consulting revenues consists of personnel
and related overhead costs. Cost of consulting revenues decreased $5.9 million
during 2019, as compared to the prior year, primarily due to a $5.4 million
decrease in compensation and related costs due to an increase in services
provided by our consulting personnel under our Enterprise Support program, the
associated costs of which are allocated to cost of product support revenues, and
a decrease in consulting staffing levels and a $0.5 million decrease in
recruiting costs. Included in cost of consulting revenues for 2019 is an
aggregate $1.7 million favorable foreign currency exchange impact. Consulting
headcount decreased 13.3% to 392 at December 31, 2019 from 452 at December 31,
2018 .
41
-------------------------------------------------------------------------------- Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. Cost of education revenues did not materially change during 2019, as compared to the prior year. Education headcount decreased 19.1% to 38 atDecember 31, 2019 from 47 atDecember 31, 2018 . Sales and marketing expenses. Sales and marketing expenses consist of personnel costs, commissions, office facilities, travel, advertising, public relations programs, and promotional events, such as trade shows, seminars, and technical conferences. The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2019 2018 % Change Sales and marketing expenses$ 191,235 $ 205,525 -7.0 % Sales and marketing expenses decreased$14.3 million during 2019, as compared to the prior year, primarily due to an$8.5 million decrease in marketing and advertising costs, a$5.4 million decrease in compensation and related costs due to a decrease in staffing levels, a$3.6 million decrease in travel and entertainment expenditures, a$1.6 million net decrease in share-based compensation expense, a$1.6 million decrease in recruiting costs, and a$0.5 million decrease in subcontractor costs, partially offset by a$4.6 million increase in variable compensation, a$1.8 million increase in facility and other related support costs, and a$0.6 million increase in the amortization of capitalized variable compensation. The$1.6 million net decrease in share-based compensation expense is primarily due to the forfeiture of certain stock options, including those related to the departures of two executive officers in 2019, and certain awards under the 2013 Equity Plan becoming fully vested, partially offset by the grant of additional awards under the 2013 Equity Plan. Included in sales and marketing expenses for 2019 is an aggregate$5.2 million favorable foreign currency exchange impact. Sales and marketing headcount decreased 15.6% to 597 atDecember 31, 2019 from 707 atDecember 31, 2018 . Research and development expenses. Research and development expenses consist of the personnel costs for our software engineering personnel, depreciation of equipment, and other related costs. The following table summarizes research and development expenses and amortization of capitalized software development costs (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2019 2018 % Change Research and development expenses$ 109,423 $ 102,499 6.8 % Amortization of capitalized software development costs included in cost of product licenses revenues $ 0$ 2,499 -100.0 % Research and development expenses increased$6.9 million during 2019, as compared to the prior year, primarily due to an$8.3 million increase in compensation and related costs due to an increase in staffing levels and a$1.9 million increase in facility and other related support costs, partially offset by a$1.6 million decrease in technology infrastructure, a$0.7 million decrease in consulting and advisory costs, and a$0.6 million net decrease in share-based compensation expense. The increase in research and development expenses reflects our previously announced strategy to seek to take greater advantage of the opportunities in the market by increasing our research and development expenditures as we invest in our technology offerings and personnel. The$0.6 million net decrease in share-based compensation expense is primarily due to certain awards under the 2013 Equity Plan becoming fully vested, partially offset by the grant of additional awards under the 2013 Equity Plan. Included in research and development expenses for 2019 is an aggregate$1.1 million favorable foreign currency exchange impact. Research and development headcount increased 3.8% to 743 atDecember 31, 2019 from 716 atDecember 31, 2018 . All of our capitalized software development costs were fully amortized as ofMay 2018 . Due to the pace of our software development efforts and frequency of our software releases, our software development costs are currently expensed as incurred. We do not expect to capitalize material software development costs in the near term. 42
--------------------------------------------------------------------------------
General and administrative expenses. General and administrative expenses consist
of personnel and related overhead costs, and other costs of our executive,
finance, human resources, information systems, and administrative departments,
as well as third-party consulting, legal, and other professional fees. The
following table sets forth general and administrative expenses (in thousands)
and related percentage changes for the periods indicated:
Years Ended December 31,
2019 2018 % Change
General and administrative expenses
0.7 % General and administrative expenses did not materially change during 2019, as compared to the prior year. Included in general and administrative expenses for 2019 is an aggregate$1.0 million favorable foreign currency exchange impact. General and administrative headcount decreased 2.9% to 338 atDecember 31, 2019 from 348 atDecember 31, 2018 .
Other Income, Net
Other income, net is comprised primarily of proceeds from the Domain Name Sale and foreign currency transaction gains and losses. During 2019, other income, net, of$28.4 million was comprised primarily of a$29.8 million gain from the Domain Name Sale in the second quarter of 2019. During 2018, other income, net, of$4.6 million was comprised primarily of foreign currency transaction net gains arising mainly from the revaluation ofU.S. dollar denominated cash balances held at international locations.
Provision for (Benefit from) Income Taxes
During 2019, we recorded a provision for income taxes of$3.9 million that resulted in an effective tax rate of 10.2%, as compared to a benefit from income taxes of$2.0 million that resulted in an effective tax rate of (9.9)% during 2018. The change in our effective tax rate in 2019, as compared to the prior year, was primarily due to the change in the proportion ofU.S. versus foreign income and the benefit from the$3.1 million measurement-period adjustment discussed below. The Tax Act imposed a mandatory deemed repatriation transition tax ("Transition Tax") on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. The Company recorded a final tax expense of$37.2 million related to the Transition Tax, comprised of a provisional Transition Tax obligation of$40.3 million in 2017 and a subsequent$(3.1) million measurement-period adjustment in 2018. The Company has elected to pay the Transition Tax over an eight-year period beginning in 2018, as permitted under the Tax Act. As ofDecember 31, 2019 ,$28.9 million of the Transition Tax was unpaid, of which$28.0 million is included in "Other long-term liabilities" and$0.9 million is included in "Accounts payable, accrued expenses, and operating lease liabilities" in our Consolidated Balance Sheets. As ofDecember 31, 2019 , we had noU.S. federal net operating loss ("NOL") carryforwards and$4.1 million of foreign NOL carryforwards. As ofDecember 31, 2019 , foreign NOL carryforwards, other temporary differences and carryforwards, and credits resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of$19.4 million . As ofDecember 31, 2019 , we had a valuation allowance of$2.1 million primarily related to certain foreign tax credit carryforwards that, in our present estimation, more likely than not will not be realized. If we are unable to sustain or increase profitability in future periods, we may be required to increase the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net income in the period in which the charge is incurred. We will continue to regularly assess the realizability of deferred tax assets. As ofDecember 31, 2019 , we intend to indefinitely reinvest$231.2 million of our undistributed foreign earnings. This amount takes into consideration a repatriation we made during 2019. After taking into account the Transition Tax, the Company estimates such repatriation generated only an immaterialU.S. tax expense related toU.S. state income taxes. 43 --------------------------------------------------------------------------------
Deferred Revenue and Advance Payments
Deferred revenue and advance payments represent amounts received or due from our
customers in advance of our transferring our software or services to the
customer. Revenue is subsequently recognized in the period(s) in which control
of the software or services is transferred to the customer.
The following table summarizes deferred revenue and advance payments (in
thousands), as of:
December 31,
2019 2018
Current:
Deferred product licenses revenue $ 481 $ 1,768
Deferred subscription services revenue 16,561
13,508
Deferred product support revenue 161,670
152,501
Deferred other services revenue 8,395
8,763
Total current deferred revenue and advance payments
176,540
Non-current:
Deferred product licenses revenue$ 293 $
542
Deferred subscription services revenue 97
2,384
Deferred product support revenue 3,417
3,091
Deferred other services revenue 537
452
Total non-current deferred revenue and advance payments$ 4,344 $
6,469
Total current and non-current: Deferred product licenses revenue$ 774 $
2,310
Deferred subscription services revenue 16,658
15,892
Deferred product support revenue 165,087
155,592
Deferred other services revenue 8,932
9,215
Total current and non-current deferred revenue and advance payments$ 191,451 $ 183,009 Total deferred revenue and advance payments increased$8.4 million in 2019, as compared to the prior year, primarily due to an increase in product support and subscription services contracts, partially offset by the recognition of previously deferred product licenses and other services revenues and a decrease in our international deferred revenue balances from the general strengthening of theU.S. dollar. The increase in product support contracts was partially due to renewals that were delayed from the fourth quarter of 2018.
We expect to recognize approximately
Liquidity and Capital Resources
Liquidity. Our principal sources of liquidity are cash and cash equivalents and on-going collection of our accounts receivable. Cash and cash equivalents may include holdings in bank demand deposits, money market instruments, certificates of deposit, andU.S. Treasury securities. We also periodically invest a portion of our excess cash in short-term investments with stated maturity dates between three months and one year from the purchase date. 44 -------------------------------------------------------------------------------- As ofDecember 31, 2019 and 2018, the amount of cash and cash equivalents and short-term investments held by ourU.S. entities was$289.4 million and$173.6 million , respectively, and by our non-U.S. entities was$276.2 million and$402.5 million , respectively. We earn a significant amount of our revenues outsidethe United States and our accumulated foreign earnings and profits as ofDecember 31, 2019 and 2018 were$431.2 million and$397.4 million , respectively. As ofDecember 31, 2019 , we intend to indefinitely reinvest$231.2 million of our undistributed foreign earnings. This amount takes into consideration a repatriation we made during 2019. After taking into account the Transition Tax, the Company estimates such repatriation generated only an immaterialU.S. tax expense related toU.S. state income taxes. We do not anticipate needing to repatriate additional cash or cash equivalents held by non-U.S. entities tothe United States to finance ourU.S. operations. We believe that existing cash and cash equivalents and short-term investments held by us and cash and cash equivalents anticipated to be generated by us are sufficient to meet working capital requirements, anticipated capital expenditures, and contractual obligations for at least the next 12 months.
The following table sets forth a summary of our cash flows (in thousands) and related percentage changes for the periods indicated:
Years Ended December 31,
2019 2018
% Change
Net cash provided by operating activities
472.8 %
Net cash provided by (used in) investing
activities $ 353,687 $ (209,064 ) -269.2 %
Net cash used in financing activities $ (66,150 ) $ (108,515 ) -39.0 %
Net cash provided by operating activities. The primary source of our cash
provided by operating activities is cash collections of our accounts receivable
from customers following the sales and renewals of our product licenses and
product support, as well as consulting, education, and subscription services,
and, in 2019, consideration received from the Domain Name Sale, net of related
income taxes and immaterial transaction costs. Our primary uses of cash in
operating activities are for personnel-related expenditures for software
development, personnel-related expenditures for providing consulting, education,
and subscription services, and for sales and marketing costs, general and
administrative costs, and income taxes.
Net cash provided by operating activities increased $50.2 million during 2019,
as compared to the prior year, due to a $28.9 million increase from changes in
operating assets and liabilities, a $9.5 million increase from changes in
non-cash items, and a $11.9 million increase in net income. Included in net cash
provided by operating activities during 2019 is a gain of $21.7 from the Domain
Name Sale, net of related income taxes and immaterial transaction
costs. Non-cash items consist primarily of depreciation and amortization, sales
allowances and bad debt expense, deferred taxes, release of liabilities for
unrecognized tax benefits, and share-based compensation expense.
Net cash provided by (used in) investing activities. The changes in net cash
provided by (used in) investing activities primarily relate to purchases and
redemptions of short-term investments and expenditures on property and
equipment. Net cash provided by investing activities increased $562.8 million
during 2019, as compared to the prior year, due to a $373.5 million decrease in
purchases of short-term investments and a $192.6 million increase in proceeds
from the redemption of short-term investments, partially offset by a $3.3
million increase in purchases of property and equipment.
Net cash used in financing activities. The changes in net cash (used in)
provided by financing activities primarily relate to the purchase of treasury
stock and the exercise of stock options under the 2013 Equity Plan. Net cash
used in financing activities decreased $42.4 million during 2019, as compared to
the prior year, primarily due to a $38.3 million decrease in purchases of
treasury stock and a $4.1 million increase in proceeds from the exercise of
stock options under the 2013 Equity Plan.
45
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Share repurchases. Our Board of Directors has authorized us to repurchase up to
an aggregate of $800.0 million of our class A common stock from time to time on
the open market through April 29, 2023 under the Share Repurchase Program,
although the program may be suspended or discontinued by us at any time. The
timing and amount of any shares repurchased will be determined by management
based on its evaluation of market conditions and other factors. The Share
Repurchase Program may be funded using working capital, as well as proceeds from
any other funding arrangements that we may enter into in the future. During the
year ended December 31, 2019 , we repurchased an aggregate of 521,843 shares of
our class A common stock at an average price per share of $139.35 and an
aggregate cost of $72.7 million pursuant to the Share Repurchase Program. During
the year ended December 31, 2018 , we repurchased an aggregate of 880,667 shares
of our class A common stock at an average price per share of $126.02 and an
aggregate cost of $111.0 million pursuant to the Share Repurchase Program.
Contractual obligations. The following table shows future minimum rent payments
under noncancellable operating leases and purchase agreements with initial terms
of greater than one year and anticipated payments related to the Transition Tax
resulting from the Tax Act, based on the expected due dates of the various
installments as of December 31, 2019 (in thousands):
Payments due by period ended December 31,
Total 2020 2021-2022 2023-2024 ThereafterContractual Obligations: Operating leases$ 160,030 $ 16,783 $ 32,686 $ 30,047 $ 80,514 Purchase obligations 20,397 12,004 5,654 1,347 1,392 Transition Tax 28,935 896 5,903 12,913 9,223 Total$ 209,362 $ 29,683 $ 44,243 $ 44,307 $ 91,129 Unrecognized tax benefits. As ofDecember 31, 2019 , we had$1.7 million of total gross unrecognized tax benefits, including accrued interest, recorded in "Other long-term liabilities." The timing of any payments that could result from these unrecognized tax benefits will depend on a number of factors, and accordingly the amount and period of any future payments cannot be estimated. We do not expect any significant tax payments related to these obligations during 2020.
Off-balance sheet arrangements. As of
Recent Accounting Standards
See Note 3, Recent Accounting Standards, to the Consolidated Financial Statements for further information.
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