MICROSTRATEGY INCORPORATED Forward-Looking Information
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (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 II. 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. Business Overview MicroStrategy® is a global leader in enterprise analytics software and services. Our vision is to enable Intelligence Everywhere™. TheMicroStrategy platform brings together data from our customers' enterprise applications, such as their financial systems, human resources systems, and supply chain and customer relationship management tools, to provide 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. Earlier this year, we releasedMicroStrategy 2020™, the newest release of our flagship enterprise analytics platform.MicroStrategy 2020 allows our customers to build high-performance, governed, and secure applications that can scale across their enterprise.MicroStrategy 2020 highlights include:
• HyperIntelligence® that delivers contextual information and insights
quickly within everyday business applications. Designed to work with
commercial, off-the-shelf applications like Salesforce, Workday, andOutlook, HyperIntelligence dynamically surfaces byte-sized cards directly
within these applications.
Web, Mobile, and Office.
• An open architecture that embraces freedom of choice with an open API
layer, leveraging our Enterprise Semantic Graph™ for trusted, governed
data. Optimized connectors combine the tools people use with the power,
performance, and trust that comes with the
such as Tableau, Qlik, Power BI, and Excel. Additionally, it includes new
connectors to data science tools Jupyter and RStudio.
• Flexible deployment methods that allow our customers to choose where to
deploy our analytics platform and the ability to easily migrate across
these three deployment options: on premises, the customer's cloud
environment, or the MicroStrategy Cloud™ Environment ("MCE"). MCE is acloud subscription service that allows customers to deploy our platform on
managed by us. It delivers distinct advantages, including lower total cost
of ownership, faster upgrades, and greater flexibility to increase
adoption. MCE also offers robust security and API infrastructure and can
be easily extended to help our customers run their business intelligence
infrastructure and applications.
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.
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 ofMicroStrategy is our modern, open, comprehensive enterprise platform that can be extended to other tools and systems, can scale across the enterprise, is optimized for cloud or on-premises deployments, and can be combined with unique packages of our expert services and education offerings. 17 --------------------------------------------------------------------------------
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption. It has already disrupted global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19 and its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally. During the three and six months endedJune 30, 2020 , we believe our product licenses revenues were negatively impacted by the overall depressed macroeconomic environment resulting from the COVID-19 pandemic. As significant uncertainty exists concerning the impact of the COVID-19 pandemic on our customers' and prospects' business and operations in future periods, we may experience decreased product licenses revenues compared to prior year periods until the effects of the pandemic have subsided. Although we continued to see high renewal rates in our product support services during the first half of 2020, our product support revenues may be negatively impacted in future periods to the extent that customers require extended payment terms or determine not to renew their product support arrangements as part of their efforts to reduce expenses. Similarly, we may experience declines in our consulting revenues in future periods as our customers continue to operate in remote work environments and aim to reduce expenses. The uncertainty related to COVID-19 may also result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. We are also continuing to adapt our operations to meet the challenges of this uncertain and rapidly evolving situation, including establishing remote working arrangements for our employees, limiting non-essential business travel, and cancelling or shifting our customer, employee, and industry events to a virtual-only format for the foreseeable future. Our sales and marketing expenses decreased significantly during the three and six months endedJune 30, 2020 , as we adapted to the challenges of selling in the current depressed macroeconomic environment, adopted virtual sales and marketing practices, and streamlined our team to sell in this new environment. We expect our sales and marketing expenses, during the balance of 2020, will continue to be lower compared to prior year periods. We also expect our research and development and general and administrative expenses, during the balance of 2020, will continue to be lower compared to prior year periods as a result of additional personnel reductions. We have received, and may continue to receive, government assistance from various relief packages available in countries where we operate. For example, inthe United States , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 to provide broad-based economic relief to various sectors of theU.S. economy through a variety of means, including payroll and income tax deferrals and employee retention credits. We have deferred payment of$1.6 million inU.S. federal and state income taxes previously due inApril 2020 toJuly 2020 and expect to defer payment of$4.7 million of our employer portion ofU.S. social security taxes accrued throughDecember 31, 2020 , half of which we expect to pay byDecember 31, 2021 and the remainder byDecember 31, 2022 . Where taxes payable to government entities have been deferred to a later date, no reduction of expenses has been recorded. Effects of the COVID-19 pandemic that may negatively impact our business in future periods include, but are not limited to: limitations on the ability of our customers to conduct their business, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; and decreases in product licenses revenues driven by channel partners. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition. 18
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Operating Highlights
The following table sets forth certain operating highlights (in thousands) for
the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Revenues
Product licenses $ 14,816 $ 20,121 $ 27,400 $ 38,412
Subscription services 8,021 7,104 15,989 14,248
Total product licenses and subscription
services 22,837 27,225 43,389 52,660
Product support 70,038 72,978 141,196 144,428
Other services 17,709 17,534 37,423 36,015
Total revenues 110,584 117,737 222,008 233,103
Cost of revenues
Product licenses 514 552 1,184 1,071
Subscription services 3,792 3,489 7,856 7,087
Total product licenses and subscription
services 4,306 4,041 9,040 8,158
Product support 6,837 7,721 13,555 14,788
Other services 12,846 13,588 25,939 28,577
Total cost of revenues 23,989 25,350 48,534 51,523
Gross profit 86,595 92,387 173,474 181,580
Operating expenses
Sales and marketing 34,951 48,273 74,469 97,033
Research and development 25,867 27,764 51,968 55,979
General and administrative 19,449 21,180 40,781 43,784
Total operating expenses 80,267 97,217 167,218 196,796
Income (loss) from operations $ 6,328 $ (4,830 ) $ 6,256 $ (15,216 )
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.
Employees
As ofJune 30, 2020 , we had a total of 2,259 employees, of whom 978 were based inthe United States and 1,281 were based internationally. The following table summarizes employee headcount as of the dates indicated: June 30, December 31, June 30, 2020 2019 2019 Subscription services 64 69 62 Product support 189 219 234 Consulting 421 392 404 Education 43 38 40 Sales and marketing 573 597 637 Research and development 684 743 764 General and administrative 285 338 336 Total headcount 2,259 2,396 2,477 19
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Share-based Compensation Expense
As discussed in Note 9, 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 cost of revenues and operating expense line items in
our Consolidated Statements of Operations for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Cost of subscription services revenues
(50 ) 81 $ 74 $ 162
Cost of consulting revenues 0 46 0 98
Cost of education revenues 67 (28 ) 133 20
Sales and marketing 384 1,055 806 1,958
Research and development 574 585 1,212 1,264
General and administrative 1,235 1,297
3,079 2,551
Total share-based compensation expense
As ofJune 30, 2020 , we estimated that approximately$26.0 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 2.8 years.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP income (loss) from operations that excludes the impact of our share-based compensation arrangements, (ii) non-GAAP net income (loss) and non-GAAP diluted earnings (loss) per share that exclude the impact from the Domain Name Sale in the second quarter of 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 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. 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. 20 -------------------------------------------------------------------------------- The following is a reconciliation of our non-GAAP income (loss) from operations excluding the impact of our share-based compensation arrangements to its most directly comparable GAAP measures (in thousands) for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Reconciliation of non-GAAP income (loss) from operations: Income (loss) from operations$ 6,328 $ (4,830 ) $ 6,256 $ (15,216 ) Share-based compensation expense 2,226 3,036
5,337 6,053
Non-GAAP income (loss) from operations
The following are reconciliations of our non-GAAP net income (loss) and non-GAAP
diluted earnings (loss) per share, in each case excluding the impact of the
Domain Name Sale in the second quarter of 2019, to their most directly
comparable GAAP measures (in thousands, except per share data) for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of non-GAAP net income
(loss):
Net income $ 3,387 $ 20,394 $ 4,044 $ 12,488
Gain from Domain Name Sale, net of tax 0 (21,778 ) 0 (21,778 )
Non-GAAP net income (loss) $ 3,387 $ (1,384 ) $
4,044
Reconciliation of non-GAAP diluted earnings (loss) per share: Diluted earnings per share$ 0.35 $ 1.98 $ 0.41 $ 1.21 Gain from Domain Name Sale, net of tax (per diluted share) 0.00 (2.12 ) 0.00 (2.11 ) Non-GAAP diluted earnings (loss) per share$ 0.35 $ (0.14 ) $ 0.41 $ (0.90 ) 21
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The following are reconciliations of certain non-GAAP constant currency revenues, cost of revenues, and operating expenses to their most directly comparable GAAP measures (in thousands) for the periods indicated:
Three Months Ended
June 30,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2020 2020 2020 2019 2020 2020
Product licenses $ 14,816 $ (655 ) $ 15,471 $ 20,121 -26.4 % -23.1 %
revenues
Subscription services 8,021 (46 ) 8,067 7,104 12.9 % 13.6 %
revenues
Product support 70,038 (1,165 ) 71,203 72,978 -4.0 % -2.4 %
revenues
Other services 17,709 (243 ) 17,952 17,534 1.0 % 2.4 %
revenues
Cost of product 6,837 (99 ) 6,936 7,721 -11.4 % -10.2 %
support revenues
Cost of other services 12,846 (404 ) 13,250 13,588 -5.5 % -2.5 %
revenues
Sales and marketing 34,951 (1,095 ) 36,046 48,273 -27.6 % -25.3 %
expenses
Research and 25,867 (251 ) 26,118 27,764 -6.8 % -5.9 %
development expenses
General and 19,449 (224 ) 19,673 21,180 -8.2 % -7.1 %
administrative
expenses
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 $ 20,121 $ (616 ) $ 20,737 $ 19,292 4.3 % 7.5 %
revenues
Subscription services 7,104 (93 ) 7,197 7,584 -6.3 % -5.1 %
revenues
Product support 72,978 (2,091 ) 75,069 73,676 -0.9 % 1.9 %
revenues
Other services 17,534 (603 ) 18,137 20,050 -12.5 % -9.5 %
revenues
Cost of product 7,721 (163 ) 7,884 4,810 60.5 % 63.9 %
support revenues
Cost of other services 13,588 (499 ) 14,087 15,118 -10.1 % -6.8 %
revenues
Sales and marketing 48,273 (1,382 ) 49,655 50,978 -5.3 % -2.6 %
expenses
Research and 27,764 (409 ) 28,173 25,082 10.7 % 12.3 %
development expenses
General and 21,180 (309 ) 21,489 21,299 -0.6 % 0.9 %
administrative
expenses
22
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Six Months Ended
June 30,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2020 2020 2020 2019 2020 2020
Product licenses $ 27,400 $ (1,196 ) $ 28,596 $ 38,412 -28.7 % -25.6 %
revenues
Subscription services 15,989 (82 ) 16,071 14,248 12.2 % 12.8 %
revenues
Product support 141,196 (2,341 ) 143,537 144,428 -2.2 % -0.6 %
revenues
Other services revenues 37,423 (498 ) 37,921 36,015 3.9 % 5.3 %
Cost of product support 13,555 (178 ) 13,733 14,788 -8.3 % -7.1 %
revenues
Cost of other services 25,939 (693 ) 26,632 28,577 -9.2 % -6.8 %
revenues
Sales and marketing 74,469 (2,105 ) 76,574 97,033 -23.3 % -21.1 %
expenses
Research and 51,968 (465 ) 52,433 55,979 -7.2 % -6.3 %
development expenses
General and 40,781 (423 ) 41,204 43,784 -6.9 % -5.9 %
administrative expenses
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 $ 38,412 $ (1,940 ) $ 40,352 $ 36,593 5.0 % 10.3 %
revenues
Subscription services 14,248 (206 ) 14,454 15,246 -6.5 % -5.2 %
revenues
Product support 144,428 (4,786 ) 149,214 148,091 -2.5 % 0.8 %
revenues
Other services revenues 36,015 (1,415 ) 37,430 43,639 -17.5 % -14.2 %
Cost of product support 14,788 (351 ) 15,139 9,606 53.9 % 57.6 %
revenues
Cost of other services 28,577 (1,296 ) 29,873 30,047 -4.9 % -0.6 %
revenues
Sales and marketing 97,033 (3,066 ) 100,099 102,313 -5.2 % -2.2 %
expenses
Research and 55,979 (819 ) 56,798 48,642 15.1 % 16.8 %
development expenses
General and 43,784 (707 ) 44,491 43,471 0.7 % 2.3 %
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
(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.
The section "Critical Accounting Policies" included in Item 7 of our Annual
Report on Form 10-K for the year ended
23
--------------------------------------------------------------------------------Results of Operations
Comparison of the three and six months 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:
Three Months Ended Six Months Ended
June 30, % June 30, %
2020 2019 Change 2020 2019 Change
Product Licenses and Subscription
Services Revenues:
Product Licenses
Domestic $ 5,678 $ 11,525 -50.7 % $ 12,663 $ 20,719 -38.9 %
International 9,138 8,596 6.3 % 14,737 17,693 -16.7 %
Total product licenses revenues 14,816 20,121 -26.4 % 27,400 38,412 -28.7 %
Subscription Services
Domestic 6,160 5,379 14.5 % 12,128 10,842 11.9 %
International 1,861 1,725 7.9 % 3,861 3,406 13.4 %
Total subscription services
revenues 8,021 7,104 12.9 % 15,989 14,248 12.2 %
Total product licenses and
subscription services revenues $ 22,837 $ 27,225 -16.1 % $ 43,389 $ 52,660 -17.6 %
The following table sets forth a summary, grouped by size, of the number of recognized product licenses transactions for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Product Licenses Transactions with
Recognized Licenses Revenue in the
Applicable Period:
More than $1.0 million in licenses
revenue recognized 1 5 1 7
Between $0.5 million and $1.0 million in
licenses revenue recognized 4 1 7 4
Total 5 6 8 11
Domestic:
More than $1.0 million in licenses
revenue recognized 0 4 0 5
Between $0.5 million and $1.0 million in
licenses revenue recognized 1 1 3 2
Total 1 5 3 7
International:
More than $1.0 million in licenses
revenue recognized 1 1 1 2
Between $0.5 million and $1.0 million in
licenses revenue recognized 3 0 4 2
Total 4 1 5 4
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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:
Three Months Ended Six Months Ended
June 30, % June 30, %
2020 2019 Change 2020 2019 Change
Product Licenses Revenue
Recognized in the Applicable
Period:
More than $1.0 million in
licenses revenue recognized $ 3,195 $ 7,579 -57.8 % $ 3,195 $ 9,981 -68.0 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 2,342 993 135.9 % 4,644 3,054 52.1 %
Less than $0.5 million in
licenses revenue recognized 9,279 11,549 -19.7 % 19,561 25,377 -22.9 %
Total 14,816 20,121 -26.4 % 27,400 38,412 -28.7 %
Domestic:
More than $1.0 million in
licenses revenue recognized 0 5,219 -100.0 % 0 6,347 -100.0 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 525 993 -47.1 % 1,833 1,542 18.9 %
Less than $0.5 million in
licenses revenue recognized 5,153 5,313 -3.0 % 10,830 12,830 -15.6 %
Total 5,678 11,525 -50.7 % 12,663 20,719 -38.9 %
International:
More than $1.0 million in
licenses revenue recognized 3,195 2,360 35.4 % 3,195 3,634 -12.1 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 1,817 0 n/a 2,811 1,512 85.9 %
Less than $0.5 million in
licenses revenue recognized 4,126 6,236 -33.8 % 8,731 12,547 -30.4 %
Total $ 9,138 $ 8,596 6.3 % $ 14,737 $ 17,693 -16.7 %
Product licenses revenues decreased $5.3 million and $11.0 million for the three
and six months ended June 30, 2020 , respectively, as compared to the same
periods in the prior year. For the three months ended June 30, 2020 and 2019,
product licenses transactions with more than $0.5 million in recognized revenue
represented 37.4% and 42.6%, respectively, of our product licenses revenues. For
the six months ended June 30, 2020 , our top three product licenses transactions
totaled $5.0 million in recognized revenue, or 18.1% of total product licenses
revenues, compared to $5.4 million , or 14.0% of total product licenses revenues,
for the six months ended June 30, 2019 . During the three months ended June 30,
2020 , we were able to close certain product license deals that were previously
delayed from the first quarter of 2020 due to customers shifting their attention
to address operational challenges associated with the COVID-19 pandemic.
However, we also experienced delays in closing certain product license deals
during the three months ended June 30, 2020 due to a general increase in the
time it takes to close deals in the current depressed macroeconomic environment.
We may continue to experience decreased product licenses revenues compared to
prior year periods until the effects of the pandemic have subsided.
Domestic product licenses revenues. Domestic product licenses revenues decreased
$5.8 million for the three months ended June 30, 2020 , as compared to the same
period in the prior year, primarily due to a decrease in the number of
transactions with more than $1.0 million in recognized revenue and a decrease in
the average deal size of transactions with recognized revenue between $0.5
million and $1.0 million . Domestic product licenses revenues decreased $8.1
million for the six months ended June 30, 2020 , as compared to the same period
in the prior year, primarily due to a decrease in the number of transactions
with more than $1.0 million in recognized revenue and a decrease in the average
deal size of transactions with less than $0.5 million in recognized revenue.
25
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International product licenses revenues. International product licenses revenues
did not materially change for the three months ended June 30, 2020 , as compared
to the same period in the prior year, primarily due to an increase in the number
of transactions with recognized revenue between $0.5 million and $1.0 million
and an increase in the average deal size of transactions with more than $1.0
million in recognized revenue, substantially offset by a decrease in the number
of transactions with less than $0.5 million in recognized revenue and a $0.7
million unfavorable foreign currency exchange impact. International product
licenses revenues decreased $3.0 million for the six months ended June 30, 2020 ,
as compared to the same period in the prior year, primarily due to a decrease in
the number of transactions with less than $0.5 million in recognized revenue and
a $1.2 million unfavorable foreign currency exchange impact, partially offset by
an increase 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
the MicroStrategy Cloud Environment, a cloud subscription service, that are
recognized ratably over the service period in the contract. Subscription
services revenues increased $0.9 million and $1.7 million for the three and six
months ended June 30, 2020 , respectively, as compared to the same periods in the
prior year, primarily due to an increase in the use of subscription services by
existing customers.
Product support revenues. The following table sets forth product support
revenues (in thousands) and related percentage changes for the periods
indicated:
Three Months Ended Six Months Ended
June 30, % June 30, %
2020 2019 Change 2020 2019 Change
Product Support Revenues:
Domestic $ 41,631 $ 43,184 -3.6 % $ 84,428 $ 85,186 -0.9 %
International 28,407 29,794 -4.7 %
56,768 59,242 -4.2 %
Total product support revenues
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$2.9 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$1.2 million unfavorable foreign currency exchange impact, a decrease in new product support contracts, certain customers converting from product licenses to our subscription services offering, and higher revenues in the prior year from late product support renewals. Product support revenues decreased$3.2 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$2.3 million unfavorable foreign currency exchange impact, a decrease in new product support contracts, and certain customers converting from product licenses to our subscription services offering. Although our product support revenues were not materially impacted by the COVID-19 pandemic during the three and six months endedJune 30, 2020 , we believe our product support revenues may be negatively impacted in future periods by the overall depressed macroeconomic environment resulting from the COVID-19 pandemic and to the extent that customers require extended payment terms or determine not to renew their product support arrangements as part of their efforts to reduce expenses.
Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:
Three Months Ended Six Months Ended
June 30, % June 30, %
2020 2019 Change 2020 2019 ChangeOther Services Revenues: Consulting Domestic$ 7,987 $ 6,254 27.7 %$ 17,012 $ 13,300 27.9 % International 8,591 9,240 -7.0 % 18,007 18,797 -4.2 % Total consulting revenues 16,578 15,494 7.0 % 35,019 32,097 9.1 % Education 1,131 2,040 -44.6 %
2,404 3,918 -38.6 %
Total other services revenues
26
-------------------------------------------------------------------------------- Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased$1.1 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to an increase in billable hours, partially offset by a decrease in average bill rates worldwide. Consulting revenues increased$2.9 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide. Although our consulting revenues were not materially impacted by the COVID-19 pandemic during the three and six months endedJune 30, 2020 , we believe our consulting revenues may be negatively impacted in future periods by the overall depressed macroeconomic environment resulting from the COVID-19 pandemic, particularly as our customers continue to operate in remote work environments and aim to reduce expenses. 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$0.9 million and$1.5 million for the three and six months endedJune 30, 2020 , respectively, as compared to the same periods in the prior year, primarily due to a reduction in the average sales price of our education offerings and education offerings that we made available at no charge for a limited time period during the first half of 2020 in response to the COVID-19 pandemic.
Costs and Expenses
Cost of revenues. The following table sets forth cost of revenues (in thousands) and related percentage changes for the periods indicated:
Three Months Ended Six Months Ended
June 30, % June 30, %
2020 2019 Change 2020 2019 Change
Cost of Revenues:
Product licenses and subscription
services:
Product licenses $ 514 $ 552 -6.9 % $ 1,184 $ 1,071 10.6 %
Subscription services 3,792 3,489 8.7 % 7,856 7,087 10.9 %
Total product licenses and
subscription services 4,306 4,041 6.6 % 9,040 8,158 10.8 %
Product support 6,837 7,721 -11.4 % 13,555 14,788 -8.3 %
Other services:
Consulting 10,168 11,909 -14.6 % 21,596 24,894 -13.2 %
Education 2,678 1,679 59.5 % 4,343 3,683 17.9 %
Total other services 12,846 13,588 -5.5 % 25,939 28,577 -9.2 %
Total cost of revenues $ 23,989 $ 25,350 -5.4 % $ 48,534 $ 51,523 -5.8 %
Cost of product licenses revenues. Cost of product licenses revenues consists of
referral fees paid to channel partners, the costs of product manuals and media,
and royalties paid to third-party software vendors. Cost of product licenses
revenues did not materially change for the three and six months ended June 30,
2020 , as compared to the same periods in the prior year.
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. Subscription services headcount increased 3.2% to 64
at June 30, 2020 from 62 at June 30, 2019 . Cost of subscription services
revenues did not materially change for the three months ended June 30, 2020 , as
compared to the same period in the prior year. Cost of subscription services
revenues increased $0.8 million for the six months ended June 30, 2020 , as
compared to the same period in the prior year, primarily due to a $0.7 million
increase in compensation and related costs due to an increase in average
staffing levels.
Cost of product support revenues. Cost of product support revenues consists of
personnel and related overhead costs, including those under our Enterprise
Support program. Our Enterprise Support program utilizes primarily consulting
personnel to provide product support to our customers at our
discretion. Compensation related to personnel providing Enterprise Support
services is reported as cost of product support revenues. Product support
headcount decreased 19.2% to 189 at June 30, 2020 from 234 at June 30, 2019 .
Cost of product support revenues decreased $0.9 million for the three months
ended June 30, 2020 , as compared to the same period in the prior year, primarily
due to a $0.5 million decrease in compensation and related costs due to a
decrease in product support staffing levels. Cost of product support revenues
decreased $1.2 million for the six months ended June 30, 2020 , as compared to
the same period in the prior year, primarily due to a $0.7 million decrease in
compensation and related costs due to a decrease in product support staffing
levels.
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-------------------------------------------------------------------------------- Cost of consulting revenues. Cost of consulting revenues consists of personnel and related overhead costs, excluding those under our Enterprise Support program which are allocated to cost of product support revenues. Consulting headcount increased 4.2% to 421 atJune 30, 2020 from 404 atJune 30, 2019 . Cost of consulting revenues decreased$1.7 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$1.7 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic. Cost of consulting revenues decreased$3.3 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$2.3 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic and a$0.6 million decrease in compensation and related costs due to a decrease in variable compensation, partially offset by an increase in consulting staffing levels. Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs and technology infrastructure costs. Education headcount increased 7.5% to 43 atJune 30, 2020 from 40 atJune 30, 2019 . Cost of education revenues increased$1.0 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$0.8 million increase in technology infrastructure costs associated with education offerings that we made available at no charge for a limited time period during the second quarter of 2020 in response to the COVID-19 pandemic. Cost of education revenues increased$0.7 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$0.9 million increase in technology infrastructure costs associated with education offerings that we made available at no charge for a limited time period during the first half of 2020 in response to the COVID-19 pandemic. 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. Sales and marketing headcount decreased 10.0% to 573 atJune 30, 2020 from 637 atJune 30, 2019 . The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2020 2019 Change
2020 2019 Change
Sales and marketing expenses
Sales and marketing expenses decreased$13.3 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$3.6 million decrease in variable compensation, a$3.4 million decrease in marketing and advertising costs as we transitioned from in-person to virtual marketing events, a$2.4 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic, a$2.0 million decrease in employee salaries due to a decrease in staffing levels, a$0.7 million net decrease in share-based compensation expense, a$0.6 million decrease in facility and other related support costs, and a$0.5 million decrease in subcontractor costs. The$0.7 million net decrease in share-based compensation expense is primarily due to the forfeiture of certain stock options. Included in sales and marketing expenses for the three months endedJune 30, 2020 is an aggregate$1.1 million favorable foreign currency exchange impact. Sales and marketing expenses decreased$22.6 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$7.1 million decrease in variable compensation, which includes the cancellation of a sales employee awards event as a result of the COVID-19 pandemic, a$4.6 million decrease in employee salaries due to a decrease in staffing levels, a$4.1 million decrease in marketing and advertising costs as we transitioned from in-person to virtual marketing events, a$3.4 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic, a$1.2 million decrease in facility and other related support costs, a$1.2 million net decrease in share-based compensation expense, a$0.7 million decrease in subcontractor costs, and a$0.5 million decrease in the amortization of capitalized variable compensation. The$1.2 million net decrease in share-based compensation expense is primarily due to the forfeiture of certain stock options. Included in sales and marketing expenses for the six months endedJune 30, 2020 is an aggregate$2.1 million favorable foreign currency exchange impact. We expect sales and marketing expenses in the near term will be lower compared to prior year periods as we continue to transition from in-person to more virtual sales and marketing practices and streamline our team to sell in the current depressed macroeconomic environment. 28 -------------------------------------------------------------------------------- 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. Due to the pace of our software development efforts and frequency of our software releases, our software development costs are expensed as incurred. We do not expect to capitalize material software development costs in the near term. Research and development headcount decreased 10.5% to 684 atJune 30, 2020 from 764 atJune 30, 2019 . The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2020 2019 Change
2020 2019
Research and development expenses decreased$1.9 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$1.1 million decrease in compensation and related costs due to a decrease in staffing levels. Research and development expenses decreased$4.0 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$1.7 million decrease in compensation and related costs due to a decrease in staffing levels, a$0.5 million decrease in consulting and advisory costs, a$0.5 million decrease in recruiting costs, a$0.5 million decrease in employee relations expenses, and a$0.4 million decrease in technology infrastructure costs.
We expect research and development expenses in the near term will be lower compared to prior year periods as we undertake additional personnel reductions.
General and administrative expenses. General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. General and administrative headcount decreased 15.2% to 285 atJune 30, 2020 from 336 atJune 30, 2019 . The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2020 2019 Change 2020 2019 Change General and administrative expenses$ 19,449 $ 21,180 -8.2 %$ 40,781 $ 43,784 -6.9 % General and administrative expenses decreased$1.7 million for the three months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$0.6 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic and a$0.6 million decrease in facility and other related support costs. General and administrative expenses decreased$3.0 million for the six months endedJune 30, 2020 , as compared to the same period in the prior year, primarily due to a$1.1 million decrease in facility and other related support costs, a$0.7 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic, a$0.6 million decrease in recruiting costs, and a$0.6 million decrease in legal, consulting, and other advisory costs, partially offset by a$0.5 million net increase in share-based compensation expense. The$0.5 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan, partially offset by certain awards becoming fully vested and the forfeiture of certain stock options.
We expect general and administrative expenses in the near term will be lower compared to prior year periods as we undertake additional personnel reductions.
Other (Expense) Income, Net
For the three and six months endedJune 30, 2020 , other expense, net, of$2.0 million and$1.6 million , respectively, were comprised primarily of foreign currency transaction net losses. For the three and six months endedJune 30, 2019 , other income, net, of$29.4 million and$28.8 million , respectively, were comprised primarily of a$29.8 million gain from the Domain Name Sale in the second quarter of 2019. 29
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Provision for Income Taxes
We have estimated an annual effective tax rate for the full fiscal year 2020 and applied that rate to the income before income taxes in determining the provision for income taxes for the six months endedJune 30, 2020 . We also record discrete items in each respective period as appropriate. The estimated effective tax rate is subject to fluctuation based on the level and mix of earnings and losses by tax jurisdiction, foreign tax rate differentials, and the relative impact of permanent book to tax differences (e.g., non-deductible expenses). Each quarter, a cumulative adjustment is recorded for any fluctuations in the estimated annual effective tax rate as compared to the prior quarter. As a result of these factors, and due to potential changes in our period-to-period results, fluctuations in our effective tax rate and respective tax provisions or benefits may occur. For the six months endedJune 30, 2020 , we recorded a provision for income taxes of$3.1 million that resulted in an effective tax rate of 43.1%, as compared to a provision for income taxes of$6.7 million that resulted in an effective tax rate of 35.0% for the six months endedJune 30, 2019 . The change in the effective tax rate in 2020 is mainly due to certain discrete items and the change in the expected proportion ofU.S. versus foreign income between periods. As ofJune 30, 2020 , we had noU.S. federal NOL carryforwards and we estimated that we had$5.5 million of foreign NOL carryforwards. As ofJune 30, 2020 , we estimated that we had foreign NOL carryforwards, other temporary differences and carryforwards, and credits that resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of$18.8 million . As ofJune 30, 2020 , we had a valuation allowance of$2.1 million 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.
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:
June 30, December 31, June 30,
2020 2019 2019
Current:
Deferred product licenses revenue $ 100 $ 481 $ 633
Deferred subscription services revenue 17,934 16,561 15,393
Deferred product support revenue 142,543 161,670 152,866
Deferred other services revenue 7,066 8,395 7,894
Total current deferred revenue and advance
payments $ 167,643 $ 187,107 $ 176,786
Non-current:
Deferred product licenses revenue $ 168 $ 293 $ 405
Deferred subscription services revenue 90 97 116
Deferred product support revenue 5,152 3,417 3,083
Deferred other services revenue 500 537 571
Total non-current deferred revenue and
advance payments $ 5,910 $ 4,344 $ 4,175
Total current and non-current:
Deferred product licenses revenue $ 268 $ 774 $ 1,038
Deferred subscription services revenue 18,024 16,658 15,509
Deferred product support revenue 147,695 165,087 155,949
Deferred other services revenue 7,566 8,932 8,465
Total current and non-current deferred
revenue and advance payments $ 173,553 $ 191,451 $ 180,961
30
-------------------------------------------------------------------------------- Total deferred revenue and advance payments decreased$17.9 million as ofJune 30, 2020 , as compared toDecember 31, 2019 , primarily due to the recognition of previously deferred product support, other services, and product licenses revenues, partially offset by an increase in deferred revenues from new subscription services contracts. Total deferred revenue and advance payments decreased$7.4 million as ofJune 30, 2020 , as compared toJune 30, 2019 , primarily due to the recognition of previously deferred product support, other services, and product licenses revenues and a decrease in our international deferred revenue balances from the general strengthening of theU.S. dollar, partially offset by an increase in deferred revenues from new subscription services contracts.
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. We currently have substantial excess cash that we do not believe we need to manage our daytoday business or to achieve reasonable growth objectives. Therefore, over the next 12 months, we intend to return up to$250 million to our stockholders and invest up to another$250 million in one or more alternative investments or assets that may generate higher returns than our current investments. As ofJune 30, 2020 andDecember 31, 2019 , the amount of cash and cash equivalents and short-term investments held by ourU.S. entities was$228.1 million and$289.4 million , respectively, and by our non-U.S. entities was$302.8 million and$276.2 million , respectively. We earn a significant amount of our revenues outsidethe United States and our accumulated foreign earnings and profits as ofDecember 31, 2019 were$431.2 million , of which we intended to indefinitely reinvest$231.2 million as ofJune 30, 2020 . 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:
Six Months Ended June 30, %
2020 2019 Change
Net cash provided by operating activities $ 26,521 $ 49,202 -46.1 %
Net cash (used in) provided by investing
activities $ (1,090 ) $ 148,923 100.7 %
Net cash used in financing activities $ (59,973 ) $ (46,408 ) 29.2 %
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 the six months ended June 30, 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 decreased $22.7 million for the six
months ended June 30, 2020 , as compared to the same period in the prior year,
due to a $19.4 million decrease from changes in operating assets and liabilities
and an $8.4 million decrease in net income, partially offset by a $5.2 million
increase from changes in non-cash items. Included in net cash provided by
operating activities for the six months ended June 30, 2019 is a gain of $21.8
million from the Domain Name Sale, net of related income taxes and immaterial
transaction costs. Non-cash items consist primarily of depreciation and
amortization, reduction in the carrying amount of ROU assets, credit losses and
sales allowances, deferred taxes, and share-based compensation expense.
31
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Net cash (used in) provided by investing activities. The changes in net cash
(used in) provided by investing activities relate to purchases and redemptions
of short-term investments and expenditures on property and equipment. Net cash
used in investing activities was $1.1 million for the six months ended June 30,
2020 , while net cash provided by investing activities was $148.9 million for the
six months ended June 30, 2019 . The change in net cash (used in) provided by
investing activities was due to a $359.6 million decrease in proceeds from the
redemption of short-term investments, partially offset by a $202.3 million
decrease in purchases of short-term investments and a $7.3 million decrease 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 increased $13.6 million for the six months ended
June 30, 2020 , as compared to the same period in the prior year, primarily due
to a $13.6 million increase in purchases of treasury stock.
Share repurchases. See "Part II. Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds" of this Quarterly Report and Note 7, Treasury Stock, to the
Consolidated Financial Statements for further information.
Contractual obligations.
The following table shows future minimum payments under noncancellable operating leases and purchase agreements with initial terms of greater than one year and anticipated payments related to the Transition Tax resulting from the Tax Act, based on the expected due dates of the various installments as ofJune 30, 2020 (in thousands): Payments due by period ended June 30, Total 2021 2022-2023 2024-2025 Thereafter Contractual Obligations: Operating leases$ 151,356 $ 16,994 $ 32,685 $ 28,456 $ 73,221 Purchase obligations 10,716 6,047 2,270 1,351 1,048 Transition Tax 28,935 3,847 8,486 16,602 0 Total$ 191,007 $ 26,888 $ 43,441 $ 46,409 $ 74,269 Unrecognized tax benefits. As ofJune 30, 2020 , we had$2.7 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 2, Recent Accounting Standards, to the Consolidated Financial Statements for further information.
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