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
Management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2018 , including comparison of our results for the years endedDecember 31, 2019 and 2018, is included in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Business Overview
MicroStrategy pursues two corporate strategies in the operation of its business. One strategy is to grow our enterprise analytics software business and the other strategy is to acquire and hold bitcoin. We are 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.
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. In 2021, we determined also to pursue as part of our overall business strategy, a strategy of investing our liquid assets that exceed working capital requirements in bitcoin, and we may from time to time, subject to market conditions, issue debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. We believe that our bitcoin strategy is complementary to our analytics software and services business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand and can provide opportunities to secure new customers for our analytics offerings. We are also exploring opportunities to apply bitcoin related technologies such as blockchain analytics into our software offerings. We view our bitcoin holdings as long-term holdings and we do not plan to engage in regular trading of bitcoin or to hedge or otherwise enter into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoin in future periods as needed to generate cash for treasury management and other general corporate purposes. As ofFebruary 8, 2021 , the Company holds approximately 71,079 bitcoin that were acquired at an aggregate purchase price of$1.145 billion and an average purchase price of approximately$16,109 per bitcoin, inclusive of fees and expenses. 39 --------------------------------------------------------------------------------
Impact of COVID-19 on Our Software Strategy
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. Significant uncertainty exists concerning the impact of the COVID-19 pandemic on our customers' and prospects' business and operations in future periods. Although our product licenses revenues were not materially impacted by the COVID-19 pandemic during the year endedDecember 31, 2020 , we believe our product licenses revenues may be negatively impacted in future periods until the effects of the pandemic have subsided due to a general increase in the time it takes to close deals in the current depressed macroeconomic environment. Although we continued to see high renewal rates in our product support services during the year endedDecember 31, 2020 , we believe our product support revenues may be negatively impacted in future periods by the overall depressed macroeconomic environment 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. Similarly, we may experience declines in our consulting revenues in future periods due to the overall depressed macroeconomic environment and 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 year endedDecember 31, 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 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. In theAsia Pacific region, government assistance provided to us has primarily been in the form of employer payroll tax exemptions. We have deferred payment of$4.6 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.
Treasury Reserve Policy and Bitcoin Acquisition Strategy
InSeptember 2020 , our Board of Directors adopted a Treasury Reserve Policy (as amended to date, the "Treasury Reserve Policy") that updated our treasury management and capital allocation strategies, under which our treasury reserve assets will consist of:
• cash and cash equivalents and short-term investments ("Cash Assets")
held by us that exceed working capital requirements; and
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• bitcoin held by us, with bitcoin serving as the primary treasury reserve
asset on an ongoing basis, subject to market conditions and anticipated
needs of the business for Cash Assets.
As part of these treasury management and capital allocation strategies, we purchased a total of approximately 70,469 bitcoins at an aggregate purchase price of approximately$1.125 billion in 2020 for an average purchase price of approximately$15,964 per bitcoin, inclusive of fees and expenses. These purchases included purchases of bitcoin using the net proceeds of issuance of$650.0 million aggregate principal amount of 0.750% Convertible Senior Notes due 2025 in the fourth quarter of 2020. AtDecember 31, 2020 , we carried$1.054 billion of digital assets on our balance sheet, consisting of the approximately 70,469 bitcoins and reflecting$70.7 million in cumulative impairment losses attributable to bitcoin trading price fluctuations, and held$59.7 million in cash and cash equivalents, compared to no digital assets and$456.7 million in cash and cash equivalents atDecember 31, 2019 , reflecting the shift in our liquid asset holdings following the adoption of our new Treasury Reserve Policy. Digital asset impairment losses of$70.7 million incurred in 2020 represented 17.5% of our operating expenses for the year, compared to no digital asset impairment losses for 2019, contributing to our net loss of$7.5 million for 2020 compared to net income of$34.4 million in 2019. In 2021, we determined to adopt, in addition to and in conjunction with our Treasury Reserve Policy, a business strategy of purchasing bitcoin, and we may from time to time, subject to market conditions, issue debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. We view our bitcoin holdings as long-term holdings and we do not plan to engage in regular trading of bitcoin or to hedge or otherwise enter into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoins in future periods as needed to generate cash for treasury management and other general corporate purposes. As ofFebruary 8, 2021 , we held approximately 71,079 bitcoins that were acquired at an aggregate purchase price of$1.145 billion and an average purchase price of approximately$16,109 per bitcoin, inclusive of fees and expenses. 41 --------------------------------------------------------------------------------
Operating Highlights
The following table sets forth certain operating highlights (in thousands) for
the years ended
Years Ended December 31,
2020 2019
Revenues
Product licenses $ 86,743 $ 87,471
Subscription services 33,082 29,394
Total product licenses and subscription services 119,825 116,865
Product support 284,434 292,035
Other services 76,476 77,427
Total revenues 480,735 486,327
Cost of revenues
Product licenses 2,293 2,131
Subscription services 14,833 15,161
Total product licenses and subscription services 17,126 17,292
Product support 23,977 28,317
Other services 49,952 54,365
Total cost of revenues 91,055 99,974
Gross profit 389,680 386,353
Operating expenses
Sales and marketing 148,910 191,235
Research and development 103,561 109,423
General and administrative 80,136 86,697
Digital asset impairment losses 70,698 0
Total operating expenses 403,305 387,355
Loss from operations $ (13,625 ) $ (1,002 )
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. In addition, we have
incurred and may continue to incur significant impairment losses on our digital
assets and we may recognize gains upon sale of our digital assets in the future,
which would be presented net of any impairment losses within operating
expenses. We therefore believe that quarter-to-quarter comparisons of our
operating results may not be a good indication of our future performance.
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--------------------------------------------------------------------------------Share-based Compensation Expense
As discussed in Note 12, Share-based Compensation, to the Consolidated Financial
Statements, we have outstanding stock options to purchase shares of our class A
common stock, restricted stock units, 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:
Years Ended December 31,
2020 2019Cost of subscription services revenues $ 75 $ 7 Cost of product support revenues
155 331
Cost of consulting revenues 23 198
Cost of education revenues 202 20
Sales and marketing 1,609 1,943
Research and development 2,740 2,460
General and administrative 6,349 5,250
Total share-based compensation expense
As ofDecember 31, 2020 , we estimated that approximately$36.6 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 3.1 years. 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 expense and impairment losses and gains on sale from intangible assets, which include our digital assets, (ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact of our share-based compensation expense, impairment losses and gains on sale from intangible assets, which include our digital assets and the Domain Name Sale in the second quarter of 2019, interest expense arising from the amortization of the debt discount and issuance costs on our convertible senior notes, and related income tax effects, 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 (i) 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 and (ii) significant impairment losses and gains on sale from intangible assets, which include our bitcoin. The second set of supplemental financial measures excludes the impact of (i) share-based compensation expense, (ii) impairment losses and gains on sale from intangible assets, which include our bitcoin and the Domain Name Sale, which was outside of our normal business operations, (iii) non-cash interest expense arising from the amortization of the debt discount and issuance costs related to our convertible senior notes, and (iv) related income tax effects. Although the portion of non-cash interest expense related to the amortization of the debt discount will be eliminated upon our planned adoption of ASU 2020-06 onJanuary 1, 2021 , excluding the current year non-cash interest expense related to both the amortization of the debt discount and the issuance costs will allow for greater comparability of our results after we adopt the new accounting rules. 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. 43 -------------------------------------------------------------------------------- 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 two non-GAAP financial measures, 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. Similarly, we expect that the portion of interest expense arising from the amortization of debt issuance costs will continue to be a recurring expense over the term of the convertible senior notes, even after our planned adoption of ASU 2020-06 onJanuary 1, 2021 . We have also excluded impairment losses and gains on sale from intangible assets from the first two non-GAAP financial measures, either of which may occur in future periods as a result of our continued holdings of significant amounts of bitcoin. 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, which excludes the impact of (i) share-based compensation expense and (ii) impairment losses and gains on sale from intangible assets, which include our digital assets, to its most directly comparable GAAP measures (in thousands) for the periods indicated: Years EndedDecember 31, 2020 2019
Reconciliation of non-GAAP income from operations: Loss from operations
$ (13,625 ) $ (1,002 ) Share-based compensation expense 11,153
10,209
Digital asset impairment losses 70,698
0
Non-GAAP income from operations$ 68,226 $ 9,207 44
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The following are reconciliations of our non-GAAP net income and non-GAAP
diluted earnings per share, in each case excluding the impact of (i) share-based
compensation expense, (ii) impairment losses and gains on sale from intangible
assets, which include our digital assets and the Domain Name Sale in 2019, (iii)
interest expense arising from the amortization of the debt discount and issuance
costs on our convertible senior notes, and (iv) related income tax effects to
their most directly comparable GAAP measures (in thousands, except per share
data) for the periods indicated:
Years Ended December 31,
2020 2019
Reconciliation of non-GAAP net income:
Net (loss) income $ (7,524 ) $ 34,355
Share-based compensation expense 11,153 10,209
Digital asset impairment losses 70,698 0
Gain from Domain Name Sale 0 (29,829 )
Interest expense arising from amortization of debt
discount and issuance costs 1,543 0
Income tax effects (1) (25,841 ) 7,450
Non-GAAP net income $ 50,029 $ 22,185
Reconciliation of non-GAAP diluted earnings per share: Diluted (loss) earnings per share
$ (0.78 ) $ 3.33 Share-based compensation expense (per diluted share) 1.15 0.99 Digital asset impairment losses (per diluted share) 7.31 0.00 Gain from Domain Name Sale (per diluted share) 0.00 (2.89 )
Interest expense arising from amortization of debt discount and issuance costs (per diluted share)
0.16 0.00
Income tax effects (per diluted share) (2.67 ) 0.72
Non-GAAP diluted earnings per share $ 5.17 $ 2.15
(1) Income tax effects reflect the net tax effects of stock-based compensation expense, digital asset
impairment losses, gain from the Domain Name Sale, and interest expense for amortization of debt
discount and issuance costs.
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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.
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)
2020 2020 2020 2019 2020 2020
Product licenses $ 86,743 $ (1,227 ) $ 87,970 $ 87,471 -0.8 % 0.6 %
revenues
Subscription services 33,082 121 32,961 29,394 12.5 % 12.1 %
revenues
Product support 284,434 (358 ) 284,792 292,035 -2.6 % -2.5 %
revenues
Other services revenues 76,476 304 76,172 77,427 -1.2 % -1.6 %
Cost of product support 23,977 (142 ) 24,119 28,317 -15.3 % -14.8 %
revenues
Cost of other services 49,952 (347 ) 50,299 54,365 -8.1 % -7.5 %
revenues
Sales and marketing 148,910 (2,184 ) 151,094 191,235 -22.1 % -21.0 %
expenses
Research and 103,561 42 103,519 109,423 -5.4 % -5.4 %
development expenses
General and 80,136 (444 ) 80,580 86,697 -7.6 % -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 $ 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
(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
our convertible senior notes and revenue recognition, have a material impact on
our Consolidated Financial Statements. Actual results and outcomes could differ
from these estimates and assumptions.
Convertible Debt Arrangement
As discussed in Note 9, Convertible Senior Notes, to the Consolidated Financial Statements, we issued convertible senior notes inDecember 2020 . As the notes contain conversion features, we must separate the debt and equity components of the notes. The carrying amount of the liability component is determined by measuring the fair value of a similar debt instrument without any associated conversion features at the time of issuance and the carrying amount of the equity component is determined by deducting the fair value of the liability component from the initial proceeds of the notes. We also allocate issuance costs associated with the offering between debt and equity based on their relative carrying values at the time of issuance. Such issuance costs are taken as a direct reduction to the debt and equity components. Both the difference between the principal and the liability component's initial carrying value and the issuance costs allocated to the debt component are amortized to interest expense using the effective interest method over the expected term of the notes. In determining the fair value of a similar debt instrument without any associated conversion features, we estimated a nonconvertible debt borrowing rate at the time of issuance using a blend of different methodologies, which considered Level 2 inputs such as observable market prices of our debt and class A common stock, our historical and implied class A common stock volatility, a synthetic credit rating consistent with that utilized for determining the incremental borrowing rate for our accounting of leasing arrangements, and analysis of similar convertible debt issuances and their equivalent nonconvertible debt yields.
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.
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--------------------------------------------------------------------------------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 when control of the license is transferred to the OEM.
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 technical 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.
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Education Services
We sell various education and training services to our customers. Education services are sold on a standalone basis under two different types of arrangements: (i) annual subscriptions to live and on-demand training courses and (ii) custom courses purchased on an hourly basis. 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 annual 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 training courses. Revenue on custom courses are recognized on a time and materials basis as the services are delivered.
See Note 16, 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.
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, 2020 and 2019. 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, 2020 and
2019.
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-------------------------------------------------------------------------------- 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 stated net license fee, and because an
economic relationship exists between product licenses and standardproduct 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.
(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. Semi-annually, 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 determine SSP. If the
stated fee is above or below SSP, the highest or lowest end of therange, respectively, will generally be used to determine SSP of standard
product support for perpetual licenses. For term licenses, we determine
SSP of standard product support at the lower end of the SSP range used
for perpetual licenses because the term licenses are time bound,
resulting in a lower value placed on product support as compared to a
perpetual license.
(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, 2020 and 2019, separate performance obligations arising from
future purchase options have not been material.
50
--------------------------------------------------------------------------------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 initial-year product support and 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. We do not currently pay variable compensation on product support or cloud subscription renewals.
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,
2020 2019 % Change
Product Licenses and Subscription Services
Revenues:
Product Licenses
Domestic $ 51,504 $ 45,850 12.3 %
International 35,239 41,621 -15.3 %
Total product licenses revenues 86,743 87,471 -0.8 %
Subscription Services
Domestic 24,684 21,453 15.1 %
International 8,398 7,941 5.8 %
Total subscription services revenues 33,082 29,394 12.5 %
Total product licenses and subscription
services revenues $ 119,825 $ 116,865 2.5 %
51
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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,
2020 2019
Product Licenses Transactions with Recognized
Licenses Revenue in the Applicable Period:
More than $1.0 million in licenses revenue recognized 10 10
Between $0.5 million and $1.0 million in licenses
revenue recognized 18 17
Total 28 27
Domestic:
More than $1.0 million in licenses revenue recognized 8 7
Between $0.5 million and $1.0 million in licenses
revenue recognized 10 10
Total 18 17
International:
More than $1.0 million in licenses revenue recognized 2 3
Between $0.5 million and $1.0 million in licenses
revenue recognized 8 7
Total 10 10
52
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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,
2020 2019 % Change
Product Licenses Revenue Recognized in the
Applicable Period:
More than $1.0 million in licenses revenue
recognized $ 25,599 $ 13,830 85.1 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 12,096 11,233 7.7 %
Less than $0.5 million in licenses revenue
recognized 49,048 62,408 -21.4 %
Total 86,743 87,471 -0.8 %
Domestic:
More than $1.0 million in licenses revenue
recognized 20,108 8,707 130.9 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 6,568 6,908 -4.9 %
Less than $0.5 million in licenses revenue
recognized 24,828 30,235 -17.9 %
Total 51,504 45,850 12.3 %
International:
More than $1.0 million in licenses revenue
recognized 5,491 5,123 7.2 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 5,528 4,325 27.8 %
Less than $0.5 million in licenses revenue
recognized 24,220 32,173 -24.7 %
Total $ 35,239 $ 41,621 -15.3 %
Product licenses revenues decreased $0.7 million during 2020, as compared to the
prior year. For the years ended December 31, 2020 and 2019, product licenses
transactions with more than $0.5 million in recognized revenue represented 43.5%
and 28.7%, respectively, of our product licenses revenues. During 2020, our top
three product licenses transactions totaled $15.3 million in recognized revenue,
or 17.6% of total product licenses revenues, compared to $5.4 million , or 6.2%
of total product licenses revenues, during 2019. Although our product licenses
revenues were not materially impacted by the COVID-19 pandemic during the year
ended December 31, 2020 , we believe our product licenses revenues may be
negatively impacted in future periods until the effects of the pandemic have
subsided due to a general increase in the time it takes to close deals in the
current depressed macroeconomic environment.
Domestic product licenses revenues. Domestic product licenses revenues increased
$5.7 million during 2020, as compared to the prior year, primarily due to an
increase in the average deal size and the number of transactions with more than
$1.0 million in recognized revenue, partially offset by a decrease in the
average deal size and the number of transactions with less than $0.5 million in
recognized revenue.
International product licenses revenues. International product licenses revenues
decreased $6.4 million during 2020, as compared to the prior year, primarily due
to a decrease in the average deal size 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
MCE, a cloud subscription service, that are recognized ratably over the service
period in the contract. Subscription services revenues increased $3.7 million
during 2020, as compared to the prior year, primarily due to an increase in the
use of subscription services by existing customers and conversions to
cloud-based subscriptions from existing on-premises customers.
53
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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,
2020 2019 % Change
Product Support Revenues:
Domestic $ 167,266 $ 172,124 -2.8 %
International 117,168 119,911
-2.3 %
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$7.6 million during 2020, as compared to the prior year, primarily due to certain customers converting from perpetual product licenses to our subscription services or term product licenses offerings and a decrease in new product support contracts. Although our product support revenues were not materially impacted by the COVID-19 pandemic during the year endedDecember 31, 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:
Years Ended December 31,
2020 2019 % Change
Other Services Revenues:
Consulting
Domestic $ 33,021 $ 29,779 10.9 %
International 38,324 39,880 -3.9 %
Total consulting revenues 71,345 69,659 2.4 %
Education 5,131 7,768 -33.9 %
Total other services revenues $ 76,476 $ 77,427 -1.2 %
Consulting revenues. Consulting revenues are derived from helping customers plan
and execute the deployment of our software. Consulting revenues increased $1.7
million during 2020, as compared to the prior year, primarily due to an increase
in billable hours worldwide, partially offset by a decrease in average bill
rates and a decrease in billable travel and entertainment expenditures. Although
our consulting revenues were not materially impacted by the COVID-19 pandemic
during the year ended December 31, 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 and 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 $2.6 million during
2020, as compared to 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.
54
--------------------------------------------------------------------------------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,
2020 2019 % Change
Cost of Revenues:
Product licenses and subscription services:
Product licenses $ 2,293 $ 2,131 7.6 %
Subscription services 14,833 15,161 -2.2 %
Total product licenses and subscription services 17,126 17,292 -1.0 %
Product support 23,977 28,317 -15.3 %
Other services:
Consulting 42,923 47,664 -9.9 %
Education 7,029 6,701 4.9 %
Total other services 49,952 54,365 -8.1 %
Total cost of revenues $ 91,055 $ 99,974 -8.9 %
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 during 2020, as compared to 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 decreased 29.0% to
49 at December 31, 2020 from 69 at December 31, 2019 . Cost of subscription
services revenues did not materially change during 2020, as compared to the
prior year.
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 29.7% to 154 at December 31, 2020 from 219 at December 31,
2019 . Cost of product support revenues decreased $4.3 million during 2020, as
compared to the prior year, primarily due to a $3.8 million decrease in
compensation and related costs due to a decrease in product support staffing
levels, a $0.7 million decrease in facility and other related support costs, and
a $0.4 million decrease in travel and entertainment expenditures, partially
offset by a $1.1 million increase in compensation and related costs attributable
to non-product support personnel providing increased Enterprise Support
services.
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 0.3% to 393 at December 31, 2020 from 392 at December 31, 2019 . Cost
of consulting revenues decreased $4.7 million during 2020, as compared to the
prior year, primarily due to a $5.1 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 $0.9 million decrease in compensation and
related costs attributable to consulting personnel providing increased
Enterprise Support services, partially offset by a $1.1 million increase in
compensation and related costs due to an increase in average staffing levels and
a $0.7 million increase in subcontractor costs.
Cost of education revenues. Cost of education revenues consists of personnel and
related overhead costs. Education headcount decreased 2.6% to 37 at December 31,
2020 from 38 at December 31, 2019 . Cost of education revenues did not materially
change during 2020, as compared to the prior year.
55
--------------------------------------------------------------------------------
Sales and marketing expenses. Sales and marketing expenses consist of personnel
costs (excluding those under our Enterprise Support program which are allocated
to cost of product support revenues), commissions, office facilities, travel,
advertising, public relations programs, and promotional events, such as trade
shows, seminars, and technical conferences. Sales and marketing headcount
decreased 19.8% to 479 at December 31, 2020 from 597 at December 31, 2019 . The
following table sets forth sales and marketing expenses (in thousands) and
related percentage changes for the periods indicated:
Years Ended December 31,
2020 2019 % Change
Sales and marketing expenses
Sales and marketing expenses decreased$42.3 million during 2020, as compared to the prior year, primarily due to a$10.2 million decrease in variable compensation, which includes the cancellation of a sales employee awards event as a result of the COVID-19 pandemic, a$9.9 million decrease in employee salaries due to a decrease in staffing levels, an$8.7 million decrease in marketing and advertising costs as we transitioned from in-person to virtual marketing events, an$8.0 million decrease in travel and entertainment expenditures as a result of restrictions placed on non-essential business travel during the COVID-19 pandemic, a$2.7 million decrease in facility and other related support costs, a$1.4 million decrease in subcontractor costs, a$1.0 million decrease in recruiting costs, and a$0.5 million decrease in compensation and related costs attributable to sales and marketing personnel providing increased Enterprise Support services. Included in sales and marketing expenses for 2020 is an aggregate$2.2 million favorable foreign currency exchange impact. 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. Research and development headcount decreased 13.6% to 642 atDecember 31, 2020 from 743 atDecember 31, 2019 . The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2020 2019 % Change
Research and development expenses
Research and development expenses decreased$5.9 million during 2020, as compared to the prior year, primarily due to a$2.4 million decrease in compensation and related costs due to a decrease in staffing levels and certain COVID-19-related employer payroll tax exemptions in theAsia Pacific region, a$1.4 million decrease in recruiting costs, a$1.1 million decrease in facility and other related support costs (which includes an allocated portion of the gain on partial lease termination of our corporate headquarters lease during the fourth quarter of 2020), 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$0.7 million decrease in consulting and advisory costs, and a$0.5 million decrease in employee relations expenses, partially offset by a$0.7 million increase in technology infrastructure costs. General and administrative expenses. General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. General and administrative headcount decreased 28.1% to 243 atDecember 31, 2020 from 338 atDecember 31, 2019 . The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2020 2019 % Change General and administrative expenses$ 80,136 $ 86,697 -7.6 % 56
-------------------------------------------------------------------------------- General and administrative expenses decreased$6.6 million during 2020, as compared to the prior year, primarily due to a$2.0 million decrease in bad debt expense, a$1.9 million decrease in facility and other related support costs (which includes an allocated portion of the gain on partial lease termination of our corporate headquarters lease during the fourth quarter of 2020), 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, a$1.6 million decrease in compensation and related costs due to a decrease in staffing levels, a$1.0 million decrease in recruiting costs, a$0.9 million decrease in costs related to our corporate aircraft, and a$0.5 million decrease in employee relations expenses, partially offset by a$2.1 million increase in legal, consulting, and other advisory costs and a$1.1 million net increase in share-based compensation expense. The$1.1 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. Digital asset impairment losses. Digital asset impairment losses are recognized when the carrying value of our digital assets exceeds their lowest fair value at any time since their acquisition. Impaired digital assets are written down to fair value at the time of impairment, and such impairment loss cannot be recovered for any subsequent increases in fair value. The following table sets forth digital asset impairment losses (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2020 2019 % Change Digital asset impairment losses $ 70,698$ 0 n/a
We did not sell any of our digital assets during the year ended
Other (Expense) Income,Net During 2020, other expense, net, of$7.0 million was comprised primarily of foreign currency transaction net losses arising mainly from the revaluation ofU.S. denominated cash balances held at international locations. 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.
(Benefit from) Provision for Income Taxes
During 2020, we recorded a benefit from income taxes of$12.4 million on pre-tax losses of$20.0 million that resulted in an effective tax rate of 62.3%, as compared to a provision for income taxes of$3.9 million on pre-tax income of$38.3 million that resulted in an effective tax rate of 10.2% during 2019. The change in our effective tax rate in 2020, as compared to the prior year, was primarily due to certain discrete items, overall income or loss level, and the change in the proportion ofU.S. versus foreign income. 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, 2020 ,$28.0 million of the Transition Tax was unpaid, of which$25.1 million is included in "Other long-term liabilities" and$3.0 million is included in "Accounts payable, accrued expenses, and operating lease liabilities" in our Consolidated Balance Sheets. As ofDecember 31, 2020 , we had noU.S. federal net operating loss ("NOL") carryforwards and$7.9 million of foreign NOL carryforwards. As ofDecember 31, 2020 , foreign NOL carryforwards, other temporary differences and carryforwards, and credits resulted in deferred tax assets, net of valuation allowances, of$6.5 million . As ofDecember 31, 2020 , we also had a deferred tax liability of$8.2 million primarily due to the debt discount on the Company's convertible senior notes, property and equipment depreciation, and other temporary differences. 57 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , we had a valuation allowance of$1.3 million primarily related to certain foreign tax credit carryforward tax assets that, in our present estimation, more likely than not will not be realized. If we are unable to regain 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 (loss) income in the period in which the charge is incurred. We will continue to regularly assess the realizability of deferred tax assets.
Beginning in the third quarter of 2020, we no longer intend to permanently
reinvest our foreign earnings and profits. After taking into account the
Transition Tax and GILTI tax, we recorded a tax expense of
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. In the case of multi-year service contracts arrangements, the Company
generally does not invoice more than one year in advance of services and does
not record deferred revenue for amounts that have not been invoiced and that
require an additional contract. 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,
2020 2019
Current:
Deferred product licenses revenue $ 1,495 $ 481
Deferred subscription services revenue 26,258
16,561
Deferred product support revenue 156,216
161,670
Deferred other services revenue 7,281
8,395
Total current deferred revenue and advance payments
187,107
Non-current:
Deferred product licenses revenue$ 139 $
293
Deferred subscription services revenue 8,758
97
Deferred product support revenue 5,055
3,417
Deferred other services revenue 710
537
Total non-current deferred revenue and advance payments$ 14,662 $
4,344
Total current and non-current: Deferred product licenses revenue$ 1,634 $
774
Deferred subscription services revenue 35,016
16,658
Deferred product support revenue 161,271
165,087
Deferred other services revenue 7,991
8,932
Total current and non-current deferred revenue and advance payments$ 205,912 $ 191,451 Total deferred revenue and advance payments increased$14.5 million in 2020, as compared to the prior year, primarily due to an increase in deferred revenue from new subscription services contracts, including certain multi-year arrangements and customers converting from product licenses to our subscription services offerings, and an increase in deferred revenue from new product license contracts, partially offset by decreases in deferred product support from certain customers converting from perpetual product licenses to term product licenses or subscription services offerings and the recognition of previously deferred other services revenues. Included in our international deferred revenue balances atDecember 31, 2020 is a$4.3 million favorable foreign currency impact from the general weakening of theU.S. dollar compared to the same period in the prior year.
We expect to recognize approximately
58
--------------------------------------------------------------------------------satisfaction of various performance obligations, and the amount of deferred revenue and advance payments at any date should not be considered indicative of revenues for any succeeding period.
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 have also periodically invested a portion of our cash in short-term investments with stated maturity dates between three months and one year from the purchase date. In 2020, we invested a significant portion of our cash in bitcoin. As discussed in Note 2.g, Summary of Significant Accounting Policies - Digital Assets, to our Consolidated Financial Statements, our bitcoin are classified as indefinite-lived intangible assets. As ofDecember 31, 2020 and 2019, the amount of cash and cash equivalents and short-term investments held by ourU.S. entities was$13.7 million and$289.4 million , respectively, and by our non-U.S. entities was$46.0 million and$276.2 million , respectively. We earn a significant amount of our revenues outsidethe United States and our accumulated undistributed foreign earnings and profits as ofDecember 31, 2020 and 2019 were$136.3 million and$231.2 million , respectively. Beginning in the third quarter of 2020, we no longer intend to permanently reinvest our foreign earnings and profits. After taking into account the Transition Tax and GILTI tax, we recorded a tax expense of$1.7 million on the undistributed foreign earnings related to foreign withholding tax andU.S. state income taxes in 2020. We believe that existing cash and cash equivalents 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. As ofDecember 31, 2020 , we held approximately 70,469 bitcoins. We do not believe we will need to sell any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell bitcoins as part of treasury management operations, including to increase our cash balances. The Bitcoin market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the Bitcoin market, we may not be able to sell our bitcoins at reasonable prices or at all. As a result, our bitcoins are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. In addition, upon sale of our bitcoin, we may incur additional taxes related to any realized gains or we may incur capital losses as to which the tax deduction may be limited.
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,
2020 2019
% Change
Net cash provided by operating activities
-11.9 %
Net cash (used in) provided by investing
activities $ (1,018,693 ) $ 353,687 388.0 %
Net cash provided by (used in) financing
activities $ 563,233 $ (66,150 ) 951.4 %
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. Non-cash items to further reconcile net
(loss) income to net cash provided by operating activities consist primarily of
depreciation and amortization, reduction in the carrying amount of ROU assets,
credit losses and sales allowances, deferred taxes, release of liabilities for
unrecognized tax benefits,
59
--------------------------------------------------------------------------------
share-based compensation expense, digital asset impairment losses, gain on partial lease termination, and amortization of the debt discount and issuance costs on our convertible senior notes.
Net cash provided by operating activities decreased$7.2 million during 2020, as compared to the prior year, due to a$41.9 million decrease in net income and a$27.7 million decrease from changes in operating assets and liabilities, partially offset by a$62.3 million increase from changes in non-cash items, which included digital asset impairment losses of$70.7 million . 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. Net cash (used in) provided by investing activities. The changes in net cash (used in) provided by investing activities primarily relate to purchases of digital assets, purchases and redemptions of short-term investments, and expenditures on property and equipment. Net cash used in investing activities was$1,018.7 million during 2020, while net cash provided by investing activities was$353.7 million during 2019. The change in net cash (used in) provided by investing activities was due to a$1,125.0 million purchase of bitcoins and a$564.5 million decrease in proceeds from the redemption of short-term investments, partially offset by a$310.6 million decrease in purchases of short-term investments and a$6.5 million decrease in purchases of property and equipment. Net cash provided by (used in) financing activities. The changes in net cash provided by (used in) financing activities primarily relate to the issuance of our convertible senior notes, purchase of treasury stock, and the exercise of stock options under the 2013 Equity Plan. Net cash provided by financing activities was$563.2 million during 2020, while net cash used in financing activities was$66.2 million in 2019. The change in net cash provided by (used in) financing activities was due to$650.0 million gross proceeds from our convertible senior notes and a$44.5 million increase in proceeds from the exercise of stock options under the 2013 Equity Plan, partially offset by a$50.5 million increase in purchases of treasury stock and$14.6 million of issuance costs paid for our convertible senior notes. Convertible Senior Notes InDecember 2020 , we issued$650.0 million aggregate principal amount of 0.750% Convertible Senior Notes due 2025. We invested the net proceeds from the issuance of the notes in bitcoin in accordance with our Treasury Reserve Policy pending the identification of working capital needs and other general corporate purposes. The terms of the convertible notes are discussed more fully in Note 9 to the Consolidated Financial Statements. 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 throughApril 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 endedDecember 31, 2020 , we repurchased an aggregate of 444,769 shares of our class A common stock at an average price per share of$139.12 and an aggregate cost of$61.9 million pursuant to the Share Repurchase Program. During the year endedDecember 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. OnAugust 11, 2020 , we announced that we commenced a "modified Dutch Auction" tender offer (the "Offer") to purchase up to$250.0 million in value of shares of our issued and outstanding class A common stock, or such lesser number of shares as are properly tendered and not properly withdrawn, at a price not greater than$140.00 nor less than$122.00 per share. The Offer expired at5:00 p.m. ,New York City time, onSeptember 10, 2020 . During the year endedDecember 31, 2020 , we repurchased an aggregate of 432,313 shares of our class A common stock through the Offer at a price of$140.00 per share for an aggregate cost of$61.3 million , inclusive of$0.8 million in certain fees and expenses related to the Offer. 60
-------------------------------------------------------------------------------- Contractual obligations. The following table shows future minimum rent payments under noncancellable operating leases, payments related to our convertible senior notes (semi-annual interest payments and principal upon maturity), payments under purchase agreements with initial terms of greater than one year, and anticipated payments related to the Transition Tax resulting from the Tax Act, based on the expected due dates of the various installments as ofDecember 31, 2020 (in thousands): Payments due by period ended December 31, Total 2021 2022-2023 2024-2025 Thereafter Contractual Obligations: Operating leases$ 133,481 $ 16,738 $ 30,884 $ 25,785 $ 60,074 Convertible senior notes 674,443 4,740 9,750 659,953 0 Purchase obligations 34,602 13,825 18,378 1,351 1,048 Transition Tax 28,039 2,951 8,486 16,602 0 Total$ 870,565 $ 38,254 $ 67,498 $ 703,691 $ 61,122 Unrecognized tax benefits. As ofDecember 31, 2020 , we had$4.6 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 2021.
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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