Strategy Inc 10-Q for FY2020 Q1
Strategy Inc (MSTR)
About this 10-Q
Strategy Inc filed this 10-Q on April 28, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $111.42M
- down 3.4% from $115.37M a year earlier
- Net income
- $657K
- compared with a net loss of $7.91M a year earlier
- Diluted EPS
- $0.07
- compared with -$0.77 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer
Identification Number)
(Address of Principal Executive Offices)
(Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
|
Trading Symbol |
|
Name of Each Exchange on which Registered |
|
|
|
|
|
|
|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☒ |
|
Accelerated filer |
☐ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
|
|
|
|
|
Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of April 20, 2020, the registrant had
MICROSTRATEGY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
|
|
|
|
Page |
|
PART I. |
|
|
|
|
|
|
|
|
|
Item 1. |
|
1 |
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 |
1 |
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 |
2 |
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity as of March 31, 2020 |
4 |
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 |
5 |
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
|
|
|
|
|
|
Item 3. |
|
27 |
|
|
|
|
|
|
|
Item 4. |
|
28 |
|
|
|
|
|
|
|
PART II. |
|
|
|
|
|
|
|
|
|
Item 1. |
|
29 |
|
|
|
|
|
|
|
Item 1A. |
|
29 |
|
|
|
|
|
|
|
Item 2. |
|
42 |
|
|
|
|
|
|
|
Item 5. |
|
43 |
|
|
|
|
|
|
|
Item 6. |
|
43 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(unaudited) |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
|
Right-of-use assets |
|
|
|
|
|
|
|
|
|
Deposits and other assets |
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses, and operating lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
Accrued compensation and employee benefits |
|
|
|
|
|
|
|
|
|
Deferred revenue and advance payments |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
Deferred revenue and advance payments |
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Preferred stock undesignated, $ |
|
|
|
|
|
|
|
|
|
Class A common stock, $ |
|
|
|
|
|
|
|
|
|
Class B convertible common stock, $ |
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
Treasury stock, at cost; |
|
|
( |
) |
|
|
( |
) |
|
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
Retained earnings |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
1
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
Three Months Ended |
|
|||||
|
|
|
March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(unaudited) |
|
|
(unaudited) |
|
||
|
Revenues: |
|
|
|
|
|
|
|
|
|
Product licenses |
|
$ |
|
|
|
$ |
|
|
|
Subscription services |
|
|
|
|
|
|
|
|
|
Total product licenses and subscription services |
|
|
|
|
|
|
|
|
|
Product support |
|
|
|
|
|
|
|
|
|
Other services |
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
Product licenses |
|
|
|
|
|
|
|
|
|
Subscription services |
|
|
|
|
|
|
|
|
|
Total product licenses and subscription services |
|
|
|
|
|
|
|
|
|
Product support |
|
|
|
|
|
|
|
|
|
Other services |
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
( |
) |
|
|
( |
) |
|
Interest income, net |
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
|
|
|
|
( |
) |
|
Income (loss) before income taxes |
|
|
|
|
|
|
( |
) |
|
Provision for (benefit from) income taxes |
|
|
|
|
|
|
( |
) |
|
Net income (loss) |
|
|
|
|
|
|
( |
) |
|
Basic earnings (loss) per share (1) |
|
$ |
|
|
|
$ |
( |
) |
|
Weighted average shares outstanding used in computing basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share (1) |
|
$ |
|
|
|
$ |
( |
) |
|
Weighted average shares outstanding used in computing diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
(1) |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
Three Months Ended |
|
|||||
|
|
|
March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(unaudited) |
|
|
(unaudited) |
|
||
|
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
Other comprehensive income (loss), net of applicable taxes: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
( |
) |
|
|
( |
) |
|
Unrealized gain on short-term investments |
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
|
|
|
$ |
( |
) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
Class A |
|
|
Convertible |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
Common Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Retained |
|
||||||||||||||||||
|
|
|
Total |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Earnings |
|
||||||||||
|
Balance at January 1, 2019 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net loss |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of class A common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of class A common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Issuance of class A common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of class A common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Issuance of class A common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
Three Months Ended |
|
|||||
|
|
|
March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(unaudited) |
|
|
(unaudited) |
|
||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Reduction in carrying amount of right-of-use assets |
|
|
|
|
|
|
|
|
|
Credit losses and sales allowances |
|
|
|
|
|
|
|
|
|
Net realized loss on short-term investments |
|
|
|
|
|
|
|
|
|
Deferred taxes |
|
|
|
|
|
|
( |
) |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
|
Deposits and other assets |
|
|
|
|
|
|
( |
) |
|
Accounts payable and accrued expenses |
|
|
( |
) |
|
|
( |
) |
|
Accrued compensation and employee benefits |
|
|
( |
) |
|
|
( |
) |
|
Deferred revenue and advance payments |
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from redemption of short-term investments |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Purchases of short-term investments |
|
|
( |
) |
|
|
( |
) |
|
Net cash (used in) provided by investing activities |
|
|
( |
) |
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from sale of class A common stock under exercise of employee stock options |
|
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
Net (decrease) increase in cash, cash equivalents, and restricted cash |
|
|
( |
) |
|
|
|
|
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying Consolidated Financial Statements of MicroStrategy Incorporated (“MicroStrategy” or the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair statement of financial position and results of operations have been included. All such adjustments are of a normal recurring nature, unless otherwise disclosed. Interim results are not necessarily indicative of results for a full year.
Certain amounts in the prior year’s Consolidated Statements of Cash Flows have been reclassified to conform to current year presentation. In particular, reductions in the carrying amount of right-of-use (“ROU”) assets have been reclassified from “Depreciation and amortization” to “Reduction in carrying amount of right-of-use assets” in operating activities.
As discussed in Note 2, Recent Accounting Standards, to the Consolidated Financial Statements, the Company adopted Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its subsequent amendments (“ASU 2016-13”), effective January 1, 2020. Comparative prior period Consolidated Financial Statements have not been restated for ASU 2016-13.
The Consolidated Financial Statements and Notes to Consolidated Financial Statements are presented as required by the United States Securities and Exchange Commission (“SEC”) and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in the Company’s accounting policies since December 31, 2019, except as discussed below with respect to the Company’s adoption of ASU 2016-13.
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is not aware of any material subsequent event that would require recognition or disclosure.
(b) Short-term Investments
The Company periodically invests a portion of its excess cash in short-term investment instruments. All highly liquid investments with stated maturity dates between three months and one year from the purchase date are classified as short-term investments. The Company determines the appropriate classification of its short-term investments at the time of purchase and reassesses the appropriateness of the classification at each reporting date.
All of the Company’s short-term investments are in U.S. Treasury securities. All short-term investments have been classified as available-for-sale and are reported at fair value within “Short-term investments” on the accompanying Consolidated Balance Sheets. The fair value of the Company’s short-term investments is determined based on quoted market prices in active markets for identical securities (Level 1 inputs). Premiums and discounts related to the Company’s short-term investments are amortized over the life of the investment and recorded in earnings. Each reporting period, the Company determines the amount of unrealized holding gains and losses on each individual security by comparing the fair value to the amortized cost. Unrealized holding gains and unrealized holding losses that are not a result of a credit loss are reported in other comprehensive income (loss) until realized. Beginning January 1, 2020, unrealized holding losses that are a result of a credit loss are recorded in earnings, with the establishment of an allowance for credit losses.
(c) Credit Losses on Accounts Receivable
The Company maintains an allowance for credit losses on its accounts receivable balances, which represents its best estimate of current expected credit losses over the contractual life of the accounts receivable. Beginning January 1, 2020, when evaluating the adequacy of its allowance for credit losses each reporting period, the Company analyzes accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivable balances, payment terms, geographic location, historical loss experience, current information, and future expectations. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should instead be evaluated as part of another pool or on an individual basis. Changes to the allowance for credit losses are adjusted through credit loss expense, which is presented within “General and administrative” operating expenses in the Consolidated Statements of Operations.
6
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2) Recent Accounting Standards
Credit losses
The Company adopted ASU 2016-13 effective as of January 1, 2020. Under ASU 2016-13, the Company applies a current expected credit loss (“CECL”) impairment model to its trade accounts receivable, in which lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. Under the CECL model, trade accounts receivable with similar risk characteristics are analyzed on a collective (pooled) basis. ASU 2016-13 also changed the impairment accounting for available-for-sale debt securities, requiring credit losses to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. Impairment due to factors other than credit loss will continue to be recorded through other comprehensive income (loss). All of the Company’s available-for-sale debt securities are in U.S. Treasury securities with stated maturity dates between
Cloud computing arrangements
The Company adopted Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”) effective as of January 1, 2020 and elected to apply the guidance prospectively. ASU 2018-15 requires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize and which costs to expense. Customers are required to amortize the capitalized implementation costs over the term of the hosting arrangement, which might extend beyond the noncancelable period. Financial statement presentation under ASU 2018-15 requires: (i) capitalized implementation costs be classified in the same balance sheet line item as the amounts prepaid for the related hosting arrangement; (ii) amortization of capitalized implementation costs be presented in the same income statement line item as the service fees for the related hosting arrangement; and (iii) cash flows related to capitalized implementation costs be presented within the same category of cash flow activity as the cash flows for the related hosting arrangement (i.e. operating activity). Prior to the adoption of ASU 2018-15, the Company expensed as incurred all implementation costs related to cloud computing arrangements that were service contracts. As of March 31, 2020, the Company did not have any material capitalized implementation costs related to cloud computing arrangements that are service contracts.
Accounting for income taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to outside basis differences. The standard is effective for interim and annual periods beginning January 1, 2021, with certain amendments applied prospectively and others requiring retrospective application. Early adoption is permitted, with any adjustments reflected as of the beginning of the fiscal year of adoption. If early adoption is elected, all changes as a result of the standard must be adopted in the same period. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.
7
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) Short-term Investments
The amortized cost and fair value of available-for-sale investments at March 31, 2020 were $
(4) Contract Balances
The Company invoices its customers in accordance with billing schedules established in each contract. The Company’s rights to consideration from customers are presented separately in the Company’s Consolidated Balance Sheets depending on whether those rights are conditional or unconditional.
The Company presents unconditional rights to consideration from customers within “Accounts receivable, net” in its Consolidated Balance Sheets. All of the Company’s contracts are generally non-cancellable and/or non-refundable, and therefore an unconditional right generally exists when the customer is billed or amounts are billable per the contract.
Accounts receivable (in thousands) consisted of the following, as of:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Billed and billable |
|
$ |
|
|
|
$ |
|
|
|
Less: allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
Accounts receivable, net |
|
$ |
|
|
|
$ |
|
|
Changes in the allowance for credit losses were not material for the three months ended March 31, 2020. In estimating its allowance for credit losses as of March 31, 2020, the Company considered the impact from the pandemic caused by a novel strain of coronavirus (“COVID-19”) and considered additional risk pools and reserves relating to customers in certain geographic areas and industries.
Rights to consideration that are subject to a condition other than the passage of time are considered contract assets and presented within “Prepaid expenses and other current assets” in the Consolidated Balance Sheets since the rights to consideration are expected to become unconditional and transfer to accounts receivable within one year. Contract assets generally consist of accrued sales and usage-based royalty revenue. In these arrangements, consideration is not billed or billable until the royalty reporting is received, generally in the subsequent quarter, at which time the contract asset transfers to accounts receivable and a true-up adjustment is recorded to revenue. These true-up adjustments are generally not material. During the three months ended March 31, 2020 and 2019, there were
Contract liabilities are amounts received or due from customers in advance of the Company transferring the 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 Company’s contract liabilities are presented as either current or non-current “Deferred revenue and advance payments” in the Consolidated Balance Sheets, depending on whether the software or services are expected to be transferred to the customer within the next year.
The Company’s “Accounts receivable, net” and “Deferred revenue and advance payments” balances in the Consolidated Balance Sheets include unpaid amounts related to contracts under which the Company has an enforceable right to invoice the customer for non-cancellable and/or non-refundable software and services. Changes in accounts receivable and changes in deferred revenue and advance payments are presented net of these unpaid amounts in “Operating activities” in the Consolidated Statements of Cash Flows.
8
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Deferred revenue and advance payments (in thousands) from customers consisted of the following, as of:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
|
Deferred product licenses revenue |
|
$ |
|
|
|
$ |
|
|
|
Deferred subscription services revenue |
|
|
|
|
|
|
|
|
|
Deferred product support revenue |
|
|
|
|
|
|
|
|
|
Deferred other services revenue |
|
|
|
|
|
|
|
|
|
Total current deferred revenue and advance payments |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current: |
|
|
|
|
|
|
|
|
|
Deferred product licenses revenue |
|
$ |
|
|
|
$ |
|
|
|
Deferred subscription services revenue |
|
|
|
|
|
|
|
|
|
Deferred product support revenue |
|
|
|
|
|
|
|
|
|
Deferred other services revenue |
|
|
|
|
|
|
|
|
|
Total non-current deferred revenue and advance payments |
|
$ |
|
|
|
$ |
|
|
During the three months ended March 31, 2020, the Company recognized revenues of $
As of March 31, 2020, the Company had an aggregate transaction price of $
(5) Leases
The Company leases office space in the United States and foreign locations under operating lease agreements. Office space is the Company’s only material underlying asset class under operating lease agreements. The Company has no material finance leases.
Under the Company’s office space lease agreements, fixed payments and variable payments that depend on an index or rate are typically comprised of base rent and parking fees. Additionally, under these agreements the Company is generally responsible for certain variable payments that typically include certain taxes, utilities and maintenance costs, and other fees. These variable lease payments are generally based on the Company’s occupation or usage percentages and are subject to adjustments by the lessor.
As of March 31, 2020, the Company’s ROU assets and total lease liabilities were $
9
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Commitments and Contingencies
(a) Commitments
From time to time, the Company enters into certain types of contracts that require it to indemnify parties against third-party claims. These contracts primarily relate to agreements under which the Company assumes indemnity obligations for intellectual property infringement, as well as other obligations from time to time depending on arrangements negotiated with customers and other third parties. The conditions of these obligations vary. Thus, the overall maximum amount of the Company’s indemnification obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations and does not currently expect to incur any material obligations in the future. Accordingly, the Company has not recorded an indemnification liability on its Balance Sheets as of March 31, 2020 or December 31, 2019.
See Note 5, Leases, to the Consolidated Financial Statements for information regarding the Company’s commitments that are related to lease agreements.
See Note 8, Income Taxes, to the Consolidated Financial Statements for information regarding the Company’s commitments that are related to a mandatory deemed repatriation transition tax (“Transition Tax”) imposed under the U.S. Tax Cuts and Jobs Act (the “Tax Act”).
(b) Contingencies
Following an internal review initiated in 2018, the Company believes that its Brazilian subsidiary failed or likely failed to comply with local procurement regulations in conducting business with certain Brazilian government entities.
On February 6, 2020, the Company learned that a Brazilian court has authorized the Brazilian Federal Police to use certain investigative measures in its investigation into alleged corruption and procurement fraud involving certain government officials, pertaining to a particular transaction. Pursuant to this court authorization, numerous entities and individuals across Brazil, which are unaffiliated with the Company, have been subject to the freezing of assets and other measures, including a reseller and a former employee of the Company’s Brazilian subsidiary. On February 6, 2020, the bank accounts of the Company’s Brazilian subsidiary were also frozen up to an amount of BRL
While the Company believes that it is probable that the resolution of these Brazilian matters will result in a loss, the amount or range of loss is not reasonably estimable at this time. Given the stage of these matters, the outcome may result in a material impact on the Company’s earnings and financial results for the period in which any such liability is accrued. However, the Company believes that the outcome of these matters will not have a material effect on the Company’s financial position.
The Company is also involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, management does not expect the resolution of these legal proceedings to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
The Company has contingent liabilities that, in management’s judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, the Company may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.
10
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) Treasury Stock
The Board of Directors has authorized the Company’s repurchase of up to an aggregate of $
(8) Income Taxes
The Company and its subsidiaries conduct business in the United States and various foreign countries and are subject to taxation in numerous domestic and foreign jurisdictions. As a result of its business activities, the Company files tax returns that are subject to examination by various U.S. federal, state, and local, and foreign tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examination by tax authorities for years before
As of March 31, 2020, the Company had unrecognized tax benefits of $
The following table summarizes the Company’s deferred tax assets, net of deferred tax liabilities and valuation allowance (in thousands), as of:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Deferred tax assets, net of deferred tax liabilities |
|
$ |
|
|
|
$ |
|
|
|
Valuation allowance |
|
|
( |
) |
|
|
( |
) |
|
Deferred tax assets, net of deferred tax liabilities and valuation allowance |
|
$ |
|
|
|
$ |
|
|
The valuation allowances as of March 31, 2020 and December 31, 2019 primarily related to certain foreign tax credit carryforwards that, in the Company’s present estimation, more likely than not will not be realized.
The Company has estimated its annual effective tax rate for the full fiscal year 2020 and applied that rate to its income before income taxes in determining its provision for income taxes for the three months ended March 31, 2020. The Company also records 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 the Company’s period-to-period results, fluctuations in the Company’s effective tax rate and respective tax provisions or benefits may occur.
11
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three months ended March 31, 2020, the Company recorded a provision for income taxes of $
In the United States, the Tax Act reduced the U.S. corporate tax rate from
The Tax Act also imposed a Transition Tax on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries of the Company. As a result of the Tax Act, the Company recorded a final tax expense of $
The Company earns a significant amount of its revenues outside the United States and, as of December 31, 2019, the Company’s accumulated foreign earnings and profits were $
Estimates and judgments related to the Company’s projections and assumptions are inherently uncertain. Therefore, actual results could differ materially from projections. Currently, the Company expects to use its deferred tax assets, subject to Internal Revenue Code limitations, within the carryforward periods. Valuation allowances have been established where the Company has concluded that it is more likely than not that such deferred tax assets are not realizable. If the Company is unable to sustain or increase profitability in future periods, it may be required to increase the valuation allowance against the 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.
12
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(9) Share-based Compensation
The Company’s 2013 Stock Incentive Plan (as amended, the “2013 Equity Plan”) authorizes the issuance of various types of share-based awards to the Company’s employees, officers, directors, and other eligible participants. As of March 31, 2020, a total of
Stock option awards
As of March 31, 2020, there were options to purchase
The following table summarizes the Company’s stock option activity (in thousands, except per share data and years) for the three months ended March 31, 2020:
|
|
|
Stock Options Outstanding |
|
|||||||||||||
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
Weighted Average |
|
|||
|
|
|
|
|
|
|
Exercise Price |
|
|
Intrinsic |
|
|
Remaining Contractual |
|
|||
|
|
|
Shares |
|
|
Per Share |
|
|
Value |
|
|
Term (Years) |
|
||||
|
Balance as of January 1, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Forfeited/Expired |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Expected to vest as of March 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Stock options outstanding as of March 31, 2020 are comprised of the following range of exercise prices per share (in thousands, except per share data and years):
|
|
|
Stock Options Outstanding at March 31, 2020 |
|
|||||||||
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
||
|
|
|
|
|
|
|
Exercise Price |
|
|
Remaining Contractual |
|
||
|
Range of Exercise Prices per Share |
|
Shares |
|
|
Per Share |
|
|
Term (Years) |
|
|||
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
An aggregate of
|
|
|
Three months ended |
|
||
|
|
|
March 31, |
|
||
|
|
|
2019 |
|
||
|
Expected term of options in years |
|
|
|
|
|
|
Expected volatility |
|
|
|
|
% |
|
Risk-free interest rate |
|
|
|
|
% |
|
Expected dividend yield |
|
|
|
|
% |
13
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three months ended March 31, 2020 and 2019, the Company recognized approximately $
Other stock-based awards
During the three months ended March 31, 2020, the Company did
(10) Common Equity and Earnings per Share
The Company has two classes of common stock: class A common stock and class B common stock. Holders of class A common stock generally have the same rights, including rights to dividends, as holders of class B common stock, except that holders of class A common stock have
Potential shares of common stock are included in the diluted earnings per share calculation when dilutive. Potential shares of common stock, consisting of common stock issuable upon exercise of outstanding stock options, are calculated using the treasury stock method.
For the three months ended March 31, 2020 and 2019, stock options issued under the 2013 Equity Plan to purchase a weighted average of approximately
14
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(11) Segment Information
The Company manages its business in
|
Geographic regions: |
|
Domestic |
|
|
EMEA |
|
|
Other Regions |
|
|
Consolidated |
|
||||
|
Three months ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gross profit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gross profit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
As of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The domestic region consists of the United States and Canada. The EMEA region includes operations in Europe, the Middle East, and Africa. The other regions include all other foreign countries, generally comprising Latin America and the Asia Pacific region. For the three months ended March 31, 2020 and 2019,
For the three months ended March 31, 2020 and 2019,
As of March 31, 2020 and December 31, 2019,
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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™. The MicroStrategy platform brings together data from our customers’ enterprise applications, such as their financial systems, human resources systems, and supply chain management and customer relationship management tools, and provides analytics for actionable insights. Customers can also use our consulting and education offerings to harness MicroStrategy’s innovative technology and empower their workforce to make better decisions.
Earlier this year, we released MicroStrategy 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, and Outlook, HyperIntelligence dynamically surfaces byte-sized cards directly within these applications. MicroStrategy 2020 offers HyperIntelligence for 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 MicroStrategy platform. MicroStrategy 2020 delivers improvements for connectors to analytics tools 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 a cloud subscription service that allows customers to deploy our platform on Amazon Web Services (“AWS”) or Microsoft Azure environments hosted and 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 of MicroStrategy 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.
16
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 first quarter of 2020, our product licenses revenues were negatively impacted by delays attributed to the impact of the COVID-19 pandemic on our customers’ operational priorities. 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. Similarly, we may experience declines in our consulting revenues in future periods as our customers continue operating in remote work environments and aim to reduce expenses. Although we continued to see high renewal rates in our product support services during the first quarter 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.
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 transitioning towards virtual sales and marketing events. Our sales and marketing expenses decreased during the first quarter of 2020, and we expect these expenses will be lower compared to prior year periods due to the ongoing impact of the COVID-19 pandemic on worldwide travel and in-person marketing events.
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.
Operating Highlights
The following table sets forth certain operating highlights (in thousands) for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended |
|
|
|||||
|
|
|
March 31, |
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
$ |
12,584 |
|
|
$ |
18,291 |
|
|
|
Subscription services |
|
|
7,968 |
|
|
|
7,144 |
|
|
|
Total product licenses and subscription services |
|
|
20,552 |
|
|
|
25,435 |
|
|
|
Product support |
|
|
71,158 |
|
|
|
71,450 |
|
|
|
Other services |
|
|
19,714 |
|
|
|
18,481 |
|
|
|
Total revenues |
|
|
111,424 |
|
|
|
115,366 |
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
|
670 |
|
|
|
519 |
|
|
|
Subscription services |
|
|
4,064 |
|
|
|
3,598 |
|
|
|
Total product licenses and subscription services |
|
|
4,734 |
|
|
|
4,117 |
|
|
|
Product support |
|
|
6,718 |
|
|
|
7,067 |
|
|
|
Other services |
|
|
13,093 |
|
|
|
14,989 |
|
|
|
Total cost of revenues |
|
|
24,545 |
|
|
|
26,173 |
|
|
|
Gross profit |
|
|
86,879 |
|
|
|
89,193 |
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
39,518 |
|
|
|
48,760 |
|
|
|
Research and development |
|
|
26,101 |
|
|
|
28,215 |
|
|
|
General and administrative |
|
|
21,332 |
|
|
|
22,604 |
|
|
|
Total operating expenses |
|
|
86,951 |
|
|
|
99,579 |
|
|
|
Loss from operations |
|
$ |
(72 |
) |
|
$ |
(10,386 |
) |
|
17
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 of March 31, 2020, we had a total of 2,363 employees, of whom 1,043 were based in the United States and 1,320 were based internationally. The following table summarizes employee headcount as of the dates indicated:
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||
|
|
|
2020 |
|
|
2019 |
|
|
2019 |
|
|||
|
Subscription services |
|
|
63 |
|
|
|
69 |
|
|
|
54 |
|
|
Product support |
|
|
204 |
|
|
|
219 |
|
|
|
224 |
|
|
Consulting |
|
|
425 |
|
|
|
392 |
|
|
|
429 |
|
|
Education |
|
|
42 |
|
|
|
38 |
|
|
|
50 |
|
|
Sales and marketing |
|
|
594 |
|
|
|
597 |
|
|
|
675 |
|
|
Research and development |
|
|
721 |
|
|
|
743 |
|
|
|
733 |
|
|
General and administrative |
|
|
314 |
|
|
|
338 |
|
|
|
329 |
|
|
Total headcount |
|
|
2,363 |
|
|
|
2,396 |
|
|
|
2,494 |
|
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 operating expense line items in our Consolidated Statements of Operations for the periods indicated:
|
|
|
Three Months Ended |
|
|
|||||
|
|
|
March 31, |
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
||
|
Cost of subscription services revenues |
|
$ |
17 |
|
|
$ |
0 |
|
|
|
Cost of product support revenues |
|
|
124 |
|
|
|
81 |
|
|
|
Cost of consulting revenues |
|
|
0 |
|
|
|
52 |
|
|
|
Cost of education revenues |
|
|
66 |
|
|
|
48 |
|
|
|
Sales and marketing |
|
|
422 |
|
|
|
903 |
|
|
|
Research and development |
|
|
638 |
|
|
|
679 |
|
|
|
General and administrative |
|
|
1,844 |
|
|
|
1,254 |
|
|
|
Total share-based compensation expense |
|
$ |
3,111 |
|
|
$ |
3,017 |
|
|
As of March 31, 2020, we estimated that approximately $32.9 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 3.0 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 and (ii) 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 in the 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
18
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.
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 |
|
|
|||||
|
|
|
March 31, |
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
||
|
Reconciliation of non-GAAP income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(72 |
) |
|
$ |
(10,386 |
) |
|
|
Share-based compensation expense |
|
|
3,111 |
|
|
|
3,017 |
|
|
|
Non-GAAP income (loss) from operations |
|
$ |
3,039 |
|
|
$ |
(7,369 |
) |
|
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 |
|
|||||||||||||||||||||
|
|
|
March 31, |
|
|||||||||||||||||||||
|
|
|
GAAP |
|
|
Foreign Currency Exchange Rate Impact (1) |
|
|
Non-GAAP Constant Currency (2) |
|
|
GAAP |
|
|
GAAP % Change |
|
|
Non-GAAP Constant Currency % Change (3) |
|
||||||
|
|
|
2020 |
|
|
2020 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2020 |
|
||||||
|
Product licenses revenues |
|
$ |
12,584 |
|
|
$ |
(541 |
) |
|
$ |
13,125 |
|
|
$ |
18,291 |
|
|
|
-31.2 |
% |
|
|
-28.2 |
% |
|
Subscription services revenues |
|
|
7,968 |
|
|
|
(36 |
) |
|
|
8,004 |
|
|
|
7,144 |
|
|
|
11.5 |
% |
|
|
12.0 |
% |
|
Product support revenues |
|
|
71,158 |
|
|
|
(1,176 |
) |
|
|
72,334 |
|
|
|
71,450 |
|
|
|
-0.4 |
% |
|
|
1.2 |
% |
|
Other services revenues |
|
|
19,714 |
|
|
|
(255 |
) |
|
|
19,969 |
|
|
|
18,481 |
|
|
|
6.7 |
% |
|
|
8.1 |
% |
|
Cost of product support revenues |
|
|
6,718 |
|
|
|
(79 |
) |
|
|
6,797 |
|
|
|
7,067 |
|
|
|
-4.9 |
% |
|
|
-3.8 |
% |
|
Cost of other services revenues |
|
|
13,093 |
|
|
|
(289 |
) |
|
|
13,382 |
|
|
|
14,989 |
|
|
|
-12.6 |
% |
|
|
-10.7 |
% |
|
Sales and marketing expenses |
|
|
39,518 |
|
|
|
(1,010 |
) |
|
|
40,528 |
|
|
|
48,760 |
|
|
|
-19.0 |
% |
|
|
-16.9 |
% |
|
Research and development expenses |
|
|
26,101 |
|
|
|
(214 |
) |
|
|
26,315 |
|
|
|
28,215 |
|
|
|
-7.5 |
% |
|
|
-6.7 |
% |
|
General and administrative expenses |
|
|
21,332 |
|
|
|
(199 |
) |
|
|
21,531 |
|
|
|
22,604 |
|
|
|
-5.6 |
% |
|
|
-4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
|
Foreign Currency Exchange Rate Impact (1) |
|
|
Non-GAAP Constant Currency (2) |
|
|
GAAP |
|
|
GAAP % Change |
|
|
Non-GAAP Constant Currency % Change (3) |
|
||||||
|
|
|
2019 |
|
|
2019 |
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2019 |
|
||||||
|
Product licenses revenues |
|
$ |
18,291 |
|
|
$ |
(1,324 |
) |
|
$ |
19,615 |
|
|
$ |
17,301 |
|
|
|
5.7 |
% |
|
|
13.4 |
% |
|
Subscription services revenues |
|
|
7,144 |
|
|
|
(113 |
) |
|
|
7,257 |
|
|
|
7,662 |
|
|
|
-6.8 |
% |
|
|
-5.3 |
% |
|
Product support revenues |
|
|
71,450 |
|
|
|
(2,695 |
) |
|
|
74,145 |
|
|
|
74,415 |
|
|
|
-4.0 |
% |
|
|
-0.4 |
% |
|
Other services revenues |
|
|
18,481 |
|
|
|
(812 |
) |
|
|
19,293 |
|
|
|
23,589 |
|
|
|
-21.7 |
% |
|
|
-18.2 |
% |
|
Cost of product support revenues |
|
|
7,067 |
|
|
|
(188 |
) |
|
|
7,255 |
|
|
|
4,796 |
|
|
|
47.4 |
% |
|
|
51.3 |
% |
|
Cost of other services revenues |
|
|
14,989 |
|
|
|
(797 |
) |
|
|
15,786 |
|
|
|
14,929 |
|
|
|
0.4 |
% |
|
|
5.7 |
% |
|
Sales and marketing expenses |
|
|
48,760 |
|
|
|
(1,684 |
) |
|
|
50,444 |
|
|
|
51,335 |
|
|
|
-5.0 |
% |
|
|
-1.7 |
% |
|
Research and development expenses |
|
|
28,215 |
|
|
|
(410 |
) |
|
|
28,625 |
|
|
|
23,560 |
|
|
|
19.8 |
% |
|
|
21.5 |
% |
|
General and administrative expenses |
|
|
22,604 |
|
|
|
(398 |
) |
|
|
23,002 |
|
|
|
22,172 |
|
|
|
1.9 |
% |
|
|
3.7 |
% |
19
|
(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. |
|
(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 December 31, 2019 provides a more detailed explanation of the judgments made and a discussion of our accounting estimates and policies relating to revenue recognition. There have been no significant changes in such estimates and policies since December 31, 2019.
Results of Operations
Comparison of the three months ended March 31, 2020 and 2019
Revenues
Except as otherwise indicated herein, the term “domestic” refers to operations in the United States and Canada and the term “international” refers to operations outside of the United States and Canada.
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 |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Product Licenses and Subscription Services Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Licenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
6,985 |
|
|
$ |
9,194 |
|
|
|
-24.0 |
% |
|
|
International |
|
|
5,599 |
|
|
|
9,097 |
|
|
|
-38.5 |
% |
|
|
Total product licenses revenues |
|
|
12,584 |
|
|
|
18,291 |
|
|
|
-31.2 |
% |
|
|
Subscription Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
5,968 |
|
|
|
5,463 |
|
|
|
9.2 |
% |
|
|
International |
|
|
2,000 |
|
|
|
1,681 |
|
|
|
19.0 |
% |
|
|
Total subscription services revenues |
|
|
7,968 |
|
|
|
7,144 |
|
|
|
11.5 |
% |
|
|
Total product licenses and subscription services revenues |
|
$ |
20,552 |
|
|
$ |
25,435 |
|
|
|
-19.2 |
% |
|
20
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 |
|
|
|||||
|
|
|
March 31, |
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
||
|
Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period: |
|
|
|
|
|
|
|
|
|
|
More than $1.0 million in licenses revenue recognized |
|
|
0 |
|
|
|
2 |
|
|
|
Between $0.5 million and $1.0 million in licenses revenue recognized |
|
|
3 |
|
|
|
3 |
|
|
|
Total |
|
|
3 |
|
|
|
5 |
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
More than $1.0 million in licenses revenue recognized |
|
|
0 |
|
|
|
1 |
|
|
|
Between $0.5 million and $1.0 million in licenses revenue recognized |
|
|
2 |
|
|
|
1 |
|
|
|
Total |
|
|
2 |
|
|
|
2 |
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
More than $1.0 million in licenses revenue recognized |
|
|
0 |
|
|
|
1 |
|
|
|
Between $0.5 million and $1.0 million in licenses revenue recognized |
|
|
1 |
|
|
|
2 |
|
|
|
Total |
|
|
1 |
|
|
|
3 |
|
|
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 |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Product Licenses Revenue Recognized in the Applicable Period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than $1.0 million in licenses revenue recognized |
|
$ |
0 |
|
|
$ |
2,402 |
|
|
|
-100.0 |
% |
|
|
Between $0.5 million and $1.0 million in licenses revenue recognized |
|
|
2,302 |
|
|
|
2,061 |
|
|
|
11.7 |
% |
|
|
Less than $0.5 million in licenses revenue recognized |
|
|
10,282 |
|
|
|
13,828 |
|
|
|
-25.6 |
% |
|
|
Total |
|
|
12,584 |
|
|
|
18,291 |
|
|
|
-31.2 |
% |
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than $1.0 million in licenses revenue recognized |
|
|
0 |
|
|
|
1,128 |
|
|
|
-100.0 |
% |
|
|
Between $0.5 million and $1.0 million in licenses revenue recognized |
|
|
1,308 |
|
|
|
549 |
|
|
|
138.3 |
% |
|
|
Less than $0.5 million in licenses revenue recognized |
|
|
5,677 |
|
|
|
7,517 |
|
|
|
-24.5 |
% |
|
|
Total |
|
|
6,985 |
|
|
|
9,194 |
|
|
|
-24.0 |
% |
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than $1.0 million in licenses revenue recognized |
|
|
0 |
|
|
|
1,274 |
|
|
|
-100.0 |
% |
|
|
Between $0.5 million and $1.0 million in licenses revenue recognized |
|
|
994 |
|
|
|
1,512 |
|
|
|
-34.3 |
% |
|
|
Less than $0.5 million in licenses revenue recognized |
|
|
4,605 |
|
|
|
6,311 |
|
|
|
-27.0 |
% |
|
|
Total |
|
$ |
5,599 |
|
|
$ |
9,097 |
|
|
|
-38.5 |
% |
|
Product licenses revenues decreased $5.7 million for the three months ended March 31, 2020, as compared to the same period in the prior year. For the three months ended March 31, 2020 and 2019, product licenses transactions with more than $0.5 million in recognized revenue represented 18.3% and 24.4%, respectively, of our product licenses revenues. For the three months ended March 31, 2020, our top three product licenses transactions totaled $2.3 million in recognized revenue, or 18.3% of total product licenses revenues, compared to $3.4 million, or 18.6% of total product licenses revenues, for the three months ended March 31, 2019. Due to the impact of the COVID-19 pandemic on companies worldwide, we experienced delays in closing certain product license deals during the first quarter of 2020 as customers shifted their attention to addressing operational challenges associated with the pandemic. We may 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 $2.2 million for the three months ended March 31, 2020, as compared to the same period in 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 decrease in the number of transactions with more than $1.0 million in
21
recognized revenue, partially offset by an increase in the number and average deal size of transactions with recognized revenue between $0.5 million and $1.0 million.
International product licenses revenues. International product licenses revenues decreased $3.5 million for the three months ended March 31, 2020, as compared to the same period in the prior year, primarily due to a decrease in the number of transactions and a $0.5 million unfavorable foreign currency exchange impact.
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 $0.8 million for the three months ended March 31, 2020, as compared to the same period 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 |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Product Support Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
42,797 |
|
|
$ |
42,002 |
|
|
|
1.9 |
% |
|
|
International |
|
|
28,361 |
|
|
|
29,448 |
|
|
|
-3.7 |
% |
|
|
Total product support revenues |
|
$ |
71,158 |
|
|
$ |
71,450 |
|
|
|
-0.4 |
% |
|
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 did not materially change for the three months ended March 31, 2020, as compared to the same period in the prior year, primarily due to an increase in new product support contracts, substantially offset by a $1.2 million unfavorable foreign currency exchange impact. Although our product support revenues were not materially impacted by the COVID-19 pandemic during the three months ended March 31, 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.
Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:
|
|
|
Three Months Ended |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Other Services Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
9,025 |
|
|
$ |
7,046 |
|
|
|
28.1 |
% |
|
|
International |
|
|
9,416 |
|
|
|
9,557 |
|
|
|
-1.5 |
% |
|
|
Total consulting revenues |
|
|
18,441 |
|
|
|
16,603 |
|
|
|
11.1 |
% |
|
|
Education |
|
|
1,273 |
|
|
|
1,878 |
|
|
|
-32.2 |
% |
|
|
Total other services revenues |
|
$ |
19,714 |
|
|
$ |
18,481 |
|
|
|
6.7 |
% |
|
Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased $1.8 million for the three months ended March 31, 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. Although our consulting revenues were not materially impacted by the COVID-19 pandemic during the three months ended March 31, 2020, we may experience declines in our consulting revenues in future periods as our customers continue operating 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 $0.6 million for the three months ended March 31, 2020, as compared to the same period in the prior year, primarily due to a reduction in the average sales price of our education offerings.
22
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 |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Cost of Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses and subscription services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
$ |
670 |
|
|
$ |
519 |
|
|
|
29.1 |
% |
|
|
Subscription services |
|
|
4,064 |
|
|
|
3,598 |
|
|
|
13.0 |
% |
|
|
Total product licenses and subscription services |
|
|
4,734 |
|
|
|
4,117 |
|
|
|
15.0 |
% |
|
|
Product support |
|
|
6,718 |
|
|
|
7,067 |
|
|
|
-4.9 |
% |
|
|
Other services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting |
|
|
11,428 |
|
|
|
12,985 |
|
|
|
-12.0 |
% |
|
|
Education |
|
|
1,665 |
|
|
|
2,004 |
|
|
|
-16.9 |
% |
|
|
Total other services |
|
|
13,093 |
|
|
|
14,989 |
|
|
|
-12.6 |
% |
|
|
Total cost of revenues |
|
$ |
24,545 |
|
|
$ |
26,173 |
|
|
|
-6.2 |
% |
|
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 months ended March 31, 2020, as compared to the same period 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. Cost of subscription services revenues did not materially change for the three months ended March 31, 2020, as compared to the same period in the prior year. Subscription services headcount increased 16.7% to 63 at March 31, 2020 from 54 at March 31, 2019.
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 consulting personnel providing Enterprise Support services is reported as cost of product support revenues. Cost of product support revenues did not materially change for the three months ended March 31, 2020, as compared to the same period in the prior year. Product support headcount decreased 8.9% to 204 at March 31, 2020 from 224 at March 31, 2019.
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. Cost of consulting revenues decreased $1.6 million for the three months ended March 31, 2020, as compared to the same period in the prior year, primarily due to a $0.8 million decrease in compensation and related costs and a $0.6 million decrease in travel and entertainment expenditures. Consulting headcount decreased 0.9% to 425 at March 31, 2020 from 429 at March 31, 2019.
Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. Cost of education revenues did not materially change for the three months ended March 31, 2020, as compared to the same period in the prior year. Education headcount decreased 16.0% to 42 at March 31, 2020 from 50 at March 31, 2019.
Sales and marketing expenses. Sales and marketing expenses consist of personnel costs, commissions, office facilities, travel, advertising, public relations programs, and promotional events, such as trade shows, seminars, and technical conferences. The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated:
|
|
|
Three Months Ended |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Sales and marketing expenses |
|
$ |
39,518 |
|
|
$ |
48,760 |
|
|
|
-19.0 |
% |
|
23
Sales and marketing expenses decreased $9.2 million for the three months ended March 31, 2020, as compared to the same period in the prior year, primarily due to a $3.5 million decrease in variable compensation, including the cancellation of a sales employee awards event as a result of the COVID-19 pandemic, a $2.6 million decrease in employee salaries due to a decrease in staffing levels, a $1.0 million decrease in travel and entertainment expenditures, a $0.7 million decrease in marketing and advertising costs, a $0.5 million decrease in facility and other related support costs, a $0.5 million decrease in the amortization of capitalized variable compensation, and a $0.5 million net decrease in share-based compensation expense. The $0.5 million net decrease in share-based compensation expense is primarily due to the forfeiture of certain stock options, partially offset by the grant of additional awards under the 2013 Equity Plan. Included in sales and marketing expenses for the three months ended March 31, 2020 is an aggregate $1.0 million favorable foreign currency exchange impact. Sales and marketing headcount decreased 12.0% to 594 at March 31, 2020 from 675 at March 31, 2019. We expect sales and marketing expenses will be lower compared to prior year periods due to the ongoing impact of the COVID-19 pandemic on worldwide travel and in-person marketing events.
Research and development expenses. Research and development expenses consist of the personnel costs for our software engineering personnel, depreciation of equipment, and other related costs. The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated:
|
|
|
Three Months Ended |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
Research and development expenses |
|
$ |
26,101 |
|
|
$ |
28,215 |
|
|
|
-7.5 |
% |
|
Research and development expenses decreased $2.1 million for the three months ended March 31, 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 staffing levels, a $0.4 million decrease in recruiting costs, a $0.4 million decrease in employee relations expenses, a $0.3 million decrease in consulting and advisory costs, and a $0.3 million decrease in technology infrastructure costs. Research and development headcount decreased 1.6% to 721 at March 31, 2020 from 733 at March 31, 2019. 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.
General and administrative expenses. General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated:
|
|
|
Three Months Ended |
|
|
|
|
|
|
|||||
|
|
|
March 31, |
|
|
% |
|
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|||
|
General and administrative expenses |
|
$ |
21,332 |
|
|
$ |
22,604 |
|
|
|
-5.6 |
% |
|
General and administrative expenses decreased $1.3 million for the three months ended March 31, 2020, as compared to the same period in the prior year, primarily due to a $0.6 million decrease in legal, consulting, and other advisory costs, a $0.5 million decrease in facility and other related support costs, and a $0.5 million decrease in recruiting costs, partially offset by a $0.6 million net increase in share-based compensation expense. The $0.6 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. General and administrative headcount decreased 4.6% to 314 at March 31, 2020 from 329 at March 31, 2019.
Provision for (Benefit from) 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 three months ended March 31, 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.
24
For the three months ended March 31, 2020, we recorded a provision for income taxes of $1.6 million that resulted in an effective tax rate of 70.4%, as compared to a benefit from income taxes of $0.5 million that resulted in an effective tax rate of 6.1% for the three months ended March 31, 2019. The change in the effective tax rate in 2020 is mainly due to certain discrete items and the change in the expected proportion of U.S. versus foreign income.
As of March 31, 2020, we had no U.S. federal NOL carryforwards and we estimated that we had $4.1 million of foreign NOL carryforwards. As of March 31, 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 $18.1 million.
As of March 31, 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:
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||
|
|
|
2020 |
|
|
2019 |
|
|
2019 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product licenses revenue |
|
$ |
131 |
|
|
$ |
481 |
|
|
$ |
555 |
|
|
Deferred subscription services revenue |
|
|
16,567 |
|
|
|
16,561 |
|
|
|
15,641 |
|
|
Deferred product support revenue |
|
|
161,135 |
|
|
|
161,670 |
|
|
|
166,306 |
|
|
Deferred other services revenue |
|
|
7,058 |
|
|
|
8,395 |
|
|
|
7,568 |
|
|
Total current deferred revenue and advance payments |
|
$ |
184,891 |
|
|
$ |
187,107 |
|
|
$ |
190,070 |
|
|
Non-current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product licenses revenue |
|
$ |
262 |
|
|
$ |
293 |
|
|
$ |
479 |
|
|
Deferred subscription services revenue |
|
|
84 |
|
|
|
97 |
|
|
|
247 |
|
|
Deferred product support revenue |
|
|
2,789 |
|
|
|
3,417 |
|
|
|
3,231 |
|
|
Deferred other services revenue |
|
|
525 |
|
|
|
537 |
|
|
|
582 |
|
|
Total non-current deferred revenue and advance payments |
|
$ |
3,660 |
|
|
$ |
4,344 |
|
|
$ |
4,539 |
|
|
Total current and non-current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product licenses revenue |
|
$ |
393 |
|
|
$ |
774 |
|
|
$ |
1,034 |
|
|
Deferred subscription services revenue |
|
|
16,651 |
|
|
|
16,658 |
|
|
|
15,888 |
|
|
Deferred product support revenue |
|
|
163,924 |
|
|
|
165,087 |
|
|
|
169,537 |
|
|
Deferred other services revenue |
|
|
7,583 |
|
|
|
8,932 |
|
|
|
8,150 |
|
|
Total current and non-current deferred revenue and advance payments |
|
$ |
188,551 |
|
|
$ |
191,451 |
|
|
$ |
194,609 |
|
Total deferred revenue and advance payments decreased $2.9 million as of March 31, 2020, as compared to December 31, 2019, primarily due to a decrease in our international deferred revenue balances from the general strengthening of the U.S. dollar and the recognition of previously deferred other services and product licenses revenues, partially offset by an increase in deferred revenues from new product support contracts. Total deferred revenue and advance payments decreased $6.1 million as of March 31, 2020, as compared to March 31, 2019, primarily due to a decrease in our international deferred revenue balances from the general strengthening of the U.S. dollar and the recognition of previously deferred product support, product licenses, and other services revenues, partially offset by an increase in deferred revenues from new subscription services contracts.
We expect to recognize approximately $184.9 million of deferred revenue and advance payments over the next 12 months. However, the timing and ultimate recognition of our deferred revenue and advance payments depend on our 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.
25
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, and U.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.
As of March 31, 2020 and December 31, 2019, the amount of cash and cash equivalents and short-term investments held by our U.S. entities was $245.8 million and $289.4 million, respectively, and by our non-U.S. entities was $293.4 million and $276.2 million, respectively. We earn a significant amount of our revenues outside the United States and our accumulated foreign earnings and profits as of December 31, 2019 were $431.2 million. As of March 31, 2020, we intend to indefinitely reinvest $231.2 million of our undistributed foreign earnings. We do not anticipate needing to repatriate additional cash or cash equivalents held by non-U.S. entities to the United States to finance our U.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:
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Three Months Ended March 31, |
|
|
% |
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
Net cash provided by operating activities |
|
$ |
29,069 |
|
|
$ |
26,456 |
|
|
|
9.9 |
% |
|
Net cash (used in) provided by investing activities |
|
$ |
(589 |
) |
|
$ |
170,293 |
|
|
|
-100.3 |
% |
|
Net cash used in financing activities |
|
$ |
(50,407 |
) |
|
$ |
(46,737 |
) |
|
|
7.9 |
% |
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. Our primary uses of cash in operating activities are for personnel-related expenditures for software development, personnel-related expenditures for providing consulting, education, and subscription services, and for sales and marketing costs, general and administrative costs, and income taxes.
Net cash provided by operating activities increased $2.6 million for the three months ended March 31, 2020, as compared to the same period in the prior year, due to an $8.6 million increase in net income and a $3.9 million increase from changes in non-cash items, partially offset by a $9.8 million decrease from changes in operating assets and liabilities. 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.
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 increased $170.9 million for the three months ended March 31, 2020, as compared to the same period in the prior year, due to a $304.4 million decrease in proceeds from the redemption of short-term investments, partially offset by a $128.2 million decrease in purchases of short-term investments and a $5.4 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 $3.7 million for the three months ended March 31, 2020, as compared to the same period in the prior year, due to a $2.5 million increase in purchases of treasury stock and a $1.2 million decrease in proceeds from the exercise of stock options under the 2013 Equity Plan.
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.
26
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 of March 31, 2020 (in thousands):
|
|
|
Payments due by period ended March 31, |
|
|||||||||||||||||
|
|
|
Total |
|
|
2021 |
|
|
2022-2023 |
|
|
2024-2025 |
|
|
Thereafter |
|
|||||
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
154,593 |
|
|
$ |
16,546 |
|
|
$ |
32,250 |
|
|
$ |
29,163 |
|
|
$ |
76,634 |
|
|
Purchase obligations |
|
|
14,938 |
|
|
|
9,178 |
|
|
|
3,361 |
|
|
|
1,351 |
|
|
|
1,048 |
|
|
Transition Tax |
|
|
28,935 |
|
|
|
896 |
|
|
|
5,903 |
|
|
|
12,913 |
|
|
|
9,223 |
|
|
Total |
|
$ |
198,466 |
|
|
$ |
26,620 |
|
|
$ |
41,514 |
|
|
$ |
43,427 |
|
|
$ |
86,905 |
|
Unrecognized tax benefits. As of March 31, 2020, we had $2.6 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 2020.
Off-balance sheet arrangements. As of March 31, 2020, we did not have any off-balance sheet arrangements that had a material impact on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Recent Accounting Standards
See Note 2, Recent Accounting Standards, to the Consolidated Financial Statements for further information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk exposures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.
We are exposed to the impact of both interest rate changes and foreign currency fluctuations.
Interest Rate Risk. We face exposure to changes in interest rates primarily relating to our investments. We generally invest our excess cash in short-term, highly-rated, fixed-rate financial instruments. These fixed-rate instruments are subject to interest rate risk and may fall in value if interest rates increase. We do not hold or invest in these fixed-rate instruments for trading purposes or speculation. As of March 31, 2020, we held approximately $109.9 million of investments in U.S. Treasury securities with stated maturity dates between three months and one year from the purchase date.
Foreign Currency Risk. We conduct a significant portion of our business in currencies other than the U.S. dollar, the currency in which we report our Consolidated Financial Statements. International revenues accounted for 41.2% and 43.8% of our total revenues for the three months ended March 31, 2020 and 2019, respectively. We anticipate that international revenues will continue to account for a significant portion of our total revenues. The functional currency of each of our foreign subsidiaries is generally the local currency.
Assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the applicable Balance Sheet date and any resulting translation adjustments are included as an adjustment to stockholders’ equity. Revenues and expenses generated from these subsidiaries are translated at average monthly exchange rates during the quarter in which the transactions occur. Gains and losses from transactions in local currencies are included in net income (loss).
As a result of transacting in multiple currencies and reporting our Consolidated Financial Statements in U.S. dollars, our operating results may be adversely impacted by currency exchange rate fluctuations in the future. The impact of foreign currency exchange rate fluctuations on current and comparable periods is described in the “Non-GAAP Financial Measures” section under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
27
We cannot predict the effect of exchange rate fluctuations upon our future results. We attempt to minimize our foreign currency risk by converting our excess foreign currency held in foreign jurisdictions to U.S. dollar-denominated cash and investment accounts.
As of March 31, 2020 and December 31, 2019, a 10% adverse change in foreign currency exchange rates versus the U.S. dollar would have each decreased our aggregate reported cash and cash equivalents and short-term investments by 0.3%. If average exchange rates during the three months ended March 31, 2020 had changed unfavorably by 10%, our revenues for the three months ended March 31, 2020 would have decreased by 2.8%. During the three months ended March 31, 2020, our revenues were lower by 1.8% as a result of a 1.4% unfavorable change in weighted average exchange rates, as compared to the same period in the prior year.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, we do not expect the resolution of these legal proceedings to have a material adverse effect on our financial position, results of operations, or cash flows.
Item 1A. Risk Factors
You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
If any of the following risks occurs, our business, financial condition, or results of operations could be materially adversely affected. In such case, the market price of our class A common stock could decline, and you may lose all or part of your investment.
Our quarterly operating results, revenues, and expenses may fluctuate significantly, which could have an adverse effect on the market price of our stock
For many reasons, including those described below, our operating results, revenues, and expenses have varied in the past and may vary significantly in the future from quarter to quarter. These fluctuations could have an adverse effect on the market price of our class A common stock.
Fluctuations in Quarterly Operating Results. Our quarterly operating results may fluctuate, in part, as a result of:
|
|
• |
the size, timing, volume, and execution of significant orders and shipments; |
|
|
• |
the mix of our offerings ordered by customers, including product licenses and cloud subscriptions, which can affect the extent to which revenue is recognized immediately or over future quarterly periods; |
|
|
• |
the timing of the release or delivery of new or enhanced offerings, which may affect the period in which we can recognize revenue; |
|
|
• |
the timing of announcements of new offerings by us or our competitors; |
|
|
• |
changes in our pricing policies or those of our competitors; |
|
|
• |
market acceptance of new and enhanced versions of our offerings; |
|
|
• |
the length of our sales cycles; |
|
|
• |
seasonal or other buying patterns of our customers; |
|
|
• |
changes in our operating expenses; |
|
|
• |
the impact of the COVID-19 pandemic, or other future infectious disease pandemics, on the global economy and on our customers, suppliers, employees, and business; |
|
|
• |
the timing of research and development projects and the capitalization of software development costs; |
|
|
• |
personnel changes; |
|
|
• |
our use of channel partners; |
|
|
• |
utilization of our consulting and education services, which can be affected by delays or deferrals of customer implementation of our software; |
|
|
• |
changes in foreign currency exchange rates; |
|
|
• |
our profitability and expectations for future profitability and their effect on our deferred tax assets and net income for the period in which any adjustment to our net deferred tax asset valuation allowance may be made; |
|
|
• |
increases or decreases in our liability for unrecognized tax benefits; and |
|
|
• |
changes in customer decision-making processes or customer budgets. |
29
Limited Ability to Adjust Expenses. We base our operating expense budgets on expected revenue trends and strategic objectives. Many of our expenses, such as office leases and certain personnel costs, are relatively fixed. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any quarter. For example, if our revenues in the future are not sufficient to offset our operating expenses, or we are unable to adjust our operating expenses in a timely manner in response to any shortfall in anticipated revenue, we may incur operating losses.
Based on the above factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the market price of our class A common stock may fall.
The market price of our class A common stock has been and may continue to be volatile
The market price of our class A common stock historically has been volatile and may continue to be volatile. The market price of our class A common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include, but are not limited to:
|
|
• |
quarterly variations in our results of operations or those of our competitors; |
|
|
• |
announcements about our earnings that are not in line with analyst expectations, the likelihood of which may be enhanced because it is our policy not to give guidance relating to our anticipated financial performance in future periods; |
|
|
• |
announcements by us or our competitors of acquisitions, dispositions, new offerings, significant contracts, commercial relationships, or capital commitments; |
|
|
• |
the emergence of new sales channels in which we are unable to compete effectively; |
|
|
• |
our ability to develop, market, and deliver new and enhanced offerings on a timely basis; |
|
|
• |
commencement of, or our involvement in, litigation; |
|
|
• |
any major change in our Board of Directors, management, or governing documents; |
|
|
• |
changes in government regulations or in the status of our regulatory approvals; |
|
|
• |
recommendations by securities analysts or changes in earnings estimates and our ability to meet those estimates; |
|
|
• |
investor perception of our Company; |
|
|
• |
announcements by our competitors of their earnings that are not in line with analyst expectations; |
|
|
• |
the volume of shares of our class A common stock available for public sale; |
|
|
• |
sales or purchases of stock by us or by our stockholders, and issuances of awards under our stock incentive plan; |
|
|
• |
short sales, hedging, and other derivative transactions involving shares of our class A common stock; and |
|
|
• |
general economic conditions and slow or negative growth of related markets. |
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies in those markets. These broad market and industry factors may seriously harm the market price of our class A common stock, regardless of our actual operating performance.
We may not be able to sustain or increase profitability in the future
We generated net income for the three months ended March 31, 2020; however, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues are not sufficient to offset our operating expenses, or we are unable to adjust our operating expenses in a timely manner in response to any shortfall in anticipated revenue, we may incur operating losses in future periods, our profitability may decrease, or we may cease to be profitable. As a result, our business, results of operations, and financial condition may be materially adversely affected.
As of March 31, 2020, we had $18.1 million of deferred tax assets, net of a $2.1 million valuation allowance. If we are unable to sustain or increase profitability in the future, we may be required to increase the valuation allowance against these 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.
30
We face risks related to the COVID-19 pandemic that could significantly disrupt our business and operating results.
The COVID-19 pandemic has had a significant adverse impact on global commercial activity and has created significant volatility in financial markets. Many countries have instituted quarantines and travel restrictions and closed or limited hours of operations of non-essential offices and retail centers, which are adversely impacting a number of industries such as travel, leisure, hospitality, and retail. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the global economy and consumer confidence. The COVID-19 pandemic could have a sustained adverse impact on economic and market conditions and trigger a period of global economic slowdown, which could decrease technology spending, adversely affect demand for our offerings, and harm our business and operating results.
During the first quarter of 2020, our product licenses revenues were negatively impacted by delays attributed to the impact of the COVID-19 pandemic on our customers’ operational priorities. 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. We may also experience declines in our consulting revenues in future periods as our customers continue operating in remote work environments and aim to reduce expenses. Our product support revenues may also 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.
In light of the uncertain and rapidly evolving situation relating to COVID-19, we have taken precautionary measures intended to reduce the risk of the virus to our employees, customers, and communities in which we operate. We have established remote working arrangements for our employees, placed restrictions on non-essential business travel, and begun transitioning towards virtual sales and marketing events. We expect that many of our customers and partners are doing the same. As a result of these precautionary measures, there could be a negative impact on our sales, marketing, and customer success efforts, continued delays in our sales cycles, delays in the release or delivery of new or enhanced offerings or unexpected changes to such offerings, or operational or other challenges, any of which could significantly disrupt our business and operating results.
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. Although we continue to actively monitor the situation and may take further actions as may be required by government authorities or as more information and public health guidance become available, the full extent to which COVID-19 impacts our business and operating results will depend on future developments, which are highly uncertain and cannot be predicted.
Economic uncertainty, increased competition, and the effects of the COVID-19 pandemic could materially adversely affect our business and results of operations
The U.S. and other significant markets have experienced cyclical downturns, and worldwide economic conditions remain uncertain. Economic uncertainty and associated macroeconomic conditions make it extremely difficult for our customers and us to accurately forecast and plan future business activities and could cause our customers to slow spending on our offerings, which could delay and lengthen sales cycles. Furthermore, during uncertain economic times, our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our results would be negatively impacted.
Furthermore, some of our customers have experienced increased competition and significant adverse impacts from the COVID-19 pandemic and related containment and mitigation measures. A significant economic downturn, the intensification of competition, or adverse effects of the COVID-19 pandemic may cause organizations to reduce their expenditures in general or specifically reduce their spending on information technology (“IT”). Customers may delay or cancel IT projects or seek to lower their costs by renegotiating vendor contracts. Customers with excess IT resources may choose to develop in-house software solutions rather than obtain those solutions from us. In addition, our competitors may respond to challenging market conditions by lowering prices and attempting to lure away our customers.
We cannot predict the timing, strength, or duration of any economic slowdown, any intensification of competition, the extent of adverse impacts to the economy from the COVID-19 pandemic, or the timing or strength of any subsequent recovery generally. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and results of operations could be materially adversely affected.
We may have exposure to greater than anticipated tax liabilities
We are subject to income taxes and non-income taxes in a variety of domestic and foreign jurisdictions. Our future income tax liability could be materially adversely affected by earnings that are lower than anticipated in jurisdictions where we have lower statutory rates,
31
earnings that are higher than anticipated in jurisdictions where we have higher statutory rates, changes in the valuation of our deferred tax assets and liabilities, changes in the amount of unrecognized tax benefits, or changes in tax laws, regulations, accounting principles, or interpretations thereof.
In the United States, the Tax Act was enacted in December 2017, bringing about broad changes in the existing corporate tax system. Over time, the Tax Act may result in material impacts to our results of operations and may affect customer behavior and our ability to forecast our effective tax rate.
In the United Kingdom, legislation imposing a tax related to offshore receipts in respect of intangible property held in low tax jurisdictions became effective in April 2019. Certain aspects of this legislation and its implementation remain unclear at this time, and, as a result, we have not yet been able to determine the full impact of the legislation on our business, operating results, or financial condition.
Further changes in the tax laws of foreign jurisdictions could arise, including as a result of the project undertaken by the Organisation for Economic Co-operation and Development (“OECD”) to combat base erosion and profit shifting (“BEPS”). The OECD, which represents a coalition of member countries, has issued recommendations that, in some cases, make substantial changes to numerous long-standing tax positions and principles. These changes, many of which have been adopted or are under active consideration by OECD members and/or other countries, could increase tax uncertainty and may adversely affect our provision for income taxes.
Our determination of our tax liability is subject to review by applicable domestic and foreign tax authorities. Any adverse outcome of such reviews could have an adverse effect on our operating results and financial condition. The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Moreover, as a multinational business, we have subsidiaries that engage in many intercompany transactions in a variety of tax jurisdictions where the ultimate tax determination is uncertain.
We also have contingent tax liabilities that, in management’s judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, we may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.
As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements and any such difference may materially affect our financial results in future periods in which we change our estimates of our tax obligations or in which the ultimate tax outcome is determined.
If the market for analytics software fails to grow as we expect or if businesses fail to adopt our offerings, our business, operating results, and financial condition could be materially adversely affected
Our revenue is derived from sales of our analytics software and related services. We expect these sales to account for a large portion of our revenues for the foreseeable future. Although demand for analytics software has grown in recent years, the market for analytics offerings continues to evolve. Resistance from consumer and privacy groups to commercial collection, use, and sharing of data on spending patterns and other personal behavior (including individuals’ online or offline activities, mobile data, sensor data, social data, web log data, Internet of Things data, and other personal data) has grown in recent years and our customers, potential customers, or the public in general may perceive that use of our analytics software could violate individual privacy rights. In addition, increasing government restrictions on the collection, use, and transfer of personal data could impair the further growth of the market for analytics software. We cannot be sure that this market will continue to grow or, even if it does grow, that businesses will adopt our solutions.
We have spent, and intend to keep spending, considerable resources to educate potential customers about analytics offerings in general and our offerings in particular. However, we cannot be sure that these expenditures will help any of our offerings achieve any additional market acceptance. If the market fails to grow or grows more slowly than we currently expect or businesses fail to adopt our offerings, our business, operating results, and financial condition could be materially adversely affected.
Our offerings face intense competition, which may lead to lower prices for our offerings, reduced gross margins, loss of market share, and reduced revenue
The analytics market is highly competitive and subject to rapidly changing technology paradigms. Within the analytics space, we compete with many different software vendors, including IBM, Microsoft, Oracle, Qlik, Salesforce, and SAP. Our future success depends on the effectiveness with which we can differentiate our offerings and compete with these vendors and other potential competitors across analytics implementation projects of varying sizes. Our ability to compete successfully in our markets depends on a number of factors, both within and outside of our control. Some of these factors include software deployment options; analytical,
32
mobility, data discovery, and visualization capabilities; performance and scalability; the quality and reliability of our customer service and support; licensing model; and brand recognition. Failure to compete successfully in any one of these or other areas may reduce the demand for our offerings, as well as materially adversely affect our revenue from both existing and prospective customers.
Some of our competitors have longer operating histories and significantly greater financial, technical, and marketing resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion, sale, and marketing of their offerings than we can, such as offering certain analytics products free of charge when bundled with other products. In addition, many of our competitors have strong relationships with current and potential customers, extensive industry and specialized business knowledge, as well as corresponding proprietary technologies that they can leverage, such as multidimensional databases and enterprise resource planning repositories. As a result, they may be able to prevent us from penetrating new accounts or expanding within existing accounts.
Increased competition may lead to price cuts, reduced gross margins, and loss of market share. We may not be able to compete successfully against current and future competitors, and the failure to meet the competitive pressures we face may have a material adverse effect on our business, operating results, and financial condition.
Current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others. By doing so, these competitors may increase their ability to meet the needs of our potential customers by their expanded offerings. Our current or prospective channel partners may establish cooperative relationships with our current or future competitors. These relationships may limit our ability to sell our analytics offerings through specific distribution channels. Accordingly, new competitors or alliances among current and future competitors may emerge and rapidly gain significant market share. These developments could limit our ability to obtain revenues from new customers and to sustain software maintenance revenues from our installed customer base. In addition, basic office productivity software suites, such as Microsoft Office, could evolve to offer advanced analysis and reporting capabilities that may reduce the demand for our analytics offerings.
We depend on revenue from a single software platform and related services as well as revenue from our installed customer base
Our revenue is derived from sales of our software platform and related services. Because of this revenue concentration, our business could be harmed by a decline in demand for, or in the adoption or prices of, our platform and related services as a result of, among other factors, any change in our pricing or packaging model, increased competition, maturation in the markets for our platform, or other risks described in this Quarterly Report.
We also depend on our installed customer base for a substantial portion of our revenue. We have contracts for cloud subscriptions that provide recurring revenues to us, as well as contracts with our license customers for ongoing support and maintenance. In addition, our installed customer base has historically generated additional new license and services revenues for us. If our existing customers cancel or fail to renew their service contracts or fail to make additional purchases from us, our revenue could decrease and our operating results could be materially adversely affected.
If we are unable to develop and release new offerings and software enhancements to respond to rapid technological change, new customer requirements, or evolving industry standards in a timely and cost-effective manner, our business, operating results, and financial condition could be materially adversely affected
The market for our offerings is characterized by frequent new offerings and software enhancements in response to rapid technological change, new customer requirements, and evolving industry standards. The introduction of offerings embodying new technologies can quickly make existing offerings obsolete and unmarketable. We believe that our future success depends largely on our ability to:
|
|
• |
continue to support a number of popular operating systems and databases; |
|
|
• |
maintain and improve our current offerings; |
|
|
• |
rapidly develop new offerings and software enhancements that achieve market acceptance; |
|
|
• |
maintain technological competitiveness; and |
|
|
• |
meet an expanding range of customer requirements. |
Analytics applications are inherently complex, and it can take a long time and require significant research and development expenditures to develop and test new offerings and software enhancements. In addition, customers may delay their purchasing decisions because they anticipate that new or enhanced versions of our offerings will soon become available. We cannot be sure that we will succeed in developing, marketing, and delivering, on a timely and cost-effective basis, new or enhanced offerings that respond
33
to technological change, new customer requirements, or evolving industry standards, nor can we be sure that any new or enhanced offerings will achieve market acceptance. Moreover, even if we introduce a new offering, we may experience a decline in revenues of our existing offerings that is not fully matched by the new offering’s revenue. For example, customers may delay making purchases of a new offering to permit them to make a more thorough evaluation of the offering or until industry and marketplace reviews become widely available. Some customers may hesitate migrating to a new offering due to concerns regarding the complexity of migration or performance issues that may occur in product infancy. In addition, we may lose existing customers who choose a competitor’s offering rather than migrate to our new offering. This could result in a temporary or permanent revenue shortfall and materially adversely affect our business, operating results, and financial condition.
A substantial customer shift in the deployment of the MicroStrategy platform from a product license model to a cloud subscription model could affect the timing of revenue recognition, reduce product licenses and product support revenues, and materially adversely affect our operating results
We offer our analytics platform in the form of a product license or a cloud subscription. The payment streams and revenue recognition timing for our product licenses are different from those for our cloud subscriptions. For product licenses, customers typically pay us a lump sum soon after entering into a license agreement and we typically recognize product licenses revenue when control of the license is transferred to the customer. For cloud subscriptions, customers typically make periodic payments over the subscription period and we recognize subscription services revenues ratably over the subscription period. As a result, if a substantial number of current customers shift to, or new customers purchase, cloud subscriptions instead of product licenses, the resulting change in payment terms and revenue recognition may result in our recognizing less revenue in the reporting period in which the sale transactions are consummated than has been the case in prior periods, with more revenue being recognized in future periods. This change in the timing of revenue recognition could materially adversely affect our operating results and cash flows for the periods during which such a shift or change in purchasing occurs. Accordingly, in any particular reporting period, cloud subscription sales could negatively impact product license sales to our existing and prospective customers, which could reduce product licenses and product support revenues.
Our investment in new business strategies and initiatives could disrupt the operations of our ongoing business and present risks that we have not adequately anticipated
We have invested, and in the future may invest, in new business strategies and initiatives. For example, we have introduced a number of innovative technologies designed to enable companies to capitalize on Big Data, mobile applications, cloud services, security, Internet of Things, and artificial intelligence trends in the marketplace. These endeavors may involve significant risks and uncertainties, including distraction of management from other business operations, the dedication of significant research and development, sales and marketing, and other resources to these new initiatives at the expense of our other business operations, generation of insufficient revenue to offset expenses associated with new initiatives, incompatibility of our new technologies with third-party platforms, inadequate return of capital, and other risks that we may not have adequately anticipated. Because new strategies and initiatives are inherently risky, these strategies and initiatives may not be successful and could materially adversely affect our financial condition and operating results.
Business disruptions, including interruptions, delays, or failures of our systems, third-party data center hosting facility or other third-party services, could materially adversely affect our operating results or result in a material weakness in our internal controls that could adversely affect the market price of our stock
A significant portion of our research and development activities or certain other critical business operations are concentrated in facilities in Northern Virginia, China, and Poland. In addition, we serve our customers and manage certain critical internal processes using a third-party data center hosting facility located in the United States and other third-party services, including AWS, Azure, and other cloud services. We could experience a disruption or failure of our systems or the third-party hosting facility or other services that we use. Such disruptions or failures could include a natural disaster, fire, cyber-attack, act of terrorism, geopolitical conflict, the effects of climate change, or other catastrophic event, as well as power outages or telecommunications infrastructure outages, or a decision by one of our third-party service providers to close facilities that we use without adequate notice or to materially change the pricing or terms of their services, or other unanticipated problems with the third-party services that we use, including a failure to meet service standards.
We are a highly automated business and any such disruptions or failures could (i) result in the destruction or disruption of any of our critical business operations, controls or procedures, or IT systems, (ii) severely affect our ability to conduct normal business operations, including delaying completion of sales and provision of services, (iii) result in a material weakness in our internal control over financial reporting, (iv) cause our customers to terminate their subscriptions, (v) result in our issuing credits to customers or paying penalties or fines, (vi) harm our reputation, (vii) adversely affect our attrition rates or our ability to attract new customers, or
34
(viii) cause our offerings to be perceived as not being secure, any of which could materially adversely affect our future operating results.
We use channel partners and if we are unable to maintain successful relationships with them, our business, operating results, and financial condition could be materially adversely affected
In addition to our direct sales force, we use channel partners, such as system integrators, consulting firms, resellers, solution providers, managed service providers, OEMs, and technology companies, to license and support our offerings. For the three months ended March 31, 2020, transactions by channel partners for which we recognized revenue accounted for 26.8% of our total product licenses revenues. Our channel partners may offer customers the products and services of several different companies, including offerings that compete with ours. Because our channel partners generally do not have exclusive relationships with us, we cannot be certain that they will prioritize or devote adequate resources to selling our offerings. Moreover, divergence in strategy or contract defaults by any of these channel partners may materially adversely affect our ability to develop, market, sell, or support our offerings.
Although we believe that direct sales will continue to account for a majority of our product licenses revenues, we seek to maintain a significant level of sales activities through our channel partners. There can be no assurance that our channel partners will continue to cooperate with us. In addition, actions taken or not taken by such parties may materially adversely affect us. Our ability to achieve revenue growth in the future will depend in part on our ability to maintain successful relationships with our channel partners. If we are unable to maintain our relationships with these channel partners, our business, operating results, and financial condition could be materially adversely affected.
In addition, we rely on our channel partners to operate in accordance with applicable laws and regulatory requirements. If they fail to do so, we may need to incur significant costs in responding to investigations or enforcement actions or paying penalties assessed by the applicable authorities. We also rely on our channel partners to operate in accordance with the terms of their contractual agreements with us. For example, some of our agreements with our channel partners prescribe the terms and conditions pursuant to which they are authorized to resell or distribute our software and offer technical support and related services. If our channel partners do not comply with their contractual obligations to us, our business, operating results, and financial condition may be materially adversely affected.
Our recognition of deferred revenue and advance payments is subject to future performance obligations and may not be representative of revenues for succeeding periods
Our current and non-current deferred revenue and advance payments totaled $188.6 million as of March 31, 2020. The timing and ultimate recognition of our deferred revenue and advance payments depend on various factors, including our performance of various service obligations.
Because of the possibility of customer changes or delays in customer development or implementation schedules or budgets, and the need for us to satisfactorily perform product support and other services, deferred revenue and advance payments at any particular date may not be representative of actual revenue for any succeeding period.
Our international operations are complex and expose us to risks that could have a material adverse effect on our business, operating results, and financial condition
We receive a significant portion of our total revenues from international sales and conduct our business activities in various foreign countries, including some emerging markets where we have limited experience, where the challenges of conducting our business can be significantly different from those we have faced in more developed markets, and where business practices may create internal control risks. International revenues accounted for 41.2% and 43.8% of our total revenues for the three months ended March 31, 2020 and 2019, respectively. Our international operations require significant management attention and financial resources.
Our international business activities expose us to additional risks, including:
|
|
• |
fluctuations in foreign currency exchange rates; |
|
|
• |
new, or changes in, regulatory requirements; |
|
|
• |
tariffs, export and import restrictions, restrictions on foreign investments, sanctions, laws and policies that favor local competitors (such as mandatory technology transfers), and other trade barriers or protection measures; |
35
|
|
• |
the burden of complying with a wide variety of laws, including those relating to labor matters, antitrust, procurement and contracting, consumer and data protection, privacy, data localization, governmental access to data, network security, and encryption; |
|
|
• |
costs of localizing offerings; |
|
|
• |
lack of acceptance of localized offerings; |
|
|
• |
difficulties in and costs of staffing, managing, and operating our international operations; |
|
|
• |
economic weakness or currency related crises; |
|
|
• |
generally longer payment cycles and greater difficulty in collecting accounts receivable; |
|
|
• |
tax issues, including restrictions on repatriating earnings; |
|
|
• |
weaker intellectual property protection; |
|
|
• |
increased risk of misappropriation, theft, or misuse of intellectual property, particularly in foreign countries where we have significant software development operations that have access to product source code, such as China; |
|
|
• |
our ability to adapt to sales practices and customer requirements in different cultures; |
|
|
• |
natural disasters, acts of war, terrorism, or pandemics, including the ongoing COVID-19 pandemic; |
|
|
• |
corporate espionage; and |
|
|
• |
political instability and security risks in the countries where we are doing business. |
Disruptions to trade, weakening of economic conditions, economic and legal uncertainties, or changes in currency rates may adversely affect our business, financial condition, operating results, and cash flows. For example, we may face heightened risks in connection with our international operations as a result of the withdrawal of the United Kingdom from the European Union, commonly referred to as “Brexit.” The future effects of Brexit are uncertain and will depend on, among other things, the terms of any agreements the United Kingdom enters into governing U.K. access to E.U. and other markets either during the transitional period that is currently scheduled to end on December 31, 2020 or more permanently. Brexit could, among other outcomes, disrupt the free movement of goods, services, and people between the United Kingdom and the European Union. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations, including tax laws and regulations, as the United Kingdom determines which E.U. laws to replace or replicate. In addition, the Trump administration has called for substantial changes to U.S. foreign trade policy, including the imposition of greater restrictions on international trade and significant increases in tariffs on goods imported into the United States, and has increased tariffs on certain goods imported into the United States from a number of foreign markets, following which retaliatory tariffs have been imposed on exports of certain U.S. goods to those markets. These tariffs and any further escalation of protectionist trade measures could adversely affect the markets in which we sell our offerings and, in turn, our business, financial condition, operating results, and cash flows.
Changes to the U.S. taxation of our international income, or changes in foreign tax laws, could have a material effect on our future operating results. For example, the Tax Act brought about, among other items, corporate income tax rate changes, the modification or elimination of certain tax incentives, changes to the existing regime for taxing overseas earnings, and measures to prevent BEPS, and the United Kingdom adopted legislation imposing a tax related to offshore receipts in respect of intangible property held in low tax jurisdictions.
In addition, from time to time, we may undertake various potential intercompany transactions and legal entity restructurings that involve our international subsidiaries. We consider various factors in evaluating these potential transactions and restructurings, including the alignment of our corporate structure with our organizational objectives, the operational and tax efficiency of our corporate structure, and the long-term cash flows and cash needs of our business. Such transactions and restructurings could negatively impact our overall tax rate and result in additional tax liabilities.
Moreover, compliance with foreign and U.S. laws and regulations that are applicable to our international operations is complex and may increase our cost of doing business in international jurisdictions, and our international operations could expose us to fines and penalties if we fail to comply with these regulations. These laws and regulations include anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, local laws prohibiting corrupt payments to government officials, and local laws relating to procurement, contracting, and antitrust. These laws and regulations also include import and export requirements and economic and trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce based on U.S. foreign policy and national security goals against targeted foreign states, organizations, and individuals. Although we have implemented policies and procedures designed to help ensure compliance with these laws, there can be no assurance that our employees,
36
channel partners, and other persons with whom we do business will not take actions in violation of our policies or these laws. Any violations of these laws could subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to sell our offerings to one or more countries, and could also materially damage our reputation and our brand.
These factors may have a material adverse effect on our future sales and, consequently, on our business, operating results, and financial condition.
We may lose sales, or sales may be delayed, due to the long sales and implementation cycles of certain of our offerings, which could reduce our revenues
To date, our customers have typically invested substantial time, money, and other resources and involved many people in the decision to purchase our software and related services. As a result, we may wait nine months or more after the first contact with a customer for that customer to place an order while it seeks internal approval for the purchase of our software or services. During this long sales cycle, events may occur that affect the size and/or timing of the order or even cause it to be canceled. For example, our competitors may introduce new offerings, or the customer’s own budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our software and complete services engagements can vary widely. Implementing some of our offerings can take several months, depending on the customer’s needs, and may begin only with a pilot program. It may be difficult to deploy our software if the customer has complicated deployment requirements, such as deployments that involve integrating databases, hardware, and software from different vendors. If a customer hires a third party to deploy our software, we cannot be sure that our software will be deployed successfully.
Our results in any particular period may depend on the number and volume of large transactions in that period and these transactions may involve lengthier, more complex, and more unpredictable sales cycles than other transactions
As existing and potential customers seek to standardize on a single analytics vendor or require greater vendor capacity to meet their growing analytics needs, our business may experience larger transactions at the enterprise level and larger transactions may account for a greater proportion of our business. The presence or absence of one or more large transactions in a particular period may have a material positive or negative effect on our revenue and operating results for that period. For the three months ended March 31, 2020, our top three product licenses transactions with recognized revenue totaled $2.3 million, or 18.3% of total product licenses revenues, compared to $3.4 million, or 18.6% of total product licenses revenues, for the three months ended March 31, 2019. These transactions represent significant business and financial decisions for our customers, require considerable effort on the part of customers to assess alternative products, and often require additional levels of management approval. In addition, large transactions are often more complex than smaller transactions. These factors generally lengthen the typical sales cycle and increase the risk that customers may postpone or delay purchasing decisions from one period to a subsequent period or that customers will alter their purchasing requirements. We may also encounter greater competition and pricing pressure in larger transactions, and the sales effort and service delivery scope for larger transactions may require us to use additional resources to execute the transactions. These factors could result in lower than anticipated revenue and earnings for a particular period or lower estimated revenue and earnings in future periods.
We face a variety of risks in doing business with U.S. and foreign federal, state, and local governments and government agencies, including risks related to the procurement process, budget constraints and cycles, termination of contracts, and compliance with government contracting requirements
Our customers include the U.S. government and a number of state and local governments and government agencies. There are a variety of risks in doing business with government entities, including:
Procurement. Contracting with public sector customers is highly competitive and can be time-consuming and expensive, requiring us to incur significant up-front time and expense without any assurance that we will win a contract.
Budgetary Constraints and Cycles. Demand and payment for our offerings are impacted by public sector budgetary cycles and funding availability, with funding reductions or delays adversely impacting public sector demand for our offerings.
Termination of Contracts. Public sector customers often have contractual or other legal rights to terminate contracts for convenience or due to a default. If a contract is terminated for convenience, which can occur if the customer’s needs change, we may only be able to collect fees for software or services delivered prior to termination and settlement expenses. If a contract is terminated due to a default, we may not recover even those amounts, and we may be liable for excess costs incurred by the customer for procuring alternative software or services.
Compliance with Government Contracting Requirements. Government contractors are required to comply with a variety of complex laws, regulations, and contractual provisions relating to the formation, administration, or performance of government contracts that give public sector customers substantial rights and remedies, many of which are not typically found in commercial
37
contracts. These may include rights with respect to price protection, the accuracy of information provided to the government, contractor compliance with socio-economic policies, and other terms that are particular to government contracts. Federal, state, and local governments and government agencies routinely investigate and audit contractors for compliance with these requirements. If, as a result of an audit or review, it is determined that we have failed to comply with these requirements, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, fines, and suspensions or debarment from future government business and we may suffer harm to our reputation.
Our customers also include a number of foreign governments and government agencies. Similar procurement, budgetary, contract, and audit risks also apply to our doing business with these entities. In addition, compliance with complex regulations and contracting provisions in a variety of jurisdictions can be expensive and consume significant management resources. In certain jurisdictions, our ability to win business may be constrained by political and other factors unrelated to our competitive position in the market. Each of these difficulties could materially adversely affect our business and results of operations.
We depend on technology licensed to us by third parties, and the loss of this technology could impair our software, delay implementation of our offerings, or force us to pay higher license fees
We license third-party technologies that are incorporated into or utilized by our existing offerings. There can be no assurance that the licenses for such third-party technologies will not be terminated or that we will be able to license third-party technologies for future offerings. In addition, we may be unable to renegotiate acceptable third-party license terms, or we may be subject to infringement liability if third-party technologies that we license is found to infringe intellectual property rights of others. Changes in or the loss of third-party licenses could lead to a material increase in our costs or to our offerings becoming inoperable or their performance being materially reduced. As a result, we may need to incur additional development costs to help ensure continued performance of our offerings, and we may experience a decreased demand for our offerings.
If we are unable to recruit or retain skilled personnel, or if we lose the services of our Chairman of the Board of Directors, President & Chief Executive Officer, our business, operating results, and financial condition could be materially adversely affected
Our future success depends on our continuing ability to attract, train, assimilate, and retain highly skilled personnel. Competition for these employees is intense, and competition may be amplified by evolving restrictions on immigration, travel, or availability of visas for skilled technology workers. We may not be able to retain our current key employees or attract, train, assimilate, and retain other highly skilled personnel in the future. Competition for qualified employees in the technology industry has historically been high, particularly for software engineers and other technical positions. Our future success also depends in large part on the continued service of Michael J. Saylor, our Chairman of the Board of Directors, President & Chief Executive Officer. If we lose the services of Mr. Saylor, or if we are unable to attract, train, assimilate, and retain the highly skilled personnel we need, our business, operating results, and financial condition could be materially adversely affected.
Changes in third-party software or systems or the emergence of new industry standards could materially adversely affect the operation of and demand for our existing software
The functionalities of our software depend in part on the ability of our software to interface with our customers’ IT infrastructure and cloud environments, including software applications, network infrastructure, and end user devices, which are supplied to our customers by various other vendors. When new or updated versions of these third-party software or systems are introduced, or new industry standards in related fields emerge, we may be required to develop updated versions of or enhancements to our software to help ensure that it continues to effectively interoperate with our customers’ IT infrastructure and cloud environments. If new or modified operating systems are introduced or new web standards and technologies or new standards in the field of database access technology emerge that are incompatible with our software, and we are unable to adapt our software on a timely basis, the ability of our software to deliver reports, access customer databases, or otherwise perform key functions could be impaired, which may impact our customers’ satisfaction with our software and potentially result in breach of warranty claims or other claims. For example, the release of the Google Chrome version 80 browser and Microsoft’s recent Windows security update enabling LDAP hardening affected some existing MicroStrategy software deployments, as a result of which we were required to make certain changes to our software. Development efforts to maintain the interoperability of our software with our customers’ IT infrastructure and cloud environments could require substantial capital investment and employee resources, and we may not be able to update our software quickly, cost-effectively, or at all. If we are unable to update our software in a timely manner, demand for our software could be materially adversely affected.
38
The nature of our software makes it particularly susceptible to undetected errors, bugs, or security vulnerabilities, which could cause problems with how the software performs and, in turn, reduce demand for our software, reduce our revenue, and lead to litigation claims against us
Software as complex as ours may contain undetected errors, bugs, or security vulnerabilities. Although we test our software extensively, we have in the past discovered software errors, bugs, or security vulnerabilities in our offerings after their introduction. Despite testing by us and our current and potential customers, errors, bugs, or security vulnerabilities may be found in new offerings or releases after commercial shipments begin. This could result in lost revenue, damage to our reputation, or delays in market acceptance, which could have a material adverse effect on our business, operating results, and financial condition. We may also need to expend resources and capital to correct these defects if they occur.
Our agreements with customers typically contain provisions designed to limit our exposure to product liability, warranty, and other claims. It is possible, however, that these provisions may not be effective under the laws of certain domestic or international jurisdictions and we may be exposed to product liability, warranty, and other claims. A successful product liability claim against us could have a material adverse effect on our business, operating results, and financial condition.
Changes in laws or regulations relating to privacy or the collection, processing, disclosure, storage, localization, or transmission of personal data, or any actual or perceived failure by us or our third-party service providers to comply with such laws and regulations, contractual obligations, or applicable privacy policies, could materially adversely affect our business
Aspects of our business, including our digital identity offering and the cloud environments we manage, involve collecting, processing, disclosing, storing, and transmitting personal data, which are subject to certain privacy policies, contractual obligations, and U.S. federal, U.S. state, and foreign laws, regulations, and directives relating to privacy and data protection. We store a substantial amount of customer and employee data, including personal data, on our networks and other systems and the cloud environments we manage. In addition, the types of data subject to protection as personal data in the European Union, the United States, and elsewhere, including Asia and Latin America, have been expanding. In recent years, the collection and use of personal data by companies have come under increased regulatory and public scrutiny, especially in relation to the collection and processing of sensitive data, such as healthcare, biometric, genetic, financial services, and government data, children’s data, precise location data, and data regarding a person’s race or ethnic origins, political opinions, religious or philosophical beliefs, trade union membership, or sex life or sexual orientation. For example, in the United States, protected health information is subject to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA has been supplemented by the Health Information Technology for Economic and Clinical Health Act with the result of increased civil and criminal penalties for noncompliance. Entities performing certain functions that engage in creating, receiving, maintaining, or transmitting protected health information provided by covered entities and other business associates are directly subject to enforcement under HIPAA. Our access to protected health information through the cloud environments we manage triggers obligations to comply with certain privacy rules and data security requirements under HIPAA.
Any systems failure or security breach that results in the release of, or unauthorized access to, personal data, or any failure or perceived failure by us or our third-party service providers to comply with applicable privacy policies, contractual obligations, or any applicable laws or regulations relating to privacy or data protection, could result in proceedings against us by domestic or foreign government entities or others, including private plaintiffs in litigation. Such proceedings could result in the imposition of sanctions, fines, penalties, liabilities, government orders, and/or orders arising out of private proceedings, requiring that we change our data practices, any of which could have a material adverse effect on our business, operating results, reputation, and financial condition.
Various U.S. federal, U.S. state, and foreign legislative, regulatory, or other government bodies may enact new or additional laws or regulations, or issue rulings that invalidate prior laws or regulations, concerning privacy, data storage, data protection, and cross-border transfer of data that could materially adversely impact our business. For example, in the European Union, the General Data Protection Regulation (“GDPR”) took effect in May 2018. GDPR governs data practices and privacy, establishes requirements regarding the handling and security of personal data, requires disclosure of data breaches to individuals, customers, and data protection authorities in certain circumstances, requires companies to honor data subjects’ requests relating to their personal data, permits regulators to impose fines of up to €20,000,000 or 4% of global annual revenue, whichever is higher, and establishes a private right of action. Furthermore, a new ePrivacy Regulation, regulating electronic communications, was proposed in 2017 and is under consideration by the European Commission, the European Parliament, and the European Council.
Brazil also enacted the Lei Geral de Proteção de Dados (the Brazilian General Data Protection Law), which will impose requirements largely similar to GDPR on products and services offered to users in Brazil, effective in August 2020. We may also be subject to a cybersecurity law that went into effect in China in June 2017 that has uncertain but broad application and imposes a number of new privacy and data security obligations, including a data localization requirement for certain types of data.
39
The state of California has also adopted a new comprehensive privacy law, the California Consumer Protection Act (“CCPA”), modeled largely on GDPR, that took effect on January 1, 2020 and is expected to become enforceable no later than July 1, 2020. We may be required to devote substantial resources to implement and maintain compliance with the CCPA, and noncompliance could carry the threat of regulatory investigations and fines or private litigation. In addition, several states are also now considering bills similar to the CCPA.
Furthermore, the U.S. Congress is considering comprehensive privacy legislation. At this time, it is unclear whether it will in fact pass such a law and if so, when and what it will require and prohibit. Moreover, it is not clear whether any such legislation would give the Federal Trade Commission (“FTC”) any new authority to impose civil penalties for violations of the Federal Trade Commission Act in the first instance, or whether the U.S. Congress will grant the FTC rulemaking authority over privacy and information security.
Complying with these and other changing requirements could cause us or our customers to incur substantial costs or pay substantial fines or penalties, require us to change our business practices, require us to take on more onerous obligations in our contracts, or limit our ability to provide certain offerings in certain jurisdictions, any of which could materially adversely affect our business and operating results. In addition, mechanisms for lawfully transferring personal data from the European Union to the United States and certain other countries are being challenged in European courts, which could lead to uncertainty about the legality of such transfers, or burdensome or inconsistent legal requirements. New laws or regulations restricting or limiting the collection or use of mobile data could also reduce demand for certain of our offerings or require changes to our business practices, which could materially adversely affect our business and operating results.
If we or our third-party service providers experience a security breach and unauthorized parties obtain access to our customers’, prospects’, vendors’, or channel partners’ data, our data, our networks or other systems, or the cloud environments we manage, our offerings may be perceived as not being secure, our reputation may be harmed, demand for our offerings may be reduced, our operations may be disrupted, we may incur significant legal and financial liabilities, and our business could be materially adversely affected
As part of our business, we process, store, and transmit our customers’, prospects’, vendors’, and channel partners’ information and data as well as our own, including in our networks and other systems and the cloud environments we manage. There can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against all current or future security threats. For example, security measures may be breached as a result of technological error, computer viruses, or third-party action, including intentional misconduct by computer hackers, physical break-ins, the actions of state actors, industrial espionage, fraudulent inducement of employees, customers, or channel partners to disclose sensitive information such as user names or passwords, and employee, customer, or channel partner error or malfeasance. We have experienced attempts by third parties to identify and exploit software and service vulnerabilities, penetrate or bypass our security measures, and gain unauthorized access to our or our customers’ or service providers’ cloud environments, networks, and other systems.
A security breach could result in unauthorized access to or disclosure, modification, misuse, loss, or destruction of our customers’, prospects’, vendors’, or channel partners’ data, our data (including our proprietary information, intellectual property, or trade secrets), our networks or other systems, or the cloud environments we manage. Because there are many different security breach techniques and such techniques continue to evolve, we may be unable to anticipate, detect, or mitigate attempted security breaches and implement adequate preventative measures. Third parties may also conduct attacks designed to prevent access to critical data or systems through ransomware or temporarily deny customers access to our cloud environments.
Any security breach or successful denial of service attack could result in a loss of customer confidence in the security of our offerings and damage to our brand, reduce the demand for our offerings, disrupt our normal business operations, require us to spend material resources to investigate or correct the breach, require us to notify affected customers or individuals and/or applicable regulators and others, and provide identity theft protection services to individuals under applicable laws, expose us to legal liabilities, including litigation, regulatory enforcement, and indemnity obligations, and materially adversely affect our revenue and operating results. Our software operates in conjunction with and is dependent on third-party products and components across a broad ecosystem. If there is a security vulnerability in one of these products or components, and if there is a security exploit targeting it, we could face increased costs, liability claims, customer dissatisfaction, reduced revenue, or harm to our reputation or competitive position. These risks will increase as we continue to grow the number and scale of our cloud subscriptions and process, store, and transmit increasingly large amounts of our customers’, prospects’, vendors’, channel partners’, and our own information and data, which may include proprietary or confidential data or personal or other identifying information. Moreover, if a high-profile security breach occurs with respect to an industry peer, our customers and potential customers may lose trust in the security of business intelligence or analytics platforms generally, which could adversely impact our ability to retain existing customers or attract new ones.
40
Our intellectual property is valuable, and any inability to protect it could reduce the value of our offerings and brand
We rely on a combination of copyrights, patents, trademarks, trade secrets, confidentiality procedures, and contractual commitments to protect our intellectual property worldwide. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our software or otherwise obtain and use our intellectual property. Any intellectual property owned by us may be invalidated, circumvented, or challenged. Any of our pending or future intellectual property applications, whether or not currently being challenged, may not be issued with the scope we seek, if at all. Moreover, amendments to and developing jurisprudence regarding U.S. and international law may affect our ability to protect our intellectual property and defend against claims of infringement. In addition, although we generally enter into confidentiality agreements with our employees and contractors, there can be no assurance that the confidential nature of our intellectual property will be maintained. Furthermore, the laws of some countries do not provide the same level of protection of our intellectual property as do the laws of the United States. If we cannot protect our intellectual property against unauthorized copying or use, we may not remain competitive.
Third parties may claim we infringe their intellectual property rights
We periodically receive notices from third parties claiming we are infringing their intellectual property rights, principally patent, copyright, and trademark rights. We expect the number of such claims will increase as we continue to expand our offerings and branding, the number of offerings and level of competition in our industry segments grow, the functionality of offerings overlaps, and the volume of issued patents, patent applications, and copyright and trademark registrations continues to increase. Responding to any infringement claim, regardless of its validity, could:
|
|
• |
be time-consuming, costly, and/or result in litigation; |
|
|
• |
divert management’s time and attention from developing our business; |
|
|
• |
require us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable; |
|
|
• |
require us to stop selling certain of our offerings; |
|
|
• |
require us to redesign certain of our offerings using alternative non-infringing technology or practices, which could require significant effort and expense; |
|
|
• |
require us to rename certain of our offerings or entities; or |
|
|
• |
require us to satisfy indemnification obligations to our customers and channel partners. |
Additionally, while we monitor our use of third-party software, including open source software, we cannot assure you that our processes for controlling such use in our offerings will be effective. If we fail to comply with the terms or conditions associated with third-party software that we use, including any changes to the license terms or conditions that may occur, if we inadvertently embed certain types of third-party software into one or more of our offerings, or if third-party software that we license is found to infringe the intellectual property rights of others, we could subject ourselves to infringement liability and be required to re-engineer our offerings, discontinue the sale of our offerings if re-engineering could not be accomplished on a timely or cost-effective basis, or make available to certain third parties or generally available, in source code form, our proprietary code, any of which could materially adversely affect our business, operating results, and financial condition.
If a successful infringement claim is made against us and we fail to develop or license a substitute technology or brand name, as applicable, our business, results of operations, financial condition, or cash flows could be materially adversely affected.
Because of the rights of our two classes of common stock and because we are controlled by Michael J. Saylor, who beneficially owns the majority of our class B common stock, Mr. Saylor could transfer control of MicroStrategy to a third party without the approval of our Board of Directors or our other stockholders, prevent a third party from acquiring us, or limit the ability of our other stockholders to influence corporate matters
We have two classes of common stock: class A common stock and class B common stock. Holders of our class A common stock generally have the same rights as holders of our class B common stock, except that holders of class A common stock have one vote per share while holders of class B common stock have ten votes per share. As of April 20, 2020, holders of our class B common stock owned 2,035,184 shares of class B common stock, or 72.5% of the total voting power. As of April 20, 2020, Mr. Saylor, our Chairman of the Board of Directors, President & Chief Executive Officer, beneficially owned 2,011,668 shares of class B common stock, or 71.6% of the total voting power. Accordingly, Mr. Saylor can control MicroStrategy through his ability to determine the outcome of elections of our directors, amend our certificate of incorporation and by-laws, and take other actions requiring the vote or consent of stockholders, including mergers, going-private transactions, and other extraordinary transactions and their terms.
41
Our certificate of incorporation allows holders of class B common stock to transfer shares of class B common stock, subject to the approval of stockholders holding a majority of the outstanding class B common stock. Mr. Saylor could, without the approval of our Board of Directors or our other stockholders, transfer voting control of MicroStrategy to a third party. Such a transfer of control could have a material adverse effect on our business, operating results, and financial condition. Mr. Saylor could also prevent a change of control of MicroStrategy, regardless of whether holders of class A common stock might otherwise receive a premium for their shares over the then current market price. In addition, this concentrated control limits stockholders’ ability to influence corporate matters and, as a result, we may take actions that our non-controlling stockholders do not view as beneficial or that conflict with their interests. As a result, the market price of our class A common stock could be materially adversely affected.
Our status as a “controlled company” could make our class A common stock less attractive to some investors or otherwise materially adversely affect our stock price
Because we qualify as a “controlled company” under the corporate governance rules for Nasdaq-listed companies, we are not required to have independent directors comprise a majority of our Board of Directors. Additionally, our Board of Directors is not required to have an independent compensation or nominating committee, or to have the independent directors exercise the nominating function. We are also not required to have the compensation of our executive officers be determined by a compensation committee of independent directors. In addition, we are not required to empower our Compensation Committee with the authority to engage the services of any compensation consultants, legal counsel, or other advisors, or to have the Compensation Committee assess the independence of compensation consultants, legal counsel, and other advisors that it engages.
In light of our status as a controlled company, our Board of Directors has determined not to establish an independent nominating committee or have its independent directors exercise the nominating function and has elected instead to have the Board of Directors be directly responsible for nominating members of the Board. A majority of our Board of Directors is currently comprised of independent directors, and our Board of Directors has established a Compensation Committee comprised entirely of independent directors. The Compensation Committee determines the compensation of our Chief Executive Officer. However, our Board of Directors has authorized our Chief Executive Officer to determine the compensation of executive officers other than himself, rather than having such compensation determined by the Compensation Committee, except that certain performance-based executive officer compensation is determined by the Compensation Committee. Awards under our 2013 Equity Plan are also approved by the Compensation Committee. Additionally, while our Compensation Committee is empowered with the authority to retain and terminate outside counsel, compensation consultants, and other experts or consultants, it is not required to assess their independence.
Although currently a majority of our Board of Directors is comprised of independent directors and the Compensation Committee is comprised entirely of independent directors, we may elect in the future not to have independent directors constitute a majority of the Board of Directors or the Compensation Committee, our Chief Executive Officer’s compensation determined by a compensation committee of independent directors, or a compensation committee of the Board of Directors at all.
Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections that are afforded to stockholders of companies that are required to follow all of the corporate governance rules for Nasdaq-listed companies. Our status as a controlled company could make our class A common stock less attractive to some investors or otherwise materially adversely affect our stock price.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our repurchases of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the periods indicated:
|
|
|
|
(a) |
|
|
|
(b) |
|
|
|
(c) |
|
|
|
(d) |
|
|
||||
|
Period |
|
|
Total Number of Shares (or Units) Purchased |
|
|
|
Average Price Paid per Share (or Unit) (1) |
|
|
|
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1) |
|
|
|
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) |
|
|
||||
|
January 1, 2020 – January 31, 2020 |
|
|
|
0 |
|
|
|
N/A |
|
|
|
|
0 |
|
|
|
$ |
271,012,425 |
|
|
|
|
February 1, 2020 – February 29, 2020 |
|
|
|
202,206 |
|
|
|
$ |
149.32 |
|
|
|
|
202,206 |
|
|
|
$ |
240,818,533 |
|
|
|
March 1, 2020 – March 31, 2020 |
|
|
|
152,427 |
|
|
|
$ |
134.84 |
|
|
|
|
152,427 |
|
|
|
$ |
220,265,129 |
|
|
|
Total: |
|
|
|
354,633 |
|
|
|
$ |
143.10 |
|
|
|
|
354,633 |
|
|
|
$ |
220,265,129 |
|
|
42
|
(1) |
On July 28, 2005, we announced that the Board of Directors authorized us to repurchase up to an aggregate of $300.0 million of our class A common stock from time to time on the open market under the Share Repurchase Program. The Share Repurchase Program was subsequently amended to authorize us to repurchase up to an aggregate of $800.0 million of our class A common stock through April 29, 2023, 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 our working capital, as well as proceeds from any other funding arrangements that we may enter into in the future. As of March 31, 2020, pursuant to the Share Repurchase Program, we had repurchased an aggregate of 5,584,090 shares of our class A common stock at an average price per share of $103.82 and an aggregate cost of $579.7 million. As of March 31, 2020, $220.3 million of our class A common stock remained available for repurchase pursuant to the Share Repurchase Program. The average price per share and aggregate cost amounts disclosed above include broker commissions. |
Item 5. Other Information
Earnings Release
On April 28, 2020, we issued a press release announcing the Company’s financial results for the quarter ended March 31, 2020. A copy of this press release is attached as Exhibit 99.1 to this Quarterly Report. The information regarding this press release in this Item 5 (including Exhibit 99.1) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
Resignation and Appointment of Executive Officers
On April 23, 2020, Lisa Mayr resigned from her position as our Senior Executive Vice President & Chief Financial Officer. In connection with her resignation, on April 26, 2020, Ms. Mayr entered into an agreement with the Company (the “Agreement”). The Agreement provides Ms. Mayr with the following severance payments and benefits: (i) a lump-sum cash payment of $275,000, which is equal to six months of her base salary; and (ii) retention by Ms. Mayr of a one-time reporting bonus of $100,000 paid to her in connection with the commencement of her employment and an advance bonus payment with respect to 2020 of $300,000 that was paid to her in January 2020. The Agreement also includes a general release of claims and certain other covenants in favor of the Company.
The foregoing summary of the Agreement is qualified in its entirety by reference to the full text of the Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report and incorporated herein by reference.
In connection with Ms. Mayr’s resignation, we appointed Phong Le, our Senior Executive Vice President & Chief Operating Officer, to succeed Ms. Mayr as our Chief Financial Officer, effective immediately. In addition to his new responsibilities as Chief Financial Officer, Mr. Le will continue to serve as our Senior Executive Vice President & Chief Operating Officer. Mr. Le will continue to report to Michael Saylor, our Chairman, President & Chief Executive Officer.
Annual Discretionary Cash Bonus Targets for Certain Executive Officers
On April 23, 2020, our Chief Executive Officer established annual discretionary cash bonus targets for the following executive officers of the Company in the amounts set forth opposite their respective names, effective as of January 1, 2020:
|
Phong Q. Le |
|
$ |
750,000 |
|
|
Senior Executive Vice President, Chief Operating Officer & Chief Financial Officer |
|
|
|
|
|
Timothy E. Lang |
|
$ |
500,000 |
|
|
Senior Executive Vice President & Chief Technology Officer |
|
|
|
|
|
W. Ming Shao |
|
$ |
500,000 |
|
|
Senior Executive Vice President & General Counsel |
|
|
|
|
Awards pursuant to the foregoing discretionary cash bonus targets will be determined by our Chief Executive Officer based on his subjective evaluation of the applicable executive’s performance in the context of general economic and industry conditions and Company performance during 2020.
Item 6. Exhibits
43
INDEX TO EXHIBITS
|
Exhibit Number |
|
Description |
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
10.1† |
|
Agreement, dated as of April 26, 2020, by and between the registrant and Lisa Mayr. |
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
99.1 |
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema. |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase. |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase. |
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase. |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase. |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
|
† |
Management contracts and compensatory plans or arrangements. |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
MICROSTRATEGY INCORPORATED |
|
|
|
|
|
|
|
|
|
By: |
/s/ Michael J. Saylor |
|
|
|
|
Michael J. Saylor |
|
|
|
|
Chairman of the Board of Directors, |
|
|
|
|
President & Chief Executive Officer |
|
|
|
|
|
|
|
|
By: |
/s/ Phong Le |
|
|
|
|
Phong Le |
|
|
|
|
Senior Executive Vice President, |
|
|
|
|
Chief Operating Officer & Chief Financial Officer |
Date: April 28, 2020
45