01—Abstract
Summary
Summary of the 10-K filed February 26, 2015. Cited figures are marked; the original filing is the authoritative source.
MicroStrategy Incorporated's 10-K for fiscal 2014 reports total revenues of $579.8 milliona, up slightly from $575.9 million in 2013, but income from continuing operations fell to $5.0 million from $26.6 million, with 2014 results including a $14.7 million restructuring charge.
Product license revenue declined 14.8% to $126.0 millionb, while subscription services revenue rose 82.3% to $22.3 million and product support revenue grew 6.6% to $295.7 million. Management attributes the license decline in part to execution challenges during the restructuring, and says the 2014 Restructuring Plan, which reduced the workforce by 777 employees, is expected to deliver annualized pre-tax savings of about $67.2 million. The company identified a material weakness in internal control over financial reporting as of December 31, 2014.
It arose because a third-party service organization did not provide an adequate SOC 1 Type 2 report for its cloud-based professional services automation system, and KPMG issued an adverse opinion on internal control. Management stated that no adjustment to the financial statements was required. Cash and short-term investments were $146.9 millionc in cash and cash equivalents plus $198.5 million in short-term investments at year end, and the company did not repurchase shares in 2014.
Control of the company remains concentrated: Chairman and CEO Michael J. Saylor beneficially owned 2,011,668 class B shares, or 67.9%d of total voting power, as of February 20, 2015. The filing also discloses ongoing patent litigation with DataTern, Inc. and Vasudevan Software, Inc., with outcomes described as not presently determinable.
02—Key points
Key Highlights
- Total revenues were $579.8 million in 2014, compared with $575.9 million in 2013.
- Income from continuing operations, net of tax, was $5.0 million in 2014, down from $26.6 million in 2013; diluted EPS from continuing operations was $0.44 versus $2.35.
- Product licenses revenue fell 14.8% to $126.0 million, while subscription services revenue rose 82.3% to $22.3 million.
- The 2014 Restructuring Plan cut 777 employees, recorded $14.7 million in restructuring costs, and is expected to save about $67.2 million annually pre-tax.
- Management concluded that internal control over financial reporting was not effective at December 31, 2014 due to a material weakness tied to a third-party service provider; KPMG issued an adverse opinion on internal control.
- Michael J. Saylor controls 67.9% of total voting power through class B common stock as of February 20, 2015.
- Deferred revenue and advance payments totaled $223.7 million gross, and the company disclosed $136.4 million of future minimum customer purchase commitments through 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Strategy kept $0.01.
- Revenue$579.8M100.0%
- Cost of revenue−$135.2M23.3%
- Gross profit$444.6M76.7%
- Operating costs−$439.5M75.8%
- Operating income$5.1M0.9%
- Interest, other & tax−$69,0000.0%
- Net income$5.0M0.9%
Where FY2014 revenue went
$579.8M- Other operating costs: $336.2M, 58% of revenue
- Cost of revenue: $135.2M, 23% of revenue
- R&D: $103.4M, 18% of revenue
- Net income: $5.0M, 0.9% of revenue
Kept 0.9% as net incomeNet income $5.0M · 0.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 26, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $579.83M$575.89M | +0.7% |
| Cost of Revenue | $135.21M$138.57M | −2.4% |
| Gross Profit | $444.62M$437.32M | +1.7% |
| R&D Expenses | $103.36M$98.06M | +5.4% |
| Operating Expenses | $439.52M$417.88M | +5.2% |
| Operating Income | $5.10M$19.44M | −73.7% |
| Net Income | $5.04M$83.33M | −94.0% |
| EPS (Basic) | $0.45$7.37 | −93.9% |
| EPS (Diluted) | $0.44$7.37 | −94.0% |
| Shares Outstanding (Basic) | 11.30M11.30M | 0.0% |
| Shares Outstanding (Diluted) | 11.36M11.30M | +0.5% |
05—Questions
Frequently Asked Questions
Why did net income decline so sharply in 2014?
Income from continuing operations fell to $5.0 million from $26.6 million. The filing cites a $14.7 million restructuring charge, a $5.8 million other income figure that partly offset costs, and a 54.4% effective tax rate driven by a higher valuation allowance. Product license revenue also dropped 14.8%, which management partly attributes to execution challenges during the restructuring.
What is the material weakness and how does it affect investors?
A third-party service organization that operates the cloud-based professional services automation system did not provide an adequate SOC 1 Type 2 report for 2014. As a result, the company lacked evidence that controls over billable time and travel expenses were operating effectively. Management said no adjustment to the financial statements was required, but KPMG issued an adverse opinion on internal control, and management plans to implement alternative controls and possibly move off the system.
How concentrated is control of MicroStrategy?
Class B shares carry ten votes each. Holders of class B common stock owned 68.7% of total voting power as of February 20, 2015, and Michael J. Saylor individually held 67.9%. This allows him to determine the outcome of director elections and approve major transactions, and the company relies on the NASDAQ controlled company exemption from certain governance requirements.
What are the company's main legal risks?
The filing describes two patent infringement suits filed in December 2011: one by DataTern, Inc. concerning U.S. Patent No. 6,101,502, and one by Vasudevan Software, Inc. concerning four patents. The company has received indemnification requests from resellers and customers in the DataTern matter. The filing states the outcome of both matters is not presently determinable and that no liability has been accrued.
How much cash and liquidity does the company have?
At December 31, 2014, cash and cash equivalents were $146.9 million and short-term investments were $198.5 million, largely U.S. Treasury securities. Cash provided by operating activities from continuing operations was $14.6 million in 2014, down from $30.6 million. The company repurchased no shares in 2014 and has $454.7 million remaining under its 2005 share repurchase program.
06—Continue