01—Abstract
Summary
Summary of the 10-K filed February 20, 2019. Cited figures are marked; the original filing is the authoritative source.
MicroStrategy Incorporated reported full-year 2018 total revenues of $497.6 milliona, down from $503.8 million in 2017, and net income of $22.5 million, up from $18.2 million.
Income from operations fell sharply to $4.0 millionb from $73.2 million, as sales and marketing expense rose to $205.5 million and research and development expense rose to $102.5 million, both reflecting the company's stated strategy of increasing investment in sales, marketing, and technology. Net income was helped by a $2.0 million income tax benefit, compared with a $53.3 million provision in 2017 that included a one-time $44.0 million charge under the Tax Act. Product licenses revenue declined 5.6% and subscription services revenue declined 8.6%, while product support revenue grew 2.4%.
Operating cash flow fell to $10.6 millionc from $78.3 million, and the company repurchased $111.0 million of class A common stock during 2018. The company concluded that its internal control over financial reporting was not effective as of December 31, 2018, citing material weaknesses tied to the implementation of a Configure Price Quote application and a Professional Services Application, both residing on a third-party CRM platform. KPMG LLP issued an adverse opinion on internal control, though it issued an unqualified opinion on the financial statements.
Management expects to complete remediation before the end of 2019. The filing also notes that Michael J. Saylor controls the company through class B common stock, holding 70.4%d of total voting power as of February 11, 2019, and that the company adopted ASU 2014-09 (revenue recognition) with full retrospective application effective January 1, 2018.
02—Key points
Key Highlights
- Total revenues were $497.6 million in 2018, versus $503.8 million in 2017 and $513.6 million in 2016.
- Income from operations declined to $4.0 million in 2018 from $73.2 million in 2017, as sales and marketing expense rose to $205.5 million and research and development expense rose to $102.5 million.
- Net income was $22.5 million, or $1.97 diluted earnings per share, compared with $18.2 million, or $1.58 per diluted share, in 2017; 2018 results included a $2.0 million income tax benefit.
- Management concluded internal control over financial reporting was not effective as of December 31, 2018, due to material weaknesses; KPMG LLP issued an adverse opinion on internal control.
- Net cash provided by operating activities fell to $10.6 million from $78.3 million, and the company spent $111.0 million repurchasing class A common stock under its 2005 Share Repurchase Program.
- Michael J. Saylor controls the company through class B common stock, holding 70.4% of total voting power as of February 11, 2019.
- Total deferred revenue and advance payments were $183.0 million at December 31, 2018, and the company expects to recognize $176.5 million within the next 12 months.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Strategy kept $0.05.
- Revenue$497.6M100.0%
- Cost of revenue−$99.5M20.0%
- Gross profit$398.1M80.0%
- Operating costs−$394.2M79.2%
- Operating income$4.0M0.8%
- Interest, other & tax$18.5M3.7%
- Net income$22.5M4.5%
Where FY2018 revenue went
$497.6M- Other operating costs: $291.7M, 59% of revenue
- R&D: $102.5M, 21% of revenue
- Cost of revenue: $99.5M, 20% of revenue
- Operating income: $4.0M, 0.8% of revenue
Kept 0.8% as operating incomeOperating income $4.0M · 0.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 20, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $497.64M$503.84M | −1.2% |
| Cost of Revenue | $99.50M$96.65M | +2.9% |
| Gross Profit | $398.14M$407.19M | −2.2% |
| R&D Expenses | $102.50M$78.77M | +30.1% |
| Operating Expenses | $394.16M$333.97M | +18.0% |
| Operating Income | $3.98M$73.22M | −94.6% |
| Net Income | $22.50M$18.20M | +23.7% |
| EPS (Basic) | $1.98$1.59 | +24.5% |
| EPS (Diluted) | $1.97$1.58 | +24.7% |
| Shares Outstanding (Basic) | 11.38M11.44M | −0.6% |
| Shares Outstanding (Diluted) | 11.41M11.55M | −1.2% |
05—Questions
Frequently Asked Questions
Why did operating income fall so much in 2018?
Income from operations dropped to $4.0 million from $73.2 million. The filing attributes the increase in operating expenses to the company's strategy of taking greater advantage of market opportunities by increasing sales and marketing spending, which rose $30.5 million, and research and development spending, which rose $23.7 million. Total operating expenses reached $394.2 million, up from $334.0 million in 2017.
Why was net income higher than operating income in 2018?
Net income of $22.5 million exceeded income from operations of $4.0 million because the company recorded interest income of $11.9 million, other income of $4.6 million, and an income tax benefit of $2.0 million. The 2017 tax line had included a one-time $44.0 million provision related to the Tax Act.
What are the material weaknesses in internal control?
Management identified control deficiencies related to the implementation of the Configure Price Quote application and its impact on the Professional Services Application, both on a third-party CRM platform. The deficiencies involved IT general controls, process-level automated controls, and IT risk assessment. The company did not identify any misstatements in its financial statements from these deficiencies and expects to complete remediation before the end of fiscal 2019.
How concentrated is control of the company?
The company has two classes of common stock, with class B shares carrying ten votes each. As of February 11, 2019, holders of class B stock owned 71.2% of total voting power, and Mr. Saylor individually beneficially owned 70.4% of total voting power. The filing states he can control elections of directors and other stockholder-approved matters, and that the company qualifies as a controlled company under Nasdaq rules.
How much cash does the company have and what are its obligations?
Cash and cash equivalents were $109.9 million and short-term investments were $466.2 million at December 31, 2018. Total future operating lease payments were $195.6 million, and the remaining Transition Tax was $28.9 million, with total contractual obligations of $224.5 million. The filing states that existing cash and short-term investments are sufficient to meet requirements for at least the next 12 months.
06—Continue