SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community
 
| More

TMCNet:  MICROSTRATEGY INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 13, 2013]

MICROSTRATEGY INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Information This discussion contains forward-looking statements within the meaning of Section 21E of the Exchange Act. For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed under "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.


Overview MicroStrategy is a leading worldwide provider of business intelligence and mobile software. Our business intelligence software platform enables leading organizations to analyze vast amounts of data and distribute business insight throughout the enterprise. Recently, MicroStrategy has invested significantly in a number of additional software technologies designed to help organizations capitalize on four disruptive technology trends: Big Data, Mobile Applications, Cloud-based Services, and Social Networking. These forces are reshaping products, companies, industries, and economies around the world, and we expect them to drive significant new investments from companies and governments in the coming years.

To exploit these macro trends, MicroStrategy has extended its offerings to now include seven product lines: the MicroStrategy Business Intelligence (BI) Platform; the MicroStrategy Mobile Platform; MicroStrategy Cloud; MicroStrategy Express; MicroStrategy Wisdom; MicroStrategy Alert; and MicroStrategy Usher.

The MicroStrategy BI Platform delivers reports and dashboards to business users via a web interface and office productivity software suites. The MicroStrategy Mobile Platform lets organizations rapidly build enterprise-caliber mobile applications needed to mobilize business processes and information across a range of mobile platforms, including the Apple iPhone, iPod touch, iPad, and iPad Mini, and Android-based smart phones and tablets. It enables organizations to build a wide variety of mobile apps that deliver BI, business workflows, transactions, operational system access, and multimedia in compelling custom native apps. MicroStrategy Cloud is a cloud-based BI PaaS offering. It allows enterprises to deploy MicroStrategy BI and mobile apps using MicroStrategy's BI Platform and MicroStrategy's Mobile Platform more quickly and with lower financial risk than equivalent on-premises solutions. MicroStrategy Express is designed to be the fastest way for companies, departments, and small businesses to build and deploy MicroStrategy-caliber BI and mobile apps without the assistance of internal IT professionals. MicroStrategy Express guides business people through a streamlined flow - from data-to-discovery-to-dashboard-to-distribution - and is available as a cloud-based service to allow rapid startup.

MicroStrategy Wisdom is an application for market intelligence that leverages the vast amount of data available in social networks and publicly available databases to create unique views of the consumer and brand landscape.

MicroStrategy Alert is a mobile commerce application designed to help retailers and other merchants compete effectively in the new mobile world by providing a mobile channel for marketing, commerce, and loyalty directly from merchants to their customers. MicroStrategy Usher is a mobile application that provides businesses with a mobile identity network alternative to traditional employee IDs, keys, and proximity cards. It also provides a more effective way to reduce fraud, manage the workforce, improve customer service, and diminish the threat of cyber-attacks.

Our BI and Mobile Platforms, together with related product and support services continue to generate the vast majority of our revenue. During 2012 and 2011, we did not generate significant revenues from MicroStrategy Express, MicroStrategy Wisdom, MicroStrategy Alert, or MicroStrategy Usher.

We operate one non-core business, Angel.com, a provider of cloud-based Consumer Experience Management (CEM) solutions for Interactive Voice Response (IVR) and contact centers.

43 -------------------------------------------------------------------------------- Table of Contents The following tables set forth certain operating highlights (in thousands) for the years ended December 31, 2012, 2011, and 2010: BI Software and Services Other Consolidated Year Ended Year Ended Year Ended December 31, 2012 December 31, 2012 December 31, 2012 Revenues Product licenses $ 147,344 $ 0 $ 147,344 Product support and other services 418,380 0 418,380 Angel.com services 0 28,882 28,882 Total revenues 565,724 28,882 594,606 Cost of revenues Product licenses 5,819 0 5,819 Product support and other services 135,257 0 135,257 Angel.com services 0 11,716 11,716 Total cost of revenues 141,076 11,716 152,792 Gross profit 424,648 17,166 441,814 Operating expenses Sales and marketing 209,975 9,870 219,845 Research and development 88,190 6,375 94,565 General and administrative 93,384 3,867 97,251 Total operating expenses 391,549 20,112 411,661 Income (loss) from operations before financing and other income and income taxes $ 33,099 $ (2,946 ) $ 30,153 BI Software and Services Other Consolidated Year Ended Year Ended Year Ended December 31, 2011 December 31, 2011 December 31, 2011 Revenues Product licenses $ 154,574 $ 0 $ 154,574 Product support and other services 382,594 0 382,594 Angel.com services 0 24,982 24,982 Total revenues 537,168 24,982 562,150 Cost of revenues Product licenses 8,774 0 8,774 Product support and other services 121,924 0 121,924 Angel.com services 0 11,322 11,322 Total cost of revenues 130,698 11,322 142,020 Gross profit 406,470 13,660 420,130 Operating expenses Sales and marketing 231,504 11,525 243,029 Research and development 67,863 4,755 72,618 General and administrative 86,237 3,204 89,441 Total operating expenses 385,604 19,484 405,088 Income (loss) from operations before financing and other income and income taxes $ 20,866 $ (5,824 ) $ 15,042 44 -------------------------------------------------------------------------------- Table of Contents BI Software and Services Other Consolidated Year Ended Year Ended Year Ended December 31, 2010 December 31, 2010 December 31, 2010 Revenues Product licenses $ 126,717 $ 0 $ 126,717 Product support and other services 309,371 0 309,371 Angel.com services 0 18,489 18,489 Total revenues 436,088 18,489 454,577 Cost of revenues Product licenses 7,637 0 7,637 Product support and other services 89,718 0 89,718 Angel.com services 0 8,736 8,736 Total cost of revenues 97,355 8,736 106,091 Gross profit 338,733 9,753 348,486 Operating expenses Sales and marketing 157,459 8,273 165,732 Research and development 47,239 3,327 50,566 General and administrative 79,390 2,209 81,599 Total operating expenses 284,088 13,809 297,897 Income (loss) from operations before financing and other income and income taxes $ 54,645 $ (4,056 ) $ 50,589 The business intelligence market is highly competitive and our results of operations depend on our ability to market and sell offerings that provide customers with greater value than those offered by our competitors.

Organizations recently have sought, and we expect may continue to seek, to standardize their various business intelligence applications around a single software platform. This trend presents both opportunities and challenges for our business. It offers us the opportunity to increase the size of transactions with new customers and to expand the size of our business intelligence installations with existing customers. On the other hand, it presents the challenge that we may not be able to penetrate accounts that a competitor has penetrated or in which a competitor is the incumbent business intelligence application provider.

In addition, companies with industry leading positions in certain software markets, such as Microsoft, Oracle, IBM, and SAP, have incorporated business intelligence capabilities into their product suites. As a result, our offerings need to be sufficiently differentiated from these bundled software offerings to create customer demand for our platform, products, and services.

To address these opportunities and challenges, we have continued to focus on a number of initiatives, including: • concentrating our research and development efforts on maintaining our position as a technology leader by continuing to innovate and lead in enterprise business intelligence, improving the capability of our products to efficiently handle the ever increasing volume of data and user scalability needs of our current and future customers, and adding analytical and end user features to support the increasing levels of sophistication in our customers' business intelligence needs and applications, such as the incorporation of "visual data discovery" user functionality into our interface to support better end user self-service; • introducing MicroStrategy Cloud and MicroStrategy Express; • offering mobile application platforms for creating and deploying BI applications to the expanding community of users of mobile devices; • introducing MicroStrategy Wisdom, MicroStrategy Alert, and MicroStrategy Usher; • focusing our sales and marketing activities to create brand awareness and expand channel partner relationships in an effort to obtain new customers, as well as to expand and strengthen our existing customer base; 45 -------------------------------------------------------------------------------- Table of Contents • maintaining a dedicated performance engineering team, and focusing specific research and development efforts on providing our customers with the highest levels of performance for BI applications of all sizes; and • reorganizing our executive management team in October 2012 to help focus the Company's efforts across our various offerings.

As part of these initiatives, we invested significantly in our research and development, sales and marketing, and consulting capabilities during 2011.

Although we continued to make additional investments in research and development capabilities during 2012, our rate of increase of expenses related to such investments was lower in 2012 as compared to 2011. We expect the level of investments and related expenses in 2013 to be higher than in 2012. We generated net income for the year ended December 31, 2012. However, if our revenues are not sufficient to offset increased operating expenses or we are unable to timely adjust our operating expenses in response to any shortfall in anticipated revenue, our profitability may decrease or we may cease to be profitable or incur operating losses on a quarterly or annual basis.

We believe that effective recruiting, education, and nurturing of human resources are critical to our success and we have traditionally made investments in these areas in order to differentiate ourselves from our competition, increase employee loyalty, and create a culture conducive to creativity, cooperation, and continuous improvement.

In January 2010, we entered into a lease for approximately 142,000 square feet of office space at a location in Northern Virginia that began serving as our new corporate headquarters in October 2010. The lease granted an abatement of base rent until March 2011. In May 2010 and May 2011, we entered into amendments to the lease pursuant to which, in each instance, we leased an additional 24,000 square feet of office space, for a cumulative total of 48,000 square feet of additional office space, at the same location. The May 2010 amendment provided an abatement of base rent on the additional space until July 2011. The May 2011 amendment provided for an abatement of base rent on the additional space until February 2012. The lease, as amended, includes tenant incentives and allowances that we may use for leasehold improvements. The term of the lease, as amended, expires in December 2020. Notwithstanding the rent abatements, we are recognizing lease expense ratably over the term of the lease. As we continued to pay rent and recognize lease expense on our former corporate headquarters through October 2010, we incurred a non-recurring increase in operating expenses of approximately $5.3 million in 2010.

In July 2011, we entered into a lease for a 37.5% fractional interest in a corporate aircraft owned and managed by a fractional interest program operator.

We terminated the fractional lease in September 2012 following the return to service of our owned corporate aircraft in the second quarter of 2012. During 2012, we incurred approximately $2.0 million in general and administrative expenses for the fractional interest lease.

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. We may be unable to adjust spending quickly enough in any particular period to offset any unexpected revenue shortfall in that period. 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.

Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and equity and 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, allowance for doubtful accounts, valuation of property and equipment, litigation and contingencies, and valuation of net deferred tax assets, have a material impact on our financial statements and are discussed in detail throughout our analysis of the results of operations discussed below. In some cases, changes in accounting estimates are reasonably likely to occur from period to period.

46 -------------------------------------------------------------------------------- Table of Contents In addition to evaluating estimates relating to the items discussed above, we also consider other estimates and judgments, including, but not limited to, those related to software development costs, provision for income taxes, and other contingent liabilities, including liabilities that we deem not probable of assertion. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities, and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.

MicroStrategy does not have any material ownership interest in any special purpose or other entities that are not wholly-owned and/or consolidated into our Consolidated Financial Statements. Except as may be the case with respect to the sale of an investment described in Note 6, Cost Method Investment, to the Consolidated Financial Statements, MicroStrategy does not have any material related party transactions.

Revenue recognition. We recognize revenue from sales of software licenses to end users upon: 1) persuasive evidence of an arrangement, as provided by agreements, contracts, purchase orders or other arrangements, generally executed by both parties; 2) existence of a fixed or determinable fee; 3) delivery of the software; and 4) determination that collection is reasonably assured.

When the fees for software upgrades and enhancements, technical support, consulting and education are bundled with the license fee, they are unbundled for revenue recognition purposes using vendor specific objective evidence ("VSOE") of fair value of the elements.

Product support or post contract support ("PCS") revenue is derived from providing technical software support and software updates and upgrades to customers. PCS revenue is recognized ratably over the term of the contract, which in most cases is one year. Our VSOE for PCS, which includes updates, upgrades, and enhancements, is determined based upon the optional stated renewal fee for PCS in the contract, which is the price the customer is required to pay when PCS is renewed. Additionally, the optional stated renewal fee used to establish VSOE for PCS in a software transaction must be above our minimum substantive VSOE rate for PCS. If a stated renewal rate is considered non-substantive, VSOE of PCS has not been established and we recognize all revenue under the arrangement ratably over the PCS period. A minimum substantive VSOE rate is determined based upon an analysis of historical sales of PCS. For a renewal rate to be non-substantive, we believe it must be significantly lower than our minimum VSOE rate. We consider a 10% variance below our minimum VSOE rate to be significant. It is rare for the Company to have an arrangement that includes a renewal rate that is below the minimum VSOE rate.

Revenue from consulting, education, and other services is recognized as the services are performed. Our VSOE for services other than PCS is determined based upon an analysis of our historical sales of each element when sold separately from software.

For new offerings of services other than PCS or service offerings that have not had a sufficient history of sales activity, we initially establish VSOE based on the list price as determined by management with the relevant authority. Each service offering has a single list price in each country where sold.

If VSOE exists for all undelivered elements and there is no such evidence of fair value established for delivered elements, the arrangement fee is first allocated to the elements where evidence of fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of an arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value exists for undelivered elements or until all elements of the arrangement are delivered, subject to certain limited exceptions.

If an arrangement includes acceptance criteria, revenue is not recognized until we can objectively demonstrate that the software or service can meet the acceptance criteria or the acceptance period lapses, whichever occurs earlier.

If a software license arrangement obligates us to deliver specified future products or upgrades, revenue is recognized when the specified future product or upgrades are delivered or when the obligation to deliver specified future products expires, whichever occurs earlier. If a software license arrangement obligates us to deliver unspecified future products, then revenue is recognized on a subscription basis, ratably over the term of the contract.

47-------------------------------------------------------------------------------- Table of Contents License revenue derived from sales to resellers or OEMs who purchase our products for resale is recognized upon sufficient evidence that the products have been sold to the ultimate end users, provided all other revenue recognition criteria have been met. Our standard software license and reseller agreements do not include any return rights other than the right to return non-conforming products for repair or replacement under our standard product warranties. During the last three fiscal years, we have not experienced any product returns related to warranty claims.

The Company generally offers either commercial discounts or referral fees to its channel partners, depending on the nature of services performed. Revenue recognized from transactions with channel partners involved in resale or distribution activities is recorded net of any commercial discounts provided to them. Referral fees paid to channel partners not involved in resale or distribution activities are expensed as cost of revenues and have been immaterial to date.

Our standard software license agreements do not include any price protection or similar rights. We offer price protection to certain government agencies as required by applicable laws and regulations. For example, transactions under our General Services Administration Federal Supply Schedule contract must comply with the Price Reductions clause. In addition, certain government agencies have the right to cancel contracts for "convenience." During the last three fiscal years, amounts related to price protection or similar rights clauses and contracts cancelled for convenience were not significant.

Amounts collected prior to satisfying the Company's revenue recognition criteria are included in deferred revenue and advance payments in the accompanying Consolidated Balance Sheets.

Software revenue recognition requires judgment, including a determination that collectibility is reasonably assured, the fee is fixed and determinable, whether a software arrangement includes multiple elements, and if so, whether VSOE exists for those elements. Judgment is also required to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products.

The Company also generates subscription services revenues from MicroStrategy Cloud, a cloud-based BI PaaS. Subscription services revenues include subscription fees from customers for access to the full suite of MicroStrategy BI technology, database services, and data integration services. Our standard arrangements with customers generally do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract, following completion of the set-up service. Any related set-up service fees are recognized ratably over the longer of the contract period or the estimated average life of the customer relationship.

Our Cloud subscription services are generally offered as stand-alone arrangements or as part of arrangements that include professional services. If deliverables in a multiple-element arrangement have stand-alone value upon delivery, the Company accounts for each such deliverable separately. The Company has concluded that its subscription services and its professional services each have stand-alone value. When the Company enters into multiple-element arrangements that include Cloud subscription services and professional services, the total arrangement consideration is allocated to each of the deliverables based on the relative selling price hierarchy. The Company determines the relative selling price for a deliverable using VSOE of selling price, if it exists. If VSOE for a deliverable does not exist, the Company uses third-party evidence of selling price ("TPE"), if it exists. If neither VSOE nor TPE exists for a deliverable, the Company uses its best estimate of selling price ("BESP"). For professional services, the Company has established VSOE. For Cloud subscription services, the Company has not established VSOE due to the fact that the offering is relatively new. Accordingly, the Company uses TPE, when available, or, if TPE is not available, BESP to determine the relative selling price of Cloud subscription services.

Amounts, upon invoicing, are recorded in accounts receivable and either deferred revenue or revenue, depending on whether the applicable revenue recognition criteria have been met.

During 2012 and 2011, we did not generate significant revenues from MicroStrategy Express, MicroStrategy Wisdom, MicroStrategy Alert, or MicroStrategy Usher.

48 -------------------------------------------------------------------------------- Table of Contents Allowance for doubtful accounts. We have established an allowance for doubtful accounts, which represents our best estimate of probable losses inherent in the accounts receivable balances. We evaluate specific accounts when we become aware that a customer may not be able to meet its financial obligations due to deterioration of its liquidity or financial viability, credit ratings, or bankruptcy. In addition, we periodically adjust this allowance based upon management's review and assessment of the aging of receivables. While actual credit losses have historically been within management's expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates we have in the past. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Property and Equipment. Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows: three years for computer equipment and purchased software, five years for office equipment and automobiles, and ten years for office furniture and our corporate aircraft, which has an estimated salvage value of 70%. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the term of the lease, whichever is shorter. We periodically evaluate the appropriateness of the estimated useful lives and salvage value of all property and equipment. Any change in the estimated useful life or salvage value is treated as a change in estimate and accounted for prospectively in the period of change.

Expenditures for maintenance and repairs are charged to expense as incurred, except for certain costs related to the aircraft. The costs of normal, recurring, or periodic repairs and maintenance activities related to the aircraft are expensed as incurred. The cost of planned major maintenance activities ("PMMA") may be treated differently because those activities may involve the acquisition of additional aircraft components or the replacement of existing aircraft components. PMMA are performed periodically based on passage of time and/or use of the aircraft. The classification of a maintenance activity as part of PMMA requires judgment and can affect the amount of expense we recognize in any particular period. The cost of each PMMA is expected to be capitalized and amortized over the period until the next scheduled PMMA.

When assets are retired or sold, the capitalized cost and related accumulated depreciation are removed from the property and equipment accounts and any resulting gain or loss is recognized in the results of operations.

Eligible internal-use software development costs are capitalized subsequent to the completion of the preliminary project stage. Such costs include external direct material and service costs, employee payroll, and payroll-related costs.

After all substantial testing and deployment is completed and the software is ready for its intended use, capitalization ceases and internal-use software development costs are amortized using the straight-line method over the estimated useful life of the software, generally three years.

We review long-lived assets, including intangible assets, for impairment annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an asset is impaired, the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset.

Litigation and Contingencies. We are subject to various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.

We have 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, we may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.

Income Taxes. In determining our net deferred tax assets and valuation allowances, management is required to make judgments and estimates related to projections of domestic and foreign profitability, the timing and extent of the utilization of net operating loss carryforwards, changes in applicable tax laws, transfer pricing methods, and prudent and feasible tax planning strategies.

However, judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections, which could impact the carrying value of our net deferred tax assets in future periods.

49 -------------------------------------------------------------------------------- Table of Contents As a global company with subsidiaries in many countries, we are required to calculate and provide for estimated income tax liabilities for each of the tax jurisdictions in which we operate. This process involves estimating current tax liabilities and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, changes in tax laws related to the utilization of net operating losses in various jurisdictions, changes in tax rates, and changes resulting from tax audits can all affect the overall effective income tax rate which, in turn, impacts the overall level of income tax expense and net income. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

We consider past and future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance. If we determine that we would not be able to realize all or part of net deferred tax assets in the future, an adjustment to deferred tax assets would reduce income in the period that such determination was made.

50 -------------------------------------------------------------------------------- Table of Contents Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations 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. As currency rates change from quarter to quarter and year over year, our results of operations may be impacted. The table below summarizes the impact (in thousands) of fluctuations in foreign currency exchange rates on certain components of our Consolidated Statements of Operations by showing the increase (decrease) in revenues or expenses, as applicable, from the prior year. The term "international" refers to operations outside of the United States and Canada.

Years Ended December 31, 2012 2011 2010 International product licenses revenues $ (3,973 ) $ 2,320 $ (1,386 ) International product support revenues (7,732 ) 5,411 (1,069 ) International other services revenues (4,093 ) 3,127 (258 ) Cost of product support revenues (216 ) 167 47 Cost of other services revenues (3,898 ) 2,020 (189 ) Sales and marketing expenses (5,649 ) 5,179 (428 ) Research and development expenses 270 636 29 General and administrative expenses (1,241 ) 1,086 75 For example, if there had been no change to foreign currency exchange rates from 2011 to 2012, international product licenses revenues would have been $70.8 million rather than $66.8 million for the year ended December 31, 2012. If there had been no change to foreign currency exchange rates from 2011 to 2012, sales and marketing expenses for our BI Software and Services business would have been $215.6 million rather than $210.0 million for the year ended December 31, 2012.

51 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the years ended December 31, 2012, 2011, and 2010 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 revenues. The following table sets forth product licenses revenues (in thousands) and related percentage changes in these revenues for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011Product Licenses Revenues: Domestic $ 80,508 $ 90,585 $ 72,937 -11.1 % 24.2 % International 66,836 63,989 53,780 4.4 % 19.0 % Total product licenses revenues $ 147,344 $ 154,574 $ 126,717 -4.7 % 22.0 % The following table sets forth a summary, grouped by size, of the number of recognized product licenses transactions for the periods indicated: Years Ended December 31, 2012 2011 2010 Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period: More than $1.0 million in licenses revenue recognized 19 16 12 Between $0.5 million and $1.0 million in licenses revenue recognized 31 41 28 Total 50 57 40 Domestic: More than $1.0 million in licenses revenue recognized 15 11 7 Between $0.5 million and $1.0 million in licenses revenue recognized 18 29 17 Total 33 40 24 International: More than $1.0 million in licenses revenue recognized 4 5 5 Between $0.5 million and $1.0 million in licenses revenue recognized 13 12 11 Total 17 17 16 52 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the recognized revenue (in thousands) attributable to product licenses transactions, grouped by size, and related percentage changes in recognized revenues for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 Product Licenses Revenue Recognized in the Applicable Period: More than $1.0 million in licenses revenue recognized $ 39,103 $ 26,883 $ 22,739 45.5 % 18.2 % Between $0.5 million and $1.0 million in licenses revenue recognized 20,942 26,638 18,766 -21.4 % 41.9 % Less than $0.5 million in licenses revenue recognized 87,299 101,053 85,212 -13.6 % 18.6 % Total 147,344 154,574 126,717 -4.7 % 22.0 % Domestic: More than $1.0 million in licenses revenue recognized 25,709 17,536 14,034 46.6 % 25.0 % Between $0.5 million and $1.0 million in licenses revenue recognized 12,172 18,193 11,279 -33.1 % 61.3 % Less than $0.5 million in licenses revenue recognized 42,627 54,856 47,624 -22.3 % 15.2 % Total 80,508 90,585 72,937 -11.1 % 24.2 % International: More than $1.0 million in licenses revenue recognized 13,394 9,347 8,705 43.3 % 7.4 % Between $0.5 million and $1.0 million in licenses revenue recognized 8,770 8,445 7,487 3.8 % 12.8 % Less than $0.5 million in licenses revenue recognized 44,672 46,197 37,588 -3.3 % 22.9 % Total $ 66,836 $ 63,989 $ 53,780 4.4 % 19.0 % Product licenses revenues decreased $7.2 million during 2012, as compared to the prior year. Product licenses revenues increased $27.9 million during 2011, as compared to the prior year. For the years ended December 31, 2012, 2011, and 2010, product licenses transactions with more than $0.5 million in recognized revenue represented 40.8%, 34.6%, and 32.8%, respectively, of our product licenses revenues. During 2012, our top three product licenses transactions totaled $13.5 million in recognized revenue, or 9.2% of total product licenses revenues, compared to $9.5 million and $8.3 million, or 6.2% and 6.5% of total product licenses revenues, during 2011 and 2010, respectively.

Domestic product licenses revenues. Domestic product licenses revenues decreased $10.1 million during 2012, as compared to the prior year, primarily due to a decrease in the number of transactions with between $0.5 million and $1.0 million in recognized revenue and a decrease in the average deal size of transactions with less than $0.5 million in recognized revenue, partially offset by an increase in the number and average deal size of transactions with more than $1.0 million in recognized revenue.

Domestic product licenses revenues increased $17.6 million during 2011, as compared to the prior year, primarily due to an increase in the number of transactions with more than $0.5 million in recognized revenue and an increase in the average deal size of transactions with less than $0.5 million in recognized revenue.

International product licenses revenues. International product licenses revenues increased $2.8 million during 2012, as compared to the prior year, primarily due to an increase in the average deal size of transactions with more than $1.0 million in recognized revenue.

International product licenses revenues increased $10.2 million during 2011, as compared to the prior year, primarily due to an increase in the average deal size of transactions across each group size.

53-------------------------------------------------------------------------------- Table of Contents Product support and other services revenues. The following table sets forth product support and other services revenues (in thousands) and related percentage changes in these revenues for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 Product Support and Other Services Revenues: Product Support Domestic $ 149,738 $ 136,162 $ 121,394 10.0 % 12.2 % International 112,310 107,385 89,411 4.6 % 20.1 % Total product support revenues 262,048 243,547 210,805 7.6 % 15.5 % Consulting Domestic 81,796 67,321 51,914 21.5 % 29.7 % International 52,586 53,543 30,291 -1.8 % 76.8 % Total consulting support revenues 134,382 120,864 82,205 11.2 % 47.0 % Education 18,832 18,107 16,361 4.0 % 10.7 % Subscription services 3,118 76 0 4002.6 % n/a Angel.com services 28,882 24,982 18,489 15.6 % 35.1 % Total product support and other services revenues $ 447,262 $ 407,576 $ 327,860 9.7 % 24.3 % Product support revenues. Product support revenues are derived from providing technical software support and software updates and upgrades to customers.

Product support revenues are recognized ratably over the term of the contract, which in most cases is one year. Product support revenues increased $18.5 million during 2012, as compared to the prior year, primarily due to an increase in the number of product support contracts and an overall increase in renewal pricing on existing support contracts. Product support revenues increased $32.7 million during 2011, as compared to the prior year, primarily due to an increase in the number of product support contracts.

Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased during 2012 and 2011, as compared to the prior years, primarily due to an increase in billable hours.

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 increased during 2012, as compared to the prior year, primarily due to an increase in new customers requiring custom course development, as well as an increase in both new and renewed perennial education passes for existing customers. Education revenues increased during 2011, as compared to the prior year, primarily due to an increase in the number of students trained.

Subscription services revenues. Subscription services revenues are derived from Cloud services that we provide to our customers and are recognized on a subscription basis over the service period of the contract. Subscription services revenues were $3.1 million and $0.1 million during 2012 and 2011, respectively. Because we only began to offer Cloud services in the second half of 2011, we did not recognize subscription services revenues during 2010.

Angel.com services revenues. Angel.com services revenues increased $3.9 million during 2012, as compared to the prior year, due to a $3.5 million increase in revenues as a result of an increase in the usage of Angel.com's interactive voice response services and a $0.4 million increase in revenues as a result of an increase in professional services rendered. Angel.com services revenues increased $6.5 million during 2011, as compared to the prior year, due to a $4.5 million increase in revenues as a result of an increase in the usage of Angel.com's interactive voice response services and a $2.0 million increase in revenues as a result of an increase in professional services rendered.

54-------------------------------------------------------------------------------- Table of Contents Costs and Expenses Cost of revenues. The following table sets forth cost of revenues (in thousands) and related percentage changes in cost of revenues for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 Cost of Revenues: Product licenses $ 5,819 $ 8,774 $ 7,637 -33.7 % 14.9 % Product support 15,532 13,417 11,280 15.8 % 18.9 % Consulting 105,720 99,008 70,527 6.8 % 40.4 % Education 7,384 8,690 7,911 -15.0 % 9.8 % Subscription services 6,621 809 0 718.4 % n/a Angel.com services 11,716 11,322 8,736 3.5 % 29.6 % Total cost of revenues $ 152,792 $ 142,020 $ 106,091 7.6 % 33.9 % Cost of product licenses revenues. Cost of product licenses revenues consists of amortization of capitalized software development costs and the costs of product manuals, media, and royalties paid to third-party software vendors. Capitalized software development costs are generally amortized over a useful life of three years.

Cost of product licenses revenues decreased during 2012, as compared to the prior year, primarily due to a decrease in amortization of capitalized software development costs related to MicroStrategy 9, which became fully amortized in March 2012, partially offset by an increase in amortization of capitalized software development costs related to the release of MicroStrategy 9.3 in September 2012. We expect to amortize the remaining balance of our products' capitalized software development costs as of December 31, 2012 ratably over the applicable remaining amortization periods as follows: Capitalized Software Balance as of Remaining December 31, Amortization 2012 Period (in thousands) (in months) MicroStrategy 9.2 $ 1,573 15 MicroStrategy 9.2.1 1,090 18 MicroStrategy 9.3 7,333 33 MicroStrategy Mobile 364 6 Total capitalized software development costs $ 10,360 Cost of product licenses revenues increased during 2011, as compared to the prior year, primarily due to the increase in amortization of capitalized software development costs related to the release of MicroStrategy 9.2 in March 2011.

Cost of product support revenues. Cost of product support revenues consists of product support personnel and related overhead costs. Cost of product support revenues increased $2.1 million during 2012, as compared to the prior year, primarily due to a $1.6 million increase in compensation and related costs associated with an increase in staffing levels to support an increased customer base. Product support headcount increased 14.5% to 182 at December 31, 2012 from 159 at December 31, 2011.

Cost of product support revenues increased $2.1 million during 2011, as compared to the prior year, primarily due to a $1.8 million increase in compensation and related costs associated with an increase in staffing levels to support an increased customer base. Product support headcount increased 10.4% to 159 at December 31, 2011 from 144 at December 31, 2010.

Cost of consulting revenues. Cost of consulting revenues consists of personnel and related overhead costs. Cost of consulting revenues increased $6.7 million during 2012, as compared to the prior year, primarily due to a $6.5 million increase in compensation and related costs, a $0.7 million increase in travel and entertainment expenditures, and a $0.4 million increase in facility and other related support costs, partially offset by a $0.8 million decrease in subcontractor costs. Consulting headcount decreased 1.4% to 824 at December 31, 2012 from 836 at December 31, 2011.

55-------------------------------------------------------------------------------- Table of Contents Cost of consulting revenues increased $28.5 million during 2011, as compared to the prior year, primarily due to a $22.9 million increase in compensation and related costs due to an increase in staffing levels, a $4.8 million increase in travel and entertainment expenditures, and a $1.9 million increase in facility and other related support costs, partially offset by a $1.2 million decrease in subcontractor costs. Consulting headcount increased 18.2% to 836 at December 31, 2011 from 707 at December 31, 2010.

Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. Cost of education revenues decreased $1.3 million during 2012, as compared to the prior year, primarily due to a $0.7 million decrease in compensation and related costs associated with a decrease in staffing levels, a $0.3 million decrease in travel and entertainment expenditures, and a $0.2 million decrease in subcontractor costs. Education headcount decreased 11.1% to 48 at December 31, 2012 from 54 at December 31, 2011.

Cost of education revenues increased $0.8 million during 2011, as compared to the prior year, due to a $0.7 million increase in compensation and related costs associated with an increase in staffing levels and a $0.2 million increase in travel and entertainment expenditures, partially offset by a $0.1 million decrease in facility and other related support costs. Education headcount increased 1.9% to 54 at December 31, 2011 from 53 at December 31, 2010.

Cost of subscription services revenues. Cost of subscription services revenues consists of facility and other related support costs, and personnel and related overhead costs. Cost of subscription services revenues were $6.6 million during 2012, of which $3.2 million were due to facility and other related support costs, $2.1 million were due to compensation and related costs, $1.0 million were due to subcontractor costs, and $0.2 million were due to travel and entertainment expenditures. Subscription services headcount was 15 at December 31, 2012.

Cost of subscription services revenues were $0.8 million during 2011, of which $0.5 million were due to compensation and related costs and $0.3 million were due to facility and other related support costs. Because we only began to offer Cloud services in the second half of 2011, we did not have significant headcount associated with subscription services at December 31, 2011.

Cost of Angel.com services revenues. Cost of Angel.com services revenues includes hardware and hosting costs, and personnel and related overhead costs.

The increase in cost of Angel.com services revenues during 2012, as compared to the prior year, was primarily due to an increase in customer demand, which required us to purchase additional capacity, and an increase in facility and other related support costs. The increase in cost of Angel.com services revenues during 2011, as compared to the prior year, was primarily due to an increase in compensation and related costs associated with an increase in staffing levels, as well as an increase in consulting and advisory costs, both to support an increased customer base. Angel.com consulting and technical support headcount was 28 at both December 31, 2012 and December 31, 2011. Angel.com consulting and technical support headcount increased 16.7% to 28 at December 31, 2011 from 24 at December 31, 2010.

Sales and marketing expenses. Sales and marketing expenses consists 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 in these expenses for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 BI Software and Services $ 209,975 $ 231,504 $ 157,459 -9.3 % 47.0 % Angel.com 9,870 11,525 8,273 -14.4 % 39.3 % Total $ 219,845 $ 243,029 $ 165,732 -9.5 % 46.6 % Sales and marketing expenses for BI Software and Services. Sales and marketing expenses for BI Software and Services decreased $21.5 million during 2012, as compared to the prior year, primarily due to a $19.4 million decrease in compensation and related costs due to a decrease in staffing levels, a $1.5 million decrease in travel and entertainment expenditures, and a $0.8 million decrease in consulting and advisory costs. Sales and marketing headcount for BI Software and Services decreased 11.3% to 725 at December 31, 2012 from 817 at December 31, 2011.

56 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses for BI Software and Services increased $74.0 million during 2011, as compared to the prior year, primarily due to a $52.9 million increase in compensation and related costs due to an increase in staffing levels, higher compensation levels, and increased variable compensation, a $8.2 million increase in marketing and advertising costs and computer supplies costs due to increased sponsorships as well as an increased number of marketing events to promote our social networking offerings and MicroStrategy Mobile for the iPhone and iPad, a $6.6 million increase in travel and entertainment expenditures, a $4.6 million increase in facility and other related support costs, and a $1.6 million increase in consulting and advisory costs. Sales and marketing headcount for BI Software and Services increased 16.9% to 817 at December 31, 2011 from 699 at December 31, 2010.

Sales and marketing expenses for Angel.com. The decrease in Angel.com sales and marketing expenses during 2012, as compared to the prior year, was primarily due to decreases in compensation and related costs, decreases in travel and entertainment expenditures, and decreases in consulting and advisory costs.

Angel.com sales and marketing headcount increased 9.1% to 48 at December 31, 2012 from 44 at December 31, 2011. The increase in Angel.com sales and marketing expenses during 2011, as compared to the prior year, was primarily due to increases in compensation and related costs and an increase in travel and entertainment expenditures. Angel.com sales and marketing headcount decreased 12.0% to 44 at December 31, 2011 from 50 at December 31, 2010.

General and administrative expenses. General and administrative expenses consists of personnel and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as associated third-party consulting, legal, and other professional fees.

The following table sets forth general and administrative expenses (in thousands) and related percentage changes in these expenses for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 BI Software and Services $ 93,384 $ 86,237 $ 79,390 8.3 % 8.6 % Angel.com 3,867 3,204 2,209 20.7 % 45.0 % Total $ 97,251 $ 89,441 $ 81,599 8.7 % 9.6 % General and administrative expenses for BI Software and Services. General and administrative expenses for BI Software and Services increased $7.1 million during 2012, as compared to the prior year, primarily due to a $8.3 million increase in legal, consulting, and other advisory costs, a $3.2 million increase in compensation and related costs associated with increased staffing levels, a $0.8 million increase in facility and other related support costs, and a $0.2 million increase in other operating costs of our owned corporate aircraft and our leased fractional interest in a corporate aircraft, partially offset by a $5.3 million decrease in recruiting costs. General and administrative headcount for BI Software and Services increased 5.9% to 428 at December 31, 2012 from 404 at December 31, 2011.

General and administrative expenses for BI Software and Services increased $6.9 million during 2011, as compared to the prior year, primarily due to a $5.7 million increase in compensation and related costs associated with increased staffing levels, a $0.9 million increase in recruiting costs, a $1.5 million increase attributable to operating costs of our leased fractional interest in a corporate aircraft, a $1.1 million increase in legal, consulting, and other advisory costs, and a $0.6 million increase in travel and entertainment expenditures, partially offset by a $2.8 million decrease in facility and other related support costs primarily due to the increased rent expense incurred during 2010 for carrying two headquarters leases. General and administrative headcount for BI Software and Services increased 12.5% to 404 at December 31, 2011 from 359 at December 31, 2010.

General and administrative expenses for Angel.com. The increase in Angel.com general and administrative expenses during 2012, as compared to the prior year, was primarily due to increases in facility and other related support costs, including depreciation expense, and compensation and related costs. Angel.com general and administrative headcount increased to 9 at December 31, 2012 from 5 at December 31, 2011. The increase in Angel.com general and administrative expenses during 2011, as compared to the prior year, was primarily due to increases in recruiting costs, facility and other related support costs, including depreciation expense, and compensation and related costs. Angel.com general and administrative headcount increased to 5 at December 31, 2011 from 4 at December 31, 2010.

57 -------------------------------------------------------------------------------- Table of Contents Research and development expenses. Research and development expenses consists of the personnel costs for our software engineering personnel, depreciation of equipment, and other related costs.

The following table summarizes research and development expenses and amortization of capitalized software development costs (in thousands) and related percentage changes in these expenses for the periods indicated: Years Ended December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 Gross research and development expenses: BI Software and Services research and development activities $ 96,338 $ 73,770 $ 49,424 30.6 % 49.3 % Angel.com research and development activities 6,375 4,755 3,327 34.1 % 42.9 % Total research and development expenses before capitalized software development costs $ 102,713 $ 78,525 $ 52,751 30.8 % 48.9 % Capitalized software development costs (8,148 ) (5,907 ) (2,185 ) 37.9 % 170.3 % Total research and development expenses $ 94,565 $ 72,618 $ 50,566 30.2 % 43.6 % Amortization of capitalized software development costs included in cost of product licenses revenues $ 4,819 $ 7,934 $ 6,557 -39.3 % 21.0 % Total research and development expenses, before capitalization of software development costs, increased $24.2 million, or 30.8%, during 2012, as compared to the prior year, primarily due to increases in compensation and related costs due to an increase in staffing levels and increases in facility and other related support costs. During 2012, we capitalized $8.1 million in costs associated with the development of our MicroStrategy 9.3 software, as compared to $5.9 million in software development costs associated with the development of our MicroStrategy 9.2 and 9.2.1 software that were capitalized in the prior year. Research and development headcount for BI Software and Services increased 24.5% to 888 at December 31, 2012 from 713 at December 31, 2011. Angel.com research and development headcount decreased 7.1% to 26 at December 31, 2012 from 28 at December 31, 2011.

Total research and development expenses, before capitalization of software development costs, increased $25.8 million, or 48.9%, during 2011, as compared to the prior year, primarily due to increases in compensation and related costs due to an increase in staffing levels. During 2011, we capitalized $5.9 million in costs associated with the development of our MicroStrategy 9.2 and 9.2.1 software, as compared to $2.2 million in software development costs associated with the development of our MicroStrategy Mobile that were capitalized in the prior year. Research and development headcount for BI Software and Services increased 49.2% to 713 at December 31, 2011 from 478 at December 31, 2010.

Angel.com research and development headcount increased 27.3% to 28 at December 31, 2011 from 22 at December 31, 2010.

During 2012, our research and development personnel were focused on the following: 61.1% on the MicroStrategy BI Platform, including the MicroStrategy Mobile Platform, and 38.9% on other research and development, including MicroStrategy Cloud, MicroStrategy Express, MicroStrategy Wisdom, MicroStrategy Alert, MicroStrategy Usher, and our Angel.com business.

During 2011, our research and development personnel were focused on the following projects: 61.0% on MicroStrategy 9.2, including MicroStrategy Mobile, and 39.0% on other research and development, including MicroStrategy Cloud, MicroStrategy Wisdom, MicroStrategy Alert, MicroStrategy Usher, our Angel.com business, and internal information technology initiatives.

Provision for Income Taxes During 2012 and 2011, we recorded a provision for income taxes from operations of $8.7 million and $1.4 million, respectively, resulting in an effective tax rate from operations of 29.7% and 7.0%, respectively. The increase in the Company's effective tax rate from operations in 2012, as compared to the prior year, was primarily due to stronger financial results in the U.S., where the tax rate is higher. In addition, during the twelve months ended December 31, 2011, the Company recorded significant tax benefits resulting from a favorable settlement with the U.K. tax authority and the release of valuation allowances in foreign jurisdictions, whereas no such benefits were recorded during the twelve months ended December 31, 2012.

58-------------------------------------------------------------------------------- Table of Contents As of December 31, 2012, we had U.S. net operating loss carryforwards of $71.2 million and foreign net operating loss carryforwards of $3.6 million. We were not able, under U.S. GAAP, to recognize a deferred tax asset related to $60.1 million of the U.S. net operating loss carryforwards that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by $23.4 million if and when such U.S. net operating loss carryforwards are ultimately utilized. As of December 31, 2012, U.S. and foreign net operating loss carryforwards, other temporary differences and carryforwards, and credits resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of $23.5 million. As of December 31, 2012, we had a valuation allowance of $0.2 million related to certain foreign net operating loss carryforward tax assets that, in our present estimation, more likely than not will not be realized.

Except as discussed below, we intend to indefinitely reinvest our undistributed earnings of certain foreign subsidiaries. Therefore, the annualized effective tax rate applied to our pre-tax income does not include any provision for U.S.

federal and state income taxes on the amount of the undistributed foreign earnings. U.S. federal tax laws, however, require us to include in our U.S.

taxable income certain investment income earned outside of the U.S. in excess of certain limits ("Subpart F deemed dividends"). Because Subpart F deemed dividends are already required to be recognized in our U.S. federal income tax return, we regularly repatriate to the U.S. Subpart F deemed dividends and no additional tax is incurred on the distribution. We generated $2.5 million of Subpart F income in 2011 and repatriated that amount in 2012 with no additional tax. As of December 31, 2012 and December 31, 2011, the amount of cash and cash equivalents held by U.S. entities was $40.6 million and $35.7 million, respectively, and by non-U.S. entities was $183.8 million and $163.9 million, respectively. If the cash and cash equivalents held by non-U.S. entities were to be repatriated to the U.S., we would generate U.S. taxable income to the extent of our undistributed foreign earnings, which amounted to $184.0 million at December 31, 2012. Although the tax impact of repatriating these earnings is difficult to determine, we would not expect the maximum effective tax rate that would be applicable to such repatriation to exceed the U.S. statutory rate of 35.0%, after considering applicable foreign tax credits.

During 2010, we recorded a provision for income taxes from continuing operations of $11.2 million, resulting in an effective tax rate of 20.3%. Our effective tax rate decreased during 2011, as compared to 2010, primarily due to an increased proportion of foreign income taxed at lower rates, the benefit from the release of valuation allowances in foreign jurisdictions, and changes in estimates of certain permanent tax differences from previous estimates.

Deferred Revenue and Advance Payments Deferred revenue and advance payments represent product support, subscription services, and other services fees that are collected in advance and recognized over the contract service period and product licenses revenues relating to multiple element software arrangements that include future deliverables.

The following table summarizes deferred revenue and advance payments (in thousands), as of: December 31, 2012 2011 2010 Current: Deferred product licenses revenue $ 12,252 $ 14,876 $ 13,881 Deferred product support revenue 145,343 143,165 129,766 Deferred subscription services revenue 6,569 423 0 Deferred other services revenue 16,843 19,974 18,136 Gross current deferred revenue and advance payments 181,007 178,438 161,783 Less: unpaid deferred revenue (79,119 ) (75,239 ) (72,452 ) Net current deferred revenue and advance payments $ 101,888 $ 103,199 $ 89,331 Non-current: Deferred product licenses revenue $ 3,280 $ 3,528 $ 3,732 Deferred product support revenue 8,205 9,453 8,436 Deferred subscription services revenue 696 725 0 Deferred other services revenue 1,184 235 321 Gross non-current deferred revenue and advance payments 13,365 13,941 12,489 Less: unpaid deferred revenue (4,542 ) (3,100 ) (4,611 ) Net non-current deferred revenue and advance payments $ 8,823 $ 10,841 $ 7,878 59 -------------------------------------------------------------------------------- Table of Contents We offset our accounts receivable and deferred revenue for any unpaid items included in deferred revenue and advance payments.

Total gross deferred revenue and advance payments increased $2.0 million in 2012, as compared to the prior year, primarily due to an increase in the number of technical support and subscription services contracts in our installed customer base, partially offset by the recognition of previously deferred product licenses and other services revenues. Total gross deferred revenue and advance payments increased $18.1 million in 2011, as compared to the prior year, primarily due to an increase in the number of technical support, subscription services, and other services contracts in our installed customer base.

We expect to recognize approximately $181.0 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 performance of various service obligations, and the amount of deferred revenue and advance payments at any date should not be considered indicative of revenues for any succeeding period.

As of December 31, 2012, we had entered into certain additional agreements that include future minimum commitments by our customers to purchase products, product support, or other services through 2017, totaling approximately $110.4 million. As of December 31, 2011, the future minimum commitments by our customers to purchase products, product support, or other services through 2016 totaled approximately $112.7 million. Revenue relating to such future commitments by our customers is not included in our deferred revenue balances.

Revenue relating to such agreements will be recognized during the period in which all revenue recognition criteria are met. The timing and ultimate recognition of any revenue from such customer purchase commitments depend on our customers' meeting their future purchase commitments and our meeting our associated performance obligations related to those purchase commitments.

Liquidity and Capital Resources Liquidity. Our principal sources of liquidity are cash, cash equivalents, and on-going collection of our accounts receivable. Cash and cash equivalents include holdings in money market funds and U.S. Treasury bills.

As of December 31, 2012 and December 31, 2011, the amount of cash and cash equivalents held by U.S. entities was $40.6 million and $35.7 million, respectively, and by non-U.S. entities was $183.8 million and $163.9 million, respectively. We earn a significant amount of our revenues outside the U.S. and, except for Subpart F deemed dividends, we intend to indefinitely reinvest undistributed earnings of certain non-U.S. entities. We do not anticipate needing to repatriate the cash or cash equivalents held by non-U.S. entities to the U.S. to finance our U.S. operations. However, if we were to elect to repatriate these amounts, we would generate U.S. taxable income to the extent of our undistributed foreign earnings, which amounted to $184.0 million at December 31, 2012. Although the tax impact of repatriating these earnings is difficult to determine and our effective tax rate could increase as a result of any such repatriation, we would not expect the maximum effective tax rate that would be applicable to such repatriation to exceed the U.S. statutory rate of 35.0%, after considering applicable foreign tax credits.

We believe that existing cash and cash equivalents held by the Company and anticipated to be generated by the Company are sufficient to meet working capital requirements, anticipated capital expenditures, and contractual obligations for at least the next 12 months, and accordingly, we do not expect that we will need to borrow money to finance our operations. However, we may elect to borrow money in future periods in order to take advantage of favorable pricing in the credit markets.

The following table sets forth a summary of our cash flows (in thousands) and percentage changes for the periods indicated: December 31, % Change % Change 2012 2011 2010 in 2012 in 2011 Net cash provided by operating activities $ 49,884 $ 60,814 $ 75,825 -18.0 % -19.8 % Net cash used in by investing activities (35,833 ) (36,182 ) (17,427 ) -1.0 % 107.6 % Net cash provided by (used in) financing activities 9,759 2,463 (107,098 ) 296.2 % 102.3 % 60 -------------------------------------------------------------------------------- Table of Contents Net Cash Provided by Operating Activities. The primary source of our net cash provided by operating activities is cash collections of our accounts receivable from customers following the sales and renewals of our software licenses, technical software support, software updates and upgrades, as well as consulting, education, subscription services, and other services. Our primary uses of cash from operating activities are for personnel related expenditures for software development, personnel related expenditures for providing consulting, education, subscription services, and other services, and for sales and marketing costs, general and administrative costs, and income taxes.

Net cash provided by operating activities was $49.9 million, $60.8 million, and $75.8 million during 2012, 2011, and 2010, respectively. The decrease in net cash provided by operating activities during 2012, as compared to the prior year, was due to a $32.7 million change in operating assets and liabilities, partially offset by a $19.2 million increase in non-cash items and a $2.6 million increase in net income. The decrease in net cash provided by operating activities during 2011, as compared to the prior year, was due to a $25.9 million decrease in net income and a $6.0 million decrease in non-cash items, partially offset by a $16.9 million change in operating assets and liabilities.

Non-cash items primarily consist of depreciation and amortization, bad debt expense, deferred taxes, and excess tax benefits from share-based compensation arrangements.

Net Cash Used in Investing Activities. The changes in net cash used in investing activities primarily relate to expenditures on property, plant and equipment, capitalized software development costs, and receipts of insurance proceeds related to the repair of our owned corporate aircraft. Net cash used in investing activities was $35.8 million, $36.2 million, and $17.4 million during 2012, 2011, and 2010, respectively. The decrease in net cash used in investing activities during 2012, as compared to the prior year, was primarily due to a $9.5 million decrease in purchases of property and equipment, comprised primarily of computer equipment, expenditures associated with repairs to our owned corporate aircraft, and leasehold improvements, partially offset by a $3.9 million decrease in the amount of insurance proceeds related to our owned corporate aircraft, a $2.2 million increase in capitalized software development costs, and the fact that we received $3.4 million of proceeds from the sale of an investment in the prior year. The increase in net cash used in investing activities during 2011, as compared to the prior year, was primarily due to a $24.4 million increase in purchases of property and equipment, comprised primarily of computer equipment, expenditures associated with repairs to our owned corporate aircraft, and leasehold improvements, and a $3.7 million increase in capitalized software development costs, partially offset by a $7.1 million increase in the amount of insurance proceeds related to our owned corporate aircraft, and the fact that we received $3.4 million of proceeds from the sale of an investment.

Net Cash Provided by (Used in) Financing Activities. The changes in net cash provided by (used in) financing activities primarily relate to the exercise of employee stock options and stock repurchases. Net cash provided by financing activities was $9.8 million and $2.5 million during 2012 and 2011, respectively.

Net cash used in financing activities was $107.1 million during 2010. The increase in net cash provided by financing activities during 2012, as compared to the prior year, was primarily due to a $7.8 million increase in proceeds from the exercise of employee stock options, partially offset by a $0.5 million increase in payments on capital lease obligations. The increase in net cash provided by financing activities during 2011, as compared to the prior year, was primarily due to a $109.0 million decrease in purchases of treasury stock and a $1.3 million increase in proceeds from the exercise of employee stock options, partially offset by a $0.7 million decrease in excess tax benefits from stock-based compensation arrangements.

Share Repurchases. The Board of Directors has authorized the Company's repurchase of up to an aggregate of $800.0 million of its class A common stock from time to time on the open market through April 29, 2013 (the "2005 Share Repurchase Program"), although the program may be suspended or discontinued by the Company at any time. The timing and amount of any shares repurchased will be determined by the Company's management based on its evaluation of market conditions and other factors. The 2005 Share Repurchase Program may be funded using the Company's working capital, as well as proceeds from any credit facilities and other borrowing arrangements which the Company may enter into in the future.

During the years ended December 31, 2012 and 2011, we did not repurchase any shares of our class A common stock pursuant to the 2005 Share Repurchase Program. During the year ended December 31, 2010, we repurchased an aggregate of 1,357,474 shares of our class A common stock at an average price per share of $80.29 and an aggregate cost of $109.0 million pursuant to the 2005 Share Repurchase Program. The average price per share and aggregate cost amounts disclosed above include broker commissions.

61-------------------------------------------------------------------------------- Table of Contents Contractual Obligations. As disclosed in Note 7, Commitments and Contingencies, to the Consolidated Financial Statements, we lease office space and computer and other equipment under operating lease agreements. We also lease certain computer and other equipment under capital lease agreements. Under these agreements, in addition to base rent, we are generally responsible for certain taxes, utilities and maintenance costs, and other fees; and several leases include options for renewal or purchase. The following table shows future minimum rent payments under noncancellable operating and capital leases and agreements with initial terms of greater than one year, net of total future minimum rent payments to be received under noncancellable sublease agreements, based on the expected due dates of the various installments as of December 31, 2012: Payments due by period ended December 31, Total 2013 2014-2015 2016-2017 Thereafter Contractual Obligations: Operating leases $ 134,884 $ 25,448 $ 39,134 $ 28,726 $ 41,576 Capital leases 2,119 863 1,215 41 0 Total $ 137,003 $ 26,311 $ 40,349 $ 28,767 $ 41,576 Unrecognized Tax Benefits. As of December 31, 2012, we had $17.3 million of total gross unrecognized tax benefits, including interest accrued. The unrecognized tax benefits are recorded in other long-term liabilities. The timing of any payments which 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 a significant tax payment related to these obligations within the next year.

Off-Balance Sheet Arrangements. As of December 31, 2012, we did not have any off-balance sheet arrangements that had or were reasonably likely to have a current or future material impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

[ Back To Microsoft News 's Homepage ]







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved.