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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
8000 Towers Crescent Drive, Vienna, VA 22182
(Address of Principal Executive Offices) (Zip Code)
51-0323571
(I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: (703) 848-8600
Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $0.001 per share
(Title of class)
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.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant (based on the last reported sale price of the Registrant's Class
A common stock on March 1, 2001 on the Nasdaq National Market) was approximately
$267.2 million.
The number of shares of the registrant's Class A common stock and Class B
common stock outstanding on March 1, 2001 was 30,325,030 and 51,165,624,
respectively.
MICROSTRATEGY INCORPORATED
TABLE OF CONTENTS
Page
PART I ----
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 17
Item 3. Legal Proceedings........................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......................................... 18
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................ 18
Item 6. Selected Financial Data..................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................................. 49
Item 8. Financial Statements and Supplementary Data................................................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 49
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 49
Item 11. Executive Compensation...................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 56
Item 13. Certain Relationships and Related Transactions.............................................. 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 59
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CERTAIN DEFINITIONS
All references in this Annual Report on Form 10-K to "MicroStrategy",
"we", "us", and "our" refer to MicroStrategy Incorporated and its consolidated
subsidiaries (unless the context otherwise requires).
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein 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
below under the caption "Business--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.
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PART I
ITEM 1. BUSINESS
Overview
We are a leading worldwide provider of business intelligence software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and voice communication channels. Our product line enables
both proactive and interactive delivery of information from large-scale
databases. Our objective is to provide businesses with a software platform to
develop solutions that deliver insight and intelligence to their enterprises,
customers and supply-chain partners.
Our software platform enables users to query and analyze the most
detailed, transaction-level databases, turning data into business intelligence.
In addition to supporting internal enterprise users, the platform delivers
critical business information beyond corporate boundaries to customers, partners
and supply-chain constituencies through a broad range of communication channels
such as the Internet, e-mail, telephone and wireless communication devices. Our
platform is designed for developing business intelligence solutions that are
personalized and proactive and that reach millions of users. We offer a
comprehensive set of consulting, education and technical support services for
our customers and partners.
Our principal corporate offices are located in Vienna, Virginia. We also
maintain domestic sales offices throughout the United States and international
sales offices throughout Europe, South America, and the Asia-Pacific region.
International sales accounted for 24.9%, 24.0% and 26.1% of our total revenues
in 2000, 1999 and 1998, respectively.
In July 1999, we launched a new business unit called Strategy.com. Third
party content providers use Strategy.com's hosted One-to-One Messaging platform
to offer their customers highly personalized, timely information services. These
services are delivered on a scheduled or event-driven basis through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
With an infrastructure built upon a scalable and flexible database architecture,
MicroStrategy platform technology and an XML interface, Strategy.com delivers
over 500,000 messages per day on average. Each message is individually tailored
by matching end user profiles and preferences with proprietary content or third-
party syndicated content in the areas of finance, weather, traffic, sports and
news. Strategy.com's hosted messaging applications can be used by companies to
facilitate transactions, increase mind share and augment customer profile data
warehouses with information that the user has provided and given permission to
use. Strategy.com also provides application maintenance, development, customer
billing, hosting and support services, enabling customers to focus on their core
businesses. As of March 1, 2001, syndicated programming hosted by Strategy.com
includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com
syndicates its channels through companies it refers to as Strategy.com
affiliates, such as Earthlink and Ameritrade. Strategy.com has established
dozens of affiliate agreements with leading Internet companies, communications
carriers, media companies and financial institutions. Strategy.com also powers
messaging services utilizing proprietary content for content brands such as
Thomson Financial, Wall Street Journal Interactive, and Belo Interactive.
Strategy.com currently provides over 500,000 subscribers with information
services. In October 2000, MicroStrategy completed the reorganization of
Strategy.com into a separate subsidiary. In connection with this reorganization,
Strategy.com commenced a round of financing through the sale of Series A
redeemable convertible preferred stock which was completed in January 2001.
Aggregate proceeds from this round of financing totaled approximately $49.8
million, net of offering costs of approximately $3.0 million. Microstrategy owns
approximately 84% of the economic interest in the outstanding equity of
Strategy.com on an as converted, diluted basis.
Industry Background
The emergence and widespread acceptance of the Internet (or "web") as a
medium of communication and commerce has dramatically changed the way businesses
interact with each other and with their customers. The Internet provides
opportunities for businesses to establish new revenue streams, create new
distribution channels and reduce costs. For example, companies are using
Internet-based systems to facilitate business operations, including sales
automation, supply-chain management, marketing, customer service and human
resource management. Consumers are also becoming increasingly sophisticated in
their use of the Internet, relying on the Internet not only
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to make online purchases, but to perform price comparisons, analyze
recommendations from like-minded individuals and educate themselves about
relevant products and offerings. The integration of the Internet into business
processes and increased consumer sophistication create opportunities for
companies to use business intelligence applications as part of a more dynamic
business model. Factors increasing demand for these systems include:
Increased Electronic Capture of Transaction and Customer Information. The
rapid growth in the electronic capture of business transactions and the
increased availability of related profile data on the parties or products
involved in each transaction are providing businesses with a rich data
foundation for one-to-one customer interactions. Powerful data analysis tools
are required to sift through massive amounts of data to uncover information
regarding customer interactions, in turn enabling organizations to provide
superior service and products to customers.
Need to Create a Personalized, One-to-One Customer Experience While
Maintaining Privacy. Many companies are initiating one-to-one marketing
strategies that establish personalized relationships with each customer based on
their individual needs and preferences and earn customer loyalty by providing
superior service, security and convenience. In order to successfully acquire,
retain and upgrade customers, organizations need to understand their profiles,
their transaction history, their past responses to marketing campaigns, and
their interactions with customer service. Retrieving information from widely
dispersed and complex data sources and providing a holistic view of the customer
can be challenging. At the same time, while businesses have the opportunity to
collect a variety of information that could improve targeting, customers are
increasingly concerned about the potential for loss or abuse of their privacy.
Need to Integrate Online and Traditional Operations. While there are
substantial benefits to conducting business electronically, companies need to
ensure that their online operations work in combination with their traditional
bricks and mortar operations. Companies are seeking to ensure that an order
placed online can be reliably fulfilled according to the expectations of the
customer and to develop and maintain consistent interactions with customers
across different channels. Maintaining the integrity of, and enhancing, the
customer experience is crucial to fostering customer loyalty.
Emergence of Wireless Internet and Voice Technologies. Information can be
more valuable if there is untethered, ubiquitous access to the information. The
recent development of the wireless application protocol and improvements in
text-to-speech and voice-recognition technologies have created a uniform
technology platform for delivering Internet-based information and services to
digital mobile phones and other wireless devices. This development is expected
to generate new business opportunities for companies by providing an additional
channel for existing services and creating opportunities to provide new services
that can be delivered any place and at any time to anyone that has access to a
wireless device. For instance, customers of an online brokerage company will
have the capability not only to get stock portfolio updates and alerts over
their phones, but will also be able to immediately act on that information and
buy or sell securities through a wireless device.
Web Browsers are Becoming the Standard Interface for Business Intelligence
Applications. Until recently, business intelligence tools were primarily
deployed in a company's headquarter offices. With web-based business
intelligence applications, store clerks, customer service representatives and
technicians can have the tools to make data-driven decisions in the field. The
web facilitates an unprecedented degree of collaboration between geographically
distributed people. Headquarters-based users and distributed users now have
access to the same data through the same tool. Hopes for the web have revolved
around its ability to serve as a point-of-transaction for customers and trading
partners. With a web-based business intelligence system, the web can also become
the "point-of-decision" that provides users, customers and partners with the
information they need to make insightful decisions.
Increased Openness of Business Intelligence Applications to Customers,
Suppliers and Partners. Business intelligence systems are no longer confined to
the corporation. Today, companies are extending their business intelligence
insight to suppliers, channel partners and customers. Business partners can have
up-to-the-minute access to sales histories, inventory status and billing
information through their web browsers. Three key drivers for opening up the
business intelligence system to vendors, partners and customers are:
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o Supplier transactions become more efficient with direct access to
inventory and other related data. For true vendor-managed inventory
and collaborative commerce systems, vendors need to have access to
key information about how their products are performing against
business metrics. For example, vendors should be able to see how
their products are selling in each geography so as not to over-ship
products that are slow-moving or under-ship products that are
selling quickly. By opening vendor performance information to the
vendors themselves, they become partners in the quest to optimize
sales, margin and inventory.
o Business partners collaborate more effectively with access to shared
data. By giving access to information such as the manufacturing
pipeline and build schedule, partners can be more effective at
satisfying end customers and setting expectations. Opening invoice
and purchase order information to partners will enable them to
reduce the overhead associated with channel management, resulting in
cost savings and time efficiencies. For example, notifying channel
sales partners of changes in the manufacturing schedule allows them
to reset end customer expectations or to increase selling activity.
o Customers derive increasing value from the information content of
products and services. In a market crowded with mass-market
advertising, customers increasingly value meaningful interactions
with companies. Customers want companies to know their interests and
preferences. Customers also want to be able to login to their
providers' systems to check their billing and order status. These
are the features that a business intelligence system can deliver to
help differentiate each company in a crowded marketplace.
The MicroStrategy Solution
MicroStrategy offers a comprehensive suite of software products and
services that enable businesses to develop and deploy business intelligence
systems. MicroStrategy's solution enables organizations seeking a strong,
personalized relationship with their customers to better understand customer
interactions and actively deliver personalized information to customers through
the Internet, e-mail, telephones or wireless devices.
Optimized Support for Large Data Volumes and All Major Relational
Database/Hardware Combinations. The MicroStrategy platform supports systems with
very large data volumes and is specifically designed to support all major
relational database platforms commonly used for business intelligence systems.
Important features of our solution in this area include:
o structured query language optimization drivers that improve
performance of each major database;
o the ability to support very large user populations;
o maximized up-time, even in high volume applications; and
o the ability to work with many languages for international
applications.
Extremely Powerful Analytics to Customer- and Transaction-Levels of
Detail. We believe that the MicroStrategy platform incorporates the most
sophisticated analysis engine available today, capable of answering highly
detailed business questions. The MicroStrategy platform offers support for
information beyond the summary level to include information at the customer
transaction and interaction level. This capability is critical to a wide range
of applications, including highly targeted direct marketing, e-commerce site
personalization, customer and product affinity analysis, call detail analysis,
fraud detection, credit analysis forecasting and trend metrics and campaign
management. The MicroStrategy platform allows the creation of highly
sophisticated systems that take maximum advantage of the detail available in a
company's databases.
Powerful Personalization Engine. The MicroStrategy platform includes a
customer transaction-level personalization engine. The underlying architecture
is designed to generate personalization parameters based on data gathered by an
organization from a variety of sources, including past customers' transactions,
customer clickstream information, stated user preferences and demographic
information. In addition, the MicroStrategy personalization engine is able to
determine when and under what circumstances a person is automatically provided
with a set of
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information.
Interactive Broadcast Engine for Delivery and Response Using Internet,
E-mail, Wireless or Voice Media. Our technology offers a high performance
personalized broadcast engine for delivering periodic and alert-based
information to people via Internet, e-mail, wireless devices and traditional
telephone via text-to-speech conversion. The broadcast engine includes drivers
for all major device types used in both domestic and international markets
enabling the delivery of information to users when and where it is needed. In
addition, users can respond to a message delivered by the MicroStrategy
broadcast engine. For example, a store manager can be alerted via a personal
digital assistant that an item is out of stock and order additional inventory
using this device.
Strategy
Our objective is to provide businesses with a software platform to develop
solutions that deliver insight and intelligence to their enterprises, customers
and supply-chain partners. The key elements of our strategy include.
Marketing Strategy. Our marketing strategy focuses on expanding our market
share and brand awareness by focusing in three key areas:
Business Intelligence Platform. Our business intelligence
platform marketing strategy is designed to extend our footprint in
the business intelligence market, by increasing awareness of the
MicroStrategy 7 platform. In the business intelligence market, our
marketing programs will target three principal audiences:
o Our historical base of corporate technology buyers and
departmental technology buyers in Global 2000
enterprises;
o Corporate and departmental technology buyers in
mid-sized enterprises, with revenue between $500
million and $2.5 billion; and
o Independent software vendors who want to embed
analytical tools in their solutions.
Analytical Customer Relationship Management Applications. In
January 2001, MicroStrategy announced the general availability of
our analytical Customer Relationship Management (CRM) applications.
We believe that corporate marketing departments are the target
market for these applications. Because the applications are built on
the MicroStrategy 7 platform, we will seek to create maximum synergy
between our MicroStrategy 7 platform and analytical CRM applications
by continuing to upgrade the CRM applications to run on newer
versions of the MicroStrategy 7 platform and by incorporating
functionality developed by the CRM applications as base
functionality for the Microstrategy 7 platform. Our advertising and
other promotions will be designed to mutually support both product
lines.
Hosted Messaging Platform. The target market for Strategy.com
includes marketing executives and general managers at companies that
have strong electronic relationships with their customers. During
2001, our marketing objectives are to engage financial institutions
and media companies and communicate the benefits of Strategy.com's
One-to-One Messaging service. The companies most interested in
Strategy.com services seek to enhance their customer relationships,
drive transactions and/or monetize their content.
Strategy.com will focus on creating awareness among our target
customer base with a combination of vertically-targeted public
relations campaigns, direct marketing programs, vertically-targeted
print advertising and trade show participation. Strategy.com will
also selectively promote new product releases and initiatives to
build its subscriber base.
Technology Strategy--Provide a Scalable, Sophisticated and Maintainable
Business Intelligence Platform. We have designed our platform to be
highly-scalable, sophisticated, reliable and easy to maintain. Our technology
strategy is focused on expanding our support for large customer-oriented
information stores, enhancing our analysis and segmentation capabilities,
strengthening our personalization technology, enhancing our information delivery
functionality to the broadest set of consumer devices and providing a platform
that can be easily integrated with e-
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commerce transaction engines. As part of this strategy, we are developing
technology that further differentiates our product offerings by increasing
functionality along the following key dimensions:
o Deployability--the ease with which applications can be deployed,
modified, upgraded and tuned;
o Capacity--the volume of information that can be efficiently analyzed
and utilized;
o Database flexibility--the range of data sources, data warehouses and
online transaction processing databases which the software is
capable of efficiently querying without modification;
o Performance--the response time of the system;
o Openness--the ease with which applications can be developed on our
standard-based platform and comprehensive application programming
interfaces;
o Interactivity--the ability for users to take action upon information
and update the data warehouse or transactional systems;
o Personalization--the quality and sophistication of a one-to-one user
experience;
o Concurrency--the number of users, which can be supported
simultaneously;
o Sophistication--the range of analytical methods available to the
application designer; and
o Robustness--the reliability and availability of the software in
mission critical environments.
Sales Strategy--Our sales strategy is executed through a field-based
direct sales force, a newly launched web store and inside sales force, and
relationships with indirect channel partners. Our goal is to increase market
share both domestically and abroad, by targeting corporate and departmental
technology buyers in Global 2000 enterprises, in mid-sized companies and
independent software vendors. We also seek to increase sales to our installed
base of customers by offering a wide range of software and services utilizing
our MicroStrategy 7 platform.
Products
We offer a comprehensive business intelligence platform, known as
MicroStrategy 7, which is designed to enable businesses to turn information into
strategic insight, transform customer interactions into relationships and make
more effective business decisions. Revenues from sales of product licenses
accounted for approximately 46% of total revenues during 2000. The following are
the components of the MicroStrategy 7 platform:
MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is
the foundation for our business intelligence platform. We believe that
MicroStrategy Intelligence Server is the most sophisticated analysis engine
available. MicroStrategy Intelligence Server is capable of answering highly
detailed business questions. Its robust relational analysis technology enables
organizations to conduct large-scale product affinity and product profitability
analyses, research customer preferences through sales, contribution and pricing
analysis, and compare present and historical customer retention data with
forecasting and trend metrics. MicroStrategy Intelligence Server generates
highly optimized queries through its very large database drivers, enabling high
throughput and fast response times.
The MicroStrategy Intelligence Server has been built with the scalability
and fault tolerance required for sophisticated analysis of multi-terabyte
databases and can be deployed to thousands of users through complete user,
object and data security and management. It contains thousands of specific
optimizations for all major relational databases and includes the load
distribution, prioritization and system tuning capabilities demanded by
large-scale implementations.
MicroStrategy Intelligence Server contains an analytical engine with over
150 different sophisticated mathematical and statistical functions with the
flexibility for further function extensions. MicroStrategy Intelligence
5
Server combines the power of its analytical engine with the scalability of a
relational database to perform complex data analysis with maximum efficiency.
All the other products in the MicroStrategy 7 platform integrate with the
MicroStrategy Intelligence Server and benefit from its broad functionality.
MicroStrategy Intelligence Server is designed to be fault-tolerant to
ensure system availability and high performance. Through an enterprise
management console, MicroStrategy Intelligence Server provides a sophisticated
array of enterprise management tools, such as caching and query prioritization
to streamline performance and batch job scheduling, which helps to maintain
disparate and diverse user communities. Administrators can automate the dynamic
adjustments of system and user governing settings, such as user thresholds and
database thread priorities, in order to smooth the database workload and ensure
the high performance that large user communities require.
MicroStrategy Web. MicroStrategy Web provides easy-to-use, interactive,
sophisticated analysis, which extends the information access and analysis
capabilities of MicroStrategy Intelligence Server to any user with a web
browser. MicroStrategy Web can be accessed through a web browser on any
operating system, eliminating deployment issues associated with customer-side
Java and Active X controls. Using the MicroStrategy Web infrastructure,
customers can rapidly implement systems that allow local and remote users to
develop and access sophisticated reports containing information from their
relational databases.
MicroStrategy Web provides a graphical user interface designed to boost
end user efficiency. Users gain access to an array of options for data
exploration and analysis, such as spreadsheet grids and a wide variety of
graphs. A flexible architecture enables businesses to implement a standardized
structure for analysis and ensure consistent work practices. Through
MicroStrategy Web's reporting capabilities, users receive key elements of a
report in easily understood messages. MicroStrategy Web also allows users to
dynamically analyze data with higher levels of detail to view the underlying
information or to create and save new analyses. In addition, MicroStrategy Web's
security plug-ins enable businesses to limit access to sensitive information. In
order to accommodate the various business requirements of end users,
MicroStrategy Web is available in a full-featured version, a simplified version
and an enterprise reporting version.
MicroStrategy Narrowcast Server. MicroStrategy Narrowcast Server is a
powerful content generation and information broadcast server designed to
proactively deliver personalized information to millions of recipients via the
Internet, e-mail, telephone and wireless devices. MicroStrategy Narrowcast
Server delivers targeted information to individuals on an event-triggered or
scheduled basis through the consumer communication device that is most
convenient. It provides an engine to implement targeted messaging to acquire and
retain customers, and a platform for distributing information to the corporate
enterprise, customers, suppliers and other constituencies.
MicroStrategy Narrowcast Server has a web-based interface that can be used
with existing web applications. Users subscribe to information services by
providing personal information and preferences, ensuring they receive
personalized product offerings and information.
In addition to proactively delivering information from the MicroStrategy 7
platform, MicroStrategy Narrowcast Server's open information source modules
enable it to deliver information from a multitude of information sources to the
business user. The multiple information sources can be combined to provide users
with requested information in one personalized e-mail, message or document.
MicroStrategy OLAP Provider. With MicroStrategy OLAP Provider, other
vendors' front-end business intelligence products can now access the analytical
power and scalability of the MicroStrategy 7 platform. Cognos PowerPlay and
Microsoft Excel 2000 communicate with MicroStrategy OLAP Provider using the
standard OLE database for OLAP application programming interface. MicroStrategy
OLAP Provider accepts multi-dimensional expressions, or MDX, queries from Cognos
PowerPlay, Microsoft Excel 2000 or custom applications, and works with
MicroStrategy Intelligence Server to translate these queries into
database-optimized structured query language. MicroStrategy OLAP Provider allows
organizations to standardize on a reporting and analysis platform, while still
enabling users to access the platform from a variety of user interfaces. This
leverages investments in databases, software and training and removes some of
the traditional burdens of cube-based architectures.
By doing this, MicroStrategy OLAP Provider allows other vendors'
interfaces to access transaction-level detail
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in a relational database, with the analytical power and flexibility of the
MicroStrategy 7 platform. This helps organizations realize value by reducing
maintenance and development costs, increasing user access to the data,
minimizing re-training costs and promoting a standard, enterprise-wide view of
the data.
MicroStrategy Transactor. To integrate business intelligence and online
transaction processing systems, MicroStrategy Transactor employs intelligent
transaction agents that interpret and integrate web information with various
enterprise information systems, such as database, commerce, business
intelligence, and enterprise resource planning systems through an open driver
application programming interface, allowing customers to transact with
businesses via XML-compliant devices such as web-enabled phones, personal
digital assistants and web browsers. Through its transaction and extraction
capabilities, MicroStrategy Transactor enables e-commerce applications through a
variety of devices and communications media.
MicroStrategy Architect. MicroStrategy Architect is the MicroStrategy 7
component in which applications are modeled through an intuitive graphical user
interface. MicroStrategy Architect provides a unified environment for creating
and maintaining all aspects of web reporting and business intelligence
applications. MicroStrategy Architect is highly automated and is based on an
open, flexible architecture, which greatly reduces the cost and time required to
implement and maintain systems.
MicroStrategy Administrator. MicroStrategy Administrator enables
administrators to efficiently maintain large-scale data warehouse applications
supporting millions of users. Project migration utilities help administrators
develop, test and deploy systems. Performance analysis enables administrators to
monitor and tune systems for maximum performance and availability. MicroStrategy
Administrator has been designed to ensure easy management of application objects
and users across multiple development, testing, and production environments.
MicroStrategy Administrator eases the burden of maintaining users and security
by using textual commands that can be saved as scripts. These commands and
scripts can be executed from either a graphical interface or from the command
line giving system administrators the flexibility and ease-of-use necessary for
efficient systems management.
MicroStrategy Agent. MicroStrategy Agent provides an advanced environment
for rapid application development and sophisticated analysis. It provides an
object-oriented view of business data--converting a company's business data into
a virtual library of valuable information, enabling users to develop
sophisticated business metrics, filtering criteria and pre-defined report
templates. Applications developed within MicroStrategy Agent are easily deployed
throughout the MicroStrategy architecture bringing integrated query and
reporting capabilities, powerful analytics and decision support workflow to
analysts, quantitative users and end users throughout the enterprise and beyond.
These applications provide better understanding of a business or customer
base through analyses such as customer profiling, clickstream analysis and sales
and inventory analyses. Once applications have been created through
MicroStrategy Architect, they can be deployed through a number of different
interfaces. For power analysts and application developers desiring to use a
client-server Microsoft Windows interface, MicroStrategy Agent is an advanced
environment providing a full range of analytical functionality, a rich
mathematical function library, built-in workflow and data mining integration.
MicroStrategy SDK. MicroStrategy SDK completes the MicroStrategy 7
platform by enabling developers to integrate, extend and fully harness the power
of MicroStrategy 7. Through a set of rich XML, Java and COM-based application
programming interfaces that fully expose all platform functionality, businesses
can leverage this powerful development environment to quickly deploy custom
applications and embed intelligence into any website.
MicroStrategy CRM Applications. MicroStrategy CRM Applications enable
customers to develop and grow personal and profitable customer relationships.
MicroStrategy CRM Applications is an easy-to-use, web-based customer
relationship management application built on the MicroStrategy 7 platform that
delivers customer analysis and segmentation across all customer touch points.
MicroStrategy CRM Applications customers can use best-of-breed marketing
automation to continually build, execute and manage permission-based,
personalized and event-driven marketing campaigns.
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Consulting, Education and Technical Support
Our services and customer support capabilities are as follows:
MicroStrategy Consulting. MicroStrategy Consulting facilitates the
development of high-end applications for our customers. Our consultants design
and implement scalable, high performance applications that run against
multi-terabyte databases for companies throughout the world. MicroStrategy
Consulting's mission is to provide services that ensure customer success and
return on investment through full use of our advanced technology. Revenues from
consulting services accounted for approximately 31% of total revenues during
2000.
MicroStrategy Education. MicroStrategy Education provides our customers
with a thorough understanding of our products and the implementation of business
intelligence systems through quality instruction and hands-on experience. With
nearly ten years of experience training a diverse customer base, we have
developed a comprehensive set of education programs designed to help customers
quickly become familiar with business intelligence technologies. Revenues from
education services accounted for approximately 5% of total revenues during 2000.
MicroStrategy Technical Support. MicroStrategy technical support provides
support services designed to help customers extract the highest return on
investment from our products. MicroStrategy technical support offers a variety
of support options geared to resolve technical issues quickly and efficiently
whenever they arise. All support options are supplemented with access to online
support services, including the comprehensive, web-based MicroStrategy Knowledge
Base, as well as the ability to check, modify or log new cases via the web.
Revenues from technical support services accounted for approximately 18% of
total revenues during 2000.
Customer Case Studies
The following case studies illustrate the application and implementation
of our products and related services by several of our customers.
Best Buy. Best Buy, one of the nation's leading electronics retailers,
continues to drive business growth with MicroStrategy's business intelligence
platform. For more than four years, Best Buy has used MicroStrategy technology
to provide merchandise buyers, financial analysts, store managers and executive
officers detailed reports on store performance, product sales, marketing results
and consumer trends. MicroStrategy Web anchors the business performance
management application that gives end users an array of options for powerful
information analysis and exploration. For example, merchandise buyers and other
user groups can run predefined reports, create their own queries and download
information into Excel spreadsheets for easy off-line analysis right from their
desktops. Identified trends indicate potential problems or opportunities. Users
can drill down into the data to get more detailed information, including sales
by region, city or even individual store. In addition, a MicroStrategy-based
customer relationship management application helps Best Buy employees foster
stronger relationships with their valued customers.
GE Capital Fleet Services. GE Capital Fleet Services, one of the world's
largest vehicle fleet management companies, chose MicroStrategy as its corporate
standard for business intelligence. To support, track and analyze transactions
associated with thousands of corporate fleet vehicles leased to customers, GE
Capital required a platform that could be deployed via the Internet and scale to
support a rapidly growing user community. Approximately 1,600 GE Capital Fleet
Services' end users access a simple-to-use web-based system via MicroStrategy
Web and perform critical analyses, such as invoice management, trend analysis
and forecasting, improving bottom line results. GE Capital Fleet Services also
uses MicroStrategy to send personalized proactive maintenance alerts directly to
vehicle drivers through multiple communications channels, including web,
wireless and voice.
Customers
The Company has over 1,100 customers across such diverse industries as
retail, telecommunications, banking and finance, pharmaceuticals and healthcare,
technology and consumer packaged goods. A list of some of the firms that
purchased over $250,000 of our products and services since January 1, 1997 is as
follows:
8
Banking & Finance The SABRE Group La Poste
American Express* Starwood Hotels & Resorts Ohio Department of
Ameritrade* Universal Studios* Education*
Bank of America US Air Force
CIBC Telecommunications US Postal Service*
Deutsche Borse Ameritech
Fannie Mae AT&T Wireless Services Consumer Packaged Goods
First Data Corporation Bell Atlantic* Beverage Data Network
First Union Corporation* Bell South* Brown & Williamson
First USA Bank Cable & Wireless Hallmark
FleetBoston Financial France Telecom* Ralston Purina
Corporation* Pacific Bell* S.C. Johnson & Son*
Freddie Mac* Sprint*
GE Capital* Technology
Nationwide Insurance* Pharmaceutical & Earthlink*
Royal Bank of Canada Healthcare Gateway
USAA * Cardinal Health IBM Corporation*
Visa International * Glaxo Wellcome* J.D. Edwards & Company*
Ingenix* Lexis Nexis
Retail MedPartners Network Solutions
Asda Stores Merck/Medco* Nielsen Media Research
B & Q Premier NCR*
Best Buy* Smithkline Beecham* Perot Systems
Comet Warner Lambert* Snap.com
Elder Beerman Western Digital*
Fox Entertainment Group Grocery & Pharmacy Xchange, Inc.*
Kmart* American Stores*
Kohl's Department Stores Associated Food Stores Manufacturing &
Liz Claiborne* CVS Pharmacy Industrial
Marks & Spencer* Eckerd Corporation* Allied Signal
ShopKo* Food Lion DuPont*
The Limited Harris Teeter General Motors*
Victoria's Secret Marsh Supermarkets Lexmark*
Woolworth's Michelin*
Government/Public Monsanto
Travel & Entertainment Services Samsung*
Blockbuster Entertainment* Housing and Urban Shaw Industries
Continental Airlines Development* Unisys
9
* Indicates customers that purchased more than $1.0 million of our products and
services since January 1, 1997.
Sales and Marketing
Direct Sales Organization. We market our software and services primarily
through our direct sales force. As of December 31, 2000, we had domestic sales
offices in a number of cities, including Atlanta, Bedminster, Boston, Charlotte,
Chicago, Cincinnati, Dallas, Denver, Detroit, Houston, Kansas City, Los Angeles,
Minneapolis, New York, Phoenix, Pittsburgh, San Francisco, Seattle, Tampa and
Washington, D.C., and international sales offices located in Barcelona, Buenos
Aires, Calgary, Cologne, London, Madrid, Mexico City, Milan, Montreal, Paris,
Sao Paolo, Seoul, Sydney, Toronto, Utrecht, Vancouver, Vienna and Zurich. We are
represented by distributors in several countries where we do not have sales
offices, including Chile, Colombia, the Czech Republic, Denmark, Finland,
Greece, Hungary, Ireland, Japan, Malaysia, the Middle East, New Zealand, Norway,
Peru, Poland, Singapore, South Africa and Sweden.
Indirect Sales Channels. We have entered into relationships with more than
225 system integration, application development, platform and OEM partners whose
products and services are used in conjunction with our own. Agreements with
these partners generally provide them with non-exclusive rights to market our
products and services and allow access to our marketing materials, product
training and direct sales force for field level assistance. In addition, we
offer our partners product discounts. Favorable product recommendations from the
leading system integration, application development and platform partners to
potential customers facilitate the sale of our products. We believe that such
indirect sales channels allow us to leverage sales and service resources as well
as marketing and industry specific expertise to expand our user base and
increase our market coverage. In addition, we have entered into agreements with
resellers who resell our software on a stand-alone basis.
System Integrators. We have also entered into agreements to provide
training, support, marketing and sales assistance to a number of system
integrators, including:
American Management Systems
AnswerThink Consulting Group
Arthur Andersen
AutoMate Incorporated
Braun Technology Group
Computer Sciences Corporation
Cap Gemini Ernst & Young
Deloitte & Touche
Etensity
Greenbrier & Russel
KPMG Peat Marwick
Nexgenix
Perot Systems Corporation
Questra Corporation
Tessera Enterprise Systems
Xpedior
Value-Added Resellers. Value-added resellers who resell MicroStrategy
software bundled with their own software applications and/or syndicated data
products include:
Accrue Software
Beverage Data Network
Fair Isaac and Company
HNC Software
IDX Systems Corporation
M&I Data Services
Net Perceptions
PlumTree Software
Prime Response
Radiant Systems
Retek Information Systems
Xchange, Inc.
Platform Partners. Our platform partners consist of firms which co-sell
and co-market complementary technology to the same target customer base. These
platform partners include Compaq, NCR, Informatica and Informix.
OEM Partners. Our OEM partners integrate our business intelligence
platform, narrowcast server or customer relationship management modules into
their applications. These OEM Partners include J.D. Edwards and Company,
Interworld and SageTree.
Resellers. Companies that resell MicroStrategy software on a stand-alone
basis include Broadcast 1
10
on 1.com Incorporated, Olympus Group, Fugen, Inc., Application Consulting Group,
eJiva and Veridian Information Solutions, Inc.
Research and Product Development
We have made substantial investments in research and product development.
We believe that our future performance will depend in large part on our ability
to maintain and enhance our current product line, develop new products that
achieve market acceptance, maintain technological competitiveness and meet an
expanding range of customer requirements. As of December 31, 2000, our research
and product development staff consisted of 474 employees. Our total expenses for
research and development for the years 2000, 1999 and 1998 were $61.4 million,
$28.0 million and $12.1 million, respectively.
Strategy.com
In July 1999, we launched a new business unit called Strategy.com.
Companies such as Thomson Financial, EarthLink, The Wall Street Journal, and
Ameritrade use Strategy.com's hosted one-to-one messaging platform to offer
their customers highly personalized, timely information services. These services
are delivered on a scheduled or event-driven basis through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. With an
infrastructure built upon a scalable and flexible database architecture,
MicroStrategy platform technology and an XML interface, Strategy.com delivers
over 500,000 messages per day on average. Each message is individually tailored
by matching end user profiles and preferences with proprietary content or
third-party syndicated content in the areas of finance, weather, traffic, sports
and news. Strategy.com's hosted messaging applications can be used by companies
to facilitate transactions, increase mind share and augment customer profile
data warehouses with information that the user has provided and given permission
to use. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services, enabling customers to focus on
their core businesses.
As of March 1, 2001, syndicated programming hosted by Strategy.com
includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com
syndicates its channels through companies it refers to as Strategy.com
affiliates, such as Earthlink and Ameritrade. Strategy.com has established
dozens of affiliate agreements with leading Internet companies, communications
carriers, media companies and financial institutions. Strategy.com also powers
messaging services utilizing proprietary content for premier content brands such
as Thomson Financial, Wall Street Journal Interactive, and Belo Interactive.
Strategy.com currently provides over 500,000 subscribers with information
services.
In October 2000, MicroStrategy completed the reorganization of
Strategy.com into a separate subsidiary. In connection with this reorganization,
Strategy.com commenced a round of financing through the sale of Series A
redeemable convertible preferred stock which was completed in January 2001.
Aggregate proceeds from this round of financing totaled $49.8 million, net of
offering costs. MicroStrategy owns approximately 84% of the economic interest in
the outstanding equity of Strategy.com on an as converted, diluted basis.
Strategy.com seeks to differentiate its offerings from competitors through
its greater level of personalization, its support of virtually any information
delivery device and its scalable and extensible messaging platform.
Strategy.com's XML application programming interface enables the Strategy.com
platform to be embedded into the offerings of financial institutions, device
manufacturers, Internet companies, communication carriers, media companies and
wireless companies. Our vision for Strategy.com is for it to be the leading
platform for one-to-one messaging. Strategy.com revenues accounted for
approximately 4% of our license and service revenues during 2000.
Strategy.com derives its revenue from three principal sources:
o set-up and hosting fees;
o usage fees; and
11
o subscription fees.
Set-up and hosting fees. Strategy.com affiliates and customers pay set-up
fees for integration and customization, such as linking Strategy.com financial
monitoring services to a customer's backend portfolio system. In addition,
customers also pay hosting fees for continual monitoring and support.
Usage fees. Strategy.com's affiliates and customers pay usage fees which
are typically measured on either a per message basis or on a monthly month basis
per subscriber.
Subscription fees. Strategy.com affiliates and customers pay subscription
fees for expanded or premium service. For those services in which the
Strategy.com affiliate or customer does not fully subsidize the cost of
providing the service, the end subscriber is charged a subscription fee.
Strategy.com's business is centered around its technology platform. The
key attributes of the Strategy.com platform are as follows:
o One-to-One Messaging Engine. Strategy.com's one-to-one message
engine, based on MicroStrategy platform technology, constantly
monitors incoming data, matches that data to subscriber profile
data, and creates and delivers individually personalized messages to
the subscribers delivery device of choice. This enables an end user
to configure a personal intelligence agent to act on behalf of the
user to deliver tailored, pertinent, and timely information.
o Strategy.com XML Application Programming Interface. Strategy.com's
XML application programming interface allows customers to seamlessly
integrate Strategy.com platform functionality and services into
their existing website or offering on a private-labeled basis. This
application programming interface also facilitates rapid development
of new applications upon the Strategy.com platform.
o Resource Center. Strategy.com provides its customers a web-based
Resource Center, where they can access information and sample code
on the XML application programming interface, configure settings,
view activity reports on their services and set up custom messages
to be sent to their subscribers.
o Hosting and Operations. Customers can obtain the benefits of
Strategy.com's one-to-one messaging platform without incurring the
infrastructure set-up and on-going costs of in-house
implementations.
Strategy.com's flexible platform is packaged into a set of product
offerings, tailored for different customer bases. These products are described
below.
Syndicated Information Services. Strategy.com's syndicated information
services is organized around different categories of content:
o Strategy.com Finance. As the first channel of the Strategy.com
network, Strategy.com Finance provides consumers with personalized
portfolio and market reports via the delivery device of their
choice. Strategy.com Finance provides users with a variety of
information, from intra-day stock movement alerts to a personalized
portfolio analysis sent via Excel spreadsheets.
o Strategy.com Weather. Strategy.com Weather delivers personalized
weather reports, forecasts and alerts for over 55,000 locations
worldwide. Strategy.com Weather offers subscribers features such as
severe weather alerts, beach and boating reports and weekly
forecasts, along with the convenience of receiving personalized
weather information.
o Strategy.com News. Strategy.com News delivers breaking news, news
alerts and local and global
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updates. Strategy.com News utilizes data from numerous content
providers and covers over 20,000 stories a day. Subscribers have the
ability to easily personalize Strategy.com News so they only receive
stories about the issues and locations that are of importance to
them.
o Strategy.com Sports. Strategy.com Sports gives fans across the
country and around the world the ability to track results and news
in a wide variety of leagues and sports. Strategy.com Sports
provides subscribers with daily sports highlights, score alerts and
sports news alerts.
o Strategy.com Traffic. Strategy.com Traffic offers personalized
traffic conditions, reports and alerts to people in 65 cities across
the country. Subscribers can define regularly traveled routes so
they know when an incident occurs that would specifically impact
their commute. Subscribers can also check live traffic information
and receive personalized traffic alerts.
Custom Content Services. Strategy.com can take proprietary content or data
from a customer, monitor and filter the data and create individually
personalized messages that are delivered to the end user, based on the
preferences and permissions established by the end user. In addition,
Strategy.com's customers can leverage other Strategy.com syndicated content
solutions to mix-and-match content into a custom offering. This solution is
designed for companies, such as media companies, online commerce companies,
retailers, direct marketers and financial institutions, with content or
information that would be more useful to an end user if delivered on a
personalized and timely basis.
Competition
The markets for business intelligence software, customer relationship
management applications and narrowcast messaging technologies are intensely
competitive and subject to rapidly changing technology. In addition, many of our
competitors in these markets are offering, or may soon offer, products and
services that may compete with MicroStrategy products and those of Strategy.com.
MicroStrategy's most direct competitors provide:
o business intelligence software;
o OLAP tools;
o query and reporting tools;
o web-based static reporting tools;
o information delivery and proactive reporting;
o analytical customer relationship management products;
o web traffic analysis applications; and
o marketing automation.
Each of these markets are discussed more fully below.
Business Intelligence Software. Makers of business intelligence software
provide business intelligence capabilities designed for integration,
customization and application development. Leading analyst firms classify
companies such as Microsoft, Oracle, Hyperion, SAP and SAS to be leading
providers of business intelligence software.
OLAP Tools. Companies that build software to perform online analytical
processing (OLAP) provide offerings competitive with the core MicroStrategy 7
platform. Whether web-based or client-server, these
13
tools give end users the ability to query underlying data sources without having
to hand code structured query language queries. Most OLAP tools allow users to
build their own calculations and specify report layouts and other options.
Additionally, OLAP tools provide users the ability to navigate throughout the
underlying data in an easy, graphical mode, often referred to as drilling.
Providers of OLAP tools include Cognos, Hyperion, Brio, IBM, Seagate and
Microsoft.
Query and Reporting Tools. Query and reporting tools allow large numbers
of end users to gain access to pre-defined reports for simple analysis. Often
the end users are able to specify some sort of run-time criteria that customizes
the result set for that particular person. Some limited drilling is also
provided. Companies who produce query and reporting tools include Business
Objects, Cognos, Oracle, Seagate and Brio.
Web-based Static Reporting Tools. Companies that offer software to deliver
pre-built reports for end user viewing and consumption can also compete with
MicroStrategy. These applications often lack the sophistication, robustness and
scalability of MicroStrategy, but can be attractive for small, departmental
applications. Vendors in this category include Actuate, Business Objects,
Seagate, Microsoft, Computer Associates and SAS.
Information Delivery and Proactive Reporting. Companies that focus on the
proactive delivery of information, via e-mail, website, or other medium can
compete with MicroStrategy's offerings. Typically these tools serve to push out
compiled reports on a scheduled basis to sets of users based on job type.
MicroStrategy software has this technology integrated into its core platforms.
Vendors of such technology include Actuate, nQuire, Information Builders and
Business Objects.
Analytical Customer Relationship Management Products. Companies that
deliver customer relationship management products alone or in conjunction with
e-commerce applications, such as Broadbase, BroadVision, E.piphany and Vignette,
compete with our analytical customer relationship management applications. In
contrast with providers of operational customer relationship management vendors,
such as Vantive and Oracle, analytical customer relationship management deals
more with customer segmentation, analysis and interaction as opposed to
infrastructure and call centers.
Web Traffic Analysis Applications. Reporting and analysis tools can be
specialized to deal specifically with the analysis of visitors to a company's
website. Typically this involves extracting data from a web-log file and
importing it into a usable format, often in a relational database. A set of
analyses, sometimes customer-centric in nature, is performed, and limited ad-hoc
reporting is permitted. Advanced applications in this space merge data from the
web-logs with other customer centric attributes to help provide a complete view
of the customer base. Vendors in this space include Accrue, Net.Genesis and
WebTrends.
Marketing Automation. Applications focused on the automation and execution
of marketing tasks, such as campaign management and delivery, compete with our
customer relationship management applications and our Narrowcast Server
platform. Leading vendors in this space include E.piphany, Xchange, Chordiant
and Broadbase.
Strategy.com's most direct competitors are:
o Web portal and information networks;
o E-mail marketers and publishers;
o Wireless content vendors;
o Alert vendors;
o Financial solution vendors; and
o Vertical internet portals and information networks.
14
Each of these markets are discussed more fully below.
Web Portals and Information Networks. Web portals and information
networks, such as Microsoft Network, Yahoo, Lycos, Excite, America Online
and InfoSpace.com, offer an array of information that is similar to
information provided by Strategy.com.
E-mail marketers and publishers. E-mail marketers and publishers,
such as DoubleClick, Responsys, and ClickAction, offer companies the
ability to deliver non-personalized content via e-mail to end users. These
companies could expand their offering to more closely compete with
Strategy.com.
Wireless content vendors. Wireless content vendors, such as
Infospace and i3Mobile, have similar offerings as Strategy.com's
syndicated information services for wireless devices. These companies
could expand their offerings to support e-mail and voice, as well as to
deliver proprietary content.
Alert vendors. Alert vendors, such as Alerts Inc., Pumatech, and
Xigo, have similar offerings as Strategy.com's proactive alert services.
These companies could expand their offering to more closely compete with
Strategy.com.
Financial solution vendors. Financial solution vendors, such as 724
Solutions and W-Technologies, offer a broad array of consumer finance
technology solutions, but generally do not have a proactive messaging
system like Strategy.com. Any of these companies could augment their
existing offering with proactive messaging comparable to Strategy.com.
Vertical Internet Portals and Information Networks. Expedia,
Weather.com, CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss,
Microsoft CarPoint, InfoBeat, Internet Travel Network and others have
developed custom applications and products to commercialize, analyze and
deliver specific information over the Internet. These systems are usually
tailored to one application, such as providing news, sports or weather,
but in the aggregate, they offer applications similar to those provided by
Strategy.com. Any one of these companies could expand their offerings to
more closely compete with Strategy.com.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, and greater name
recognition than we do. In addition, many of our competitors have strong
relationships with current and potential customers and extensive knowledge of
the business intelligence industry. 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 and sale
of their products than we can. Increased competition may lead to price cuts,
reduced gross margins and loss of market share. We cannot be sure that we will
be able to compete successfully against current and future competitors or that
the competitive pressures we face will not 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, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could harm our ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
Intellectual Property and Licenses
We rely primarily on a combination of copyright, patent, trademark
and trade secret laws,
15
non-disclosure agreements and contractual provisions to protect our proprietary
technology. For example, we require software licensees to enter into license
agreements that impose certain restrictions on their use of the software. In
addition, we have made efforts to avoid disclosure of our trade secrets,
including requiring those persons with access to our proprietary technology and
information to enter into confidentiality agreements with us and restricting
access to our source code. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which piracy of our software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. Generally, our products are
licensed through software licenses that restrict its use to a specific number of
named users or a specific hardware configuration. A user is an individual to
whom a licensee has assigned an identification number for purposes of tracking
use of a product and who is under an obligation to the licensee to protect any
of our confidential information. Under our standard software license agreement,
we have the ability to request certified statements of records regarding
identification numbers in particular, and use of the products in general, once
per year, and have the right to audit use of the products at least once per
year. Copying of products and documentation is limited to the number of users
for whom license fees have been paid and for archival purposes.
There can be no assurance that third parties will not claim infringement
by us with respect to current or future products. We expect that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
Employees
As of December 31, 2000, we had a total of 1,899 employees, of whom 1,498
were based in the United States and 401 were based internationally. Of the
total, 661 were engaged in sales and marketing, 474 in product development, 516
in professional services and 248 in finance, administration and corporate
operations. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
We believe that effective recruiting, education and nurturing of human
resources are critical to our success and 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.
All newly hired professionals complete a professional orientation course
that ranges from 2 days to 6 weeks long, presented by "MicroStrategy
University," our in-house education function. The curriculum consists of
lectures, problem sets and independent and group projects, covering data, our
products, competitors and customers. Certain lectures also deal with general
business practices, ethics and teamwork. At the end of this training, students
must pass a number of oral and written examinations in order to begin their
assignments. Following this introductory course, veteran employees normally
complete at least one week of continuing professional development each year.
Course content for MicroStrategy University is created by experienced members of
our professional staff, who generally have an annual obligation to create expert
content based upon the best practices they have most recently observed in the
field. This expert content is then used to upgrade and revitalize our education,
consulting, support, technology and marketing operations.
16
ITEM 2. PROPERTIES
Our principal offices currently occupy over 350,000 square feet in
Northern Virginia pursuant to multiple leases, the majority of which expire
between June 2003 and June 2010. In addition, we also lease sales offices
domestically and internationally in a variety of locations, including Atlanta,
Bedminster, Boston, Charlotte, Chicago, Cincinnati, Dallas, Denver, Detroit,
Houston, Los Angeles, Minneapolis, New York, Phoenix, Pittsburgh, San Francisco,
Seattle, Tampa, Washington, D.C., Barcelona, Buenos Aires, Calgary, Cologne,
London, Madrid, Mexico City, Milan, Montreal, Paris, Sao Paolo, Seoul, Sydney,
Toronto, Utrecht, Vancouver, Vienna and Zurich. We do not expect to add
additional office space in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws
From March through May 2000, twenty-five class action complaints were
filed in federal courts in various jurisdictions alleging that we and certain of
our officers and directors violated section 10(b) of the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated thereunder,
and section 20(a) and section 20A of the Exchange Act. Our outside auditor,
PricewaterhouseCoopers LLP, was also named in two of the suits. The complaints
contained varying allegations, including that we made materially false and
misleading statements with respect to our 1999, 1998 and 1997 financial results
in our filings with the SEC, analysts' reports, press releases and media
reports. In June 2000, these putative class action lawsuits were consolidated in
the United States District Court for the Eastern District of Virginia. On July
7, 2000, the lead plaintiffs filed an amended class action complaint naming us,
certain of our officers and directors, and PricewaterhouseCoopers LLP as
defendants. The amended class action complaint alleges claims under section
10(b), section 20(a) and section 20A of the Exchange Act. The amended class
action complaint does not specify the amount of damages sought.
On October 23, 2000, the Company, its officers and directors named as
defendants, and plaintiffs' counsel entered into a settlement agreement in the
consolidated class action. Under the settlement agreement, class members will
receive: (1) five-year unsecured promissory notes issued by MicroStrategy having
an aggregate principal amount of $80.5 million and bearing interest at 7.5% per
year; (2) 550,000 shares of our Class A common stock, with the number of shares
to be increased if the market value of the shares, based on the dollar weighted
average trading price during a specified trading period prior to the district
court settlement hearing, is less than $30 per share, so that the minimum value
of the shares is $16.5 million; and (3) warrants to purchase 1.9 million shares
of Class A common stock at an exercise price of between $40 and $50 per share,
based on the dollar weighted average trading price during a specified trading
period prior to the district court settlement hearing, with the warrants
expiring five years from the date they are issued. The settlement was made
subject to confirmatory discovery, final documentation, district court approval,
and other conditions.
On January 19, 2001, the district court authorized notice of the proposed
settlement to be sent to all putative class members. The notice informs class
members of their rights including their rights to object to the proposed
settlement and to opt out of the proposed settlement and pursue their claims
separately. A hearing has been scheduled for April 2, 2001 for the district
court to consider and, if appropriate, approve the settlement.
Delaware Derivative Investigation
On June 30, 2000, a shareholder derivative action was filed in the
Delaware Court of Chancery seeking recovery for various alleged breaches of
fiduciary duties by certain of our directors and officers relating to our
restatement of financial results. On September 11, 2000, we filed a motion to
dismiss the derivative complaint for failure to make a demand. That motion
remains pending. On October 23, 2000, the Company, the directors and officers
named as defendants and the derivative plaintiff reached an agreement in
principle settling the derivative action. Under the derivative settlement
agreement, we will add a new, independent director with finance experience to
the audit committee of our
17
Board of Directors and will ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. In addition, certain of our officers will contribute a
portion of the Class A common stock held by them that is to be issued to class
members in settlement of the class action lawsuit. Specifically, Michael J.
Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the class action
settlement shares of Class A common stock with a total value of $10 million. The
settlement was made subject to confirmatory discovery, final documentation,
Chancery Court approval, and other conditions. No hearing has been scheduled for
the Chancery Court to review and, if appropriate, approve the settlement.
SEC Investigation
In March 2000, we were notified that the SEC had issued a formal order of
private investigation in connection with matters relating to the restatement of
our financial results. On December 14, 2000, we consented, without admitting or
denying the SEC's findings, to the entry of an administrative cease and desist
order finding that we had violated certain provisions of the federal securities
laws. As part of the cease and desist order, we made a number of undertakings
pursuant to which we will implement various corporate governance enhancements,
hire additional staff and adopt policies and controls relating to our contract
administration and financial reporting functions. The cease and desist order
imposed no monetary fines or penalties on us.
Other Proceedings
We are also involved in other legal proceedings through the normal course
of business. Management believes that any unfavorable outcome related to these
other proceedings will not have a material effect on our financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Class A common stock, $0.001 par value, is traded on the Nasdaq
National Market under the symbol, MSTR. The following table sets forth for the
periods indicated the high and low closing prices, adjusted to reflect the
two-for-one stock split which occurred in January 2000, for our Class A common
stock as reported by Nasdaq in each quarter:
For the quarter ended High Low
----------------------------- ------ ------
March 31, 1999.......... 17.25 9.00
June 30, 1999........... 18.94 7.75
September 30, 1999...... 28.03 13.22
December 31, 1999....... 115.66 28.81
March 31, 2000.......... 313.00 74.78
June 30, 2000........... 77.12 17.31
September 30, 2000...... 35.75 20.25
December 31, 2000....... 28.00 9.25
As of March 1, 2001, there were approximately 510 stockholders of record
of our Class A common stock and 13 stockholders of record of our Class B common
stock, $0.001 par value.
We have never paid any cash dividends on our Class A common stock and do
not expect to pay any such dividends in the foreseeable future. Our stock price
has fluctuated substantially since our initial public offering in June 1998. The
trading price of our Class A common stock is subject to significant fluctuations
18
in response to variations in quarterly operating results, the gain or loss of
significant orders, changes in earnings estimates by analysts, announcements of
technological innovations or new products by us or our competitors, general
conditions in the software and computer industries and other events or factors.
In addition, the equity markets in general have experienced extreme price and
volume fluctuations which have affected the market price for many companies in
industries similar or related to that of ours and which have been unrelated to
the operating performance of these companies. These market fluctuations have
affected and may continue to affect the market price of our Class A common
stock.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
--------------------------------------------
2000 1999 1998 1997 1996
--------- -------- ------- ------- -------
(in thousands, except per share data)
Statements of Operations Data
Revenues:
Product licenses.................................. $ 102,050 $ 85,797 $61,635 $35,478 $15,873
Product support and other services................ 121,880 65,461 33,854 17,073 6,730
--------- -------- ------- ------- -------
Total revenues.................................. 223,930 151,258 95,489 52,551 22,603
--------- -------- ------- ------- -------
Cost of revenues:
Product licenses.................................. 2,722 2,597 2,246 1,641 1,020
Product support and other services................ 85,249 34,436 17,535 9,475 4,237
--------- -------- ------- ------- -------
Total cost of revenues.......................... 87,971 37,033 19,781 11,116 5,257
--------- -------- ------- ------- -------
Gross profit......................................... 135,959 114,225 75,708 41,435 17,346
Operating expenses:
Sales and marketing............................... 151,095 93,090 53,327 30,468 13,054
Research and development.......................... 61,433 27,998 12,106 5,049 2,840
General and administrative........................ 58,762 24,448 12,743 6,552 3,742
Amortization of intangible assets................. 17,667 422 81 -- --
In-process research and development............... -- 2,800 -- -- --
Restructuring and related charges................. 10,835 -- -- -- --
--------- -------- ------- ------- -------
Total operating expenses........................ 299,792 148,758 78,257 42,069 19,636
--------- -------- ------- ------- -------
Loss from operations................................. (163,833) (34,533) (2,549) (634) (2,290)
Financing and other income (expenses):
Interest income................................... 3,675 2,174 1,028 94 22
Interest expense.................................. (37) (144) (720) (333) (127)
Loss on investments............................... (9,365) -- -- -- --
Provision for litigation settlement............... (89,729) -- -- -- --
Minority interest................................. (713) -- -- -- --
Other income (expense), net....................... 96 6 (14) (12) 20
--------- -------- ------- ------- -------
Total financing and other income (expenses)..... (96,073) 2,036 294 (251) (85)
--------- -------- ------- ------- -------
Loss before income taxes............................. (259,906) (32,497) (2,255) (885) (2,375)
Provision for income taxes........................... 1,400 1,246 -- -- --
--------- -------- ------- ------- -------
Net loss............................................. (261,306) (33,743) (2,255) (885) (2,375)
--------- -------- ------- ------- -------
Preferred stock dividends............................ (4,687) -- -- -- --
Beneficial conversion feature........................ (19,375) -- -- -- --
--------- -------- ------- ------- -------
Net loss attributable to common stockholders......... $(285,368) $(33,743) $(2,255) $ (885) $(2,375)
========= ======== ======= ======= =======
Basic and diluted net loss per share (1)............. $ (3.58) $ (0.44) $ (0.03) $ (0.02) $ (0.04)
========= ======== ======= ======= =======
Weighted average shares used in computing basic
and diluted net loss per share (1)................ 79,779 77,028 66,986 58,988 58,988
========= ======== ======= ======= =======
19
As of December 31,
--------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- ------- -------
(in thousands)
Balance Sheet Data
Cash and cash equivalents............................ $ 67,685 $ 25,941 $ 27,491 $ 3,506 $ 1,686
Restricted cash...................................... 25,884 -- -- -- --
Working capital (deficit)............................ 42,616 53,109 23,919 (7,048) (2,237)
Total assets......................................... 259,087 203,368 76,571 27,052 13,004
Long-term liabilities, excluding deferred revenue and
advance payments.................................. 100,993 -- 1,928 2,428 460
Series A redeemable convertible preferred stock...... 119,585 -- -- -- --
Mandatorily redeemable convertible preferred stock
of consolidated subsidiary........................ 40,530 -- -- -- --
Total stockholders' equity (deficit)................. (145,538) 101,816 37,775 (1,433) (793)
- ----------
(1) Share and per share amounts for all periods presented have been restated to
reflect the two-for-one stock split which occurred in January 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading worldwide provider of business intelligence software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and communication channels. Our product line enables both
proactive and interactive delivery of information from large-scale databases.
Our objective is to provide businesses with a software platform to develop
solutions that deliver insight and intelligence to their enterprises, customers
and supply-chain partners.
Our software platform enables users to query and analyze the most
detailed, transaction-level databases, turning data into business intelligence.
In addition to supporting internal enterprise users, the platform delivers
critical business information beyond corporate boundaries to customers, partners
and supply chain constituencies through a broad range of communication channels
such as the Internet, e-mail, telephone and wireless communications devices. Our
platform is designed for developing business intelligence solutions that are
personalized and proactive and that reach millions of users. We offer a
comprehensive set of consulting, education and technical support services for
our customers and partners.
In July 1999, we launched a new business unit called Strategy.com. Third
party content providers use Strategy.com's hosted one-to-one messaging platform
to offer their customers highly personalized, timely information services. These
services are delivered on a scheduled or event-driven basis through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
With an infrastructure built upon a scalable and flexible database architecture,
MicroStrategy platform technology and an XML interface, Strategy.com delivers
over 500,000 messages per day on average. Each message is individually tailored
by matching end user profiles and preferences with proprietary content or
third-party syndicated content in the areas of finance, weather, traffic, sports
and news. Strategy.com's hosted messaging applications can be used by companies
to facilitate transactions, increase mind share and augment customer profile
data warehouses with information that the user has provided and given permission
to use. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services, enabling customers to focus on
their core businesses. As of March 1, 2001, syndicated programming hosted by
Strategy.com includes Finance, News, Weather, Sports and Traffic "channels."
Strategy.com syndicates its channels through companies it refers to as
Strategy.com affiliates, such as Earthlink and Ameritrade. Strategy.com has
established dozens of affiliate agreements with leading Internet companies,
communications carriers, media companies and financial institutions.
Strategy.com also powers messaging services utilizing proprietary content for
content brands such as Thomson Financial, Wall Street Journal Interactive, and
Belo Interactive. Strategy.com currently provides over 500,000 subscribers with
information services. In October 2000, MicroStrategy completed the
reorganization of Strategy.com into a separate subsidiary. In connection with
this reorganization, Strategy.com commenced a round of financing through the
sale of Series A redeemable convertible preferred stock which was completed in
January 2001. Aggregate proceeds from this round of financing totaled
approximately $49.8 million, net of offering costs of approximately $3.0
million. MicroStrategy owns approximately 84% of the economic interest in the
outstanding equity of Strategy.com on an as converted, diluted basis. Aether
Capital, the investment arm of Aether Systems, Inc., a provider of wireless data
products and services, participated as an investor in this round of financing.
Aether Capital's investment was
20
approximately $25.0 million of total gross proceeds. Concurrent with this
financing round, we also announced a strategic alliance with Aether Systems
which includes initiatives in the following areas:
o the companies will develop a new product, MicroStrategy 7M, that
will be designed to combine Aether Systems' wireless technology with
the functionality and performance of the MicroStrategy 7 platform to
deliver personalized, intelligent information services to a full
range of wireless devices;
o Aether Systems' chairman and chief executive officer, David Oros,
was named to the Board of Directors of Strategy.com; and
o Aether Systems will offer Strategy.com services to its customers.
Since 1997, we have significantly increased our sales and marketing,
service and support, research and development and general and administrative
staff. Although our revenues have significantly increased over the last three
years, we experienced fluctuating operating margins during 2000, 1999 and 1998
primarily as a result of increases in staff levels, expansion of operations
outside of the United States, and our increased investment in Strategy.com. Our
net losses increased substantially during 2000, as our growth in revenues, and
particularly higher margin product license revenues, decreased, while our
expenses have significantly increased due primarily to aggressive hiring of
additional personnel and advertising expenditures in the first half of 2000,
increased investment in our Strategy.com subsidiary, and increased legal and
professional fees relating to class action lawsuits and an SEC investigation in
connection with matters relating to the restatement of our 1999, 1998 and 1997
financial statements.
Our net loss increased significantly during 2000 to $261.3 million
primarily as a result of the following factors: (1) operating expenses
(excluding in-process research and development and restructuring related
charges) increased by $143.0 million while gross profit increased by only $21.7
million; (2) amortization of intangible assets increased by $17.2 million; (3)
we recorded an $89.7 million expense associated with an agreement to settle
outstanding class action and derivative shareholder lawsuit litigation (of which
approximately $4.0 million is a cash charge for legal fees and administration
costs and approximately $85.7 million is a non-cash charge); (4) we recorded a
$10.8 million charge related to restructuring activities; and (5) we recorded a
$9.4 million loss on investments, net of realized gain of $2.7 million.
Our revenues historically have been derived from two principal sources,
fees for product licenses and fees for product support and other services,
including maintenance, education and consulting services. We recognize revenue
in accordance with accounting principles generally accepted in the United States
and particularly with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions, SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, and SEC
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, as applicable.
Product license revenues are generally recognized upon persuasive evidence
of an arrangement (as provided by agreements or contracts executed by both
parties), delivery of the software and determination that collection of a fixed
or determinable license fee is reasonably assured. When fees for software
upgrades and enhancements, maintenance, consulting or education are bundled with
the license fee, they are unbundled using objective evidence of the fair value
of the multiple elements represented by our customary pricing for each element
in separate transactions. If such evidence of fair value exists on undelivered
elements and there is no such evidence of fair value established for delivered
elements, revenue is first allocated to the elements where such evidence of fair
value has been established and the residual amount is allocated to the delivered
elements. If evidence of fair value for each undelivered element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist for undelivered elements or
until all elements of the arrangement are delivered, subject to certain limited
exceptions set forth in SOP 97-2.
21
Technical support revenues are derived from customer support agreements
generally entered into in connection with initial product license sales and
subsequent renewals. Fees for our technical support services are recorded as
deferred revenue and recognized ratably over the term of the maintenance and
support agreement, which is typically one year. We also record as deferred
revenue the fair value of implicit maintenance arrangements when resellers or
other customers that sell our software to end users offer these end users the
right to receive the then current version of our software at the time of resale.
These agreements may extend over several years. Fees for our education and
consulting services are typically recognized at the time the services are
performed. Revenue from arrangements where we provide hosting services is
recognized over the hosting period. Any fees paid or costs incurred prior to the
hosting period, such as license fees, consulting, customization or development
services, are deferred and recognized ratably over the subsequent hosting
period, which is typically two to three years.
Customers at times require consulting and implementation services, which
may include evaluating their business needs, identifying resources necessary to
meet their needs and installing the solution to fulfill their needs. When the
software license arrangement requires us to provide significant consulting
services to produce, customize or modify software, or when the customer
considers these services essential to the functionality of the software product,
both the product license revenue and product support and other services revenue
are recognized in accordance with the provisions of SOP 81-1. We recognize
revenue from these arrangements using contract accounting (typically, the
percentage of completion method based on cost inputs) and, therefore, both
product license and product support and other services revenue are recognized as
work progresses. Expected losses on contracts in progress are expensed in the
current period. As of December 31, 2000, we have not incurred any losses on
contracts in progress. If the arrangement includes acceptance criteria, revenue
is not recognized until we can demonstrate that the software or services can
meet the acceptance criteria. If the software license arrangement obligates us
to deliver unspecified future products, then revenue is recognized on the
subscription basis, ratably over the term of the contract.
Beginning in the fourth quarter of 1998, we began to sell our products and
services to customers for large-scale applications and have continued to enter
into similar transactions. In contrast to earlier periods in which our typical
customer transaction involved a stand-alone software license and simple
maintenance and support services, these transactions typically involve multiple
software products and services for use by very large numbers of end users across
network, intranet, web, wireless and voice communication channels, and sometimes
incorporate elements from our Strategy.com network. In addition, these multiple
element transactions often include significant implementation and other
consulting work and may also include the provision of hosting services, in which
we manage the operation of hosting the customer's specific e-commerce
application. Customers often use our products and services in a variety of ways,
including internal use, integration with their own products for resale to end
users and creation of e-commerce applications. These arrangements typically lead
to revenue recognition from multiple elements, including product license fees,
product support fees and royalties based on advertising, e-commerce transactions
or the resale of solutions that incorporate our software platform.
These large, multiple element transactions typically involve more complex
licensing and product support arrangements than the software licensing and
maintenance and support arrangements that comprised the bulk of our revenues in
earlier periods. Based on the revenue recognition criteria established in SOP
97-2 and SOP 81-1, revenue from many of these large, multiple element contracts
may not be recognized upon full execution and delivery of the software product
as in the past, but instead is initially recorded as deferred revenue, with
product revenue recognized using the percentage of completion method based on
cost inputs or ratably over the entire term of the contract. If the arrangement
includes acceptance criteria, revenue is not recognized until we can demonstrate
that the software or services can meet the acceptance criteria. As a result of
the size and complexity of these transactions, our results for any quarter may
depend significantly on the types of customer transactions that we enter into
during the quarter and on the mix of product licenses, support agreements,
implementation work and other specific terms of each transaction, each of which
may have a significant effect on the manner in which we recognize revenue from
the transaction.
The sales cycle for our products may span nine months or more.
Historically, we have recognized a
22
substantial portion of our revenues in the last month of a quarter, with these
revenues frequently concentrated in the last two weeks of a quarter. Even minor
delays in booking orders may have a significant adverse impact on revenues for a
particular quarter. To the extent that delays are incurred in connection with
orders of significant size, the impact will be correspondingly greater. Product
license revenues in any quarter can be dependent on orders booked and shipped in
that quarter. As a result of these and other factors, our quarterly results have
varied significantly in the past and are likely to fluctuate significantly in
the future. Accordingly, we believe that quarter-to-quarter comparisons of our
results of operations are not necessarily indicative of the results to be
expected for any future period.
We license our software through license transactions generated by our
direct sales force and increasingly through or in conjunction with "channel
partners," including value-added resellers, system integrators and original
equipment manufacturers. Channel partners accounted for, directly or indirectly,
approximately 44.4%, 39.2% and 33.6% of our revenues for the years ended
December 31, 2000, 1999 and 1998, respectively. Although we believe that direct
sales will continue to account for a majority of product license revenues, we
intend to increase the level of indirect sales activities. However, our efforts
to continue to expand indirect sales may not be successful. We also intend to
continue to expand our international operations and have committed, and continue
to commit, significant management time and financial resources to developing
direct and indirect international sales and support channels.
We recently implemented a new multi-channel distribution strategy and
product-pricing plan designed to expand our customer base, improve operating
efficiency and decrease the length of sales cycles. The strategy includes the
use of the web as a channel for distributing products where new and existing
customers can test our software on a demonstration basis and configure, upgrade
and order software directly online via a standard pricing model. In addition, we
will now provide complimentary evaluation software for all potential customers
and qualified partners.
Recognizing the need to bring operating expenses in line with our revenue
expectations, during the third quarter of 2000, we developed and implemented a
restructuring plan that called for the elimination of 231 employees or
approximately 10% of our workforce. We also rescinded approximately 230 offers
of employment, reduced various company-sponsored events for employees, limited
the use of external contractors and consultants and developed a plan to
consolidate facilities. To implement these actions we made severance payments to
employees, incurred costs for rescinded job offers, recognized expenses
associated with stock grants from a principal shareholder and the acceleration
of vesting provisions of stock options and recorded a liability for commitments
related to company-sponsored events. These costs totaled $10.8 million and are
reflected as restructuring and related charges in the accompanying consolidated
statements of operations for the year ended December 31, 2000. We expect that
annualized savings from these actions will approximate $25.0 million and will
contribute to slowing the growth of our sales and marketing expenses and our
general and administrative expenses. Substantially all restructuring costs and
related charges had been paid as of December 31, 2000. The unpaid amount of
$48,000 is included in accounts payable and accrued expenses in the accompanying
consolidated balance sheets.
Our operations and prospects have been and will be significantly affected
by the developments relating to the revision of our 1999, 1998 and 1997
financial statements. We and certain of our officers and directors are
defendants in a class action lawsuit alleging violations of various securities
laws and certain of our officers and directors are defendants in a shareholder
derivative lawsuit alleging that they breached their fiduciary duties related to
our restated financial statements. In October 2000, we entered into agreements
to settle the class action and shareholder derivative lawsuits. Both settlements
are subject to confirmatory discovery, final documentation, court approval and
certain other conditions.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:
23
Years ended December 31,
------------------------
2000 1999 1998
----- ----- -----
Statements of Operations Data
Revenues:
Product licenses .............................. 45.6% 56.7% 64.5%
Product support and other services ............ 54.4 43.3 35.5
----- ----- -----
Total revenues .............................. 100.0 100.0 100.0
Cost of revenues:
Product licenses .............................. 1.2 1.7 2.4
Product support and other services ............ 38.1 22.8 18.4
----- ----- -----
Total cost of revenues ...................... 39.3 24.5 20.8
----- ----- -----
Gross profit ..................................... 60.7 75.5 79.2
Operating expenses:
Sales and marketing ........................... 67.5 61.5 55.8
Research and development ...................... 27.4 18.5 12.7
General and administrative .................... 26.2 16.1 13.3
Amortization of intangible assets ............. 7.9 0.3 0.1
In-process research and development ........... -- 1.9 --
Restructuring and related charges ............. 4.8 -- --
----- ----- -----
Total operating expenses .................... 133.8 98.3 81.9
----- ----- -----
Loss from operations ............................. (73.1) (22.8) (2.7)
Financing and other income (expenses):
Interest income ............................... 1.6 1.4 1.1
Interest expense .............................. -- (0.1) (0.8)
Loss on investments ........................... (4.2) -- --
Provision for litigation settlement ........... (40.1) -- --
Minority interest ............................. (0.3) -- --
Other income (expense), net ................... -- -- --
----- ----- -----
Total financing and other income
(expenses) .................................. (43.0) 1.3 0.3
----- ----- -----
Loss before income taxes ......................... (116.1) (21.5) (2.4)
Provision for income taxes ....................... 0.6 0.8 --
----- ----- -----
Net loss ......................................... (116.7)% (22.3)% (2.4)%
===== ===== =====
Preferred stock dividends ........................ (2.1) -- --
Beneficial conversion feature .................... (8.6) -- --
----- ----- -----
Net loss attributable to common stockholders ..... (127.4)% (22.3)% (2.4)%
====== ===== =====
Comparison of 2000, 1999 and 1998
Revenues. Total revenues consist of revenues derived from sales of product
licenses and product support and other services, including technical support,
education and consulting services. Total revenues increased from $95.5 million
in 1998 to $151.3 million in 1999, and to $223.9 million in 2000, resulting in
annual revenue growth rates of 81.7% in 1998, 58.4% in 1999 and 48.0% in 2000.
Total revenues may not continue to increase at the rates experienced in prior
periods. Additionally, based on the revenue recognition criteria established in
SOP 97-2 and SOP 81-1, revenue from many large, multiple element arrangements is
recorded as deferred revenue, with both product license revenues and product
support and other services revenues recognized using the percentage of
completion method based on cost inputs as the work progresses. If the
arrangement includes acceptance criteria, revenue is not recognized until we can
demonstrate that the software or service can meet the acceptance criteria. If
the software license arrangement obligates us to the delivery of unspecified
future products, then revenue is recognized on the subscription basis, ratably
over the term of the contract.
In 1999, we launched the Strategy.com Finance channel. In 2000, we
launched the Strategy.com News and Weather channels, and in March 2001, we
launched the Strategy.com Sports and Traffic channels. We did not recognize
revenues related to Strategy.com until 2000, in which we recognized $8.7 million
in network affiliate and subscription fees and other services. During 2000,
approximately $5.0 million of Strategy.com revenues related to a customer
24
from whom we do not expect to generate significant recurring revenue in the
future. We expect to continue to generate revenues from OEM fees, network
affiliation fees, subscription fees, hosting, transaction and other fees from
Strategy.com services in the future.
During 2000, we agreed to restructure our relationship with a significant
customer, terminating the Strategy.com affiliation and joint research and
development agreement and replacing it with a standard enterprise software
license and maintenance agreement. While we had been providing services to the
customer throughout the year, no revenue had been recognized in accordance with
our revenue recognition accounting policies. In view of changes in the
customer's internal information technology plans, we entered into an agreement
with the customer in which we agreed to discontinue our development efforts and
deliver all existing work product. Since we have no future obligations to this
customer, all payments were made prior to the end of the year, and all other
revenue recognition criteria were met, we recorded revenues of $9.8 million,
with $4.4 million and $5.4 million recorded as product license and services
revenue, respectively, and deferred an additional $1.2 million related to
ongoing technical support obligations. Of the total $5.4 million recorded as
services revenue, $5.0 million related to Strategy.com. We do not expect to
generate significant recurring revenue from this customer in future periods.
Product License Revenues. Product license revenues increased from $61.6
million in 1998 to $85.8 million in 1999, and to $102.1 million in 2000,
resulting in annual growth rates of 73.7% in 1998, 39.2% in 1999 and 18.9% in
2000. The increase in product license revenues was due to increased customer
acceptance of our recently released products and the growth of the business
intelligence software market in general. Product license revenues were also
positively affected by the restructuring of the customer relationship described
above which resulted in $4.4 million of product license revenue. Although
product revenues have increased each year, the rate of increase has declined. We
believe this may be caused, in part, by concerns of potential new customers over
our restatement of financial results and the related litigation during 2000. We
believe the resolution of these matters may relieve these concerns. We expect
product license revenues as a percentage of total revenues to fluctuate on a
period-to-period basis and vary significantly from the percentage of total
revenues achieved in prior years. Additionally, historic growth rates my not be
sustainable or may decline due to the current economic climate in the first
quarter of 2001 with respect to decreased corporate spending in information
technology.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $33.9 million in 1998 to $65.5 million in 1999,
and to $121.9 million in 2000, resulting in a growth rate of 98.3% in 1998,
93.4% in 1999 and 86.2% in 2000. The increase in product support and other
services revenues was primarily due to a continuing increase in large scale
business intelligence applications which require significant implementation and
other consulting work. As a result of expected fluctuations in product license
revenues discussed above, we expect product support and other services revenues
as a percentage of total revenues to fluctuate on a period-to-period basis and
vary significantly from the percentage of total revenues achieved in prior
years.
International Revenues. International revenues are included in the amounts
discussed above and are discussed separately in this paragraph. International
revenues increased from $24.9 million in 1998 to $36.4 million in 1999, and to
$55.8 million in 2000, resulting in a growth rate of 74.9% in 1998, 45.9% in
1999 and 53.5% in 2000. Growth in international product license revenues
accounted for 45% of the total product license growth during 2000. The increase
in these revenues is due to the expansion of our international operations, new
product offerings and growing international market acceptance of our software
products. International revenues also increased as a result of the recognition
of $4.4 million of product license revenues from the non-recurring transaction
with the significant customer that restructured its relationship with us. In
addition, we opened new sales offices in Argentina, Switzerland, Mexico, Korea
and Australia in 2000, in Brazil in 1999, in Canada and Italy in 1998 and in
Austria, France, the Netherlands, Germany, United Kingdom and Spain prior to
1998. As a percentage of total revenues, international revenues were 26.1% in
1998, 24.0% in 1999 and 24.9% in 2000. We anticipate that international revenues
will continue to account for a significant amount of total revenues and
management expects to continue to commit significant time and financial
resources to the maintenance and ongoing development of direct and indirect
international sales and support channels.
25
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues
consists primarily of the costs of product manuals, media, amortization of
capitalized software expenses and royalties paid to third party software
vendors. Cost of product license revenues increased from $2.2 million in 1998 to