Business context and reporting period
MicroStrategy Incorporated (identified in the request as Strategy Inc) filed this unaudited Form 10-Q for the quarter ended June 30, 2023. Its two strategies are operating an enterprise analytics software business and acquiring and holding bitcoin. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $120.4 | $122.1 | $242.3 | $241.4 |
| Gross profit / margin | $93.3 / 77.5% | $96.9 / 79.3% | $187.3 / 77.3% | $190.5 / 78.9% |
| Operating loss | $(26.7) | $(918.1) | $(47.0) | $(1,088.1) |
| Net income (loss) | $22.2 | $(1,062.3) | $483.4 | $(1,193.0) |
| Operating cash flow | Not reported separately for quarter | Not reported separately for quarter | $18.9 | $22.9 |
- Q2 revenue declined 1.4% year over year; first-half revenue rose 0.4%. Q2 GAAP diluted EPS was $1.52; first-half diluted EPS was $33.56.
- At June 30, cash and cash equivalents were $66.0, restricted cash $2.1, and working capital was negative approximately $63.3 ($209.6 current assets versus $272.9 current liabilities).
- Net carrying value of debt was $2.178 billion; aggregate principal debt was approximately $2.211 billion. First-half interest expense, net, was $26.0.
- First-half investing cash outflow was $527.4, primarily $526.3 of bitcoin purchases; financing cash inflow was $525.9. Cash, cash equivalents and restricted cash ended the period at $68.1.
- The company held approximately 152,333 bitcoin, carried at $2.323 billion after $2.196 billion in cumulative impairment losses. The filing’s illustrative quarter-end market-value calculation was $4.625 billion, based on a Coinbase price of $30,361.51 per bitcoin; this is not the balance-sheet carrying amount or a guarantee of realizable proceeds.
Material changes versus the prior comparable period
- Subscription services revenue grew 41.8% in Q2 and 44.0% in the first half, while product-license revenue fell 22.9% and 10.1%, respectively. Product support was broadly stable in Q2 and down 1.6% for the first half; other services fell 11.6% and 11.4%.
- Gross margin declined year over year in both periods, as costs of revenue increased despite roughly flat revenue.
- Bitcoin impairment losses fell sharply to $24.1 in Q2 from $917.8 a year earlier, and to $43.1 in the first half from $1.088 billion. Under the accounting policy described, impairment losses are recognized when applicable, while increases in bitcoin value are not recorded as gains until sale.
- First-half net income chiefly reflects a $513.5 income-tax benefit, primarily from releasing a valuation allowance on bitcoin-related deferred tax assets, and a $44.7 gain on extinguishing the secured term loan. The company still reported a $30.0 pretax loss for the first half.
- The company repaid its Silvergate secured term loan in March 2023 for approximately $161.0, releasing the bitcoin pledged for that loan. It raised $676.1 gross proceeds from ATM share sales in the first half and issued about 2.43 million shares under its ATM agreements, increasing potential dilution.
Outlook, management commentary, risks and unusual items
- No earnings or revenue guidance is provided. Management expects subscription-services revenue to continue growing as it promotes cloud offerings; it also cautions that product-license and product-support revenue may decline as customers migrate to cloud subscriptions.
- Management believes cash and cash equivalents plus anticipated cash generation are sufficient for working capital, expected capital expenditures and contractual obligations for at least 12 months. It says software-business cash generation alone is not expected to cover long-term obligations, and identifies refinancing, equity issuance, bitcoin-backed borrowing or bitcoin sales as possible funding sources.
- The 2028 secured notes have a springing-maturity feature that could accelerate maturity to September 2025 or November 2026 if specified liquidity tests are not met. Management expected to meet the requirements to avoid triggering the feature; the notes are secured in part by bitcoin. The company reported compliance with debt covenants at June 30.
- Bitcoin price volatility, impairment accounting, market liquidity, custody and counterparty risks, cybersecurity, regulatory change and the concentration of treasury assets in bitcoin may materially affect results, liquidity and debt-service capacity. A potential accounting-standard change to fair-value measurement of certain crypto assets was also identified as a source of possible earnings volatility.
- Brazilian procurement and related proceedings: the company considers a loss probable and accrued a total minimum of $1.2, but cannot estimate losses beyond that minimum; the ultimate loss could be significantly higher. A separate District of Columbia case naming the company and Michael Saylor remained unresolved; the court denied their motion to dismiss after quarter-end on July 31, 2023. The filing also describes an unresolved patent-infringement case.
- The first-half tax benefit is unusually large and sensitive to bitcoin values and future profitability; the company warns that a future valuation-allowance increase could materially reduce net income. The company also disclosed $135.0 of new cloud-hosting purchase commitments over four years.
Most important facts for investors to verify
- How much of reported first-half profit is attributable to the $513.5 tax benefit and $44.7 debt-extinguishment gain, rather than recurring operations?
- How bitcoin price movements, impairment accounting and any future accounting-standard changes affect reported assets, earnings and liquidity—and how much bitcoin is encumbered.
- The ability to service or refinance approximately $2.211 billion of principal, including the convertible-note maturities and the secured notes’ springing-maturity conditions.
- Whether ATM equity issuance continues, its effect on share count and dilution, and the extent to which proceeds fund bitcoin purchases or debt obligations.
- Developments and potential financial exposure in the Brazilian matters, the District of Columbia case and the patent litigation.
- Whether cloud-subscription growth offsets declines in licenses, support and services while protecting margins and operating cash flow.