Business context and reporting period
MicroStrategy Incorporated (the registrant in this filing; identified in the request as Strategy Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2022. It operates an enterprise analytics software and services business and pursues a strategy of acquiring and holding bitcoin. Unless otherwise noted, financial statement amounts below are in millions; the filing presents them in thousands.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $122.1 | $125.4 | $241.4 | $248.3 |
| Gross profit | $96.9 | $102.3 | $190.5 | $202.7 |
| Operating loss | $(918.1) | $(414.2) | $(1,088.1) | $(597.4) |
| Net loss | $(1,062.3) | $(299.3) | $(1,193.0) | $(409.4) |
| Basic and diluted loss per share | $(94.01) | $(30.71) | $(105.64) | $(42.22) |
Revenue declined 2.6% in Q2 and 2.8% for the first half. Gross margin was approximately 79.3% in Q2 versus 81.6% a year earlier, and 78.9% for the first half versus 81.6%. Digital-asset impairment charges were $917.8 million in Q2 and $1,087.9 million for the first half, accounting for most of the operating losses.
For the first six months, operating cash flow was $22.9 million, compared with $76.7 million in 2021; investing cash outflow was $227.0 million, mainly reflecting bitcoin purchases; and financing cash inflow was $218.5 million. Cash, cash equivalents and restricted cash totaled $75.5 million at June 30, 2022, including $69.4 million of cash and cash equivalents. Current assets were $219.7 million versus current liabilities of $274.1 million. Total assets were $2.568 billion, total liabilities $2.755 billion, and stockholders’ deficit $187.1 million.
Long-term debt had a net carrying value of $2.375 billion; outstanding principal across debt instruments was $2.416 billion. The filing identifies $1.7 billion of convertible notes, $500 million of 2028 secured notes, a $205 million bitcoin-collateralized term loan due 2025, and $11.1 million of other secured debt. Management said cash and expected cash generation should meet working-capital needs and contractual obligations for at least 12 months.
Material changes versus the prior comparable period
- Bitcoin impairment losses rose 116.1% in Q2 and 75.8% for the first half year over year, reflecting bitcoin price declines and the company’s accounting policy of writing assets down when price falls below carrying value; subsequent price increases do not reverse impairments.
- Subscription-services revenue grew 35.5% in Q2 and 31.9% in the first half, while product-support revenue fell 6.3% and 5.6%, respectively. Product-license revenue declined 9.1% in Q2 and 15.6% in the first half, principally due to lower international sales.
- Interest expense, net, increased to $13.2 million in Q2 and $24.2 million for the first half, mainly reflecting the 2028 secured notes and new term loan. The company recorded an $88.1 million tax provision for the first half despite a pretax loss, versus a $194.5 million tax benefit in the prior-year period.
- Digital assets carried at $1.988 billion comprised approximately 129,699 bitcoin, down from a market value of approximately $2.451 billion at June 30 using the reported exchange price. The carrying value reflects cumulative impairment losses of $1.989 billion.
Outlook, risks, contingencies and unusual items
The company provided no numerical earnings or revenue guidance and stated that it does not give guidance on anticipated financial performance. Management expects subscription-services revenue to continue growing as it promotes cloud offerings. Remaining performance obligations were $273.9 million, of which $207.3 million was expected to be recognized within 12 months; the filing cautions that this balance is not necessarily indicative of future-period revenue.
Bitcoin price volatility is a central financial risk: holdings are concentrated, less liquid than cash, and may require further impairments. Approximately 30,051 bitcoin secured the Silvergate term loan; after bitcoin prices fell, the subsidiary deposited 10,585 additional bitcoin as collateral to help maintain the loan’s maximum 50% loan-to-collateral ratio. A further decline could require additional collateral or loan prepayment. The secured notes also have springing-maturity provisions; management expected those provisions not to be triggered. The company reported compliance with debt covenants at June 30.
A $391.3 million valuation allowance was recorded primarily against deferred tax assets related to bitcoin impairments. Further bitcoin declines or failure to regain profitability could require an additional allowance and materially affect earnings. The company said a loss from Brazilian procurement-regulation matters was probable, but the amount or range was not reasonably estimable; it did not expect a material effect on financial position. A patent-infringement case remained in expert discovery, with outcome not presently determinable.
Subsequent to quarter-end, the company announced that Michael Saylor would become Executive Chairman and Phong Le CEO, effective August 8, 2022. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Bitcoin prices, carrying value, collateral requirements and the potential effect of further declines on impairment expense, liquidity and debt obligations.
- Debt terms and maturities, including convertible-note conversion or repurchase provisions, the 2028 secured notes’ springing maturity, and the term loan’s collateral and loan-to-value requirements.
- Software business trends: cloud subscription growth, product-license and support declines, deferred revenue, and whether operating cash flow can sustain debt service.
- Potential additional tax valuation allowances and the resolution and financial exposure of the Brazilian matter and patent litigation.
- Post-quarter CEO transition and its effect, if any, on strategy, governance and execution.