MicroStrategy Incorporated (now Strategy Inc.) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing was signed May 3, 2022. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
The company pursued two strategies: growing its enterprise analytics software business and acquiring and holding bitcoin as its primary treasury reserve asset. At quarter-end it held approximately 129,218 bitcoin, with a reported carrying value of $2,895.6 million. Bitcoin is accounted for as an indefinite-lived intangible asset: impairments are recorded when required, while recoveries in value are not recognized unless bitcoin is sold.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $119.3 | $122.9 | Down 2.9% |
| Gross profit | $93.6 | $100.4 | Down 6.7% |
| Gross margin | 78.5% | 81.6% | Down 3.1 percentage points |
| Operating loss | $(170.0) | $(183.2) | Loss narrowed |
| Net loss | $(130.8) | $(110.0) | Loss widened |
| Basic and diluted loss per share | $(11.58) | $(11.40) | Loss per share widened |
| Cash from operations | $43.7 | $62.7 | Down 30.3% |
| Cash, cash equivalents and restricted cash at quarter-end | $98.9 | $83.7 | Up $15.2 |
Revenue mix: product licenses $16.5 million (down 22.4%); subscription services $12.8 million (up 28.1%); product support $67.2 million (down 5.0%); and other services $22.8 million (up 8.7%). Management attributed license weakness partly to fewer and smaller large transactions, support declines partly to customer conversions to subscriptions or term licenses, and subscription growth to conversions, greater usage and new customers. International revenue was 42.6% of total.
Cost of revenue rose 13.9% to $25.7 million, outpacing revenue and contributing to lower gross margin. Operating expenses were $263.6 million, including $170.1 million of bitcoin impairment losses; impairment was 64.5% of operating expenses. Excluding the impairment, software operating expenses and other costs still require consideration. Interest expense, net, rose to $11.0 million from $2.4 million, mainly reflecting the secured notes and new term loan. The $48.0 million income-tax benefit was lower than the $74.3 million prior-year benefit; the effective tax rate was 26.9% versus 40.3%.
Operating cash flow was positive but lower year over year. Investing used $216.1 million, primarily for $215.5 million of bitcoin purchases; financing provided $207.3 million, including net proceeds from the new secured term loan. Cash flow after property-and-equipment purchases was approximately $43.0 million, before bitcoin purchases and financing flows.
At March 31, 2022, cash and cash equivalents were $92.7 million and restricted cash was $6.3 million. Current assets were $247.0 million versus current liabilities of $304.9 million, a working-capital deficit of $57.9 million and a current ratio of approximately 0.81. Management said cash on hand and anticipated operating cash generation should cover working capital, expected capital expenditures and contractual obligations for at least 12 months.
Long-term debt, net of issuance costs, was $2,361.9 million, compared with $2,155.2 million at year-end 2021. Principal outstanding totaled $2,405.0 million: $650 million of 2025 convertible notes, $1,050 million of 2027 convertible notes, $500 million of 2028 secured notes and a new $205 million 2025 secured term loan. The term loan bears a floating rate of SOFR 30-day average plus 3.70%, subject to a 3.75% floor, and is secured by bitcoin and a $5 million cash reserve. Approximately 95,643 bitcoin were unencumbered at quarter-end; portions of holdings collateralize the 2028 notes and term loan.
Material changes and unusual items
- In March 2022, the wholly owned subsidiary MacroStrategy borrowed $205 million from Silvergate; approximately $190.5 million of net proceeds funded bitcoin purchases. The term loan requires a loan-to-collateral ratio of 50% or less and may require additional collateral or repayment if bitcoin prices decline.
- Bitcoin holdings increased from 124,391 at December 31, 2021 to 129,218 at March 31, 2022. The company purchased 4,827 bitcoin for $215.5 million during the quarter and recorded $170.1 million of impairment losses. Cumulative impairment losses were $1,071.4 million.
- The company’s stated bitcoin average purchase price was approximately $30,700 per bitcoin. The March 31 market price cited in the filing was $45,602.79; the reported carrying value is not a quarter-end fair-value mark and does not reflect subsequent price increases.
- Share-based compensation expense increased to $14.4 million from $7.7 million. The company attributed the increase primarily to expansion of equity award programs.
- Reported operating loss improved year over year partly because bitcoin impairment expense declined by $24.0 million. Net loss nevertheless increased, with higher interest expense and a smaller income-tax benefit among the factors.
Outlook, risks and contingencies
The filing provides no formal financial guidance; it says the company does not give guidance on anticipated future financial performance. Management expected subscription-services revenue to continue growing as it promoted its cloud offering. Management also said it did not expect to need bitcoin sales for working capital within the next 12 months, while noting that bitcoin may be sold or used in other treasury transactions.
Key risks include bitcoin price volatility and the asymmetric impairment accounting, bitcoin’s liquidity and custody/cybersecurity risks, concentration of assets in bitcoin, and the possibility that a decline in bitcoin prices could affect liquidity, collateral requirements and debt service. The 2025 secured term loan can require additional bitcoin collateral or prepayment after a collateral-ratio breach. The 2028 secured notes include springing maturity provisions linked to liquidity and convertible-note maturities; management expected the feature not to be triggered. The filing also highlights substantial debt, refinancing and conversion-payment risks, foreign-exchange exposure, software competition and execution, and continuing COVID-19 uncertainty.
Subsequent to quarter-end, the company incurred at least $30.2 million of additional bitcoin impairment losses in Q2 2022 on bitcoin held at March 31. In Brazil, the company believed it was probable that resolution of alleged procurement-regulation violations would result in a loss, but said the amount or range was not reasonably estimable; the matter could materially affect earnings when accrued. A patent infringement case brought by Daedalus Blue remained unresolved, with outcome not determinable. Management did not expect ordinary-course legal proceedings generally to have a material adverse effect on financial position, results or cash flows.
Other notable disclosures: management concluded disclosure controls were effective at the reasonable-assurance level. The filing announced Andrew Kang’s expected appointment as CFO around May 9, 2022, succeeding Phong Le, who was to remain President.
Important facts for investors to verify
- Bitcoin exposure: current holdings, market price versus accounting carrying value, further impairment exposure, custody arrangements and the amount of collateral pledged.
- Term-loan collateral triggers, floating interest cost, available liquidity and the ability to meet debt maturities and any convertible-note cash-settlement obligations.
- Software trends behind falling licenses and support revenue, subscription growth, gross-margin pressure and the timing of large license transactions.
- Potential financial impact and status of the Brazilian procurement matter and Daedalus patent litigation.
- Subsequent-quarter bitcoin impairment and any changes in management’s liquidity outlook, debt strategy or CFO transition.