Business context and reporting period
MicroStrategy Incorporated (now identified in the request as Strategy Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2021. The company operated one reportable segment: enterprise analytics software and related services. It also pursued a strategy of holding bitcoin as its primary treasury reserve asset and using excess cash and, when appropriate, debt or equity financing to acquire more.
Unless otherwise stated, financial figures below are in U.S. dollars in millions. The company early adopted ASU 2020-06 on January 1, 2021; prior-period figures were not restated, so convertible-debt and diluted-EPS accounting are not directly comparable.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $122.9 | $111.4 |
| Gross profit / margin | $100.4 / 81.7% | $86.9 / 78.0% |
| Operating income (loss) | $(183.2) | $(0.1) |
| Net income (loss) | $(110.0) | $0.7 |
| GAAP diluted EPS | $(11.40) | $0.07 |
| Operating cash flow | $62.7 | $29.1 |
- Revenue increased 10.3%. Product licenses rose 69.1% to $21.3 million and subscription services rose 25.8% to $10.0 million; product support declined 0.7% to $70.6 million, while other services grew 6.3% to $20.9 million.
- Gross margin improved, but a $194.1 million bitcoin impairment drove the operating loss. The impairment is an accounting write-down that cannot be reversed for later price increases; gains are generally recognized only upon sale. The company reported non-GAAP operating income of $18.7 million and non-GAAP net income of $14.9 million, measures that exclude specified items including impairment and share-based compensation.
- Cash from operations was $62.7 million; investing used $1,086.8 million, principally for bitcoin purchases; financing provided $1,049.3 million, primarily from the 2027 notes offering. Cash, cash equivalents and restricted cash ended at $83.7 million.
- At March 31, cash and cash equivalents were $82.5 million and current assets were $250.8 million, versus current liabilities of $283.6 million. Management said existing and expected cash resources were sufficient for working capital, anticipated capital expenditures and contractual obligations for at least 12 months.
- Bitcoin holdings were approximately 91,326 BTC, carried at $1,946.6 million, with cumulative impairment of $264.8 million. The company purchased about 20,857 BTC for $1,086.4 million during the quarter and sold none.
- Convertible senior notes had $1,700.0 million aggregate principal and a $1,661.9 million net carrying amount. The 2025 notes bear 0.750% interest and the 2027 notes bear no regular interest. Total liabilities were $2,078.0 million; stockholders’ equity was $365.0 million.
Material changes versus the prior comparable period
- Revenue growth was led by product licenses and subscriptions, while product support was broadly flat. Product-license revenue included a larger contribution from sizable transactions: the top three transactions generated $7.0 million, or 32.8% of license revenue, versus $2.3 million, or 18.3%, a year earlier.
- Net results shifted from $0.7 million income to a $110.0 million loss, principally because of the bitcoin impairment. Operating cash flow increased by $33.6 million, with non-cash adjustments, including the impairment, contributing substantially.
- Digital assets increased from $1,054.3 million at December 31, 2020 to $1,946.6 million at March 31, 2021. Cash and cash equivalents rose from $59.7 million to $82.5 million, while net convertible-note carrying value increased from $486.4 million to $1,661.9 million, reflecting the new 2027 notes and ASU 2020-06 adoption.
- The company adopted ASU 2020-06 and began using the if-converted method for diluted EPS on convertible notes. The adoption also changed the balance-sheet treatment of convertible debt and related equity and deferred taxes.
Outlook, commentary, risks and unusual items
- No financial guidance was provided. The company stated it does not give guidance on anticipated financial performance. Management expects to continue monitoring bitcoin-market conditions and may pursue additional bitcoin purchases, including through future debt or equity financings; it did not set a target holding amount.
- Management described bitcoin as a long-term holding and said it did not expect to need bitcoin sales within 12 months to meet working-capital requirements, while reserving the possibility of sales for treasury management. It cautioned that bitcoin is less liquid than cash and may not be saleable at reasonable prices during market instability.
- Bitcoin accounting creates material earnings and balance-sheet volatility: impairment follows the lowest quoted price since acquisition and is not reversed for recoveries, whereas appreciation generally is not recorded until sale. The quarter’s bitcoin market price ranged from $27,678 to $61,788 per BTC.
- The $74.3 million income-tax benefit included discrete effects, including a $54.3 million tax benefit related to bitcoin impairment and a $22.1 million excess tax benefit from stock-option exercises. Deferred tax assets, net of valuation allowance and deferred tax liabilities, were $116.5 million; management warned that reduced future profitability could require a higher valuation allowance.
- Brazilian matters: the company said it was probable that resolution of alleged procurement violations by its Brazilian subsidiary would result in a loss, but the amount or range was not reasonably estimable. It stated the company was not a subject of the related criminal investigation and the subsidiary was not a target. A patent infringement action filed by Daedalus Blue was in early discovery; outcome was not determinable.
- COVID-19 had not materially affected Q1 revenue, according to management, but could affect future customer spending, payment timing, sales cycles, consulting implementations and license revenue. Other key risks include bitcoin price, liquidity, custody and cybersecurity risks; debt repayment or cash settlement needs; foreign-exchange movements; software competition; and customer and transaction concentration.
- International operations represented 42.9% of revenue. A 10% unfavorable currency movement was estimated to reduce Q1 revenue by 3.9%. The company reported effective disclosure controls and procedures.
Important facts for investors to verify
- Bitcoin holdings, acquisition costs, market prices, impairment accounting and custody/insurance arrangements, including subsequent-period developments.
- Convertible-note terms, conversion status, potential share dilution, cash-settlement exposure and refinancing capacity.
- Underlying software-business growth and margins, especially product-license deal concentration, subscription conversion and product-support trends.
- Cash availability and liquidity needs compared with debt, leases, purchase obligations and other contractual commitments.
- Progress and potential financial exposure in the Brazilian procurement matter and the Daedalus patent litigation.
- Tax-benefit composition, deferred-tax-asset recoverability and the comparability limitations arising from ASU 2020-06 and non-GAAP adjustments.