MicroStrategy Incorporated (now Strategy Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company reported as MicroStrategy Incorporated and operated a single enterprise analytics software and services segment. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $127.4 | $119.7 | $349.4 | $352.8 |
| Gross profit / margin | $105.7 / 82.9% | $95.9 / 80.1% | $279.1 / 79.9% | $277.5 / 78.6% |
| Operating income (loss) | $(20.3) | $4.6 | $(14.0) | $(10.6) |
| Net income (loss) | $(14.2) | $9.7 | $(10.2) | $22.2 |
| Diluted EPS | $(1.48) | $0.94 | $(1.04) | $2.15 |
- Q3 revenue increased 6.4% year over year, led by product licenses, up 55.9%, and subscription services, up 5.2%. Product support fell 2.1% and other services fell 8.8%.
- Nine-month revenue declined 1.0%. Subscription services rose 9.7%, while product licenses, product support, and other services were down 0.7%, 2.2%, and 0.6%, respectively.
- Q3 operating results included a $44.2 million bitcoin impairment. Excluding share-based compensation and digital-asset impairment under the company’s non-GAAP presentation, operating income was $26.5 million and net income was $19.8 million; these non-GAAP figures are company-defined and are not substitutes for GAAP results.
- Operating cash flow was $28.3 million for the first nine months, versus $52.3 million a year earlier. Investing cash flow was $(316.2) million, primarily reflecting $425.0 million of bitcoin purchases; financing cash flow was $(118.9) million, primarily reflecting treasury-stock purchases.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $52.7 million, restricted cash $1.2 million, and bitcoin carrying value $380.8 million. Cash, cash equivalents, and restricted cash totaled $53.9 million, down from $457.8 million at year-end 2019; short-term investments were zero, versus $108.9 million at year-end.
- Total assets were $772.9 million, total liabilities $383.6 million, and stockholders’ equity $389.3 million. Current assets of $218.4 million were below current liabilities of $243.7 million.
- The balance sheet presents no conventional borrowings. It does include operating lease liabilities and $28.0 million of unpaid Transition Tax obligations. Operating lease liabilities were $95.6 million current and $95.6 million non-current; the filing separately reports total lease liabilities of $93.1 million, so the lease classifications and total warrant reconciliation.
- Management said available and anticipated cash should cover working capital, capital expenditures, and contractual obligations for at least 12 months, and did not expect to need bitcoin sales for working capital in that period. It cautioned that bitcoin is less liquid than cash and may not be saleable at reasonable prices during market instability.
Material changes and management commentary
- In Q3, the company acquired approximately 38,250 bitcoin for $425.0 million, at an average price of about $11,111 per bitcoin. Bitcoin became the primary treasury reserve asset under a policy adopted in September. The company recorded $44.2 million of impairment; its accounting policy does not recognize later price recoveries unless assets are sold.
- Cash declined sharply due principally to bitcoin purchases, redemptions and purchases of short-term investments, and share repurchases. Nine-month treasury-stock purchases totaled $122.5 million in the cash flow statement; the tender offer accounted for $61.3 million including fees.
- Q3 selling and marketing expense fell 19.6%; management attributed lower expenses partly to reduced staffing, travel, and in-person marketing. The company expected sales and marketing, R&D, and G&A expenses to remain below prior-year levels in the balance of 2020, while providing no formal revenue or earnings guidance.
- Management reported high product-support renewal rates during the period, but warned COVID-19 could lengthen sales cycles and pressure license, support, and consulting revenue through customer cost reductions, delayed decisions, and extended payment terms. It also cited lower education revenue from reduced pricing and free offerings.
- Deferred revenue and advance payments totaled $172.5 million, down from $191.5 million at year-end 2019. The company expected to recognize $160.8 million within 12 months, subject to satisfying performance obligations.
Risks, contingencies, and unusual items
- Bitcoin: Price volatility, impairment charges, lack of impairment reversals, custody and cybersecurity risks, regulatory uncertainty, and limited liquidity could materially affect earnings, asset values, and liquidity. The company reported $44.2 million of Q3 impairment and said positive price changes do not increase carrying value absent a sale.
- Brazil investigation: The company said its Brazilian subsidiary failed or likely failed to comply with local procurement regulations. Management considered a loss probable but could not reasonably estimate its amount or range; a material earnings impact is possible. A subsidiary bank-account freeze of approximately $2.3 million was lifted pending appeal. The company said it was not itself a subject of the investigation.
- COVID-19 and operating risks: The filing highlights uncertain customer demand, sales-cycle delays, customer payment risk, and pressure on consulting and renewals. Other risks include intense competition, foreign exchange exposure, cybersecurity and privacy requirements, and dependence on a single software platform.
- Other unusual comparability item: Nine-month 2019 other income included a $29.8 million gain from the sale of the Voice.com domain name; the sale also generated a discrete $8.1 million tax provision.
- The company disclosed $187.3 million of contractual obligations, including operating leases, purchase obligations, and Transition Tax installments. It reported no material off-balance-sheet arrangements. Management said disclosure controls were effective.
Key facts for investors to verify
- Bitcoin holdings, valuation, impairment treatment, custody arrangements, and the effects of subsequent price movements on liquidity and reported earnings.
- Cash needs and near-term liquidity after the $425.0 million bitcoin purchase and approximately $122.5 million of treasury-stock purchases; reconcile lease-liability classifications and totals.
- Whether core software revenue trends persist, particularly the Q3 license growth, nine-month support decline, and customer shifts between perpetual licenses and subscriptions.
- Developments in the Brazilian procurement matter, including any loss estimate, appeal outcome, or effect on the subsidiary.
- COVID-19 effects on sales cycles, renewals, collections, consulting demand, and the company’s stated expense expectations.