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 September 30, 2021. It operates an enterprise analytics software and services business and pursues a strategy of acquiring and holding bitcoin. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $128.0 | $127.4 | $376.2 | $349.4 |
| Gross profit / margin | $105.7 / 82.6% | $105.7 / 82.9% | $308.3 / 82.0% | $279.1 / 79.9% |
| Operating loss | $(49.7) | $(20.3) | $(647.1) | $(14.0) |
| Net loss | $(36.1) | $(14.2) | $(445.5) | $(10.2) |
| GAAP loss per diluted share | $(3.61) | $(1.48) | $(45.47) | $(1.04) |
- Revenue increased 0.5% in Q3 and 7.7% year to date. Q3 subscription services revenue grew 30.7% to $10.9 million; product license revenue declined 12.7% to $25.8 million. Nine-month product license and subscription revenue rose 23.6% combined.
- Operating expenses were $155.3 million in Q3 and $955.4 million year to date, including bitcoin impairment charges of $65.2 million and $684.0 million, respectively. Excluding share-based compensation and digital-asset impairment, the company reported non-GAAP operating income of $27.7 million for Q3 and $67.9 million for nine months; these are non-GAAP measures.
- Operating cash flow was $90.6 million for the nine months, versus $28.3 million in the prior-year period. Investing cash outflow was $2.037 billion, principally bitcoin purchases; financing cash inflow was $1.946 billion, principally debt and equity proceeds. Cash, cash equivalents and restricted cash totaled $58.1 million at period end.
- At September 30, current assets were $197.6 million and current liabilities were $253.9 million (current ratio about 0.78). Cash and cash equivalents were $57.0 million; bitcoin was carried at $2.406 billion. Management said available and expected cash would meet working-capital needs and obligations for at least 12 months, while noting bitcoin is less liquid than cash.
- Long-term debt, net, was $2.153 billion, comprising $650 million of 0.75% convertible notes due 2025, $1.05 billion of 0% convertible notes due 2027, and $500 million of 6.125% secured notes due 2028. The secured notes are collateralized by substantially all assets subject to exclusions and include springing-maturity conditions tied to the convertible notes. The company reported covenant compliance.
Material changes versus the prior comparable period
- Nine-month net loss widened sharply, chiefly because bitcoin impairment rose from $44.2 million to $684.0 million. Under the company’s accounting, impairment write-downs are not reversed for later bitcoin price recoveries.
- Bitcoin holdings increased from approximately 70,469 at December 31, 2020 to 114,042 at September 30, 2021. The company spent $2.035 billion on bitcoin in the first nine months, financed in part by debt and equity issuance. It reported no bitcoin sales.
- Debt increased substantially following issuance of the 2027 convertible notes and 2028 secured notes. The company also sold 555,179 Class A shares under its at-the-market agreement for approximately $399.5 million net proceeds; about $596.0 million of capacity remained.
- The company adopted ASU 2020-06 effective January 1, 2021, changing convertible-debt and diluted-EPS accounting. Prior periods were not restated and are not directly comparable in this respect.
Outlook, commentary, risks and contingencies
- The filing provides no specific financial guidance; it says the company does not give guidance on expected future financial performance. Management described bitcoin as a long-term treasury holding and said it may continue purchases subject to market conditions and financing decisions, while retaining the option to sell bitcoin for treasury or corporate purposes.
- Management said Q3 and nine-month revenue were not materially affected by COVID-19, but warned that future demand, payment timing, sales cycles and implementations could be affected.
- Key risks include bitcoin price volatility, potentially significant non-reversible impairment charges, bitcoin liquidity and custody/cybersecurity risks, evolving regulation, and the concentration of assets in bitcoin. Debt servicing and the secured notes’ springing-maturity and collateral provisions are also material risks.
- The company stated it believes a loss from Brazilian procurement-related matters is probable, but the amount or range cannot be reasonably estimated; it believes the matter will not materially affect financial position, though earnings could be materially affected when a liability is accrued. A patent infringement case remained stayed pending court assistance with claim construction and other matters.
- The nine-month $217.4 million income-tax benefit included discrete tax benefits related to bitcoin impairment and stock-option exercises. The company also disclosed $259.3 million of net deferred tax assets after valuation allowance and cautioned that future profitability affects their realizability.
Important facts for investors to verify
- Bitcoin exposure: 114,042 BTC held, $2.406 billion carrying value, $754.7 million cumulative impairment, and the gap between carrying value and market value (the filing’s quarter-end market-price calculation was approximately $4.965 billion).
- Liquidity and debt capacity: cash of $57.0 million, negative working capital of approximately $56.3 million, $2.153 billion net debt, and conditions that could accelerate secured-note maturity.
- Underlying software performance: revenue growth was modest in Q3, with lower product license revenue offset by subscription and services growth; review renewal trends, bookings and remaining performance obligations.
- Equity financing and dilution: approximately $596.0 million remained available under the at-the-market offering, in addition to potential shares issuable on convertible notes and employee awards.
- Exposure to unresolved matters: Brazilian proceedings with an unestimable probable loss and the stayed patent litigation.