MicroStrategy Incorporated (now identified in the request as Strategy Inc.) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing issuer is MicroStrategy Incorporated; its statements are unaudited and amounts below are in U.S. dollars. The company reported two strategies: operating its enterprise analytics software business and acquiring and holding bitcoin.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $125.4 million | $110.6 million | $248.3 million | $222.0 million |
| Gross profit / gross margin | $102.3 million / 81.6% | $86.6 million / 78.3% | $202.7 million / 81.6% | $173.5 million / 78.1% |
| Operating income (loss) | $(414.2) million | $6.3 million | $(597.4) million | $6.3 million |
| Net income (loss) | $(299.3) million | $3.4 million | $(409.4) million | $4.0 million |
| Diluted earnings (loss) per share | $(30.71) | $0.35 | $(42.22) | $0.41 |
- Digital-asset impairment losses were $424.8 million in Q2 and $618.9 million for the first half; they accounted for 82.2% and 77.4% of operating expenses, respectively. The company reported non-GAAP operating income of $21.6 million and non-GAAP net income of $16.7 million in Q2; first-half non-GAAP operating income was $40.3 million and non-GAAP net income was $31.6 million. These are company-defined non-GAAP measures.
- Revenue rose 13.4% in Q2 and 11.8% in the first half year over year. Q2 product-license revenue increased 49.5%, subscription services 28.9%, product support 1.4%, and other services 23.3%. First-half product support revenue was nearly flat, up 0.3%.
- Cash flow, first half: Operating cash flow was $76.7 million, versus $26.5 million; investing cash outflow was $1.617 billion, primarily bitcoin purchases; financing cash inflow was $1.538 billion, largely from debt issuance. Cash, cash equivalents and restricted cash ended at $57.6 million, versus $60.8 million at year-end 2020.
- Liquidity and balance sheet, June 30: Cash and cash equivalents were $56.4 million; current assets $208.5 million and current liabilities $275.0 million, implying negative working capital of about $66.5 million. Total assets were $2.624 billion, total liabilities $2.547 billion, and stockholders’ equity $77.4 million.
- Debt: Long-term debt, net, was $2.151 billion; principal outstanding was $2.2 billion: $650 million of 0.75% convertible notes due 2025, $1.05 billion of 0% convertible notes due 2027, and $500 million of 6.125% senior secured notes due 2028. The secured notes are collateralized by specified assets, including bitcoin acquired on or after their issuance, and have springing-maturity provisions tied to liquidity and earlier-maturing convertible debt.
- Bitcoin: The company held approximately 105,085 bitcoin, carried at $2.051 billion after $689.6 million of cumulative impairments. The filing gives original cost basis of approximately $2.741 billion and a June 30 market-price calculation of $3.653 billion; the latter is a company-reported non-GAAP estimate, not the GAAP carrying value. No bitcoin was sold in the quarter or first half.
Material changes versus comparable periods
- Net income shifted to a substantial GAAP loss, principally because bitcoin price declines triggered impairment charges. Under the accounting policy described, impairment write-downs are not reversed if bitcoin prices later rise; gains are generally recognized only on sale.
- Bitcoin purchases totaled approximately $1.616 billion in the first half, funded in part by the February convertible-note offering and June secured-note offering. The company’s bitcoin holdings increased from approximately 70,469 at December 31, 2020 to 105,085 at June 30, 2021.
- Debt increased materially: the company issued $1.05 billion of 2027 convertible notes and $500 million of 2028 secured notes in 2021. It adopted ASU 2020-06 effective January 1, 2021; prior periods were not restated, and the filing cautions that some comparative debt and earnings-per-share figures are not directly comparable.
- Operating revenue grew, with product licenses and subscriptions leading, while product support remained broadly stable. Operating expenses also rose, including increased share-based compensation.
Outlook, management commentary, risks and contingencies
- Management said cash on hand and anticipated operating cash generation should meet working-capital needs, capital expenditures and contractual obligations for at least 12 months, and said it did not expect to need bitcoin sales for working capital during that period. It cautioned that bitcoin is less liquid than cash and may not be saleable at reasonable prices in stressed markets.
- The company did not provide financial guidance and stated that it does not give guidance on anticipated future financial performance. It expects to continue monitoring market conditions when considering further bitcoin purchases and debt or equity financing; it may also sell bitcoin for treasury management or general corporate purposes.
- Bitcoin-related risks include price volatility, irreversible impairment accounting, market manipulation and liquidity concerns, regulatory uncertainty, custody and cyberattack risks, and concentration of treasury assets. The company also warned that a decline in bitcoin value could impair debt-service capacity. Its $1.0 billion at-the-market equity sale agreement was available, but no shares were sold under it through June 30.
- The 2028 secured notes impose covenants and may mature earlier than their stated 2028 date if specified liquidity tests relating to convertible debt are not met. The company said it was in compliance with debt covenants at June 30. It also disclosed potential cash-settlement and repurchase obligations under the debt instruments.
- Management said COVID-19 had not materially affected revenue in the periods reported but could weigh on future demand, customer purchasing decisions and collections. No specific earnings or revenue forecast was provided.
- Contingencies: Brazilian procurement matters remain under investigation; management considered a loss probable but could not reasonably estimate its amount or range, and said the outcome could materially affect earnings when accrued, though it did not expect a material effect on financial position. A patent-infringement case filed by Daedalus Blue was in early litigation stages; its outcome was not determinable.
- The filing reports effective disclosure controls. It also notes a related-party arrangement under which CEO Michael Saylor provided up to $40 million of personal directors’ and officers’ indemnity coverage for an initial 90 days, in return for a $388,945 fee; the company cited difficulty obtaining conventional coverage on acceptable terms.
Important facts for investors to verify
- How bitcoin prices and the impairment-only accounting model affect GAAP earnings, reported asset values, and the usefulness of the company’s non-GAAP market-value calculation.
- Debt terms, collateral coverage, covenant compliance, springing-maturity liquidity tests, and the company’s ability to meet debt service or potential conversion and repurchase obligations.
- Whether software revenue growth—particularly licenses, subscriptions and product support—can sustain operating cash generation, and how much reported growth reflects foreign-exchange movements.
- The practical availability of liquidity: cash balances, negative working capital, bitcoin market liquidity, and any future use of the at-the-market equity program or bitcoin sales.
- Developments and possible financial consequences of the Brazilian investigation and Daedalus patent litigation, as well as the indemnification arrangement with the CEO.