01—Abstract
Summary
Summary of the 10-K filed February 12, 2021. Cited figures are marked; the original filing is the authoritative source.
MicroStrategy Incorporated's 10-K for fiscal 2020 describes two parallel corporate strategies: growing its enterprise analytics software business and acquiring and holding bitcoin.
In September 2020 the Board adopted a Treasury Reserve Policy under which bitcoin became the primary treasury reserve asset, and in 2021 the company added a business strategy of purchasing bitcoin, potentially funded by debt or equity raises. As of December 31, 2020 the company carried $1.054 billiona of digital assets (approximately 70,469 bitcoins, net of $70.7 million of cumulative impairments) and $59.7 million of cash and cash equivalents. As of February 8, 2021 it held approximately 71,079 bitcoins acquired at an aggregate price of $1.145 billion.
The company reported total 2020 revenues of $480.7 millionb, down from $486.3 million in 2019, and a net loss of $7.5 million (EPS of -$0.78), compared with net income of $34.4 million in 2019. The loss was driven primarily by $70.7 million of digital asset impairment losses. Product licenses revenue was $86.7 million and product support revenue was $284.4 million.
Operating cash flow was $53.6 millionc. The company issued $650.0 million of 0.750% Convertible Senior Notes due 2025 in December 2020, which were used in part to buy bitcoin, and it had $800.0 million of share repurchase authorization with $209.1 million remaining. Investors should note the risk factors the filing emphasizes: bitcoin price volatility now directly affects reported earnings because impairments are recognized on declines below carrying value while gains are recognized only on sale, bitcoin is less liquid than cash, and Michael J.
Saylor controls about 72.0%d of the voting power through class B shares. The company also disclosed a Brazilian subsidiary matter in which it believes a loss is probable but not reasonably estimable.
02—Key points
Key Highlights
- Two strategies: growing the enterprise analytics software business and acquiring and holding bitcoin, with bitcoin designated the primary treasury reserve asset under the September 2020 Treasury Reserve Policy.
- Digital assets of $1.054 billion at December 31, 2020 (about 70,469 bitcoins) after $70.7 million of cumulative impairments; the company held about 71,079 bitcoins as of February 8, 2021, bought at an aggregate $1.145 billion.
- Total 2020 revenues of $480.7 million (vs. $486.3 million in 2019), with product support revenue of $284.4 million and product licenses revenue of $86.7 million.
- Net loss of $7.5 million (-$0.78 per share) in 2020 versus net income of $34.4 million in 2019, primarily due to $70.7 million in digital asset impairment losses.
- Issued $650.0 million of 0.750% Convertible Senior Notes due 2025 in December 2020; the conversion price is about $397.99 per share and the company intends to settle principal in cash.
- Cash and cash equivalents fell to $59.7 million at year-end 2020 from $456.7 million in 2019 as cash was shifted into bitcoin; operating cash flow was $53.6 million.
- Michael J. Saylor controls about 72.0% of total voting power through class B common stock, and the company is a controlled company under Nasdaq rules.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2020, Strategy lost $0.02.
- Revenue$480.7M100.0%
- Cost of revenue−$91.1M18.9%
- Gross profit$389.7M81.1%
- Operating costs−$403.3M83.9%
- Operating income−$13.6M2.8%
- Interest, other & tax$6.1M1.3%
- Net income−$7.5M1.6%
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 12, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $480.74M$486.33M | −1.1% |
| Cost of Revenue | $91.06M$99.97M | −8.9% |
| Gross Profit | $389.68M$386.35M | +0.9% |
| R&D Expenses | $103.56M$109.42M | −5.4% |
| Operating Expenses | $403.31M$387.36M | +4.1% |
| Operating Income | -$13.63M-$1.00M | −1259.8% |
| Net Income | -$7.52M$34.35M | −121.9% |
| EPS (Basic) | $-0.78$3.35 | −123.3% |
| EPS (Diluted) | $-0.78$3.33 | −123.4% |
| Shares Outstanding (Basic) | 9.68M10.26M | −5.6% |
| Shares Outstanding (Diluted) | 9.68M10.33M | −6.2% |
05—Questions
Frequently Asked Questions
How is MicroStrategy's bitcoin strategy affecting its reported financial results?
Under its accounting policy, bitcoin is an indefinite-lived intangible asset carried at cost less impairments. Impairments are recorded when the price falls below the lowest price since acquisition, and recoveries are not recognized until a sale. In 2020 this produced $70.7 million of impairment losses, which contributed to the net loss of $7.5 million. The filing states that future earnings volatility may be significantly greater as bitcoin holdings grow.
How did MicroStrategy fund its bitcoin purchases?
The company purchased approximately 70,469 bitcoins for about $1.125 billion in 2020. Funding included cash from the liquidation of short-term investments and the net proceeds of the $650.0 million convertible senior notes issued in December 2020. The company also states it may issue debt or equity in future capital raising transactions with the objective of buying more bitcoin.
Does MicroStrategy plan to sell its bitcoin?
The company says it views its bitcoin as long-term holdings and does not plan regular trading or hedging. It may, however, sell bitcoin as needed for treasury management and general corporate purposes. It states it does not need to sell bitcoin within the next twelve months to meet working capital requirements, and that bitcoin may be less liquid than cash in times of market instability.
What are the main risks to the company's shareholders?
The filing highlights bitcoin price volatility, the concentration of holdings, custody and private-key loss risks, potential SEC or Investment Company Act regulatory scrutiny, and dilution from future equity or convertible securities. It also cites concentrated control by Michael J. Saylor, who holds about 72.0% of voting power, and the possibility that convertible notes could require cash settlement. Core software risks include reliance on a single platform and a possible shift from product licenses to cloud subscriptions that could delay revenue recognition.
What is the status of the Brazilian subsidiary matter?
The Brazilian subsidiary is believed to have failed or likely failed to comply with local procurement regulations. A Brazilian court authorized asset freezes in 2020 related to an investigation, and the bank accounts were later unfrozen pending appeal. The company believes a loss is probable but states that the amount or range cannot be reasonably estimated, and that the outcome is not expected to have a material effect on its financial position.
06—Continue