MICROSTRATEGY INCORPORATED Forward-Looking Information
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed under "Part II. Item 1A. Risk Factors," among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations. Business Overview MicroStrategy® pursues two corporate strategies in the operation of its business. One strategy is to acquire and hold bitcoin and the other strategy is to grow our enterprise analytics software business. We believe a key differentiator ofMicroStrategy is our two, interdependent corporate strategies in the operation of our business. In the first quarter of 2021, we determined to pursue as part of our overall corporate strategy, a strategy of acquiring bitcoin with our liquid assets that exceed working capital requirements, and from time to time, subject to market conditions, issuing debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. We believe that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open-source architecture, that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation. We also believe that bitcoin offers additional opportunity for appreciation in value with increasing adoption due to its limited supply. Under this corporate strategy, we also periodically engage in activities to educate the market regarding bitcoin. We believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software and services business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand and can provide opportunities to secure new customers for our analytics offerings. We are also exploring opportunities to apply bitcoin-related technologies such as blockchain analytics into our software offerings. We view our bitcoin holdings as long-term holdings, and we do not plan to engage in regular trading of bitcoin and have not hedged or otherwise entered into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoin in future periods as needed to generate cash for treasury management and other general corporate purposes. We have not set any specific target for the amount of bitcoin we seek to hold, and we will continue to monitor market conditions in determining whether to conduct debt or equity financings to purchase additional bitcoin.
Our Bitcoin Acquisition Strategy
InSeptember 2020 , our Board of Directors adopted a Treasury Reserve Policy (as amended to date, the "Treasury Reserve Policy") that updated our treasury management and capital allocation strategies, under which our treasury reserve assets will consist of:
• cash and cash equivalents and short-term investments ("Cash Assets") held
by us that exceed working capital requirements; and
• bitcoin held by us, with bitcoin serving as the primary treasury reserve
asset on an ongoing basis, subject to market conditions and anticipated
needs of the business for Cash Assets.
In the first quarter of 2021, we adopted, in addition to and in conjunction with our Treasury Reserve Policy, a corporate strategy of acquiring and holding bitcoin, and from time to time, subject to market conditions, issuing debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. OnJune 14, 2021 , we entered into the Sale Agreement withJefferies LLC , as agent, pursuant to which we may issue and sell shares of our class A common stock having an aggregate offering price of up to$1.0 billion from time to time through Jefferies. During the three months endedSeptember 30, 2021 we issued and sold 555,179 shares of our class A common stock under the Sale Agreement, at an average gross price per share of approximately$727.64 , for aggregate net proceeds (less$4.5 million in sales commissions and expenses) of approximately$399.5 million . We used the net proceeds of these sales to purchase additional bitcoin. 24
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The following table presents a rollforward of our bitcoin holdings, including
additional information related to our bitcoin purchases and digital asset
impairment losses within the respective periods. We have not sold any of our
bitcoin as of the date of this Quarterly Report.
Source
of Digital Asset Digital Asset
Capital Digital Asset Impairment Carrying
Used to Original Cost Losses Value Approximate Approximate
Purchase Basis (in (in Number of Average Purchase
Bitcoin (in thousands) thousands) thousands) Bitcoins Held Price Per Bitcoin
Balance at June 30,
2020 $ 0 $ 0 $ 0 0 n/a
Digital asset
purchases (a) 425,000 425,000 38,250 11,111
Digital asset
impairment losses (44,242 ) (44,242 )
Balance at September
30, 2020 $ 425,000 $ (44,242 ) $ 380,758 38,250 $ 11,111
Digital asset
purchases (b) 700,000 700,000 32,219 21,726
Digital asset
impairment losses (26,456 ) (26,456 )
Balance at December
31, 2020 $ 1,125,000 $ (70,698 ) $ 1,054,302 70,469 $ 15,964
Digital asset
purchases (c) 1,086,375 1,086,375 20,857 52,087
Digital asset
impairment losses (194,095 ) (194,095 )
Balance at March 31,
2021 $ 2,211,375 $ (264,793 ) $ 1,946,582 91,326 $ 24,214
Digital asset
purchases (d) 529,231 529,231 13,759 38,464
Digital asset
impairment losses (424,774 ) (424,774 )
Balance at June 30,
2021 $ 2,740,606 $ (689,567 ) $ 2,051,039 105,085 $ 26,080
Digital asset
purchases (e) 419,865 419,865 8,957 46,876
Digital asset
impairment losses (65,165 ) (65,165 )
Balance at September
30, 2021 $ 3,160,471 $ (754,732 ) $ 2,405,739 114,042 $ 27,713
(a) In the third quarter of 2020, we purchased bitcoin using excess cash,
including cash from the liquidation of short-term investments.
(b) In the fourth quarter of 2020, we purchased bitcoin using
net proceeds from our issuance of the 2025 Convertible Notes and excess cash.
(c) In the first quarter of 2021, we purchased bitcoin using
net proceeds from our issuance of the 2027 Convertible Notes and excess cash.
(d) In the second quarter of 2021, we purchased bitcoin using
net proceeds from our issuance of the 2028 Secured Notes and excess cash.
(e) In the third quarter of 2021, we purchased bitcoin using
net proceeds from our sale of 555,179 shares of class A common stock offered
under the Sale Agreement and excess cash.
The following table shows the approximate number of bitcoins held at the end of each respective period, as well as market value calculations of our bitcoin holdings based on the lowest, highest, and ending market prices of one bitcoin on theCoinbase exchange (our principal market) for each respective quarter, as further defined below: Market Market Value of Value of Market Bitcoin Bitcoin Value of Held at End Held at End Bitcoin of Quarter of Quarter Held at End Using Using of Quarter Lowest Highest Using Approximate Market Market Ending Number of Lowest Market Price Highest Market Price Market Price Market Bitcoins Held Price Per (in Price Per (in Per Bitcoin at Price (in at End of Bitcoin During thousands) Bitcoin During thousands) End of Quarter thousands) Quarter Quarter (f) (g) Quarter (h) (i) (j) (k) June 30, 2020 0 n/a n/a n/a n/a n/a n/a September 30, 2020 38,250$ 8,905.84 $ 340,648 $ 12,486.61 $ 477,613 $ 10,706.00 $ 409,505 December 31, 2020 70,469$ 10,363.76 $ 730,324 $ 29,321.90 $ 2,066,285 $ 29,181.00 $ 2,056,356 March 31, 2021 91,326$ 27,678.00 $ 2,527,721 $ 61,788.45 $ 5,642,892 $ 58,601.28 $ 5,351,820 June 30, 2021 105,085$ 28,800.00 $ 3,026,448 $ 64,899.00 $ 6,819,911 $ 34,763.47 $ 3,653,119 September 30, 2021 114,042$ 29,301.56 $ 3,341,609 $ 52,944.96 $ 6,037,949 $ 43,534.56 $ 4,964,768
(f) The "
market price for one bitcoin reported on the
respective quarter, without regard to when we purchased any of our bitcoin.
(g) The "Market Value of Bitcoin Held Using Lowest Market Price" represents a
mathematical calculation consisting of the lowest market price for one
bitcoin reported on the
multiplied by the number of bitcoins held by us at the end of the applicable
period.
(h) The "
market price for one bitcoin reported on the
respective quarter, without regard to when we purchased any of our bitcoin.
(i) The "Market Value of Bitcoin Held Using Highest Market Price" represents a
mathematical calculation consisting of the highest market price for one
bitcoin reported on the
multiplied by the number of bitcoins held by us at the end of the applicable
period.
25
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(j) The "Market Price Per Bitcoin at End of Quarter" represents the market price
of one bitcoin on the
day of the respective quarter.
(k) The "Market Value of Bitcoin Held at End of Quarter Using Ending Market
Price" represents a mathematical calculation consisting of the market price
of one bitcoin on the
day of the respective quarter multiplied by the number of bitcoins held by us
at the end of the applicable period.
The amounts reported as "Market Value" in the above table represent only a mathematical calculation consisting of the price for one bitcoin reported on theCoinbase exchange (our principal market) in each scenario defined above multiplied by the number of bitcoins held by us at the end of the applicable period.The Securities and Exchange Commission has previously stated that there has not been a demonstration that (i) bitcoin and bitcoin markets are inherently resistant to manipulation or that the spot price of bitcoin may not be subject to fraud and manipulation; and (ii) adequate surveillance-sharing agreements with bitcoin-related markets are in place, as bitcoin-related markets are either not significant, not regulated, or both. Accordingly, the Market Value amounts reported above may not accurately represent fair market value, and the actual fair market value of our bitcoin may be different from such amounts and such deviation may be material. Moreover, (i) the bitcoin market historically has been characterized by significant volatility in price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, potential susceptibility to market abuse and manipulation, and various other risks that are, or may be, inherent in its entirely electronic, virtual form and decentralized network and (ii) we may not be able to sell our bitcoins at the Market Value amounts indicated above, at the market price as reported on theCoinbase exchange (our principal market) on the date of sale, or at all. Our digital asset impairment losses have significantly contributed to our operating expenses and net loss. For the three months endedSeptember 30, 2021 , digital asset impairment losses of$65.2 million represented 42.0% of our operating expenses, compared to digital asset impairment losses of$44.2 million representing 35.1% of our operating expenses in the three months endedSeptember 30, 2020 , contributing to our net loss of$36.1 million for the three months endedSeptember 30, 2021 compared to net loss of$14.2 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , digital asset impairment losses of$684.0 million represented 71.6% of our operating expenses, compared to$44.2 million in digital asset impairment losses representing 15.1% of our operating expenses in the nine months endedSeptember 30, 2020 , contributing to our net loss of$445.5 million for the nine months endedSeptember 30, 2021 compared to net loss of$10.2 million for the nine months endedSeptember 30, 2020 .
As of
Our Enterprise Analytics Software Strategy
As a global leader in enterprise analytics software and services, our vision is to enable Intelligence Everywhere. Our core offering,MicroStrategy 2021™, helps achieve this vision by delivering actionable intelligence and modern analytics on an open, comprehensive enterprise platform.MicroStrategy 2021 allows our customers to build high-performance, governed, and secure applications that can scale across their enterprises.
Our core product offering is our software platform. In
• Modern Analytics: We offer a modern analytics experience by delivering
insights across multiple devices to users via our HyperIntelligence®
products, visualization and reporting capabilities, mobility features, and
custom applications developed on our platform.
o HyperIntelligence-Our platform improves business processes by providing
cards with contextual intelligence, suggestions, and workflows directly
within the websites, applications, and mobile devices that people rely
on every day. For example, users can simply hover over a highlighted
word on a website to instantly bring up relevant, contextual insights on
key data.
o Data Visualization and Reporting-Our platform uses Dossier®, ourself-service dashboarding tool, that provides users with the formatting,
layout, and input controls they need to build beautiful analytics
applications.
o Transformational Mobility-Our platform empowers the increasingly mobile
workforce to make decisions and take action quickly on-the-go. It
delivers more ways for organizations to quickly deploy mobile
productivity apps for a variety of business functions and roles on any
standard device.
o Custom Applications-Our platform enables users to create highly
customized web and mobile applications using the Document tool.
26
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• Open, Federated Architecture: Our strategy is to embrace innovation and
deliver the most open analytics platform on the market.
o Federated Analytics-Our platform provides analysts and data scientists
with seamless access to trusted, governed data directly within their
favorite tools.
Excel, Power BI, and Tableau to provide users with the flexibility to
leverage trusted data from MicroStrategy directly within the client
applications they are accustomed to. MicroStrategy 2021 also provides
integrations for Jupyter and R Studio to enable data scientists to
connect to published
publish updated data back into MicroStrategy 2021-all without leaving
Jupyter or R Studio .
o APIs and Gateways-Our gateways, application programming interfaces
("APIs"), and connectors enable MicroStrategy 2021 to integrate with the
most popular enterprise platforms and tools. In addition to over 200
connectors to popular drivers and gateways to enterprise assets, we
offer a comprehensive set of Representational State Transfer APIs thatmakes it easy to embed the platform in packaged and custom applications,
workflows, and devices.
o Multiple Deployment Options-We also believe that customers should have
the choice of where to deploy their analytics platform without
compromising functionality. Our fully featured platform can be deployed
in three ways: on premises, the customer's cloud environment, or theMicroStrategy Cloud™ Environment ("MCE"). MCE is a cloud subscription
service that allows customers to deploy the platform on Amazon Web
Services ("AWS") or Microsoft Azure environments hosted and managed by
us.
• Enterprise Platform: Our platform is designed to securely scale analytics
across the enterprise.
organizations to deliver secure, high-performance applications at scale.
o Enterprise Semantic Graph™-The engine of our platform is our proprietary
Enterprise Semantic Graph, which provides a structured view of a
company's data assets by organizing them into understandable business
terms. Our Enterprise Semantic Graph also enriches metadata content with
real-time location intelligence and content and system usage telemetry.
The Enterprise Semantic Graph allows users to have a consistent and
secure view across multiple data sources to deliver a single version of
truth.
o Scalability-Our platform powers some of the largest business
intelligence deployments in the world. Our platform is designed to scale
efficiently to hundreds of thousands of users, with millions of
personalized queries, across hundreds of applications, built on top of
the largest datasets.
o Security- Our platform includes a comprehensive set of features for
superior administration, security, and architecture, includingrole-based access to both row and column data. Our cloud environment
also provides robust security delivered via annual certification,
regular assessment, and proactive enhancements.
Our customers include leading global organizations from a wide range of industries, including retail, consulting, technology, manufacturing, banking, insurance, finance, healthcare, telecommunications, as well as the public sector.
To stand apart in a highly competitive market, we depend on the effectiveness with which we can differentiate our offerings from those of large software vendors that provide products across multiple lines of business, including one or more products that directly compete with our offerings, and other potential competitors across analytics implementation projects of varying sizes.
Impact of COVID-19 on Our Software Strategy
The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption despite progress made in the development and distribution of vaccines. It has already disrupted global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19, the evolution of its variants, its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses and of various efforts to inoculate the global population. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally and there is uncertainty as to when these disruptions will fully subside. Significant uncertainty continues to exist concerning the impact of the COVID-19 pandemic on our customers' and prospects' business and operations in future periods. Although our total revenues for the three and nine months endedSeptember 30, 2021 were not materially impacted by COVID-19, we believe our revenues may be negatively impacted in future periods until the effects of the pandemic have fully subsided and the current macroeconomic environment has substantially recovered. The uncertainty related to COVID-19 may also result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. 27 -------------------------------------------------------------------------------- We have adapted our operations to meet the challenges of this uncertain and rapidly evolving situation, including establishing remote working arrangements for our employees, limiting non-essential business travel, and cancelling or shifting our customer, employee, and industry events to a virtual-only format for the foreseeable future. We have received, and may continue to receive, government assistance from various relief packages available in countries where we operate. For example, inthe United States , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 to provide broad-based economic relief to various sectors of theU.S. economy through a variety of means, including payroll and income tax deferrals and employee retention credits. We deferred payment of$4.6 million of our employer portion ofU.S. social security taxes accrued throughDecember 31, 2020 , half of which we expect to pay byDecember 31, 2021 and the remainder byDecember 31, 2022 . Where taxes payable to government entities have been deferred to a later date, no reduction of expenses has been recorded. Effects of the COVID-19 pandemic that may negatively impact our business in future periods include, but are not limited to: limitations on the ability of our customers to conduct their business, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; and decreases in product licenses revenues driven by channel partners. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition. Operating Highlights
The following table sets forth certain operating highlights (in thousands) for
the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenues
Product licenses $ 25,830 $ 29,573 $ 69,261 $ 56,973
Subscription services 10,853 8,305 31,221 24,294
Total product licenses and subscription
services 36,683 37,878 100,482 81,267
Product support 70,387 71,352 212,063 212,548
Other services 20,924 18,178 63,702 55,601
Total revenues 127,994 127,408 376,247 349,416
Cost of revenues
Product licenses 383 545 1,290 1,729
Subscription services 4,282 3,656 11,720 11,512
Total product licenses and subscription
services 4,665 4,201 13,010 13,241
Product support 4,679 5,679 14,353 19,234
Other services 12,975 11,856 40,543 37,795
Total cost of revenues 22,319 21,736 67,906 70,270
Gross profit 105,675 105,672 308,341 279,146
Operating expenses
Sales and marketing 38,209 35,330 116,728 109,799
Research and development 28,211 26,638 86,242 78,606
General and administrative 23,751 19,733 68,397 60,514
Digital asset impairment losses 65,165 44,242 684,034 44,242
Total operating expenses 155,336 125,943 955,401 293,161
Loss from operations $ (49,661 ) $ (20,271 ) $ (647,060 ) $ (14,015 )
We have incurred and may continue to incur significant impairment losses on our
digital assets and we may recognize gains upon sale of our digital assets in the
future, which would be presented net of any impairment losses within operating
expenses. In addition, we base our internal operating expense forecasts on
expected revenue trends and strategic objectives in our enterprise analytics
software business. Many of our expenses, such as office leases and certain
personnel costs, are relatively fixed. Accordingly, any shortfall in revenue in
our software business may cause significant variation in our operating
results. We therefore believe that quarter-to-quarter comparisons of our
operating results may not be a good indication of our future performance.
28
--------------------------------------------------------------------------------Employees As ofSeptember 30, 2021 , we had a total of 2,057 employees, of whom 787 were based inthe United States and 1,270 were based internationally. The following table summarizes employee headcount as of the dates indicated: September 30, December 31, September 30, 2021 2020 2020 Subscription services 71 49 54 Product support 165 154 165 Consulting 393 393 397 Education 36 37 38 Sales and marketing 473 479 495 Research and development 661 642 666 General and administrative 258 243 258 Total headcount 2,057 1,997 2,073
Share-based Compensation Expense
As discussed in Note 10, Share-based Compensation, to the Consolidated Financial
Statements, we have outstanding stock options to purchase shares of our class A
common stock, restricted stock units, and certain other stock-based awards under
our 2013 Equity Plan, as well as opportunities for eligible employees to
purchase shares of our class A common stock under our 2021 ESPP. Share-based
compensation expense (in thousands) from these awards was recognized in the
following cost of revenues and operating expense line items in our Consolidated
Statements of Operations for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Cost of subscription services revenues $ 83 $ 16 $ 172 $ 49
Cost of product support revenues 345 34 787 108
Cost of consulting revenues 240 0 424 0
Cost of education revenues 34 67 66 200
Sales and marketing 3,600 203 9,239 1,009
Research and development 2,956 625 7,546 1,837
General and administrative 4,908 1,615
12,739 4,694
Total share-based compensation expense
As ofSeptember 30, 2021 , we estimated that an aggregate of approximately$151.1 million of additional share-based compensation expense associated with the 2013 Equity Plan and the 2021 ESPP will be recognized over a remaining weighted average period of 3.3 years.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP income from operations that excludes the impact of our share-based compensation expense and impairment losses and gains on sale from intangible assets, which include our digital assets, (ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact of our share-based compensation expense, impairment losses and gains on sale from intangible assets, which include our digital assets, interest expense arising from the amortization of debt issuance costs on our long-term debt, and related income tax effects, and (iii) certain non-GAAP constant currency revenues, cost of revenues, and operating expenses that exclude foreign currency exchange rate fluctuations. These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles inthe United States ("GAAP") and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. 29 -------------------------------------------------------------------------------- We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes (i) a significant non-cash expense that we believe is not reflective of our general business performance, and for which the accounting requires management judgment and the resulting share-based compensation expense could vary significantly in comparison to other companies and (ii) significant impairment losses and gains on sale from intangible assets, which include our bitcoin. The second set of supplemental financial measures excludes the impact of (i) share-based compensation expense, (ii) impairment losses and gains on sale from intangible assets, which include our bitcoin, (iii) non-cash interest expense arising from the amortization of debt issuance costs related to our long-term debt, and (iv) related income tax effects. The third set of supplemental financial measures excludes changes resulting from fluctuations in foreign currency exchange rates so that results may be compared to the same period in the prior year on a non-GAAP constant currency basis. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors. With respect to the exclusion of impairment losses on bitcoin in the first two supplemental financial measures, we also believe that adjusting our operating results to remove GAAP impairment losses aligns with our corporate strategy of acquiring and holding bitcoin because the impairment losses do not account for the subsequent increases in market value we have experienced while holding our bitcoin. In addition, in conjunction with other excluded items, the exclusion of impairment losses on bitcoin helps to provide greater transparency on the operating results from our enterprise analytics software business. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that interest expense arising from the amortization of debt issuance costs will continue to be a recurring expense over the term of the long-term debt. We have also excluded impairment losses and gains on sale from intangible assets from the first two non-GAAP financial measures, either of which may occur in future periods as a result of our continued holdings of significant amounts of bitcoin. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally. The following is a reconciliation of our non-GAAP income from operations, which excludes the impact of (i) share-based compensation expense and (ii) impairment losses and gains on sale from intangible assets, which include our digital assets, to its most directly comparable GAAP measures (in thousands) for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Reconciliation of non-GAAP income from operations: Loss from operations$ (49,661 ) $ (20,271 ) $ (647,060 ) $ (14,015 ) Share-based compensation expense 12,166 2,560 30,973 7,897 Digital asset impairment losses 65,165 44,242 684,034 44,242 Non-GAAP income from operations$ 27,670 $ 26,531 $ 67,947 $ 38,124 30
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The following are reconciliations of our non-GAAP net income and non-GAAP
diluted earnings per share, in each case excluding the impact of (i) share-based
compensation expense (ii) impairment losses and gains on sale from intangible
assets, which include our digital assets, (iii) interest expense arising from
the amortization of debt issuance costs on our long-term debt, and (iv) related
income tax effects to their most directly comparable GAAP measures (in
thousands, except per share data) for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Reconciliation of non-GAAP net income:
Net loss $ (36,136 ) $ (14,229 ) $ (445,503 ) $ (10,185 )
Share-based compensation expense 12,166 2,560 30,973 7,897
Digital asset impairment losses 65,165 44,242 684,034 44,242
Interest expense arising from
amortization of debt issuance costs 2,107 0 5,084 0
Income tax effects (1) (24,736 ) (12,729 ) (224,407 ) (12,293 )
Non-GAAP net income $ 18,566 $ 19,844 $ 50,181 $ 29,661
Reconciliation of non-GAAP diluted
earnings per share (2):
Diluted loss per share $ (3.61 ) $ (1.48 ) $ (45.47 ) $ (1.04 )
Share-based compensation expense (per
diluted share) 1.21 0.27 3.16 0.81
Digital asset impairment losses (per
diluted share) 6.52 4.59 69.81 4.52
Interest expense arising from
amortization of debt issuance costs (per
diluted share) 0.21 0.00 0.52 0.00
Income tax effects (per diluted share) (2.47 ) (1.32 ) (22.90 ) (1.26 )
Non-GAAP diluted earnings per share $ 1.86 $ 2.06 $ 5.12 $ 3.03 (1) Income tax effects reflect the net tax effects of stock-based compensation
expense, digital asset impairment losses, and interest expense for
amortization of debt issuance costs.
(2) For reconciliation purposes, the non-GAAP diluted earnings (loss) per share
calculations use the same weighted average shares outstanding as that used
in the GAAP diluted earnings (loss) per share calculations for the same
period. For example, in periods of GAAP net loss, otherwise dilutive
potential shares of common stock from our share-based compensationarrangements and Convertible Notes are excluded from the GAAP diluted loss
per share calculation as they would be antidilutive, and therefore are also
excluded from the non-GAAP diluted earnings or loss per share calculation.
31
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The following are reconciliations of certain non-GAAP constant currency revenues, cost of revenues, and operating expenses to their most directly comparable GAAP measures (in thousands) for the periods indicated:
Three Months Ended
September 30,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2021 2021 2021 2020 2021 2021
Product licenses $ 25,830 $ (146 ) $ 25,976 $ 29,573 -12.7 % -12.2 %
revenues
Subscription services 10,853 110 10,743 8,305 30.7 % 29.4 %
revenues
Product support 70,387 450 69,937 71,352 -1.4 % -2.0 %
revenues
Other services 20,924 143 20,781 18,178 15.1 % 14.3 %
revenues
Cost of product 4,679 (18 ) 4,697 5,679 -17.6 % -17.3 %
support revenues
Cost of other 12,975 (53 ) 13,028 11,856 9.4 % 9.9 %
services revenues
Sales and marketing 38,209 (64 ) 38,273 35,330 8.1 % 8.3 %
expenses
Research and 28,211 399 27,812 26,638 5.9 % 4.4 %
development expenses
General and 23,751 60 23,691 19,733 20.4 % 20.1 %
administrative
expenses
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2020 2020 2020 2019 2020 2020
Product licenses $ 29,573 $ (341 ) $ 29,914 $ 18,972 55.9 % 57.7 %
revenues
Subscription services 8,305 91 8,214 7,894 5.2 % 4.1 %
revenues
Product support 71,352 670 70,682 72,885 -2.1 % -3.0 %
revenues
Other services 18,178 269 17,909 19,942 -8.8 % -10.2 %
revenues
Cost of product 5,679 3 5,676 6,922 -18.0 % -18.0 %
support revenues
Cost of other 11,856 88 11,768 12,478 -5.0 % -5.7 %
services revenues
Sales and marketing 35,330 (235 ) 35,565 43,935 -19.6 % -19.1 %
expenses
Research and 26,638 95 26,543 27,457 -3.0 % -3.3 %
development expenses
General and 19,733 (69 ) 19,802 19,900 -0.8 % -0.5 %
administrative
expenses
32
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Nine Months Ended
September 30,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2021 2021 2021 2020 2021 2021
Product licenses $ 69,261 $ 311 $ 68,950 $ 56,973 21.6 % 21.0 %
revenues
Subscription services 31,221 564 30,657 24,294 28.5 % 26.2 %
revenues
Product support 212,063 4,792 207,271 212,548 -0.2 % -2.5 %
revenues
Other services revenues 63,702 1,524 62,178 55,601 14.6 % 11.8 %
Cost of product support 14,353 123 14,230 19,234 -25.4 % -26.0 %
revenues
Cost of other services 40,543 819 39,724 37,795 7.3 % 5.1 %
revenues
Sales and marketing 116,728 1,348 115,380 109,799 6.3 % 5.1 %
expenses
Research and 86,242 1,502 84,740 78,606 9.7 % 7.8 %
development expenses
General and 68,397 406 67,991 60,514 13.0 % 12.4 %
administrative expenses
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2020 2020 2020 2019 2020 2020
Product licenses $ 56,973 $ (1,537 ) $ 58,510 $ 57,384 -0.7 % 2.0 %
revenues
Subscription services 24,294 9 24,285 22,142 9.7 % 9.7 %
revenues
Product support 212,548 (1,671 ) 214,219 217,313 -2.2 % -1.4 %
revenues
Other services revenues 55,601 (229 ) 55,830 55,957 -0.6 % -0.2 %
Cost of product support 19,234 (175 ) 19,409 21,710 -11.4 % -10.6 %
revenues
Cost of other services 37,795 (605 ) 38,400 41,055 -7.9 % -6.5 %
revenues
Sales and marketing 109,799 (2,340 ) 112,139 140,968 -22.1 % -20.5 %
expenses
Research and 78,606 (370 ) 78,976 83,436 -5.8 % -5.3 %
development expenses
General and 60,514 (492 ) 61,006 63,684 -5.0 % -4.2 %
administrative expenses
(1) The "Foreign Currency Exchange Rate Impact" reflects the estimated impact of
fluctuations in foreign currency exchange rates on international components
of our Consolidated Statements of Operations. It shows the increase
(decrease) in material international revenues or expenses, as applicable,
from the same period in the prior year, based on comparisons to the prior
year quarterly average foreign currency exchange rates. The term
"international" refers to operations outside of the United States and
Canada .
(2) The "Non-GAAP Constant Currency" reflects the current period GAAP amount,
less the Foreign Currency Exchange Rate Impact.
(3) The "Non-GAAP Constant Currency % Change" reflects the percentage change
between the current period Non-GAAP Constant Currency amount and the GAAP
amount for the same period in the prior year.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and equity, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates, particularly estimates relating to revenue recognition and, in the prior year only, to our Convertible Notes prior to the adoption of ASU 2020-06, have a material impact on our Consolidated Financial Statements. Actual results and outcomes could differ from these estimates and assumptions.
The section "Critical Accounting Policies" included in Item 7 of our Annual
Report on Form 10-K for the year ended
33
--------------------------------------------------------------------------------Results of Operations
Comparison of the three and nine months ended
Revenues
Except as otherwise indicated herein, the term "domestic" refers to operations
in
Product licenses and subscription services revenues. The following table sets
forth product licenses and subscription services revenues (in thousands) and
related percentage changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Product Licenses and
Subscription Services Revenues:
Product Licenses
Domestic $ 16,662 $ 22,894 -27.2 % $ 39,927 $ 35,557 12.3 %
International 9,168 6,679 37.3 % 29,334 21,416 37.0 %
Total product licenses revenues 25,830 29,573 -12.7 % 69,261 56,973 21.6 %
Subscription Services
Domestic 7,717 6,176 25.0 % 22,782 18,304 24.5 %
International 3,136 2,129 47.3 % 8,439 5,990 40.9 %
Total subscription services
revenues 10,853 8,305 30.7 % 31,221 24,294 28.5 %
Total product licenses and
subscription services revenues $ 36,683 $ 37,878 -3.2 % $ 100,482 $ 81,267 23.6 %
The following table sets forth a summary, grouped by size, of the number of recognized product licenses transactions for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Product Licenses Transactions with
Recognized Licenses Revenue in the
Applicable Period:
More than $1.0 million in licenses
revenue recognized 5 3 9 4
Between $0.5 million and $1.0 million in
licenses revenue recognized 4 6 16 13
Total 9 9 25 17
Domestic:
More than $1.0 million in licenses
revenue recognized 4 3 7 3
Between $0.5 million and $1.0 million in
licenses revenue recognized 3 4 9 7
Total 7 7 16 10
International:
More than $1.0 million in licenses
revenue recognized 1 0 2 1
Between $0.5 million and $1.0 million in
licenses revenue recognized 1 2 7 6
Total 2 2 9 7
34
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The following table sets forth the recognized revenue (in thousands) attributable to product licenses transactions, grouped by size, and related percentage changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Product Licenses Revenue Recognized
in the Applicable Period:
More than $1.0 million in licenses
revenue recognized $ 7,283 $ 13,175 -44.7 % $ 17,422 $ 16,370 6.4 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 2,594 4,194 -38.1 % 10,485 8,838 18.6 %
Less than $0.5 million in licenses
revenue recognized 15,953 12,204 30.7 % 41,354 31,765 30.2 %
Total 25,830 29,573 -12.7 % 69,261 56,973 21.6 %
Domestic:
More than $1.0 million in licenses
revenue recognized 6,236 13,175 -52.7 % 13,942 13,175 5.8 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 1,900 2,865 -33.7 % 5,977 4,698 27.2 %
Less than $0.5 million in licenses
revenue recognized 8,526 6,854 24.4 % 20,008 17,684 13.1 %
Total 16,662 22,894 -27.2 % 39,927 35,557 12.3 %
International:
More than $1.0 million in licenses
revenue recognized 1,047 0 n/a 3,480 3,195 8.9 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 694 1,329 -47.8 % 4,508 4,140 8.9 %
Less than $0.5 million in licenses
revenue recognized 7,427 5,350 38.8 % 21,346 14,081 51.6 %
Total $ 9,168 $ 6,679 37.3 % $ 29,334 $ 21,416 37.0 %
Product licenses revenues decreased $3.7 million and increased $12.3 million for
the three and nine months ended September 30, 2021 , respectively, as compared to
the same periods in the prior year. For the three months ended September 30,
2021 and 2020, product licenses transactions with more than $0.5 million in
recognized revenue represented 38.2% and 58.7%, respectively, of our product
licenses revenues. For the nine months ended September 30, 2021 , our top three
product licenses transactions totaled $10.1 million in recognized revenue, or
14.6% of total product licenses revenues, compared to $14.7 million , or 25.8% of
total product licenses revenues, for the nine months ended September 30, 2020 .
Domestic product licenses revenues. Domestic product licenses revenues decreased
$6.2 million for the three months ended September 30, 2021 , as compared to the
same period in the prior year, primarily due to a decrease in the average deal
size of transactions with more than $1.0 million in recognized revenue (in
particular, from one deal in the third quarter of 2020 that resulted in $9.8
million in recognized revenue in the prior year period) and a decrease in the
number of transactions with recognized revenue between $0.5 million and $1.0
million , partially offset by an increase in the average deal size of
transactions with less than $0.5 million in recognized revenue. Domestic product
licenses revenues increased $4.4 million for the nine months ended September 30,
2021 , as compared to the same period in the prior year, primarily due to an
increase in the average deal size of transactions with less than $0.5 million in
recognized revenue and an increase in the number of transactions with more than
$0.5 million in recognized revenue.
International product licenses revenues. International product licenses revenues
increased $2.5 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year, primarily due to an increase in
the number of transactions with less than $0.5 million in recognized revenue and
more than $1.0 million in recognized revenue, partially offset by a decrease in
the number of transactions with recognized revenue between $0.5 million and $1.0
million . International product licenses revenues increased $7.9 million for the
nine months ended September 30, 2021 , as compared to the same period in the
prior year, primarily due to an increase in the number of transactions with less
than $0.5 million in recognized revenue.
Subscription services revenues. Subscription services revenues are derived from
the MicroStrategy Cloud Environment, a cloud subscription service, and are
recognized ratably over the service period in the contract. Subscription
services revenues increased $2.5 million for the three months ended
September 30, 2021 , as compared to the same period in the prior year, primarily
due to conversions to cloud-based subscriptions from existing on-premises
customers and an increase in the use of subscription services by existing
customers. Subscription services revenues increased $6.9 million for the nine
months ended September 30, 2021 , as compared to the same period in the prior
year, primarily due to conversions to cloud-based subscriptions from existing
on-premises customers, an increase in the use of subscription services by
existing customers, and a $0.6 million favorable foreign currency exchange
impact.
35
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Product support revenues. The following table sets forth product support
revenues (in thousands) and related percentage changes for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Product Support Revenues:
Domestic $ 40,350 $ 41,645 -3.1 % $ 121,179 $ 126,073 -3.9 %
International 30,037 29,707 1.1 %
90,884 86,475 5.1 %
Total product support revenues
Product support revenues are derived from providing technical software support and software updates and upgrades to customers. Product support revenues are recognized ratably over the term of the contract, which is generally one year. Product support revenues decreased$1.0 million for the three months endedSeptember 30, 2021 , as compared to the same period in the prior year, primarily due to certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings. Product support revenues did not materially change for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year, primarily due to certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings, substantially offset by a$4.8 million favorable foreign currency exchange impact.
Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 ChangeOther Services Revenues: Consulting Domestic$ 9,202 $ 7,384 24.6 %$ 27,728 $ 24,396 13.7 % International 10,536 9,570 10.1 % 32,343 27,577 17.3 % Total consulting revenues 19,738 16,954 16.4 % 60,071 51,973 15.6 % Education 1,186 1,224 -3.1 %
3,631 3,628 0.1 %
Total other services revenues
Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased$2.8 million for the three months endedSeptember 30, 2021 , as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide, partially offset by a decrease in average bill rates and a decrease in billable travel and entertainment expenditures. Consulting revenues increased$8.1 million for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide and a$1.4 million favorable foreign currency exchange impact, partially offset by a decrease in average bill rates and a decrease in billable travel and entertainment expenditures. Education revenues. Education revenues are derived from the education and training that we provide to our customers to enhance their ability to fully utilize the features and functionality of our software. These offerings include self-tutorials, custom course development, joint training with customers' internal staff, and standard course offerings, with pricing dependent on the specific offering delivered. Education revenues did not materially change for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in the prior year. 36 --------------------------------------------------------------------------------
Costs and Expenses
Cost of revenues. The following table sets forth cost of revenues (in thousands) and related percentage changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Cost of Revenues:
Product licenses and
subscription services:
Product licenses $ 383 $ 545 -29.7 % $ 1,290 $ 1,729 -25.4 %
Subscription services 4,282 3,656 17.1 % 11,720 11,512 1.8 %
Total product licenses and
subscription services 4,665 4,201 11.0 % 13,010 13,241 -1.7 %
Product support 4,679 5,679 -17.6 % 14,353 19,234 -25.4 %
Other services:
Consulting 11,745 10,331 13.7 % 36,515 31,927 14.4 %
Education 1,230 1,525 -19.3 % 4,028 5,868 -31.4 %
Total other services 12,975 11,856 9.4 % 40,543 37,795 7.3 %
Total cost of revenues $ 22,319 $ 21,736 2.7 % $ 67,906 $ 70,270 -3.4 %
Cost of product licenses revenues. Cost of product licenses revenues consists of
referral fees paid to channel partners, the costs of product manuals and media,
and royalties paid to third-party software vendors. Cost of product licenses
revenues did not materially change for the three and nine months ended
September 30, 2021 , as compared to the same periods in the prior year.
Cost of subscription services revenues. Cost of subscription services revenues
consists of equipment, facility and other related support costs, and personnel
and related overhead costs. Subscription services headcount increased 31.5% to
71 at September 30, 2021 from 54 at September 30, 2020 . Cost of subscription
services revenues increased $0.6 million for the three months ended
September 30, 2021 , as compared to the same period in the prior year primarily
due to a $1.0 million increase in technology infrastructure costs. Cost of
subscription services revenues did not materially change for the nine months
ended September 30, 2021 , as compared to the same period in the prior year,
primarily due to a $1.6 million increase in technology infrastructure costs,
partially offset by a $1.3 million decrease in compensation and related costs
due to a decrease in average staffing levels.
Cost of product support revenues. Cost of product support revenues consists of
personnel and related overhead costs, including those under our Enterprise
Support program. Our Enterprise Support program utilizes primarily consulting
personnel to provide product support to our customers at our
discretion. Compensation related to personnel providing Enterprise Support
services is reported as cost of product support revenues. Product support
headcount was 165 as of both September 30, 2021 and 2020. Cost of product
support revenues decreased $1.0 million for the three months ended September 30,
2021 , as compared to the same period in the prior year, primarily due to a $1.0
million decrease in compensation and related costs attributable to non-product
support personnel providing a decreased level of Enterprise Support
services. Cost of product support revenues decreased $4.9 million for the nine
months ended September 30, 2021 , as compared to the same period in the prior
year, primarily due to a $3.0 million decrease in compensation and related costs
due to a decrease in product support average staffing levels, a $1.9 million
decrease in compensation and related costs attributable to non-product support
personnel providing a decreased level of Enterprise Support services, and a $0.6
million decrease in facility and other related support costs, partially offset
by a $0.7 million net increase in share-based compensation expense. The $0.7
million net increase in share-based compensation expense is primarily due to the
grant of additional awards under the 2013 Equity Plan.
Cost of consulting revenues. Cost of consulting revenues consists of personnel
and related overhead costs, excluding those under our Enterprise Support program
which are allocated to cost of product support revenues. Consulting headcount
decreased 1.0% to 393 at September 30, 2021 from 397 at September 30, 2020 . Cost
of consulting revenues increased $1.4 million for the three months ended
September 30, 2021 , as compared to the same period in the prior year, primarily
due to a $1.0 million increase in subcontractor costs and a $0.9 million
increase in compensation and related costs attributable to consulting personnel
providing a decreased level of Enterprise Support services, partially offset by
a $0.5 million decrease in compensation and related costs due to a decrease in
average staffing levels. Cost of consulting revenues increased $4.6 million for
the nine months ended September 30, 2021 , as compared to the same period in the
prior year, primarily due to a $3.3 million increase in subcontractor costs, a
$1.6 million increase in compensation and related costs attributable to
consulting personnel providing a decreased level of Enterprise Support services,
and a $0.4 million increase in variable compensation, partially offset by a $1.0
million decrease in travel and entertainment expenditures. Included in cost of
consulting revenues for the nine months ended September 30, 2021 is an aggregate
$0.8 million unfavorable foreign currency exchange impact.
Cost of education revenues. Cost of education revenues consists of personnel and
related overhead costs and technology infrastructure costs. Education headcount
decreased 5.3% to 36 at September 30, 2021 from 38 at September 30, 2020 . Cost
of education revenues did not materially change for the three months ended
September 30, 2021 , as compared to the same period in the prior year. Cost of
education revenues decreased $1.8 million for the nine months ended
September 30, 2021 , as compared to the same period in the prior
37
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year, primarily due to a $0.8 million decrease in technology infrastructure
costs associated with education offerings that we made available at no charge
for a limited time period during the first half of 2020 in response to the
COVID-19 pandemic and a $0.6 million decrease in compensation and related costs
due to a decrease in average staffing levels.
Sales and marketing expenses. Sales and marketing expenses consist of personnel
costs, commissions, office facilities, travel, advertising, public relations
programs, and promotional events, such as trade shows, seminars, and technical
conferences. Sales and marketing headcount decreased 4.4% to 473 at
September 30, 2021 from 495 at September 30, 2020 . The following table sets
forth sales and marketing expenses (in thousands) and related percentage changes
for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Sales and marketing expenses $ 38,209 $ 35,330 8.1 % $ 116,728 $ 109,799 6.3 %
Sales and marketing expenses increased $2.9 million for the three months ended
September 30, 2021 , as compared to the same period in the prior year, primarily
due to a $3.4 million net increase in share-based compensation expense and a
$0.5 million increase in marketing and advertising costs, partially offset by a
$1.0 million decrease in compensation and related costs due to a decrease in
average staffing levels. The $3.4 million net increase in share-based
compensation expense is primarily due to the grant of additional awards under
the 2013 Equity Plan.
Sales and marketing expenses increased $6.9 million for the nine months ended
September 30, 2021 , as compared to the same period in the prior year, primarily
due to a $10.1 million increase in variable compensation and an $8.2 million net
increase in share-based compensation expense, partially offset by a $5.6 million
decrease in employee salaries due to a decrease in average staffing levels, a
$3.1 million decrease in travel and entertainment expenditures, a $1.5 million
decrease in facility and other related support costs, a $0.8 million decrease in
marketing and advertising costs, and a $0.5 million decrease in subcontractor
costs. The $8.2 million net increase in share-based compensation expense is
primarily due to the grant of additional awards under the 2013 Equity Plan and
the 2021 ESPP. Included in sales and marketing expenses for the nine months
ended September 30, 2021 is an aggregate $1.3 million unfavorable foreign
currency exchange impact.
Research and development expenses. Research and development expenses consist of
the personnel costs for our software engineering personnel, depreciation of
equipment, and other related costs. Research and development headcount decreased
0.8% to 661 at September 30, 2021 from 666 at September 30, 2020 . The following
table summarizes research and development expenses (in thousands) and related
percentage changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Research and development expenses $ 28,211 $ 26,638 5.9 % $ 86,242 $ 78,606 9.7 %
Research and development expenses increased $1.6 million for the three months
ended September 30, 2021 , as compared to the same period in the prior year,
primarily due to a $2.3 million net increase in share-based compensation
expense, partially offset by a $0.5 million decrease in facility and other
related support costs. The $2.3 million net increase in share-based compensation
expense is primarily due to the grant of additional awards under the 2013 Equity
Plan.
Research and development expenses increased $7.6 million for the nine months
ended September 30, 2021 , as compared to the same period in the prior year,
primarily due to a $5.7 million net increase in share-based compensation
expense, a $2.1 million increase in variable compensation which, in the nine
months ended September 30, 2020 , included certain COVID-19-related employer
payroll tax exemptions in the Asia Pacific region, and a $0.5 million increase
in technology infrastructure costs, partially offset by a $0.6 million decrease
in facility and other related support costs. The $5.7 million net increase in
share-based compensation expense is primarily due to the grant of additional
awards under the 2013 Equity Plan and the 2021 ESPP. Included in research and
development expenses for the nine months ended September 30, 2021 is an
aggregate $1.5 million unfavorable foreign currency exchange impact.
38
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General and administrative expenses. General and administrative expenses consist
of personnel and related overhead costs, and other costs of our executive,
finance, human resources, information systems, and administrative departments,
as well as third-party consulting, legal, and other professional fees. General
and administrative headcount was 258 as of both September 30, 2021 and 2020. The
following table sets forth general and administrative expenses (in thousands)
and related percentage changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change 2021 2020 Change
General and administrative expenses $ 23,751 $ 19,733 20.4 % $ 68,397 $ 60,514 13.0 %
General and administrative expenses increased $4.0 million for the three months
ended September 30, 2021 , as compared to the same period in the prior year,
primarily due to a $3.3 million net increase in share-based compensation expense
and a $1.8 million increase in legal, consulting, and other advisory costs,
partially offset by a $0.9 million decrease in compensation and related costs
due to a decrease in average staffing levels and a $0.8 million decrease in bad
debt expense. The $3.3 million net increase in share-based compensation expense
is primarily due to the grant of additional awards under the 2013 Equity Plan.
General and administrative expenses increased $7.9 million for the nine months
ended September 30, 2021 , as compared to the same period in the prior year,
primarily due to an $8.0 million net increase in share-based compensation
expense and a $4.9 million increase in legal, consulting, and other advisory
costs, partially offset by a $3.6 million decrease in compensation and related
costs due to a decrease in average staffing levels, and a $1.3 million decrease
in bad debt expense. The $8.0 million net increase in share-based compensation
expense is primarily due to the grant of additional awards under the 2013 Equity
Plan, partially offset by certain awards becoming fully vested.
Digital asset impairment losses. Digital asset impairment losses are recognized
when the carrying value of our digital assets exceeds their lowest fair value at
any time since their acquisition. Impaired digital assets are written down to
fair value at the time of impairment, and such impairment loss cannot be
recovered for any subsequent increases in fair value. The following table sets
forth digital asset impairment losses (in thousands) and related percentage
changes for the periods indicated:
Three Months Ended Nine Months Ended
September 30, % September 30, %
2021 2020 Change
2021 2020 Change
Digital asset impairment losses
We did not sell any of our digital assets during the three and nine months ended
Interest (Expense) Income, Net
For the three and nine months endedSeptember 30, 2021 , interest expense, net, of$10.7 million and$17.5 million , respectively, were primarily related to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements. Refer to Note 6, Long-term Debt, to the Consolidated Financial Statements for further information. For the three months endedSeptember 30, 2020 , interest income, net, was not material. For the nine months endedSeptember 30, 2020 , interest income, net, of$2.6 million was primarily related to interest earned on cash and cash equivalents balances and the amortization of the discount on our short-term investments.
Other Income (Expense), Net
For the three and nine months endedSeptember 30, 2021 , other income, net, of$1.3 million and$1.6 million , respectively, were comprised primarily of foreign currency transaction net gains. For the three and nine months endedSeptember 30, 2020 other expense, net, of$3.0 million and$4.5 million , respectively, were comprised primarily of foreign currency transaction net losses.
Benefit from Income Taxes
In determining our tax provision or benefit from income taxes, we estimate an
annual effective tax rate for the full fiscal year and apply that rate to our
income or loss before income taxes. We also record discrete items in each
respective period as appropriate. The estimated effective tax rate is subject to
fluctuation based on the level and mix of earnings and losses by tax
jurisdiction, foreign tax rate differentials, and the relative impact of
permanent book to tax differences (e.g., non-deductible expenses). Each quarter,
a cumulative adjustment is recorded for any fluctuations in the estimated annual
effective tax rate as compared to the prior quarter. As a result of these
factors, and due to potential changes in our period-to-period results,
fluctuations in our effective tax rate and respective tax provisions or benefits
may occur.
39
-------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , we recorded a benefit from income taxes of$217.4 million that resulted in an effective tax rate of 32.8%, as compared to a benefit from income taxes of$5.7 million that resulted in an effective tax rate of 36.0% for the nine months endedSeptember 30, 2020 . The change in the effective tax rate in 2021 is mainly due to certain discrete items and the change in the expected proportion ofU.S. versus foreign income between periods. As ofSeptember 30, 2021 , we estimated that we had NOL carryforwards, other temporary differences and carryforwards, and credits that resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of$259.3 million . As ofSeptember 30, 2021 , we had a valuation allowance of$1.3 million related to certain foreign tax credit carryforwards that, in our present estimation, more likely than not will not be realized. If we are unable to regain or increase profitability in future periods, we may be required to increase the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net income in the period in which the charge is incurred. We will continue to regularly assess the realizability of deferred tax assets.
Deferred Revenue and Advance Payments
Deferred revenue and advance payments represent amounts received or due from our
customers in advance of our transferring our software or services to the
customer. In the case of multi-year service contracts arrangements, the Company
generally does not invoice more than one year in advance of services and does
not record deferred revenue for amounts that have not been invoiced. Revenue is
subsequently recognized in the period(s) in which control of the software or
services is transferred to the customer.
The following table summarizes deferred revenue and advance payments (in
thousands), as of:
September 30, December 31, September 30,
2021 2020 2020
Current:
Deferred product licenses revenue $ 2,315 $ 1,495 $ 186
Deferred subscription services revenue 23,089 26,258 19,535
Deferred product support revenue 130,339 156,216 134,632
Deferred other services revenue 4,954 7,281 6,492
Total current deferred revenue and advance
payments $ 160,697 $ 191,250 $ 160,845
Non-current:
Deferred product licenses revenue $ 74 $ 139 $ 140
Deferred subscription services revenue 590 8,758 5,988
Deferred product support revenue 6,973 5,055 4,759
Deferred other services revenue 665 710 770
Total non-current deferred revenue and advance
payments $ 8,302 $ 14,662 $ 11,657
Total current and non-current:
Deferred product licenses revenue $ 2,389 $ 1,634 $ 326
Deferred subscription services revenue 23,679 35,016 25,523
Deferred product support revenue 137,312 161,271 139,391
Deferred other services revenue 5,619 7,991 7,262
Total current and non-current deferred revenue
and advance payments $ 168,999 $ 205,912 $ 172,502
Total deferred revenue and advance payments decreased $36.9 million as of
September 30, 2021 , as compared to December 31, 2020 , primarily due to the
timing of product support and subscription services renewals and the
presentation of multi-year contracts. The portions of such multi-year contracts
that will be invoiced in the future are not presented on the balance sheet in
"Accounts receivable, net" and "Deferred revenue and advance payments" and
instead are included in the remaining performance obligation disclosure
below. Included in our international deferred revenue balances at September 30,
2021 is a $3.3 million unfavorable foreign currency impact from the general
strengthening of the U.S. dollar compared to the fourth quarter of 2020. The
decrease in total deferred revenue and advance payments as of September 30, 2021
as compared to September 30, 2020 was not material.
40
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Our remaining performance obligation represents all future revenue under
contract and includes deferred revenue and advance payments and billable
non-cancelable amounts that will be invoiced and recognized as revenue in future
periods. The remaining performance obligation excludes contracts that are billed
in arrears, such as certain time and materials contracts. As of September 30,
2021 , we had an aggregate transaction price of $198.9 million allocated to the
remaining performance obligation related to product support, subscription
services, other services, and in limited cases, product licenses contracts. We
expect to recognize approximately $168.3 million of the remaining performance
obligation over the next 12 months and the remainder thereafter. However, the
timing and ultimate recognition of our deferred revenue and advance payments and
other remaining performance obligations depend on our satisfaction of various
performance obligations, and the amount of deferred revenue and advance payments
and remaining performance obligations at any date should not be considered
indicative of revenues for any succeeding period.
Liquidity and Capital Resources
Liquidity. Our principal sources of liquidity are cash and cash equivalents and on-going collection of our accounts receivable. Cash and cash equivalents may include holdings in bank demand deposits, money market instruments, certificates of deposit, andU.S. Treasury securities. Under our Treasury Reserve Policy and bitcoin acquisition strategy, we use a significant portion of our cash to acquire bitcoins, which are classified as indefinite-lived intangible assets. As ofSeptember 30, 2021 andDecember 31, 2020 , the amount of cash and cash equivalents held by ourU.S. entities was$16.4 million and$13.7 million , respectively, and by our non-U.S. entities was$40.6 million and$46.0 million , respectively. We earn a significant amount of our revenues outsidethe United States . We repatriated foreign earnings and profits of$186.6 million during 2020 and$57.5 million during the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , the accumulated undistributed foreign earnings and profits is estimated to be$109.5 million . Beginning in the third quarter of 2020, we determined to no longer permanently reinvest our foreign earnings and profits. Therefore, we accrued for foreign withholding tax andU.S. state income taxes on undistributed foreign earnings in addition to the Transition Tax and GILTI tax. We believe that existing cash and cash equivalents held by us and cash and cash equivalents anticipated to be generated by us are sufficient to meet working capital requirements, anticipated capital expenditures, and contractual obligations for at least the next 12 months. As ofSeptember 30, 2021 , we held approximately 114,042 bitcoins. We do not believe we will need to sell any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell bitcoins as part of treasury management operations, including to increase our cash balances. The bitcoin market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the bitcoin market, we may not be able to sell our bitcoins at reasonable prices or at all. As a result, our bitcoins are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. In addition, upon sale of our bitcoin, we may incur additional taxes related to any realized gains or we may incur capital losses as to which the tax deduction may be limited. OnJune 14, 2021 , we entered into the Sale Agreement with Jefferies pursuant to which we may issue and sell shares of our class A common stock having an aggregate offering price of up to$1.0 billion from time to time through Jefferies. During the three and nine months endedSeptember 30, 2021 , we sold 555,179 shares of our class A common stock under the Sale Agreement, at an average gross price per share of approximately$727.64 , for aggregate net proceeds (less$4.5 million in sales commissions and expenses) of approximately$399.5 million . As ofSeptember 30, 2021 , approximately$596.0 million of our class A common stock remained available for issuance and sale pursuant to the Sale Agreement.
The following table sets forth a summary of our cash flows (in thousands) and related percentage changes for the periods indicated:
Nine Months Ended September 30, %
2021 2020 Change
Net cash provided by operating activities $ 90,586 $ 28,297 220.1 %
Net cash used in investing activities $ (2,037,353 ) $ (316,204 ) 544.3 %
Net cash provided by (used in) financing
activities $ 1,946,169 $ (118,864 ) 1,737.3 %
Net cash provided by operating activities. The primary source of our cash
provided by operating activities is cash collections of our accounts receivable
from customers following the sales and renewals of our product licenses and
product support, as well as consulting, education, and subscription services.
Our primary uses of cash in operating activities are for personnel-related
expenditures for software development, personnel-related expenditures for
providing consulting, education, and subscription services, and for sales and
marketing costs, general and administrative costs, and income taxes. Non-cash
items to further reconcile net loss to net cash provided by operating activities
consist primarily of depreciation and amortization, reduction in the carrying
amount of ROU lease assets, credit losses and sales allowances, deferred taxes,
share-based compensation expense, digital asset impairment losses, and
amortization of debt issuance costs on our long-term debt.
41
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Net cash provided by operating activities increased $62.3 million for the nine
months ended September 30, 2021 , as compared to the same period in the prior
year, due to a $458.1 million increase from changes in non-cash items and a
$39.5 million increase from changes in operating assets and liabilities,
partially offset by a $435.3 million increase in net loss.
Net cash used in investing activities. The changes in net cash (used in)
provided by investing activities relate to purchases of digital assets,
purchases and redemptions of short-term investments, and expenditures on
property and equipment. Net cash used in investing activities increased $1.721
billion for the nine months ended September 30, 2021 , as compared to the same
period in the prior year, due to a $1.610 billion increase in purchases of
bitcoins and a $119.9 million decrease in proceeds from the redemption of
short-term investments, partially offset by a $9.9 million decrease in purchases
of short-term investments. During the nine months ended September 30, 2021 , we
purchased bitcoin using the net proceeds from the issuance of our 2027
Convertible Notes and 2028 Secured Notes, the issuance and sale of class A
common stock under the Sale Agreement, and excess cash. During the nine months
ended September 30, 2020 , we purchased bitcoin using excess cash, including cash
from the liquidation of short-term investments.
Net cash provided by (used in) financing activities. The changes in net cash
provided by (used in) financing activities primarily relate to our issuance of
long-term debt, the sale of class A common stock offered under the Sale
Agreement, the purchase of treasury stock, the exercise of stock options under
the 2013 Equity Plan, and the issuance of class A common stock under the 2021
ESPP. Net cash provided by financing activities was $1.946 billion for the nine
months ended September 30, 2021 , while net cash used in financing activities was
$118.9 million for the nine months ended September 30, 2020 . The change in net
cash provided by (used in) financing activities was due to $1.050 billion in
gross proceeds from our 2027 Convertible Notes, $500.0 million in gross proceeds
from our 2028 Secured Notes, $404.0 million in gross proceeds from the sale of
class A common stock offered under the Sale Agreement, a $122.5 million decrease
in purchases of treasury stock, a $27.8 million increase in proceeds from the
exercise of stock options under the 2013 Equity Plan, and $2.9 million in
proceeds from the issuance of class A common stock under the 2021 ESPP,
partially offset by $24.7 million of issuance costs paid for our Convertible
Notes, $12.8 million of issuance costs paid for our 2028 Secured Notes, and $4.5
million of issuance costs paid related to the Sale Agreement.
Convertible Senior Notes and 2028 Senior Secured Notes
InDecember 2020 andFebruary 2021 , we issued$650.0 million aggregate principal amount of the 2025 Convertible Notes and$1.050 billion aggregate principal amount of the 2027 Convertible Notes. We used the net proceeds from the issuance of the Convertible Notes to acquire bitcoin. The terms of the Convertible Notes are discussed more fully in Note 6, Long-term Debt, to the Consolidated Financial Statements. The Company did not pay any interest to holders of the 2025 Convertible Notes during the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2021 , the Company paid$2.5 million in interest to holders of the 2025 Convertible Notes. The 2027 Convertible Notes do not bear regular interest and the Company has not paid any special interest to holders of the 2027 Convertible Notes to date. InJune 2021 , we issued$500.0 million aggregate principal amount of the 2028 Secured Notes. We used the net proceeds from the issuance of the 2028 Secured Notes to acquire bitcoin. The terms of the 2028 Secured Notes are discussed more fully in Note 6, Long-term Debt to the Consolidated Financial Statements. The Company did not pay any interest to holders of the 2028 Secured Notes during the three and nine months endedSeptember 30, 2021 . Share repurchases. See "Part II. Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds" of this Quarterly Report and Note 8, Treasury Stock, to the Consolidated Financial Statements for further information. 42 --------------------------------------------------------------------------------
Contractual obligations.
The following table shows future minimum rent payments under noncancellable operating leases with initial terms of greater than one year, payments related to our Convertible Notes and 2028 Secured Notes (semi-annual interest payments and principal upon maturity), payments under purchase agreements with initial terms of greater than one year, and anticipated payments related to the Transition Tax resulting from the Tax Act, based on the expected due dates of the various installments as ofSeptember 30, 2021 (in thousands). The contractual principal payments related to the 2028 Secured Notes are included in the table below based on their stated maturity date ofJune 15, 2028 and our expectation that the springing maturity feature of the 2028 Secured Notes will not be triggered. Payments due by period ended September 30, Total 2022 2023-2024 2025-2026 Thereafter Contractual Obligations: Operating leases$ 119,782 $ 15,001 $ 28,450 $
25,869
0
2027 Convertible Notes 1,050,000 0 0 0 1,050,000
2028 Secured Notes 714,460 30,710 61,250 61,250 561,250
Purchase obligations 24,537 11,806 11,145 1,356 230
Transition Tax 25,088 2,952 12,913 9,223 0
Total $ 2,605,818 $ 65,344 $ 123,508 $ 755,024 $ 1,661,942
Unrecognized tax benefits. As of September 30, 2021 , we had $4.3 million of
total gross unrecognized tax benefits, including accrued interest, of which $2.9
million was recorded in "Other long-term liabilities" and $1.4 million was
recorded in "Deferred tax assets, net." The timing of any payments that could
result from these unrecognized tax benefits will depend on a number of factors,
and accordingly the amount and period of any future payments cannot be
estimated. We do not expect any significant tax payments related to these
obligations during 2021.
Off-balance sheet arrangements. As of
Recent Accounting Standards
See Note 2, Recent Accounting Standards, to the Consolidated Financial Statements for further information.
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