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 that undertaking these two, interdependent corporate strategies serves as a key differentiator for our business, as our bitcoin acquisition strategy has raised our profile with potential software customers while our enterprise analytics software business has provided stable cash flows that allow us to acquire and hold bitcoin for the long-term. Our bitcoin acquisition strategy involves 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 or engaging in other capital raising transactions with the objective of using the proceeds to purchase bitcoin. As part of our bitcoin acquisition strategy, we also periodically engage in activities to educate the market regarding bitcoin. 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 may consider entering into additional capital raising transactions that may be collateralized by our bitcoin holdings and may consider strategies to create income streams or otherwise generate funds using our bitcoin holdings, including lending bitcoin to creditworthy counterparties. 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 engage in additional financings to purchase additional 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 in the long term. We also believe that bitcoin offers additional opportunity for appreciation in value with increasing adoption due to its limited supply. We believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software 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 software offerings. We are also exploring opportunities to apply bitcoin-related technologies such as blockchain analytics into our software offerings.
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. Pursuant to this corporate strategy, and from time to time, subject to market conditions, we issue debt or equity securities or engage in other capital raising transactions with the objective of using the proceeds to purchase bitcoin. During 2021 and 2022, we used the proceeds of the following capital raising transactions to purchase bitcoin. The transactions are further described below under "-Liquidity and Capital Resources- Long-term Debt" and under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Open Market Sale Agreement" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 :
•
issued in
•
in June 2021 ;
21
--------------------------------------------------------------------------------• 1,413,767 shares of class A common stock issued during the second half of
2021, for aggregate gross proceeds of
Market Sale Agreement (the "Open Market Sale Agreement") with
as agent; and
•
issued in
As ofJune 30, 2022 , we held an aggregate of approximately 129,699 bitcoins, with 14,589 bitcoins held directly byMicroStrategy Incorporated and 115,110 bitcoins held byMacroStrategy LLC , a wholly-owned subsidiary ofMicroStrategy . The approximately 14,589 bitcoins held directly byMicroStrategy Incorporated serve as part of the collateral securing our 2028 Secured Notes, and approximately 30,051 of the 115,110 bitcoins held by MacroStrategy serve as part of the collateral securing our 2025 Secured Term Loan. 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 Capital Digital Asset Digital Asset Approximate Used to Original Cost Impairment Digital Asset Approximate Average Purchase Basis Losses Carrying Value Number of Purchase Price Bitcoin (in thousands) (in thousands) (in thousands) Bitcoins Held Per Bitcoin Balance at December 31, 2020$ 1,125,000 $ (70,698 ) $ 1,054,302 70,469$ 15,964 Digital asset purchases (a) 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 (b) 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 (c) 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 Digital asset purchases (d) 591,058 591,058 10,349 57,113 Digital asset impairment losses (146,587 ) (146,587 ) Balance at December 31, 2021$ 3,751,529 $ (901,319 ) $ 2,850,210 124,391$ 30,159 Digital asset purchases (e) 215,500 215,500 4,827 44,645 Digital asset impairment losses (170,091 ) (170,091 ) Balance at March 31, 2022$ 3,967,029 $ (1,071,410 ) $ 2,895,619 129,218$ 30,700 Digital asset purchases (f) 10,000 10,000 481 20,790 Digital asset impairment losses (917,838 ) (917,838 ) Balance at June 30, 2022$ 3,977,029 $ (1,989,248 ) $ 1,987,781 129,699$ 30,664
(a) In the first quarter of 2021, we purchased bitcoin using
net proceeds from our issuance of the 2027 Convertible Notes and excess cash.
(b) In the second quarter of 2021, we purchased bitcoin using
net proceeds from our issuance of the 2028 Secured Notes and excess cash.
(c) 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 Open Market Sale Agreement and excess cash.
(d) In the fourth quarter of 2021, we purchased bitcoin using
net proceeds from our sale of 858,588 shares of class A common stock offered
under the Open Market Sale Agreement and excess cash.
(e) In the first quarter of 2022, we purchased bitcoin using
the net proceeds from the issuance of the 2025 Secured Term Loan and excess
cash.
(f) In the second quarter of 2022, we purchased bitcoin using 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 bitcoin) for each respective quarter, as further defined below: 22 --------------------------------------------------------------------------------
Market Value Market Value Market Value
of Bitcoin of Bitcoin of Bitcoin
Lowest Held at End of Highest Held at End of Held at End of
Approximate Market Price Quarter Using Market Price Quarter Using Market Price Quarter Using
Number of Per Bitcoin Lowest Per Bitcoin Highest Per Bitcoin at Ending
Bitcoins Held During Market Price During Market Price End of Market Price
at End of Quarter (in thousands) Quarter (in thousands) Quarter (in thousands)
Quarter (a) (b) (c) (d) (e) (f)
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
105,085 $ 28,800.00 $
3,026,448
114,042 $ 29,301.56 $
3,341,609
124,391 $ 42,333.00 $
5,265,844
129,218 $ 32,933.33 $
4,255,579
129,699 $ 17,567.45 $
2,278,481
(a) The "
market price for one bitcoin reported on the
respective quarter, without regard to when we purchased any of our bitcoin.
(b) The "Market Value of Bitcoin Held at End of Quarter Using Lowest Market
Price" represents a mathematical calculation consisting of the lowest market
price for one bitcoin reported on the
quarter multiplied by the number of bitcoins we held at the end of the
applicable period.
(c) The "Highest Market Price Per Bitcoin During Quarter" represents the highest
market price for one bitcoin reported on the
respective quarter, without regard to when we purchased any of our bitcoin.
(d) The "Market Value of Bitcoin Held at End of Quarter Using Highest Market
Price" represents a mathematical calculation consisting of the highest market
price for one bitcoin reported on the
quarter multiplied by the number of bitcoins we held at the end of the
applicable period.
(e) The "Market Price Per Bitcoin at End of Quarter" represents the market price
of one bitcoin on the
day of the respective quarter.
(f) 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 we held 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 for bitcoin) in each scenario defined above multiplied by the number of bitcoins we held 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 for bitcoin) 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 endedJune 30, 2022 , digital asset impairment losses of$917.8 million represented 90.4% of our operating expenses, contributing to our net loss of$1.062 billion for the three months endedJune 30, 2022 , compared to digital asset impairment losses of$424.8 million in the three months endedJune 30, 2021 , representing 82.2% of our operating expenses and contributing to our net loss of$299.3 million for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , digital asset impairment losses of$1.088 billion represented 85.1% of our operating expenses, contributing to our net loss of$1.193 billion for the six months endedJune 30, 2022 , compared to digital asset impairment losses of$618.9 million in the six months endedJune 30, 2021 , representing 77.4% of our operating expenses and contributing to our net loss of$409.4 million for the six months endedJune 30, 2021 . As ofAugust 1, 2022 , we held approximately 129,699 bitcoins that were acquired at an aggregate purchase price of$3.977 billion and an average purchase price of approximately$30,664 per bitcoin, inclusive of fees and expenses. As ofAugust 1, 2022 , at4:00 p.m. Eastern Time , the market price of one bitcoin reported on theCoinbase exchange was$22,964.22 . 23 --------------------------------------------------------------------------------
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, theMicroStrategy platform, helps achieve this vision for our enterprise customers around the world. It delivers actionable intelligence and modern analytics on an open, comprehensive enterprise platform. TheMicroStrategy platform empowers our customers to quickly build and deploy high-performance, governed, and secure applications that can scale across their enterprises. Our core product offering is our software platform. In 2021, we moved to a monthly release cadence to enable the same functionality, security, and stability enhancements that we have historically delivered for our platform in annual releases, without the friction of a single, annual release. Our platform features the following:
• Pervasive, Modern Analytics:
clients and devices to users via our HyperIntelligence® products,
visualization and reporting capabilities, mobility features, and custom
applications developed on our platform.
o Data Visualization and Reporting - Dossier®, our dashboarding anddata-visualization tool, provides users with the formatting, layout, and
input controls needed to quickly build low-code/no-code analytics
applications, from infographic-style reports to high-impact productivity
applications.
o Transformational Mobility - Our platform empowers the mobile workforce
to make decisions and take action from any location. It delivers more
ways to quickly deploy mobile productivity apps for a variety of
business functions and roles on any standard smartphone or tablet.
o HyperIntelligence - Our platform offers the potential to radically
improve business processes by enhancing the websites, applications, and
mobile devices people use every day with contextual intelligence,
next-action suggestions, and workflows.
o Custom Applications - Our platform enables users to create highlycustomized web and mobile applications that leverage the full breadth of
the MicroStrategy platform to deliver intuitive BI apps for teams,
departments, and organizations.
• Open, Federated Architecture:
development and innovation, addressing our strategy of seeking to offer 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. The MicroStrategy platform integrates with popular
business apps, including Microsoft Excel, Power BI, and Tableau to
provide users with the flexibility to leverage trusted data from
MicroStrategy directly within the client applications to which they are
accustomed. The
integrations to popular data-science tools like Jupyter and RStudio,
allowing users to develop predictive, machine learning-enhanced data
models on top of the secure and trusted foundation offered by the
MicroStrategy platform.
o APIs and Gateways - Our gateways, application programming interfaces
("APIs"), and connectors enable the
with the most popular enterprise platforms and tools. We certify more
than 200 connectors to popular data sources both locally stored and in
the cloud, and we offer a comprehensive set of Representational State
Transfer ("REST") APIs that makes 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, fully managed and
hosted by us.
• Enterprise Platform: Our platform is designed to securely scale analytics at
high data volumes. The
functionality that enable organizations to deliver secure, high-performance
applications at scale.
o Enterprise Semantic Graph™ - The engine of our platform is ourproprietary 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. This feature allows users to have a consistent and
secure view of data across the enterprise-effectively delivering what we
refer to as a single version of truth.
o Scalability - Our platform powers some of the largest business
intelligence deployments in the world. The 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.
24--------------------------------------------------------------------------------
o Security - Our platform includes a comprehensive set of features that
provides superior administration, security, and architecture, including
role-based access to both row and column data. This level of data
security gives our customers that are subject to the most stringent data
security requirements, including financial institutions, healthcare
providers, and government agencies, the confidence they need to deploy
our platform across their enterprise.
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 continued to disrupt supply chains and has adversely impacted global commercial activity. Although many jurisdictions, includingthe United States , have substantially lifted COVID-19 travel restrictions, some restrictions do remain. Considerable uncertainty continues to surround 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 and develop effective treatments. 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 six months endedJune 30, 2022 and 2021 were not materially impacted by COVID-19, our revenues may be negatively impacted in future periods until the effects of the pandemic and the efforts to address it 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. We adapted our operations to meet the challenges of the pandemic, including establishing flexible working arrangements for our employees, reducing business travel, and shifting certain of our customer, employee, and industry events to virtual formats. 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; decreases in product licenses revenues driven by channel partners, and compliance costs and business disruptions associated with certain government requirements and recommendations adopted in response to the pandemic. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition. 25 --------------------------------------------------------------------------------
Operating Highlights
The following table sets forth certain operating highlights (in thousands) for
the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Revenues
Product licenses $ 20,129 $ 22,151 $ 36,642 $ 43,431
Subscription services 14,017 10,342 26,862 20,368
Total product licenses and subscription
services 34,146 32,493 63,504 63,799
Product support 66,521 71,027 133,672 141,676
Other services 21,406 21,831 44,174 42,778
Total revenues 122,073 125,351 241,350 248,253
Cost of revenues
Product licenses 431 419 908 907
Subscription services 5,498 3,810 10,908 7,438
Total product licenses and subscription
services 5,929 4,229 11,816 8,345
Product support 5,127 4,862 10,318 9,674
Other services 14,148 13,947 28,747 27,568
Total cost of revenues 25,204 23,038 50,881 45,587
Gross profit 96,869 102,313 190,469 202,666
Operating expenses
Sales and marketing 36,862 40,321 70,102 78,519
Research and development 31,790 28,548 65,313 58,031
General and administrative 28,502 22,917 55,208 44,646
Digital asset impairment losses 917,838 424,774 1,087,929 618,869
Total operating expenses 1,014,992 516,560 1,278,552 800,065
Loss from operations $ (918,123 ) $ (414,247 ) $ (1,088,083 ) $ (597,399 )
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 decrease in the price of
bitcoin during any quarter, any sales by us of our bitcoin at prices above their
then current carrying costs or 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.
Employees
As ofJune 30, 2022 , we had a total of 2,158 employees, of whom 779 were based inthe United States and 1,379 were based internationally. The following table summarizes employee headcount as of the dates indicated: June 30, December 31, June 30, 2022 2021 2021 Subscription services 83 72 56 Product support 164 174 160 Consulting 428 413 388 Education 36 36 38 Sales and marketing 457 470 470 Research and development 728 699 663 General and administrative 262 257 259 Total headcount 2,158 2,121 2,034 26
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Share-based Compensation Expense
As discussed in Note 8, 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, each of which represents a right to
receive a share of our class A common stock upon the satisfaction of applicable
vesting requirements, 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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Cost of subscription services revenues
522 293 972 442
Cost of consulting revenues 439 105 815 184
Cost of education revenues 54 22 106 32
Sales and marketing 4,444 3,255 8,727 5,639
Research and development 3,126 2,523 6,440 4,590
General and administrative 6,675 4,858
12,487 7,831
Total share-based compensation expense
The$4.2 million and$10.9 million increases in share-based compensation expense during the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year, are primarily due to the continued expansion of our equity award programs worldwide. As ofJune 30, 2022 , we estimated that an aggregate of approximately$191.1 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 3.1 years.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP loss from operations that excludes the impact of our share-based compensation expense, (ii) non-GAAP net loss and non-GAAP diluted loss per share that exclude the impacts of our share-based compensation expense, 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. 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 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. The second set of supplemental financial measures excludes the impacts of (i) share-based compensation expense, (ii) non-cash interest expense arising from the amortization of debt issuance costs related to our long-term debt, and (iii) 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. 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. 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. 27 -------------------------------------------------------------------------------- The following is a reconciliation of our non-GAAP loss from operations, which excludes the impact of share-based compensation expense, to its most directly comparable GAAP measures (in thousands) for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Reconciliation of non-GAAP loss from operations: Loss from operations$ (918,123 ) $ (414,247 ) $ (1,088,083 ) $ (597,399 ) Share-based compensation expense 15,294 11,096 29,688 18,807 Non-GAAP loss from operations$ (902,829 ) $ (403,151 ) $ (1,058,395 ) $ (578,592 ) The following are reconciliations of our non-GAAP net loss and non-GAAP diluted loss per share, in each case excluding the impacts of (i) share-based compensation expense, (ii) interest expense arising from the amortization of debt issuance costs on our long-term debt, and (iii) related income tax effects to their most directly comparable GAAP measures (in thousands, except per share data) for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Reconciliation of non-GAAP net loss: Net loss$ (1,062,298 ) $ (299,347 ) $ (1,193,049 ) $ (409,367 ) Share-based compensation expense 15,294 11,096 29,688 18,807 Interest expense arising from amortization of debt issuance costs 2,168 1,805 4,297 2,977 Income tax effects (1) (3,898 ) (2,651 ) (7,342 ) (26,388 ) Non-GAAP net loss$ (1,048,734 ) $ (289,097 )
Reconciliation of non-GAAP diluted loss per share (2): Diluted loss per share$ (94.01 ) $ (30.71 ) $ (105.64 ) $ (42.22 ) Share-based compensation expense (per diluted share) 1.35 1.14 2.63 1.94 Interest expense arising from amortization of debt issuance costs (per diluted share) 0.19 0.19 0.38 0.31 Income tax effects (per diluted share) (0.34 ) (0.28 ) (0.65 ) (2.72 ) Non-GAAP diluted loss per share$ (92.81 ) $ (29.66 ) $ (103.28 ) $ (42.69 )
(1) Income tax effects reflect the net tax effects of share-based compensation
expense, which includes tax benefits and expenses on exercises of stock
options and vesting of share-settled restricted stock units, 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.
28
--------------------------------------------------------------------------------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
June 30,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2022 2022 2022 2021 2022 2022
Product licenses $ 20,129 $ (608 ) $ 20,737 $ 22,151 -9.1 % -6.4 %
revenues
Subscription services 14,017 (483 ) 14,500 10,342 35.5 % 40.2 %
revenues
Product support 66,521 (3,000 ) 69,521 71,027 -6.3 % -2.1 %
revenues
Other services 21,406 (1,365 ) 22,771 21,831 -1.9 % 4.3 %
revenues
Cost of product 5,127 (236 ) 5,363 4,862 5.5 % 10.3 %
support revenues
Cost of other 14,148 (1,130 ) 15,278 13,947 1.4 % 9.5 %
services revenues
Sales and marketing 36,862 (1,505 ) 38,367 40,321 -8.6 % -4.8 %
expenses
Research and 31,790 (447 ) 32,237 28,548 11.4 % 12.9 %
development expenses
General and 28,502 (414 ) 28,916 22,917 24.4 % 26.2 %
administrative
expenses
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 $ 22,151 $ 132 $ 22,019 $ 14,816 49.5 % 48.6 %
revenues
Subscription services 10,342 264 10,078 8,021 28.9 % 25.6 % revenues Product support 71,027 2,425 68,602 70,038 1.4 % -2.1 % revenues Other services 21,831 763 21,068 17,709 23.3 % 19.0 % revenues Cost of product 4,862 83 4,779 6,837 -28.9 % -30.1 % support revenues Cost of other 13,947 521 13,426 12,846 8.6 % 4.5 % services revenues Sales and marketing 40,321 987 39,334 34,951 15.4 % 12.5 %
expenses
Research and 28,548 658 27,890 25,867 10.4 % 7.8 %
development expenses
General and 22,917 244 22,673 19,449 17.8 % 16.6 %
administrative
expenses
29
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Six Months Ended
June 30,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2022 2022 2022 2021 2022 2022
Product licenses $ 36,642 $ (1,096 ) $ 37,738 $ 43,431 -15.6 % -13.1 %
revenues
Subscription services 26,862 (688 ) 27,550 20,368 31.9 % 35.3 %
revenues
Product support 133,672 (4,699 ) 138,371 141,676 -5.6 % -2.3 %
revenues
Other services revenues 44,174 (2,167 ) 46,341 42,778 3.3 % 8.3 %
Cost of product support 10,318 (367 ) 10,685 9,674 6.7 % 10.5 %
revenues
Cost of other services 28,747 (1,816 ) 30,563 27,568 4.3 % 10.9 %
revenues
Sales and marketing 70,102 (2,317 ) 72,419 78,519 -10.7 % -7.8 %
expenses
Research and 65,313 (430 ) 65,743 58,031 12.5 % 13.3 %
development expenses
General and 55,208 (655 ) 55,863 44,646 23.7 % 25.1 %
administrative expenses
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 $ 43,431 $ 457 $ 42,974 $ 27,400 58.5 % 56.8 %
revenues
Subscription services 20,368 454 19,914 15,989 27.4 % 24.5 %
revenues
Product support 141,676 4,342 137,334 141,196 0.3 % -2.7 %
revenues
Other services revenues 42,778 1,381 41,397 37,423 14.3 % 10.6 %
Cost of product support 9,674 141 9,533 13,555 -28.6 % -29.7 %
revenues
Cost of other services 27,568 872 26,696 25,939 6.3 % 2.9 %
revenues
Sales and marketing 78,519 1,412 77,107 74,469 5.4 % 3.5 %
expenses
Research and 58,031 1,103 56,928 51,968 11.7 % 9.5 %
development expenses
General and 44,646 346 44,300 40,781 9.5 % 8.6 %
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 Estimates
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. Actual results and outcomes could differ from these estimates and assumptions. Critical accounting estimates involve a significant level of estimation uncertainty and are estimates that have had or are reasonably likely to have a material impact on our financial condition or results of operations. We consider certain estimates and judgments related to revenue recognition to be critical accounting estimates for us, as discussed under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . There have been no significant changes in such estimates and judgments sinceDecember 31, 2021 . 30 --------------------------------------------------------------------------------
Results of Operations
Comparison of the three and six 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 Six Months Ended
June 30, % June 30, %
2022 2021 Change 2022 2021 Change
Product Licenses and
Subscription Services Revenues:
Product Licenses
Domestic $ 15,165 $ 10,019 51.4 % $ 25,009 $ 23,265 7.5 %
International 4,964 12,132 -59.1 % 11,633 20,166 -42.3 %
Total product licenses revenues 20,129 22,151 -9.1 % 36,642 43,431 -15.6 %
Subscription Services
Domestic 10,061 7,596 32.5 % 19,159 15,065 27.2 %
International 3,956 2,746 44.1 % 7,703 5,303 45.3 %
Total subscription services
revenues 14,017 10,342 35.5 % 26,862 20,368 31.9 %
Total product licenses and
subscription services revenues $ 34,146 $ 32,493 5.1 % $ 63,504 $ 63,799 -0.5 %
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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Product Licenses Transactions with
Recognized Licenses Revenue in the
Applicable Period:
More than $1.0 million in licenses
revenue recognized 2 2 3 4
Between $0.5 million and $1.0 million in
licenses revenue recognized 4 7 7 12
Total 6 9 10 16
Domestic:
More than$1.0 million in licenses revenue recognized 2 1 3 3 Between$0.5 million and$1.0 million in licenses revenue recognized 4 4 6 6 Total 6 5 9 9 International: More than$1.0 million in licenses revenue recognized 0 1 0 1 Between$0.5 million and$1.0 million in licenses revenue recognized 0 3 1 6 Total 0 4 1 7 31
--------------------------------------------------------------------------------
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 Six Months Ended
June 30, % June 30, %
2022 2021 Change 2022 2021 Change
Product Licenses Revenue Recognized
in the Applicable Period:
More than $1.0 million in licenses
revenue recognized $ 7,432 $ 4,036 84.1 % $ 8,557 $ 10,139 -15.6 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 3,185 4,838 -34.2 % 5,138 7,891 -34.9 %
Less than $0.5 million in licenses
revenue recognized 9,512 13,277 -28.4 % 22,947 25,401 -9.7 %
Total 20,129 22,151 -9.1 % 36,642 43,431 -15.6 %
Domestic:
More than $1.0 million in licenses
revenue recognized 7,432 1,603 363.6 % 8,557 7,706 11.0 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 3,185 2,663 19.6 % 4,628 4,077 13.5 %
Less than $0.5 million in licenses
revenue recognized 4,548 5,753 -20.9 % 11,824 11,482 3.0 %
Total 15,165 10,019 51.4 % 25,009 23,265 7.5 %
International:
More than $1.0 million in licenses
revenue recognized 0 2,433 -100.0 % 0 2,433 -100.0 %
Between $0.5 million and $1.0
million in licenses revenue
recognized 0 2,175 -100.0 % 510 3,814 -86.6 %
Less than $0.5 million in licenses
revenue recognized 4,964 7,524 -34.0 % 11,123 13,919 -20.1 %
Total $ 4,964 $ 12,132 -59.1 % $ 11,633 $ 20,166 -42.3 %
Product licenses revenues decreased $2.0 million and $6.8 million for the three
and six months ended June 30, 2022 , respectively, as compared to the same
periods in the prior year. For the three months ended June 30, 2022 and 2021,
product licenses transactions with more than $0.5 million in recognized revenue
represented 52.7% and 40.1%, respectively, of our product licenses revenues. For
the six months ended June 30, 2022 , our top three product licenses transactions
totaled $8.6 million in recognized revenue, or 23.4% of total product licenses
revenues, compared to $8.9 million , or 20.6% of total product licenses revenues,
for the six months ended June 30, 2021 .
Domestic product licenses revenues. Domestic product licenses revenues increased
$5.1 million for the three months ended June 30, 2022 , as compared to the same
period in the prior year, primarily due to an increase in the average deal size
of transactions and an increase in the number of transactions with more than
$1.0 million in recognized revenue, partially offset by a decrease in the number
of transactions with less than $0.5 million in recognized revenue. Domestic
product licenses revenues increased $1.7 million for the six months ended
June 30, 2022 , as compared to the same period in the prior year, primarily due
to an increase in the average deal size of transactions, partially offset by a
decrease in the number of transactions with less than $0.5 million in recognized
revenue.
International product licenses revenues. International product licenses revenues
decreased $7.2 million for the three months ended June 30, 2022 , as compared to
the same period in the prior year, primarily due to a decrease in the number of
transactions and a $0.6 million unfavorable foreign currency exchange impact.
International product licenses revenues decreased $8.5 million for the six
months ended June 30, 2022 , as compared to the same period in the prior year,
primarily due to a decrease in the number of transactions and a $1.1 million
unfavorable foreign currency exchange impact.
Subscription services revenues. Subscription services revenues are derived from
our MCE cloud subscription service and are recognized ratably over the service
period in the contract. Subscription services revenues increased $3.7 million
for the three months ended June 30, 2022 , 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 sales contracts with new customers, partially offset
by a $0.5 million unfavorable foreign currency exchange impact. Subscription
services revenues increased $6.5 million for the six months ended June 30, 2022 ,
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 sales contracts with
new customers, partially offset by a $0.7 million unfavorable foreign currency
exchange impact. We expect our subscription services revenues to continue to
grow in future periods as we continue to promote our cloud offering to new and
existing customers.
32
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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 Six Months Ended
June 30, % June 30, %
2022 2021 Change 2022 2021 Change
Product Support Revenues:
Domestic $ 39,403 $ 40,739 -3.3 % $ 78,486 $ 80,829 -2.9 %
International 27,118 30,288 -10.5 %
55,186 60,847 -9.3 %
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$4.5 million for the three months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$3.0 million unfavorable foreign currency exchange impact and certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings. Product support revenues decreased$8.0 million for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$4.7 million unfavorable foreign currency exchange impact and certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings.
Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:
Three Months Ended Six Months Ended
June 30, % June 30, %
2022 2021 Change 2022 2021 ChangeOther Services Revenues: Consulting Domestic$ 9,743 $ 9,810 -0.7 %$ 19,324 $ 18,526 4.3 % International 10,530 10,812 -2.6 % 22,384 21,807 2.6 % Total consulting revenues 20,273 20,622 -1.7 % 41,708 40,333 3.4 % Education 1,133 1,209 -6.3 % 2,466 2,445 0.9 % Total other services revenues$ 21,406 $ 21,831 -1.9 %$ 44,174 $ 42,778 3.3 % Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues did not materially change for the three months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$1.3 million unfavorable foreign currency exchange impact having been substantially offset by an increase in average bill rates and an increase in billable hours worldwide. Consulting revenues increased$1.4 million for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide and an increase in average bill rates, partially offset by a$2.1 million unfavorable foreign currency exchange impact. 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 six months endedJune 30, 2022 , as compared to the same periods in the prior year. 33 --------------------------------------------------------------------------------
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 Six Months Ended
June 30, % June 30, %
2022 2021 Change 2022 2021 Change
Cost of Revenues:
Product licenses and
subscription services:
Product licenses $ 431 $ 419 2.9 % $ 908 $ 907 0.1 %
Subscription services 5,498 3,810 44.3 % 10,908 7,438 46.7 %
Total product licenses and
subscription services 5,929 4,229 40.2 % 11,816 8,345 41.6 %
Product support 5,127 4,862 5.5 % 10,318 9,674 6.7 %
Other services:
Consulting 12,837 12,438 3.2 % 26,137 24,770 5.5 %
Education 1,311 1,509 -13.1 % 2,610 2,798 -6.7 %
Total other services 14,148 13,947 1.4 % 28,747 27,568 4.3 %
Total cost of revenues $ 25,204 $ 23,038 9.4 % $ 50,881 $ 45,587 11.6 %
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 six months ended June 30,
2022 , 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 48.2% to
83 at June 30, 2022 from 56 at June 30, 2021 . Cost of subscription services
revenues increased $1.7 million for the three months ended June 30, 2022 , as
compared to the same period in the prior year, primarily due to a $1.1 million
increase in cloud hosting infrastructure costs, which is a result of the
increased usage by new and existing cloud subscription services customers, and a
$0.5 million increase in employee salaries primarily due to periodic wage
increases and an increase in average staffing levels. Cost of subscription
services revenues increased $3.5 million for the six months ended June 30, 2022 ,
as compared to the same period in the prior year, primarily due to a $2.2
million increase in cloud hosting infrastructure costs, which is a result of the
increased usage by new and existing cloud subscription services customers, and a
$0.9 million increase in employee salaries primarily due to periodic wage
increases and an increase 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 increased 2.5% to 164 at June 30, 2022 from 160 at June 30, 2021 . Cost
of product support revenues did not materially change for the three months ended
June 30, 2022 , as compared to the same period in the prior year. Cost of product
support revenues increased $0.6 million for the six months ended June 30, 2022 ,
as compared to the same period in the prior year, primarily due to a $0.6
million increase in compensation and related costs attributable to an increase
in product support average staffing levels and a $0.5 million net increase in
share-based compensation expense, partially offset by a $0.6 million decrease in
compensation and related costs attributable to non-product support personnel
providing a decreased level of Enterprise Support services. The $0.5 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
increased 10.3% to 428 at June 30, 2022 from 388 at June 30, 2021 . Cost of
consulting revenues did not materially change for the three months ended
June 30, 2022 , as compared to the same period in the prior year. Included in
cost of consulting revenues for the three months ended June 30, 2022 is an
aggregate $1.1 million favorable foreign currency exchange impact. Cost of
consulting revenues increased $1.4 million for the six months ended June 30,
2022 , as compared to the same period in the prior year, primarily due to a $0.7
million increase in employee salaries primarily due to an increase in average
staffing levels and consulting personnel providing a decreased level of
Enterprise Support services, and a $0.6 million net increase in share-based
compensation expense. The $0.6 million net increase in share-based compensation
expense is primarily due to the grant of additional awards under the 2013 Equity
Plan. Included in cost of consulting revenues for the six months ended June 30,
2022 is an aggregate $1.7 million favorable foreign currency exchange impact.
Cost of education revenues. Cost of education revenues consists of personnel and
related overhead costs. Education headcount decreased 5.3% to 36 at June 30,
2022 from 38 at June 30, 2021 . Cost of education revenues did not materially
change for the three and six months ended June 30, 2022 , as compared to the same
periods in the prior year.
34
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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 2.8% to 457 at June 30,
2022 from 470 at June 30, 2021 . The following table sets forth sales and
marketing expenses (in thousands) and related percentage changes for the periods
indicated:
Three Months Ended Six Months Ended
June 30, % June 30, %
2022 2021 Change
2022 2021 Change
Sales and marketing expenses
Sales and marketing expenses decreased$3.5 million for the three months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$4.1 million decrease in variable compensation primarily due to a decrease in personnel costs and an increase in capitalized commissions, partially offset by a$1.2 million net increase in share-based compensation expense and a$0.5 million increase in travel and entertainment expenditures that were undertaken as various COVID-19-related restrictions were lifted. The$1.2 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 the fair value remeasurement of certain liability-classified awards at the end of the reporting period. Included in sales and marketing expenses for the three months endedJune 30, 2022 is an aggregate$1.5 million favorable foreign currency exchange impact. Sales and marketing expenses decreased$8.4 million for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to an$11.2 million decrease in variable compensation primarily due to an increase in capitalized commissions and decreases in personnel costs, bonuses, and employee relations expenses, partially offset by a$3.1 million net increase in share-based compensation expense and a$0.7 million increase in travel and entertainment expenditures that were undertaken as various COVID-19-related restrictions were lifted. The$3.1 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 the forfeiture of certain awards and the fair value remeasurement of certain liability-classified awards at the end of the reporting period. Included in sales and marketing expenses for the six months endedJune 30, 2022 is an aggregate$2.3 million favorable 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 increased 9.8% to 728 atJune 30, 2022 from 663 atJune 30, 2021 . The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2022 2021 Change
2022 2021
Research and development expenses increased$3.2 million for the three months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$2.4 million increase in employee salaries primarily due to periodic wage increases and an increase in average staffing levels, partially offset by a shift in staffing levels to lower cost regions, and a$0.6 million net increase in share-based compensation expense. The$0.6 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$7.3 million for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$5.0 million increase in employee salaries primarily due to periodic wage increases and an increase in average staffing levels, partially offset by a shift in staffing levels to lower cost regions, and a$1.9 million net increase in share-based compensation expense, partially offset by a$0.5 million decrease in facility and other related support costs. The$1.9 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan, partially offset by the fair value remeasurement of certain liability-classified awards at the end of the reporting period and certain awards that became fully vested. 35 -------------------------------------------------------------------------------- General and administrative expenses. General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. General and administrative headcount increased 1.2% to 262 atJune 30, 2022 from 259 atJune 30, 2021 . The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2022 2021 Change 2022 2021 Change General and administrative expenses$ 28,502 $ 22,917 24.4 %$ 55,208 $ 44,646 23.7 % General and administrative expenses increased$5.6 million for the three months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$2.5 million increase in costs related to the maintenance and operations of our corporate aircraft, a$1.8 million net increase in share-based compensation expense, and a$1.2 million increase in legal, consulting, and other advisory costs which includes costs from executing our bitcoin acquisition strategy, partially offset by a$1.0 million decrease in custodial fees incurred on our bitcoin holdings. The$1.8 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 that became fully vested. General and administrative expenses increased$10.6 million for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$4.7 million net increase in share-based compensation expense, a$2.6 million increase in costs related to the maintenance and operations of our corporate aircraft, a$1.4 million increase in legal, consulting, and other advisory costs which includes costs from executing our bitcoin acquisition strategy, a$1.1 million increase in facility and other related support costs, a$0.6 million increase in employee salaries primarily due to an increase in average staffing levels, and a$0.5 million increase in travel and entertainment expenditures that were undertaken as various COVID-19-related restrictions were lifted, partially offset by a$1.1 million decrease in custodial fees incurred on our bitcoin holdings and a$0.6 million decrease in variable compensation. The$4.7 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 that became fully vested. Included in general and administrative expenses for the six months endedJune 30, 2022 is an aggregate$0.7 million favorable foreign currency exchange impact. 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 Six Months Ended June 30, % June 30, % 2022 2021 Change 2022 2021 Change
Digital asset impairment losses
We did not sell any of our digital assets during the three and six months ended
Interest Expense, Net
For the three and six months endedJune 30, 2022 , interest expense, net, of$13.2 million and$24.2 million , respectively, was primarily related to the contractual interest expense related to our 2028 Secured Notes, 2025 Secured Term Loan, and 2025 Convertible Notes, and the amortization of issuance costs related to our long-term debt arrangements. For the three and six months endedJune 30, 2021 , interest expense, net, of$4.4 million and$6.8 million , respectively, was primarily related to the contractual interest expense related to our 2025 Convertible Notes and 2028 Secured Notes, and the amortization of issuance costs related to our Convertible Notes. Refer to Note 4, Long-term Debt, to the Consolidated Financial Statements for further information.
Other Income (Expense), Net
For the three and six months endedJune 30, 2022 , other income, net, of$5.1 million and$7.3 million , respectively, were comprised primarily of foreign currency transaction net gains. For the three months endedJune 30, 2021 , other expense, net, of$0.9 million was comprised primarily of foreign currency transaction net losses. For the six months endedJune 30, 2021 , other income, net of$0.4 million was comprised primarily of foreign currency transaction net gains. 36 --------------------------------------------------------------------------------
Provision for (Benefit from) Income Taxes
We recorded a provision for income taxes of$88.1 million on a pretax loss of$1.105 billion for the six months endedJune 30, 2022 and a benefit from income taxes of$194.5 million on a pretax loss of$603.8 million for the six months endedJune 30, 2021 . Our provision for income taxes increased from the same period in the prior year primarily due to an increase in the valuation allowance on our deferred tax asset related to the impairment on our bitcoin holdings, attributable to the decrease in the market value of bitcoin as ofJune 30, 2022 . As ofJune 30, 2022 , we had a valuation allowance of$391.3 million primarily related to our deferred tax asset related to the impairment on our bitcoin holdings that, in our present estimation, more likely than not will not be realized. If the market value of bitcoin continues to decline or we are unable to regain profitability in future periods, we may be required to increase further the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. To the extent the market value of bitcoin rises we may decrease the valuation allowance against our deferred tax asset. We will continue to regularly assess the realizability of deferred tax assets.
Our effective tax rate may fluctuate due to changes in our domestic and foreign earnings and losses, material discrete tax items, or a combination of these factors resulting from transactions or events.
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 contract arrangements, we generally
do not invoice more than one year in advance of services and do 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:
June 30, December 31, June 30,
2022 2021 2021
Current:
Deferred product licenses revenue $ 754 $ 993 $ 544
Deferred subscription services revenue 40,295 35,589 25,916
Deferred product support revenue 143,524 166,477 150,963
Deferred other services revenue 3,525 6,801 5,395
Total current deferred revenue and advance
payments $ 188,098 $ 209,860 $ 182,818
Non-current:
Deferred product licenses revenue $ 0 $ 68 $ 76
Deferred subscription services revenue 2,639 1,064 712
Deferred product support revenue 5,272 6,203 5,920
Deferred other services revenue 586 754 554
Total non-current deferred revenue and advance
payments $ 8,497 $ 8,089 $ 7,262
Total current and non-current:
Deferred product licenses revenue $ 754 $ 1,061 $ 620
Deferred subscription services revenue 42,934 36,653 26,628
Deferred product support revenue 148,796 172,680 156,883
Deferred other services revenue 4,111 7,555 5,949
Total current and non-current deferred revenue
and advance payments $ 196,595 $ 217,949 $ 190,080
37-------------------------------------------------------------------------------- The portions of 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. Total deferred revenue and advance payments decreased$21.4 million as ofJune 30, 2022 , as compared toDecember 31, 2021 , primarily due to the timing of product support renewals and an increase in conversions from on-premises to subscription services and revenue recognized on previously deferred other services, partially offset by an increase in deferred revenue from new subscription services contracts. Total deferred revenue and advance payments increased$6.5 million as ofJune 30, 2022 , as compared toJune 30, 2021 , primarily due to an increase in deferred revenue from new subscription services contracts, partially offset by an increase in conversion from on-premises to subscription services and revenue recognized on previously deferred other services. Included in our international deferred revenue balances atJune 30, 2022 are$6.7 million and$10.2 million unfavorable foreign currency impacts from the general strengthening of theU.S. dollar compared toDecember 31, 2021 andJune 30, 2021 , respectively. 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 ofJune 30, 2022 , we had an aggregate transaction price of$273.9 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. We expect to recognize approximately$207.3 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, including cash generated from capital raising transactions, to acquire bitcoins, which are classified as indefinite-lived intangible assets. As ofJune 30, 2022 andDecember 31, 2021 , the amount of cash and cash equivalents held by ourU.S. entities was$20.9 million and$13.1 million , respectively, and by our non-U.S. entities was$48.5 million and$50.3 million , respectively. We earn a significant amount of our revenues outsidethe United States . We repatriated foreign earnings and profits of$57.5 million during 2021 and$21.1 million during the six months endedJune 30, 2022 .
Our material contractual obligations and cash requirements consist of:
• principal and interest payments related to our long-term debt; • rent payments under noncancellable operating leases;
• payments related to the mandatory deemed repatriation transition tax (the
"Transition Tax") under the
• payments under various purchase agreements, primarily related to third-party
software supporting our products, marketing, and operations; and
• ongoing personnel-related expenditures and vendor payments.
The above items are explained in further detail in Note 4, Long-term Debt, to
the Consolidated Financial Statements included in this Quarterly Report as well
as under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources" included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in
the Notes to the Consolidated Financial Statements included therein. There have
been no changes to our material contractual obligations and cash requirements
since December 31, 2021 , except for the issuance of the 2025 Secured Term Loan
and other long-term secured debt, as described in Note 4, Long-term Debt, to the
Consolidated Financial Statements.
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. Beyond the next 12 months, our
long-term cash requirements are primarily for obligations related to our
long-term debt. We have principal due upon maturity of our long-term debt
instruments in the aggregate of $2.413 billion in addition to $2.4 million in
coupon interest due each semi-annual period for the 2025 Convertible Notes,
$15.3 million in coupon interest due each semi-annual period for the 2028
Secured Notes, an estimated $0.8 million due monthly in variable coupon interest
for the 2025 Secured Term Loan (based on the interest rate in effect at June 30,
2022 ), and $0.1 million due monthly in principal and interest related to our
other long-term secured debt. We also have long-term cash requirements for
obligations related to our operating leases, the Transition Tax, and our various
purchase agreements. If cash and cash equivalents generated by future operating
activities are not sufficient to enable us to satisfy these obligations, we may
seek to generate cash and cash equivalents from other sources. The sources could
include the sale of bitcoins, additional borrowings collateralized by our
bitcoins, as well as the issuance and sale of shares of our class A common
stock. Furthermore, if certain conditions are met, we may have the right to
elect to settle the Convertible Notes upon a conversion of such Convertible
Notes in shares of our class A common stock, or a combination of cash and shares
of class A common stock, which may enable us to reduce the amount of our cash
obligations under the Convertible Notes.
38
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As of June 30, 2022 , we held approximately 129,699 bitcoins, of which
approximately 85,059 are unencumbered. We do not believe we will need to sell or
engage in other transactions with respect to any of our bitcoins within the next
twelve months to meet our working capital requirements, although we may from
time to time sell or engage in other transactions with respect to our bitcoins
as part of treasury management operations, as noted above. 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.
The following table sets forth a summary of our cash flows (in thousands) and related percentage changes for the periods indicated:
Six Months Ended June 30 , %
2022 2021 Change
Net cash provided by operating activities
-70.2 % Net cash used in investing activities$ (227,019 ) $ (1,616,948 ) -86.0 % Net cash provided by financing activities$ 218,487 $ 1,538,087
-85.8 %
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, income taxes, and interest expense related to our long-term debt arrangements. 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 operating lease right-of-use 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. Net cash provided by operating activities decreased$53.8 million for the six months endedJune 30, 2022 , as compared to the same period in the prior year, due to a$783.7 million increase in net loss and a$23.7 million decrease from changes in operating assets and liabilities, partially offset by a$753.6 million increase from changes in non-cash items. Net cash used in investing activities. The changes in net cash used in investing activities primarily relate to purchases of digital assets and expenditures on property and equipment. Net cash used in investing activities decreased$1.390 billion for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to a$1.390 billion decrease in purchases of bitcoins. During the six months endedJune 30, 2022 , we purchased bitcoin using$190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan and excess cash. During the six months endedJune 30, 2021 , we purchased bitcoin using the net proceeds from the issuance of our 2027 Convertible Notes and 2028 Secured Notes, and excess cash. Net cash provided by financing activities. The changes in net cash provided by (used in) financing activities primarily relate to the issuance of our long-term debt, the exercise of stock options under the 2013 Equity Plan, the sales of class A common stock under the 2021 ESPP, and the payment of withholding tax on vesting of restricted stock units. Net cash provided by financing activities decreased$1.320 billion for the six months endedJune 30, 2022 , as compared to the same period in the prior year, primarily due to$1.050 billion in gross proceeds from our 2027 Convertible Notes during the six months endedJune 30, 2021 ,$500.0 million in gross proceeds from our 2028 Secured Notes during the six months endedJune 30, 2021 , a$23.4 million decrease in proceeds from the exercise of stock options under the 2013 Equity Plan, and$0.5 million of withholding tax paid on vesting of restricted stock units during the six months endedJune 30, 2022 , partially offset by$204.7 million in gross proceeds, net of lender fees, from our 2025 Secured Term Loan during the six months endedJune 30, 2022 ,$24.7 million in issuance costs paid for our Convertible Notes during the six months endedJune 30, 2021 ,$11.3 million in issuance costs paid for our 2028 Secured Notes during the six months endedJune 30, 2021 ,$11.1 million in gross proceeds from other long-term secured debt during the six months endedJune 30, 2022 , and$2.8 million in proceeds from the sales of class A common stock under the 2021 ESPP in the six months endedJune 30, 2022 .
Long-term Debt
InDecember 2020 , we issued$650.0 million aggregate principal amount of the 2025 Convertible Notes and inFebruary 2021 , we issued$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 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report as well as Note 8, Long-term Debt, to the Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . For the three and six months endedJune 30, 2022 , we paid$2.4 million in interest to holders of the 2025 Convertible Notes. For the three and six months endedJune 30, 2021 , we paid$2.5 39 --------------------------------------------------------------------------------
million in interest to holders of the 2025 Convertible Notes. The 2027 Convertible Notes do not bear regular interest and we have 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. As ofJune 30, 2022 , approximately 14,589 of the bitcoins held by the Company serve as part of the collateral for the 2028 Secured Notes. The terms of the 2028 Secured Notes are discussed more fully in Note 4, Long-term Debt to the Consolidated Financial Statements included in this Quarterly Report as well as Note 8, Long-term Debt, to the Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . For the three and six months endedJune 30, 2022 , we paid$15.3 million in interest to holders of the 2028 Secured Notes. For the three and six months endedJune 30, 2021 , we did not pay any interest to holders of the 2028 Secured Notes. InMarch 2022 , MacroStrategy, our wholly-owned subsidiary, entered into a Credit and Security Agreement withSilvergate Bank , pursuant to whichSilvergate Bank issued the$205.0 million 2025 Secured Term Loan to MacroStrategy. We used$190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan to acquire bitcoin, used$5.0 million of the net proceeds to establish the Reserve Account which serves as collateral for the 2025 Secured Term Loan, and expect to use the remaining net proceeds to pay fees, interest, and expenses related to the 2025 Secured Term Loan or for general corporate purposes. As ofJune 30, 2022 , approximately 30,051 of the bitcoins held by MacroStrategy serve as part of the collateral for the 2025 Secured Term Loan, which amount includes 10,585 bitcoins that inJune 2022 , as the price of bitcoin declined causing the LTV Ratio to increase, MacroStrategy deposited into the Bitcoin Collateral Account to help ensure that the LTV Ratio remained below the Maximum LTV Ratio. Subject to certain conditions described in Note 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report, MacroStrategy can withdraw excess collateral held in the Bitcoin Collateral Account. The terms of the 2025 Secured Term Loan are discussed more fully in Note 4, Long-term Debt, to the Consolidated Financial Statements. For the three and six months endedJune 30, 2022 , we paid$1.6 million in interest to Silvergate. InJune 2022 , we, through one of our wholly-owned subsidiaries, entered into a secured term loan agreement in the amount of$11.1 million , bearing interest at an annual rate of 5.2%, and maturing inJune 2027 .
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