Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
In September 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 ended December 31, 2021:
•
$1.050 billion aggregate principal amount of the 2027 Convertible Notes issued in February 2021;
•
$500.0 million aggregate principal amount of the 2028 Secured Notes issued 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 $1.0 billion pursuant to an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies LLC, as agent; and
•
$205.0 million aggregate principal amount of the 2025 Secured Term Loan issued in March 2022.
As of June 30, 2022, we held an aggregate of approximately 129,699 bitcoins, with 14,589 bitcoins held directly by MicroStrategy Incorporated and 115,110 bitcoins held by MacroStrategy LLC, a wholly-owned subsidiary of MicroStrategy. The approximately 14,589 bitcoins held directly by MicroStrategy 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 Used to
Purchase
Bitcoin
Digital Asset
Original Cost
Basis
(in thousands)
Digital Asset
Impairment
Losses
(in thousands)
Digital Asset
Carrying Value
(in thousands)
Approximate
Number of
Bitcoins Held
Approximate
Average
Purchase Price
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 $1.026 billion in net proceeds from our issuance of the 2027 Convertible Notes and excess cash.
(b)
In the second quarter of 2021, we purchased bitcoin using $487.2 million in net proceeds from our issuance of the 2028 Secured Notes and excess cash.
(c)
In the third quarter of 2021, we purchased bitcoin using $399.5 million in 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 $591.0 million in 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 $190.5 million of 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 the Coinbase exchange (our principal market for bitcoin) for each respective quarter, as further defined below:
22
Approximate
Number of
Bitcoins Held
at End of
Quarter
Lowest
Market Price
Per Bitcoin
During
Quarter
(a)
Market Value
of Bitcoin
Held at End of
Quarter Using
Lowest
Market Price
(in thousands)
(b)
Highest
Market Price
Per Bitcoin
During
Quarter
(c)
Market Value
of Bitcoin
Held at End of
Quarter Using
Highest
Market Price
(in thousands)
(d)
Market Price
Per Bitcoin at
End of
Quarter
(e)
Market Value
of Bitcoin
Held at End of
Quarter Using
Ending
Market Price
(in thousands)
(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
$
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
December 31, 2021
124,391
$
42,333.00
$
5,265,844
$
69,000.00
$
8,582,979
$
45,879.97
$
5,707,055
March 31, 2022
129,218
$
32,933.33
$
4,255,579
$
48,240.00
$
6,233,476
$
45,602.79
$
5,892,701
June 30, 2022
129,699
$
17,567.45
$
2,278,481
$
47,469.40
$
6,156,734
$
18,895.02
$
2,450,665
(a)
The "Lowest Market Price Per Bitcoin During Quarter" represents the lowest market price for one bitcoin reported on the Coinbase exchange during 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 Coinbase exchange during the respective 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 Coinbase exchange during 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 Coinbase exchange during the respective 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 Coinbase exchange at 4:00 p.m. Eastern Time on the last 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 Coinbase exchange at 4:00 p.m. Eastern Time on the last 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 the Coinbase 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 the Coinbase 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 ended June 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 ended June 30, 2022, compared to digital asset impairment losses of $424.8 million in the three months ended June 30, 2021, representing 82.2% of our operating expenses and contributing to our net loss of $299.3 million for the three months ended June 30, 2021. For the six months ended June 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 ended June 30, 2022, compared to digital asset impairment losses of $618.9 million in the six months ended June 30, 2021, representing 77.4% of our operating expenses and contributing to our net loss of $409.4 million for the six months ended June 30, 2021.
As of August 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 of August 1, 2022, at 4:00 p.m. Eastern Time, the market price of one bitcoin reported on the Coinbase 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, the MicroStrategy 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. The MicroStrategy 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: MicroStrategy delivers insights across multiple 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 and data-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 highly customized 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: MicroStrategy embraces an agile approach to 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 MicroStrategy platform also provides out-of-the-box 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 MicroStrategy platform to integrate 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 the MicroStrategy 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 MicroStrategy platform has the tools and functionality that enable 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. 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, including the 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 ended June 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 June 30, 2022 and 2021:
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 of June 30, 2022, we had a total of 2,158 employees, of whom 779 were based in the 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
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
$
34
$
40
$
141
$
89
Cost of product support 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
$
15,294
$
11,096
$
29,688
$
18,807
The $4.2 million and $10.9 million increases in share-based compensation expense during the three and six months ended June 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 of June 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 in the 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
)
$
(1,166,406
)
$
(413,971
)
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 compensation arrangements 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,
GAAP
Foreign Currency
Exchange Rate
Impact (1)
Non-GAAP
Constant
Currency (2)
GAAP
GAAP %
Change
Non-GAAP
Constant
Currency %
Change (3)
2022
2022
2022
2021
2022
2022
Product licenses revenues
$
20,129
$
(608
)
$
20,737
$
22,151
-9.1
%
-6.4
%
Subscription services revenues
14,017
(483
)
14,500
10,342
35.5
%
40.2
%
Product support revenues
66,521
(3,000
)
69,521
71,027
-6.3
%
-2.1
%
Other services revenues
21,406
(1,365
)
22,771
21,831
-1.9
%
4.3
%
Cost of product support revenues
5,127
(236
)
5,363
4,862
5.5
%
10.3
%
Cost of other services revenues
14,148
(1,130
)
15,278
13,947
1.4
%
9.5
%
Sales and marketing expenses
36,862
(1,505
)
38,367
40,321
-8.6
%
-4.8
%
Research and development expenses
31,790
(447
)
32,237
28,548
11.4
%
12.9
%
General and administrative expenses
28,502
(414
)
28,916
22,917
24.4
%
26.2
%
GAAP
Foreign Currency
Exchange Rate
Impact (1)
Non-GAAP
Constant
Currency (2)
GAAP
GAAP %
Change
Non-GAAP
Constant
Currency %
Change (3)
2021
2021
2021
2020
2021
2021
Product licenses revenues
$
22,151
$
132
$
22,019
$
14,816
49.5
%
48.6
%
Subscription services revenues
10,342
264
10,078
8,021
28.9
%
25.6
%
Product support revenues
71,027
2,425
68,602
70,038
1.4
%
-2.1
%
Other services revenues
21,831
763
21,068
17,709
23.3
%
19.0
%
Cost of product support revenues
4,862
83
4,779
6,837
-28.9
%
-30.1
%
Cost of other services revenues
13,947
521
13,426
12,846
8.6
%
4.5
%
Sales and marketing expenses
40,321
987
39,334
34,951
15.4
%
12.5
%
Research and development expenses
28,548
658
27,890
25,867
10.4
%
7.8
%
General and administrative expenses
22,917
244
22,673
19,449
17.8
%
16.6
%
29
Six Months Ended
June 30,
GAAP
Foreign Currency
Exchange Rate
Impact (1)
Non-GAAP
Constant
Currency (2)
GAAP
GAAP %
Change
Non-GAAP
Constant
Currency %
Change (3)
2022
2022
2022
2021
2022
2022
Product licenses revenues
$
36,642
$
(1,096
)
$
37,738
$
43,431
-15.6
%
-13.1
%
Subscription services revenues
26,862
(688
)
27,550
20,368
31.9
%
35.3
%
Product support revenues
133,672
(4,699
)
138,371
141,676
-5.6
%
-2.3
%
Other services revenues
44,174
(2,167
)
46,341
42,778
3.3
%
8.3
%
Cost of product support revenues
10,318
(367
)
10,685
9,674
6.7
%
10.5
%
Cost of other services revenues
28,747
(1,816
)
30,563
27,568
4.3
%
10.9
%
Sales and marketing expenses
70,102
(2,317
)
72,419
78,519
-10.7
%
-7.8
%
Research and development expenses
65,313
(430
)
65,743
58,031
12.5
%
13.3
%
General and administrative expenses
55,208
(655
)
55,863
44,646
23.7
%
25.1
%
GAAP
Foreign Currency
Exchange Rate
Impact (1)
Non-GAAP
Constant
Currency (2)
GAAP
GAAP %
Change
Non-GAAP
Constant
Currency %
Change (3)
2021
2021
2021
2020
2021
2021
Product licenses revenues
$
43,431
$
457
$
42,974
$
27,400
58.5
%
56.8
%
Subscription services revenues
20,368
454
19,914
15,989
27.4
%
24.5
%
Product support revenues
141,676
4,342
137,334
141,196
0.3
%
-2.7
%
Other services revenues
42,778
1,381
41,397
37,423
14.3
%
10.6
%
Cost of product support revenues
9,674
141
9,533
13,555
-28.6
%
-29.7
%
Cost of other services revenues
27,568
872
26,696
25,939
6.3
%
2.9
%
Sales and marketing expenses
78,519
1,412
77,107
74,469
5.4
%
3.5
%
Research and development expenses
58,031
1,103
56,928
51,968
11.7
%
9.5
%
General and administrative expenses
44,646
346
44,300
40,781
9.5
%
8.6
%
(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 ended December 31, 2021. There have been no significant changes in such estimates and judgments since December 31, 2021.
30
Results of Operations
Comparison of the three and six months ended June 30, 2022 and 2021
Revenues
Except as otherwise indicated herein, the term “domestic” refers to operations in the United States and Canada and the term “international” refers to operations outside of the United States and Canada.
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
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
$
66,521
$
71,027
-6.3
%
$
133,672
$
141,676
-5.6
%
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 ended June 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 ended June 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
Change
Other 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 ended June 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 ended June 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 ended June 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
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
$
36,862
$
40,321
-8.6
%
$
70,102
$
78,519
-10.7
%
Sales and marketing expenses decreased $3.5 million for the three months ended June 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 ended June 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 ended June 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 ended June 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 at June 30, 2022 from 663 at June 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
Change
Research and development expenses
$
31,790
$
28,548
11.4
%
$
65,313
$
58,031
12.5
%
Research and development expenses increased $3.2 million for the three months ended June 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 ended June 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 at June 30, 2022 from 259 at June 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 ended June 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 ended June 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 ended June 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
$
917,838
$
424,774
116.1
%
$
1,087,929
$
618,869
75.8
%
We did not sell any of our digital assets during the three and six months ended June 30, 2022 and 2021. We may continue to incur significant digital asset impairment losses in the future.
Interest Expense, Net
For the three and six months ended June 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 ended June 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 ended June 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 ended June 30, 2021, other expense, net, of $0.9 million was comprised primarily of foreign currency transaction net losses. For the six months ended June 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 ended June 30, 2022 and a benefit from income taxes of $194.5 million on a pretax loss of $603.8 million for the six months ended June 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 of June 30, 2022.
As of June 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 of June 30, 2022, as compared to December 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 of June 30, 2022, as compared to June 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 at June 30, 2022 are $6.7 million and $10.2 million unfavorable foreign currency impacts from the general strengthening of the U.S. dollar compared to December 31, 2021 and June 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 of June 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, and U.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 of June 30, 2022 and December 31, 2021, the amount of cash and cash equivalents held by our U.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 outside the United States. We repatriated foreign earnings and profits of $57.5 million during 2021 and $21.1 million during the six months ended June 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 U.S. Tax Cuts and Jobs Act (the “Tax Act”);
•
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
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 bitcoin s 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 b itcoin 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 risk s inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the b itcoin market, we may not be able to sell our bitcoins at reasonable prices or at all. A s a result, our bitcoin s 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
$
22,863
$
76,675
-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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2021, $500.0 million in gross proceeds from our 2028 Secured Notes during the six months ended June 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 ended June 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 ended June 30, 2022, $24.7 million in issuance costs paid for our Convertible Notes during the six months ended June 30, 2021, $11.3 million in issuance costs paid for our 2028 Secured Notes during the six months ended June 30, 2021, $11.1 million in gross proceeds from other long-term secured debt during the six months ended June 30, 2022, and $2.8 million in proceeds from the sales of class A common stock under the 2021 ESPP in the six months ended June 30, 2022.
Long-term Debt
In December 2020, we issued $650.0 million aggregate principal amount of the 2025 Convertible Notes and in February 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 ended December 31, 2021. For the three and six months ended June 30, 2022, we paid $2.4 million in interest to holders of the 2025 Convertible Notes. For the three and six months ended June 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 ha ve not paid any special interest to holders of the 2027 Convertible Notes to date.
In June 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 of June 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 ended December 31, 2021. For the three and six months ended June 30, 2022, we paid $15.3 million in interest to holders of the 2028 Secured Notes. For the three and six months ended June 30, 2021, we did not pay any interest to holders of the 2028 Secured Notes.
In March 2022, MacroStrategy, our wholly-owned subsidiary, entered into a Credit and Security Agreement with Silvergate Bank, pursuant to which Silvergate 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 of June 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 in June 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 ended June 30, 2022, we paid $1.6 million in interest to Silvergate.
In June 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 in June 2027.