Analyzing MicroStrategy Inc's Financial Performance Metrics

School: University of New South Wales - Course: ACCT 3601 - Subject: Accounting

Who is the report for? - US client - part of a global consulting firm Question 1 Does MicroStrategy Inc's Non-GAAP or GAAP- income reflect its true performance? (October, November, December) - IN REFERENCE TO SEC GOV - Although a maker of corporate database mining software, has invested heavily in Bitcoin. - Moral hazard issue especially with voting power - - Will be used as its primary treasury reserve asset in 2021. - Bitcoin strategy seen as complementary. - "A company struggling to increase revenue - - Account for bitcoin as indefinite lived intangible asset. - Income from operations in fourth quarter - 0.4mill andnon-GAAP income from operationswhich excludes share-based compensation expense and impairment losses and gains on sale from intangible assets, which include digital assets, was $30.1 million for the fourth quarter of 2020 - MicroStrategy is providing supplemental financial measures for (i)non-GAAP income from operations that excludesthe impact of share-based compensation expense andimpairment losses and gains on sale from intangible assets, whichinclude its digital assets. -Operating expenses for the fourth quarter of 2020 were $110.1 million, an 11.0% increase compared to the fourth quarter of 2019. Beginning in the third quarter of 2020, operating expenses included impairment losses on our digital assets, which were $26.5 million during the fourth quarter of 2020. - significant impairment losses and gains on sale from intangible assets, which include MicroStrategy's bitcoin - which include MicroStrategy's bitcoin and the Domain Name Sale, which was outside of MicroStrategy's normal business operations, - resulting share-based compensation expense could vary significantly in comparison to other companies - As part of MicroStrategy's previously announced treasury management and capital allocation strategies, MicroStrategy purchased a total of approximately 32,220 bitcoins at an aggregate purchase price of $700.0 million in the fourth quarter of 2020 for an average purchase price of approximately $21,726 per bitcoin. - Operating income—also called income from operations—takes a company's gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business's operating expenses are

costs incurred from normal operating activities and include items such as office supplies and utilities. - MS says it is useful to investors and analysts in comparing out performance across reporting periods on consistent basis - that was the justification for their non GAAP financial measures. - Definitely US GAAP (Usually Non gaap earnings are reported higher but) Should it really be by this much? - No it shouldn't be this much especially when compared to the previous financial year - 2019 - income from operations - $9.6 million - Non-GAAP - 12million Can non-GAAP earning be trusted? - demand for customised performance reporting is a natural response to constraints imposed by a one-size-fits-all reporting system and that the non GAAP phenomenon forms part of a long-standing debate over the definition and presentation of periodic performance - A review of extant research suggests non-GAAP disclosures are driven by informative reporting and opportunistic motives. - Moral hazard problem here - Situations when Non GAAP is important to use - Depends if every year they use the same format of Non GAAP - Especially with intangible asset of bitcoin the waters are already murky - no need to further add to this confusion.