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MicroStrategy, a prominent Bitcoin holder, faces scrutiny regarding its cash flows ahead of its earnings report.

On July 31, Michael Saylor, a prominent Bitcoin advocate, announced that the company would release its earnings on Aug. 1 after market close and host a live webinar to discuss the results.

Bloomberg reported that MicroStrategy’s software business is drawing increased attention as its performance could become more crucial for its cash flow.

The firm’s software business revenue is expected to show minimal change from the last quarter. This stagnation is concerning, primarily because the firm has relied on convertible notes extensively to acquire much of its Bitcoin this year.

TD Cowen analyst Lance Vitanza emphasized that managing cash flow is critical for covering interest on the company’s convertible debt. He noted that the firm must ensure its cash flows can handle the added interest expense from this debt.

The company expects around $45 million in interest expenses and $20 million in cash taxes this year. Meanwhile, Vitanza estimates its earnings before items like taxes to be approximately $82 million.

Another development that could affect the firm’s cash flow is the upcoming accounting changes slated for next year. MicroStrategy will need to value its digital assets at market rates and might face a 15% corporate alternative minimum tax if its average annual adjusted income exceeds $1 billion over a three-year period.

Notably, the company has acknowledged that these changes could significantly affect its financial results, including earnings and cash flow.

Despite these challenges, analysts pointed out that MicroStrategy has options to manage its financial obligations, as its debt is not due until 2027 or later. So, the company could issue new convertible debt, secure a loan, issue additional shares, or even divest some of its Bitcoin holdings to generate funds.

Besides the cash flow concerns, MicroStrategy’s Bitcoin ownership has also been questioned. The Michael Saylor-led company has grown its stash to over 200,000 BTC, valued at nearly $15 billion, making it the largest corporate Bitcoin holder.

However, Seeking Alpha analyst Michael Del Monte pointed out that most of MicroStrategy’s Bitcoin is held by MacroStrategy, a separate entity. This separation means MicroStrategy shareholders do not have direct claims on the Bitcoin held by MacroStrategy.

Del Monte also noted that the firm’s shelf equity offerings approach to acquiring Bitcoin might dilute shareholder value. He suggested that MicroStrategy was acting as a capital-raising vehicle to boost Bitcoin holdings at MacroStrategy, leading to equity dilution and debt without direct benefits from the Bitcoin assets.

Conversely, Baris Serifsoy, former Managing Director at UBS, refuted Del Monte’s concerns, saying he is more focused on MicroStrategy’s ability to monetize its Bitcoin position and transition efficiently to a cloud-based SaaS provider.

He remarked:

“It is a theoretical risk. It would only become relevant if the operating cash-flow cannot meet the debt service AND Microstrategy cannot roll over the debt anymore AND Macrostrategy are unwilling / unable (low btc price) to sell coins to redeem the debt of the mothership.”

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