Strategy Inc (MSTR) Earnings

Management highlights

- Core Strategic Focus * Maintains three long-term guiding priorities: disciplined conservative underwriting, a strong flexible balance sheet, and proactive credit portfolio management, which remained the focus in Q2 2026 * Retains a deliberate approach to AI deployment with formal internal governance, human oversight for all outputs, and clear limits: AI does not make underwriting or investment decisions, and data security for borrower and platform information is prioritized * Maintains intentional asset diversification: 50/50 split between life sciences and technology verticals, no single sub-sector makes up more than 25% of the total portfolio, and 87% of the portfolio is higher-quality first lien exposure - Origination & Portfolio Activity * Record first half 2026 performance: $2.74 billion in total originations (35.6% year-over-year increase) and $1.35 billion in total fundings (8.5% year-over-year increase); Q2 2026 alone saw $927 million in new commitments and $647 million in gross fundings * Early prepayments reached $572.1 million in Q2 2026 (exceeding prior guidance), 60% of which came from M&A activity or borrower balance sheet cash (driven by recent equity raises), signaling strong portfolio health * Available unfunded commitments increased slightly to $408.2 million, maintaining a defensive portfolio posture - Operational Efficiency & Platform Scaling * Total firm AUM reached $6.1 billion as of Q2 end 2026, a 14.4% year-over-year increase; the platform has operated for over 21 years, with more than $28 billion in total cumulative capital commitments to over 700 companies * Maintains strong operating efficiency: annualized operating cost ratio of ~2% (well below peer group averages), with a 70 basis point reduction in the cost ratio since launching Hercules Adviser in Q1 2021 alongside 134% AUM growth * Recent technology investments (CRM, pipeline management, portfolio and loan servicing upgrades) drive further efficiency gains to support scalable growth - Credit Performance * Overall credit quality remains stable: 98% of debt is floating-rate with contractual floors, 75% of prime-based loans are already at their floor, limiting sensitivity to future rate cuts; average loan duration is 21 months * PIK income as a share of total revenue declined to 8.3% from 9.1% in Q1 2026, with 87% of Q2 PIK income structured into original underwritings; the firm collected $12 million in cash payments on accrued PIK in Q2 * Non-accrual loans totaled just 2 positions in Q2, representing 0.1% of total portfolio fair value; one Q2 non-accrual was resolved post-quarter with a $1 million recovery above Q2 fair value and a positive realized IRR - Capital & Liquidity * Maintains a conservative leverage profile: GAAP leverage decreased to 103.9% and regulatory leverage decreased to 88.5% quarter-over-quarter; the BDC had $652.9 million in available liquidity at quarter end, with total platform liquidity exceeding $1 billion inclusive of private fund capital * Post-quarter, the firm issued $325 million in 6.3% unsecured five-year notes to refinance existing debt and fund future originations, further strengthening liquidity * 24th consecutive quarter with a supplemental distribution: Q2 net investment income covered the base distribution by 125% and the total distribution (including $0.07 supplemental) by 106%

Guidance

- Core portfolio yield guidance for Q3 2026 is maintained at 11.8%-12%, reflecting the muted impact of prior rate cuts and ongoing portfolio turnover - Prepayment activity is expected to normalize to a range of $200 million-$300 million in Q3 2026, down from the record $572.1 million in Q2 2026 - Q3 2026 origination activity is expected to be seasonally lower and back-end loaded, consistent with historical patterns, but still remains robust - Third quarter interest expense is expected to be broadly stable or slightly higher compared to Q2 2026: the reduction from lower leverage (driven by elevated Q2 prepayments) will be partially offset by incremental funding for new originations - Gross SG&A expenses for Q3 2026 are expected to be $25 million-$26 million, with RIA expense allocation of approximately $4.7 million and quarterly RIA dividends of $2 million-$2.5 million - Management expects M&A exit activity in the second half of 2026 to continue at the same pace seen in the first half, which has already delivered 12 M&A events and 2 IPOs year-to-date - Management reaffirmed expectations for a robust new business environment in the second half of 2026, supported by strong market conditions and the firm's ample liquidity and scale

Segment performance

Hercules Capital operates two core business segments: the public BDC (Business Development Company) and the private credit fund business managed by its subsidiary Hercules Adviser. For Q2 2026: 1. Public BDC segment: Total investment income reached a record $149.1 million, an 8.5% year-over-year increase; net investment income was a record $92.9 million ($0.50 per share), up 4.7% year-over-year. The BDC holds a $4.4 billion fair value debt investment portfolio across 136 companies, making up ~67.2% of the firm's total $6.1 billion AUM. 2. Hercules Adviser (private credit funds segment): Manages ~$2 billion in committed capital, equal to ~32.8% of the firm's total AUM. In Q2 2026, the segment contributed $7 million to the BDC's net investment income (a 26% year-over-year increase), consisting of a $2.1 million dividend and $4.9 million in expense reimbursement. Cumulative cash flows to the public BDC from Hercules Adviser exceed $78.6 million, with $13.7 million contributed in the first half of 2026. By vertical segment: The firm maintains a 50/50 target asset allocation between life sciences and technology. In Q2 2026 originations, 59% of new commitments and 45% of fundings went to life sciences companies, while 41% of commitments and 55% of fundings went to technology companies. By credit quality: 65.4% of credits are Grade 1/2, 32.7% are Grade 3, and less than 2% are Grade 4/5 (by fair value), with non-accrual loans representing just 0.1% of total portfolio fair value.

Risks & headwinds

- General market volatility creates uncertainty around M&A exit valuations and process timelines in certain market segments, which management is monitoring closely - Some lenders (both bank and non-bank) are currently pursuing aggressive deal structures in the current strong market, which could pressure deal pricing and terms; management will maintain discipline and will not chase low-quality deals that do not benefit shareholders - While aggregate venture capital activity is at record levels, the vast majority of deal value is concentrated in AI, which creates concentration risk if not managed proactively; the firm mitigates this through intentional diversification - 75% of prime-based loans are at contractual rate floors, limiting yield upside if rates rise in the future - AI deployment carries inherent data security risks for confidential borrower and firm proprietary information, which the firm mitigates through formal governance and strict data access controls - While credit quality is currently stable, a small portion of the portfolio was downgraded to Grade 3 in Q2 as companies approach upcoming equity raises, creating near-term uncertainty until capital raises are completed

Analyst Q&A

• Q: Can you discuss the current capital deployment backdrop, and confirm if you expect a seasonal slowdown in Q3 deployment? /

  A: Management confirms Q3 will be seasonally lower than other quarters, consistent with 21 years of historical patterns, but still expects a robust level of originations. The overall pipeline is the strongest it has ever been, though there is mixed quality within the pipeline, and the team remains focused on only funding deals that meet the firm's strict quality standards.

• Q: How does Hercules plan to grow moving forward, and will growth come from expanding origination or scaling the private RIA business? /

  A: Growth will come from both the public BDC and the faster-growing Hercules Adviser private credit business, with no plan to drift from the firm's core venture debt focus. The firm is exploring limited new product and geographic initiatives, and the expanded platform now allows Hercules to stay with portfolio companies longer as they scale, rather than being refinanced out at maturity. Growth will continue to prioritize operational efficiency to maintain the firm's low operating cost ratio.

• Q: With 86% of first half 2026 VC deal value concentrated in AI, are there attractive under-the-radar opportunities outside AI that Hercules is pursuing? /

  A: Yes, there are attractive opportunities across both life sciences and technology outside of AI. Even though AI makes up 86% of total VC deal value, the remaining 14% of non-AI activity is still at historically strong levels. The firm maintains strict diversification targets (50/50 between tech and life sciences, diversified across sub-sectors) to avoid excessive concentration in any single area, including pure-play AI.

• Q: Banks have recently become very aggressive in venture lending. How are they competing, and is this sustainable? /

  A: Management has observed broad aggressive pricing and terms from banks in recent quarters, likely driven by banks seeking the cash deposits that come with venture-backed companies that have recently raised large equity rounds. This pattern of banks entering and pulling back from the space is cyclical, and management does not expect this current period of aggressive competition to last long term. Hercules will maintain underwriting discipline through this cycle.