BlackBerry announced Q2 Fiscal 2017 results today, posting a 31.8 percent fall in second-quarter revenue and it said it would end all internal hardware development, including its smartphones.
The company reported a net loss of $372 million, or 71 cents a share, on revenue of $352 million versus the consensus estimate of $393.75 million. A year ago, it reported a profit of $51 million, or 24 cents a share, on revenue of $490 million.
Excluding one-time items, the company said it broke even.
Q2 Highlights
Non-GAAP total revenue of $352 million; GAAP revenue of $334 million Non-GAAP software and services revenue of $156 million; GAAP software and services revenue of $138 million Eleventh consecutive quarter of positive adjusted EBITDA Breakeven non-GAAP earnings per share; GAAP EPS loss of $(0.71) Entered into a licensing agreement with telecom joint venture in Indonesia, BB Merah Putih, to manufacture, distribute and promote BlackBerry-branded devices running BlackBerry’s secure Android software and applications Announced a strategic alliance with Emtek Group to accelerate and advance BBM’s consumer business globally by developing new cross platform applications, content and services on the BBM platform Commenced shipment of BlackBerry Radar, an end-to-end asset tracking IOT system; lands top tier logistics company as a customer Launched BlackBerry Hub+ for Android, a software licensing program to effortlessly enable productivity and communication on Android 6.0 Marshmallow smartphones Launched the DTEK50 in July, the world’s most secure Android smartphone, combining BlackBerry’s unique security, privacy and productivity with the full Android experience in an all-touch design After the quarter close, completed the previously announced convertible debt restructuring reducing both interest costs and dilution to existing shareholdersThe company will end internal hardware development but will outsource hardware development to partners.
John Chen, Executive Chairman and CEO, BlackBerry said,
“We are reaching an inflection point with our strategy. Our financial foundation is strong, and our pivot to software is taking hold,”
“In Q2, we more than doubled our software revenue year over year and delivered the highest gross margin in the company’s history. We also completed initial shipments of BlackBerry Radar, an end-to end asset tracking system, and signed a strategic licensing agreement to drive global growth in our BBM consumer business.”
“Our new Mobility Solutions strategy is showing signs of momentum, including our first major device software licensing agreement with a telecom joint venture in Indonesia. Under this strategy, we are focusing on software development, including security and applications. The company plans to end all internal hardware development and will outsource that function to partners. This allows us to reduce capital requirements and enhance return on invested capital,”
“We remain on track to deliver 30 percent revenue growth in software and services for the full fiscal year. We are revising upward our non-GAAP EPS outlook to a range of breakeven to a five cent loss, compared to the current consensus of a 15 cent loss. This reflects increased confidence based on improving margins and reduced interest expense from the recent refinancing of our debt, as well as planned investments in growth areas.”
Ralph Pini, Chief Operating Officer and General Manager, Mobility Solutions, at BlackBerry added,
“Today we make our first significant step toward leading as a software company by announcing that we are transitioning from doing internal handset hardware development to leveraging our third party partner to provide that function. This is what the future looks like for our business, and it is the right move as we progress towards profitability. This will enable our resources to focus all efforts on providing state-of-the-art security software for devices and the enterprise of things, as well as work on other critical areas of the company.”
Referring to the company kicking off their software licensing in Indonesia, Pini continued,
“It is fitting that Indonesia is the first market where we are licensing our device software, as the country is historically BlackBerry’s largest market for devices and, by far, the most substantial for the BBM messaging software we created.”
BlackBerry Q2 ResultsNon-GAAP revenue for the second quarter of fiscal 2017 was $352 million with GAAP revenue of $334 million. The non-GAAP revenue breakdown for the quarter was approximately 44% for software and services, 26% for service access fees (SAF), and 30% for mobility solutions.
BlackBerry had around 3,000 enterprise customer wins in the quarter. Approximately 81% of the second quarter software and services revenue was recurring. Non-GAAP operating income was $16 million, and non-GAAP earnings per share was break even for the second quarter. GAAP net loss for the quarter was $(372) million, or $(0.71) per basic share. Adjustments to GAAP net income and earnings per share are summarized in a table below.
Total cash, cash equivalents, short-term and long-term investments was approximately $2.5 billion as of August 31, 2016. This reflects a use of free cash of $37 million, which includes $34 million of cash used in operations. Excluding $1.25 billion in the face value of our debt, the net cash balance at the end of the quarter was $1.22 billion. Purchase orders with contract manufacturers totaled approximately $71 million at the end of the second quarter, compared to $150 million at the end of the first quarter and down from $248 million in the year ago quarter.
[table style=”table-hover”]
(United States dollars, in millions except per share data) Reconciliation of the Company’s segment results to the consolidated results: For the Three Months Ended August 31, 2016 (in millions) Software & Services Mobility Solutions SAF Segment totals Corporate unallocated Subtotal Non-GAAP adjustments(1) Consolidated U.S. GAAP Revenue $ 156 $ 105 $ 91 $ 352 $ – $ 352 $ (18 ) $ 334 Cost of goods sold 31 78 24 133 – 133 103 236 Gross margin 125 27 67 219 – 219 (121 ) 98 Operating expenses 96 35 1 132 71 203 250 453 Operating income (loss) $ 29 $ (8 ) $ 66 $ 87 $ (71 ) $ 16 $ (371 ) $ (355 )[/table] [table style=”table-hover”]
Reconciliation of GAAP gross margin, gross margin percentage, loss before income taxes, net loss and loss per share to Non-GAAP gross margin, gross margin percentage, loss before income taxes, net loss and loss per share: (United States dollars, in millions except per share data) Q2 Fiscal 2017 Non-GAAP Adjustments For the Three Months Ended August 31, 2016 (in millions) Income statement location Revenue Gross margin(before taxes)(1) Gross margin %(before taxes)(1) Income (loss) before income taxes Net loss Basic earnings (loss) per share As reported $ 334 $ 98 29.3 % $ (371 ) $ (372 ) $ (0.71 ) Inventory write-down (2) Cost of sales – 96 28.8 % 96 96 Debentures fair value adjustment (3) Debentures fair value adjustment – – – % 62 62 RAP charges (4) Cost of sales – 7 2.1 % 7 7 RAP charges (4) Selling, marketing and administration – – – % 140 140 CORE program recovery (5) Selling, marketing and administration – – – % (2 ) (2 ) Software deferred revenue acquired (6) Revenue 18 18 2.0 % 18 18 Stock compensation expense(7) Research and development – – – % 4 4 Stock compensation expense(7) Selling, marketing and administration – – – % 14 14 Acquired intangibles amortization (8) Amortization – – – % 28 28 Business acquisition and integration costs (9) Selling, marketing and administration – – – % 4 4 Adjusted $ 352 $ 219 62.2 % $ – $ (1 ) $ 0.00[/table] Note: Non-GAAP gross margin, non-GAAP gross margin percentage, non-GAAP loss before income taxes, non-GAAP net loss and non-GAAP loss per share do not have a standardized meaning prescribed by GAAP and thus are not comparable to similarly titled measures presented by other issuers. The Company believes that the presentation of these non-GAAP measures enables the Company and its shareholders to better assess the Company’s operating results relative to its operating results in prior periods and improves the comparability of the information presented. Investors should consider these non-GAAP measures in the context of the Company’s GAAP results.
During the second quarter of fiscal 2017, the Company reported GAAP gross margin of $98 million or 29.3% of revenue. Excluding the impact of the inventory write-down and resource alignment program (“RAP”) charges included in cost of sales and software deferred revenue acquired included in revenue, the non-GAAP gross margin was $219 million, or 62.2% of revenue. During the second quarter of fiscal 2017, the Company recorded inventory write-down charges of $96 million, which were included in cost of sales. During the second quarter of fiscal 2017, the Company recorded the Q2 Fiscal 2017 Debentures Fair Value Adjustment of $62 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations. During the second quarter of fiscal 2017, the Company incurred charges related to the RAP of approximately $147 million, of which $7 million were included in cost of sale and $140 million were included in selling, marketing and administration expense. During the second quarter of fiscal 2017, the Company incurred recoveries related to the CORE program of $2 million, which were included in selling, marketing, and administration expenses. During the second quarter of fiscal 2017, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $18 million, which were included in revenue. During the second quarter of fiscal 2017, the Company recorded stock compensation expense of $18 million, of which $4 million were included in research and development, and $14 million were included in selling, marketing and administration expenses. During the second quarter of fiscal 2017, the Company recorded amortization of intangible assets acquired through business combinations of $28 million, which were included in amortization expense. During the second quarter of fiscal 2017, the Company recorded business acquisition and integration costs incurred through business combinations of $4 million, which were included in selling, marketing and administration expenses.Supplementary Geographic Revenue Breakdown [table style=”table-hover”]
BlackBerry Limited (United States dollars, in millions) Revenue by Region For the quarters ended August 31, 2016 May 31, 2016 February 29, 2016 November 28, 2015 August 29, 2015 North America $ 190 56.9 % $ 195 48.8 % $ 216 46.5 % $ 275 50.2 % $ 176 36.0 % Europe, Middle East and Africa 100 29.9 % 155 38.7 % 175 37.7 % 194 35.4 % 202 41.2 % Latin America 13 3.9 % 10 2.5 % 18 3.9 % 24 4.4 % 33 6.7 % Asia Pacific 31 9.3 % 40 10.0 % 55 11.9 % 55 10.0 % 79 16.1 % Total $ 334 100.0 % $ 400 100.0 % $ 464 100.0 % $ 548 100.0 % $ 490 100.0 %[/table] [table style=”table-hover”]
BlackBerry Limited Incorporated under the Laws of Ontario (United States dollars, in millions except share and per share amounts) (unaudited) Consolidated Statements of Operations For the three months ended For the six months ended August 31, 2016 February 29, 2016 August 29, 2015 August 31, 2016 August 29, 2015 Revenue $ 334 $ 464 $ 490 $ 734 $ 1,148 Cost of sales 236 254 305 482 653 Gross margin 98 210 185 252 495 Gross margin % 29.3 % 45.3 % 37.8 % 34.3 % 43.1 % Operating expenses Research and development 85 108 122 174 261 Selling, marketing and administration 139 179 186 268 359 Amortization 44 77 67 98 132 Impairment of goodwill – – – 57 – Impairment of long-lived assets – – – 501 – Abandonment of long-lived assets – 127 5 3 6 Write-down of assets held for sale 123 – – 123 – Debentures fair value adjustment 62 (40 ) (228 ) 38 (385 ) 453 451 152 1,262 373 Operating income (loss) (355 ) (241 ) 33 (1,010 ) 122 Investment loss, net (16 ) (15 ) (12 ) (31 ) (28 ) Income (loss) before income taxes (371 ) (256 ) 21 (1,041 ) 94 Provision for (recovery of) income taxes 1 (18 ) (30 ) 1 (25 ) Net income (loss) $ (372 ) $ (238 ) $ 51 $ (1,042 ) $ 119 Earnings (loss) per share Basic $ (0.71 ) $ (0.45 ) $ 0.10 $ (1.99 ) $ 0.23 Diluted $ (0.71 ) $ (0.45 ) $ (0.24 ) $ (1.99 ) $ (0.34 ) Weighted-average number of common shares outstanding (000’s) Basic 522,826 524,627 526,314 522,362 527,775 Diluted 522,826 524,627 667,321 522,362 667,459 Total common shares outstanding (000’s) 523,488 521,172 524,211 523,488 524,211[/table] [table style=”table-hover”]
BlackBerry Limited Incorporated under the Laws of Ontario (United States dollars, in millions except per share data) (unaudited) Consolidated Balance Sheets As at August 31, 2016 February 29, 2016 Assets Current Cash and cash equivalents $ 1,687 $ 957 Short-term investments 413 1,420 Accounts receivable, net 222 338 Other receivables 47 51 Inventories 41 143 Income taxes receivable 27 – Other current assets 73 102 Assets held for sale 129 257 2,639 3,268 Long-term investments 321 197 Restricted cash 53 50 Property, plant and equipment, net 121 155 Goodwill 562 618 Intangible assets, net 652 1,213 Deferred income tax asset – 33 $ 4,348 $ 5,534 Liabilities Current Accounts payable $ 228 $ 270 Accrued liabilities 274 368 Income taxes payable – 9 Deferred revenue 310 392 Long-term debt 1,329 – 2,141 1,039 Long-term debt – 1,277 Deferred income tax liability 9 10 2,150 2,326 Shareholders’ Equity Capital stock and additional paid-in capital 2,480 2,448 Retained earnings (deficit) (274 ) 768 Accumulated other comprehensive loss (8 ) (8 ) 2,198 3,208 $ 4,348 $ 5,534[/table] [table style=”table-hover”]
BlackBerry Limited Incorporated under the Laws of Ontario (United States dollars, in millions except per share data) (unaudited) Consolidated Statements of Cash Flows Six Months Ended August 31, 2016 August 29, 2015 Cash flows from operating activities Net income (loss) $ (1,042 ) $ 119 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization 129 327 Deferred income taxes 32 (29 ) Stock-based compensation 30 28 Loss on disposal of property, plant and equipment 1 41 Impairment of goodwill 57 – Impairment of long-lived assets 501 – Write-down of assets held for sale 123 – Other-than-temporary impairment on cost-based investments 7 – Debentures fair value adjustment 38 (385 ) Other 4 17 Net changes in working capital items: Accounts receivable, net 116 175 Other receivables 4 31 Inventories 102 (20 ) Income tax receivable, net (27 ) 153 Other current assets 28 203 Accounts payable (42 ) (40 ) Income taxes payable (9 ) – Accrued liabilities (63 ) (265 ) Deferred revenue (82 ) (111 ) Net cash provided by (used in) operating activities (93 ) 244 Cash flows from investing activities Acquisition of long-term investments (328 ) (127 ) Proceeds on sale or maturity of long-term investments 112 66 Acquisition of property, plant and equipment (7 ) (21 ) Acquisition of intangible assets (19 ) (31 ) Business acquisitions, net of cash acquired (5 ) (53 ) Acquisition of short-term investments (665 ) (1,413 ) Proceeds on sale or maturity of short-term investments 1,746 1,598 Conversion of cost-based investment to equity securities 10 – Unrealized loss in equity securities (1 ) – Effect of foreign exchange on investing activities – 4 Net cash provided by investing activities 843 23 Cash flows from financing activities Issuance of common shares 2 1 Payment of contingent consideration from business acquisitions (15 ) – Common shares repurchased – (47 ) Effect of foreign exchange gain on restricted cash (3 ) – Transfer from restricted cash – 3 Repurchase of debentures (5 ) – Net cash used in financing activities (21 ) (43 ) Effect of foreign exchange gain (loss) on cash and cash equivalents 1 (10 ) Net increase in cash and cash equivalents during the period 730 214 Cash and cash equivalents, beginning of period 957 1,233 Cash and cash equivalents, end of period $ 1,687 $ 1,447 As at August 31, 2016 May 31, 2016 Cash and cash equivalents $ 1,687 $ 1,225 Short-term investments 413 1,008 Long-term investments 321 246 Restricted cash 53 53 $ 2,474 $ 2,532[/table]
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