BlackBerry beats expectations, posts adjusted profit as revenue drops

BlackBerry today posted an adjusted profit that beat expectations, even as revenue dropped sharply. Announcing its Q3 2017 fiscal results, the company reported a $114 million net loss on $289 million in revenue. A year ago, the company reported a net loss of $89 million on revenue of $548 million.

The company posted adjusted earnings of $0.01 per share for the quarter, higher than the $0.02 per share loss expected by analysts. It did still post a $0.22 per share GAAP loss, worse than the $0.07 per share lost expected by analysts

BlackBerry says it now expects to be profitable for the full 2017 financial year, after the adjustments — an improved outlook from the company.

As expected, the company posted a drop in handset revenue from $220 for this quarter last year, down to $62 million – to be expected as the company moves from manufacturing its own hardware to third-party branding partnerships like the one it recently struck with TCL.

BlackBerry chairman and CEO John Chen said.

“We now expect to achieve non-GAAP EPS profitability for the full year, up from a prior range of breakeven to a five cent loss,”

“This is the third consecutive quarter we have increased our EPS outlook, reflecting the traction we are achieving in our shift to a software business model.”

Revenue was $289 million under generally accepted accounting rules, down from $548 million a year earlier when BlackBerry posted an $89-million third-quarter loss, worth 17 cents per share.

Analysts had estimated an adjusted loss of one cent per share in the third quarter and $331 million of adjusted revenue for the third quarter, according to Thomson Reuters.

Despite the year-over-year increase in BlackBerry’s net loss, before adjustments, it’s an improvement from the second quarter when the net loss was $372 million and the first quarter when the loss was $670 million.

Revenue for the quarter was $301 million with adjustments. About 55 per cent of that was from software and services — the company’s new focus under Chen’s leadership.

“We remain on track to deliver 30 per cent growth in company total software and services revenues for the full fiscal year,” Chen said in a statement before the company’s conference call with analysts.

Mobility Solutions, including BlackBerry’s dwindling handset business, generated 23 per cent of revenue and the remaining 22 per cent came from service access fees.

Q3 Highlights

Non-GAAP total revenue of $301 million; GAAP revenue of $289 million
Non-GAAP Company total software and services revenues of $172 million; GAAP Company total software and services revenues of $160 million
Record non-GAAP gross margin of 70%; Record GAAP gross margin of 67%
Adjusted EBITDA of $37 million; positive for twelfth consecutive quarter
Non-GAAP earnings per share of $0.02; GAAP EPS loss of ($0.22)
Signed agreement with Ford Motor Company for expanded use of BlackBerry’s QNX and security software
Entered into a long-term, global software licensing agreement with TCL Communication to design, manufacture, sell and support new BlackBerry-branded mobile devices running BlackBerry’s secure Android software and applications
Launched the DTEK60, the latest Android device running BlackBerry’s industry-leading security software
Achieved common criteria NIAP certification for BlackBerry 10.3.3, which is targeted for users in government and highly regulated industries
Announced plans to launch a Federal Cybersecurity Operations Center to support FedRAMP and other government security certification initiatives; the center will be led by former U.S. Coast Guard CIO, Rear Admiral Bob Day Jr. (retired)
After the quarter close, launched BlackBerry Secure, a comprehensive and fully integrated enterprise mobility platform that allows enterprises to increase security, productivity and collaboration, accelerate key business processes and reduce total cost of ownership
After the quarter close, announced plans to launch the BlackBerry Innovation Center in Ottawa; the center will focus on developing secure software for connected cars and autonomous driving

Non-GAAP revenue for the third quarter of fiscal 2017 was $301 million with GAAP revenue of $289 million. The non-GAAP revenue breakdown for the quarter was approximately 55% for the Software & Services segment, 22% for the Service Access Fees (SAF) segment, and 23% for the Mobility Solutions segment.

Approximately 80% of the third quarter Software & Services segment revenue (excluding IP licensing and professional services) was recurring. BlackBerry had over 3,000 enterprise customer orders in the quarter.

Non-GAAP operating income was $12 million, and non-GAAP earnings per share was $0.02. GAAP net loss for the quarter was $117 million, or ($0.22) 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 $1.6 billion as of November 30, 2016. This reflects a use of free cash of $154 million, which includes $150 million of cash used in operations. The majority of cash used in operations was attributable to working capital and supplier purchase commitments related to transitioning the device hardware business to a software licensing model. Excluding $605 million in the face value of the company’s debt, the net cash balance at the end of the quarter was approximately $1 billion. Purchase orders with contract manufacturers totaled approximately $35 million at the end of the third quarter, compared to $71 million at the end of the second quarter and down from $298 million in the year ago quarter.

Chen said,

“BlackBerry is now a software company and the market leader in mobile security,”

“We achieved significant milestones in Q3, delivering the highest gross margin in the company’s history for the second consecutive quarter and continuing to transform our infrastructure and operations to support an enterprise software business. These accomplishments drove operating profitability in all business segments and overall positive non-GAAP EPS.”

“As the number of mobile-connected devices continues to proliferate, we expect growing demand in our areas of strength, including security and embedded software,”

Chen continued,

“The recent agreements with Ford and TCL are positive proof points on our value proposition in these emerging growth areas. We have a pipeline of opportunities to continue our momentum.”

“We remain on track to deliver 30 percent growth in company total software and services revenues for the full fiscal year. We are raising our outlook on profitability for FY17. We now expect to achieve non-GAAP EPS profitability for the full year, up from a prior range of breakeven to a five cent loss. This is the third consecutive quarter we have increased our EPS outlook, reflecting the traction we are achieving in our shift to a software business model. We also anticipate breakeven non-GAAP EPS and approximately breakeven free cash flow in Q4.”

Reconciliation of the Company’s segment results to the consolidated results:
(United States dollars, in millions)
[table style=”table-hover”]

	For the Three Months Ended November 30, 2016 (in millions)
	Software & Services		Mobility Solutions		SAF		Segment totals		Corporate unallocated			Subtotal		Non-GAAP adjustments			Consolidated U.S. GAAP
Revenue	$	164	$	70	$	67	$	301	$	–		$	301	$	(12	)	$	289
Cost of goods sold		33		39		19		91		–			91		5			96
Gross margin		131		31		48		210		–			210		(17	)		193
Operating expenses		91		26		1		118		80			198		109			307
Operating income (loss)	$	40	$	5	$	47	$	92	$	(80	)	$	12	$	(126	)	$	(114	)

[/table]
Reconciliation of GAAP revenue, gross margin, gross margin percentage, loss before income taxes, net loss and loss per share to Non-GAAP revenue, gross margin, gross margin percentage, income before income taxes, net income and income per share:

(United States dollars, in millions except per share data)
[table style=”table-hover”]

Q3 Fiscal 2017 Non-GAAP Adjustments		For the Three Months Ended November 30, 2016 (in millions)
	Income statement location	Revenue		Gross margin (before taxes)		Gross margin % (before taxes)		Income (loss) before income taxes			Net income (loss)			Basic earnings (loss) per share
As reported		$	289	$	193	66.8	%	$	(118	)	$	(117	)	$	(0.22)
Debentures fair value adjustment⁽²⁾	Debentures fair value adjustment		–		–	–	%		2			2
Write-down of assets held for sale ⁽³⁾	Selling, marketing and administration		–		–	–	%		42			42
RAP charges ⁽⁴⁾	Cost of sales		–		5	1.7	%		5			5
RAP charges ⁽⁴⁾	Research and development		–		–	–	%		(1	)		(1	)
RAP charges ⁽⁴⁾	Selling, marketing and administration		–		–	–	%		20			20
CORE program recovery ⁽⁵⁾	Selling, marketing and administration		–		–	–	%		(2	)		(2	)
Software deferred revenue acquired ⁽⁶⁾	Revenue ⁽³⁾		12		12	1.3	%		12			12
Stock compensation expense ⁽⁷⁾	Research and development		–		–	–	%		4			4
Stock compensation expense ⁽⁷⁾	Selling, marketing and administration		–		–	–	%		11			11
Acquired intangibles amortization ⁽⁸⁾	Amortization		–		–	–	%		28			28
Business acquisition and integration costs⁽⁹⁾	Selling, marketing and administration		–		–	–	%		5			5
Adjusted		$	301	$	210	69.8	%	$	8		$	9		$	0.02

[/table]
Note: Non-GAAP gross margin, non-GAAP gross margin percentage, non-GAAP income before income taxes, non-GAAP net income and non-GAAP income 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 third quarter of fiscal 2017, the Company reported GAAP gross margin of $193 million or 66.8% of revenue. Excluding the impact of the resource alignment program (“RAP”) charges included in cost of sales and software deferred revenue acquired included in revenue, the non-GAAP gross margin was $210 million, or 69.8% of revenue.
During the third quarter of fiscal 2017, the Company recorded the Q3 Fiscal 2017 Debentures Fair Value Adjustment of $2 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
During the third quarter of fiscal 2017, the Company incurred charges related to the write-down of assets held for sale of $42 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
During the third quarter of fiscal 2017, the Company incurred charges related to the RAP of approximately $24 million, of which $5 million were included in cost of sale, a recovery of $1 million were included in research and development expense and $20 million were included in selling, marketing and administration expense.
During the third 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 third quarter of fiscal 2017, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $12 million, which were included in revenue.
During the third quarter of fiscal 2017, the Company recorded stock compensation expense of $15 million, of which $4 million were included in research and development, and $11 million were included in selling, marketing and administration expenses.
During the third 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 third quarter of fiscal 2017, the Company recorded business acquisition and integration costs incurred through business combinations of $5 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
	November 30, 2016				August 31, 2016				May 31, 2016				February 29, 2016				November 28, 2015
North America	$	167	57.8	%	$	190	56.9	%	$	195	48.8	%	$	216	46.5	%	$	275	50.2	%
Europe, Middle East and Africa		87	30.1	%		100	29.9	%		155	38.7	%		175	37.7	%		194	35.4	%
Latin America		7	2.4	%		13	3.9	%		10	2.5	%		18	3.9	%		24	4.4	%
Asia Pacific		28	9.7	%		31	9.3	%		40	10.0	%		55	11.9	%		55	10.0	%
Total	$	289	100.0	%	$	334	100.0	%	$	400	100.0	%	$	464	100.0	%	$	548	100.0	%

[/table]
Conference Call and Webcast

A conference call and live webcast will be held beginning at 8 am ET, which can be accessed by dialing 1-844-309-0607 or by logging on athttp://ca.blackberry.com/company/investors/events.html.

A replay of the conference call will also be available at approximately 11 am ET by dialing 1-855-859-2056 or 1-404-537-3406 and entering Conference ID # 18826550 or by clicking the link above.

[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 nine months ended
		November 30, 2016			August 31, 2016			November 28, 2015			November 30, 2016			November 28, 2015
Revenue		$	289		$	334		$	548		$	1,023		$	1,696
Cost of sales			96			236			312			578			965
Gross margin			193			98			236			445			731
	Gross margin %		66.8	%		29.3	%		43.1	%		43.5	%		43.1	%
Operating expenses
	Research and development		75			85			100			249			361
	Selling, marketing and administration		145			139			177			416			542
	Amortization		43			44			68			141			200
	Impairment of goodwill		–			–			–			57			–
	Impairment of long-lived assets		–			–			–			501			–
	Write-down of assets held for sale		42			123			–			165			–
	Debentures fair value adjustment		2			62			(5	)		40			(390	)
			307			453			340			1,569			713
Operating income (loss)			(114	)		(355	)		(104	)		(1,124	)		18
	Investment loss, net		(4	)		(16	)		(16	)		(35	)		(44	)
Loss before income taxes			(118	)		(371	)		(120	)		(1,159	)		(26	)
Provision for (recovery of) income taxes			(1	)		1			(31	)		–			(56	)
Net income (loss)		$	(117	)	$	(372	)	$	(89	)	$	(1,159	)	$	30
Earnings (loss) per share
	Basic	$	(0.22	)	$	(0.71	)	$	(0.17	)	$	(2.21	)	$	0.06
	Diluted	$	(0.22	)	$	(0.71	)	$	(0.17	)	$	(2.21	)	$	(0.46	)

Weighted-average number of common shares outstanding (000’s)
	Basic		526,102			522,826			525,103			523,601			526,879
	Diluted		526,102			522,826			525,103			523,601			651,879
Total common shares outstanding (000’s)			529,962			523,488			525,701			529,962			525,701

BlackBerry Limited

Incorporated under the Laws of Ontario

(United States dollars, in millions except per share data) (unaudited)

[/table]
[table style=”table-hover”]
Consolidated Balance Sheets

As at		November 30, 2016			February 29, 2016
Assets
Current
	Cash and cash equivalents	$	830		$	957
	Short-term investments		459			1,420
	Accounts receivable, net		199			338
	Other receivables		41			51
	Inventories		44			143
	Income taxes receivable		19			–
	Other current assets		67			102
	Assets held for sale		87			257
			1,746			3,268
Long-term investments			269			197
Restricted cash			51			50
Property, plant and equipment, net			105			155
Goodwill			559			618
Intangible assets, net			621			1,213
Deferred income tax asset			–			33
		$	3,351		$	5,534
Liabilities
Current
	Accounts payable	$	99		$	270
	Accrued liabilities		273			368
	Income taxes payable		–			9
	Deferred revenue		272			392
			644			1,039
Long-term debt			607			1,277
Deferred income tax liability			8			10
			1,259			2,326
Shareholders’ Equity
Capital stock and additional paid-in capital			2,498			2,448
Retained earnings (deficit)			(391	)		768
Accumulated other comprehensive loss			(15	)		(8	)
			2,092			3,208
		$	3,351		$	5,534

BlackBerry Limited

Incorporated under the Laws of Ontario

(United States dollars, in millions except per share data) (unaudited)

Consolidated Statements of Cash Flows

[/table]
[table style=”table-hover”]

		Nine Months Ended
		November 30, 2016			November 28, 2015
Cash flows from operating activities
Net income (loss)		$	(1,159	)	$	30
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Amortization		182			489
	Deferred income taxes		32			(67	)
	Stock-based compensation		45			42
	Loss on disposal of property, plant and equipment		5			46
	Impairment of goodwill		57			–
	Impairment of long-lived assets		501			–
	Write-down of assets held for sale		165			–
	Other-than-temporary impairment on cost-based investments		8			–
	Debentures fair value adjustment		40			(390	)
	Other		6			23
Net changes in working capital items:
	Accounts receivable, net		139			158
	Other receivables		10			54
	Inventories		99			(22	)
	Income tax receivable, net		(19	)		157
	Other current assets		31			222
	Accounts payable		(171	)		13
	Income taxes payable		(9	)		–
	Accrued liabilities		(84	)		(281	)
	Deferred revenue		(120	)		(217	)
Net cash provided by (used in) operating activities			(242	)		257
Cash flows from investing activities
Acquisition of long-term investments			(429	)		(275	)
Proceeds on sale or maturity of long-term investments			215			141
Acquisition of property, plant and equipment			(14	)		(25	)
Proceeds on sale of property, plant and equipment			4			–
Acquisition of intangible assets			(28	)		(43	)
Business acquisitions, net of cash acquired			(5	)		(689	)
Acquisition of short-term investments			(901	)		(2,091	)
Proceeds on sale or maturity of short-term investments			1,987			2,674
Conversion of cost-based investment to equity securities			10			–
Unrealized loss in equity securities			(2	)		–
Net cash provided by (used in) investing activities			837			(308	)
Cash flows from financing activities
Issuance of common shares			5			3
Payment of contingent consideration from business acquisitions			(15	)		–
Common shares repurchased			–			(57	)
Effect of foreign exchange gain on restricted cash			(3	)		–
Transfer from restricted cash			2			4
Repurchase of 6% debentures			(1,315	)		–
Issuance of 3.75% Debentures			605			–
Net cash used in financing activities			(721	)		(50	)
Effect of foreign exchange loss on cash and cash equivalents			(1	)		(9	)
Net decrease in cash and cash equivalents during the period			(127	)		(110	)
Cash and cash equivalents, beginning of period			957			1,233
Cash and cash equivalents, end of period		$	830		$	1,123

As at		November 30, 2016				August 31, 2016
Cash and cash equivalents		$	830		$	1,687
Short-term investments			459			413
Long-term investments			269			321
Restricted cash			51			53
		$	1,609		$	2,474