BlackBerry has agreed to stop adjusting its revenue after receiving a comment letter from the Securities and Exchange Commission (SEC) questioning the practice.
BlackBerry has repeatedly highlighted non-GAAP revenues in its earnings reports – particularly adjusting for “software deferred revenue acquired but not recognized due to business combination accounting rules,” or adding in revenue that wouldn’t be allowed under GAAP because of an acquisition.
The SEC’s comment letter said that BlackBerry’s practice in effect substituted individually tailored recognition and measurement methods for those of GAAP. The SEC wrote:
Form 10-K for Fiscal Year Ended February 29, 2020
Management Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures, page 32
1. We note your purchase accounting adjustments related to “Software deferred revenue acquired,” and “Software deferred commission expense acquired,” in many of your adjusted non-GAAP measures, including adjusted revenue, adjusted net income and adjusted EBITDA. Considering your deferred revenue and commission expense were adjusted to fair value at the time of acquisition pursuant to GAAP, these non-GAAP adjustments intended to eliminate the impact of purchase accounting substitute individually tailored recognition and measurement methods for those of GAAP. Please tell us how you considered the guidance of Question 100.04 of the Division’s Non-GAAP C&DIs and Rule 100(b) of Regulation G when presenting these measures.
BlackBerry responded that investors and analysts often seek information on deferred revenue acquired and software deferred commission expense, and that peers in its industry make similar adjustments.
The Company considered numerous factors in determining that disclosing a non-GAAP adjustment for Software deferred revenue acquired and Software deferred commission expense acquired would be useful to investors and provide better comparability to its past, current, and future results.
First, the Company considered (a) the potential for variability in revenue and expenses to be overstated when there has been no change in the underlying economics of its acquired contracts and business, and (b) the potential for variability in its revenue and expenses to be understated despite changes in the underlying economics of acquired contracts and business. For example, the Company considered a contract that before the acquisition would have resulted in $100 in revenue for the fiscal year, but post-acquisition resulted in $25 in revenue for the fiscal year due to the acquired deferred revenue being measured at fair value, as per the application of Accounting Standards Codification 805-20-30-1. As the nature of much of the Company’s business and its acquired businesses involves the renewal of subscription contracts on a regular basis, if this contract were to then be renewed it would result in $100 in revenue in the renewal year (a 400% increase) despite no change in the Company’s underlying business with the customer. Correspondingly, if the Company were unable to renew the contract and lose the customer, the negative impact to revenue would appear to be only $25 despite having lost a customer and $100 in revenue in the renewal year, associated with the contract’s historical value. The same issue also was identified with regards to the contract assets associated with deferred commissions, which are also measured at fair value upon acquisition (generally $0) and the associated commissions expense does not appear prior to renewal. In the above example, upon renewal of the historical contract there would be an increase in expenses associated with commissions expense where there were none before, despite no change in ongoing business.
Second, the Company considered others within its industry and found that similar adjustments were common in what the Company considers its peer group. As the Company regularly is compared against others within its industry, it felt that providing this adjustment would serve to facilitate that comparison.
Third, the Company considered that based upon its interactions with investors, financial analysts regularly seek information regarding Software deferred revenue acquired and Software deferred commission expense for modelling purposes. The Company found this consistent with comments made by the Investor Advisory Committee of the Financial Accounting Standards Board in its November 12, 2019 meeting where members noted that the requirement to measure deferred revenue at fair value is not useful, reduces comparability between periods, and is usually unwound in their analyses. Rather than provide this information only on request, the Company determined that it should provide it transparently within its public disclosures to facilitate comparability.
With regards to Question 100.04 of the Division’s Non-GAAP Compliance and Disclosure Interpretations and Rule 100(b) of Regulation G, for the above reasons the Company did not view this adjustment as misleading. Further, if the Company did not disclose the metrics of disclosing Software deferred revenue acquired and Software deferred commission expense acquired, its results could be less useful to investors since, as noted in the example above, a renewal for software and support services at the same price and term as the original acquired contract would show as an increase in revenue period over period, despite no underlying change in contract economics.
BlackBerry will no longer offer non-GAAP revenue figures in its quarterly reporting, starting with its fiscal year that started March 1.
The Company’s externally provided outlook for its fiscal 2021 results as well as market consensus estimates for fiscal 2021 results include the effect of Software deferred revenue acquired and Software deferred commission expense acquired. However, as a result of the declining quantitative impact of these adjustments as they trend to zero due to the time elapsed since its acquisitions, the Company plans to discontinue its usage of the Software deferred revenue acquired and Software deferred commission expense acquired adjustments beginning in its upcoming fiscal year beginning on March 1, 2021 and ending on February 28, 2022.
