BlackBerry FY 2019 First Quarter Results Beat Estimates Stock Falls

BlackBerry today reported financial results for the three months ended May 31, 2018. BlackBerry’s results were better than analysts were expecting, but a double-digit revenue decline and a worsening GAAP net income appears to be driving down the stock. Another factor would be that guidance for the full year calls for a slowdown in software and services growth compared to the first quarter.

BlackBerry reported first-quarter non-GAAP revenue of $217 million, down 11% year over year but about $7.4 million above the average analyst estimate.

Total non-GAAP software and services revenue of $193 million, up 14% year- over-year. Total GAAP software and services revenue was $189 million, up 18% year-over-year. Approximately 86% of first quarter software and services revenue (excluding IP licensing and professional services) was recurring, up from approximately 70% in the fourth quarter of fiscal year 2018. Gross margin of 76% (both non-GAAP and GAAP).

Non-GAAP operating income was $12 million, and positive for the ninth consecutive quarter. GAAP operating loss was $65 million. Non-GAAP earnings per share was $0.03 (basic and diluted). GAAP net loss for the quarter was $0.11 per share (basic and diluted). GAAP net loss includes a charge of $28 million related to the fair value adjustment on the debentures, $22 million in acquired intangibles amortization expense, $18 million in stock compensation expense, $4 million in restructuring charges, and other amounts as summarized in a table below.

Total cash, cash equivalents, short-term and long-term investments were approximately $2.3 billion as of May 31, 2018. Free cash flow, before considering the impact of restructuring and legal proceedings, was positive $3 million. Cash used in operations was $7 million and capital expenditures were $5 million. Excluding $605 million in the face value of the company’s debt, the net cash balance at the end of the quarter was approximately $1.7 billion.

“We are off to a solid start in fiscal 2019, with 14% year-over-year growth in total software and services revenue driven by strong double-digit billings and an increase in recurring revenue,” said John Chen, Executive Chairman and CEO, BlackBerry.

“I am pleased that BlackBerry QNX software is now embedded in over 120 million automobiles worldwide, doubling the install base in the last three years. We are very excited about the opportunities ahead of us in automobiles and in other EoT verticals.”

BlackBerry’s outlook for fiscal 2019 is as follows:

Total company software and services billings growth is expected to be double-digits
Non-GAAP EPS is expected to be positive
Free cash flow is expected to be positive for the full year, before considering the impact of restructuring and legal proceedings
Total software and services revenue growth of between 8% to 10% year-over-year

Conference Call and Webcast

A conference call and live webcast will be held today beginning at 8 a.m. ET, which can be accessed by dialing 1- 866-496-6675 or by logging on here. A replay of the conference call will also be available at approximately 11 a.m. ET by dialing 1-888-203-1112 and entering Conference ID #8263166 and at the link above.

Full Results

Reconciliation of GAAP revenue, gross margin, gross margin percentage, loss before income taxes, net loss and basic loss per share to Non-GAAP revenue, gross margin, gross margin percentage, income before income taxes, net income and basic earnings per share for the three months ended May 31, 2018:


Q1 Fiscal 2019 Non-GAAP Adjustments		For the Three Months Ended May 31,2018 (in millions, except for per share amounts)
	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		$	213	$	161	75.6%	(59)		$	(60)	$	(0.11)
Debentures fair value adjustment ⁽²⁾	Debentures fair value adjustment		—		—	—%	28			28
Resource Alignment Program charges ⁽³⁾	Research and development		—		—	—%	2			2
Resource Alignment Program charges ⁽³⁾	Selling, marketing and administration		—		—	—%	2			2
Software deferred revenue acquired ⁽⁴⁾	Revenue		4		4	0.4%	4			4
Stock compensation expense ⁽⁵⁾	Cost of sales		—		1	0.5%	1			1
Stock compensation expense ⁽⁵⁾	Research and development		—		—	—%	3			3
Stock compensation expense ⁽⁵⁾	Selling, marketing and administration		—		—	—%	14			14
Acquired intangibles amortization ⁽⁶⁾	Amortization		—		—	—%	22			22
Business acquisition and integration costs ⁽⁷⁾	Selling, marketing and administration		—		—	—%	1			1
Adjusted		$	217	$	166	76.5%	$	18	$	17	$	0.03

Note: Non-GAAP revenue, 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 first quarter of fiscal 2019, the Company reported GAAP gross margin of $161 million or 75.6% of revenue. Excluding the impact of stock compensation expense included in cost of sales and software deferred revenue acquired included in revenue, the non-GAAP gross margin was $166 million, or 76.5% of revenue.
During the first quarter of fiscal 2019, the Company recorded the Q1 Fiscal 2019 Debentures Fair Value Adjustment of $28 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
During the first quarter of fiscal 2019, the Company incurred charges related to the Resource Alignment Program of approximately $4 million, of which $2 million was included in research and development and $2 million was included in selling, marketing and administration expense.
During the first quarter of fiscal 2019, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $4 million, which was included in enterprise software and services revenue.
During the first quarter of fiscal 2019, the Company recorded stock compensation expense of $18 million, of which $1 million was included in cost of sales, $3 million was included in research and development, and $14 million was included in selling, marketing and administration expenses.
During the first quarter of fiscal 2019, the Company recorded amortization of intangible assets acquired through business combinations of $22 million, which was included in amortization expense.
During the first quarter of fiscal 2019, the Company recorded business acquisition and integration costs incurred through business combinations of $1 million, which were included in selling, marketing and administration expenses.

Supplementary Geographic Revenue Breakdown


BlackBerry Limited
(United States dollars, in millions)
Revenue by Region

	For the Quarters Ended
	May 31, 2018				February 28, 2018				November 30, 2017				August 31, 2017				May 31, 2017
North America	$	139	65.3	%	$	147	63.1	%	$	133	58.9	%	$	133	55.9	%	$	127	54.0	%
Europe, Middle East and
Africa		52	24.4	%		63	27.0	%		69	30.5	%		76	31.9	%		70	29.8	%
Other regions		22	10.3	%		23	9.9	%		24	10.6	%		29	12.2	%		38	16.2	%

Total	$	213	100.0	%	$	233	100.0	%	$	226	100.0	%	$	238	100.0	%	$	235	100.0	%

Supplementary Revenue by Product and Service Type Breakdown


BlackBerry Limited
(United States dollars, in millions)
Revenue by Product and Service Type

	US GAAP				Adjustments				Non-GAAP
	For the Three Months Ended				For the Three Months Ended				For the Three Months Ended
	May 31, 2018		May 31, 2017		May 31, 2018		May 31, 2017		May 31, 2018		May 31, 2017
Enterprise software and services	$	79	$	92	$	4	$	9	$	83	$	101
BlackBerry Technology Solutions		47		36		—		—		47		36
Licensing, IP and other		63		32		—		—		63		32
Handheld devices		8		37		—		—		8		37
SAF		16		38		—		—		16		38
Total	$	213	$	235	$	4	$	9	$	217	$	244


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

	May 31, 2018		February 28, 2018		May 31, 2017
Revenue	$	213	$	233	$	235
Cost of sales	52		56		85
Gross margin	161		177		150
Gross margin %	75.6%		76.0%		63.8%
Operating expenses
Research and development	61		58		61
Selling, marketing and administration	100		133		110
Amortization	37		37		40
Debentures fair value adjustment	28		(34)		218
Qualcomm arbitration award	—		—		(815)
	226		194		(386)
Operating income (loss)	(65)		(17)		536
Investment income, net	6		3		136
Income (loss) before income taxes	(59)		(14)		672
Provision for (recovery of) income taxes	1		(4)		1
Net income (loss)	$	(60)	$	(10)	$	671
Earnings (loss) per share
Basic	$	(0.11)	$	(0.02)	$	1.26
Diluted	$	(0.11)	$	(0.06)	$	1.23


Weighted-average number of common shares outstanding (000’s)

Basic	536,964		536,594		531,096
Diluted	536,964		597,094		544,077
Total common shares outstanding (000’s)	537,112		536,734		531,476


BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions) (unaudited)

Consolidated Balance Sheets

	As at
		May 31, 2018			May 31, 2018
Assets
Current
Cash and cash equivalents	$	520		$	816
Short-term investments		1,725			1,443
Accounts receivable, net		126			151
Other receivables		63			71
Income taxes receivable		17			26
Other current assets		56			38
		2,507			2,545
Restricted cash and cash equivalents		35			39
Long-term investments		55			55
Other long-term assets		30			28
Deferred income tax assets		2			3
Property, plant and equipment, net		64			64
Goodwill		566			569
Intangible assets, net		447			477
	$	3,706		$	3,780
Liabilities Current
Accounts payable	$	37		$	46
Accrued liabilities		162			205
Income taxes payable		19			18
Deferred revenue, current		166			142
		384			411
Deferred revenue, non-current		111			53
Other long-term liabilities		20			23
Long-term debt		810			782
Deferred income tax liabilities		5			6
		1,330			1,275
Shareholders’ equity
Capital stock and additional paid-in capital		2,580			2,560
Deficit		(185	)		(45)
Accumulated other comprehensive loss		(19	)		(10)
		2,376			2,505
	$	3,706		$	3,780


BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions except per share data) (unaudited)

Consolidated Statements of Cash Flows

	For the Three Months Ended
	May 31, 2018			May 31, 2017
Cash flows from operating activities
Net income (loss)	$	(60	)	$	671
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization		41			51
Stock-based compensation		18			13
Debentures fair value adjustment		28			218
Other		2			1
Net changes in working capital items:
Accounts receivable, net		25				35
Other receivables		8				1
Income taxes receivable		9				(2	)
Other assets		(10	)			21
Accounts payable		(9	)			(59	)
Income taxes payable		1				1
Accrued liabilities		(42	)			(50	)
Deferred revenue		(15	)			(36	)
Other long-term liabilities		(3	)			(2	)
Net cash provided by (used in) operating activities		(7	)			863
Acquisition of long-term investments		—				(25	)
Acquisition of property, plant and equipment		(5	)			(3	)
Proceeds on sale of property, plant and equipment		—				1
Acquisition of intangible assets		(7	)			(7	)
Acquisition of short-term investments		(1,011	)			(1,015	)
Proceeds on sale or maturity of short-term investments		730				378
Net cash used in investing activities		(293	)			(671	)
Cash flows from financing activities
Issuance of common shares		2				3
Net cash provided by financing activities		2				3
Effect of foreign exchange gain (loss) on cash, cash equivalents, restricted cash, and restricted cash equivalents		(2	)			1
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents during the period		(300	)			196
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period		855				785
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period	$	555		$		981

As at		May 31, 2018				February 28, 2018
Cash and cash equivalents	$	520		$		816
Short-term investments	$	1,725		$		1,443
Long-term investments	$	55		$		55
Restricted cash and cash equivalents	$	35		$		39