BlackBerry today reported financial results for the three months ended August 31, 2017. Shares are up 8.23% premarket after reporting Q2 revenue and EPS beats. The company reported stronger-than-expected quarterly results and increased its fiscal-year revenue forecast after sales as its software business hit a record.
About 79% of software and services revenue was recurring and BlackBerry had around 3,300 enterprise customer orders in Q2.
Gross margin was 76% non-GAAP or 74% GAAP compared to 29.3% in last year’s quarter. Cash flow from operations totaled $3M. FCF broke even in Q2 and BlackBerry ended the quarter with $2.5B in cash and equivalents.
Product and service revenue is where a lot of analysts will be focusing. Enterprise software and services, $102M (flat Y/Y); BlackBerry Technology Solutions, $38M (flat); Licensing, IP and other, $56M (+250%); Handheld devices, $16M (-85%); SAF, $37M (-59%).
Q2 Highlights
- Total revenue of $249 million (non-GAAP) and $238 million (GAAP)
- Record software and services revenue of $196 million (non-GAAP) and $185 million (GAAP)
- Record gross margin of 76% (non-GAAP) and 74% (GAAP)
- Operating margin of 12% (non-GAAP) and 9% (GAAP)
- Operating income of $29 million (non-GAAP) and $22 million (GAAP)
- EPS of $0.05 (non-GAAP) and fully diluted loss of ($0.07) (GAAP)
- Adjusted EBITDA of $50 million; positive for fourteenth consecutive quarter
- Adjusted EBITDA margin of 20%
- Total cash balance of $2.5 billion at the end of the fiscal second quarter
- Achieved NIAP certification for SecuSUITE for Government, which brings an end-to-end solution for encrypted voice calls and text messages to the U.S. and Canadian governments; SecuSUITE is the only NIAP-certified voice solution supporting iOS, Android and BlackBerry 10 smartphones and tablets
- Achieved the highest scores in all six use cases of Gartner’s Critical Capabilities for High-Security Mobility Management Report for the second consecutive year
- After the quarter, BlackBerry Workspaces received the highest scores in two use cases-Workforce Productivity and Centralized Content Protection-of Gartner’s Critical Capabilities for Content Collaborations Platform Report
- After the quarter, announced that Delphi chose BlackBerry QNX to provide the operating system and software infrastructure for Delphi’s fully integrated CSLP autonomous driving solution
All figures in U.S. dollars and U.S. GAAP, except where otherwise indicated.
For the Q2 period, GAAP revenues came in at $238 million, which was a $3 million rise sequentially and well ahead of the $220 million that analysts were looking for. The beat was mainly driven by revenues from service access fees, which only declined $1 million sequentially to $37 million, despite management guiding for a 25% fall. Additionally, enterprise software and services revenues declined sequentially by $1 million.
IP and Licensing revenues soared by $24 million sequentially, so it appears the amount of recurring revenue from overall software/services actually declined. The technology solutions segment, which includes QNX and Radar, increased $2 million sequentially but was flat over the prior year period.
Non-GAAP revenue for the second quarter of fiscal 2018 was $249 million with GAAP revenue of $238 million. Approximately 79% of second quarter software and services revenue (excluding IP licensing and professional services) was recurring. BlackBerry had approximately 3,300 enterprise customer orders in the quarter.
Non-GAAP operating income was $29 million, and non-GAAP earnings per share was $0.05. GAAP operating income was $22 million. GAAP net income for the quarter was $19 million, or $0.04 per basic share. Fully diluted GAAP EPS was a loss of ($0.07), which assumes conversion of the convertible debentures based on the “if-converted” method. GAAP net income includes $24 million in amortization of acquired intangibles, $29 million in restructuring charges, a benefit of $70 million of fair value adjustment related to the debentures, and other amounts as summarized in a table below.
Total cash, cash equivalents, short-term and long-term investments were approximately $2.5 billion as of August 31, 2017. This reflects breakeven free cash flow, which includes cash flow from operations of $3 million, net of capital expenditures of $3 million. The Company also used $17 million to repurchase 1.9 million shares of common stock. Excluding $605 million in the face value of the Company’s debt, the net cash balance at the end of the quarter was approximately $1.9 billion. There were no purchase orders with contract manufacturers at the end of the second quarter, or at the end of the first quarter of fiscal 2018, down from $71 million a year ago.
John Chen, Executive Chairman and CEO, BlackBerry said,
“I am pleased with our strong execution in Q2. We achieved historical highs in total software and services revenue and gross margin, as well as the highest non-GAAP operating margin in over five years, reflecting our complete transformation to a software company,”.
“More importantly, we made significant progress on our key growth initiatives. Our enterprise billings grew 19 percent year over year driven by our Unified Endpoint Management platform. We secured important design wins in our automotive business, and we expanded our sales channels for our Radar IOT solution. In our licensing businesses, we have a growing pipeline of opportunities with our BlackBerry Secure software and our IP portfolio.”
“Our position as a market leader in security continues to strengthen,”
“For the second consecutive year, BlackBerry achieved the highest scores in all six use cases in the Gartner Critical Capabilities for High-Security Mobility Management report. We added four new FedRAMP customers and now have over 300,000 licensed users on our FedRAMP authorized cloud service as of the end of Q2, an increase of 162 percent over Q1.”
“Based on our progress thus far in FY18, we are on track to achieve software and services revenue growth in the range of 10 percent to 15 percent and profitability for the full year.”
Outlook
The Company is providing the following updated outlook for fiscal 2018:
- Total non-GAAP revenue in the range of $920 million to $950 million
- Total non-GAAP software and services revenue growth in the range of 10 percent to 15 percent
- Positive non-GAAP EPS for the full year
- Positive free cash flow for the full year, before taking into account the net impact of the benefit of the Qualcomm arbitration award and costs related to restructuring and transition from the hardware business.
Reconciliation of GAAP revenue, gross margin, gross margin percentage, income before income taxes, net income and basic earnings per share to Non-GAAP revenue, gross margin, gross margin percentage, income before income taxes, net income and basic earnings per share:
(United States dollars, in millions except per share data)
| Q2 Fiscal 2018 Non-GAAP Adjustments | For the Three Months Ended August 31, 2017 (in millions, except for per share amounts) |
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| 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 | $ | 238 | $ | 175 | 73.5 | % | $ | 23 | $ | 19 | $ | 0.04 | ||||||||||
| Debentures fair value adjustment (2) | Debentures fair value adjustment | – | – | – | % | (70 | ) | (70 | ) | |||||||||||||
| LLA impairment charge (3) | Impairment of long-lived assets | – | – | – | % | 11 | 11 | |||||||||||||||
| Patent abandonment (4) | Loss on sale, disposal and abandonment of long-lived assets | – | – | – | % | 2 | 2 | |||||||||||||||
| RAP charges (5) | Cost of sales | – | 3 | 1.3 | % | 3 | 3 | |||||||||||||||
| RAP charges (5) | Research and development | – | – | – | % | 1 | 1 | |||||||||||||||
| RAP charges (5) | Selling, marketing and administration | – | – | – | % | 12 | 12 | |||||||||||||||
| Software deferred revenue acquired (6) | Revenue | 11 | 11 | 1.1 | % | 11 | 11 | |||||||||||||||
| Stock compensation expense (7) | Cost of sales | – | 1 | 0.4 | % | 1 | 1 | |||||||||||||||
| Stock compensation expense (7) | Research and development | – | – | – | % | 3 | 3 | |||||||||||||||
| Stock compensation expense (7) | Selling, marketing and administration | – | – | – | % | 8 | 8 | |||||||||||||||
| Acquired intangibles amortization (8) | Amortization | – | – | – | % | 24 | 24 | |||||||||||||||
| Business acquisition and integration costs (9) | Selling, marketing and administration | – | – | – | % | 1 | 1 | |||||||||||||||
| Adjusted | $ | 249 | $ | 190 | 76.3 | % | $ | 30 | $ | 26 | $ | 0.05 | ||||||||||
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.
| (1) | During the second quarter of fiscal 2018, the Company reported GAAP gross margin of $175 million or 73.5% of revenue. Excluding the impact of the resource alignment program (“RAP”) charges and stock compensation expense included in cost of sales and software deferred revenue acquired included in revenue, the non-GAAP gross margin was $190 million, or 76.3% of revenue. | |
| (2) | During the second quarter of fiscal 2018, the Company recorded the Q2 Fiscal 2018 Debentures Fair Value Adjustment of $(70) million. This adjustment was presented on a separate line in the Consolidated Statements of Operations. | |
| (3) | During the second quarter of fiscal 2018, the Company recorded a long-lived asset (“LLA”) impairment charge of $11 million, which was presented on a separate line in the Consolidated Statements of Operations. | |
| (4) | During the second quarter of fiscal 2018, the Company incurred charges related to selective patent abandonments of $2 million, which was included in loss on sale, disposal and abandonment of long-lived assets. | |
| (5) | During the second quarter of fiscal 2018, the Company incurred charges related to the RAP of approximately $16 million, of which $3 million was included in cost of sales, $1 million was included in research and development expense and $12 million was included in selling, marketing and administration expense. | |
| (6) | During the second quarter of fiscal 2018, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $11 million, which was included in enterprise software and services revenue. | |
| (7) | During the second quarter of fiscal 2018, the Company recorded stock compensation expense of $12 million, of which $1 million was included in cost of sales, $3 million was included in research and development, and $8 million was included in selling, marketing and administration expenses. | |
| (8) | During the second quarter of fiscal 2018, the Company recorded amortization of intangible assets acquired through business combinations of $24 million, which was included in amortization expense. | |
| (9) | During the second quarter of fiscal 2018, the Company recorded business acquisition and integration costs incurred through business combinations of $1 million, which was included in selling, marketing and administration expenses. |
Supplementary Geographic Revenue Breakdown
Revenue by Region
| For the quarters ended | ||||||||||||||||||||||||||||||
| August 31, 2017 | May 31, 2017 | February 28, 2017 | November 30, 2016 | August 31, 2016 | ||||||||||||||||||||||||||
| North America | $ | 133 | 55.9 | % | $ | 127 | 54.0 | % | $ | 166 | 58.0 | % | $ | 167 | 57.8 | % | $ | 170 | 50.9 | % | ||||||||||
| Europe, Middle East and Africa | 76 | 31.9 | % | 70 | 29.8 | % | 83 | 29.0 | % | 87 | 30.1 | % | 111 | 33.2 | % | |||||||||||||||
| Latin America | 4 | 1.7 | % | 4 | 1.7 | % | 5 | 1.8 | % | 7 | 2.4 | % | 13 | 3.9 | % | |||||||||||||||
| Asia Pacific | 25 | 10.5 | % | 34 | 14.5 | % | 32 | 11.2 | % | 28 | 9.7 | % | 40 | 12.0 | % | |||||||||||||||
| Total | $ | 238 | 100.0 | % | $ | 235 | 100.0 | % | $ | 286 | 100.0 | % | $ | 289 | 100.0 | % | $ | 334 | 100.0 | % | ||||||||||
Supplementary Revenue by Product and Service Type Breakdown
Revenue by Product and Service Type
| US GAAP | Adjustments | Non-GAAP | ||||||||||||||||
| Three months ended | Three months ended | Three months ended | ||||||||||||||||
| August 31, 2017 | August 31, 2016 | August 31, 2017 | August 31, 2016 | August 31, 2017 | August 31, 2016 | |||||||||||||
| Enterprise software and services | $ | 91 | $ | 84 | $ | 11 | $ | 18 | $ | 102 | $ | 102 | ||||||
| BlackBerry Technology Solutions | 38 | 38 | – | – | 38 | 38 | ||||||||||||
| Licensing, IP and other | 56 | 16 | – | – | 56 | 16 | ||||||||||||
| Handheld devices | 16 | 105 | – | – | 16 | 105 | ||||||||||||
| SAF | 37 | 91 | – | – | 37 | 91 | ||||||||||||
| Total | $ | 238 | $ | 334 | $ | 11 | $ | 18 | $ | 249 | $ | 352 | ||||||
Conference Call and Webcast
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