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 shareholders
The 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 Results
Non-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.
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| (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) |
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| 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 | ) | ||||||||
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| 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) |
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| 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
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| 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 | % | ||||||||||
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| 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 | ||||||
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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 here. 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 # 68672235 or by clicking the link above.
