BlackBerry

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
SAFSegment
totals
Corporate
unallocated
SubtotalNon-GAAP
adjustments
Consolidated
U.S. GAAP
Revenue$164$70$67$301$$301$(12)$289
Cost of goods sold3339199191596
Gross margin1313148210210(17)193
Operating expenses9126111880198109307
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 AdjustmentsFor the Three Months Ended November 30, 2016
(in millions)
Income
statement
location
RevenueGross
margin
(before
taxes)
Gross
margin
%
(before
taxes)
Income
(loss)
before
income
taxes
Net
income
(loss)
Basic
earnings
(loss)
per
share
As reported$289$19366.8%$(118)$(117)$(0.22)
Debentures fair value adjustment(2)Debentures fair value adjustment%22
Write-down of assets held for sale (3)Selling, marketing and administration%4242
RAP charges (4)Cost of sales51.7%55
RAP charges (4)Research and development%(1)(1)
RAP charges (4)Selling, marketing and administration%2020
CORE program recovery (5)Selling, marketing and administration%(2)(2)
Software deferred revenue acquired (6)Revenue (3)12121.3%1212
Stock compensation expense (7)Research and development%44
Stock compensation expense (7)Selling, marketing and administration%1111
Acquired intangibles amortization (8)Amortization%2828
Business acquisition and integration costs(9)Selling, marketing and administration%55
Adjusted$301$21069.8%$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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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, 2016August 31, 2016May 31, 2016February 29, 2016November 28, 2015
North America$16757.8%$19056.9%$19548.8%$21646.5%$27550.2%
Europe, Middle East and Africa8730.1%10029.9%15538.7%17537.7%19435.4%
Latin America72.4%133.9%102.5%183.9%244.4%
Asia Pacific289.7%319.3%4010.0%5511.9%5510.0%
Total$289100.0%$334100.0%$400100.0%$464100.0%$548100.0%

[/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 endedFor the nine months ended
November 30, 2016August 31, 2016November 28, 2015November 30, 2016November 28, 2015
Revenue$289$334$548$1,023$1,696
Cost of sales96236312578965
Gross margin19398236445731
Gross margin %66.8%29.3%43.1%43.5%43.1%
Operating expenses
Research and development7585100249361
Selling, marketing and administration145139177416542
Amortization434468141200
Impairment of goodwill57
Impairment of long-lived assets501
Write-down of assets held for sale42123165
Debentures fair value adjustment262(5)40(390)
3074533401,569713
Operating income (loss)(114)(355)(104)(1,124)18
Investment loss, net(4)(16)(16)(35)(44)
Loss before income taxes(118)(371)(120)(1,159)(26)
Provision for (recovery of) income taxes(1)1(31)(56)
Net income (loss)$(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)
Basic526,102522,826525,103523,601526,879
Diluted526,102522,826525,103523,601651,879
Total common shares outstanding (000’s)529,962523,488525,701529,962525,701
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 atNovember 30, 2016February 29, 2016
Assets
Current
Cash and cash equivalents$830$957
Short-term investments4591,420
Accounts receivable, net199338
Other receivables4151
Inventories44143
Income taxes receivable19
Other current assets67102
Assets held for sale87257
1,7463,268
Long-term investments269197
Restricted cash5150
Property, plant and equipment, net105155
Goodwill559618
Intangible assets, net6211,213
Deferred income tax asset33
$3,351$5,534
Liabilities
Current
Accounts payable$99$270
Accrued liabilities273368
Income taxes payable9
Deferred revenue272392
6441,039
Long-term debt6071,277
Deferred income tax liability810
1,2592,326
Shareholders’ Equity
Capital stock and additional paid-in capital2,4982,448
Retained earnings (deficit)(391)768
Accumulated other comprehensive loss(15)(8)
2,0923,208
$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, 2016November 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:
Amortization182489
Deferred income taxes32(67)
Stock-based compensation4542
Loss on disposal of property, plant and equipment546
Impairment of goodwill57
Impairment of long-lived assets501
Write-down of assets held for sale165
Other-than-temporary impairment on cost-based investments8
Debentures fair value adjustment40(390)
Other623
Net changes in working capital items:
Accounts receivable, net139158
Other receivables1054
Inventories99(22)
Income tax receivable, net(19)157
Other current assets31222
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 investments215141
Acquisition of property, plant and equipment(14)(25)
Proceeds on sale of property, plant and equipment4
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 investments1,9872,674
Conversion of cost-based investment to equity securities10
Unrealized loss in equity securities(2)
Net cash provided by (used in) investing activities837(308)
Cash flows from financing activities
Issuance of common shares53
Payment of contingent consideration from business acquisitions(15)
Common shares repurchased(57)
Effect of foreign exchange gain on restricted cash(3)
Transfer from restricted cash24
Repurchase of 6% debentures(1,315)
Issuance of 3.75% Debentures605
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 period9571,233
Cash and cash equivalents, end of period$830$1,123
As atNovember 30, 2016August 31, 2016
Cash and cash equivalents$830$1,687
Short-term investments459413
Long-term investments269321
Restricted cash5153
$1,609$2,474

[/table]

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