BBRY

BlackBerry reports $670 million loss as device sales continue to decline in Q1

BlackBerry today reported financial results for the three months ended May 31, 2016, reporting a $670 million US net loss in the first quarter of its 2017 financial year.

The loss amounted to $1.28 per share and included a $501-million writedown of the smartphone company’s assets and $23 million in restructuring charges, among other things.

The company announced that it is now reporting results for three business segments – software and services, service access fees, and mobility solutions. Mobility Solutions includes BlackBerry smartphones and device software licensing.

Q1 Highlights

  • Company begins reporting multiple business segments: Software and Services, Service Access Fees (SAF) and Mobility Solutions. Mobility Solutions includes BlackBerry smartphones and device software licensing
  • Non-GAAP total revenue of $424 million
  • Non-GAAP software and services revenue of $166 million
  • Non-GAAP gross margin of 53%
  • Tenth consecutive quarter of positive adjusted EBITDA
  • Cash and investments balance of $2.5 billion at the end of the first fiscal quarter
  • Unveiled BlackBerry Radar, a new end-to-end asset tracking system based on the company’s IoT platform, for trucking companies and private fleet operators
  • BlackBerry named a “Leader” in the Forrester Wave for enterprise file sync and share for hybrid solutions
  • After the quarter, BlackBerry named a “Leader” in the Gartner Magic Quadrant for Enterprise Mobility Management Suites
  • New Enterprise Partner Program launched globally to stimulate growth and drive profit for partners
  • Pentagon Force Protection Agency chooses AtHoc to protect Department of Defense leadership, staff, and visitors in times of crisis

Non-GAAP revenue for the first quarter of fiscal 2017 was $424 million with GAAP revenue of $400 million. The non-GAAP revenue breakdown for the quarter was approximately 39% for software and services, 25% for service access fees (SAF), and 36% for mobility solutions.

BlackBerry had approximately 3,300 enterprise customer wins in the quarter. Approximately 74% of the first quarter software revenue was recurring.

Non-GAAP operating income was $14 million, and non-GAAP net income was $0.00 per share for the first quarter. GAAP net loss for the quarter was $670 million, or $(1.28) per basic share. Basic GAAP net loss reflects a non-cash, long lived asset impairment charge of $501 million, a $57 million goodwill impairment charge, inventory write-down of $41 million, $28 million in amortization of acquired intangibles, stock compensation expense of $12 million, purchase accounting deferred revenue write-down of $24 million, $23 million in restructuring charges, $7 million related to acquisition costs, and a non-cash credit of $24 million for our convertible debt. The impact of these adjustments on GAAP net income and earnings per share is summarized in a table below.

Total cash, cash equivalents, short-term and long-term investments was $2.5 billion as of May 31, 2016. This reflects a use of free cash of $65 million, which includes negative $61 million of cash flow from operations. Cash flow from operations before working capital adjustments was negatively impacted by the inventory impairment and excluding the charges, would have been positive. Excluding $1.25 billion in the face value of our debt, the net cash balance at the end of the quarter was $1.3 billion. Purchase orders with contract manufacturers totaled approximately $150 million at the end of the first quarter, compared to $162 million at the end of the fourth quarter and down from $238 million in the year ago quarter.

John Chen, Executive Chairman and CEO, BlackBerry said,

“BlackBerry is differentiated by cross-platform market leadership in software, an end-to-end secure mobility platform and a strong financial foundation. Our Q1 results highlight these attributes. Excluding IP licensing, we have more than doubled our software revenue on a year-over-year basis for the second consecutive quarter, driven by our EMM, secure messaging and QNX embedded software businesses. In our Mobility Solutions business, our objective is to achieve operating profitability in the short term,”

“Our current plan calls for continued investments to expand our addressable markets and drive sustainable profitability and revenue growth. For the full fiscal year, we are on track to deliver 30 percent revenue growth in software and services. Based on a more efficient operating model, we expect a non-GAAP EPS loss of around 15 cents, compared to the current consensus of a 33 cent loss. We also expect to generate positive free cash flow for the full year.”

Revenue dropped to $400 million in the three months to May 31, down 39 percent from $658 million a year earlier, while Chen has made some dramatic cuts in BlackBerry’s cost of sales, to $246 million from $348 million a year earlier, but still nowhere near enough to maintain the company’s gross margin, which slipped to 39 percent from 47 percent.

That a slide is already enough to push the company deep into the red, but the company also abandoned or wrote down the value of goodwill and long-term assets to the tune of $561 million in the quarter, leaving it with a net loss of $670 million, against a net profit of $68 million a year earlier. The asset re-evaluation was a regulatory consequence of BlackBerry’s decision to break out revenue by business segment in a new way, Chen said in a conference call to discuss the results.

Service access fees brought in $106 million, while software and services accounted for $142 million.

The company is still integrating its enterprise mobility management tools and sales force with those of Good Technology, which it acquired last year.

The mobility solutions segment, including smartphones and device software licensing, raised $152 million.

While the other two segments were profitable at the operating level, mobility solutions made an operating loss of $21 million. Chen said his goal is for that segment to achieve operating profitability in a couple of quarters.

The company sold roughly 500,000 devices at an average price of $290 (U.S.) each, which is about 100,000 smartphones fewer than the previous quarter and about 200,000 fewer than two quarters earlier. BlackBerry previously said the company needs to sell about three million phones at an average of $300 (U.S.) each to break even.

‘“I really, really believe we can make money out of the handset business. But to make sure we don’t put too much emphasis on the hardware, we started the software business, he said.

Licensing device software brought in the massive sum of $0 in the quarter, but Chen sees it as a potential new revenue stream, and an alternative to licensing the patents underlying BlackBerry software.

It will also provide a way to continue making money from phones should BlackBerry decide to pull out of the hardware business.

Chen has no immediate plans to do that, though.

“Many customers, especially in governments around the world, are still relying on us providing a secure handset for them,”

While flagship phones make headlines, Chen is hoping that mid-range phones will make more money.

“The Priv is a great product but it’s too expensive for enterprise,“

This is why enterprises and the carriers that supply them have been asking for a mid-range phone. That’s why I think we should produce a mid-range product with our level of security.”

“Let’s see if we can make a run of it. If not, we already started the software part of that business and maybe that will make the transition a bit smoother.”

BlackBerry 10.3.3 is currently being certified with certification expected by the end of the month, release through carriers will happen after that.

Chen was asked what the impact would be on software if the hardware business was nuked and replied,

“I would say some but very little.”

Excluding writedowns, restructuring and certain other items, BlackBerry came close to breaking even with an adjusted loss of $1 million (U.S.) , which was better than analyst estimates.

But revenue was below analyst estimates at $400 million (U.S.) under generally accepted accounting principles, or $424 million (U.S.) with certain adjustments.

Overall, the story for BlackBerry is the same as it has been for some time now. BlackBerry is focused on software and has very few answers for its device division.

Outlook

The Company anticipates maintaining a strong cash position and further reallocating additional resources to go-to-market and product development areas as it continues to execute on its strategy of positive adjusted EBITDA for the full 2017 fiscal year.

Q1 Results

(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 May 31, 2016
(in millions)
Software &
Services
Mobility
Solutions
SAFSegment
totals
Corporate
unallocated
SubtotalNon-GAAP
adjustments
Consolidated
U.S. GAAP
Revenue$166$152$106$424$$424$(24)$400
Cost of goods sold321402619819848246
Gross margin1341280226226(72)154
Operating expenses9733213280212597809
Operating income (loss)$37$(21)$78$94$(80)$14$(669)$(655)

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)

Q1 Fiscal 2017 Non-GAAP AdjustmentsFor the Three Months Ended May 31, 2016
(in millions)
Income
statement
location
RevenueGross
margin
(before
taxes)
(1)
Gross
margin
%
(before
taxes)
(1)
Loss
before
income
taxes
Net
Loss
Basic loss
per share
As reported$40015438.5%$(670)$(670)$(1.28)
LLA Impairment Charge (2)Impairment of
long-lived assets
%501501
Goodwill Impairment Charge (3)Impairment of
goodwill
%5757
Inventory write-down(4)Cost of sales4110.3%4141
Debentures fair value adjustment (5)Debentures fair
value adjustment
%(24)(24)
RAP charges (6)Cost of sales71.7%77
RAP charges (6)Research and
development
%22
RAP charges (6)Selling,
marketing
and administration
%1616
CORE program recovery(7)Selling,
marketing
and administration
%(2)(2)
Software deferred revenue acquired(8)Revenue24242.8%2424
Stock compensation expense(9)Research and
development
%44
Stock compensation expense(9)Selling,
marketing
and administration
%88
Acquired intangibles amortization(10)Amortization%2828
Business acquisition and integration costs(11)Selling,
marketing
and administration
%77
Adjusted$42422653.3%$(1)$(1)$0.00

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.

(1)During the first quarter of fiscal 2017, the Company reported GAAP gross margin of $154 million or 38.5% 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 $226 million, or 53.3% of revenue.
(2)During the first quarter of fiscal 2017, the Company recorded long-lived asset impairment charge of $501 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
(3)During the first quarter of fiscal 2017, the Company recorded goodwill impairment charge of $57 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
(4)During the first quarter of fiscal 2017, the Company recorded inventory write-down charges of $41 million, which were included in cost of sales.
(5)During the first quarter of fiscal 2017, the Company recorded the Q1 Fiscal 2017 Debentures Fair Value Adjustment of $24 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
(6)During the first quarter of fiscal 2017, the Company incurred charges related to the RAP of approximately $25 million, of which $7 million were included in cost of sales, $2 million were included in research and development and $16 million were included in selling, marketing and administration expense.
(7)During the first 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.
(8)During the first quarter of fiscal 2017, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $24 million, which were included in revenue.
(9)During the first quarter of fiscal 2017, the Company recorded stock compensation expense of $12 million, of which $4 million were included in research and development, and $8 million were included in selling, marketing and administration expenses.
(10)During the first quarter of fiscal 2017, the Company recorded amortization of intangible assets acquired through business combinations of $28 million, which were included in amortization expense.
(11)During the first quarter of fiscal 2017, the Company recorded business acquisition and integration costs incurred through business combinations of $7 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,
2016
February 29,
2016
November 28,
2015
August 29,
2015
May 30,
2015
North America$19548.8%$21646.5%$27550.2%$17636.0%$28543.3%
Europe, Middle East
and Africa
15538.7%17537.7%19435.4%20241.2%24537.2%
Latin America102.5%183.9%244.4%336.7%426.4%
Asia Pacific4010.0%5511.9%5510.0%7916.1%8613.1%
Total$400100.0%$464100.0%$548100.0%$490100.0%$658100.0%

Conference Call and Webcast

A replay of the conference call will be available at approximately 11 am ET by dialing 1-855-859-2056 or 1-404-537-3406 and entering Conference ID # 15218824 or logging on at ca.blackberry.com/company/investors/events.html.

 

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