BlackBerry Reports Profitability in Fiscal 2018 First Quarter as Revenues decline

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BlackBerry reported an unexpected profit for its fiscal first quarter on Friday, but it wasn’t enough to rally Wall Street behind the software and services company.

Shares of BlackBerry’s fell 6 percent in premarket trading following its earnings report, which revealed sales that came in below analysts’ expectations.

BlackBerry reported revenue of $244 million for the period. Analysts had estimated $264.4 million, according to Thomson Reuters. Enterprise software and services revenue — something analysts who follow the company have been monitoring more closely — declined to $101 million, from $106 million one year ago.

Further, BlackBerry said it received 3,000 orders from enterprise customers in the first quarter, below the 3,500 orders in the fourth quarter.

Profit came in slightly above expectations, however. The company posted first-quarter earnings per share of 2 cents, adjusted, topping a Thomson Reuters consensus forecast of 0 cents.

A surprise for many, the company managed to swing to a net profit of $671 million, or $1.23 per share, in the first quarter, from a loss of $670 million, or $1.28 a share, in the year-earlier period.

“In Q1, we made great progress strengthening our strategic position in emerging growth markets, most notably in cybersecurity and the Enterprise of Things,” CEO John Chen.

“We secured key design wins in high growth segments of automotive technology, including advanced driver assist, digital instrument cluster and our hypervisor solution. Our ecosystem is growing with Qualcomm and NVIDIA adopting BlackBerry technology for their automotive platforms. … Our financial foundation is solid.”

The company has maintained its outlook for fiscal 2018, a period in which BlackBerry expects to be profitable on an adjusted basis and generate positive free cash flow.

“Our financial foundation is solid,” continued Chen. “We reported non-GAAP profitability for the third consecutive quarter, and our balance sheet continues to strengthen. More importantly, we are better positioned to invest in our strategic areas of focus to drive long-term sustainable growth, while returning capital through share repurchases to further enhance shareholder value.”

“Our outlook for fiscal 2018 is unchanged. We expect growth at or above the overall market in software and services. We also expect to be profitable on a non-GAAP basis and to generate positive free cash flow for the full year, excluding the benefit of the Qualcomm arbitration award.”

Non-GAAP revenue for the first quarter of fiscal 2018 was $244 million with GAAP revenue of $235 million. Approximately 79% of first quarter software and services 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 $14 million, and non-GAAP earnings per share was $0.02. GAAP operating income was $536 million. GAAP net income for the quarter was $671 million, or $1.23 per fully diluted share. GAAP net income includes $25 million in amortization of acquired intangibles, $17 million in restructuring charges, $218 million of fair value adjustment related to the debentures, $815 million in expense recovery and $139 million in investment income related to the positive outcome of the Qualcomm arbitration, and other amounts as summarized in a table below.

Total cash, cash equivalents, short-term and long-term investments increased by $855 million to approximately $2.6 billion as of May 31, 2017. This reflects free cash flow of $860 million, which includes cash flow from operations of $863 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 $1.9 billion. There were no purchase orders with contract manufacturers at the end of the first quarter, or at the end of the fourth quarter of fiscal 2017, down from $150 million a year ago.

Q1 Fiscal 2018 Non-GAAP AdjustmentsFor the Three Months Ended May 31, 2017
(in millions)
Income statement locationRevenueGross margin (before taxes)Gross margin % (before taxes)Income before income taxesNet incomeBasic earnings per share
As reported$235$15063.8%$672$671$1.26
Debentures fair value adjustment (2)Debentures fair value adjustment%218218
RAP charges (3)Cost of sales31.3%33
RAP charges (3)Research and development%33
RAP charges (3)Selling, marketing and administration%1111
Software deferred revenue acquired (4)Revenue991.3%99
Stock compensation expense (5)Cost of sales10.3%11
Stock compensation expense (5)Research and development%44
Stock compensation expense (5)Selling, marketing and administration%88
Acquired intangibles amortization (6)Amortization%2525
Business acquisition and integration costs (7)Selling, marketing and administration%1111
Qualcomm arbitration award (8)Qualcomm arbitration award%(815)(815)
Qualcomm arbitration award (8)Investment income%(139)(139)
$244$16366.8%$11$10$0.02

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 first quarter of fiscal 2018, the Company reported GAAP gross margin of $150 million or 63.8% 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 $163 million, or 66.8% of revenue.
(2)During the first quarter of fiscal 2018, the Company recorded the Q1 Fiscal 2018 Debentures Fair Value Adjustment of $218 million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
(3)During the first quarter of fiscal 2018, the Company incurred charges related to the RAP of approximately $17 million, of which $3 million was included in cost of sales, $3 million was included in research and development expense and $11 million was included in selling, marketing and administration expense.
(4)During the first quarter of fiscal 2018, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $9 million, which was included in enterprise software and services revenue.
(5)During the first quarter of fiscal 2018, the Company recorded stock compensation expense of $13 million, of which $1 million was included in cost of sales, $4 million was included in research and development, and $8 million was included in selling, marketing and administration expenses.
(6)During the first quarter of fiscal 2018, the Company recorded amortization of intangible assets acquired through business combinations of $25 million, which was included in amortization expense.
(7)During the first quarter of fiscal 2018, the Company recorded business acquisition and integration costs incurred through business combinations of $11 million, which was included in selling, marketing and administration expenses.
(8)During the first quarter of fiscal 2018, the Company recorded the Qualcomm arbitration award of $954 million, of which $815 million was presented on a separate line in the Consolidated Statements of Operations, and $139 million was included in investment income.

Supplementary Geographic Revenue Breakdown

For the quarters ended
May 31, 2017February 28, 2017November 30, 2016August 31, 2016May 31, 2016
North America$12754.0%$16658.0%$16757.8%$19056.9%$17744.3%
Europe, Middle East and Africa7029.8%8329.0%8730.1%10029.9%16641.5%
Latin America41.7%51.8%72.4%133.9%102.5%
Asia Pacific3414.5%3211.2%289.7%319.3%4711.8%
Total$235100.0%$286100.0%$289100.0%$334100.0%$400100.0%

Supplementary Revenue by Product and Service Type Breakdown

US GAAPAdjustmentsNon-GAAP
Three months endedThree months endedThree months ended
May 31, 2017May 31, 2016May 31, 2017May 31, 2016May 31, 2017May 31, 2016
Enterprise software and services$92$82$9$24$101$106
BlackBerry Technology Solutions36353635
Licensing, IP and other32253225
Handheld devices3715237152
SAF3810638106
Total$235$400$9$24$244$424

Conference Call and Webcast

A conference call and live webcast will be held beginning at 8 a.m. 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 a.m. ET by dialing 1-855-859-2056 or 1-404-537-3406 and entering Conference ID #23915085 or by clicking the link above.

Consolidated Statements of Operations

For the three months ended
May 31, 2017February 28, 2017May 31, 2016
Revenue$235$286$400
Cost of sales85114246
Gross margin150172154
Gross margin %63.8%60.1%38.5%
Operating expenses
Research and development615789
Selling, marketing and administration110143132
Amortization404554
Impairment of goodwill57
Impairment of long-lived assets501
Debentures fair value adjustment218(16)(24)
Qualcomm arbitration award(815)
(386)229809
Operating income (loss)536(57)(655)
Investment income (loss), net1368(15)
Income (loss) before income taxes672(49)(670)
Provision for (recovery of) income taxes1(2)
Net income (loss)$671$(47)$(670)
Loss per share
Basic$1.26$(0.09)$(1.28)
Diluted$1.23$(0.10)$(1.28)
Weighted-average number of common shares outstanding (000’s)
Basic531,096530,352521,905
Diluted544,077590,852521,905
Total common shares outstanding (000’s)531,476530,497522,517

Consolidated Balance Sheets

As atMay 31, 2017February 28, 2017
Assets
Current
Cash and cash equivalents$933$734
Short-term investments1,278644
Accounts receivable, net152181
Other receivables3034
Inventories1126
Income taxes receivable1217
Other current assets4855
2,4641,691
Long-term investments294269
Restricted cash and cash equivalents4851
Property, plant and equipment, net8191
Goodwill563559
Intangible assets, net569602
Deferred income tax asset
$4,019$3,263
Liabilities
Current
Accounts payable$48$103
Accrued liabilities204258
Deferred revenue211245
463606
Long-term debt809591
Deferred income tax liability99
1,2811,206
Shareholders’ equity
Capital stock and additional paid-in capital2,5282,512
Retained earnings (deficit)227(438)
Accumulated other comprehensive loss(17)(17)
2,7382,057
$4,019$3,263

Consolidated Statements of Cash Flows

For the three months ended
May 31, 2017May 31, 2016
Cash flows from operating activities
Net income (loss)$671$(670)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization5172
Deferred income taxes32
Stock-based compensation1312
Loss on disposal of property, plant and equipment1
Impairment of goodwill57
Impairment of long-lived assets501
Other-than-temporary impairment on cost-based investments7
Debentures fair value adjustment218(24)
Other13
Net changes in working capital items:
Accounts receivable, net2973
Other receivables4(4)
Inventories1516
Income taxes receivable(1)(25)
Other current assets68
Accounts payable(55)8
Income taxes payable(9)
Accrued liabilities(55)(53)
Deferred revenue(34)(66)
Net cash provided by (used in) operating activities863(61)
Cash flows from investing activities
Acquisition of long-term investments(25)(163)
Proceeds on sale or maturity of long-term investments32
Acquisition of property, plant and equipment(3)(4)
Proceeds on sale of property, plant and equipment1
Acquisition of intangible assets(7)(9)
Acquisition of short-term investments(1,015)(389)
Proceeds on sale or maturity of short-term investments378875
Net cash provided by (used in) investing activities(671)342
Cash flows from financing activities
Issuance of common shares33
Payment of contingent consideration from business acquisitions(15)
Effect of foreign exchange loss on restricted cash and cash equivalents(3)
Transfer from restricted cash3
Net cash used in financing activities6(15)
Effect of foreign exchange gain on cash and cash equivalents12
Net decrease in cash and cash equivalents during the period199268
Cash and cash equivalents, beginning of period734957
Cash and cash equivalents, end of period$933$1,225
As atMay 31, 2017February 28, 2017
Cash and cash equivalents$933$734
Short-term investments1,278644
Long-term investments294269
Restricted cash4851
$2,553$1,698

BlackBerry also announced Friday it would buy back up to 31 million shares, or 6.4 percent of its outstanding public float. The buyback is designed to offset some of the expected dilution from BlackBerry’s equity incentive plan, the company said.

BlackBerry’s total cash balance has now increased to $2.6 billion as of the end of its fiscal first quarter.

 

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