BlackBerry Revenue falls as Company Ends Hardware Development

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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.

[table style=”table-hover”]

(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)
Software & ServicesMobility SolutionsSAFSegment totalsCorporate unallocatedSubtotalNon-GAAP adjustments(1)Consolidated U.S. GAAP
Revenue$156$105$91$352$$352$(18)$334
Cost of goods sold317824133133103236
Gross margin1252767219219(121)98
Operating expenses9635113271203250453
Operating income (loss)$29$(8)$66$87$(71)$16$(371)$(355)

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[table style=”table-hover”]

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 AdjustmentsFor the Three Months Ended August 31, 2016
(in millions)
Income statement locationRevenueGross margin(before taxes)(1)Gross margin %(before taxes)(1)Income (loss) before income taxesNet lossBasic earnings (loss) per share
As reported$334$9829.3%$(371)$(372)$(0.71)
Inventory write-down (2)Cost of sales9628.8%9696
Debentures fair value adjustment (3)Debentures fair value adjustment%6262
RAP charges (4)Cost of sales72.1%77
RAP charges (4)Selling, marketing and administration%140140
CORE program recovery (5)Selling, marketing and administration%(2)(2)
Software deferred revenue acquired (6)Revenue18182.0%1818
Stock compensation expense(7)Research and development%44
Stock compensation expense(7)Selling, marketing and administration%1414
Acquired intangibles amortization (8)Amortization%2828
Business acquisition and integration costs (9)Selling, marketing and administration%44
Adjusted$352$21962.2%$$(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.

  1. 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.
  2. During the second quarter of fiscal 2017, the Company recorded inventory write-down charges of $96 million, which were included in cost of sales.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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
[table style=”table-hover”]

BlackBerry Limited
(United States dollars, in millions)
Revenue by Region
For the quarters ended
August 31, 2016May 31, 2016February 29, 2016November 28, 2015August 29, 2015
North America$19056.9%$19548.8%$21646.5%$27550.2%$17636.0%
Europe, Middle East and Africa10029.9%15538.7%17537.7%19435.4%20241.2%
Latin America133.9%102.5%183.9%244.4%336.7%
Asia Pacific319.3%4010.0%5511.9%5510.0%7916.1%
Total$334100.0%$400100.0%$464100.0%$548100.0%$490100.0%

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[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 six months ended
August 31, 2016February 29, 2016August 29, 2015August 31, 2016August 29, 2015
Revenue$334$464$490$734$1,148
Cost of sales236254305482653
Gross margin98210185252495
Gross margin %29.3%45.3%37.8%34.3%43.1%
Operating expenses
Research and development85108122174261
Selling, marketing and administration139179186268359
Amortization44776798132
Impairment of goodwill57
Impairment of long-lived assets501
Abandonment of long-lived assets127536
Write-down of assets held for sale123123
Debentures fair value adjustment62(40)(228)38(385)
4534511521,262373
Operating income (loss)(355)(241)33(1,010)122
Investment loss, net(16)(15)(12)(31)(28)
Income (loss) before income taxes(371)(256)21(1,041)94
Provision for (recovery of) income taxes1(18)(30)1(25)
Net income (loss)$(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)
Basic522,826524,627526,314522,362527,775
Diluted522,826524,627667,321522,362667,459
Total common shares outstanding (000’s)523,488521,172524,211523,488524,211

[/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 atAugust 31, 2016February 29, 2016
Assets
Current
Cash and cash equivalents$1,687$957
Short-term investments4131,420
Accounts receivable, net222338
Other receivables4751
Inventories41143
Income taxes receivable27
Other current assets73102
Assets held for sale129257
2,6393,268
Long-term investments321197
Restricted cash5350
Property, plant and equipment, net121155
Goodwill562618
Intangible assets, net6521,213
Deferred income tax asset33
$4,348$5,534
Liabilities
Current
Accounts payable$228$270
Accrued liabilities274368
Income taxes payable9
Deferred revenue310392
Long-term debt1,329
2,1411,039
Long-term debt1,277
Deferred income tax liability910
2,1502,326
Shareholders’ Equity
Capital stock and additional paid-in capital2,4802,448
Retained earnings (deficit)(274)768
Accumulated other comprehensive loss(8)(8)
2,1983,208
$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, 2016August 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:
Amortization129327
Deferred income taxes32(29)
Stock-based compensation3028
Loss on disposal of property, plant and equipment141
Impairment of goodwill57
Impairment of long-lived assets501
Write-down of assets held for sale123
Other-than-temporary impairment on cost-based investments7
Debentures fair value adjustment38(385)
Other417
Net changes in working capital items:
Accounts receivable, net116175
Other receivables431
Inventories102(20)
Income tax receivable, net(27)153
Other current assets28203
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 investments11266
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 investments1,7461,598
Conversion of cost-based investment to equity securities10
Unrealized loss in equity securities(1)
Effect of foreign exchange on investing activities4
Net cash provided by investing activities84323
Cash flows from financing activities
Issuance of common shares21
Payment of contingent consideration from business acquisitions(15)
Common shares repurchased(47)
Effect of foreign exchange gain on restricted cash(3)
Transfer from restricted cash3
Repurchase of debentures(5)
Net cash used in financing activities(21)(43)
Effect of foreign exchange gain (loss) on cash and cash equivalents1(10)
Net increase in cash and cash equivalents during the period730214
Cash and cash equivalents, beginning of period9571,233
Cash and cash equivalents, end of period$1,687$1,447
As atAugust 31, 2016May 31, 2016
Cash and cash equivalents$1,687$1,225
Short-term investments4131,008
Long-term investments321246
Restricted cash5353
$2,474$2,532

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