Le Lézard
Classified in: Science and technology, Business
Subject: EARNINGS

BlackBerry Reports Record Software and Services Revenue in Fiscal 2018 Second Quarter


WATERLOO, ONTARIO--(Marketwired - Sept. 28, 2017) -

BlackBerry Limited (NASDAQ:BBRY)(TSX:BB), a global software leader in securing, connecting and mobilizing enterprises, today reported financial results for the three months ended August 31, 2017 (all figures in U.S. dollars and U.S. GAAP, except where otherwise indicated).

Q2 Highlights

Q2 Results

Non-GAAP revenue for the second quarter of fiscal 2018 was $249 million with GAAP revenue of $238 million. Approximately 79% of second quarter software and services revenue (excluding IP licensing and professional services) was recurring. BlackBerry had approximately 3,300 enterprise customer orders in the quarter.

Non-GAAP operating income was $29 million, and non-GAAP earnings per share was $0.05. GAAP operating income was $22 million. GAAP net income for the quarter was $19 million, or $0.04 per basic share. Fully diluted GAAP EPS was a loss of ($0.07), which assumes conversion of the convertible debentures based on the "if-converted" method. GAAP net income includes $24 million in amortization of acquired intangibles, $29 million in restructuring charges, a benefit of $70 million of fair value adjustment related to the debentures, and other amounts as summarized in a table below.

Total cash, cash equivalents, short-term and long-term investments were approximately $2.5 billion as of August 31, 2017. This reflects breakeven free cash flow, which includes cash flow from operations of $3 million, net of capital expenditures of $3 million. The Company also used $17 million to repurchase 1.9 million shares of common stock. 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 second quarter, or at the end of the first quarter of fiscal 2018, down from $71 million a year ago.

"I am pleased with our strong execution in Q2. We achieved historical highs in total software and services revenue and gross margin, as well as the highest non-GAAP operating margin in over five years, reflecting our complete transformation to a software company," said John Chen, Executive Chairman and CEO, BlackBerry. "More importantly, we made significant progress on our key growth initiatives. Our enterprise billings grew 19 percent year over year driven by our Unified Endpoint Management platform. We secured important design wins in our automotive business, and we expanded our sales channels for our Radar IOT solution. In our licensing businesses, we have a growing pipeline of opportunities with our BlackBerry Secure software and our IP portfolio."

"Our position as a market leader in security continues to strengthen," continued Chen. "For the second consecutive year, BlackBerry achieved the highest scores in all six use cases in the Gartner Critical Capabilities for High-Security Mobility Management report. We added four new FedRAMP customers and now have over 300,000 licensed users on our FedRAMP authorized cloud service as of the end of Q2, an increase of 162 percent over Q1."

"Based on our progress thus far in FY18, we are on track to achieve software and services revenue growth in the range of 10 percent to 15 percent and profitability for the full year."

Outlook

The Company is providing the following updated outlook for fiscal 2018:

Reconciliation of GAAP revenue, gross margin, gross margin percentage, income before income taxes, net income and basic earnings per share to Non-GAAP revenue, gross margin, gross margin percentage, income before income taxes, net income and basic earnings per share:

(United States dollars, in millions except per share data)

Q2 Fiscal 2018 Non-GAAP Adjustments   For the Three Months Ended August 31, 2017
(in millions, except for per share amounts)
    Income statement location   Revenue   Gross margin (before taxes)   Gross margin % (before taxes)     Income (loss) before income taxes     Net income (loss)     Basic earnings (loss) per share
As reported       $ 238   $ 175   73.5 %   $ 23     $ 19     $ 0.04
Debentures fair value adjustment (2)   Debentures fair value adjustment     -     -   - %     (70 )     (70 )      
LLA impairment charge (3)   Impairment of long-lived assets     -     -   - %     11       11        
Patent abandonment (4)   Loss on sale, disposal and abandonment of long-lived assets     -     -   - %     2       2        
RAP charges (5)   Cost of sales     -     3   1.3 %     3       3        
RAP charges (5)   Research and development     -     -   - %     1       1        
RAP charges (5)   Selling, marketing and administration     -     -   - %     12       12        
Software deferred revenue acquired (6)   Revenue     11     11   1.1 %     11       11        
Stock compensation expense (7)   Cost of sales     -     1   0.4 %     1       1        
Stock compensation expense (7)   Research and development     -     -   - %     3       3        
Stock compensation expense (7)   Selling, marketing and administration     -     -   - %     8       8        
Acquired intangibles amortization (8)   Amortization     -     -   - %     24       24        
Business acquisition and integration costs (9)   Selling, marketing and administration     -     -   - %     1       1        
Adjusted       $ 249   $ 190   76.3 %   $ 30     $ 26     $ 0.05

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 second quarter of fiscal 2018, the Company reported GAAP gross margin of $175 million or 73.5% 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 $190 million, or 76.3% of revenue.
(2)   During the second quarter of fiscal 2018, the Company recorded the Q2 Fiscal 2018 Debentures Fair Value Adjustment of $(70) million. This adjustment was presented on a separate line in the Consolidated Statements of Operations.
(3)   During the second quarter of fiscal 2018, the Company recorded a long-lived asset ("LLA") impairment charge of $11 million, which was presented on a separate line in the Consolidated Statements of Operations.
(4)   During the second quarter of fiscal 2018, the Company incurred charges related to selective patent abandonments of $2 million, which was included in loss on sale, disposal and abandonment of long-lived assets.
(5)   During the second quarter of fiscal 2018, the Company incurred charges related to the RAP of approximately $16 million, of which $3 million was included in cost of sales, $1 million was included in research and development expense and $12 million was included in selling, marketing and administration expense.
(6)   During the second quarter of fiscal 2018, the Company recorded software deferred revenue acquired but not recognized due to business combination accounting rules of $11 million, which was included in enterprise software and services revenue.
(7)   During the second quarter of fiscal 2018, the Company recorded stock compensation expense of $12 million, of which $1 million was included in cost of sales, $3 million was included in research and development, and $8 million was included in selling, marketing and administration expenses.
(8)   During the second quarter of fiscal 2018, the Company recorded amortization of intangible assets acquired through business combinations of $24 million, which was included in amortization expense.
(9)   During the second quarter of fiscal 2018, the Company recorded business acquisition and integration costs incurred through business combinations of $1 million, which was 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  
    August 31, 2017     May 31, 2017     February 28, 2017     November 30, 2016     August 31, 2016  
North America   $ 133   55.9 %   $ 127   54.0 %   $ 166   58.0 %   $ 167   57.8 %   $ 170   50.9 %
Europe, Middle East and Africa     76   31.9 %     70   29.8 %     83   29.0 %     87   30.1 %     111   33.2 %
Latin America     4   1.7 %     4   1.7 %     5   1.8 %     7   2.4 %     13   3.9 %
Asia Pacific     25   10.5 %     34   14.5 %     32   11.2 %     28   9.7 %     40   12.0 %
Total   $ 238   100.0 %   $ 235   100.0 %   $ 286   100.0 %   $ 289   100.0 %   $ 334   100.0 %

Supplementary Revenue by Product and Service Type Breakdown

BlackBerry Limited
(United States dollars, in millions)
Revenue by Product and Service Type

    US GAAP   Adjustments   Non-GAAP
    Three months ended   Three months ended   Three months ended
    August 31, 2017   August 31, 2016   August 31, 2017   August 31, 2016   August 31, 2017   August 31, 2016
Enterprise software and services   $ 91   $ 84   $ 11   $ 18   $ 102   $ 102
BlackBerry Technology Solutions     38     38     -     -     38     38
Licensing, IP and other     56     16     -     -     56     16
Handheld devices     16     105     -     -     16     105
SAF     37     91     -     -     37     91
Total   $ 238   $ 334   $ 11   $ 18   $ 249   $ 352

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 at http://ca.blackberry.com/company/investors/events.html. 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 #73039525 or by clicking the link above.

About BlackBerry

BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise. Based in Waterloo, Ontario, the Company was founded in 1984 and operates in North America, Europe, Asia, Middle East, Latin America and Africa. The Company trades under the ticker symbols "BB" on the Toronto Stock Exchange and "BBRY" on the NASDAQ. For more information, visit www.BlackBerry.com.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

This news release contains forward-looking statements within the meaning of certain securities laws, including under the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including statements regarding: BlackBerry's plans, strategies and objectives, including BlackBerry's expectations regarding anticipated demand for, and the timing of, product and service offerings, including the BlackBerry Secure platform for the Enterprise of Things and BlackBerry Radar; BlackBerry's expectations with respect to the strength of its financial resources; BlackBerry's expectations regarding the generation of software and services revenue growth; and BlackBerry's expectations regarding its non-GAAP earnings per share and free cash flow.

The words "expect", "anticipate", "estimate", "may", "will", "should", "could", "intend", "believe", "target", "plan" and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are based on estimates and assumptions made by BlackBerry in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that BlackBerry believes are appropriate in the circumstances. Many factors could cause BlackBerry's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including the following risks: BlackBerry's ability to enhance, develop, introduce or monetize products and services for the enterprise market in a timely manner with competitive pricing, features and performance; BlackBerry's ability to maintain or expand its customer base for its software and services offerings to grow revenue, achieve sustained profitability or offset the decline in BlackBerry's service access fees; the intense competition faced by BlackBerry; risks related to BlackBerry's ability to attract new personnel, retain existing key personnel and manage its staffing effectively; BlackBerry's dependence on its relationships with resellers and distributors; the occurrence or perception of a breach of BlackBerry's security measures, or an inappropriate disclosure of confidential or personal information; the risk that sales to large enterprise customers and to customers in highly regulated industries and governmental entities can be highly competitive and require compliance with stringent regulation; risks related to BlackBerry's products and services being dependent upon the interoperability with rapidly changing systems provided by third parties; BlackBerry's ability to successfully generate revenue and profitability through the licensing of security software and services or the BlackBerry brand to device manufacturers; the risk that network disruptions or other business interruptions could have a material adverse effect on BlackBerry's business and harm its reputation; risks related to acquisitions, divestitures, investments and other business initiatives; the risk of litigation against the Company resulting in adverse outcomes; the risk that failure to protect BlackBerry's intellectual property could harm its ability to compete effectively and BlackBerry may not earn the revenues it expects from intellectual property rights; BlackBerry's reliance on third parties to manufacture and repair its hardware products; BlackBerry's ability to obtain rights to use software or components supplied by third parties; the substantial asset risk faced by BlackBerry, including the potential for additional charges related to its long-lived assets and goodwill; the risk that BlackBerry's ability to maintain or increase its liquidity;
risks related to BlackBerry's indebtedness; the risk that BlackBerry could be found to have infringed on the intellectual property rights of others; risks related to government regulations applicable to BlackBerry's products and services, including products containing encryption capabilities; risks related to the use and management of user data and personal information; risks related to foreign operations, including fluctuations in foreign currencies; risks associated with any errors in BlackBerry's products and services; the risk of a negative impact on BlackBerry's business as a result of actions of activist shareholders; risks related to fostering an ecosystem of third-party application developers; risks related to the failure of BlackBerry's suppliers, subcontractors, third-party distributors and representatives to use acceptable ethical business practices or comply with applicable laws; risks related to health and safety and hazardous materials usage regulations, and product certification risks; costs and other burdens associated with regulations regarding conflict minerals; risks related to BlackBerry possibly losing its foreign private issuer status under U.S. federal securities laws; the potential impact of copyright levies in numerous countries; risks related to tax provision changes, the adoption of new tax legislation, or exposure to additional tax liabilities; risks related to the fluctuation of BlackBerry's quarterly revenue and operating results; the volatility of the market price of BlackBerry's common shares; risks related to adverse economic and geopolitical conditions; market and credit risk associated with BlackBerry's cash, cash equivalents and short-term or long-term investments; the risk that future issuances of common shares by BlackBerry will be dilutive to existing shareholders; and the potential consequences for BlackBerry's shareholders in the United States if BlackBerry is or was a passive foreign investment company. These risk factors and others relating to BlackBerry are discussed in greater detail in BlackBerry's Annual Information Form, which is included in its Annual Report on Form 40-F and the "Cautionary Note Regarding Forward-Looking Statements" section of BlackBerry's MD&A (copies of which filings may be obtained at www.sedar.com or www.sec.gov). All of these factors should be considered carefully, and readers should not place undue reliance on BlackBerry's forward-looking statements. BlackBerry has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

BlackBerry®, BBMtm, QNX®, Good® and related trademarks, names and logos are the property of BlackBerry Limited and are registered and/or used in the United States and countries around the world. All other trademarks are the property of their respective owners.

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  
    August 31, 2017     May 31, 2017     August 31, 2016  
Revenue   $ 238     $ 235     $ 334  
Cost of sales     63       85       236  
Gross margin     175       150       98  
  Gross margin %     73.5 %     63.8 %     29.3 %
Operating expenses                        
  Research and development     60       61       85  
  Selling, marketing and administration     110       109       138  
  Amortization     39       40       44  
  Impairment of long-lived assets     11       -       -  
  Loss on sale, disposal and abandonment of long-lived assets     3       1       124  
  Debentures fair value adjustment     (70 )     218       62  
  Qualcomm arbitration award     -       (815 )     -  
      153       (386 )     453  
Operating income (loss)     22       536       (355 )
  Investment income (loss), net     1       136       (16 )
Income (loss) before income taxes     23       672       (371 )
Provision for income taxes     4       1       1  
Net income (loss)   $ 19     $ 671     $ (372 )
Earnings (loss) per share                        
  Basic   $ 0.04     $ 1.26     $ (0.71 )
  Diluted   $ (0.07 )   $ 1.23     $ (0.71 )
                         
Weighted-average number of common shares outstanding (000's)                        
  Basic     531,381       531,096       522,826  
  Diluted     606,645       544,077       522,826  
Total common shares outstanding (000's)     530,411       531,476       523,488  

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, 2017     February 28, 2017  
Assets            
Current            
  Cash and cash equivalents   $ 586     $ 734  
  Short-term investments     1,766       644  
  Accounts receivable, net     155       200  
  Other receivables     38       27  
  Inventories     8       26  
  Income taxes receivable     27       31  
  Other current assets     44       55  
      2,624       1,717  
Long-term receivables     37       7  
Long-term investments     129       269  
Restricted cash and cash equivalents     53       51  
Property, plant and equipment, net     71       91  
Goodwill     567       559  
Intangible assets, net     531       602  
    $ 4,012     $ 3,296  
Liabilities                
Current                
  Accounts payable   $ 85     $ 128  
  Accrued liabilities     206       258  
  Income taxes payable     18       14  
  Deferred revenue     197       239  
      506       639  
Long-term debt     739       591  
Deferred income tax liability     8       9  
      1,253       1,239  
Shareholders' equity                
Capital stock and additional paid-in capital     2,530       2,512  
Retained earnings (deficit)     238       (438 )
Accumulated other comprehensive loss     (9 )     (17 )
      2,759       2,057  
    $ 4,012     $ 3,296  

BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions except per share data) (unaudited)

Consolidated Statements of Cash Flows

    For the six months ended  
    August 31, 2017     August 31, 2016  
Cash flows from operating activities            
Net income (loss)   $ 690     $ (1,042 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
  Amortization     96       129  
  Deferred income taxes     (2 )     32  
  Stock-based compensation     24       30  
  Impairment of goodwill     -       57  
  Impairment of long-lived assets     11       501  
  Loss on sale, disposal and abandonment of long-lived assets     4       127  
  Other-than-temporary impairment on cost-based investments     -       7  
  Debentures fair value adjustment     148       38  
  Long-term receivables     (30 )     -  
  Other     (3 )     1  
Net changes in working capital items:                
  Accounts receivable, net     45       116  
  Other receivables     (11 )     4  
  Inventories     18       102  
  Income taxes receivable     (2 )     (27 )
  Other current assets     13       28  
  Accounts payable     (43 )     (42 )
  Income taxes payable     4       (9 )
  Accrued liabilities     (53 )     (63 )
  Deferred revenue     (42 )     (82 )
Net cash provided by (used in) operating activities     867       (93 )
Cash flows from investing activities                
Acquisition of long-term investments     (25 )     (328 )
Proceeds on sale or maturity of long-term investments     1       112  
Acquisition of property, plant and equipment     (6 )     (7 )
Proceeds on sale of property, plant and equipment     3       -  
Acquisition of intangible assets     (14 )     (19 )
Business acquisitions, net of cash acquired     -       (5 )
Acquisition of short-term investments     (1,693 )     (665 )
Proceeds on sale or maturity of short-term investments     732       1,745  
Conversion of cost-based investment to equity securities     -       10  
Net cash provided by (used in) investing activities     (1,002 )     843  
Cash flows from financing activities                
Issuance of common shares     3       2  
Payment of contingent consideration from business acquisitions     -       (15 )
Common shares repurchased     (17 )     -  
Effect of foreign exchange loss on restricted cash and cash equivalents     -       (3 )
Transfer to restricted cash and cash equivalents     (2 )     -  
Repurchase of 6% Debentures     -       (5 )
Net cash used in financing activities     (16 )     (21 )
Effect of foreign exchange gain on cash and cash equivalents     3       1  
Net increase (decrease) in cash and cash equivalents during the period     (148 )     730  
Cash and cash equivalents, beginning of period     734       957  
Cash and cash equivalents, end of period   $ 586     $ 1,687  
                 
As at     August 31, 2017       February 28, 2017  
Cash and cash equivalents   $ 586     $ 734  
Short-term investments     1,766       644  
Long-term investments     129       269  
Restricted cash     53       51  
    $ 2,534     $ 1,698  

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