BLACKBERRY Ltd quarterly report, Q2 FY2023

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BlackBerry Limited — Q2 FY2023 Form 10-Q

Reporting period: Three and six months ended August 31, 2022. All amounts are in U.S. dollars; financial statements are unaudited and prepared under U.S. GAAP.

Business context and performance

BlackBerry reports three segments: Cybersecurity, IoT, and Licensing and Other. It focuses on enterprise security software and services, embedded and automotive software, and intellectual-property licensing.

  • Q2 revenue: $168 million, down 4% from $175 million. Gross margin was $106 million (63.1%), versus $112 million (64.0%).
  • Q2 results: Operating loss was $47 million and net loss was $54 million, or $0.09 basic and $0.10 diluted loss per share. The prior-year quarter’s net loss was $144 million. Adjusted net loss, a non-GAAP measure, was $29 million versus $33 million.
  • First half revenue and results: Revenue was $336 million, down 4% from $349 million; gross margin was $210 million (62.5%) versus $226 million (64.8%). Net loss was $235 million versus $206 million; adjusted net loss was $60 million in both periods.
  • Q2 segments: Cybersecurity revenue was $111 million, down $9 million; IoT was $51 million, up $11 million; Licensing and Other was $6 million, down $9 million. First-half revenue was $224 million, $102 million, and $10 million, respectively.
  • Q2 operating expenses: $153 million versus $253 million, a decrease driven substantially by the prior-year debenture fair-value charge and lower amortization. First-half operating expenses were $434 million versus $425 million, including the $165 million litigation settlement.

Cash flow, debt and liquidity

  • Cash and investments: $699 million at August 31, 2022, versus $770 million at February 28, 2022. This includes $431 million cash and cash equivalents, $212 million short-term investments, $29 million long-term investments, and $27 million restricted cash.
  • Cash flow, first half: Operating activities used $66 million, compared with $18 million used in the prior-year period. Investing activities provided $117 million and financing activities provided $3 million. Cash, cash equivalents and restricted cash increased by $52 million.
  • Working capital: $424 million, down from $646 million at February 28, 2022. Current assets were $940 million and current liabilities $516 million; the current-liability increase chiefly reflected the settlement accrual.
  • Convertible debentures: Reported fair value was $449 million against $365 million principal. They bear 1.75% interest; Fairfax holds $330 million principal. Fair-value changes materially affected reported results but do not change the debentures’ contractual principal or conversion terms.
  • The company said its financial resources, expected operating cash generation and expense reductions, and potential financing arrangements should cover current commitments and foreseeable operating needs. Contractual and other obligations totaled $749 million, including $164 million remaining on the litigation settlement and $374 million of debt interest and principal payments.

Material changes and unusual items

  • The company accrued $165 million for settlement of U.S. securities class actions. It paid $1 million in June and the remaining $164 million on September 6, 2022, after quarter-end; final court approval was scheduled for September 29, 2022.
  • A $10 million Q2 non-cash gain from the debentures’ fair-value change reduced reported expenses; the first-half gain was $56 million. The prior-year Q2 included a $67 million fair-value loss.
  • BlackBerry sold its corporate aircraft, receiving about $17 million and recording a $6 million gain. It also recorded a $4 million non-cash impairment after deciding to exit and seek subleases for certain facilities.
  • Cybersecurity ARR was $321 million, down from $364 million a year earlier; dollar-based net retention was 85%, versus 95%. Cybersecurity TCV billings were $102 million, versus $104 million.
  • The proposed $600 million sale of substantially all non-core patents to Catapult remained uncertain: financing and other closing conditions were outstanding, BlackBerry was no longer under exclusivity, and it was exploring alternatives. The company continued to classify $132 million of related intellectual property as a current asset.

Outlook, commentary and risks

  • Management expected Cybersecurity ARR to return to growth in early FY2024 and continued to expect year-over-year Cybersecurity billings growth in each of Q3 and Q4 FY2023. No specific consolidated revenue or earnings guidance is provided in the supplied filing text.
  • BlackBerry said semiconductor shortages and COVID-19 effects could continue to pressure QNX automotive production-based royalties. It also cited possible effects from the Ukraine invasion and sanctions, inflation and higher interest rates on vehicle demand, cybersecurity spending and sales cycles.
  • Other disclosed exposures include foreign-exchange and investment interest-rate risk, customer concentration (one customer represented 16% of Q2 revenue), and possible collection delays. The company described ongoing patent, securities and employment litigation; apart from the accrued U.S. settlement, it reported no other material claims assessed as both probable and reasonably estimable.
  • Management reported disclosure controls and procedures were effective as of August 31, 2022, and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether Cybersecurity ARR and retention stabilize, and whether the promised Q3 and Q4 year-over-year billings growth occurs.
  • Whether IoT/QNX growth can offset Cybersecurity weakness and the reduced contribution from Licensing and Other.
  • The status, financing and eventual proceeds of the proposed patent transaction, including any implications for recorded intellectual-property assets.
  • Cash generation and liquidity after the settlement payment, including working-capital trends and the company’s ability to fund operations while reporting operating cash outflows.
  • The final approval and any remaining obligations or consequences of the $165 million class-action settlement.
  • Reported GAAP results alongside management’s non-GAAP measures: adjustments include debenture fair-value changes, amortization, stock compensation, impairment and litigation settlement, and may limit comparability with other companies.