BlackBerry Limited — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended May 31, 2022. Unaudited financial statements are prepared under U.S. GAAP; amounts are in U.S. dollars and millions unless otherwise noted. Comparisons are with the three months ended May 31, 2021, or with February 28, 2022 for balance-sheet items.
Business context
BlackBerry provides cybersecurity software and services, IoT software—principally QNX automotive and embedded systems—and licensing services. It reports three segments: Cybersecurity, IoT, and Licensing and Other. Management describes its strategy as expanding cybersecurity and IoT offerings, developing the BlackBerry IVY vehicle-data platform, and pursuing growth in enterprise software and embedded software designs.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $168 | $174 |
| Gross margin | $104; 61.9% | $114; 65.5% |
| Operating loss | $(177) | $(58) |
| Net loss | $(181) | $(62) |
| Basic / diluted loss per share | $(0.31) / $(0.35) | $(0.11) / $(0.11) |
| Net cash used in operating activities | $(42) | $(33) |
| Free cash usage (non-GAAP) | $(43) | $(35) |
The larger GAAP loss chiefly reflects a $165 litigation-settlement charge, partly offset by a $46 non-cash gain from revaluing the convertible debentures. Excluding specified items, including the settlement and debenture fair-value adjustment, BlackBerry reported a non-GAAP net loss of $31, or $0.05 per share, versus a non-GAAP net loss of $27, or $0.05 per share. Non-GAAP measures are not standardized and should be considered alongside GAAP results.
Segment revenue was Cybersecurity $113 (up $6), IoT $51 (up $8), and Licensing and Other $4 (down $20). The Licensing and Other decline was primarily tied to lower intellectual-property licensing revenue amid the pending patent transaction and restrictions on monetization activity. Cybersecurity gross margin was $60 versus $61; IoT gross margin was $43 versus $36; Licensing and Other gross margin was $2 versus $18.
Liquidity, debt, and balance sheet
- Cash, cash equivalents, and investments were $721 at May 31, 2022, down $49 from February 28, 2022; this includes $28 of restricted cash. Cash and cash equivalents alone were $391.
- Working capital was $443, down from $646, as current assets fell $79 and current liabilities rose $124. The liability increase principally reflects the $165 settlement accrual.
- The 1.75% convertible debentures had a fair value of $459 and unpaid principal of $365. The quarter’s $46 earnings gain from fair-value changes was non-cash. Fairfax held $330 principal amount. Full conversion could issue approximately 60.8 million shares.
- Operating cash use was $42. Investing activities provided $53, mainly reflecting net maturities and purchases of short-term investments; financing provided $3. The filing states that management expects available resources, anticipated cash generation, expense-reduction activities, and potential financing arrangements to meet foreseeable funding needs.
Material changes and operating indicators
- Revenue declined $6 year over year, while gross margin fell $10 and gross-margin percentage declined 3.6 percentage points. Lower Licensing and Other revenue and lower BlackBerry Spark revenue weighed on the margin.
- Cybersecurity annual recurring revenue (ARR) was $334, down from $364 a year earlier; its dollar-based net retention rate fell to 88% from 94%. IoT ARR rose to $94 from $86.
- QNX royalty revenue backlog increased to $560 from $490 a year earlier; management cautions that this estimate depends on projected volumes and may not indicate actual future revenue.
- Cybersecurity total contract value billings rose to $89 from $77. Recurring software product revenue was approximately 80% of software and services product revenue, compared with approximately 90%, attributed to product mix.
- One customer represented 15% of quarterly revenue; no customer exceeded 10% of accounts receivable at period end.
Outlook, risks, and unusual items
- Litigation settlement: BlackBerry accrued $165 for a U.S. securities class-action settlement. The agreement was subject to court approval; preliminary approval was granted after quarter-end, with a final approval hearing scheduled for September 29, 2022. Management expected final settlement and payment before the end of fiscal 2023.
- Patent sale: BlackBerry had agreed to sell substantially all non-core patents to Catapult for $600, subject to financing and other closing conditions. Catapult was still seeking financing; BlackBerry was no longer under exclusivity and was exploring alternatives. The patents essential to core operations are excluded. The filing notes potential material implications for the related reporting unit’s goodwill valuation if the sale changes estimated cash flows.
- Business outlook: A proof-of-concept version of BlackBerry IVY was released in February 2022; vehicle installations were expected to begin in the 2024 or 2025 model year. The filing discusses expectations for fiscal 2023 revenue and billings, but does not provide a clear consolidated numerical forecast in the supplied text.
- Operating risks: Management says COVID-19 and the global semiconductor shortage may adversely affect QNX production-based royalties; impacts could be compounded by the Russia-Ukraine war and related sanctions. The duration and full financial effect of these factors remain uncertain.
- Other exposures: The company is subject to ongoing litigation and tax examinations; other material claims with probable and reasonably estimable losses were not accrued. It also discloses foreign-exchange, interest-rate, credit, and customer-concentration risks. Government subsidies recognized as a reduction to operating expenses were $4, compared with $15 a year earlier.
Important facts for investors to verify
- Whether the $165 settlement receives final court approval and when payment is made.
- Whether Catapult secures financing or BlackBerry completes an alternative patent transaction, and the resulting cash and goodwill effects.
- Whether Cybersecurity ARR and retention stabilize, and whether IoT growth and QNX backlog convert into recognized revenue.
- How semiconductor supply constraints, COVID-19 developments, and geopolitical events affect QNX royalties and operating results.
- Liquidity and working-capital trends, including the timing of settlement cash outflow and the status of the $365 principal convertible debentures and potential share dilution.