BlackBerry Limited — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended August 31, 2020. Unaudited U.S. GAAP financial statements; amounts are U.S. dollars unless stated otherwise. BlackBerry reports as one operating segment, focused on enterprise security software, IoT solutions and licensing.
Financial results and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $259m | $244m | $465m | $491m |
| Gross margin | $199m; 76.8% | $176m; 72.1% | $342m; 73.5% | $353m; 71.9% |
| Operating expenses | $221m | $219m | $1,009m | $432m |
| Operating loss | $22m | $43m | $667m | $79m |
| Net loss | $23m; $0.04/share | $44m; $0.08 basic/share | $659m; $1.18/share | $79m; $0.14 basic/share |
Q2 adjusted revenue was $266m and adjusted net income was $62m ($0.11/share), compared with $261m and $1m (nil/share), respectively, a year earlier. For the six-month period, adjusted revenue was $480m versus $528m, and adjusted net income was $74m versus $6m. These are company-defined non-GAAP measures and exclude specified items.
Six-month operating cash flow was reported as $0, compared with cash used of $47m in the prior-year period. Q2 operating cash flow was $31m; after $2m of capital expenditures, Q2 free cash flow was $29m. Six-month investing cash flow was positive $454m, mainly reflecting net investment maturities and sales.
At August 31, cash and cash equivalents were $837m, short-term investments $58m, long-term investments $33m and restricted cash $49m. The company’s reported cash, cash equivalents and investments total was $977m. Working capital was $163m, up from $75m at February 29, 2020. Current liabilities included $610m of debentures; total liabilities were $1,257m. The filing reports no clear standalone net-debt figure.
Material changes versus comparable periods
- Q2 revenue rose $15m year over year, but six-month revenue fell $26m. Q2 Licensing and Other revenue increased to $108m from $76m, while Software and Services declined to $151m from $168m.
- Q2 gross margin percentage improved to 76.8% from 72.1%, reflecting mix and stronger Licensing and Other margins.
- The six-month GAAP loss includes a $594m non-cash goodwill impairment in the BlackBerry Spark reporting unit, following a first-quarter impairment test amid COVID-19 uncertainty and a decline in the company’s share price relative to carrying value. Goodwill fell to $848m from $1,437m.
- Q2 also included a $21m non-cash impairment charge for leased facilities and associated property and equipment. Six-month operating expenses additionally reflect $19m of debenture fair-value charges, versus $51m of fair-value income in the prior-year period.
- The company recorded $27m of Canadian wage subsidies in the first six months, including $18m in Q2, as reductions to operating expenses. Adjusted operating expenses for the six months declined to $294m from $387m.
Outlook, management commentary and risks
- Management expects slight U.S. GAAP and adjusted revenue growth in Software and Services, excluding BTS, in the second half of FY2021. It expects sequential BTS revenue growth in Q3 and Q4, with a return to an approximately $50m quarterly revenue run rate in early FY2022.
- Management expects FY2021 Licensing revenue to be modestly above $250m. It also said total adjusted revenue increased sequentially in Q2, with faster sequential growth in Licensing and Other than in Software and Services.
- COVID-19 disrupted customer access and sales cycles, reduced demand and prolonged sales cycles; QNX automotive royalties were affected by automotive market weakness. Management observed a partial recovery in automotive production in Q2 but warned of a potentially material adverse effect on FY2021 results. It did not expect a material adverse effect on liquidity.
- Customer concentration is notable: Teletry represented about 40% of Q2 revenue and 34% of six-month revenue; management expected this share to be significantly lower in Q3 and Q4. Two customers each represented more than 10% of receivables at quarter-end. Days sales outstanding rose to 80 from 70 at fiscal year-end, and overdue balances increased amid COVID-19.
- On September 1, 2020, after quarter-end, BlackBerry redeemed its 3.75% convertible debentures for approximately $615m and issued $365m of new 1.75% convertible debentures due November 2023. Fairfax subscribed for $330m of the new issue. The new debentures are convertible at $6 per share, subject to a 19.99% ownership limit. This refinancing is a subsequent event, not reflected in quarter-end debt balances.
- Other exposures include patent and other litigation, uncertain potential losses for claims not reasonably estimable, $49m of collateralized letters of credit, foreign-exchange and interest-rate risk, and potential repayment of some government innovation-fund support if conditions are not met. No material probable and estimable litigation loss was accrued.
Investor facts to verify
- Confirm the post-quarter refinancing’s cash and debt effects, including the $615m redemption and $365m issuance; the filing estimates cash, cash equivalents and investments would have been $727m at August 31 had the transactions occurred that day.
- Assess whether Q2’s improvement in adjusted profitability and margins is sustainable, given that Software and Services revenue remained weaker and adjusted measures exclude significant items.
- Track Teletry’s contribution to revenue and collections, receivables aging and the $14m credit-loss allowance.
- Review the assumptions and sensitivity underlying the $594m Spark goodwill impairment and the $21m facilities impairment.
- Monitor COVID-19 effects on QNX, the company’s revenue outlook, and the timing of the expected BTS recovery and licensing revenue.