BlackBerry Limited — Q1 FY2024 Form 10-Q
Reporting period: Three months ended May 31, 2023. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
BlackBerry reports Cybersecurity, IoT and Licensing and Other segments. Revenue rose to $373 million from $168 million, principally because of a one-time patent transaction with Malikie; Cybersecurity and IoT revenue both declined year over year.
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $373 million | $168 million |
| Gross margin | $179 million; 48.0% | $104 million; 61.9% |
| Operating expenses | $190 million | $281 million |
| Operating loss | $11 million | $177 million |
| Net loss / diluted loss per share | $11 million / $0.02 | $181 million / $0.35 |
| Operating cash flow | $99 million | $(42) million |
| Free cash flow (company-defined) | $97 million | $(43) million |
Non-GAAP results were adjusted net income of $35 million, or $0.06 per share, versus adjusted net loss of $31 million, or $0.05 per share, a non-GAAP measure that should be considered alongside U.S. GAAP results.
Segments and material changes
- Cybersecurity: Revenue was $93 million, down $20 million; segment gross margin was $56 million. Management attributed weaker-than-expected sales partly to longer sales cycles and additional customer approval requirements.
- IoT: Revenue was $45 million, down $6 million; segment gross margin was $36 million. Customer delays in development-seat deployments and automotive production conditions weighed on results.
- Licensing and Other: Revenue was $235 million, including $218 million recognized from the Malikie patent sale, versus $4 million a year earlier.
- Consolidated gross margin percentage fell to 48.0% from 61.9%, largely due to revenue mix and the patent sale’s asset cost. Operating expenses were lower year over year, partly because the prior-year period included a $165 million litigation settlement; the current quarter also included a $22 million non-cash debenture fair-value charge.
Cash, debt and liquidity
Cash, cash equivalents and investments totaled $578 million at May 31, 2023, up from $487 million at February 28, 2023. Cash, cash equivalents and restricted cash were $385 million. Current assets of $696 million were below current liabilities of $736 million, resulting in negative working capital of $40 million.
The convertible debentures had a $389 million fair value and $365 million unpaid principal balance; they mature November 13, 2023. Contractual debt interest and principal payments were listed at $369 million due within 12 months. Management said it intended to pursue other financing on commercially reasonable terms and believed available resources, expected cash generation, expense reductions and potential financing would support foreseeable needs. That assessment depends on estimates and assumptions.
Operating cash flow improved to $99 million, but included a $147 million non-cash adjustment for intellectual property disposed of by sale and changes in working capital. Investing activities used $38 million; financing activities provided $2 million.
Outlook, unusual items and risks
- The Malikie transaction provided $170 million cash at closing, with another $30 million due by the third anniversary and potential royalties of up to $700 million. BlackBerry recognized $218 million revenue and $147 million cost of sales in the quarter. Of the potential future royalties, $23 million present value was recognized and $210 million was constrained; recognition may change as evidence develops. The transaction includes a license back and does not affect customers’ rights to use BlackBerry products.
- FY2024 outlook: Cybersecurity revenue of $425–$450 million; IoT revenue expected at the lower end of $240–$250 million; and Software & Services revenue, excluding potential IVY revenue, of $665–$700 million. Management expects Cybersecurity ARR to return to sequential growth in the second half of FY2024, non-GAAP profitability in Q4 FY2024, and targets positive full-year non-GAAP EPS and cash flow beginning in FY2025.
- FY2026 targets include Cybersecurity revenue of $540–$590 million and IoT revenue, excluding potential IVY revenue, of $340–$370 million. IVY installations are expected to begin with the 2025 model year.
- Cybersecurity ARR declined to $289 million from $334 million a year earlier; dollar-based net retention was 81% versus 88%. Cybersecurity contract-value billings increased to $122 million from $89 million.
- On May 1, 2023, the Board initiated a strategic review of the business portfolio, including possible separation of one or more businesses. There is no set timetable and no assurance a transaction will result.
- Management cited semiconductor shortages, automotive supply-chain disruption, macroeconomic weakness, inflation and higher interest rates, which may affect automotive demand and cybersecurity spending. One customer accounted for 58% of quarterly revenue, primarily because of the Malikie transaction.
- The debentures’ fair value is remeasured each period, creating potentially volatile non-cash earnings effects. The company also reported ongoing litigation; it had no material claims assessed as both probable and reasonably estimable, while some reasonably possible claims could not be quantified.
Investor verification priorities
- Track Cybersecurity and IoT growth, ARR, retention, billings and progress against FY2024 guidance, separating recurring operations from patent-sale revenue.
- Verify collection of the Malikie deferred consideration and the timing and amount of any future royalty revenue, including the variable-consideration constraint.
- Monitor refinancing or repayment plans for the November 2023 debenture maturity and the resulting effect on liquidity and share dilution.
- Assess the sustainability and composition of operating cash flow, given working-capital movements and the patent transaction.
- Follow the strategic review, customer concentration, sales-cycle delays, automotive conditions and updates to litigation or other contingencies.