BlackBerry Limited — Q2 Fiscal 2022 Form 10-Q
Reporting period: Three and six months ended August 31, 2021. Figures are in U.S. dollars; financial statements are unaudited and prepared under U.S. GAAP. BlackBerry reorganized its reporting in fiscal 2022 into Cyber Security, IoT, and Licensing and Other segments.
Financial performance and position
| Metric | Three months ended August 31, 2021 | Six months ended August 31, 2021 |
|---|---|---|
| Revenue | $175 million, down 32% from $259 million | $349 million, down 25% from $465 million |
| Gross margin | $112 million; 64.0% of revenue, versus $199 million and 76.8% | $226 million; 64.8% of revenue, versus $342 million and 73.5% |
| Operating loss | $141 million, versus $22 million | $199 million, versus $667 million |
| Net loss and loss per share | $144 million; $0.25 per share, versus $23 million and $0.04 | $206 million; $0.36 per share, versus $659 million and $1.18 |
| Adjusted net income (loss) | Loss of $33 million, or $0.06 per share, versus income of $58 million, or $0.10 | Loss of $60 million, or $0.11 per share, versus income of $65 million, or $0.12 |
Q2 operating expenses were $253 million, including a $67 million non-cash charge from remeasuring convertible debentures. The six-month prior-year comparison includes a $594 million goodwill impairment and $21 million long-lived asset impairment that did not recur; thus the lower year-over-year GAAP operating expenses in fiscal 2022 do not indicate stronger underlying revenue performance. Adjusted measures exclude specified items and are not standardized GAAP measures.
- Segment revenue, Q2: Cyber Security $120 million (flat year over year); IoT $40 million (up $9 million); Licensing and Other $15 million (down $93 million). For the six-month period, the respective amounts were $227 million (down $12 million), $83 million (up $23 million), and $39 million (down $127 million).
- Cash flow: Net cash used in operating activities was $18 million for the six months, versus zero in the prior-year period. Q2 alone generated $12 million in operating cash and $10 million of free cash flow, versus $31 million and $29 million, respectively, a year earlier. Six-month investing cash flow was positive $113 million, largely reflecting investment maturities and purchases; financing cash flow was positive $5 million.
- Liquidity: Cash, cash equivalents and investments totaled $772 million at August 31, 2021, versus $804 million at February 28, 2021. Working capital was $507 million, down from $577 million. Management said available resources, expected operating cash generation, expense reductions and potential financing arrangements should meet foreseeable funding needs.
- Debt: Long-term debentures were carried at fair value of $782 million, although unpaid principal was $365 million. The 1.75% convertible debentures’ fair value rose during the period, creating a $67 million Q2 non-cash expense. The filing says 60.8 million shares could be issued upon full conversion.
Material changes and management commentary
- The steep Q2 revenue decline primarily reflected lower Licensing and Other revenue, including reduced revenue from intellectual-property licensing arrangements such as the Teletry agreement. Cyber Security revenue was flat, while IoT benefited from a partial automotive-market recovery and higher QNX royalties and development-seat revenue.
- Management attributed weaker consolidated gross margin percentage mainly to the smaller contribution from high-margin Licensing and Other revenue. Q2 segment gross margins were 59% for Cyber Security, 83% for IoT and 60% for Licensing and Other.
- Cyber Security annual recurring revenue was approximately $364 million, down from $367 million a year earlier; its dollar-based net retention rate was 95%, versus 100%. IoT ARR was approximately $89 million, versus $92 million a year earlier. Recurring software product revenue was approximately 80% of adjusted Software and Services product revenue, down from approximately 90%, attributed to product mix.
Outlook, risks and contingencies
- BlackBerry expects modest sequential Cyber Security revenue growth for the remainder of fiscal 2022 and sequential Cyber Security billings growth. It expects Licensing and Other revenue of approximately $10 million in each of Q3 and Q4, and approximately $60 million for fiscal 2022, reflecting restrictions while a patent-sale process continues. These are management expectations, not guarantees.
- The company was in exclusive negotiations to sell a portion of its non-core or legacy patent portfolio. Management expected to enter a definitive agreement in Q3 fiscal 2022, but stated there was no assurance of an agreement or completed sale; it expected to retain rights to use the patents and not sell patents associated with current Software and Services.
- Management cited COVID-19 and the global chip shortage as potential sources of material adverse impact, particularly for QNX automotive software. The filing also identifies uncertainty around customer demand, sales cycles, supply constraints, foreign exchange, interest rates, credit risk and asset impairment.
- BlackBerry IVY early access was expected in October 2021, commercial release in February 2022, and installations in 2023 model-year vehicles.
- There were no material litigation claims for which loss was both considered probable and reasonably estimable, so no accrual was recorded. Certain shareholder and employment class actions remained outstanding; potential losses on some claims could not be reasonably estimated. The filing also describes a contingent $90 million CEO performance award triggered if the specified share-price threshold is reached before November 2023; the recorded liability was approximately $11 million.
- BlackBerry recorded $27 million of Canada Emergency Wage Subsidy benefits in the six months. Subsidies received after June 5, 2021 may be repayable if conditions are not met; repayment was not considered probable at filing.
Important facts for investors to verify
- Whether Cyber Security revenue, ARR, retention and billings improve, given declining retention and lower recurring-product mix.
- Whether the patent-portfolio transaction closes, and how its restrictions affect Licensing and Other revenue against management’s fiscal 2022 expectations.
- Whether the automotive recovery, chip availability and QNX royalty trends support the reported IoT growth and planned IVY milestones.
- The distinction between the $365 million debenture principal and its $782 million fair-value carrying amount, including potential conversion dilution and future non-cash valuation swings.
- Operating cash generation, working capital and liquidity trends; six-month operating cash flow was negative despite positive Q2 operating cash flow.
- Developments in the pending class actions, the contingent CEO award and any potential subsidy repayment obligations.