BlackBerry Limited — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended November 30, 2022. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
BlackBerry reports three segments: Cybersecurity and IoT (together, Software & Services), and Licensing and Other. Management focuses on enterprise cybersecurity, QNX embedded software and commercializing the BlackBerry IVY vehicle-data platform. The filing describes the interim results as unaudited.
Key financial results
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $169 | $184 | $505 | $533 |
| Gross margin | $109; 64.5% | $117; 63.6% | $319; 63.2% | $343; 64.4% |
| Operating income (loss) | $(2) | $51 | $(226) | $(148) |
| Net income (loss) | $(4) | $74 | $(239) | $(132) |
| Basic loss per share | $(0.01) | Basic EPS $0.13 | $(0.41) | $(0.23) |
| Adjusted net income (loss), non-GAAP | $(30) | $(1) | $(90) | $(61) |
Quarterly revenue declined 8% year over year. Cybersecurity revenue was $106, down $22; IoT was $51, up $8; Licensing and Other was $12, down $1. For the nine months, segment revenue was $330 for Cybersecurity (down $25), $153 for IoT (up $27), and $22 for Licensing and Other (down $30). BlackBerry attributed the Licensing and Other decline largely to reduced patent monetization activity while the proposed patent transaction is pending.
Operating results include a non-cash debenture fair-value gain of $56 in the quarter and $112 year to date. Year-to-date results also include a $165 litigation settlement expense. These items materially affect GAAP comparisons; the company’s adjusted measures exclude specified items and are non-GAAP.
Cash, debt and liquidity
- Cash, cash equivalents and investments totaled $505 at November 30, 2022, down from $770 at February 28, 2022. This includes $255 cash and equivalents, $194 short-term investments, $29 long-term investments and $27 restricted cash.
- Operating cash flow was $(253) for the first nine months, compared with $(37) a year earlier. The company identified payment of the $165 U.S. securities settlement and working-capital changes as significant factors. Investing cash flow was $126; financing cash flow was $6.
- Current assets were $769 and current liabilities $767, leaving working capital of $2, versus $646 at February 28, 2022. Current liabilities include $392 of debentures at fair value, reclassified as current ahead of their November 2023 maturity.
- The 1.75% convertible debentures have $365 principal outstanding and a fair value of $392 at period end. Fairfax holds $330 principal. The filing says 60.8 million shares would be issuable upon full conversion.
- Contractual obligations totaled $580, including $373 of debt interest and principal payments due within 12 months, $116 of purchase obligations due within 12 months and $28 of short-term lease obligations. Management believes resources, expected cash generation, expense reductions and potential financing access should meet foreseeable funding needs.
Material changes and management commentary
- Cybersecurity ARR was $313, down from $358 a year earlier; its dollar-based net retention rate was 84%, versus 95%. Cybersecurity total contract value billings were $103, down from $112.
- Management no longer expects Cybersecurity ARR to return to growth in early FY2024; it now expects growth in the second half of FY2024, citing longer sales cycles and macroeconomic factors. It expects Q4 FY2023 sequential growth in Cybersecurity revenue and billings, with billings exceeding Cybersecurity revenue.
- Management revised FY2023 IoT revenue expectations to $205–$210, from $200–$210. It expects BlackBerry IVY vehicle installations to begin in the 2024 or 2025 model year.
- The proposed $600 patent sale to Catapult remains subject to financing and other closing conditions. The parties were negotiating definitive documents; BlackBerry also reported advanced discussions with an alternate buyer that would not require external financing.
- Macroeconomic risks include semiconductor-related automotive supply-chain disruption, the effects of the Russia-Ukraine war and sanctions, inflation, higher interest rates and possible recession. BlackBerry said these factors could affect QNX production-based royalties, vehicle demand and cybersecurity sales cycles.
Unusual items, contingencies and other risks
- The $165 U.S. securities class-action settlement was paid in full by September 6, 2022 and received final court approval on September 29, 2022. The company said it believed the allegations lacked merit but considered settlement preferable to continued litigation.
- BlackBerry reported other ongoing litigation, including a certified Canadian securities class action and an employment class action; mediation in the employment case did not result in agreement. It recorded no accrual for other material claims assessed as both probable and reasonably estimable, while some reasonably possible claims could not be estimated.
- During the second quarter, the company recorded a $4 non-cash impairment charge on lease right-of-use assets for facilities it exited and is seeking to sublease. It also sold its corporate aircraft, receiving about $17 and recording a $6 gain.
- Goodwill impairment remains a risk if forecasts, discount rates or market assumptions change; management specifically noted potential sensitivity in the BlackBerry Spark reporting unit. Completion of the patent sale could also affect recoverability assessments for the Intellectual Property reporting unit.
- One customer represented 11% of quarterly revenue and 14% of nine-month revenue. One customer represented more than 10% of accounts receivable at period end.
Important facts for investors to verify
- Progress on the $600 patent sale, including financing, definitive documents, closing conditions and the alternate-buyer discussions.
- Whether Cybersecurity ARR, retention and billings stabilize, and whether the revised second-half FY2024 ARR-growth expectation remains achievable.
- Q4 FY2023 Cybersecurity revenue and billings expectations, and delivery against the revised FY2023 IoT revenue range.
- Liquidity and cash generation after the settlement payment, especially the $2 working-capital balance and debenture obligations due within 12 months.
- Potential effects of macroeconomic and automotive supply-chain conditions on QNX royalties, and any changes in goodwill or intangible-asset impairment assessments.
- Developments in the outstanding Canadian securities and employment proceedings, and any resulting financial exposure.