Business context and reporting period
BlackBerry Limited provides enterprise and government security software and services, embedded/IoT software and intellectual-property licensing. This Form 10-K reports fiscal 2020, ended February 29, 2020, with comparisons to fiscal 2019; the fourth quarter ended February 29, 2020. Amounts are U.S. dollars unless noted. BlackBerry reports as one operating segment.
Financial results and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Revenue | $1.040 billion | $904 million |
| Gross margin dollars / percentage | $763 million / 73.4% | $698 million / 77.2% |
| Operating expenses | $912 million | $638 million |
| Operating income (loss) | $(149) million | $60 million |
| Net income (loss) | $(152) million; $(0.27) basic EPS | $93 million; $0.17 basic EPS |
| Adjusted net income (non-GAAP) | $74 million; $0.13 per share | $131 million; $0.24 per share |
| Operating cash flow / capital expenditures | $26 million / $12 million | $100 million / $17 million |
| Free cash flow (non-GAAP) | $14 million | Not stated in the provided filing text |
Cash, cash equivalents and investments were $990 million at year-end, down $15 million from the prior year. Current assets were $1.196 billion and current liabilities $1.121 billion, leaving $75 million of working capital. The current-liability total includes $606 million of debentures reclassified as current because they mature November 13, 2020. The debentures have $605 million principal, a 3.75% coupon and potential conversion into 60.5 million shares. Management said available resources and expected cash generation, cost reductions and potential financing should cover commitments and foreseeable operating needs.
Fourth-quarter revenue was $282 million versus $255 million a year earlier; gross margin was $212 million, or 75.2%, versus $206 million, or 80.8%. The quarter recorded a $41 million GAAP net loss, compared with $51 million net income in the prior-year quarter. Adjusted net income was $51 million versus $60 million. Fourth-quarter operating cash flow was $35 million and free cash flow was $32 million, including $4 million of facility restructuring payments.
Material changes versus the prior comparable period
- Annual revenue rose 15%, primarily reflecting a full year of Cylance results after its February 2019 acquisition and higher licensing revenue. Cylance revenue was $151 million; adjusted Cylance revenue was $208 million, up 16.9% from the prior-year comparable business base described by management.
- IoT revenue fell 3% to $540 million; lower enterprise software-license sales and QNX royalty volumes were partly offset by fixed-price conversions and development-seat revenue. Adjusted IoT revenue declined to $542 million from $565 million.
- Licensing revenue increased to $328 million from $286 million, although Teletry patent-licensing revenue decreased $78 million. Direct licensing revenue increased, including revenue recognition associated with the licensee’s shutdown of BBM Consumer.
- Other revenue declined to $21 million from $59 million, mainly due to lower legacy service-access-fee and handheld revenue.
- GAAP operating expenses rose $274 million, including higher compensation and amortization largely associated with Cylance, plus $22 million of goodwill impairment and $10 million of long-lived-asset impairment. Adjusted operating expenses rose to $754 million from $597 million. The goodwill impairment related to the BBM Consumer reporting unit.
- Adjusted operating income declined to $78 million from $119 million, and adjusted operating margin fell to 7% from 13%. GAAP gross-margin percentage also declined, reflecting business mix, including Cylance professional services and lower enterprise revenue.
Outlook, commentary and risks
- Management expects fiscal 2021 licensing revenue of approximately $250 million. It expects first-quarter fiscal 2021 performance below the fourth quarter of fiscal 2020, with COVID-19 potentially also affecting the second quarter; management anticipated a stronger second half than first half.
- BlackBerry QNX revenue was already affected by automotive-market weakness and COVID-19 uncertainty. BlackBerry had previously withdrawn its expectation of generating $100 million of cumulative Radar revenue within three years. Management also reported fiscal 2020 billings growth in the double digits, while Enterprise adjusted revenue declined 9.8%.
- COVID-19 could disrupt customers, suppliers, sales and product development, weaken demand and materially affect fiscal 2021 results. Management noted possible impairment impacts from changing market conditions, particularly for goodwill and long-lived assets.
- Other principal risks include intense competition, customer renewals and sales execution, cyber incidents or product vulnerabilities, dependence on channel partners and licensing revenue, foreign-exchange and regulatory exposure, and the ability to refinance or repay the debentures at maturity. One customer represented approximately 13% of fiscal 2020 net sales.
- Fair-value changes in the debentures produced a $66 million non-cash gain in fiscal 2020 GAAP results. Non-GAAP measures exclude various items, including acquisition-related amortization, stock compensation, restructuring, impairment and debenture valuation changes; they are not standardized and should be assessed alongside GAAP results.
- The company disclosed ongoing securities and employment litigation. It reported no material claims assessed as both probable and reasonably estimable, but some claims were considered reasonably possible and losses could not be estimated. The auditor issued unqualified opinions on the financial statements and internal controls; goodwill valuation and licensing revenue recognition were identified as critical audit matters.
Most important facts to verify
- How the company plans to fund or refinance the $605 million debenture principal due November 2020, and the resulting dilution if converted.
- Whether operating cash flow and free cash flow recover after fiscal 2020’s decline, while working capital was only $75 million.
- Underlying growth, renewals and margins in Cylance, Enterprise and QNX, separating recurring performance from acquisition accounting and one-time licensing revenue.
- The extent of COVID-19 effects on automotive customers, fiscal 2021 guidance and goodwill or long-lived-asset impairment assumptions.
- Whether Teletry and other major licensing arrangements remain sustainable, given the customer concentration and the decline in Teletry revenue.