BlackBerry Limited — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended November 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. BlackBerry reports as one operating segment, focused on Software and Services and Licensing and Other.
Financial results and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $218 | $267 | $683 | $758 |
| Gross margin | $149; 68.3% | $198; 74.2% | $491; 71.9% | $551; 72.7% |
| Operating loss | $(127) | $(29) | $(794) | $(108) |
| Net loss | $(130); $(0.23) per share | $(32); $(0.06) basic per share | $(789); $(1.41) per share | $(111); $(0.20) basic per share |
| Adjusted net income (non-GAAP) | $11; $0.02 per share | $17; $0.03 per share | $85 | $23 |
| Adjusted EBITDA (non-GAAP) | $31 | $38 | $132 | $81 |
Q3 Software and Services revenue was $162, down from $185; Licensing and Other was $56, down from $82. Nine-month revenue fell $75, with Software and Services down $60, chiefly reflecting lower QNX royalties and automotive-related demand. Adjusted figures exclude specified items and are not U.S. GAAP measures.
- Cash flow: Nine-month operating cash flow was $30, versus cash use of $8 a year earlier. Investing activities provided $52 and financing activities used $236, including the debenture redemption and new issuance. Q3 free cash flow, a non-GAAP measure, was $27.
- Liquidity: Cash, cash equivalents and investments were reported at $757 at November 30, versus $990 at February 29, 2020. This total includes $50 of restricted cash. Working capital was $544, compared with $75 at fiscal year-end.
- Debt: BlackBerry redeemed its 3.75% debentures for approximately $615 and issued $365 principal of 1.75% convertible debentures, due November 2023 and convertible at $6 per share. The new debentures were carried at a $459 fair value at quarter-end, including a $94 increase over principal; the fair-value remeasurement produced a $95 Q3 non-cash expense. Up to 60.8 million shares are issuable upon conversion.
Material changes and unusual items
- A $594 non-cash goodwill impairment was recorded in the BlackBerry Spark reporting unit during the first quarter, following COVID-19-related economic deterioration and a decline in the Company’s share price. Goodwill fell to $849 from $1,437 at fiscal year-end.
- A $21 non-cash long-lived-asset impairment was recorded in the second quarter, mainly for leased facilities being exited or subleased.
- The nine-month GAAP net loss also reflects debenture fair-value charges. Lower revenue and gross margin contributed to the weaker Q3 results; expense reductions and government wage subsidies partly offset the decline.
- BlackBerry recorded $37 of Canadian CEWS subsidies as reductions to operating expenses in the first nine months. It also reported approximately $39 in temporary cost savings from salary and benefit, travel, and discretionary spending measures.
Outlook, commentary and risks
- Management expected sequential non-GAAP Software and Services revenue growth in Q4 FY2021. It reported sequential Software and Services growth in Q3, including a sequential recovery in BTS revenue.
- Management expected COVID-19 effects on QNX automotive software to continue until early FY2022. It cautioned that the pandemic could materially adversely affect FY2021 results and that further effects may emerge in future periods, while stating it did not expect a material adverse effect on liquidity.
- BlackBerry said its AWS collaboration on BlackBerry IVY is expected to generate recurring revenue beginning with 2023 model-year vehicles, with revenue expected to increase over time thereafter.
- Software and Services ARR was approximately $475; DBNRR was 90%, and net customer churn was approximately 1%. Adjusted Software and Services product revenue was approximately 83% recurring, down from over 90% a year earlier.
- Risks include pandemic-driven customer and automotive demand, longer sales cycles, overdue receivables, customer concentration, foreign-exchange and interest-rate exposure, patent and other litigation, and the assumptions used in asset valuations. One customer represented 13% of Q3 revenue and 27% for the first nine months; two customers each exceeded 10% of receivables.
- Management reported no material claims assessed as both probable and reasonably estimable; other reasonably possible litigation claims remain, but loss amounts could not be estimated. The filing also describes a contingent $90 award for the CEO if the specified share-price threshold is reached before November 2023.
Important facts for investors to verify
- Whether Q4 sequential Software and Services growth and the expected QNX recovery materialize, given the pandemic and automotive demand outlook.
- Whether the $594 Spark goodwill impairment and other asset carrying values remain appropriate as forecasts and valuation assumptions change.
- The impact of debenture fair-value volatility on reported GAAP results, and potential dilution from the 60.8 million conversion shares.
- Whether cash generation, collections and reported liquidity remain adequate; distinguish restricted cash from funds freely available for operations.
- How recurring revenue, ARR and customer retention trends develop, including concentration in Teletry and major receivables.
- Developments in outstanding litigation and the conditions attached to government subsidies and other contingent obligations.