BLACKBERRY LIMITED
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read together with the audited
consolidated financial statements and the accompanying notes (the "Consolidated
Financial Statements") of BlackBerry Limited , for the fiscal year ended
February 29, 2020 . The Consolidated Financial Statements are presented in U.S.
dollars and have been prepared in accordance with U.S. GAAP. All financial
information in this MD&A is presented in U.S. dollars, unless otherwise
indicated.
Readers should carefully review Part I, Item 1A "Risk Factors" and other
documents filed from time to time with the Securities and Exchange Commission
("SEC") and other securities regulators. A number of factors may materially
affect our business, financial condition, operating results and prospects. These
factors include but are not limited to those set forth in Part I, Item 1A "Risk
Factors" and elsewhere in this Annual Report on Form 10-K. Any one of these
factors, and other factors that we are unaware of, or currently deem immaterial,
may cause our actual results to differ materially from recent results or from
our anticipated future results. Please refer to our MD&A of our Annual Report on
Form 40-F for Fiscal 2019 for a comparative discussion of our Fiscal 2019
financial results as compared to our Fiscal 2018. Additional information about
the Company, which is included in the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 2020 (the "Annual Report"), can be found on
SEDAR at www.sedar.com and on the SEC's website at www.sec.gov.
Cautionary Note Regarding Forward-Looking Statements
This MD&A contains forward-looking statements within the meaning of certain
securities laws, including under the U.S. Private Securities Litigation Reform
Act of 1995 and applicable Canadian securities laws, including statements
relating to:
•the Company's plans, strategies and objectives, including its intentions to
achieve long-term profitable revenue growth and increase and enhance its product
and service offerings;
•the Company's expectations with respect to its financial performance in fiscal
2021;
•the Company's estimates of purchase obligations and other contractual
commitments; and
•the Company's expectations with respect to the sufficiency of its financial
resources.
The words "expect", "anticipate", "estimate", "may", "will", "should", "could",
"intend", "believe", "target", "plan" and similar expressions are intended to
identify forward-looking statements in this MD&A, including in the sections
entitled "Results of Operations - Fiscal year ended February 29, 2020 compared
to fiscal year ended February 28, 2019 - Revenue - Revenue by Product and
Service", "Results of Operations - Three months ended February 29, 2020 compared
to the three months ended February 28, 2019 - Net Income", and "Financial
Condition - Debenture Financing and Other Funding Sources ". Forward-looking
statements are based on estimates and assumptions made by the Company in light
of its experience and its perception of historical trends, current conditions
and expected future developments, as well as other factors that the Company
believes are appropriate in the circumstances, including but not limited to, the
Company's expectations regarding its business, strategy, opportunities and
prospects, the launch of new products and services, general economic conditions,
competition, and the Company's expectations regarding its financial performance.
Many factors could cause the Company's actual results, performance or
achievements to differ materially from those expressed or implied by the
forward-looking statements, including, without limitation, the risk factors
discussed in Part I, Item 1A "Risk Factors" in the Annual Report on Form 10-K.
All of these factors should be considered carefully, and readers should not
place undue reliance on the Company's forward-looking statements. Any statements
that are forward-looking statements are intended to enable the Company's
shareholders to view the anticipated performance and prospects of the Company
from management's perspective at the time such statements are made, and they are
subject to the risks that are inherent in all forward-looking statements, as
described above, as well as difficulties in forecasting the Company's financial
results and performance for future periods, particularly over longer periods,
given changes in technology and the Company's business strategy, evolving
industry standards, intense competition and short product life cycles that
characterize the industries in which the Company operates. See "Strategy"
subsection in Part I, Item 1 "Business" of the Annual Report.
The Company has no intention and undertakes no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by applicable law.
Business Overview
The Company provides intelligent security software and services to enterprises
and governments around the world. The Company secures more than 500 million
endpoints, including 150 million cars. Based in Waterloo, Ontario , the Company
leverages artificial intelligence and machine learning to deliver innovative
solutions in the areas of cybersecurity, safety and data privacy solutions, and
is a leader in the areas of endpoint security management, encryption, and
embedded systems. The
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Company's common shares trade under the ticker symbol "BB" on the New York Stock
Exchange and the Toronto Stock Exchange . The Company was incorporated under the
Business Corporations Act (Ontario ) ("OBCA") on March 7, 1984 .
The Company continued to execute on its strategy in fiscal 2020. The Company
also announced the following achievements:
•Announced that the German Development Agency , Deutsche Gesellschaft für
Internationale Zusammenarbeit (GIZ) GmbH , selected BlackBerry AtHoc as its
emergency mass notification system;
•Launched enhancements and feature updates to SecuSUITE for Government and
BlackBerry AtHoc that enable government agencies to securely communicate and
safeguard sensitive data;
•Announced the appointment of Marjorie Dickman as the Company's first Chief
Government Affairs and Public Policy Officer;
•Announced product enhancements to CylancePROTECT and CylanceOPTICS;
•Launched the BlackBerry Spark platform with a new unified endpoint security
(UES) layer which can work with BlackBerry UEM to deliver zero trust security;
•Released the 2020 Threat Report, which examines the latest adversarial
techniques and tactics analyzed by BlackBerry Cylance threat researchers and
provides guidance organizations can leverage to mitigate risk;
•Launched BlackBerry Digital Workplace, a robust workspace that provides secure
online and offline access to corporate on-premise or cloud content including
Microsoft Office 365 resources;
•Announced that the BlackBerry Radar solution integrates with Trimble's
TMW.Suite and TruckMate transportation management system solutions;
•Announced that BlackBerry Cylance integrates with SafeBreach to help
organizations improve their overall security posture with continuous enterprise
endpoint security validation;
•Entered into a collaboration with Ansys to support BlackBerry QNX's
industry-leading real-time operating system ("RTOS") for connected and
autonomous vehicles;
•Collaborated with Amazon Web Services, Inc. (AWS) to demonstrate a connected
vehicle software platform for in-vehicle applications that combines the
BlackBerry QNX RTOS with AWS' IoT Services in the cloud and in the car;
•Announced that Damon Motorcycles' CoPilot advanced warning system will be
powered by BlackBerry QNX technology across its entire line-up of advanced
electric motorcycles;
•Announced that Renovo and BlackBerry QNX will cooperate to jointly develop and
market safety-critical data management solutions for use in the next generation
of connected and autonomous vehicles;
•Entered into a partnership that will provide advanced digital infrastructure to
students as part of the Government of Romania's National Wireless Campus
Project ;
•Entered into an agreement with electric carmaker WM Motor to embed
BlackBerry 's QNX Neutrino Realtime Operating System and other BlackBerry QNX
software products within the company's third-generation SUVs;
•Entered into a strategic collaboration to integrate the QNX Platform for
Digital Cockpits in MARELLI Electronics China's eCockpit and Digital Cluster
solution;
•Announced the second cohort of companies for the Company's joint accelerator
program with L-SPARK to advance Canadian startups that are focused on connected
vehicle technologies;
•Announced that its QNX Hypervisor 2.0 for Safety has been recognized as ISO
26262 ASIL D compliant by the independent auditors at TÜV Rheinland, making it
the world's first ASIL D safety-certified commercial hypervisor;
•Announced that Reece Group has deployed BlackBerry Cylance technology to
protect thousands of endpoints across its retail stores and offices in Australia
and the United States ;
•Entered into an agreement with Canadian Pacific Railway to deploy BlackBerry
Radar across 2,000 of its domestic intermodal chassis;
•Entered into an agreement for BlackBerry QNX technology to power Arrival's
Generation 2.0 autonomous-ready commercial electric vehicles;
•Announced an agreement with ETAS GmbH , a subsidiary of Bosch, to cooperate on
the joint development and marketing of an automotive software platform based on
the AUTOSAR Adaptive standard;
•Announced that Hyundai Autron selected BlackBerry QNX technology to power its
next-generation advanced driver-assistance systems (ADAS) and autonomous driving
software platform;
•Launched BlackBerry AtHoc & BlackBerry SecuSUITE solutions on AWS;
•Launched CylancePROTECT for mobile devices managed by BlackBerry UEM;
•Announced the promotion of John McClurg to the role of Chief Information
Security Officer and Christopher Hummel to the role of Chief Information
Officer;
•Announced the integration of CylancePROTECT and CylanceOPTICS with Chronicle's
Backstory security analytics platform;
•Launched BlackBerry Solutions on the Microsoft Azure Marketplace ;
•Launched the BlackBerry Advanced Technology Development Labs to develop
cutting-edge security innovations;
•Announced the transition of Steve Capelli to the role of Chief Revenue Officer
and the promotion of Steve Rai to the role of Chief Financial Officer;
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•Entered into an agreement with Matson Logistics to deploy the BlackBerry
Radar-M solution across its entire fleet of domestic intermodal containers;
•Announced, along with DENSO Corporation, that the first integrated Human
Machine Interface digital cockpit system with BlackBerry QNX technology has
shipped in SUBARU vehicles;
•Launched the BlackBerry QNX Acoustics Management Platform 3.0, the latest
version of its automotive acoustics software;
•Announced a deeper partnership with Jaguar Land Rover for the use of the
Company's AI and machine learning technologies, BlackBerry QNX software and
BlackBerry Cybersecurity Consulting services in the development of the
automaker's next-generation vehicles;
•Appointed Lisa Disbrow to the Company's Board of Directors (the "Board") and to
the audit and risk management committee of the Board;
•Named as a Leader in Gartner's 2019 Magic Quadrant for Unified Endpoint
Management Tools for the fourth consecutive year;
•Launched BlackBerry Intelligent Security, the first cloud-based solution that
leverages the power of adaptive security, continuous authentication and
artificial intelligence to enhance mobile endpoint security in zero trust
environments;
•Entered into an agreement with SYNNEX Corporation to distribute the BlackBerry
Enterprise Mobility Suite in the United States and accelerate partner
recruitment for the BlackBerry Enterprise Partner Program;
•Introduced CylanceGUARD, a managed detection and response solution that
leverages BlackBerry Cylance security experts and its industry-leading native AI
platform to provide continuous threat hunting and monitoring;
•Entered into a collaborative supply agreement expanding the Company's
partnership with LG Electronics Inc. to accelerate the deployment of connected
and autonomous vehicle technology for automotive OEMs and Tier 1 vendors;
•Announced that BlackBerry QNX Software is embedded in more than 150 million
vehicles;
•Achieved Federal Risk and Authorization Management Program ("FedRAMP") Ready
status for the BlackBerry Government Mobility Suite, a cloud-based endpoint
management solution developed specifically for U.S. government agencies;
•Announced support of Canada's Digital Charter, aimed at protecting the privacy
and data security of Canadians, and that the Company has been recognized by the
Government of Canada as a benchmark for trusted technology;
•Announced that Forrester found that BlackBerry Cylance's AI-driven endpoint
security products delivered a 99 percent return on investment;
•Announced that BlackBerry Cylance has completed an Australian Information
Security Registered Assessors Program (IRAP) assessment to obtain certification
as a security solutions provider to Australian federal government agencies;
•With WITTENSTEIN high integrity systems, announced a new embedded software
platform that enables the development of safety-certified and mission-critical
applications on heterogenous system-on-chip processors;
•Launched BlackBerry Radar H2, a new intelligent, data-driven asset monitoring
device that can help automate operations, improve utilization of trailers,
containers, chassis and other remote assets, as well as ensure assets are safe
and secure;
•Established BlackBerry Government Solutions, to accelerate the Company's
FedRAMP initiatives and deepen ties with U.S. federal agencies;
•BlackBerry Limited announced that the NATO Communications and Information (NCI)
Agency has awarded a contract for BlackBerry 's SecuSUITE® for Government to
encrypt the conversations of its technology and cyber leaders;
•Announced that Verizon added BlackBerry Cylance's AI-driven antivirus security
solutions to its Managed Security Services portfolio; and
•Introduced CylancePERSONA, the first proactive endpoint behavioral analytics
solution.
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Fiscal 2020 Summary Results of Operations
The following table sets forth certain consolidated statements of operations
data, as well as certain consolidated balance sheet data, as at and for the
fiscal years ended February 29, 2020 , February 28, 2019 , and February 28, 2018 :
As at and for the Fiscal Years Ended
(in millions, except for share and per share amounts)
February 28,
February 29, 2020 2019 Change February 28, 2018 Change
Revenue $ 1,040 $ 904 $ 136 $ 932 $ (28)
Gross margin 763 698 65 670 28
Operating expenses 912 638 274 387 251
Investment income (loss), net 1 17 (16) 123 (106)
Income (loss) before income taxes (148) 77 (225) 406 (329)
Provision for (recovery of) income taxes 4 (16) 20 1 (17)
Net income (loss) $ (152) $ 93 $ (245) $ 405 $ (312)
Earnings (loss) per share - reported
Basic $ (0.27) $ 0.17 $ 0.76
Diluted $ (0.32) $ 0.00 $ 0.74
Weighted-average number of shares
outstanding (000's)
Basic 553,861 540,477 532,888
Diluted (1) 614,361 616,467 545,886
Total assets $ 3,888 $
3,968
- $ 665 $ (665) $ 782 $ (117) ______________________________
(1)Diluted earnings (loss) per share on aU.S. GAAP basis for fiscal 2018 does not include the dilutive effect of the Debentures as to do so would be anti-dilutive. Diluted loss per share on aU.S. GAAP basis for fiscal 2020 does not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive. See Note 9 to the Consolidated Financial Statements for the fiscal year endedFebruary 29, 2020 for calculation of the diluted weighted average number of shares outstanding. Financial Highlights The Company had approximately$990 million in cash, cash equivalents and investments as ofFebruary 29, 2020 . In fiscal 2020, the Company recognized revenue of$1.04 billion and incurred a net loss of$152 million , or$0.27 basic loss per share on aU.S. GAAP basis. The Company incurred a diluted loss per share of$0.32 on aU.S. GAAP basis. The Company recognized adjusted revenue of$1.10 billion and adjusted net income of$74 million , or adjusted earnings of$0.13 per share, on a non-GAAP basis in fiscal 2020. See "Non-GAAP Financial Measures" below. Debentures Fair Value Adjustment As previously disclosed, the Company elected the fair value option to account for the 3.75% unsecured convertible debentures (the "Debentures"); therefore, periodic revaluation has been and continues to be required underU.S. GAAP. The fair value adjustment does not impact the terms of the Debentures such as the face value, the redemption features or the conversion price. In fiscal 2020, the fair value of the Debentures decreased by approximately$59 million . For the three months endedFebruary 29, 2020 , the Company recorded non-cash income relating to changes in fair value from instrument specific credit risk of$7 million in AOCI and a non-cash charge relating to changes in fair value from non-credit components of$5 million (pre-tax and after tax) (the "Q4 Fiscal 2020 Debentures Fair Value Adjustment") in the Company's consolidated statements of operations. In fiscal 2020, the Company recorded a non-cash charge relating to changes in fair value from instrument-specific credit risk of$7 million in AOCI and non-cash income relating to changes in fair value from non-credit components of$66 million (pre-tax and after tax) (the "Fiscal 2020 Debentures Fair Value Adjustment") in the Company's consolidated statements of operations. 31 -------------------------------------------------------------------------------- Non-GAAP Financial Measures The Consolidated Financial Statements have been prepared in accordance withU.S. GAAP, and information contained in this MD&A is presented on that basis. OnMarch 31, 2020 , the Company announced financial results for the three months and fiscal year endedFebruary 29, 2020 , which included certain non-GAAP financial measures, including adjusted revenue, adjusted gross margin (before taxes), adjusted gross margin percentage (before taxes), adjusted operating expense, adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage, adjusted EBITDA margin percentage, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense and free cash flow. In the Company's internal reports, management evaluates the performance of the Company's business on a non-GAAP basis by excluding the impact of the items below from the Company's financial results. The Company believes that excluding the below items provides readers of the Company's financial statements with a more consistent basis for comparison across accounting periods and is more useful in helping readers understand the Company's operating results and underlying operational trends. •Debenture fair value adjustment. The Company has elected to measure its outstanding Debenture at fair value in accordance with the fair value option underU.S. GAAP. Each period, the fair value of the Debentures is recalculated and resulting non-cash gains and losses from the change in fair value from non-credit components of the Debentures are recognized in income. The amount can vary each period depending on changes to the Company's share price. This is not indicative of the Company's core operating performance, and is not meaningful in comparison to the Company's past operating performance. •Restructuring charges. The Company believes that restructuring costs relating to employee termination benefits, facilities, and manufacturing network simplification efforts pursuant to the Resource Allocation Program ("RAP") entered into in order to transition the Company from a legacy hardware manufacturer to a licensing driven software business do not reflect expected future operating expenses, are not indicative of the Company's core operating performance, and are not meaningful in comparison to the Company's past operating performance. •Software deferred revenue acquired. The Company has acquired businesses whose net assets include deferred revenue. In accordance withU.S. GAAP reporting requirements, the Company recorded write-downs of deferred revenue under arrangements pre-dating each acquisition to fair value, which resulted in lower recognized revenue than the original transaction price until the related service obligations under such arrangements are fulfilled. Therefore,U.S. GAAP revenues after the acquisitions will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value, prior to the renewal of these arrangements. The Company believes that reversing the acquisition-related deferred revenue write-downs (so that the full amount of revenue booked by the acquired businesses is included) provides a more appropriate representation of revenue in a given period and, therefore, provides readers of the Company's financial statements with a more consistent basis for comparison across accounting periods. The Company also believes that the adjustment is more useful in helping readers to understand the Company's operating results and underlying operational trends, especially in future periods when the contracts underlying the acquired deferred revenue are renewed at amounts more consistent with their transaction price. As the impacted contracts renew over time, the associated reversal of the acquisition write-downs will trend to zero. •Software deferred commission expense acquired. The Company has acquired businesses whose net assets include deferred commissions. In accordance withU.S. GAAP reporting requirements, the Company recorded write-downs of deferred commissions under arrangements pre-dating each acquisition to fair value, which in most cases is nil. Therefore,U.S. GAAP commission expense after the acquisitions will not reflect commission expense that would have been reported if the acquired deferred commissions were not written down to fair value. The Company believes that reversing the acquisition-related deferred commission write-downs (so that the full amount of commission expense is included) provides a more appropriate representation of commission expense in a given period and, therefore, provides readers of the Company's financial statements with a more consistent basis for comparison across accounting periods. The Company also believes that the adjustment is more useful in helping readers to understand the Company's operating results and underlying operational trends, especially in future periods when the Company recognizes commissions on the renewals of the contracts underlying the acquired deferred commissions. As the impacted contracts renew over time, the associated reversal of the acquisition write-downs will trend to zero. •Stock compensation expenses. Equity compensation is a non-cash expense and does not impact the ongoing operating decisions taken by the Company's management. •Amortization of acquired intangible assets. When the Company acquires intangible assets through business combinations, the assets are recorded as part of purchase accounting and contribute to revenue generation. Such acquired intangible assets depreciate over time and the related amortization will recur in future periods until the assets have been fully amortized. This is not indicative of the Company's core operating performance, and is not meaningful in comparison to the Company's past operating performance. 32 -------------------------------------------------------------------------------- •Business acquisition and integration costs. The Company incurs costs associated with business acquisitions, including legal costs, audit and accounting fees, and other acquisition and integration expenses. These expenditures do not relate to the ongoing operation of the business and they tend to vary significantly based on the circumstances of each transaction. This is not indicative of the Company's core operating performance, and is not meaningful in comparison to the Company's past operating performance. •Acquisition valuation allowance. The Company records an income tax valuation allowance associated with business acquisitions. This is not indicative of the Company's core operating performance, and is not meaningful in comparison to the Company's past operating performance. •Arbitration awards and settlements, net. The Company believes that arbitration awards and settlements, net related to theQualcomm Technologies, Inc. , Nokia Corporation and Panasonic Corporation arbitration and settlements are unusual items related to legacy operations which are not reflective of the Company's ongoing operating expense or core operating performance and are not meaningful in comparison to the Company's past and future operating performance. •Long-lived asset impairment charge. The Company believes that long-lived asset impairment charges do not reflect expected future operating expenses, are not indicative of the Company's core operating performance, and are not meaningful in comparison to the Company's past operating performance. •Goodwill impairment charge. The Company believes that goodwill impairment charge does not reflect expected future operating expenses, is not indicative of the Company's core operating performance as it is associated with a legacy line of business, and is not meaningful in comparison to the Company's past operating performance. On aU.S. GAAP basis, the impact of these items is reflected in the Company's income statement. However, the Company believes that the provision of supplemental non-GAAP measures allow investors to evaluate the financial performance of the Company's business using the same evaluation measures that management uses, and is therefore a useful indication of the Company's performance or expected performance of future operations and facilitates period-to-period comparison of operating performance. As a result, the Company considers it appropriate and reasonable to provide, in addition toU.S. GAAP measures, supplementary non-GAAP financial measures that exclude certain items from the presentation of its financial results. Reconciliation of non-GAAP based measures with most directly comparable GAAP based measures for the three months endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2018 Readers are cautioned that adjusted revenue, adjusted gross margin (before taxes), adjusted gross margin percentage (before taxes), adjusted operating expense, adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage, adjusted EBITDA margin percentage, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense and free cash flow and similar measures do not have any standardized meaning prescribed byU.S. GAAP and are therefore unlikely to be comparable to similarly titled measures reported by other companies. These non-GAAP financial measures should be considered in the context of theU.S. GAAP results, which are described in this MD&A and presented in our Consolidated Financial Statements. 33 -------------------------------------------------------------------------------- A reconciliation of the most directly comparableU.S. GAAP financial measures for the three months endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2018 to adjusted financial measures is reflected in the tables below: For the Three Months Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018 Revenue $ 282 $ 255 $ 233 Software deferred revenue acquired (1) 9 2 6 Adjusted revenue $ 291 $ 257 $ 239 Gross margin (before taxes) $ 212 $ 206 $ 177 Software deferred revenue acquired (1) 9 2 6 Restructuring charges - 1 3 Stock compensation expense 2 1 1 Adjusted gross margin (before taxes) $ 223 $ 210 $ 187 Gross margin % (before taxes) 75.2 % 80.8 % 76.0 % Software deferred revenue acquired (1) 0.7 % 0.1 % 0.5 % Restructuring charges - % 0.4 % 1.4 % Stock compensation expense 0.7 % 0.4 % 0.3 % Adjusted gross margin % (before taxes) 76.6 % 81.7 % 78.2 %
______________________________
(1) See Reconciliation of
Reconciliation of operating expense for the three months endedFebruary 29, 2020 ,November 30, 2019 ,February 28, 2019 andFebruary 28, 2018 to adjusted operating expense is reflected in the tables below: For the Three Months Ended (in millions) February 29, 2020 November 30, 2019 February 28, 2019 February 28, 2018 Operating expense $ 253 $ 227 $ 178 $ 194 Restructuring charges 1 4 2 23 Stock compensation expense 15 14 13 12 Debenture fair value adjustment (1) 5 (20) (6) (34) Software deferred commission expense acquired (3) (4) - - Acquired intangibles amortization 35 35 18 22 Business acquisition and integration costs 1 - 8 - Goodwill impairment charge 22 - - - LLA impairment charge 5 3 - - Arbitration awards and settlements, net - - (9) (1) Adjusted operating expense $ 172 $ 195 $ 152 $ 172
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(1) See "Fiscal 2020 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment"
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Reconciliation of GAAP net income (loss) and GAAP basic earnings per share for
the three months ended February 29, 2020 , February 28, 2019 and February 28,
2018 to adjusted net income and adjusted basic earnings per share is reflected
in the tables below:
For the Three Months Ended (in
millions, except per share amounts) February 29, 2020 February 28, 2019 February 28, 2018
Basic Basic Basic
earnings per earnings per earnings per
share share share
Net income (loss) $ (41) $(0.07) $ 51 $0.09 $ (10) $(0.02)
Software deferred revenue acquired 9 2 6
Restructuring charges 1 3 26
Stock compensation expense 17 14 13
Debenture fair value adjustment 5 (6) (34)
Software deferred commission expense
acquired (3) - -
Acquired intangibles amortization 35 18 22
Business acquisition and integration
costs 1 8 -
Goodwill impairment charge 22 - -
LLA impairment charge 5 - -
Arbitration awards and settlements,
net - (9) (1)
Acquisition valuation allowance - (21) -
Adjusted net income $ 51 $0.09 $ 60 $0.11 $ 22 $0.05
Reconciliation of U.S GAAP IoT, BlackBerry Cylance and software and services
revenue for the three months ended February 29, 2020 , February 28, 2019 and
February 28, 2018 to adjusted IoT, BlackBerry Cylance and software and services
revenue is reflected in the tables below:
For the Three Months Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018
IoT Revenue $ 127 $ 144 $ 154
Software deferred revenue acquired - 1 6
Adjusted IoT revenue $ 127 $ 145 $ 160
BlackBerry Cylance Revenue $ 43 $ 3 $ -
Software deferred revenue acquired 9 1 -
Adjusted BlackBerry Cylance Revenue $ 52 $ 4 $ -
Software and Services revenue
Revenue $ 282 $ 255 $ 233
Less: Other revenue 4 9 21
Software and Services revenue $ 278 $ 246 $ 212
Software deferred revenue acquired 9 2 6
Adjusted Software and Services revenue $ 287 $ 248 $ 218
35-------------------------------------------------------------------------------- Reconciliation ofU.S GAAP research and development, selling, marketing and administration, and amortization expense for the three months endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2018 to adjusted research and development, selling, marketing and administration, and amortization expense is reflected in the tables below: For the Three Months Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018 Research and development $ 60 $ 52 $ 58 Stock compensation expense 3 3 3 Adjusted research and development $ 57 $ 49 $ 55 Selling, marketing and administration $ 113 $ 110 $ 131 Restructuring charges 1 2 23 Software deferred commission expense acquired (3) - - Stock compensation expense 12 10 9 Business acquisition and integration costs 1 8 - Adjusted selling, marketing and administration $ 102 $ 90 $ 99 Amortization $ 48 $ 31 $ 37 Acquired intangibles amortization 35 18 22 Adjusted amortization $ 13 $ 13 $ 15 36
-------------------------------------------------------------------------------- Reconciliation of selected GAAP-based measures to non-GAAP based measures for the years endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2018 A reconciliation of the most directly comparableU.S. GAAP financial measures for the years endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2018 to adjusted financial measures is reflected in the tables below: For the Fiscal Years Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018 Revenue $ 1,040 $ 904 $ 932 Software deferred revenue acquired (1) 59 12 35 Adjusted revenue $ 1,099 $ 916 $ 967 Gross margin (before taxes) $ 763 $ 698 $ 670 Software deferred revenue acquired (1) 59 12 35 Restructuring charges 5 2 11 Stock compensation expense 5 4 4 Adjusted gross margin (before taxes) $ 832 $ 716 $ 720 Gross margin % (before taxes) 73.4 % 77.2 % 71.9 % Software deferred revenue acquired (1) 1.4 % 0.3 % 0.9 % Restructuring charges 0.5 % 0.2 % 1.2 % Stock compensation expense 0.4 % 0.5 % 0.5 % Adjusted gross margin % (before taxes) 75.7 % 78.2 % 74.5 % Operating expense $ 912 $ 638 $ 387 Restructuring charges 5 9 67 Stock compensation expense 58 64 45 Debenture fair value adjustment (2) (66) (117) 191 Software deferred commission expense acquired (16) - - Acquired intangibles amortization 141 82 95 Business acquisition and integration costs 4 12 14 Goodwill impairment charge 22 - - LLA impairment charge 10 - 11 Arbitration awards and settlements, net - (9) (683) Adjusted operating expense $ 754 $ 597 $ 647
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(1) See Reconciliation of
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Reconciliation of GAAP net income (loss) and GAAP basic earnings per share for
the years ended February 29, 2020 , February 28, 2019 and February 28, 2018 to
the adjusted net income and adjusted basic earnings per share is reflected in
the tables below:
For the Fiscal Years Ended (in
millions, except per share amounts) February 29, 2020 February 28, 2019 February 28, 2018
Basic earnings Basic earnings Basic earnings
per share per share per share
Net income (loss) $ (152) $ (0.27) $ 93 $ 0.17 $ 405 $ 0.76
Software deferred revenue acquired 59 12 35
Restructuring charges 10 11 78
Stock compensation expense 63 68 49
Debenture fair value adjustment (66) (117) 191
Software deferred commission expense
acquired (16) - -
Acquired intangibles amortization 141 82 95
Business acquisition and integration
costs 4 12 14
Goodwill impairment charge 22 - -
LLA impairment charge 10 - 11
Arbitration awards and settlements,
net - (9) (806)
Acquisition valuation allowance (1) (21) -
Adjusted net income $ 74 $0.13 $ 131 $0.24 $ 72 $0.14
Reconciliation of U.S GAAP IoT, BlackBerry Cylance and software and services
revenue for the years ended February 29, 2020 , February 28, 2019 and
February 28, 2018 to adjusted IoT, BlackBerry Cylance and software and services
revenue is reflected in the tables below:
For the Fiscal Years Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018
IoT Revenue $ 540 $ 554 $ 551
Software deferred revenue acquired 2 11 35
Adjusted IoT revenue $ 542 $ 565 $ 586
BlackBerry Cylance Revenue $ 151 $ 5 $ -
Software deferred revenue acquired 57 1 -
Adjusted BlackBerry Cylance revenue $ 208 $ 6 $ -
Software and Services revenue
Revenue $ 1,040 $ 904 $ 932
Less: Other revenue 21 59 185
Software and Services revenue $ 1,019 $ 845 $ 747
Software deferred revenue acquired 59 12 35
Adjusted software and services revenue $ 1,078 $ 857 $ 782
Reconciliation of U.S GAAP research and development, selling, marketing and
administration, and amortization expense for the years ended February 29, 2020 ,
February 28, 2019 and February 28, 2018 to adjusted research and development,
selling, marketing and administration, and amortization expense is reflected in
the tables below:
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For the Fiscal Years Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018
Research and development $ 259 $ 219 $ 239
Restructuring charges - 2 5
Stock compensation expense 13 12 12
Adjusted research and development $ 246 $ 205 $ 222
Selling, marketing and administration $ 493 $ 409 $ 476
Restructuring charges 5 7 62
Software deferred commission expense acquired (16) - -
Stock compensation expense 45 52 33
Business acquisition and integration costs 4 12 14
Adjusted selling, marketing and
administration $ 455 $ 338 $ 367
Amortization $ 194 $ 136 $ 153
Acquired intangibles amortization 141 82 95
Adjusted amortization $ 53 $ 54 $ 58
Adjusted operating income, adjusted EBITDA, adjusted operating income margin
percentage and adjusted EBITDA margin percentage for the three months ended
February 29, 2020 , February 28, 2019 and February 28, 2018 are reflected in the
table below. These are non-GAAP financial measures that do not have any
standardized meaning as prescribed by U.S. GAAP and are therefore unlikely to be
comparable to similar measures presented by other companies.
For the Three Months Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018
Operating income (loss) $ (41) $ 28 $ (17)
Non-GAAP adjustments to operating income
(loss)
Software deferred revenue acquired 9 2 6
Restructuring charges 1 3 26
Stock compensation expense 17 14 13
Debenture fair value adjustment 5 (6) (34)
Software deferred commission expense
acquired (3) - -
Acquired intangibles amortization 35 18 22
Business acquisition and integration costs 1 8 -
Goodwill impairment charge 22 - -
LLA impairment charge 5 - -
Arbitration awards and settlements, net - (9) -
Total non-GAAP adjustments to operating loss 92 30 33
Adjusted operating income 51 58 16
Amortization 52 33 39
Acquired intangibles amortization (35) (18) (22)
Adjusted EBITDA $ 68 $ 73 $ 33
Adjusted revenue (per above) $ 291 $ 257 $ 239
Adjusted operating income margin % (1) 18 % 23 % 7 %
Adjusted EBITDA margin % (2) 23 % 28 % 14 %
______________________________
(1) Adjusted operating income margin % is calculated by dividing adjusted operating income by adjusted revenue (2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by adjusted revenue
39
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Adjusted operating income, adjusted EBITDA, adjusted operating income margin
percentage and adjusted EBITDA margin percentage for the fiscal years ended
February 29, 2020 , February 28, 2019 and February 28, 2018 are reflected in the
table below.
For the Fiscal Years Ended (in millions) February 29, 2020 February 28, 2019 February 28, 2018
Operating income (loss) $ (149) $ 60 $ 283
Non-GAAP adjustments to operating income
(loss)
Software deferred revenue acquired 59 12 35
Restructuring charges 10 11 78
Stock compensation expense 63 68 49
Debenture fair value adjustment (66) (117) 191
Software deferred commission expense
acquired (16) - -
Acquired intangibles amortization 141 82 95
Business acquisition and integration costs 4 12 14
Goodwill impairment charge 22 - -
LLA impairment charge 10 - 11
Arbitration awards and settlements, net - (9) (683)
Total non-GAAP adjustments to operating
income 227 59 (210)
Adjusted operating income 78 119 73
Amortization 212 149 177
Acquired intangibles amortization (141) (82) (95)
Adjusted EBITDA $ 149 $ 186 $ 155
Adjusted revenue (per above) $ 1,099 $ 916 $ 967
Adjusted operating income margin % (1) 7 % 13 % 8 %
Adjusted EBITDA margin % (2) 14 % 20 % 16 %
______________________________
(1) Adjusted operating income margin % is calculated by dividing adjusted
operating income by adjusted revenue
(2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by
adjusted revenue
Key Metrics
The Company regularly monitors a number of financial and operating metrics,
including the following key metrics, in order to measure the Company's current
performance and estimate future performance. Readers are cautioned that
recurring revenue percentage, annual recurring revenue ("ARR"), dollar-based net
retention rate ("DBNRR") and free cash flow do not have any standardized meaning
prescribed by U.S. GAAP and are therefore unlikely to be comparable to similarly
titled measures reported by other companies.
Billings
The Company defines billings as amounts invoiced less credits issued, with the
exception of BlackBerry Cylance for which billings are defined as revenue
recognized plus the change in deferred revenue from the beginning to the end of
the period. The Company considers billings to be a useful metric because
billings drive deferred revenue, which is an important indicator of the health
and visibility of the business, and represents a significant percentage of
future revenue.
The Company previously stated that it expected double-digit percentage billings
growth in fiscal 2020. The Company's billings grew by a double-digit percentage
in fiscal 2020.
Enterprise achieved sequential billings growth in the high teen percentage in
the fourth quarter of fiscal 2020, which quarter also marked the highest level
of Enterprise billings in fiscal 2020.
BlackBerry Cylance billings also increased sequentially in the fourth quarter of
fiscal 2020.
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Recurring Revenue Percentage
The Company defines recurring revenue percentage as subscription, license and
support revenue (which includes revenue relating to support for perpetual
licenses), less IP licensing and professional services, for the period divided
by total software and services revenue for the period. The Company uses
recurring revenue percentage to provide visibility into the revenue expected to
be recognized in the current and future periods.
The Company previously stated that it expected approximately 90% of total
adjusted software and services revenue, excluding IP licensing and professional
services, to be recurring in fiscal 2020. Total adjusted software and services
revenue, excluding IP licensing and professional services, was greater than 90%
recurring in the fourth quarter of fiscal 2020. Total software and services
includes IoT, BlackBerry Cylance and Licensing.
Annual Recurring Revenue
The Company defines ARR as the annualized value of all active subscription
contracts as of the end of the reporting period. The Company uses ARR as an
indicator of business momentum for the BlackBerry Cylance product line.
BlackBerry Cylance ARR was approximately $167 million in the fourth quarter of
fiscal 2020, an increase of approximately $14 million , or 9%, compared to
approximately $153 million in the fourth quarter of fiscal 2019.
Dollar-Based Net Retention Rate
The Company defines DBNRR as the percentage of total annual contract value
("ACV") from its subscription customer base at the end of a trailing 12-month
period over the ACV of the same tranche of customers at the beginning of that
12-month period. The Company uses DBNRR to evaluate the long-term value of
BlackBerry Cylance's customer relationships, measuring the ability of the
business to retain and expand recurring revenue from its existing customer base.
BlackBerry Cylance DBNRR was greater than 90% in the fourth quarter of fiscal
2020 and greater than 100% in the fourth quarter of fiscal 2019.
Free Cash Flow
Free cash flow is a measure of liquidity calculated as net operating cash flow
minus capital expenditures. Free cash flow does not have any standardized
meaning as prescribed by U.S. GAAP and therefore may not be comparable to
similar measures presented by other companies. The Company uses free cash flow
when assessing its sources of liquidity, capital resources, and quality of
earnings. Free cash flow is helpful in understanding the Company's capital
requirements and provides an additional means to reflect the cash flow trends in
the Company's business. For the three months ended February 29, 2020 , the
Company's net cash flow from operating activities was $35 million and capital
expenditures were $3 million , resulting in the Company reporting free cash flow
of $32 million which includes $4 million in restructuring payments associated
with facilities.
For the fiscal year ended February 29, 2020 , the Company's net cash provided by
operating activities was $26 million and capital expenditures were $12 million ,
resulting in the Company reporting free cash flow of $14 million which includes
$17 million relating to acquisition and integration expenses, restructuring
costs and legal proceeding.
41
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Results of Operations - Fiscal year ended February 29, 2020 compared to fiscal
year ended February 28, 2019
Revenue
Revenue by Product and Service
Comparative breakdowns of revenue by product and service on a U.S. GAAP basis
are set forth below.
For the Fiscal Years Ended
(in millions)
February 29,
2020 February 28, 2019 Change February 28, 2018 Change
Revenue by Product and Service
IoT $ 540 $ 554 $ (14) $ 551 $ 3
BlackBerry Cylance 151 5 146 - 5
Licensing 328 286 42 196 90
Other 21 59 (38) 185 (126)
$ 1,040 $ 904 $ 136 $ 932 $ (28)
% Revenue by Product and Service
IoT 51.9 % 61.3 % 59.1 %
BlackBerry Cylance 14.5 % 0.6 % - %
Licensing 31.5 % 31.6 % 21.0 %
Other 2.1 % 6.5 % 19.9 %
100.0 % 100.0 % 100.0 %
IoT
IoT revenue was $540 million , or 51.9% of revenue in fiscal 2020, a decrease of
$14 million compared to $554 million , or 61.3% of revenue in fiscal 2019. The
decrease in IoT revenue of $14 million was primarily due to a decrease of $28
million from a lower number of Enterprise software licenses sold due to the
reorganization of the Enterprise sales force in fiscal 2020 and a decrease of
$13 million from lower BlackBerry QNX royalty volumes, partially offset by an
increase of $19 million due to conversions of certain existing BlackBerry QNX
royalty-bearing licenses to fixed pricing from volume-based pricing, resulting
in recognition of the fixed price in the current period rather than as units are
shipped (net of recurring royalties that would have been recognized without
conversion) and an increase of $6 million related to BlackBerry QNX development
seat revenues.
Adjusted IoT revenue was $542 million in fiscal 2020 compared to $565 million in
fiscal 2019, representing a decrease of $23 million . The $23 million decrease in
IoT revenue was primarily attributable to the same reasons described above on a
U.S. GAAP basis and due to a decrease of $9 million in the non-GAAP adjustment
of deferred software revenue acquired to $2 million in fiscal 2020 from $11
million in fiscal 2019.
The Company previously stated it expected BTS revenue growth of mid to high teen
percentage in fiscal 2020 compared to 2019. BTS revenue grew by 5.9%, which was
lower than expected due to the negative impacts of a slowdown in the automotive
market and the COVID-19 pandemic. BTS revenue includes revenue from BlackBerry
QNX, BlackBerry Certicom, BlackBerry Radar, Paratek and BlackBerry Jarvis.
The Company previously stated it expected Enterprise adjusted revenue growth of
less than 12% in fiscal 2020. The Company also previously stated that it
expected modest sequential growth in Enterprise adjusted revenue for the
remainder of fiscal 2020. Enterprise adjusted revenue declined by 9.8% in fiscal
2020 and Enterprise adjusted revenue declined in the fourth quarter of fiscal
2020 versus the third quarter of fiscal 2020 due to reorganizations of the
Enterprise sales force during fiscal 2020, which caused delays in developing and
closing Enterprise sales transactions, and due to competitive upgrades to the
Company's Enterprise product features and suites not being introduced until late
in the fiscal year.
In the second quarter of fiscal 2019, the Company previously stated that it
expected to generate $100 million in cumulative revenue from its BlackBerry
Radar asset tracking solution over the next three years. The Company no longer
expects to generate this revenue within this time frame.
In fiscal 2021, the Company expects BlackBerry QNX revenue to be negatively
impacted by a slowdown in automotive market related to the COVID-19 pandemic,
the impact of which could be partially offset by increased customer demand for
the Company's endpoint security and productivity solutions that support business
continuity and remote working environments, including the BlackBerry Spark
platform, SecuSUITE and BlackBerry AtHoc.
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BlackBerry Cylance
BlackBerry Cylance revenue was $151 million , or 14.5% of revenue in fiscal 2020,
an increase of $146 million compared to $5 million , or 0.6% of revenue in fiscal
2019. The increase in BlackBerry Cylance revenue of $146 million was due to the
acquisition of Cylance late in the fourth quarter of fiscal 2019; revenue
reported in the prior year period related to BlackBerry Cybersecurity Services
and seven days of BlackBerry Cylance revenue following its acquisition on
February 21, 2019 .
Adjusted BlackBerry Cylance revenue increased by $202 million to $208 million in
fiscal 2020, compared to $6 million in fiscal 2019. The increase was primarily
due to the same reason described above on a U.S. GAAP basis and due to an
increase of $56 million in the non-GAAP adjustment of deferred software revenue
acquired to $57 million in fiscal 2020 from $1 million in fiscal 2019.
Cylance recorded U.S. GAAP revenue of $175 million for the year ended
February 28, 2019 . After including BlackBerry Cybersecurity Services revenue,
BlackBerry Cylance revenue was $178 million for the year ended February 28,
2019 . Adjusted BlackBerry Cylance revenue was $208 million for the year ended
February 29, 2020 , representing an increase of $30 million , or 16.9% over the
prior year period.
The Company previously stated that it expected adjusted BlackBerry Cylance
revenue growth excluding BlackBerry Cybersecurity Services to be approximately
20% in fiscal 2020 on a base of $170 million . Adjusted BlackBerry Cylance
revenue growth was 20.5% in fiscal 2020.
The Company previously stated that it expected the profitability of BlackBerry
Cylance to improve through fiscal 2020. BlackBerry Cylance profitability at the
end of fiscal 2020 was greater than at the end of fiscal 2019.
Licensing
Licensing revenue was $328 million , or 31.5% of revenue in fiscal 2020, an
increase of $42 million compared to $286 million , or 31.6% of revenue in fiscal
2019. The increase in Licensing revenue of $42 million was primarily due to a
$126 million increase in direct licensing arrangements consisting of patent
licensing transactions and the BBM Consumer licensing arrangement and $4 million
related to the sale of IP, partially offset by a $78 million decrease in revenue
from the Company's patent licensing agreement with Teletry and the impact of $11
million received from an IP settlement in fiscal 2019 which did not recur in
fiscal 2020. The revenue recognized for the BBM Consumer licensing arrangement
was due to the shut down of the BBM Consumer service by the licensee, as a
result of which all of the Company's performance obligations were completed and
an assessment of the amount of revenue for which significant reversal was not
probable was performed.
The Company previously stated that it expected IP revenue to grow in fiscal 2020
over the prior fiscal year. Licensing revenue grew in fiscal 2020.
The Company previously stated that it expected Licensing revenue in the second
half of fiscal 2020 to be higher than in the first half of fiscal 2020.
Licensing revenue in the second half of fiscal 2020 was higher than the first
half of fiscal 2020.
The Company expects Licensing revenue of approximately $250 million in fiscal
2021.
Other
Other revenue was $21 million , or 2.1% of revenue in fiscal 2020 compared to $59
million , or 6.5% of revenue in fiscal 2019, representing a decrease of $38
million . The decrease in Other revenue of $38 million was primarily attributable
to a decrease in SAF revenue and revenue from the legacy handheld business. The
decrease in SAF revenue is primarily attributable to a lower number of
BlackBerry 7 users and lower revenue from those users compared to fiscal 2019.
The decrease in revenue from the legacy handheld business is primarily
attributable to the release of previously accrued amounts in fiscal 2019 when
the Company determined it had no further performance obligations, which did not
recur in fiscal 2020.
The Company previously stated that it expected SAF revenue of between $10
million and $20 million in fiscal 2020. SAF revenue was approximately $21
million in fiscal 2020.
Adjusted Total Revenue and Software and Services
The Company previously stated that it expected adjusted total Company revenue
growth of between 23% and 25% over the prior fiscal year. Adjusted total Company
revenue growth was 20.0% in fiscal 2020, lower than expectations due to the
reasons described above in IoT.
The Company previously stated that it expected total adjusted software and
services revenue growth, excluding the revenue growth of BlackBerry Cylance,
over the prior fiscal year. Total adjusted software and services revenue
excluding BlackBerry Cylance grew by 2.2% in fiscal 2020.
43
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U.S. GAAP Revenue by Geography
Comparative breakdowns of the geographic regions on a U.S. GAAP basis are set
forth in the following table:
For the Fiscal Years Ended
(in millions)
February 29,
2020 February 28, 2019 Change February 28, 2018 Change
Revenue by Geography
North America $ 743 $ 599 $ 144 $ 540 $ 59
Europe, Middle East and Africa 221 222 (1) 278 (56)
Other 76 83 (7) 114 (31)
$ 1,040 $ 904 $ 136 $ 932 $ (28)
% Revenue by Geography
North America 71.4 % 66.2 % 58.0 %
Europe, Middle East and Africa 21.3 % 24.6 % 29.8 %
Latin America 7.3 % 9.2 % 12.2 %
100.0 % 100.0 % 100.0 %
North America Revenue
Revenue in North America was $743 million , or 71.4% of revenue, in fiscal 2020,
reflecting an increase of $144 million compared to $599 million , or 66.2% of
revenue in fiscal 2019. The increase in North American revenue is primarily due
to increases of $121 million in BlackBerry Cylance and $47 million in Licensing
revenue, partially offset by decreases of $13 million in Other revenue and $12
million in IoT revenue, due to the reasons discussed above in "Revenue by
Product and Service".
Europe , Middle East and Africa Revenue
Revenue in Europe , Middle East and Africa was $221 million , or 21.3% of revenue,
in fiscal 2020, reflecting a decrease of $1 million compared to $222 million , or
24.6% of revenue, in fiscal 2019. The decrease in revenue is primarily due to
decrease of $18 million in Other revenue, partially offset by an increase of $17
million in BlackBerry Cylance revenue, due to the reasons discussed above in
"Revenue by Product and Service".
Other Regions Revenue
Revenue in other regions was $76 million , or 7.3% of revenue, in fiscal 2020,
reflecting a decrease of $7 million compared to $83 million , or 9.2% of revenue,
in fiscal 2019. The decrease in revenue is primarily due to decreases in Other,
Licensing and IoT revenue, partially offset by an increase in BlackBerry Cylance
revenue. The decrease of $8 million in Other revenue and $4 million in IoT
revenue are primarily due to the reasons discussed above in "Revenue by Product
and Service". The decrease in Licensing revenue is primarily due to a decrease
of $5 million in revenue from mobility licensing arrangements. The increase in
BlackBerry Cylance revenue of $10 million was primarily due to the reasons
discussed above in "Revenue by Product and Service".
Gross Margin
Consolidated Gross Margin
Consolidated gross margin increased by $65 million to approximately $763 million
in fiscal 2020 from $698 million in fiscal 2019. The increase was primarily due
to an increase in gross margin associated with BlackBerry Cylance and Licensing,
partially offset by a decrease in gross margin associated with Other and IoT
revenue due to the reasons discussed above in "Revenue by Product and Service".
The increase in gross margin associated with BlackBerry Cylance and Licensing is
primarily due to the reasons discussed above in "Revenue by Product and
Service". The decrease in gross margin associated with Other revenue is
primarily due to the decline in SAF revenue discussed above in "Revenue by
Product and Service", as cost of goods sold associated with SAF were consistent
in fiscal 2020 and fiscal 2019 due to certain fixed costs associated with SAF
infrastructure. The decrease in gross margin associated with IoT revenue is
primarily due to the decline in Enterprise revenue discussed above in "Revenue
by Product and Service.
44
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Consolidated Gross Margin Percentage
Consolidated gross margin percentage decreased by 3.8%, to approximately 73.4%
of consolidated revenue in fiscal 2020 from 77.2% of consolidated revenue in
fiscal 2019. The decrease was primarily due to a lower gross margin percentage
associated with BlackBerry Cylance, which has a higher proportion of revenue
related to professional services and due to a lower gross margin percentage in
IoT revenue due to the decline in Enterprise revenue discussed above in "Revenue
by Product and Service.
The Company previously stated that it expected adjusted gross margin to be
between 74% and 75% for fiscal 2020. Adjusted gross margin was 75.7% for fiscal
2020.
Operating Expenses
The table below presents a comparison of research and development, selling,
marketing and administration, and amortization expense for fiscal 2020 compared
to fiscal 2019 and fiscal 2019 compared to fiscal 2018.
For the Fiscal Years Ended
(in millions)
February 29, 2020 February 28, 2019 Change February 28, 2018 Change
Revenue $ 1,040 $ 904 $ 136 $ 932 $ (28)
Operating expenses
Research and development 259 219 $ 40 239 $ (20)
Selling, marketing and
administration 493 409 84 476 (67)
Amortization 194 136 58 153 (17)
Impairment of goodwill 22 - 22 - -
Impairment of long-lived assets 10 - 10 11 (11)
Debentures fair value adjustment (66) (117) 51 191 (308) Arbitration awards and settlements, net - (9) 9 (683) 674 Total $ 912 $ 638$ 274 $ 387$ 251 Operating Expense as % of Revenue Research and development 24.9 % 24.2 % 25.6 % Selling, marketing and administration 47.4 % 45.2 % 51.1 % Amortization 18.7 % 15.0 % 16.4 % Impairment of goodwill 2.1 % - % - % Impairment of long-lived assets 1.0 % - % 1.2 % Debentures fair value adjustment (6.3) % (12.9) % 20.5 % Arbitration awards and settlements, net - % (1.0) % (73.3) % Total 87.7 % 70.5 % 41.5 % See "Non-GAAP Financial Measures" for a reconciliation of selected GAAP-based measures to adjusted measures for the years endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2018 .U.S. GAAP Operating Expenses Operating expenses increased by$274 million , or 42.9%, to$912 million , or 87.7% of revenue in fiscal 2020, compared to$638 million , or 70.5% of revenue, in fiscal 2019. The increase was attributable to an increase in salaries and benefits expense of$82 million and an increase in amortization expense of$58 million primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019, the difference between the Fiscal 2020 Debentures Fair Value Adjustment and Fiscal 2019 Debentures Fair Value Adjustment of$51 million , an increase of$22 million in goodwill impairment, costs associated with direct IP licensing arrangements of$18 million , an increase in marketing and advertising costs of$17 million , and long-lived asset impairment of$10 million , partially offset by$10 million in expenses reimbursed by the Ministry ofInnovation, Science and Economic Development Canada through itsStrategic Innovation Fund program's investment inBlackBerry QNX (the "SIF Claims") and a decrease of$8 million inCylance acquisition costs from fiscal 2019 which did not recur. 45 -------------------------------------------------------------------------------- Adjusted Operating Expenses Adjusted operating expenses increased by$157 million , or 26.3%, to$754 million in the fiscal 2020, compared to$597 million in fiscal 2019. The increase was primarily attributable to an increase in salaries and benefits expense of$83 million , an increase of$22 million in sales incentive plan costs and a$17 million increase in marketing and advertising cost primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019, partially offset by$10 million from the SIF Claims. Research and Development Expenses Research and development expenses consist primarily of salaries and benefits for technical personnel, new product development costs, travel, office and building costs, infrastructure costs and other employee costs. Research and development expenses increased by$40 million , or 18.3%, to$259 million , or 24.9% of revenue, in fiscal 2020, compared to$219 million , or 24.2% of revenue, in fiscal 2019. The increase was primarily attributable to an increase in salaries and benefits expense of$37 million , an increase of$6 million in professional service costs, and a$4 million increase in infrastructure cost primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019, partially offset by$10 million from the SIF Claims. Adjusted research and development expenses increased by$41 million , or 20.0% to$246 million in fiscal 2020 compared to$205 million in fiscal 2019. The increase was primarily due to the same reasons described above on aU.S. GAAP basis. Selling, Marketing and Administration Expenses Selling, marketing and administration expenses consist primarily of marketing, advertising and promotion, salaries and benefits, external advisory fees, information technology costs, office and related staffing infrastructure costs and travel expenses. Selling, marketing and administration expenses increased by$84 million , or 20.5%, to$493 million , or 47.4% of revenue, in fiscal 2020 compared to$409 million in fiscal 2019, or 45.2% of revenue. The increase was primarily attributable to an increase in salaries and benefits expense of$44 million and an increase of$7 million in sales incentive plan costs primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019, costs associated with a direct IP licensing arrangement of$18 million , and a marketing and advertising cost increase of$17 million , partially offset by a decrease in stock compensation expense of$9 million and a decrease in professional services of$8 million inCylance acquisition costs from fiscal 2019 which did not recur. Adjusted selling, marketing and administration expenses increased by$117 million , or 34.6%, to$455 million in fiscal 2020 compared to$338 million in fiscal 2019. The increase was primarily attributable to an increase in salaries and benefits expense of$46 million , an increase of$22 million in sales incentive plan costs, a marketing and advertising cost increase of$17 million , and an increase in infrastructure cost of$8 million primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019 and an increase of$8 million in legal costs, partially offset by a decrease in accounting expense of$2 million . Amortization Expense The table below presents a comparison of amortization expense relating to property, plant and equipment and intangible assets recorded as amortization or cost of sales for fiscal 2020 compared to fiscal 2019 and fiscal 2019 compared to fiscal 2018. Intangible assets are comprised of patents, licenses and acquired technology. For the Fiscal Years Ended (in millions) Included in Operating Expense February 29, 2020 February 28, 2019 Change February 28, 2018 Change Property, plant and equipment $ 18 $ 14$ 4 $ 18$ (4) Intangible assets 176 122 54 135 (13) Total $ 194 $ 136$ 58 $ 153$ (17) Included in Cost of Sales February 29, 2020 February 28, 2019 Change February 28, 2018 Change Property, plant and equipment $ 6 $ 6 $ - $ 18$ (12) Intangible assets 12 7 5 6 1 Total $ 18 $ 13$ 5 $ 24$ (11) 46
-------------------------------------------------------------------------------- Amortization included in Operating Expense Amortization expense relating to certain property, plant and equipment and intangible assets increased by$58 million to$194 million for fiscal 2020, compared to$136 million for fiscal 2019. The increase in amortization expense primarily reflects the amortization of assets acquired in theCylance acquisition. Adjusted amortization expense decreased by$1 million . Amortization included in Cost of Sales Amortization expense relating to certain property, plant and equipment and intangible assets employed in the Company's service operations increased by$5 million to$18 million for fiscal 2020, compared to$13 million for fiscal 2019. This increase primarily reflects the full depreciation of certain assets, partially offset by a portion of the amortization of patents being classified as cost of goods sold due to the Company's intellectual property licensing arrangements. Investment Income, Net Investment income, net, which includes the interest expense from the Debentures, decreased by$16 million to income of$1 million in fiscal 2020, from income of$17 million in fiscal 2019. The decreased investment income was due to lower cash and investment balances in fiscal 2020 versus fiscal 2019 as a result of the use of cash to fund theCylance acquisition. Income Taxes For fiscal 2020, the Company's net effective income tax expense rate was approximately 3%, compared to a net effective income tax recovery of approximately 21% for the prior fiscal year. The Company's net effective income tax rate reflects the fact that the Company has a significant valuation allowance against its deferred tax assets, and in particular, the change in fair value of the Debentures, amongst other items, was offset by a corresponding adjustment of the valuation allowance. The Company's net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates. The Company's adjusted net effective income tax expense rate was approximately 6%, compared to approximately 4% for the same period in the prior fiscal year. The increase is due to current year taxable items that could not be offset with carried forward tax attributes such as tax losses. Net Income The Company's net loss for fiscal 2020 was$152 million , reflecting a decrease in net income of$245 million compared to net income of$93 million in fiscal 2019, primarily due to an increase in operating expenses, as described above in "Operating Expenses", and a decrease in gross margin percentage, as described above in "Consolidated Gross Margin Percentage", partially offset by an increase in revenue as described above in "Revenue by Product and Service". Adjusted net income for fiscal 2020 was$74 million compared to$131 million in fiscal 2019, reflecting a decrease in adjusted net income of$57 million , primarily due to an increase in operating expenditures and a decrease in the gross margin percentage, partially offset by an increase in revenue. Basic loss per share on aU.S. GAAP basis was$0.27 and diluted loss per share on aU.S. GAAP basis was$0.32 in fiscal 2020, a decrease in earnings per share of$0.44 and$0.32 , respectively, compared to basic earnings per share on aU.S. GAAP basis of$0.17 and diluted earnings per share on aU.S. GAAP basis of$0.00 in fiscal 2019. The weighted average number of shares outstanding was 554 million and 614 million for basic and diluted loss per share, respectively, for the fiscal year endedFebruary 29, 2020 . The weighted average number of shares outstanding was 540 million and 616 million for basic and diluted earnings per share, respectively, for the fiscal year endedFebruary 28, 2019 . The Company previously stated its expectations of achieving adjusted earnings per share of approximately$0.08 for fiscal 2020. Adjusted earnings per share were$0.13 in fiscal 2020 primarily due to better than expected Licensing revenue in the fourth quarter and continued demonstration of cost discipline. Common Shares Outstanding OnMarch 26, 2020 , there were 554 million voting common shares, options to purchase 6 million voting common shares, 24 million restricted share units and 1 million deferred share units outstanding. In addition, 60.5 million common shares are issuable upon conversion in full of the Debentures. The Company has not paid any cash dividends during the last three fiscal years. 47 -------------------------------------------------------------------------------- Results of Operations - Three months endedFebruary 29, 2020 compared to the three months endedFebruary 28, 2019 The following section sets forth certain unaudited consolidated statements of operations data, which is expressed in millions of dollars, except for share and per share amounts and as a percentage of revenue, for the three months endedFebruary 29, 2020 ,February 28, 2019 andFebruary 28, 2019 : For the Three Months Ended (in millions, except for share and per share amounts) February 29, February 28, February 28, 2020 2019 Change 2018 Change Revenue$ 282 $ 255 $ 27 $ 233 $ 22 Gross margin 212 206 6 177 29 Operating expenses 253 178 75 194 (16) Investment income, net (1) 4 (5) 3 1 Income (loss) before income taxes (42) 32 (74) (14) 46 Recovery of income taxes (1) (19) 18 (4) (15) Net income (loss)$ (41) $ 51 $ (92) $ (10) $ 61 Earnings (loss) per share - reported Basic$ (0.07) $ 0.09 $ (0.16) $ (0.02) $ 0.11 Diluted (1)$ (0.07) $ 0.08 $ (0.15) $ (0.06) $ 0.14 Weighted-average number of shares outstanding (000's) Basic 556,668 547,272 536,594 Diluted (1) 556,668 615,593 597,094
______________________________
(1)Diluted loss per share on aU.S. GAAP basis in the fourth quarter of 2020 does not include the dilutive effect of the Debentures as to do so would be anti-dilutive. Diluted loss per share on aU.S. GAAP basis for fiscal 2020 and fiscal 2018 do not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive. Revenue Revenue by Product and Service Comparative breakdowns of revenue by product and service on aU.S. GAAP basis are set forth below. For the Three Months Ended (in millions) February 29, 2020 February 28, 2019 Change February 28, 2018 Change Revenue by Product and Service IoT $ 127 $ 144$ (17) $ 154$ (10) BlackBerry Cylance 43 3 40 - 3 Licensing 108 99 9 58 41 Other 4 9 (5) 21 (12) $ 282 $ 255$ 27 $ 233$ 22 % Revenue by Product and Service IoT 45.0 % 56.5 % 66.1 % BlackBerry Cylance 15.2 % 1.2 % - % Licensing 38.3 % 38.8 % 24.9 % Other 1.5 % 3.5 % 9.0 % 100.0 % 100.0 % 100.0 % 48
--------------------------------------------------------------------------------
IoT
IoT revenue was$127 million , or 45.0% of revenue, in the fourth quarter of fiscal 2020, a decrease of$17 million compared to$144 million , or 56.5% of revenue, in the fourth quarter of fiscal 2019. The decrease in IoT revenue of$17 million was primarily due to a decrease of$13 million due to a lower number of Enterprise software licenses sold and a decrease of$7 million in recurring royalties inBlackBerry QNX due to the conversion in prior periods of certain existing royalty-bearing licenses to fixed pricing from volume-based pricing, resulting in recognition of the fixed price in prior periods, partially offset by an increase of$3 million in tablet sales in Secusmart. Adjusted IoT revenue was$127 million in the fourth quarter of fiscal 2020, a decrease of$18 million compared to$145 million in the fourth quarter of fiscal 2019. Adjusted IoT revenue decreased due to the reasons described above on aU.S. GAAP basis and due to a decrease of$1 million in the non-GAAP adjustment of deferred software revenue acquired to nil in the fourth quarter of fiscal 2020 from$1 million in the fourth quarter of fiscal 2019. The Company believes thatBlackBerry QNX revenue was negatively impacted by a slowdown in automotive market related to the COVID-19 pandemic in the fourth quarter of fiscal 2020.BlackBerry Cylance BlackBerry Cylance revenue was$43 million , or 15.2% of revenue, in the fourth quarter of fiscal 2020, an increase of$40 million compared to$3 million , or 1.2% of revenue, in the fourth quarter of fiscal 2019. The increase inBlackBerry Cylance revenue of$40 million was due to the acquisition ofCylance late in the fourth quarter of fiscal 2019; revenue reported in the prior year period related toBlackBerry Cybersecurity Services which has been reclassified as a component ofBlackBerry Cylance revenue, and seven days ofBlackBerry Cylance revenue. AdjustedBlackBerry Cylance revenue was$52 million in the fourth quarter of fiscal 2020, an increase of$48 million compared to$4 million in the fourth quarter of fiscal 2019. The increase in adjustedBlackBerry Cylance revenue of$48 million was due to the same reason described above on aU.S. GAAP basis and due to an increase of$8 million in the non-GAAP adjustment of deferred software revenue acquired to$9 million in the fourth quarter of fiscal 2020 from$1 million in the fourth quarter of fiscal 2019; revenue reported in the prior year period related toBlackBerry Cybersecurity Services and seven days ofBlackBerry Cylance revenue.Cylance recordedU.S. GAAP revenue of$49 million for the three months endedFebruary 28, 2019 . After includingBlackBerry Cybersecurity Services revenue,Cylance revenue was$50 million for the three months endedFebruary 28, 2019 . AdjustedBlackBerry Cylance revenue was$52 million for the three months endedFebruary 29, 2020 , representing an increase of$2 million , or 3.9% over the prior year period. Licensing Licensing revenue was$108 million , or 38.3% of revenue, in the fourth quarter of fiscal 2020, an increase of$9 million compared to$99 million , or 38.8% of revenue, in the fourth quarter of fiscal 2019. The increase in Licensing revenue of$9 million was primarily due to an increase of$75 million in direct licensing arrangements consisting of the BBM Consumer licensing arrangement and patent licensing transactions and$4 million related to the sale of IP, partially offset by a$67 million decrease in revenue from the Company's patent licensing agreement with Teletry. The revenue recognized for the BBM Consumer licensing arrangement was due to the shut down of the BBM Consumer service by the licensee, as a result of which all of the Company's performance obligations were completed and an assessment of the amount of revenue for which significant reversal was not probable was performed. Other Other revenue includes revenue from SAF and the Company's legacy handheld devices business. Other revenue was$4 million related to SAF, or 1.5% of revenue, in the fourth quarter of fiscal 2020, compared to$9 million , or 3.5% of revenue, in the fourth quarter of fiscal 2019, representing a decrease of$5 million . The decrease in Other revenue of$5 million was attributable to a decrease in SAF revenue. The decrease in SAF revenue, which is generated from users ofBlackBerry 7 and priorBlackBerry operating systems is primarily attributable to a lower number ofBlackBerry 7 users and lower revenue from those users compared to the fourth quarter of fiscal 2019. Adjusted Revenue - Fourth Quarter vs. First QuarterThe Company previously stated that it expected adjusted revenue to be lower in the first quarter of fiscal 2020 than in the fourth quarter of fiscal 2020. Adjusted revenue was lower in the first quarter of fiscal 2020 compared to the fourth quarter of fiscal 2020. 49 --------------------------------------------------------------------------------U.S. GAAP Revenue by Geography Comparative breakdowns of the geographic regions are set forth in the following table: For the Three Months Ended (in millions) February 29, 2020 February 28, 2019 Change February 28, 2018 Change Revenue by Geography North America $ 213 $ 176$ 37 $ 147$ 29 Europe, Middle East and Africa 53 61 (8) 63 (2) Other regions 16 18 (2) 23 (5) $ 282 $ 255$ 27 $ 233$ 22 % Revenue by Geography North America 75.5 % 69.0 % 63.1 % Europe, Middle East and Africa 18.8 % 23.9 % 27.0 % Other regions 5.7 % 7.1 % 9.9 % 100.0 % 100.0 % 100.0 % North America Revenue Revenue inNorth America was$213 million , or 75.5% of revenue, in the fourth quarter of fiscal 2020, reflecting an increase of$37 million compared to$176 million , or 69.0% of revenue, in the fourth quarter of fiscal 2019. Revenue inNorth America increased compared to the fourth quarter of fiscal 2019 primary due to a$35 million increase inBlackBerry Cylance and$12 million increase in Licensing revenue due to the reasons discussed above in "Revenue by Product and Service", partially offset by a decrease in IoT revenue due to a$8 million decrease in Enterprise software licenses sold.Europe ,Middle East and Africa Revenue Revenue inEurope ,Middle East andAfrica was$53 million or 18.8% of revenue in the fourth quarter of fiscal 2020, reflecting a decrease of$8 million compared to$61 million or 23.9% of revenue in the fourth quarter of fiscal 2019. The decrease in revenue is primarily due to a decrease of$8 million in IoT revenue and a decrease of$3 million in Other revenue due to the reasons discussed above in "Revenue by Product and Service", partially offset by an increase of$4 million inBlackBerry Cylance revenue for the reasons discussed above in "Revenue by Product and Service". Other Regions Revenue Revenue in other regions was$16 million or 5.7% of revenue in the fourth quarter of fiscal 2020, reflecting a decrease of$2 million compared to$18 million or 7.1% of revenue in the fourth quarter of fiscal 2019. The decrease in revenue is primarily due to a decrease in Licensing revenue due to a$2 million decrease in revenue from mobility licensing arrangements and a$1 million decrease in Other revenue due to the reasons discussed above in "Revenue by Product and Service", partially offset by an increase of$2 million inBlackBerry Cylance revenue due to the reasons discussed above in "Revenue by Product and Service". Gross Margin Consolidated Gross Margin Consolidated gross margin increased by$6 million to approximately$212 million in the fourth quarter of fiscal 2020 from$206 million in the fourth quarter of fiscal 2019. The increase was primarily due to increases in gross margin inBlackBerry Cylance and Licensing, partially offset by a decrease in gross margin associated with IoT and Other. The increase in gross margin associated withBlackBerry Cylance and Licensing is primarily due to the increase in revenue discussed above in "Revenue by Product and Service". The decrease in gross margin associated with IoT is primarily due to the reasons discussed above in "Revenue by Product and Service". The decrease in gross margin associated with Other is due to the decline in SAF revenue discussed above in "Revenue by Product and Service", as the cost of goods sold associated with SAF was consistent in the fourth quarter of fiscal 2020 and the fourth quarter of fiscal 2019 due to certain fixed costs associated with SAF infrastructure. Consolidated Gross Percentage Consolidated gross margin percentage decreased by 5.6%, to approximately 75.2% of consolidated revenue in the fourth quarter of fiscal 2020 from 80.8% of consolidated revenue in the fourth quarter of fiscal 2019. The decrease was primarily due to lower 50 -------------------------------------------------------------------------------- gross margin percentage associated withBlackBerry Cylance, which has a higher proportion of revenue related to professional services and due to a lower gross margin percentage in IoT revenue due to the decline in Enterprise revenue discussed above in "Revenue by Product and Service". Operating Expenses The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the quarter endedFebruary 29, 2020 , compared to the quarter endedNovember 30, 2019 and the quarter endedFebruary 28, 2019 . The Company believes it is also meaningful to provide a sequential comparison between the fourth quarter of fiscal 2020 and the third quarter of fiscal 2020. For the Three Months Ended (in millions) February 29, 2020 November 30, 2019 February 28, 2019 February 28, 2018 Revenue $ 282 $ 267 $ 255 $ 233 Operating expenses Research and development 60 66 52 58 Selling, marketing and administration 113 129 110 131 Amortization 48 49 31 37 Impairment of long-lived assets 5 3 - - Impairment of goodwill 22 - - - Loss on sale, disposal and abandonment of long-lived assets - - -
2
Debentures fair value adjustment 5 (20) (6)
(34)
Arbitration awards and settlements, net - - (9) - Total $ 253 $ 227 $ 178 $ 194 Operating Expense as % of Revenue Research and development 21.3 % 24.7 % 20.4 % 24.9 % Selling, marketing and administration 40.1 % 48.3 % 43.1 % 56.2 % Amortization 17.0 % 18.4 % 12.2 % 15.9 % Impairment of long-lived assets 1.8 % 1.1 % - % - % Impairment of goodwill 7.8 % - % - % - % Loss on sale, disposal and abandonment of long-lived assets - % - % - % 0.9 % Debentures fair value adjustment 1.8 % (7.5) % (2.4) % (14.6) % Arbitration awards and settlements, net - % - % (3.5) % - % Total 89.7 % 85.0 % 69.8 % 83.3 % See "Non-GAAP Financial Measures" for a reconciliation of selected GAAP-based measures to adjusted measures for the three months endedFebruary 29, 2020 ,November 30, 2019 ,February 28, 2019 andFebruary 28, 2018 .U.S. GAAP Operating Expenses Operating expenses increased by$26 million , or 11.5%, to$253 million , or 89.7%% of revenue, in the fourth quarter of fiscal 2020, compared to$227 million , or 85.0% of revenue, in the third quarter of fiscal 2020. The increase was primarily attributable to the difference between the Q4 Fiscal 2020 Debentures Fair Value Adjustment and Q3 Fiscal 2020 Debentures Fair Value Adjustment of$25 million and an increase of$22 million resulting from goodwill impairment, offset by a decrease in variable incentive plan costs of$8 million . Operating expenses increased by$75 million , or 42.1%, to$253 million , or 89.7%% of revenue, in the fourth quarter of fiscal 2020, compared to$178 million , or 69.8% of revenue, in the fourth quarter of fiscal 2019. The increase was primarily attributable to the goodwill impairment of$22 million , an increase of$18 million in salaries and benefits expenses primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019, an increase of$11 million in the difference between the Q4 Fiscal 2020 Debentures Fair Value Adjustment and Q4 Fiscal 2019 Debentures Fair Value Adjustment and a decrease in arbitration awards and settlements, net of$9 million in fiscal 2019, partially offset by a decrease of$8 million inCylance acquisition costs from the fourth quarter of fiscal 2019 which did not recur. 51 -------------------------------------------------------------------------------- Adjusted Operating Expenses Adjusted operating expenses decreased by$23 million , or 11.8%, to$172 million in the fourth quarter of fiscal 2020 compared to$195 million in the third quarter of fiscal 2020. The decrease was primarily attributable to a decrease of$8 million in variable incentive plan cost, a decrease of$4 million in bad debt expenses, a decrease of$3 million in marketing and advertising expense, and a$3 million decrease in infrastructure cost, partially offset by an increase of$2 million in sales incentive plan costs. Adjusted operating expenses increased by$20 million , or 13.2%, to$172 million in the fourth quarter of fiscal 2020, compared to$152 million in the fourth quarter of fiscal 2019. The increase was primarily attributable to the increase of$18 million in salaries and benefits expense and an increase in sales incentive plan cost of$7 million primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019 and an increase of$3 million in legal cost, partially offset by decreases of$4 million in bad debt expense and$3 million in variable incentive plan costs. Research and Development Expense Research and development expenses consist primarily of salaries and benefits costs for technical personnel, new product development costs, travel expenses, office and building costs, infrastructure costs and other employee costs. Research and development expenses increased by$8 million , or 15.4%, to$60 million in the fourth quarter of fiscal 2020 compared to$52 million in the fourth quarter of fiscal 2019. The increase was primarily attributable to the increase of$8 million in salaries and benefits expense primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019. Adjusted research and development expenses increased by$8 million , or 16.3%, to$57 million in the fourth quarter of fiscal 2020 compared to$49 million in the fourth quarter of fiscal 2019. This increase was primarily attributable to an increase of$8 million in salaries and benefits costs. Selling, Marketing and Administration Expenses Selling, marketing and administration expenses consist primarily of marketing, advertising and promotion, salaries and benefits, external advisory fees, information technology costs, office and related staffing infrastructure costs and travel expenses. Selling, marketing and administration expenses increased by$3 million , or 2.7%, to$113 million in the fourth quarter of fiscal 2020 compared to$110 million in the fourth quarter of fiscal 2019. This increase is primarily attributable to an increase of$10 million in salaries and benefits expense and an increase of$3 million in marketing and advertising expense, partially offset by a decrease of$8 million inCylance acquisition costs from the fourth quarter of fiscal 2019 which did not recur and a decrease of$5 million in variable incentive plan expense. Adjusted selling, marketing and administration expenses increased by$12 million , or 13.3%, to$102 million in the fourth quarter of fiscal 2020 compared to$90 million in the fourth quarter of fiscal 2019. This increase was primarily attributable to an increase of$10 million in salaries and benefits expense and a$7 million increase in sales incentive plan costs primarily due to the acquisition ofCylance in the fourth quarter of fiscal 2019, partially offset by a decrease in variable incentive plan expense of$4 million . 52 -------------------------------------------------------------------------------- Amortization Expense The table below presents a comparison of amortization expense relating to property, plant and equipment and intangible assets recorded as amortization or cost of sales for the quarter endedFebruary 29, 2020 compared to the quarter endedFebruary 28, 2019 and for the quarter endedFebruary 28, 2019 compared to the quarter endedFebruary 28, 2018 . Intangible assets are comprised of patents, licenses and acquired technology. For the Three Months Ended (in millions) Included in Operating Expense February 29, 2020 February 28, 2019 Change February 28, 2018 Change Property, plant and equipment $ 4 $ 4 $ - $ 5$ (1) Intangible assets 44 27 17 32 (5) Total $ 48 $ 31$ 17 $ 37$ (6) Included in Cost of Sales February 29, 2020 February 28, 2019 Change February 28, 2018 Change Property, plant and equipment $ 2 $ 1$ 1 $ 2$ (1) Intangible assets 2 1 1 - 1 Total $ 4 $ 2$ 2 $ 2 $ - Amortization included in Operating Expense Amortization expense relating to certain property, plant and equipment and certain intangible assets increased by$17 million to$48 million for the fourth quarter of fiscal 2020 compared to$31 million for the fourth quarter of fiscal 2019. The increase in amortization expense reflects the intangible assets acquired as part of theCylance acquisition in the fourth quarter of fiscal 2019. Adjusted amortization in the fourth quarter of fiscal 2020 was consistent with the fourth quarter of fiscal 2019. Amortization included in Cost of Sales Amortization expense relating to certain property, plant and equipment and certain intangible assets employed in the Company's service operations were$4 million in the fourth quarter of fiscal 2019 compared to$2 million for the fourth quarter of fiscal 2019. The increase is due to a higher portion of the amortization of patents being classified as cost of goods sold due to the Company's IP licensing arrangements. Investment Income, Net Investment income, net, which includes the interest expense from the Debentures, decreased by$5 million to a loss of$1 million in the fourth quarter of fiscal 2020, compared to income of$4 million in the fourth quarter of fiscal 2019. The decrease in investment income was due to lower cash and investment balances in fiscal 2020 versus fiscal 2019 as a result of the use of cash to fund theCylance acquisition. Income Taxes For the fourth quarter of fiscal 2020, the Company's net effective income tax recovery rate was approximately 2%, compared to an effective income tax recovery rate of approximately 59% for the same period in the prior fiscal year. The Company's net effective income tax rate reflects the fact that the Company has a significant valuation allowance against its deferred tax assets, and in particular, the change in fair value of the Debentures, amongst other items, was offset by a corresponding adjustment of the valuation allowance. The Company's net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates. The Company's adjusted net effective income tax recovery rate was approximately 2%, compared to a net effective income tax recovery rate of approximately 3% for the same period in the prior fiscal year. The increase is due to current year taxable items that could not be offset with carried forward tax attributes such as tax losses. Net Income (Loss) The Company's net loss for the fourth quarter of fiscal 2020 was$41 million , or$0.07 basic loss per share and$0.07 diluted loss per share on aU.S. GAAP basis, reflecting a decrease in net income of$92 million compared to a net income of$51 million , or$0.09 basic earnings per share and$0.08 diluted earnings per share, in the fourth quarter of fiscal 2019. The decrease in net income of$92 million was primarily due to an increase in operating expenses, as described above in "Operating 53 -------------------------------------------------------------------------------- Expenses", and a decrease in gross margin percentage, as described above in "Consolidated Gross Margin Percentage", partially offset by an increase in revenue as described above in "Revenue by Product and Service". Adjusted net income was$51 million in the fourth quarter of fiscal 2020 compared to$60 million in the fourth quarter of fiscal 2019, reflecting a decrease in adjusted net income of$9 million primarily due to an increase in operating expenses as described above in "Operating Expenses" and a decrease in gross margin percentage, as described above in "Consolidated Gross Margin Percentage", partially offset by an increase in revenue as described above in "Revenue by Product and Service". The Company previously stated that it expected adjusted earnings to be lower in the first quarter of fiscal 2020 than in the fourth quarter of fiscal 2020. Adjusted earnings was lower in the first quarter of fiscal 2020 compared to the fourth quarter of fiscal 2020. The Company expects its financial performance in the first quarter of fiscal 2021 to be below that of the fourth quarter of fiscal 2020 due to the COVID-19 pandemic. The COVID-19 pandemic may also negatively impact the Company's financial performance in the second quarter of fiscal 2021. The Company expects its financial performance in the second half of fiscal 2021 to be stronger than its financial performance in the first half of the fiscal year. The weighted average number of shares outstanding was 557 million common shares for basic and diluted loss per share for the fourth quarter of fiscal 2020. The weighted average number of shares outstanding was 547 million common shares for basic earnings per share and 616 million common shares for diluted earnings per share for the fourth quarter of fiscal 2019. 54 -------------------------------------------------------------------------------- Selected Quarterly Financial Data The following table sets forth the Company's unaudited quarterly consolidated results of operations data for each of the eight most recent quarters, including the quarter endedFebruary 29, 2020 . The information in the table below has been derived from the Company's unaudited interim consolidated financial statements that, in management's opinion, have been prepared on a basis consistent with the audited consolidated financial statements of the Company and include all adjustments necessary for a fair presentation of information when read in conjunction with the audited consolidated financial statements of the Company. The Company's quarterly operating results have varied substantially in the past and may vary substantially in the future. Accordingly, the information below is not necessarily indicative of results for any future quarter. (in millions, except per share data) Fiscal Year 2020 Fiscal Year 2019 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Revenue$ 282 $ 267 $ 244 $ 247 $ 255 $ 226 $ 210 $ 213 Gross margin 212 198 176 177 206 170 161 161 Operating expenses 253 227 219 213 178 112 122 226 Income (loss) before income taxes (42) (30) (43) (33) 32 60 44
(59)
Provision for (recovery of) income taxes (1) 2 1 2 (19) 1 1 1 Net income (loss)$ (41) $ (32) $ (44) $ (35) $ 51 $ 59 $ 43 $ (60) Earnings (loss) per share Basic earnings (loss) per share$ (0.07) $ (0.06) $ (0.08)
(0.11)
Diluted earnings (loss) per share$ (0.07) $ (0.07) $ (0.10)
(0.11)
Research and development
$ 71 $ 52 $ 55 $ 51 $ 61 Selling, marketing and administration 113 129 130 121 110 93 106 100 Amortization 48 49 48 49 31 33 35 37 Impairment of long-lived assets 5 3 2 - - - - - Impairment of goodwill 22 - - - - - - - Debentures fair value adjustment 5 (20) (23) (28) (6) (69) (70) 28 Arbitration awards and settlements, net - - - - (9) - - - Operating expenses$ 253 $ 227 $ 219 $ 213 $ 178 $ 112 $ 122 $ 226 Financial Condition Liquidity and Capital Resources Cash, cash equivalents, and investments decreased by$15 million to$990 million as atFebruary 29, 2020 from$1.01 billion as atFebruary 28, 2019 , primarily as a result of changes in working capital. The majority of the Company's cash, cash equivalents, and investments are denominated inU.S. dollars as atFebruary 29, 2020 . 55 -------------------------------------------------------------------------------- A comparative summary of cash, cash equivalents, and investments is set out below: As at (in millions) February 28, February 28, February 29, 2020 2019 Change 2018 Change Cash and cash equivalents $ 377$ 548 $ (171) $ 816 $ (268) Restricted cash 49 34 15 39 (5) Short-term investments 532 368 164 1,443 (1,075) Long-term investments 32 55 (23) 55 - Cash, cash equivalents, and investments $ 990$ 1,005
The table below summarizes the current assets, current liabilities, and working
capital of the Company:
As at
(in millions)
February 29, February 28, February 28,
2020 2019 Change 2018 Change
Current assets $ 1,196 $ 1,233 $ (37) $ 2,566 $ (1,333)
Current liabilities 1,121 510 611 432 78
Working capital $ 75 $ 723 $ (648) $ 2,134 $ (1,411)
Current Assets
The decrease in current assets of $37 million at the end of fiscal 2020 from the
end of fiscal 2019 was primarily due to a decrease in cash and cash equivalents
of $171 million , accounts receivable, net of $18 million , other receivables of
$5 million , other current assets of $4 million , and income taxes receivable of
$3 million partially offset by increases in short term investments of $164
million .
At February 29, 2020 , accounts receivable was $215 million , a decrease of $18
million from February 28, 2019 . The decrease reflects a decrease in days sales
outstanding to 70 days at the end of the fourth quarter of fiscal 2020 from 82
days at the end of the fourth quarter of fiscal 2019, partially offset by higher
revenue recognized over the three months ended February 29, 2020 .
At February 29, 2020 , other receivables decreased by $5 million to $14 million
compared to $19 million as at February 28, 2019 . The decrease was primarily due
to a decrease of $3 million in GST and VAT receivable.
At February 29, 2020 , other current assets was $52 million , a decrease of $4
million from February 28, 2019 . The decrease is primarily due to a decrease in
prepaid rent of $4 million , partially offset by an increase in prepaid
maintenance of $2 million .
At February 29, 2020 , income taxes receivable was $6 million , a decrease of $3
million from February 28, 2019 . The decrease was primarily due to tax refund
received in fiscal 2020.
Current Liabilities
The increase in current liabilities of $611 million at the end of fiscal 2020
from the end of fiscal 2019 was primarily due to the Debentures balance of $606
million moving from long-term to current liabilities as they mature on November
13, 2020 , an increase in deferred revenue of $11 million and an increase in
accrued liabilities of $10 million , partially offset by a decrease in accounts
payable of $17 million .
Deferred revenue, current was $264 million , which reflects an increase of $11
million compared to February 28, 2019 that was attributable to a $25 million
increase in deferred revenue related to BlackBerry Cylance and $10 million
related to Licensing, partially offset by a $27 million decrease in deferred
revenue, current related to IoT.
As at February 29, 2020 , accounts payable were $31 million , reflecting a
decrease of $17 million from February 28, 2019 , which was primarily attributable
to payments of accounts payable.
Accrued liabilities were $202 million , reflecting an increase of $10 million
compared to February 28, 2019 , which was primarily attributable to a $31 million
increase related to the current portion of operating lease liabilities from the
adoption of ASC 842, partially offset by a $12 million decrease in vendor
liabilities and a $4 million lower variable incentive plan accrual compared to
fiscal 2019.
56
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Cash flows for the fiscal year ended
For the Fiscal Years Ended
(in millions)
February 29, February 28,
2020 2019 Change February 28, 2018 Change
Net cash flows provided by (used
in):
Operating activities $ 26 $ 100 $ (74) $ 704 $ (604)
Investing activities (188) (375) 187 (630) 255
Financing activities 7 5 2 (10) 15
Effect of foreign exchange gain
(loss) on cash and cash equivalents (1) (3) 2 6 (9)
Net increase (decrease) in cash and
cash equivalents $ (156) $ (273) $ 117 $ 70 $ (343)
Operating Activities
The decrease in net cash flows provided by operating activities of $74 million
primarily reflects the net changes in working capital and lower net income after
adjustments for non-cash items.
Investing Activities
During the fiscal year ended February 29, 2020 , cash flows used in investing
activities were $188 million and included cash used in transactions involving
the acquisitions of short-term and long-term investments, net of the proceeds on
sale or maturity in the amount of $145 million , intangible asset additions of
$32 million , and acquisitions of property, plant and equipment of $12 million ,
partially offset by proceeds received from the decrease in consideration paid
for the Cylance acquisition following finalizing the accounting for the
acquisition. During fiscal 2019, cash flows used in investing activities were
$375 million and included cash flows used in the Cylance acquisition of $1.40
billion , intangible asset additions of $32 million , and acquisitions of
property, plant and equipment of $17 million , partially offset by proceeds on
sales of short-term and long-term investments, net of the proceeds used in the
acquisition of short-term and long-term investments of $1.08 billion and
proceeds on the sale of property, plant and equipment of $1 million .
Financing Activities
The increase in cash flows provided by financing activities was $2 million for
fiscal 2020 due to an increase in common shares issued, partially offset by cash
used for the finance lease liability.
Aggregate Contractual Obligations
The following table sets out aggregate information about the Company's
contractual obligations and the periods in which payments are due as at
February 29, 2020 :
(in millions)
Less than One One to Four to Five Greater than
Total Year Three Years Years Five Years
Operating lease obligations
132 62 31 -
Debt interest and principal payments 621 621 - - -
Total $ 1,013 $ 790 $ 124 $ 71 $ 28
Purchase obligations and commitments amounted to approximately $1,013 million as
at February 29, 2020 , including future principal and interest payments of $621
million on the Debentures and operating lease obligations of $167 million . The
remaining balance consists of purchase orders for goods and services utilized in
the operations of the Company. Total aggregate contractual obligations as at
February 29, 2020 decreased by approximately $18 million as compared to the
February 28, 2019 balance of approximately $1,031 million , which was
attributable to a decrease in operating lease obligations and interest payments
on the Debentures.
57
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Debenture Financing and Other Funding Sources
See Note 7 to the Consolidated Financial Statements for a description of the
Debentures.
The Company has $42 million in collateralized outstanding letters of credit in
support of certain leasing arrangements entered into in the ordinary course of
business. See Note 3 to the Consolidated Financial Statements for further
information concerning the Company's restricted cash.
Cash, cash equivalents, and investments were approximately $990 million as at
February 29, 2020 . The Company's management remains focused on maintaining
appropriate cash balances, efficiently managing working capital balances and
managing the liquidity needs of the business. Based on its current financial
projections, the Company believes its financial resources, together with
expected future operating cash generating and operating expense reduction
activities and access to other potential financing arrangements, should be
sufficient to meet funding requirements for current financial commitments and
future operating expenditures not yet committed, and should provide the
necessary financial capacity for the foreseeable future.
The Company does not have any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K under the Exchange Act, or under applicable
Canadian securities laws.
Accounting Policies and Critical Accounting Estimates
Accounting Policies
See Note 1 to the Consolidated Financial Statements for a description of the
Company's significant accounting policies.
Critical Accounting Estimates
The preparation of the consolidated financial statements requires management to
make estimates and assumptions with respect to the reported amounts of assets,
liabilities, revenue and expenses and the disclosure of contingent assets and
liabilities. Significant areas requiring the use of management estimates relate
to revenue-related estimates including variable consideration, standalone
selling price ("SSP"), estimated customer life, if control of the license has
transferred, value of non-cash consideration, right of return and customer
incentive commitments, fair value of reporting units in relation to potential
goodwill impairment, fair value of the Debentures, fair value of long-lived
assets in relation to potential impairment, useful lives of property, plant and
equipment and intangible assets, fair values of assets acquired and liabilities
assumed in business combinations, provision for income taxes, realization of
deferred income tax assets and the related components of the valuation
allowance, allowance for doubtful accounts, incremental borrowing rate in
determining the present value of lease liabilities and the determination of
reserves for various litigation claims. Actual results could differ from these
estimates, which were based upon circumstances that existed as of the date of
the consolidated financial statements, February 29, 2020 . Subsequent to this
date, there have been significant changes to the global economic situation and
to public securities markets as a consequence of the COVID-19 pandemic. It is
reasonably possible that this could cause changes to estimates as a result of
the financial circumstances of the markets in which the Company operates, the
price of the Company's publicly traded equity in comparison to the Company's
carrying value, and the health of the global economy. Such changes to estimates
could potentially result in impacts that would be material to the consolidated
financial statements, particularly with respect to the fair value of the
Company's reporting units in relation to potential goodwill impairment and the
fair value of long-lived assets in relation to potential impairment.
The Company's critical accounting estimates have been reviewed and discussed
with the Company's Audit & Risk Management Committee and are set out below.
Except as noted, there have not been any changes to the Company's critical
accounting estimates during the past three fiscal years.
Valuation of Long-Lived Assets
The LLA impairment test prescribed by U.S. GAAP requires the Company to identify
its asset groups and test impairment of each asset group separately. To conduct
the LLA impairment test, the asset group is tested for recoverability using
undiscounted cash flows over the remaining useful life of the primary asset. If
forecasted net cash flows are less than the carrying amount of the asset group,
an impairment charge is measured by comparing the fair value of the asset group
to its carrying value. Determining the Company's asset groups and related
primary assets requires significant judgment by management. Different judgments
could yield different results.
The Company's determination of its asset groups, its primary asset and its
remaining useful life, and estimated cash flows are significant factors in
assessing the recoverability of the Company's assets for the purposes of LLA
impairment testing. The Company's share price can be affected by, among other
things, changes in industry or market conditions, including the effect of
competition, changes in the Company's results of operations, changes in the
Company's forecasts or market expectations relating to future results, and the
Company's strategic initiatives and the market's assessment of any such factors.
See Part 1, Item 1A "Risk Factors - The market price of the Company's common
shares is volatile". The current macroeconomic
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environment and competitive dynamics continue to be challenging to the Company's
business and the Company cannot be certain of the duration of these conditions
and their potential impact on the Company's future financial results and cash
flows. A decline in the Company's performance, the Company's market
capitalization and future changes to the Company's assumptions and estimates
used in the LLA impairment test, particularly the expected future cash flows,
remaining useful life of the primary asset and terminal value of the asset
group, may result in further impairment charges in future periods of some or all
of the assets on the Company's balance sheet. Although it does not affect the
Company's cash flow, an impairment charge to earnings has the effect of
decreasing the Company's earnings or increasing the Company's losses, as the
case may be. The Company's share price could also be adversely affected by the
Company's recorded LLA impairment charges.
The Company used various valuation techniques to determine the fair values of
its assets to measure and allocate impairment. Techniques related to capital
equipment and intangible assets included the direct capitalization method,
market comparable transactions, the replacement cost method, discounted cash
flow analysis, as well as the relief from royalty and excess earnings valuation
methods. Determining valuations using these valuation techniques requires
significant judgment and assumptions by management. Different judgments could
yield different results.
Valuation of Goodwill Reporting Units
Goodwill represents the excess of the acquisition price in a business
combination over the fair value of identifiable net assets acquired. Goodwill is
allocated at the date of the business combination. Goodwill is not amortized but
is tested for impairment annually on December 31 or more frequently if events or
changes in circumstances indicate the asset may be impaired. These events and
circumstances may include a significant change in legal factors or in the
business climate, a significant decline in the Company's share price, an adverse
action or assessment by a regulator, unanticipated competition, a loss of key
personnel, significant disposal activity and the testing of recoverability for a
significant asset group.
The Company's annual impairment test was carried out in two steps. In the first
step, the carrying amount of the reporting unit, including goodwill, was
compared with its fair value. The estimated fair value was determined utilizing
multiple approaches based on the nature of the reporting units being valued. In
its analysis, the Company utilized multiple valuation techniques, including the
income approach, discounted future cash flows, the market-based approach, and
the asset value approach. The analysis requires significant judgment, including
estimation of future cash flows, which is dependent on internal forecasts,
estimation of the long-term rate of revenue growth for our reporting units,
estimation of the useful life over which cash flows will occur, terminal growth
rate, profitability measures, and determination of the discount rates for the
reporting units. The carrying amount of the Company's assets was assigned to
reporting units using reasonable methodologies based on the asset type. When the
carrying amount of a reporting unit exceeds its fair value, goodwill of the
reporting unit is considered to be impaired and the second step is necessary.
Different judgments could yield different results. In fiscal 2020, the Company
disaggregated one reporting unit and goodwill was assigned to the disaggregated
reporting units based upon the relative fair value allocation approach.
The completion of step one of the goodwill impairment test provided indications
of impairment in certain reporting units, necessitating step two.
In the second step, the implied fair value of the reporting unit's goodwill is
compared with its carrying amount to measure the amount of the impairment loss,
if any. The second step involves significant judgment in the selection of
assumptions necessary to arrive at an implied fair value of goodwill. Different
judgments could yield different results.
Valuation Allowance Against Deferred Tax Assets
The Company regularly assesses the need for a valuation allowance against its
deferred tax assets. A valuation allowance is required for deferred tax assets
if it is more likely than not that all or some portion of the asset will not be
realized. All available evidence, both positive and negative, that may affect
the realization of deferred tax assets must be identified and considered in
determining the appropriate amount of the valuation allowance. Additionally, for
interim periods, the estimated annual effective tax rate should include the
valuation allowance for current year changes in temporary differences and losses
or income arising during the year. For interim periods, the Company needs to
consider the valuation allowance that it expects to recognize at the end of the
fiscal year as part of the estimated annual effective tax rate. During interim
quarters, the Company uses estimates including pre-tax results and ending
position of temporary differences as at the end of the fiscal year to estimate
the valuation allowance that it expects to recognize at the end of the fiscal
year. This accounting treatment has no effect on the Company's actual ability to
utilize deferred tax assets to reduce future cash tax payments. Different
judgments could yield different results. See "Results of Operations - Fiscal
year ended February 29, 2020 compared to fiscal year ended February 28, 2019 -
Income Taxes" and "Results of Operations - Three months ended February 29, 2020
compared to three months ended February 28, 2019 - Income Taxes".
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Revenue Recognition
The Company's contracts with customers often include promises to transfer
multiple products and services to a customer. Determining whether products and
services are considered distinct performance obligations that should be
accounted for separately versus together may require significant judgment.
Variable consideration is included in the transaction price if, in the Company's
judgment, it is probable that a significant future reversal of cumulative
revenue recognized under the contract will not occur. Any estimates, including
any constraints on variable consideration, are evaluated at each reporting
period. Judgment is required to determine the fair value of non-cash
consideration at contract inception. The Company uses an independent third-party
valuator for the fair value of non-cash consideration.
Judgment is required to determine the SSP for each distinct performance
obligation. The Company's products and services often have observable SSP when
the Company sells a promised product or service separately to similar customers.
A contractually stated price or list price for a good or service may be the SSP
of that good or service. However, in instances where SSP is not directly
observable, the Company determines the SSP by maximizing observable inputs and
using an adjusted market assessment approach using information that may include
market conditions and other observable inputs from the Company's pricing team,
including historical SSP.
Judgment is required to determine in certain agreements if the Company is the
principal or agent in the arrangement. The Company considers factors such as,
but not limited to, which party can direct the usage of the product or service,
which party obtains substantially all the remaining benefits and which party has
the ability to establish the selling price.
Significant judgment is required to determine the estimated customer life used
in perpetual license contracts that require access to the Company's proprietary
secure network infrastructure to function. The Company uses historical
experience regarding the length of the technology upgrade cycle and the expected
life of the product to draw this conclusion.
Adoption of Accounting Policies
ASC 842, Leases
In February 2016 , the Financial Accounting Standards Board ("FASB") issued ASC
842 on leases. The standard requires companies to include lease obligations in
their balance sheets, including a dual approach for lessee accounting under
which a lessee would account for leases as finance leases or operating leases.
Both finance leases and operating leases result in the lessee recognizing a
right-of-use ("ROU") asset and a corresponding lease liability. The operating
lease ROU asset also includes any lease payments made and excludes lease
incentives and initial direct costs incurred on transition. For finance leases,
the lessee will recognize interest expense and amortization of the ROU asset,
and for operating leases, the lessee will recognize a straight-line total lease
expense.
The guidance is effective for interim and annual periods beginning after
December 15, 2018 . The Company adopted this guidance in the first quarter of
fiscal 2020 using the modified retrospective method for all leases that existed
at or commence after the date of initial application. As a result of the
adoption of the new standard on leases, the Company recognized ROU assets of
approximately $161 million , lease liabilities of approximately $175 million and
a cumulative adjustment to increase the deficit of approximately $14 million in
the consolidated balance sheet as at March 1, 2019 . Future lease costs included
in the RAP of approximately $14 million , which were accrued for prior to
adoption of ASC 842, and were previously included in accrued liabilities and
other long-term liabilities, are now presented in accrued liabilities and
operating lease liabilities in the consolidated balance sheet as at March 1,
2019 . As a result, total operating lease liabilities were $189 million in the
consolidated balance sheet as at March 1, 2019 .
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ASU 2017-12, Hedge Accounting InAugust 2017 , the FASB issued ASU 2017-12. This guidance expands the range of strategies that qualify for hedge accounting, changes how certain hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The guidance is effective for interim and annual periods beginning afterDecember 15, 2018 . The Company adopted this guidance in the first quarter of fiscal 2020 and it did not have a material impact to the consolidated financial results. Recently Issued Accounting Pronouncements InJune 2016 , the FASB issued guidance related to the measurement of credit losses on financial instruments, ASU 2016-13. This guidance replaces the incurred loss impairment methodology in currentU.S. GAAP with a methodology that reflects expected credit losses, requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates, and requires entities to estimate an expected lifetime credit loss on its financial assets. The guidance is effective for interim and annual periods beginning afterDecember 15, 2019 . The Company will adopt this guidance in the first quarter of fiscal 2021 and does not expect the adoption to have a material impact on its results of operations, financial position and disclosures.
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