ITEM 1A. RISK FACTORS
Investors in the Company’s securities should carefully consider the following risks, as well as the other information contained in MD&A (as defined below) and elsewhere in this Annual Report on Form 10-K for the fiscal year ended February 29, 2024. Any of the following risks, in whole or in part, could materially and adversely impact the Company’s business, financial condition and operating results. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties, including those of which the Company is unaware or the Company currently deems immaterial, may also have a material adverse effect on the Company’s business, financial condition and results of operations.
Risks Related to the Company’s Business
The Company may not be able to maintain or expand its customer base for its software and services offerings to grow revenue or achieve sustained profitability.
The Company has focused its strategy on software and services to grow revenue and generate sustainable profitability. For the Company to increase its software and services revenues, it must continually grow its customer base by attracting new customers or, in the case of existing customers, deploying software and services across more endpoints or attracting additional users in such existing customers’ businesses. The Company also needs to sell additional software and services over time to the same customers, or have customers upgrade their level of service. If the Company is unable to promote a compelling value
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proposition to customers and its efforts to sell or upsell software or services as described above are not successful, its results of operations could be materially impacted.
Existing customers that purchase the Company’s software and services have no contractual obligation to renew their subscriptions or purchase additional solutions after the initial subscription or contract period. The Company’s customers’ expansion and renewal rates may decline or fluctuate as a result of a number of factors, including the perceived need for such additional software and services, the level of satisfaction with the Company’s software and services, features or functionality, the reliability of the Company’s software and services, the Company’s customer support, customer budgets and other competitive factors, such as pricing and competitors’ offerings. For smaller or simpler deployments, the switching costs and time are relatively minor compared to traditional enterprise software deployments and as such a customer may more easily decide not to renew with the Company and switch to a competitor’s offerings.
Further, the Company’s future success depends in part on the growth, if any, in the markets for endpoint security software and embedded solutions, including in software-defined vehicles. If the recent growth trends in these markets do not continue due to security incidents, technological challenges, lack of customer acceptance, weakening economic conditions or other reasons, demand for the Company’s products, and those of its competitors, could be negatively affected.
The Company’s sales cycles can be long and unpredictable and its sales efforts require considerable time and expense.
For many customers, licensing the Company’s Cybersecurity or IoT solutions represents a significant strategic decision and, as a result, sales cycles can be long and unpredictable, particularly during times of economic uncertainty. When dealing with automotive, government or large regulated enterprise customers in particular, the Company is subject to risks related to increased customer bargaining power and pricing pressure, extended evaluation periods, regulatory changes, compliance with procurement requirements, complex approval systems, and unanticipated administrative delays. IoT revenue recognition is also subject to delays in the development of embedded software platforms and the manufacture of new vehicles by automotive OEMs.
The Company’s ability to grow software and services revenue is dependent in part on its ability to maintain a qualified direct sales force, which requires significant time and resources, including investment in systems and training. From time to time, the Company may choose to reorganize its go-to-market teams in an effort to better leverage its sales resources and improve customer service. These reorganizations, which may include investments in educating the Company’s sales force, can cause short-term disruptions and may negatively impact sales. There can be no assurance that the Company will be successful in implementing its sales and distribution strategy. See also the Risk Factor entitled “The Company’s success depends on its relationships with resellers and distributors”.
The Company faces intense competition.
The Company is engaged in markets that are highly competitive and rapidly evolving, and has experienced, and expects to continue to experience, intense competition from a number of companies. No technology has been exclusively or commercially adopted as the industry standard for many of the products and services offered by the Company. Accordingly, both the nature of the competition and the scope of the business opportunities afforded by the markets in which the Company competes are uncertain.
The Company’s competitors, including new market entrants, may implement new technologies before the Company does, deliver new products and services earlier, or provide products and services that are disruptive or that are attractively priced or enhanced or better quality compared to those of the Company, making it more difficult for the Company to win or preserve market share.
Some of the Company’s competitors have greater name recognition, larger customer bases and significantly greater financial, technical, marketing, public relations, sales, distribution and other resources than the Company does. In particular, some of the Company’s competitors may be able to leverage their relationships with enterprise customers based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing the Company’s solutions, including by selling at zero or negative margins, product bundling or offering closed technology platforms. In the automotive sector, some of the Company’s OEM and Tier 1 customers have accelerated internal development of embedded solutions. In addition, competition may intensify as the Company’s competitors enter into business combinations or alliances and established companies in other market segments expand to become competitive with the Company’s business.
The impact of the competition described above could result in fewer customer orders, loss of market share, pressure to reduce prices, commoditization of product and service categories in which the Company participates, reduced revenue and reduced margins. If the Company is unable to compete successfully, there could be a material adverse effect on the Company’s business, results of operations and financial condition.
The Company must obtain and maintain certain product approvals and certifications from governmental authorities, regulated enterprise customers and third-party standards bodies in order to remain competitive, meet contractual requirements and enable
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its customers to meet their certification needs. Failure to maintain such approvals or certifications for the Company’s current products or to obtain such approvals or certifications for any new products on a timely basis could have a material adverse effect on the Company’s competitive position. In addition, independent industry analysts often issue reports regarding endpoint security solutions and the perception of the Company’s solutions in the marketplace, especially as compared to those of the Company’s competitors, may be significantly influenced by these reports. If these reports are negative, less frequent or less positive than reports on the Company’s competitors’ products, the Company’s competitive position may be harmed.
The Company may not be able to enhance, develop, introduce or monetize products and services for the enterprise market in a timely manner with competitive pricing, features and performance.
The industries in which the Company competes are characterized by rapid technological change, frequent new product introductions, frequent market price reductions, constant improvements in features and short product life cycles. The Company’s future success depends upon its ability to enhance and integrate its current products and services, to provide for their compatibility with evolving industry standards and operating systems, to address competing technologies and evolving security threats, and to continue to develop and introduce new products and services offering enhanced performance and functionality on a timely basis at competitive prices.
The process of developing new technology is complex and uncertain, and involves time, substantial costs and risks, which are further magnified when the development process involves multiple operating platforms. The development of next-generation technologies that utilize new and advanced features, including artificial intelligence and machine learning, involves making predictions regarding the willingness of the market to adopt such technologies over legacy solutions. The Company may be required to commit significant resources to developing new products, software and services before knowing whether such investment will result in products or services that the market will accept.
The Company’s inability, for technological or other reasons, some of which may be beyond the Company’s control, to enhance, develop, introduce and monetize products and services in a timely manner, or at all, in response to changing market conditions or customer requirements could have a material adverse effect on the Company’s business, results of operations and financial condition or could result in its products and services not achieving market acceptance or becoming obsolete. In addition, if the Company fails to deliver a compelling customer experience or accurately predict emerging technological trends and the changing needs of customers and end users, or if the features of its new products and services do not meet the demands of its customers or are not sufficiently differentiated from those of its competitors, the Company’s business, results of operations and financial condition could be materially harmed.
The occurrence or perception of a breach of the Company’s network cybersecurity measures or an inappropriate disclosure of confidential or personal information could significantly harm its business.
The Company is continuously exposed to cyber threats through the actions of outside parties, such as hacking, viruses, and other malicious software, denial of service attacks, industrial espionage and other methods designed to breach the Company’s network or data security. The Company is also exposed to risk as a result of process, coding or human errors and through attempts by third parties to fraudulently induce employees to provide access to confidential or personal information. Although malicious attempts to gain unauthorized access to such information affect many companies across various industries, the Company is at a relatively greater risk of being specifically targeted because of its reputation for security and the nature of its network operations, and because the Company has been involved in the identification of organized cyber adversaries.
The Company devotes significant resources to network security, encryption and authentication technologies and other measures, including security policies and procedures, vulnerability testing and awareness training, to mitigate cyber risk to its systems, endpoints and data. In addition, the Company engineers novel security and reliability features, deploys software updates to address vulnerabilities, and maintains a security infrastructure that protects the integrity of the Company’s network, products and services. The Company also mitigates risk by actively monitoring external threats, reviewing best practices and implementing appropriate internal controls, including incident response plans. However, the techniques used to obtain unauthorized access or to disable or degrade service are constantly evolving and becoming more sophisticated in nature, and frequently are not recognized or identified until after they have been deployed against a target. The Company may not be able to anticipate these techniques, to implement adequate preventative measures or to identify and respond to them in a timely manner, and the Company’s efforts to do so may have a material adverse impact on the Company’s operating margins, the user experience or compatibility with third party products and services.
Although to date the Company has not experienced any material financial or other losses relating to technology failure, cyberattacks or security breaches, there is no assurance that the Company will not experience material loss or damage in the future. If the network and product security measures implemented by the Company or its partners, including third-party data center operators, cloud service providers and product manufacturers are breached, or perceived to be breached, or if the confidentiality, integrity or availability of the Company’s data, including intellectual property and legally protected personal data, is compromised, the Company could be exposed to significant litigation, service disruptions, investigation and remediation costs, regulatory sanctions, fines and contractual penalties. In addition, any such event could materially damage the
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Company’s reputation, which is built in large measure on the security and reliability of BlackBerry products and services, and could result in the loss of investor confidence, channel partners, competitive advantages, revenues and customers, including the Company’s most significant government and regulated enterprise customers. While the Company maintains cybersecurity insurance, the Company’s coverage may be insufficient to cover all losses or types of claims that may arise from cyber incidents, and any incidents may result in the loss of, or increased costs of, the Company’s insurance.
The Company’s business could be negatively affected as a result of its business unit separation and cost reduction initiatives.
The separation of the Company’s IoT and Cybersecurity businesses into standalone divisions and the streamlining of the Company’s centralized functions is intended to enhance operational focus and flexibility for each business, to drive improved profitability, and to increase optionality for the Company to optimize shareholder value. If the separation is not managed effectively, it may not provide these intended benefits and may result in a disruption of the Company’s operations, an inability to retain or recruit key personnel, and the impairment of customer relationships.
Further, if the separation is not conducted in manner or on a timeline that meets investor expectation, the Company may be subject to shareholder activism advocating for governance or strategic changes at the Company. Responding to proxy contests, media campaigns and other tactics by activist shareholders would be costly and time-consuming, disrupt the Company’s operations and divert the attention of the Board and senior management from the pursuit of the Company’s strategies, which could adversely affect the Company’s business. Perceived uncertainties as to the Company’s future direction as a result of shareholder activism could also result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and partners.
The business separation is expected to result in each division performing corporate functions that have historically been performed on a centralized basis, including certain legal, finance, human resources, marketing and IT functions, which may require each division to increase its investment in these administrative functions. Additionally, the integration of the Cybersecurity and IoT businesses has enabled them to share economies of scope and scale in costs, systems and vendor relationships, and their separation may result in each division paying higher charges for third-party services.
The Company’s success depends on its continuing ability to attract new personnel, retain existing key personnel and manage its staffing effectively.
The Company’s success is largely dependent on its continuing ability to identify, attract, develop, motivate and retain skilled employees, including members of its executive team, top research developers and experienced salespeople with specialized knowledge. Competition for such people is intense, continuous, and increasing in the industries in which the Company participates, and the Company has experienced solicitations of its employees by its competitors.
Competition for highly skilled personnel is intense, especially in the Waterloo and Ottawa, Ontario areas, where the Company has a substantial presence and need for highly skilled personnel. The Company is also substantially dependent on the continued service of its existing engineering personnel because of the complexity and specialization of its products and services. Also, to the extent that the Company hires employees from mature public companies with significant financial resources, the Company may be subject to allegations that such employees have been improperly solicited, or that they have divulged proprietary or other confidential information or that their former employers own such employees’ inventions or other work product.
To attract and retain critical personnel, the Company may experience increased compensation costs that are not offset by increased productivity or higher prices for our products and services. Also, the Company’s financial results and share price performance (particularly for senior employees for whom equity-based compensation is a key element of their total compensation), among other factors, may impact the Company’s ability to attract new, and retain existing, employees. Any failure by the Company to attract and retain key employees could have a material adverse effect on the Company’s business, results of operations and financial condition.
In addition, during periods of internal reorganization, such as the Company’s ongoing business separation, the Company may experience losses of business continuity and accumulated knowledge, internal compliance gaps or other inefficiencies, including litigation claims by terminated employees. If the Company does not maintain appropriate staffing, develop effective business continuity and succession programs, mitigate turnover and effectively utilize employees with the right mix of skills and experience across the functions necessary to meet the current and future needs of its business, the financial and operational performance of the Company could suffer.
A failure or perceived failure of the Company’s solutions to detect or prevent security vulnerabilities could materially adversely affect the Company’s reputation, financial condition and results of operations.
The techniques used by cyber adversaries to breach network and endpoint security measures are sophisticated and change frequently, and the Company’s products and services may not protect users against all cyberattacks. At the same time, the Company’s products and services are highly complex and may contain design defects, bugs or security vulnerabilities that are
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difficult to detect and correct. Such internal defects and a variety of external factors, including misconfigurations, errors introduced through collaborations with the Company’s engineering partners or the failure of customers to address risks identified by our platform, could impair the effectiveness of the Company’s solutions and cause them to fail to secure endpoints and prevent attacks or function as intended. In addition, the Company’s solutions may falsely indicate a cyber threat that does not actually exist, which may negatively impact customers’ trust in the Company’s solutions.
Real or perceived defects, errors or vulnerabilities in the Company’s software and services, or the failure of the Company’s platform solutions to detect or prevent cyber incidents, could result in the delay or denial of their market acceptance and may harm the Company’s financial condition, results of operations and reputation as a security solutions vendor. If errors are discovered, correcting them could require significant expenditures by the Company and the Company may not be able to successfully correct them in a timely manner or at all.
The Company’s products and services frequently involve the transmission, processing and storage of data, including proprietary, confidential and personally-identifiable information, and a security compromise, misconfiguration or malfunction involving the Company’s software could result in such information being accessible to attackers or other third parties. Real or perceived security breaches against a customer using the Company’s solutions could cause damage or disruption to the customer and subject the Company to liability, and may result in the customer and the public believing that the Company’s solutions are ineffective, even if they were not implicated in failing to block the attack. Further, a breach of an artificial intelligence and machine learning-based solution offered by another endpoint security provider could cause the market to lose confidence in next-generation security software generally, including the Company’s solutions.
The Company’s success depends on its relationships with resellers and channel partners.
The Company’s ability to maintain and expand its market reach, particularly with small and medium-sized businesses, is increasingly dependent on establishing, developing and maintaining relationships with third party resellers and channel partners, especially in its Cybersecurity business. The Company makes training available to its partners and develops sales programs to incentivize them to promote and deliver the Company’s current and future products and services and to grow its user base.
If the Company is not able to effectively identify and establish new relationships with successful resellers and channel partners, or to maintain or enhance existing relationships without giving rise to conflicts between channels, or if the Company’s partners do not act in a manner that will promote the success of the Company’s products and services, the Company’s business, results of operations and financial condition could be materially adversely affected.
Many resellers and channel partners sell products and services of the Company’s competitors and may terminate their relationships with the Company with limited or no notice and limited or no penalty. If the Company’s competitors offer their products and services to the resellers and channel partners on more favorable contractual or business terms, have more products and services available, or those products and services are, or are perceived to be, in higher demand by end users, or are more lucrative for the resellers and channel partners, there may be continued pressure on the Company to reduce the price of its products and services, or those resellers and channel partners may stop offering the Company’s products or de-emphasize the sale of its products and services in favor of the Company’s competitors, which could have a material adverse effect on the Company’s business, results of operations and financial condition.
Litigation against the Company may result in adverse outcomes.
In the course of its business, the Company is subject to potential litigation claims and enforcement actions arising from its public disclosure. The Company is committed to providing a high level of disclosure and transparency and provides commentary that highlights the trends and uncertainties that the Company anticipates. Given the highly competitive and dynamic industry in which the Company operates and the evolution of the Company’s business strategy over time, the Company’s financial results may not follow any past trends, making it difficult to predict the Company’s financial results. Consequently, actual results may differ materially from those expressed or implied by the Company’s forward-looking statements and may not meet the expectations of analysts or investors, which can contribute to the volatility of the market price of the Company’s common shares.
In addition, the Company receives general commercial claims related to the conduct of its business and the performance of its products and services, including product liability and warranty claims, employment claims, claims for breaches of contractual covenants and other litigation claims, which may potentially include claims relating to improper use of, or access to, personal data. Liability claims related to product defects, bugs or vulnerabilities could give rise to class action litigation or to the withdrawal of certifications, and the Company may be subject to such claims either directly or indirectly through indemnities that it provides to certain of its customers. The Company’s exposure to product liability risk may increase as the Company continues to commercialize its software innovations for autonomous and connected vehicles.
Litigation resulting from these claims and from actions asserted by the Company could be costly and time-consuming and could divert the attention of management and key personnel from the Company’s business operations. The complexity of the
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technology involved and the inherent uncertainty of commercial, class action, securities, employment and other litigation increases these risks. In recognition of these considerations, the Company may enter into settlements resulting in material expenditures, the payment of which could have a material adverse effect on the Company’s business, results of operation and financial condition. Similarly, if the Company is unsuccessful in its defense of material litigation claims, the Company may be faced with significant monetary damages or injunctive relief against it that could have a material adverse effect on the Company’s business, BlackBerry brand, results of operations and financial condition. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, BlackBerry brand, results of operations and financial condition. See Note 10 to the Consolidated Financial Statements for information regarding certain legal proceedings in which the Company is involved.
Adverse macroeconomic and geopolitical conditions have had and may continue to have a material adverse effect on the Company’s business, results of operations and financial condition.
Challenging macroeconomic conditions, including as a result of geopolitical events, public health crises, automotive labor disruptions, disruptions in global supply chains, increases in inflation and interest rates, have negatively impacted and may in the future negatively impact consumer demand for automobiles and sales cycles and spending on cybersecurity solutions, and in turn have materially affected the Company’s business, results of operations and financial condition in certain periods. Because all components of the Company’s budgeting and forecasting are dependent upon estimates of economic activity in the markets that the Company serves and demand for its products and services, economic uncertainties make it difficult to estimate future income and expenditures.
Network disruptions or other business interruptions could have a material adverse effect on the Company’s business and harm its reputation.
The Company’s operations rely to a significant degree on the efficient and uninterrupted operation of complex technology systems and networks, which are in some cases integrated with those of cloud service providers and third-party data centre operators. The Company’s network operations and technology systems are potentially vulnerable to damage or interruption from a variety of sources, including by fire, earthquake, power loss, telecommunications or computer systems failure, cyberattack, human error, terrorist acts, war, and the threatened or actual suspension of BlackBerry services at the request of a government for alleged non-compliance with local laws or other events. The increased number of third-party applications on the Company’s network may also enhance the risk of network disruption or cyberattack for the Company. There may also be system or network interruptions if new or upgraded systems are defective or not installed properly, or if data centre operators fail to meet agreed service levels.
The Company has experienced network events, including those arising from third-party applications, in the past, none of which had a material impact on us. Any future outage in a network or system or other unanticipated problem that leads to an interruption or disruption of BlackBerry services, however, could have a material adverse effect on the Company’s business, results of operations and financial condition, and could adversely affect the Company’s reputation.
The Company may not be successful in fostering an ecosystem of third-party application developers.
The Company believes decisions by customers to purchase its products, including the BlackBerry IVY platform, depend and will depend in part on the availability and compatibility of software applications and services that are developed and maintained by third-party developers. The Company may not be able to convince third parties to develop and maintain applications for its cybersecurity software and embedded solutions platforms. The loss of, or inability to maintain these developer relationships may materially and adversely affect the desirability of the Company’s products and, hence, the Company’s revenue from the sale of its products.
The Company’s products and services are dependent upon interoperability with rapidly changing systems provided by third parties.
The Company’s platform depends on interoperability with operating systems, such as those provided by Apple, Google and Microsoft, as well as automotive OEMs. Operating systems are upgraded frequently in response to consumer demand and, in order to maintain the interoperability of its platform, the Company may need to release new software updates at a much greater pace than a traditional enterprise software company that supports only a single platform. In addition, the Company typically receives limited advance notice of changes in features and functionality of operating systems and platforms, and therefore the Company may be forced to divert resources from its preexisting product roadmap to accommodate these changes.
If the Company fails to enable IT departments to support operating system upgrades upon release, the Company’s business and reputation could suffer. This could further disrupt the Company’s product roadmap and cause it to delay introduction of planned products and services, features and functionality, which could harm the Company’s business. Furthermore, some of the features and functionality in the Company’s products and services require interoperability with APIs of other operating systems, and if operating system providers decide to restrict the Company’s access to their APIs, that functionality would be lost and the Company’s business could be impaired.
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Operating system providers have included, and may continue to include, features and functionality in their operating systems that are comparable to elements of the Company’s products and services, thereby making the Company’s platform less valuable. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by the Company’s products and services in mobile or embedded operating systems may have an adverse effect on the Company’s ability to market and sell its products and services.
Risks Related to Intellectual Property and Technology Licensing
Failure to protect the Company’s intellectual property could harm its ability to compete effectively and the Company may not earn the revenues it expects from intellectual property rights.
The Company’s commercial success is highly dependent upon its ability to protect its proprietary technology. The Company relies on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights, all of which offer only limited protection. Despite the Company’s efforts, the steps taken to protect its proprietary rights may not be adequate to preclude misappropriation of its proprietary information or infringement of its intellectual property rights. Detecting and protecting against the unauthorized use of the Company’s products, technology proprietary rights, and intellectual property rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend the Company’s intellectual property rights and could result in substantial costs and diversion of management resources, either of which could harm the Company’s business, financial condition and results of operations, and there is no assurance that the Company will be successful. Further, the laws of certain countries in which the Company’s products and services are sold or licensed do not protect intellectual property rights to the same extent as the laws of Canada or the United States.
With respect to patent rights, the Company cannot be certain whether any of its pending patent applications will result in the issuance of patents or whether the examination process will require the Company to narrow its claims. Furthermore, any patents issued could be challenged, invalidated or circumvented and may not provide proprietary protection or a competitive advantage. In addition, a number of the Company’s competitors and other third parties have been issued patents, and may have filed patent applications or may obtain additional patents and proprietary rights, for technologies similar to those that the Company has made or may make in the future. Public awareness of new technologies often lags behind actual discoveries, making it difficult or impossible to know all relevant patent applications at any particular time. Consequently, the Company cannot be certain that it was the first to develop the technology covered by its pending patent applications or that it was the first to file patent applications for the technology. In addition, the disclosure in the Company’s patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. As a result, there can be no assurance that the Company’s patent applications will result in patents being issued.
While the Company enters into confidentiality and non-disclosure agreements with its employees, consultants, contract manufacturers, customers, potential customers and others to attempt to limit access to, and distribution of, proprietary and confidential information, it is possible that:
•some or all of its confidentiality agreements will not be honored;
•third parties will independently develop equivalent technology or misappropriate the Company’s technology or designs;
•disputes will arise with the Company’s strategic partners, customers or others concerning the ownership of intellectual property;
•unauthorized disclosure or use of the Company’s intellectual property, including source code, know-how or trade secrets will occur; or
•contractual provisions may not be enforceable.
In addition, the Company expends significant resources to patent and manage the intellectual property it creates with the expectation that it will generate revenues by incorporating that intellectual property in its products or services. The Company also monetizes its patent assets through outbound licensing. Changes in the law may weaken the Company’s ability to collect royalty revenue for licensing its patents. Similarly, licensees of the Company’s patents may fail to satisfy their obligations to pay royalties, or may contest the scope and extent of their obligations. Finally, the royalties the Company can obtain to monetize its intellectual property may decline because of the evolution of technology, changes in the selling price of products using licensed patents, or the difficulty of discovering infringements.
The consideration payable to the Company from the sale of its non-core patent portfolio in the Malikie Transaction is expected to include potential future royalty payments. The royalties, if any, that may be earned by the Company from the Malikie Transaction in any particular fiscal year or in the aggregate over the term of the royalty arrangement are difficult to predict, particularly given that any such royalties will depend entirely upon the business success of a third party. The aggregate proceeds that the Company ultimately receives from the Malikie Transaction are expected to be less than $900 million.
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The Company may not be able to obtain rights to use third-party software and is subject to risks related to the use of open source software.
Many of the Company’s products include intellectual property which must be licensed from third parties. The termination of any of these licenses, or the failure of such third parties to adequately maintain, protect or update their software or intellectual property rights, could delay the Company’s ability to offer its products while the Company seeks to implement alternative technology offered by other sources (which may not be available on commercially reasonable terms) or develop such technology internally (which would require significant unplanned investment on the Company’s part). The use of third-party software in the Company’s products could also expose the Company and its customers to security vulnerabilities.
In addition, certain software that the Company uses may be subject to open source licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that the Company make available source code for modifications or derivative works created by the Company based upon the type of open source software used. If the Company combines its proprietary solutions with open source software in a certain manner, the Company could, under certain of the open source licenses, face claims from third parties claiming ownership of or demanding the public release of the source code of the Company’s proprietary solutions, or demanding that the Company offer its solutions to users at no cost. This could allow the Company’s competitors to create similar solutions with lower development effort and time and ultimately could result in a loss of revenue to the Company. The Company could also be subject to litigation by parties claiming that what the Company believes to be licensed open source software infringes their intellectual property rights.
The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on the Company’s ability to commercialize its products and services. In such an event, the Company could be exposed to litigation or reputational damage, and could be required to obtain licenses from third parties in order to continue offering its products and services or to re-engineer its products or services, or discontinue their sale in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect the Company’s business and operating results.
The Company could be found to have infringed on the intellectual property rights of others.
Companies in the software and technology industries, including some of the Company’s current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently engage in litigation based on allegations of infringement or other violations of intellectual property rights. Although the Company believes that third-party software included in the Company’s products is licensed from the entity holding the intellectual property rights and that its products do not infringe on the rights of third parties, third parties have and are expected to continue to assert infringement claims against the Company in the future. The Company may be subject to these types of claims either directly or indirectly through indemnities that it provides to certain of its customers, partners and suppliers against these claims. As the Company continues to develop software products and expand its portfolio using new technology and innovation, its exposure to threats of infringement may increase.
Many intellectual property infringement claims are brought by entities whose business model is to obtain patent-licensing revenues from operating companies such as the Company. Because such entities do not typically generate their own products or services, the Company cannot deter their claims based on counterclaims that they infringe patents in the Company’s portfolio or by entering into cross-licensing arrangements.
Regardless of whether patent or other intellectual property infringement claims against the Company have any merit, they could:
•adversely affect the Company’s relationships with its customers;
•be time-consuming and expensive to evaluate and defend, including in litigation or other proceedings;
•result in negative publicity for the Company;
•divert management’s attention and resources;
•cause product delays or stoppages;
•subject the Company to significant liabilities;
•require the Company to develop possible workaround solutions that may be costly and disruptive to implement; and
•require the Company to cease certain activities or to cease selling its products and services in certain markets.
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In addition, any such claim may require the Company to enter into costly royalty agreements or obtain a license for the intellectual property rights of third parties. Such licenses may not be available or they may not be available on commercially reasonable terms.
Any of the foregoing infringement claims and related litigation could have a significant adverse impact on the Company’s business and operating results, as well as the Company’s ability to generate future revenues and profits. See also “Legal Proceedings” in this Annual Report on Form 10-K.
Risks Related to Assets, Indebtedness and Taxation
The Company has incurred indebtedness, which could adversely affect its operating flexibility and financial condition.
The Company has, and may from time to time in the future have, third-party debt service obligations pursuant to its outstanding indebtedness, which currently includes $200 million aggregate principal amount of 3.00% Senior Convertible Notes maturing on February 15, 2029 (the “Notes”). The degree to which the Company is leveraged could have important consequences, including that:
•the Company’s ability to obtain additional debt financing may be limited;
•a portion of the Company’s cash flow from operations or other capital resources will be dedicated to the payment of the principal of, and/or interest on, indebtedness, thereby reducing funds available for working capital, capital expenditures, strategic initiatives or other business purposes; and
•the Company’s earnings under U.S. GAAP may be negatively affected to the extent that any indebtedness is accounted for by the Company at fair value and includes embedded derivatives which fluctuate in value from period to period.
If the Company cannot maintain an adequate cash balance or positive cash flow from operations, the Company may be unable to pay amounts due under its outstanding indebtedness or to fund other liquidity needs and it may be required to refinance all or part of its then existing indebtedness, sell assets, reduce or delay capital expenditures or seek to raise additional capital, any of which could have a material adverse effect on the Company’s business, results of operations and financial condition. There can be no assurance that the Company would be able to restructure or refinance the Notes on terms as favourable as those currently in place.
The Notes are subject to restrictive and other covenants that may limit the discretion of the Company and its subsidiaries with respect to certain business matters. A breach of any of these covenants could result in a default under the Company’s outstanding indebtedness, which would have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company faces substantial asset risk, including the potential for charges related to its long-lived assets and goodwill.
The Company’s long-lived assets include items such as the Company’s network infrastructure, operating lease right-of-use assets and certain intellectual property. Under United States generally accepted accounting principles (“U.S. GAAP”), the Company reviews its long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. The Company’s ability to generate sufficient cash flows to fully recover the current carrying value of these assets depends on the successful execution of its strategies. If it is determined that sufficient future cash flows do not exist to support the current carrying value, the Company will be required to record an impairment charge for long-lived assets in order to adjust the value of these assets to the newly established estimated value.
Goodwill represents the excess of the acquisition price over the fair value of identifiable net assets acquired. Under U.S. GAAP, the Company tests goodwill for impairment annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate that 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. If any such events or circumstances arise, the Company may be required to record an impairment charge in the value of its goodwill.
In the fourth quarter of fiscal 2024, the Company recorded the Fiscal 2024 Goodwill ImpairmentCharge. For additional information, see Note 3 to the Consolidated Financial Statements.
Tax provision changes, the adoption of new tax legislation or exposure to additional tax liabilities could materially impact the Company’s financial condition.
The Company is subject to income, indirect (such as sales tax, sales and use tax and value-added tax) and other taxes in Canada and numerous foreign jurisdictions. Significant judgment is required in determining its worldwide liability for income, indirect and other taxes, as well as potential penalties and interest. In the ordinary course of the Company’s business, there are many
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transactions and calculations where the ultimate tax determination is uncertain. Although the Company believes that its tax estimates are reasonable, there can be no assurance that the final determination of any tax audits will not be materially different from that which is reflected in historical income, indirect and other tax provisions and accruals. Should additional taxes or penalties and interest be assessed as a result of an audit, litigation or changes in tax laws, there could be a material adverse effect on the Company’s current and future results and financial condition. In addition, there is a risk of recoverability of future deferred tax assets.
The Company’s future effective tax rate will depend on the relative profitability of the Company’s domestic and foreign operations, the statutory tax rates and taxation laws of the related tax jurisdictions, the tax treaties between the countries in which the Company operates, the timing of the release, if any, of the valuation allowance, and the relative proportion of research and development incentives to the Company’s profitability.
Canada, together with approximately 140 other countries comprising the Organization for Economic Co-Operation and Development (“OECD”) and the G20 Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”), approved in principle in 2021 certain base erosion tax initiatives, including the introduction of a 15% global minimum tax which is intended to be effective in 2023. In August 2023, the Department of Finance (Canada) released for public comment draft legislative proposals to implement the global minimum tax. The draft legislative proposals are generally intended to apply in respect of fiscal years beginning on or after December 31, 2023. In November 2023, the Department of Finance (Canada) released revised draft legislative proposals which, if enacted, may limit the deductibility of interest and financing expenses for Canadian tax purposes. The revised draft legislative proposals are generally intended to apply in respect of taxation years beginning on or after October 1, 2023. The Company will continue to monitor the BEPS and interest deductibility limitation proposals and any impact on the Company, which may result in an increase in future taxes and an adverse effect on the Company.
Under U.S. federal income tax laws, if a company is, or for any past period was, a passive foreign investment company (“PFIC”), there could be adverse U.S. federal income tax consequences to U.S. shareholders even if the Company is no longer a PFIC. While the Company does not believe that it is currently a PFIC, there can be no assurance that the Company was not a PFIC in the past and will not be a PFIC in the future.
Risks Related to Regulation
The use and management of user data and personal information could give rise to liabilities as a result of legal, customer and other third-party requirements.
User data and personal information is increasingly subject to new and amended legislation and regulations in numerous jurisdictions around the world that are intended to protect the privacy and security of personal information, as well as the collection, storage, transmission, use and disclosure of such information.
The interpretation of privacy and data protection laws and their application to the Internet and mobile communications in a number of jurisdictions is unclear and evolving. There is a risk that these laws may be interpreted and applied in conflicting ways from country to country and in a manner that is not consistent with the Company’s current data protection practices. Complying with these varying international requirements could cause the Company to incur additional costs and change the Company’s business practices. In addition, because the Company’s services are accessible worldwide, certain foreign jurisdictions may claim that the Company is required to comply with their laws, even where the Company has no local entity, employees, or infrastructure. Non-compliance could result in penalties or significant legal liability and the Company’s business, results of operations and financial condition may be adversely affected.
The Company’s customers, partners and members of its ecosystem may also have differing expectations or impose particular requirements for the collection, storage, processing and transmittal of user data or personal information in connection with BlackBerry products and services. Such expectations or requirements could subject the Company to additional costs, liabilities or negative publicity, and limit its future growth. In addition, governmental authorities may require access to limited data stored by the Company through lawful access demands and capabilities, which could subject the Company to legal liability, unforeseen compliance cost and negative publicity. Even a perception that the Company’s products or practices do not adequately protect users’ privacy or data collected by the Company, made available to the Company or stored in or through the Company’s products, or that they are being used by third parties to access personal or consumer data, could impair the Company’s sales or its reputation and brand value.
Government regulations applicable to the Company’s products and services, including products containing encryption capabilities, could negatively impact the Company’s business.
Certain government regulations applicable to the Company’s products and services may provide opportunities for competitors or limit growth. The impact of potential incremental obligations may vary based on the jurisdiction, but regulatory changes could impact whether the Company enters, maintains or expands its presence in a particular market, and whether the Company must dedicate additional resources to comply with these obligations.
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Various countries have enacted laws and regulations, adopted controls, license or permit requirements, and restrictions on the export, import, and use of products or services that contain encryption technology. In addition, from time to time, governmental agencies have proposed additional regulations relating to encryption technology, such as requiring certification, notifications, review of source code, or the escrow and governmental recovery of private encryption keys. Governmental regulation of encryption technology, including the regulation of imports or exports, could harm the Company’s sales in one or more jurisdictions and adversely affect the Company’s revenues. Complying with such regulations could also require the Company to devote additional research and development resources to change the Company’s software or services or alter the methods by which the Company makes them available, which could be costly. In addition, failure to comply with such regulations could result in penalties, costs and restrictions on import or export privileges or adversely affect sales to government agencies or government funded projects.
Environmental, social and governance (“ESG”) expectations and standards expose the Company to risks that could adversely affect the Company’s reputation and performance.
Standards for identifying, measuring and reporting ESG matters continue to evolve, including regulatory requirements such as the Securities and Exchange Commission’s recently-published final rules on climate-related disclosures . If the Company’s ESG practices or disclosures do not meet evolving investor or other stakeholder expectations and standards, then the reputation of the Company, its ability to attract or retain employees, and its attractiveness as an investment, business partner, acquiror or service provider could be negatively impacted. Further, the Company’s failure or perceived failure to pursue or fulfill ESG objectives or to satisfy applicable reporting standards on a timely basis, or at all, could have similar negative impacts or expose the Company to government enforcement actions and private litigation.
Failure of the Company’s suppliers, subcontractors, channel partners and representatives to use acceptable ethical business practices or to comply with applicable laws could negatively impact the Company’s business.
The Company expects its suppliers, subcontractors, licensees and other partners to operate in compliance with applicable laws, rules and regulations regarding working conditions, labour and employment practices, environmental compliance, anti-corruption, and patent and trademark licensing, as detailed in the Company’s Supplier Code of Conduct. However, the Company does not directly control their labour and other business practices. If one of the Company’s suppliers or subcontractors violates applicable labour, anti-corruption or other laws, or implements labour or other business practices that are regarded as unethical, or if a supplier or subcontractor fails to comply with procedures designed by the Company to adhere to existing or proposed regulations, the delivery of BlackBerry products could be interrupted, orders could be canceled, relationships could be terminated, the Company’s reputation could be damaged, and the Company may be subject to liability. Any of these events could have a negative impact on the Company’s business, results of operations and financial condition.
General Risk Factors
Acquisitions, divestitures, investments and other business initiatives may negatively affect the Company’s results of operations.
The Company has acquired and continues to seek out opportunities to acquire or invest in, businesses, assets, products, services and technologies that expand, complement or are otherwise related to the Company’s business or provide opportunities for growth. In addition, the Company is increasingly collaborating and partnering with third parties to develop technologies, products and services, as well as seek new revenue through partnering arrangements.
These activities involve significant challenges and risks, including: that they may not advance the Company’s strategic objectives or generate satisfactory synergies or return on investment; that the Company may have difficulty integrating and managing new employees, business systems, development teams and product offerings; the potential loss of key employees of an acquired business; additional demands on the Company’s management, resources, systems, procedures and controls; disruption of the Company’s ongoing business; and diversion of management’s attention from other business concerns. Acquisitions, investments or other strategic collaborations or partnerships may involve significant commitments of financial and other resources of the Company. If these fail to perform as expected, or if the Company fails to enter into and execute the transactions or arrangements needed to succeed, the Company may not be able to bring its products, services or technologies to market successfully or in a timely manner, which would have a material adverse impact on results of operations.
In addition, the acquisitions may involve unanticipated costs and liabilities, including possible litigation and new or increased regulatory exposure, which are not covered by the indemnity or escrow provisions, if any, of the relevant acquisition agreements.
As business circumstances dictate, the Company may also decide to divest itself of assets or businesses. The Company may not be successful in identifying or managing the risks involved in any divestiture, including its ability to obtain a reasonable purchase price for the assets, potential liabilities that may continue to apply to the Company following the divestiture, potential tax implications, employee issues or other matters. The Company’s inability to address these risks could adversely affect the Company’s business, results of operations and financial condition.
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The Company’s business is subject to risks inherent in foreign operations, including fluctuations in foreign currencies.
Sales outside of North America account for a significant portion of the Company’s revenue. The Company maintains offices in a number of foreign jurisdictions and intends to continue to pursue growth in select international markets. The Company is subject to a number of risks associated with its foreign operations that may increase liability and costs, lengthen sales cycles and require significant management attention. These risks include:
•compliance with the laws of the United States, Canada and other countries that apply to the Company’s international operations, including import and export legislation, trade sanctions, lawful access, and privacy, anti-corruption and consumer protection laws;
•unexpected changes in foreign regulatory requirements;
•reliance on third parties to establish and maintain foreign operations;
•instability in economic or political conditions;
•foreign exchange controls and cash repatriation restrictions;
•tariffs and other trade barriers;
•increased credit risk and difficulties in collecting accounts receivable;
•potential adverse tax consequences;
•uncertainties of laws and enforcement relating to the protection of intellectual property or secured technology;
•litigation in foreign court systems;
•cultural and language differences; and
•difficulty in managing a geographically dispersed workforce.
In addition, the Company is exposed to foreign exchange risk as a result of transactions in currencies other than its U.S. dollar functional currency. The majority of the Company’s revenue is denominated in U.S. dollars; however, some revenue, and a substantial portion of operating costs and capital expenditures are incurred in other currencies, primarily Canadian dollars, euros and British Pounds. For more details, please refer to the discussion of foreign exchange and income taxes in the Company’s MD&A for the fiscal year ended February 29, 2024.
All of the above factors may have a material adverse effect on the Company’s business, results of operations and financial condition and there can be no assurance that the policies and procedures implemented by the Company to address or mitigate these risks will be successful, that Company personnel will comply with them, or that the Company will not experience these factors in the future.
Environmental events may negatively affect the Company.
The Company has operations in numerous locations around the world that expose the Company to additional diverse environmental risks. A significant natural disaster, such as an earthquake, fire or flood could have a material adverse impact on the Company’s business and operations and could cause the Company to incur costs to repair damages to its facilities, equipment and infrastructure. From time to time, the Company’s offices and remote working locations have historically experienced, and are projected to continue to experience, climate-related events including drought, heat waves, ice storms, power shortages, and wildfires and resultant air quality impacts. The increasing frequency and impact of extreme weather events on the infrastructure of the Company and its suppliers, as well as public infrastructure, have the potential to disrupt the business of the Company, its suppliers and its customers.
Although the Company maintains incident management and disaster response plans, they may prove to be inadequate in the event of a major disruption caused by a natural disaster or geopolitical incident and the Company may be unable to continue its operations and may endure system interruptions, reputational harm, delays in its development activities, lengthy interruptions in service, breaches of data security and loss of critical data, and the Company’s insurance may not cover such events or may be insufficient to compensate the Company for the potentially significant losses it may incur.
The Company expects its quarterly revenue and operating results to fluctuate.
The Company’s revenues can change from one quarter to the next, including due to unexpected developments late in a quarter, such as lower-than-anticipated demand for the Company’s products and services, issues with new product or service
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introductions, an internal systems failure, or challenges with one of the Company’s distribution channels or other partners (including licensees and manufacturers).
Gross margins on the Company’s products and services vary across product lines and can change over time as a result of product transitions, pricing and configuration changes, and cost fluctuations. In addition, the Company’s gross margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product/service, geographic or channel mix, component cost increases, price competition, or the introduction of new products and services, including those that have higher cost structures or reduced pricing.
The market price of the Company’s common shares is volatile.
The market price of the Company’s outstanding common shares has been and continues to be volatile. The market price of the Company’s shares may fluctuate significantly in response to the risks described elsewhere in these Risk Factors, as well as numerous other factors, many of which are beyond the Company’s control, including: (i) announcements by the Company or its competitors of new products and services, acquisitions, customer wins or strategic partnerships; (ii) forward-looking financial guidance provided by the Company, any updates to this guidance, or the Company’s failure to meet this guidance; (iii) quarterly and annual variations in operating results, which are difficult to forecast, and the Company’s financial results not meeting the expectations of analysts or investors; (iv) recommendations by securities analysts or changes in earnings estimates; (v) the performance of other technology companies or the increasing market share of such companies; (vi) results of existing or potential litigation; (vii) market rumours; (viii) trading in derivative securities based on the Company’s common shares; or (ix) speculative trading that is not primarily motivated by Company announcements or the condition of the Company’s business. In addition, dilutive share issuances could adversely affect the market price of the Company’s outstanding common shares.
In addition, broad market and industry factors may decrease the market price of the Company’s common shares, regardless of the Company’s operating performance. The stock market in general, and the securities of technology companies in particular, have often experienced extreme price and volume fluctuations. Periods of volatility in the market price of the Company’s securities may prompt securities class action litigation against the Company which, if not resolved swiftly, can result in substantial costs and a diversion of management’s attention and resources. See also the Risk Factor entitled “Litigation against the Company may result in adverse outcomes” and the “Legal Proceedings” section in this Annual Report on Form 10-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity Risk Management and Strategy
The Company’s cybersecurity risk management program is an integral part of its overall enterprise risk management efforts. The Company manages cybersecurity risks within its products and services, infrastructure and corporate resources using a framework that is based on applicable regulations, industry standards and recognized best practices. Through this framework, the Company devotes significant resources to identifying, monitoring, assessing and responding to cybersecurity threats and incidents, including those associated with its use of third-party software, applications, services, and cloud infrastructure.
To mitigate risk to its systems, endpoints and data, the Company evaluates internal and external threat intelligence, deploys encryption and authentication technologies and other protective measures, maintains security policies and procedures, and conducts vulnerability testing and awareness training. The Company also conducts penetration testing and other risk assessments, implements appropriate internal controls, and engages independent third-party auditors to evaluate its compliance with security compliance standards.
The Company’s incident response team, comprised of representatives from the Company’s information technology, information security, product security, engineering, privacy and legal groups, is responsible for addressing data breaches, intrusions, and other security incidents and implementing the Company’s incident response plan. The Company’s incident response plan includes processes and procedures for assessing internal and external threats, escalation and activation, crisis management, and post-incident recovery.
The readiness of the incident response team is promoted through table-top exercises and threat simulations. The Company also conducts mandatory training of all employees on its security practices and policies and periodically sends simulated phishing emails to employees to build resilience.
In addition, the Company maintains specific policies and practices to mitigate third party security risks, including a process for evaluating the security controls of vendors and service providers who exchange data with the Company or have access to or integrate with the Company’s systems. At the same time, the Company’s control over the security posture of third parties is limited and there can be no assurance that any partner of the Company will not experience a compromise or failure in the information assets under its control.
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For the years covered by this report, the Company did not identify any security threats or incidents that have materially affected or are reasonably likely to materially affect its business strategy, results of operations or financial condition. However, like all other enterprises, the Company faces known and unknown cybersecurity risks and threats that are not fully mitigated. While the Company works continuously to enhance its security programs and risk management efforts, it discovers vulnerabilities from time to time and there can be no assurance that the Company has not experienced an undetected cybersecurity incident or that it will not experience material loss or damage from an incident in the future.
Cybersecurity Governance
The Board has overall responsibility for the Company’s enterprise risk management program, and the Audit and Risk Management Committee assists the Board with this oversight. The Company’s internal audit function reports to the Audit and Risk Management Committee and, among other things, provides independent assurance on the Company’s risk management activities and internal controls related to cybersecurity risk. For more information, see Part 3, Item 10 “Directors, Executive Officers and Corporate Governance – Enterprise Risk Management”.
Management’s cybersecurity programs operate under the leadership of the Company’s Chief Information Security Officer (“CISO”), who receives reports from his team of information and product security professionals and monitors the prevention, detection, mitigation and remediation of cybersecurity risks. The CISO provides quarterly updates to the Board on the advancing maturity of the Company’s cybersecurity program, including reports on security controls coverage and effectiveness, secure software development and product security, vulnerability testing and remediation, and security operations. The updates also include reports on improvements to processes, technology and governance to mitigate residual cybersecurity risk.
ITEM 2. PROPERTIES
The Company’s headquarters are located in Waterloo, Ontario, where the campus consists of one leased building with approximately 148,000 square feet. The remaining lease term is approximately one year with the option to renew for an additional five years. The Company’s other significant leased property is its Ottawa, Ontario facility at approximately 147,000 square feet. The remaining lease term is approximately three years with the option to renew for an additional three years. Company also operates facilities in the United States, Asia-Pacific, Europe and the Middle East for engineering, sales, marketing, research and development, our data center, and operations, among other general and administrative purposes.
The following table sets forth the location and approximate square footage of the Company’s leased facilities as of February 29, 2024:
(Square feet in thousands)
Location
North America 899
Europe, Middle East and Africa 42
Asia Pacific 66
ITEM 3. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements for information regarding certain legal proceedings in which the Company is involved.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common shares are listed and posted for trading on the NYSE and the TSX under the symbol “BB”.
On February 29, 2024, there were 1,049 registered holders of record of our common shares.
Unregistered Sales of Equity Securities
The Company had no unregistered sales of equity securities during fiscal 2024 that were not previously reported.
Share Repurchases
The Company did not repurchase any shares during fiscal 2024.
Stock Performance Graph
In fiscal 2024, the Company adopted a total shareholder return metric for performance-based restricted share unit awards granted in the fourth quarter of fiscal 2024 and the S&P Software & Services Select Industry Index was selected as the most appropriate comparator index for the Company based on the characteristics of its constituents.
The following graph shows the cumulative total shareholder return of $100 invested in the common shares compared to the S&P/TSX Capped Composite index, the peer group index (S&P Software & Services Select Industry Index) and the previous peer group index (S&P 500 Information Technology Index) for the period of February 28, 2019 to February 29, 2024.
The performance of the Company’s common shares as set out in the graph is based upon historical data and is not indicative of, nor intended to forecast, future performance of our common shares. The graph lines merely connect measurement dates and do not reflect fluctuations between those dates.
Base Period
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This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.
Ownership and Exchange Controls
There is currently no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect the remittance of dividends, interest or other payments by us to non-resident holders of the Company’s common shares, other than withholding tax requirements.
There is currently no limitation imposed by Canadian law or by the Company’s articles or by-laws on the right of non-residents to hold or vote the Company’s common shares, other than those imposed by the Investment Canada Act (Canada) and the Competition Act (Canada). These acts will generally not apply except where control of an existing Canadian business or company, which has Canadian assets or revenue, or enterprise value (as applicable) over a certain threshold, is acquired and will not apply to trading generally of securities listed on a stock exchange.
Certain Canadian Federal Income Tax Considerations for U.S. Residents
The following is a summary of the principal Canadian federal income tax considerations generally applicable under the Income Tax Act (Canada) (together with the regulations thereto, the “Tax Act”) to a beneficial holder of the Company’s common shares who, for the purposes of the Tax Act and the Canada-United States Income Tax Convention (1980) (the “Treaty”), and at all relevant times, (i) is not and is not deemed to be a resident in Canada, (ii) is a resident of the United States for the purposes of the Treaty and is entitled to the full benefits thereunder, (iii) holds all common shares as capital property, (iv) deals at arm’s length with and is not affiliated with the Company, and (v) does not use or hold and is not deemed to use or hold the common shares in connection with a business carried on in Canada (each such holder, a “U.S. Resident Holder”). This summary is not generally applicable to a U.S. Resident Holder that is: (i) an insurer carrying on an insurance business in Canada and elsewhere, or (ii) an “authorized foreign bank,” each as defined in the Tax Act. Such U.S. Resident Holders should consult their own tax advisors.
Generally, a U.S. Resident Holder’s common shares will be considered to be capital property of a U.S. Resident Holder provided the U.S. Resident Holder does not hold such shares in the course of carrying on a business of trading or dealing in securities and has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.
This summary is based upon the current provisions of the Tax Act, the current administrative policies and assessing practices of the Canada Revenue Agency published in writing prior to the date hereof, and the Treaty. This summary takes into account all specific proposals to amend the Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Tax Proposals”), and assumes that all Tax Proposals will be enacted in the form proposed. However, no assurances can be given that the Tax Proposals will be enacted as proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative policy or assessing practice whether by legislative, administrative or judicial action or decision, nor does it take into account tax legislation or considerations of any province, territory or foreign jurisdiction, which may differ from those discussed herein.
This summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any particular holder or prospective holder of the Company’s common shares, and no opinion or representation with respect to the tax consequences to any holder or prospective holder of the common shares is made. Accordingly, holders and prospective holders of the Company’s common shares should consult their own tax advisors with respect to the income tax consequences of purchasing, owning and disposing of the common shares in their particular circumstances.
Dividends
Dividends paid or credited, or deemed to be paid or credited, on the Company’s common shares to a U.S. Resident Holder will be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividends, subject to reduction under the provisions of the Treaty. Under the Treaty, the rate of Canadian withholding tax applicable to a U.S. Resident Holder that is the beneficial owner of dividends is generally reduced to 15% of the gross amount of the dividends, and, if such U.S. Resident Holder is a company that owns at least 10% of the Company’s voting shares at the time of the dividends, the rate of Canadian withholding tax is reduced to 5% of the gross amount of the dividends. U.S. Resident Holders who may be eligible for a reduced rate of withholding tax on dividends pursuant to the Treaty should consult with their own tax advisors with respect to taking all appropriate steps in this regard.
Disposition of Common Shares
A U.S. Resident Holder who disposes or is deemed to dispose of a common share will not be subject to tax under the Tax Act on any capital gain realized on such disposition, unless the common share constitutes “taxable Canadian property,” within the meaning of the Tax Act, of the U.S. Resident Holder at the time of the disposition and the U.S. Resident Holder is not entitled to relief under the Treaty.
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Generally, a common share of a particular U.S. Resident Holder will not be “taxable Canadian property” of such U.S. Resident Holder at any time at which such common share is listed on a “designated stock exchange,” within the meaning of the Tax Act (which includes the TSX and NYSE) unless, at any particular time during the 60-month period that ends at that time, both of the following conditions are met concurrently: (a) 25% or more of the issued shares of any class of the capital stock of the Company were owned by or belonged to one or any combination of (i) the U.S. Resident Holder, (ii) persons with whom the U.S. Resident Holder did not deal at arm’s length for purposes of the Tax Act, and (iii) partnerships in which the U.S. Resident Holder or a person described in (ii) holds a membership interest directly or indirectly through one or more partnerships; and (b) more than 50% of the fair market value of the common share was derived, directly or indirectly, from one or any combination of: (i) real or immovable property situated in Canada, (ii) “Canadian resource properties” (as defined in the Tax Act), (iii) “timber resource properties” (as defined in the Tax Act), and (iv) options in respect of, or interests in, or for civil law rights in, property described in any of (b)(i) to (iii), whether or not the property exists. A common share may also be deemed to be “taxable Canadian property” in certain circumstances as set out in the Tax Act. In the case of a U.S. Resident Holder to whom a common share of the Company represents “taxable Canadian property”, under the Treaty, such a U.S. Resident Holder will generally not be subject to tax under the Tax Act on a capital gain realized on the disposition of such share unless the value of such share is derived principally from real property situated in Canada (within the meaning of the Treaty).
In the event that a common share is “taxable Canadian property,” within the meaning of the Tax Act, to a U.S. Resident Holder at the time of disposition, such U.S. Resident Holder should consult its own tax advisor as to the Canadian federal income tax consequences of the disposition.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the consolidated financial statements and the accompanying notes (the “Consolidated Financial Statements”) of BlackBerry Limited, for the fiscal year ended February 29, 2024. 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 by the Company 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 included in our Annual Report on 10-K for the fiscal year ended February 28, 2023 for a comparative discussion of our fiscal 2023 financial results as compared to our fiscal 2022 financial results, which is incorporated herein by reference. Additional information about the Company can be found on SEDAR+ at www.sedarplus.ca and on the SEC’s website at www.sec.gov.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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 increase and enhance its product and service offerings and to patent new innovations;
•the Company’s expectations with respect to enhancing operational focus and flexibility, driving improved profitability, and increasing optionality for optimizing shareholder value through the full separation of its principal business units;
•the Company’s expectations with respect to its revenue, non-GAAP EPS and adjusted EBITDA in the first quarter of fiscal 2025 and fiscal 2025 as a whole, annual recurring revenue of the Company’s Cybersecurity division and cash usage in the first quarter of fiscal 2025, non-GAAP operating expenses for fiscal 2025 and non-GAAP EPS and cash flow in the fourth quarter fiscal 2025;
•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.
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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 Annual Report on Form 10-K, including in the sections in Part I, Item 1 “Business” entitled “Products and Services - IoT”, “Products and Services - Licensing and Other”, “Intellectual Property” and “Human Capital”, and in the sections of this MD&A entitled, “Non-GAAP Financial Measures - Key Metrics - Cybersecurity Annual Recurring Revenue”, “Results of Operations - Fiscal year ended February 29, 2024 compared to fiscal year ended February 28, 2023 - Revenue - Revenue by Segment”, “Results of Operations - Fiscal year ended February 29, 2024 compared to fiscal year ended February 28, 2023 - Operating Expenses”, “Results of Operations - Fiscal year ended February 29, 2024 compared to fiscal year ended February 28, 2023 - Net Income (Loss)” and “Financial Condition - Contractual and Other Obligations”. 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, the Company’s expectations regarding its financial performance, and the Company’s expectations regarding the planned separation of its businesses. 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 this 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 the “Strategy” subsection in Part I, Item 1 “Business” of this Annual Report on Form 10-K.
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 235 million vehicles. Based in Waterloo, Ontario, the Company leverages artificial intelligence (“AI”) and machine learning to deliver innovative solutions in the areas of cybersecurity, safety and data privacy, and is a leader in the areas of endpoint security, endpoint management, encryption, and embedded systems. The 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) on March 7, 1984.
The Company continued to execute on its strategy in fiscal 2024 and announced the following significant achievements:
Products and Innovation:
•Announced general availability of QNX® Software Development Platform (SDP) 8.0, the Company’s scalable, high-performance foundation for next generation automotive and IoT systems;
•Launched an enhanced AI-based Cylance® cybersecurity solutions portfolio, including a major update to its patented Cylance AI engine;
•Launched QNX® Sound, an audio and acoustics innovation platform for software-defined vehicles;
•Announced enhancements to SecuSUITE® for Government, including encrypted video and group audio calls;
•Announced an integration of CylanceGUARD® and BlackBerry® AtHoc® technologies for secure bi-directional response communications during cyber incidents;
•Announced that CylanceENDPOINTTM received Gartner® Peer InsightsTM 2023, Customers’ Choice designation for Endpoint Protection Platforms, based on customer feedback, placing in the upper-right quadrant;
•Released a Global Threat Intelligence Report, highlighting that the Company’s AI-driven cybersecurity solutions stopped 55,000 individual cyber-attacks between March and May 2023;
•Launched a generative AI-powered cybersecurity assistant to increase efficiency and reduce fatigue for CISO teams; and
•Announced that BlackBerry is the first Mobile Device Management vendor to receive BSI clearance for BlackBerry® UEM Brightsite usage with Apple iNDIGO.
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Customers and Partners:
•Announced a significant, multi-year deal to provide full suite of cybersecurity solutions to the Government of Malaysia;
•Stellantis, BlackBerry QNX and AWS launched the world’s first virtual cockpit, leveraging the QNX® Hypervisor in the cloud to transform in-vehicle software engineering;
•Mobility in Harmony (MIH) consortium, a Foxconn initiative, selected BlackBerry IVY® to power its next-generation electric production vehicles;
•Announced the Company’s new Cybersecurity Center of Excellence (CCoE) in Kuala Lumpur will offer SANS training courses to help grow and upskill cyber workforces in Malaysia;
•Announced that the United States Department of Homeland Security awarded a new PENS (personal emergency notification system) contract to BlackBerry, utilizing BlackBerry® AtHoc® critical event management (CEM) solution;
•Announced that Mitsubishi’s enhanced automotive in-cabin system, FlexConnect.X, will be powered by BlackBerry IVY to deliver AI data-driven experiences;
•Announced that BlackBerry QNX software is embedded in over 235 million vehicles;
•Announced an extended partnership with leading managed security services provider (MSSP) Solutions Granted, enabling better scale to address small and medium-sized businesses (SMBs); and
•Announced a strategic partnership with McLeod Software, a leading Transportation Management System (TMS) provider, delivering enterprise software solutions to the transportation and logistics industry.
Environmental, Sustainability and Corporate Governance:
•Appointed Philip Brace, an IoT technology industry veteran, to the Board of Directors (the “Board”); and
•Appointed John Giamatteo, President of BlackBerry’s Cybersecurity division, as Chief Executive Officer.
Goodwill Impairment
During the fourth quarter of fiscal 2024, as part of its process for setting the annual operating plan for fiscal 2025, the Company updated its estimates of long-term future cash flows to reflect lower revenue and EBITDA growth rate expectations and a reduction in revenue multiples used in the valuation of the BlackBerry Spark reporting unit. These changes in estimates, combined with the continued global economic uncertainty, customer budgetary constraints, and inflation, as well as higher interest rates implemented in response to inflation, and a broad-based stock market decline impacting the Company’s market capitalization, resulted in the recognition of a goodwill impairment charge of $35 million (the “Fiscal 2024 Goodwill Impairment Charge”) in the BlackBerry Spark reporting unit, which is included within the Company’s Cybersecurity segment. For additional information, see Note 3 to the Consolidated Financial Statements. The estimated fair values of the Company’s other reporting units substantially exceeded their carrying values as at the annual goodwill impairment test date, with the exception of the Intellectual Property reporting unit.
Business Separation
On May 1, 2023, the Company announced that the Board would initiate a review of the Company’s portfolio of businesses, with the assistance of its financial advisors, as the Board considered strategic alternatives to drive enhanced shareholder value. On October 4, 2023, the Company announced its intention to separate the IoT and Cybersecurity business units with a view to pursuing a subsidiary initial public offering (“Sub-IPO”) for the IoT business. On December 11, 2023, the Company announced that it had reassessed its strategy and would no longer pursue a Sub-IPO but intends to pursue a full separation of the IoT and Cybersecurity businesses, including the separation and streamlining of the Company’s centralized corporate functions into business-unit specific teams, with a view to establishing each business as an independently-operated, profitable and cashflow-positive division. The Company intends for the separation to enhance the operational focus and flexibility for each business, drive improved profitability, and increase optionality for the Company to optimize shareholder value. On February 12, 2024, the Company announced its progress in separation and provided targets in respect to annualized net profit improvements to be achieved through a combination of cost reductions and margin expansion, identified previously achieved annualized cost savings in the third quarter of fiscal 2024, and provided guidance regarding expected improvements in operating cash flow in fiscal 2025. On April 3, 2024, the Company stated that it had taken action in fiscal 2024 to reduce annualized expenditures by approximately $105 million and is working towards further run rate reductions.
Patent Sale
On May 11, 2023, the Company completed its previously announced patent sale with Malikie Innovations Limited and sold certain non-core patent assets for $170 million in cash on closing, an additional $30 million in cash by no later than the third anniversary of closing and potential future royalties in the aggregate amount of up to $700 million (the “Malikie Transaction”).
In the first quarter of fiscal 2024, the Company recognized revenue of $218 million and cost of sales of $147 million related to non-core intellectual property sold. The revenue recognized reflects the application of the Company’s accounting policies and
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critical accounting estimates, as described in Note 1 to the Consolidated Financial Statements, which resulted in a substantial majority of the potential future royalties from the Malikie Transaction being constrained until future periods. In evaluating the Malikie Transaction, the Company considered estimates of value, among other factors, which are not fully reflected when applying the principles of revenue recognition, such as the variable consideration constraint that is recognized at the inception of the Malikie Transaction. Accordingly, amounts initially recognized in the first quarter of fiscal 2024 do not reflect the full fair value of the overall transaction as determined by the Company. Additional variable consideration is expected to be recognized in future quarters, as determined quarterly based on the revenue recognition accounting framework. See Note 12 to the Consolidated Financial Statements.
Debt Repayment and New Issuance
On November 13, 2023, the Company repaid all amounts due upon the maturity of its outstanding 1.75% unsecured convertible debentures (the “2020 Debentures”) for an aggregate amount of $365 million. On November 17, 2023, the Company issued an aggregate of $150 million principal amount of new 1.75% extendable unsecured convertible debentures maturing on February 15, 2024 (the “Extension Debentures” and collectively with the 2020 Debentures, the “Debentures”), with an option for the parties to extend the maturity date to May 15, 2024 by mutual agreement, to certain controlled affiliates of Fairfax Financial Holdings Limited (“Fairfax”) on a private placement basis. The Extension Debentures had terms that were substantially similar to those of the 2020 Debentures. Interest expense on the Extension Debentures was approximately $1 million for the period from issuance to maturity on February 15, 2024.
On January 29, 2024, the Company issued $200 million aggregate principal amount of 3.00% senior convertible unsecured notes (the “Notes”) in an offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The Company used the net proceeds of the issuance of the Notes principally to repay the Extension Debentures at maturity on February 15, 2024. The Notes are due on February 15, 2029 unless earlier converted, redeemed, or repurchased. Interest expense on the Notes will be approximately $6 million per year.
See Note 6 to the Consolidated Financial Statements for a description of the terms of the Notes.
Refer to Part I, Item 1A “Risk Factors” in this Annual Report on form 10-K for a discussion of these factors and other risks.
Fiscal 2024 Summary Results of Operations
The following table sets forth certain consolidated statements of operations data for the fiscal years ended February 29, 2024, February 28, 2023, and February 28, 2022:
Earnings (loss) per share - reported
Weighted-average number of shares outstanding (000’s)
______________________________
(1)Diluted loss per share on a U.S. GAAP basis for fiscal 2024 does not include the dilutive effect of the Debentures and the Notes as to do so would be anti-dilutive. Diluted loss per share on a U.S. GAAP basis for fiscal 2024, fiscal 2023, and fiscal 2022 does not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive. See Note 8 to the
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Consolidated Financial Statements for the fiscal year ended February 29, 2024 for calculation of the diluted weighted average number of shares outstanding.
The following section sets forth certain unaudited consolidated statements of operations data for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022:
For the Three Months Ended(in millions, except for share and per share amounts)
Investment income (loss), net 4 6 (2) (1) 7
Provision for income taxes 4 2 2 1 1
Earnings (loss) per share - reported
Weighted-average number of shares outstanding (000’s)
______________________________
(1)Diluted loss per share on a U.S. GAAP basis in the fourth quarter of 2024 and 2023 do not include the dilutive effect of the Debentures or Notes as to do so would be anti-dilutive. Diluted loss per share on a U.S. GAAP basis in the fourth quarter of 2024, 2023 and 2022 do not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive.
The following tables show information by operating segment for the three months and year ended February 29, 2024 and February 28, 2023. The Company reports segment information in accordance with U.S. GAAP Accounting Standards Codification Section 280 based on the “management” approach. The management approach designates the internal reporting used by the CODM for making decisions and assessing performance of the Company’s reportable operating segments. See Note 12 to the Consolidated Financial Statements for a description of the Company’s operating segments.
For the Three Months Ended(in millions)
Cybersecurity IoT Licensing and Other Segment Totals
For the Year Ended
(in millions)
Cybersecurity IoT Licensing and Other Segment Totals
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The following tables reconcile the Company’s segment results for the three months and year ended February 29, 2024 to consolidated U.S. GAAP results:
For the Three Months Ended February 29, 2024
(in millions)
Investment income, net 4 4
Loss before income taxes $ (52)
For the Year Ended February 29, 2024
(in millions)
Investment income, net 19 19
Loss before income taxes $ (106)
______________________________
(1) See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the three months and year ended February 29, 2024.
The following tables reconcile the Company’s segment results for the three months and year ended February 28, 2023 to consolidated U.S. GAAP results:
For the Three Months Ended February 28, 2023
(in millions)
Investment income, net 6 6
Loss before income taxes $ (493)
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For the Year Ended February 28, 2023
(in millions)
Investment income, net 5 5
Loss before income taxes $ (720)
______________________________
(1) See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the three months and year ended February 28, 2023.
Financial Highlights
The Company had approximately $298 million in cash, cash equivalents and investments as of February 29, 2024 (Fiscal 2023 - $487 million).
In fiscal 2024, the Company recognized revenue of $853 million and incurred a net loss of $130 million, or $0.22 basic and diluted loss per share on a U.S. GAAP basis (fiscal 2023 - revenue of $656 million and net loss of $734 million, or $1.27 basic loss per share and $1.35 diluted loss per share).
The Company recognized adjusted net income of $31 million, or adjusted income of $0.05 per share, on a non-GAAP basis in fiscal 2024 (fiscal 2023 - adjusted net loss of $103 million and adjusted loss of $0.18 per share). See “Non-GAAP Financial Measures” below.
Debentures Fair Value Adjustment
As previously disclosed, the Company elected the fair value option to account for the Debentures; therefore, periodic revaluation was required under U.S. GAAP. The fair value adjustment did not impact the terms of the Debentures such as the face value, the redemption features or the conversion price.
In fiscal 2024, the Company recorded non-cash income relating to changes in fair value of the 2020 Debentures of $2 million (pre-tax and after tax) and realized a non-cash charge relating to changes in fair value from non-credit components released from AOCL on maturity of the Extension Debentures and 2020 Debentures of $6 million (the “Fiscal 2024 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations. See Note 6 to the Consolidated Financial Statements for further details on the Debentures.
Non-GAAP Financial Measures
The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, and information contained in this MD&A is presented on that basis. On April 3, 2024, the Company announced financial results for the three months and fiscal year ended February 29, 2024, which included certain non-GAAP financial measures and non-GAAP ratios, including adjusted gross margin, adjusted gross margin percentage, adjusted operating expense, adjusted net income (loss), adjusted earnings (loss) per share, adjusted research and development expense, adjusted sales and marketing expense, adjusted general and administrative expense, adjusted amortization expense, adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage, adjusted EBITDA margin percentage and free cash flow (usage). Commencing with this MD&A and consistent with the presentation of the corresponding U.S. GAAP measures, the Company is presenting adjusted sales and marketing expense and adjusted general and administrative expense separately, whereas they were previously aggregated.
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 certain items from the Company’s U.S. GAAP financial results. The Company believes that these non-GAAP financial measures and non-GAAP ratios provide management, as well as readers of the Company’s financial statements, with a consistent basis for comparison across accounting periods and are useful in helping management and readers understand the Company’s operating results and underlying operational trends. For purposes of comparability, the Company’s non-GAAP financial measures for the three months ended and years ended February 28, 2023 and February 28, 2022 have been updated to conform to the current year’s presentation.
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•Debentures fair value adjustment. The Company elected to measure the Debentures at fair value in accordance with the fair value option under U.S. GAAP. Each period, the fair value of the Debentures was recalculated and the resulting non-cash income and charges from the change in fair value from non-credit components of the Debentures were recognized in income. The amount varied each period depending on changes to the Company’s share price, share price volatility and credit indices. This was not indicative of the Company’s core operating performance, and may not be meaningful when comparing the Company’s operating performance against that of prior periods.
•Restructuring charges. The Company believes that restructuring costs relating to employee termination benefits, facilities, streamlining the Company’s centralized corporate functions into Cybersecurity and IoT specific teams and other costs pursuant to the programs to reduce its annual expenses amongst R&D, infrastructure and other functions do not reflect expected future operating expenses, are not indicative of the Company’s core operating performance, and may not be meaningful when comparing the Company’s operating performance against that of prior periods
•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 may not be meaningful when comparing the Company’s operating performance against that of prior periods.
•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 may not be meaningful when comparing the Company’s operating performance against that of prior periods.
•Goodwill impairment charge.The Company believes that goodwill impairment charges do not reflect expected future operating expenses, are non-cash, and may not be meaningful when comparing the Company’s operating performance against that of prior periods.
•Litigation settlement.The Company believes that litigation settlements do not reflect expected future operating expenses, are not indicative of the Company’s core operating performance, and may not be meaningful when comparing the Company’s operating performance against that of prior periods.
On a U.S. GAAP basis, the impacts of these items are reflected in the Company’s income statement. However, the Company believes that the provision of supplemental non-GAAP measures allows 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 to U.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 U.S. GAAP based measures for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022
Readers are cautioned that adjusted gross margin, adjusted gross margin percentage, adjusted operating expense, adjusted net income (loss), adjusted earnings (loss) per share, adjusted research and development expense, adjusted sales and marketing expense, adjusted general and administrative expense, adjusted amortization expense, adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage, adjusted EBITDA margin percentage and free cash flow (usage) and similar measures 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. Commencing with this MD&A and consistent with the presentation of the corresponding U.S. GAAP measures, the Company is presenting adjusted sales and marketing expense and adjusted general and administrative expense separately. These non-GAAP financial measures should be considered in the context of the U.S. GAAP results, which are described in this MD&A and presented in the Consolidated Financial Statements.
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A reconciliation of the most directly comparable U.S. GAAP financial measures for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022 to adjusted financial measures is reflected in the table below:
Stock compensation expense — 1 1
Stock compensation expense — % 0.7 % 0.6 %
Reconciliation of U.S. GAAP operating expense (income) for the three months ended February 29, 2024, November 30, 2023, February 28, 2023 and February 28, 2022 to adjusted operating expense is reflected in the table below:
Restructuring charges 20 9 7 —
Stock compensation expense 5 7 9 4
Debentures fair value adjustment (1) — (13) (26) (165)
Acquired intangibles amortization 8 9 15 22
Goodwill impairment charge 35 — 245 —
LLA impairment charge 4 11 231 —
______________________________
(1) See “Fiscal 2024 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”.
Reconciliation of U.S. GAAP net income (loss) and U.S. GAAP basic earnings (loss) per share for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022 to adjusted net income (loss) and adjusted basic earnings (loss) per share is reflected in the table below:
Basic earnings (loss) per share Basic loss per share Basic earnings per share
Restructuring charges 20 7 —
Stock compensation expense 5 10 5
Debentures fair value adjustment — (26) (165)
Acquired intangibles amortization 8 15 22
Goodwill impairment charge 35 245 —
LLA impairment charge 4 231 —
Reconciliation of U.S. GAAP research and development, sales and marketing, general and administrative, and amortization expense for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022 to adjusted research and development, sales and marketing, general and administrative, and amortization expense is reflected in the table below:
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Research and development $ 40 $ 48 $ 47
Stock compensation expense 2 3 2
Adjusted research and development $ 38 $ 45 $ 45
Sales and marketing $ 41 $ 48 $ 45
Stock compensation expense 1 2 1
Adjusted sales and marketing $ 40 $ 46 $ 44
General and administrative $ 53 $ 35 $ 19
Restructuring charges 20 7 —
Stock compensation expense 2 4 1
Adjusted general and administrative $ 31 $ 24 $ 18
Acquired intangibles amortization 8 15 22
Adjusted amortization $ 4 $ 3 $ 10
Reconciliation of non-GAAP based measures with most directly comparable U.S. GAAP based measures for the years ended February 29, 2024, February 28, 2023 and February 28, 2022
A reconciliation of the most directly comparable U.S. GAAP financial measures for the years ended February 29, 2024, February 28, 2023 and February 28, 2022 to adjusted financial measures is reflected in the table below:
Stock compensation expense 3 3 4
Stock compensation expense 0.3 % 0.4 % 0.6 %
Restructuring charges 37 11 —
Stock compensation expense 30 28 26
Debentures fair value adjustment (1) 3 (138) (212)
Acquired intangibles amortization 38 82 115
Goodwill impairment charge 35 245 —
LLA impairment charge 15 235 —
Litigation settlement — 165 —
______________________________
(1) See “Fiscal 2024 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”.
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Reconciliation of U.S. GAAP net income (loss) and U.S. GAAP basic earnings (loss) per share for the years ended February 29, 2024, February 28, 2023 and February 28, 2022 to the adjusted net income (loss) and adjusted basic earnings (loss) per share is reflected in the table below:
Restructuring charges 37 11 —
Stock compensation expense 33 31 30
Debentures fair value adjustment 3 (138) (212)
Acquired intangibles amortization 38 82 115
Goodwill impairment charge 35 245 —
LLA impairment charge 15 235 —
Litigation settlement — 165 —
Reconciliation of U.S GAAP research and development, sales and marketing, general and administrative, and amortization expense for the years ended February 29, 2024, February 28, 2023 and February 28, 2022 to adjusted research and development, sales and marketing, general and administrative, and amortization expense is reflected in the table below:
Stock compensation expense 8 9 8
Adjusted research and development $ 178 $ 198 $ 211
Stock compensation expense 6 5 5
Adjusted sales and marketing $ 165 $ 171 $ 178
Restructuring charges 37 11 —
Stock compensation expense 16 14 13
Adjusted general and administrative $ 128 $ 139 $ 101
Acquired intangibles amortization 38 82 115
Adjusted amortization $ 16 $ 14 $ 50
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Adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage and adjusted EBITDA margin percentage for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022 are reflected in the table below. These are non-GAAP financial measures and non-GAAP ratios 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.
Operating income (loss) $ (56) $ (499) $ 146
Non-GAAP adjustments to operating income (loss)
Restructuring charges 20 7 —
Stock compensation expense 5 10 5
Debentures fair value adjustment — (26) (165)
Acquired intangibles amortization 8 15 22
Goodwill impairment charge 35 245 —
LLA impairment charge 4 231 —
Total non-GAAP adjustments to operating income (loss) 72 482 (138)
Adjusted operating income (loss) 16 (17) 8
Acquired intangibles amortization (8) (15) (22)
Adjusted EBITDA $ 21 $ (12) $ 20
Adjusted operating income (loss) margin % (1) 9% (11%) 4%
Adjusted EBITDA margin % (2) 12% (8%) 11%
______________________________
(1) Adjusted operating income (loss) margin % is calculated by dividing adjusted operating income (loss) by revenue.
(2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by revenue.
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Adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage and adjusted EBITDA margin percentage for the fiscal years ended February 29, 2024, February 28, 2023 and February 28, 2022 are reflected in the table below.
Operating loss $ (125) $ (725) $ (2)
Non-GAAP adjustments to operating loss
Restructuring charges 37 11 —
Stock compensation expense 33 31 30
Debentures fair value adjustment 3 (138) (212)
Acquired intangibles amortization 38 82 115
Goodwill impairment charge 35 245 —
LLA impairment charge 15 235 —
Litigation settlement — 165 —
Total non-GAAP adjustments to operating loss 161 631 (67)
Adjusted operating income (loss) 36 (94) (69)
Acquired intangibles amortization (38) (82) (115)
Adjusted EBITDA $ 57 $ (71) $ (8)
Adjusted operating income (loss) margin % (1) 4 % (14 %) (10 %)
Adjusted EBITDA margin % (2) 7 % (11 %) (1 %)
______________________________
(1) Adjusted operating income (loss) margin % is calculated by dividing adjusted operating income (loss) by revenue.
(2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by revenue.
The Company uses free cash flow (usage) when assessing its sources of liquidity, capital resources, and quality of earnings. The Company believes that free cash flow (usage) 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.
Reconciliation of U.S. GAAP net cash provided by (used in) operating activities for the three months ended February 29, 2024, February 28, 2023 and February 28, 2022 to free cash flow (usage) is reflected in the table below:
Net cash provided by (used in) operating activities $ (15) $ (7) $ 10
Acquisition of property, plant and equipment (2) (2) $ (2)
Free cash flow (usage) $ (17) $ (9) $ 8
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Reconciliation of U.S. GAAP net cash provided by (used in) operating activities for the years ended February 29, 2024, February 28, 2023 and February 28, 2022 to free cash flow (usage) is reflected in the table below:
Net cash used in operating activities $ (3) $ (263) $ (28)
Acquisition of property, plant and equipment (7) (7) (8)
Free cash usage $ (10) $ (270) $ (36)
For the year ended February 28, 2023, free cash usage includes $165 million paid in relation to a legal settlement.
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 estimated future performance. Readers are cautioned that Cybersecurity annual recurring revenue (“ARR”), Cybersecurity dollar-based net retention rate (“DBNRR”), Cybersecurity total contract value (“TCV”) billings, recurring software product revenue percentage and QNX royalty backlog do not have any standardized meaning and are unlikely to be comparable to similarly titled measures reported by other companies.
Comparative breakdowns of certain key metrics for the three months ended February 29, 2024 and February 28, 2023 are set forth below.
Cybersecurity Annual Recurring Revenue $ 280 $ 298 $ (18)
Cybersecurity Dollar-Based Net Retention Rate 85 % 81 % 4 %
Cybersecurity Total Contract Value Billings $ 91 $ 107 $ (16)
Recurring Software Product Revenue Percentage ~ 90% ~ 90 % — %
Cybersecurity Annual Recurring Revenue
The Company defines ARR as the annualized value of all subscription, term, maintenance, services, and royalty contracts that generate recurring revenue as of the end of the reporting period. The Company uses ARR as an indicator of business momentum for the Cybersecurity business.
Cybersecurity ARR was approximately $280 million in the fourth quarter of fiscal 2024 and increased compared to $273 million in the third quarter of fiscal 2024 and decreased compared to $298 million in the fourth quarter of fiscal 2023 primarily due to customer churn in the BlackBerry Spark business.
The Company previously stated that it expected ARR in the fourth quarter of fiscal 2024 to be broadly consistent with the third quarter of fiscal 2024. Cybersecurity ARR increased by 3% compared to the third quarter of fiscal 2024.
The Company expects Cybersecurity ARR to be flat sequentially in the first quarter of fiscal 2025.
Cybersecurity Dollar-Based Net Retention Rate
The Company calculates the Cybersecurity DBNRR as of period end by first calculating the Cybersecurity ARR from the customer base as at 12 months prior to the current period end (“Prior Period ARR”). The Company then calculates the Cybersecurity ARR for the same cohort of customers as at the current period end (“Current Period ARR”). The Company then divides the Current Period ARR by the Prior Period ARR to calculate the DBNRR.
Cybersecurity DBNRR was 85% in the fourth quarter of fiscal 2024 and increased compared to 82% in the third quarter of fiscal 2024 and 81% in the fourth quarter of fiscal 2023.
Cybersecurity Total Contract Value Billings
The Company defines Cybersecurity TCV billings as amounts invoiced less credits issued. The Company considers Cybersecurity TCV 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.
Cybersecurity TCV billings was $91 million in the fourth quarter of fiscal 2024 and decreased compared to $109 million in the third quarter of fiscal 2024 and $107 million in the fourth quarter of fiscal 2023 primarily due to the timing of closing large customer contracts and churn in the BlackBerry Spark business.
The Company previously stated that it expected Cybersecurity TCV billings to continue to exceed Cybersecurity revenue in fiscal 2024. Cybersecurity TCV billings exceeded Cybersecurity revenue in fiscal 2024.
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Recurring Software Product Revenue Percentage
The Company defines recurring software product revenue percentage as recurring software product revenue divided by total Software & Services revenue. Recurring software product revenue is comprised of subscription and term licenses, maintenance arrangements, royalty arrangements and perpetual licenses recognized ratably under ASC 606. Total Software & Services revenue is comprised of recurring product revenue, non-recurring product revenue and professional services. The Company uses recurring software product revenue percentage to provide visibility into the revenue expected to be recognized in the current and future periods.
Total Software & Services product revenue, excluding professional services, was approximately 90% recurring in the fourth quarter of fiscal 2024 and increased compared to approximately 70% recurring in the third quarter of fiscal 2024 due to product mix and was consistent with the fourth quarter of fiscal 2023.
QNX Royalty Backlog
The Company defines the royalty backlog of its QNX business as estimated future revenue from variable forecasted royalties related to the QNX business. The estimation of forecasted royalties is based on QNX’s royalty rates and on projections of anticipated volumes that are based on historical shipping experience and current customer projections that management believes are reasonable over the lifetime of a design. The QNX royalty backlog is calculated annually based on current projections of volumes and may not be indicative of actual future revenue. The revenue that the Company will recognize is subject to several factors, including actual volumes and potential terminations or modifications to customer contracts.
The Company’s QNX royalty backlog was approximately $815 million at the end of the fourth quarter of fiscal 2024 and increased compared to approximately $640 million at the end of the fourth quarter of fiscal 2023.
Results of Operations - Fiscal year ended February 29, 2024 compared to fiscal year ended February 28, 2023
Revenue
Revenue by Segment
Comparative breakdowns of revenue by segment are set forth below.
For the Fiscal Years Ended(in millions)
Revenue by Segment
% Revenue by Segment
Licensing and Other 30.5 % 4.9 % 8.8 %
Cybersecurity
The decrease in Cybersecurity revenue of $40 million was primarily due to a decrease of $28 million relating to product revenue in BlackBerry Spark, a decrease of $8 million relating to product revenue in Secusmart and a decrease of $3 million in professional services.
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The Company previously stated that it expected Cybersecurity revenue for fiscal 2024 as a whole to be in the range of $369 million to $374 million. Cybersecurity revenue for fiscal 2024 as a whole was $378 million.
The Company expects Cybersecurity revenue to be in the range of $78 million to $82 million in the first quarter of fiscal 2025, and for the full year to be in the range of $350 million to $365 million in fiscal 2025.
IoT
The increase in IoT revenue of $9 million was primarily due to an increase of $12 million in BlackBerry QNX royalty revenue and an increase of $3 million in product revenue from BlackBerry Radar, partially offset by a decrease of $6 million in professional services.
The Company previously stated that it expected IoT revenue to be in the range of $211 million to $215 million for fiscal 2024 as a whole. IoT revenue for fiscal 2024 was $215 million.
The Company expects IoT revenue to be in the range of $48 million to $52 million in the first quarter of fiscal 2025, and for the full year to be in the range of $220 million to $235 million in fiscal 2025.
The Company previously stated that it expected total Software & Services revenue, excluding potential revenue from BlackBerry IVY, to be in the range of $580 million and $589 million for fiscal 2024 as a whole. Total Software & Services revenue, excluding potential revenue from BlackBerry IVY for fiscal 2024 was $593 million due to higher revenue in Cybersecurity as described above.
Licensing and Other
The increase in Licensing and Other revenue of $228 million was primarily due to an increase of $218 million related to the completed Malikie Transaction and an increase of $10 million in revenue from the Company’s intellectual property licensing arrangements.
The Company expects Licensing and Other revenue to be approximately $4 million in each of the four quarters of fiscal 2025.
The Company expects total Company revenue to be approximately $130 million to $138 million in the first quarter of fiscal 2025 and total Company revenue to be approximately $586 million to $616 million in fiscal 2025.
Revenue by Geography
Comparative breakdowns of the geographic regions are set forth in the following table:
For the Fiscal Years Ended(in millions)
Revenue by Geography
% Revenue by Geography
Europe, Middle East and Africa 20.2 % 33.8 % 32.6 %
North America Revenue
The increase in North America revenue of $206 million was primarily due to an increase of $228 million in Licensing and Other revenue due to the reasons discussed above in “Revenue by Segment”, an increase of $4 million in BlackBerry QNX development seat revenue and an increase of $4 million relating to product revenue in AtHoc, partially offset by a decrease of $20 million in product revenue in BlackBerry Spark and a decrease of $13 million in professional services.
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Europe, Middle East and Africa Revenue
The decrease in Europe, Middle East and Africa revenue of $50 million was primarily due to a decrease of $38 million relating to product revenue in Secusmart, a decrease of $15 million in product revenue in BlackBerry Spark and a decrease of $3 million in BlackBerry QNX development seat revenue, partially offset by an increase of $6 million in BlackBerry QNX royalty revenue.
Other Regions Revenue
The increase in Other regions revenue of $41 million was primarily due to an increase of $27 million relating to product revenue in Secusmart, an increase of $7 million in product revenue in BlackBerry Spark, an increase of $6 million in professional services and an increase of $2 million in BlackBerry QNX royalty revenue.
Gross Margin
Consolidated Gross Margin
Consolidated gross margin increased by $101 million to approximately $520 million in fiscal 2024 (fiscal 2023 - $419 million). The increase was primarily due to the completed Malikie Transaction and an increase in revenue from Secusmart, partially offset by a decrease in revenue from BlackBerry Spark due to the reasons discussed above in “Revenue by Segment”, as much of the Company’s cost of sales does not significantly fluctuate based on business volume.
Consolidated Gross Margin Percentage
Consolidated gross margin percentage decreased by 2.9%, to approximately 61.0% of consolidated revenue in fiscal 2024 (fiscal 2023 - 63.9%). The decrease was primarily due to a change in mix, specifically higher contribution from Licensing and Other, which had a lower gross margin percentage due to the completed Malikie Transaction, partially offset by a higher gross margin contribution from Secusmart software licenses, which had a higher relative gross margin percentage.
Gross Margin by Segment
See “Business Overview” and “Fiscal 2024 Summary Results of Operations” for information about the Company’s operating segments and the basis of operating segment results.
For the Years Ended
(in millions)
Cybersecurity IoT Licensing and Other Segment Totals
Cybersecurity
The increase in Cybersecurity gross margin of $3 million was primarily due to the reasons discussed above in “Revenue by Segment”, a decrease of $13 million in network infrastructure costs and a change in mix, specifically a higher gross margin contribution from Secusmart software licenses, which had a higher relative gross margin percentage.
The increase in Cybersecurity gross margin percentage of 6% was primarily due to the same reasons discussed above.
IoT
The increase in IoT gross margin of $10 million was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
The increase in IoT gross margin percentage of 1% was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Licensing and Other
The increase in Licensing and Other gross margin of $88 million was primarily due to the completed Malikie Transaction.
The increase in Licensing and Other gross margin percentage of 27% was primarily due to the completed Malikie Transaction, which had a lower relative gross margin percentage due to the cost basis of the sold assets which were de-recognized.
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Operating Expenses
The table below presents a comparison of research and development, sales and marketing, general and administrative, and amortization expense for fiscal 2024 compared to fiscal 2023 and fiscal 2023 compared to fiscal 2022.
For the Fiscal Years Ended(in millions)
Operating expenses
Gain on sale of property, plant and equipment, net — (6) 6 — (6)
Operating Expense as % of Revenue
General and administrative 21.2 % 25.0 % 15.9 %
Impairment of goodwill 4.1 % 37.3 % — %
Impairment of long-lived assets 1.8 % 35.8 % — %
Gain on sale of property, plant and equipment, net — % (0.9 %) — %
Debentures fair value adjustment 0.4 % (21.0 %) (29.5 %)
Litigation settlement — % 25.2 % — %
See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the years ended February 29, 2024, February 28, 2023 and February 28, 2022.
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U.S. GAAP Operating Expenses
Operating expenses decreased by $499 million, or 43.6% in fiscal 2024 compared to fiscal 2023. The decrease was primarily due to a decrease of $220 million in impairment of long-lived assets, a decrease of $210 million in goodwill impairment, a $165 million litigation settlement in fiscal 2023 that did not recur, a decrease of $42 million in amortization expense and a decrease in $20 million in salaries and benefits expenses, partially offset by the difference between the Fiscal 2024 Debentures Fair Value Adjustment and the fair value adjustment related to the Debentures incurred in fiscal 2023 of $141 million, an increase of $27 million in restructuring costs, a decrease in benefits of $4 million in government subsidies resulting from claims filed for the Canada Emergency Wage Subsidy and Hardest-Hit Business Recovery Program programs (“COVID-19 subsidies”) to support the business through the COVID-19 pandemic and an increase of $2 million in the Company’s deferred share unit costs.
Adjusted Operating Expenses
Adjusted operating expenses decreased by $29 million, or 5.6%, to $487 million in fiscal 2024, compared to $516 million in fiscal 2023. The decrease was primarily attributable to a decrease of $20 million in salaries and benefits expenses and a benefit of $17 million related to the release of an accrued liability relating to the Company’s legacy mobile device business, partially offset by a decrease in benefits of $4 million in COVID-19 subsidies, an increase of $2 million in amortization expense and an increase of $2 million in the Company’s deferred share unit costs.
The Company expects its average quarterly non-GAAP operating expense run rate to be approximately $110 million in fiscal 2025.
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 decreased by $21 million, or 10.1% in fiscal 2024 compared to fiscal 2023. The decrease was primarily attributable to a decrease of $11 million in salaries and benefits expenses and a decrease of $3 million in consulting costs, a decrease of $3 million in variable incentive plan costs and a decrease of $2 million in stock based compensation expense.
Adjusted research and development expenses decreased by $20 million, or 10.1%, to $178 million in fiscal 2024 compared to $198 million in fiscal 2023. The decrease was primarily due to the same reasons described above on a U.S. GAAP basis, excluding the decrease in stock based compensation expense.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of marketing, advertising and promotion, salaries and benefits, information technology costs and travel expenses.
Sales and marketing expenses decreased by $5 million, or 2.8% in fiscal 2024 compared to fiscal 2023. The decrease was primarily due to a decrease of $6 million in salaries and benefits and a decrease of $4 million in marketing and advertising costs, partially offset by an increase of $3 million in consulting costs and an increase of $1 million in stock based compensation expense.
Adjusted sales and marketing expenses decreased by $6 million, or 3.5%, to $165 million in fiscal 2024 compared to $171 million in fiscal 2023. The decrease was primarily due to same reasons described above on a U.S. GAAP basis, excluding the increase in stock based compensation expense.
General and Administrative Expenses
General and administration expenses consist primarily of salaries and benefits, external advisory fees, information technology costs, office and related staffing infrastructure costs.
General and administrative expenses increased by $17 million, or 10.4%, in fiscal 2024 compared to fiscal 2023. The increase was primarily due to an increase of $27 million in restructuring costs, a decrease in benefits of $4 million in COVID-19 subsidies, an increase of $2 million in variable incentive plan costs and an increase of $2 million in stock based compensation expense, partially offset by a benefit of $17 million related to the release of an accrued liability relating to the Company’s legacy mobile device business.
Adjusted general and administrative expenses decreased by $11 million, or 7.9%, to $128 million in fiscal 2024 compared to $139 million in fiscal 2023. The decrease was primarily due a benefit of $17 million related to the release of an accrued liability relating to the Company’s legacy mobile device business, a decrease of $3 million in consulting costs, partially offset by a decrease in benefits of $4 million in COVID-19 subsidies, an increase of $2 million in variable incentive plan costs and a decrease of $2 million in the Company’s deferred share unit cost.
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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 2024 compared to fiscal 2023 and fiscal 2023 compared to fiscal 2022. Intangible assets are comprised of patents, licenses and acquired technology.
For the Fiscal Years Ended(in millions)
Included in Operating Expense
Property, plant and equipment $ 8 $ 9 $ (1) $ 12 $ (3)
Included in Cost of Sales
Property, plant and equipment $ 2 $ 3 $ (1) $ 3 $ —
Intangible assets 3 6 (3) 8 (2)
Amortization included in Operating Expense
The decrease in amortization expense included in operating expense of $42 million was primarily due to the lower cost base of acquired technology assets due to the impairment of long-lived assets in fiscal 2023.
Adjusted amortization expense increased by $2 million to $16 million in fiscal 2024 compared to $14 million in fiscal 2023 due to an increase in patent amortization expense included in operating expenses as a result of the decrease in revenue from the Company’s intellectual property licensing arrangements.
Amortization included in Cost of Sales
The decrease in amortization expense relating to certain property, plant and equipment and certain intangible assets employed in the Company’s service operations of $4 million was due to the lower cost base of assets.
Investment Income, Net
Investment income, net, which includes the interest expense from the Debentures and the Notes, increased by $14 million to investment income, net of $19 million in fiscal 2024 compared to investment income, net of $5 million in fiscal 2023. The increase in investment income, net was primarily due to a higher yield on cash and investments and interest income on significant financing components within certain revenue contracts with customers, partially offset by lower average cash and investment balances.
Income Taxes
For fiscal 2024, the Company’s net effective income tax expense rate was approximately 23% (fiscal 2023 - net effective income tax expense rate of approximately 2%). The Company’s net effective income tax rate reflects the change in unrecognized income tax benefits, if any, and the fact that the Company has a significant valuation allowance against its deferred tax assets, and in particular, the change in loss carry forwards, research and development credits, 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.
Net Income (Loss)
The Company’s net loss for fiscal 2024 was $130 million, or $0.22 basic and diluted loss per share on a U.S. GAAP basis (fiscal 2023 - net loss of $734 million, or $1.27 basic loss per share and $1.35 diluted loss per share). The decrease in net loss of $604 million was primarily due to a decrease in operating expenses, as described above in “Operating Expenses” and an increase in revenue as described above in “Revenue by Segment”, partially offset by a decrease in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”.
Adjusted net income for fiscal 2024 was $31 million (fiscal 2023 - adjusted net loss of $103 million). The increase in adjusted net income of $134 million was primarily due to an increase in revenue as described above in “Revenue by Segment” and a
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decrease in operating expenses as described above in “Operating Expenses”, partially offset by a decrease in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”.
The Company expects a sequential increase in operating cash usage in the first quarter of fiscal 2025, but a year-on-year improvement in fiscal 2025 after adjusting for the impact of the sale of our legacy patent portfolio in the first quarter of fiscal 2025.
The Company expects non-GAAP EPS to be in the range of ($0.04) to ($0.06), and adjusted EBITDA to be in the range of negative $15 million to negative $25 million in the first quarter of fiscal 2025.
The Company expects non-GAAP EPS to be in the range of ($0.02) to ($0.06), and adjusted EBITDA to be in the range of breakeven to $10 million in fiscal 2025.