Blackberry 2014 Annual Report Download - page 162

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Service Revenue
Service revenue decreased by $399 million, or 42.1%, to $548 million, or 56.2% of consolidated revenue, in the fourth quarter
of fiscal 2014, compared to $947 million, or 35.4% of consolidated revenue, in the fourth quarter of fiscal 2013. Service
revenue in the fourth quarter of fiscal 2014 included approximately $10 million relating to cash payments received on account
of previously deferred service revenue from carriers in Venezuela. The decrease in service revenue is primarily attributable to a
lower number of BlackBerry users and lower revenue from those users compared to the fourth quarter of fiscal 2013 and also
reflects the deferral of service access fees charged to customers in Venezuela in the fourth quarter of fiscal 2014 (the “Q4 Fiscal
2014 Venezuela Service Revenue Deferral”) and the Q4 Fiscal 2014 Argentina Service Revenue Deferral.
In the third quarter of fiscal 2014, the Company provided an outlook that it expected service revenue to decline in the fourth
quarter of fiscal 2014 by a percentage consistent with the decline experienced in the third quarter of fiscal 2014. Service
revenues for the fourth quarter of fiscal 2014 decreased by approximately 13% compared to the third quarter of fiscal 2014,
which is consistent with the decline experienced in the third quarter of fiscal 2014.
The year-over-year decrease also resulted from a continued shift in the mix of the Company’s customers from higher-tiered
unlimited plans to prepaid and lower-tiered plans as well as pricing reduction programs implemented by the Company to
maintain the customer base. BlackBerry customers continued to decline in the fourth quarter of fiscal 2014. As previously
disclosed, as BlackBerry 10 products use the Company's network infrastructure in a different manner than BlackBerry 7 and
previous versions, certain elements of the Company's current revenue model have changed. Users of Blackberry 10 devices
that require enhanced services, including advanced security, mobile device management and other services, continue to
generate monthly service revenue. Other BlackBerry 10 users who do not utilize such services, do not generate service
revenue. Service revenue continues to be generated by current and future users of BlackBerry 7 devices. The Company expects
service revenue to decline in the first quarter of fiscal 2015 by a percentage consistent with the decline experienced in the
fourth quarter of fiscal 2014.
The Q4 Fiscal 2014 Venezuela Service Revenue Deferral relates to the fact that, based on the recent political and economic
events that have occurred in Venezuela, combined with that country's existing and recently amended foreign currency
restrictions, the Company did not recognize any revenues related to service access fees charged to customers in Venezuela in
the fourth quarter of fiscal 2014. The Company does not sell smartphones directly into the Venezuelan market, nor does it have
any operations in Venezuela. Moreover, the Company only invoices its carrier partners in Venezuela in U.S. dollars for service
access fees provided to the BlackBerry subscriber base. The invoices are reviewed by the carriers and subsequently, an
application is made by them to CADIVI in Venezuela to obtain the necessary U.S. dollars to settle their obligations to the
Company. Foreign currency restrictions and other foreign exchange mechanisms implemented by the Venezuelan government
have impacted the ability of the Company’s Venezuelan carrier partners to timely obtain U.S. dollars in exchange for
Venezuelan Bolivars, and the Company is continuing to monitor development in this area as it considers strategies to secure
payment of its outstanding invoices. The application and approval process continue to be delayed and the Company’s ability to
timely obtain U.S. dollars at the official exchange rate remains uncertain. The Company deferred all service revenue associated
with services rendered in the fourth quarter of fiscal 2014 of approximately $40 million. The Company also experienced
similar currency-related issues in Argentina in the fourth quarter of fiscal 2014, which led to the deterioration of collections
from the carriers to whom the Company provides services. As a result, the Company recorded the Q4 Fiscal 2014 Argentina
Service Revenue Deferral of approximately $13 million of service revenue associated with service access fees charged to
customers in Argentina in the fourth quarter of fiscal 2014.
Software Revenue
Software revenue, which includes fees from licensed BES software, client assess licenses, technical support, maintenance,
upgrades and QNX software licensing revenues, decreased by $7 million, or 11.1%, to $56 million, or 5.7% of consolidated
revenue, in the fourth quarter of fiscal 2014, compared to $63 million, or 2.4% of consolidated revenue, in the fourth quarter of
fiscal 2013. This decrease was primarily attributable to a decrease in technical support revenue, partially offset by an increase
in revenue from QNX.
Other Revenue
Other revenue, which includes non-warranty repairs, accessories, licensing revenues and gains and losses on revenue hedging
instruments, decreased by $14 million or 50.0%, to $14 million in the fourth quarter of fiscal 2014 compared to $28 million in
the fourth quarter of fiscal 2013. The decrease was primarily attributable to a decrease in non-warranty repair revenues and also
reflects losses on revenue hedging instruments incurred in the fourth quarter of fiscal 2013. See “Market Risk of Financial
Instruments – Foreign Exchange” for additional information on the Company’s hedging instruments.