BlackBerry Limited

Good morning and welcome to the BlackBerry Fiscal Year 2020 Third Quarter Results Conference Call. My name is Jack and I will be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star zero. As a reminder, this conference is being recorded for replay purposes. And I'd like to turn the call over to Christopher Lee, Vice President of Finance. Please go ahead, sir.

Thank you, Jack. Welcome to the BlackBerry Fiscal Year 2020 Third Quarter Results Conference Call. With me on the call today are Executive Chairman and Chief Executive Officer John Chen and Chief Financial Officer Steve Ray. After I read our cautionary note regarding forelooking statements, John will provide a business update and Steve will then review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the safe harbor provisions of applicable U.S. and Canadian securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. 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 any other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements, including the risk factors that are discussed in the company's annual information form, which is included in our annual report on Form 40F and in our MD&A. You should not place undue reliance on the company's forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements except as required by law. As is customary during the call, John and Steve will reference non-GAAP numbers in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release and supplement published earlier today. I will now turn the call over to John.

Thanks, Chris. Good morning, everybody, and welcome to our call. As a reminder, I will be using a referencing non-GAAP numbers in my summary of quarterly results, unless otherwise stated. Let me start. I'm encouraged by our progress in the third quarter as revenue grew sequentially in all of our software businesses. The total company revenue was $280 million, growing 23% year-over-year. Total software and services revenue was $275 million. It grew to 26% year-over-year. This is a new record high for the quarter. We also record double-digit percentage billing growth in the same period. Software and services revenue growth, excluding silence, was 9% sequentially. Earnings per share came in at positive 3 cents and reported free cash flow was a positive $37 million. We continue to invest in product development and go to market to drive long-term sustainable growth. Let's move in the business segment and provide you some commentary. Let's start with the IoT business. IoT revenue grew 8% sequentially. With an IoT, both BTS and ESS the enterprise software solutions, reported sequential growth in billings and revenue. In BTS, QNX, the largest part of BTS, continued to perform well. In the quarter, we had a total of 31 design wins, of which 11 were in the automotive market and 20 were in the general embedded market. Within the general embedded market, we are experiencing good demand in the industrial vertical, as noted last quarter Grove in the general embedded market has been a stated strategic objective and priority for us this fiscal year. There were several very positive developments in the quarter that aligned with BlackBerry QNX's strategic goal of increasing output and volume in the auto sectors. These developments also extend our market leadership in automotive. I'd like to share a few of them with you. First, I will highlight Hyundai Ultron, a leader in electronic control software, has selected BlackBerry QNX for two design wins. One is in the ADARS design, which is Advanced Driver Assist, and as well as their autonomous driving platform. This is meaningful because it's a meaningful tier one relationship that provides BlackBerry QNX an opportunity to work directly with Hyundai. Hyundai happened to be the sixth largest auto OEM in the world, and its affiliate, and we also could work, extend the work with its affiliate for the first time. In addition to winning the traditional OEMs, we are also winning with emerging smart-ups, and I think, thank you. This is, quit this, sneak this work in here. Smart-up, like smart start-up, Anyway, as an example, Arrival, an electric commercial OEM based in the UK, has chosen BlackBerry QNX as the safe and secure foundation, again, for the ADAR features in the self-driving vehicles. In a quarter, we also entered into a partnership with ETOS to develop a safely critical platform using AutoSign Adaptive Standard. Bosch the world's largest automotive supplier and the parent of ETOS, decided to join forces with BlackBerry to develop this common software platform that will enable the production of safe and secure connected and autonomous vehicles for the future. Let me give a brief update on the radar business. In a quarter, we added 15 new customers, including an initial order of 2,000 units from CP Rail, And we're very pleased with that, obviously. And we had repeated purchases from a number of our customers, including Lowe's, Faxavan, and Bimbo's Bakeries. We're also starting to explore expansion in the Europe and Middle East arena. Now a few comments on our enterprise software and services business progress. The sales team is getting back into form and operating with better discipline and accountability. The team has restored a normal cadence in managing the pipeline. and converting the pipeline to billings. As a result, our pipeline increased nicely in both numbers of opportunity and dollar size since the second fiscal quarter. Revenue for UEM, Ad Hoc, and SecuSMART all grew sequentially. These included a contribution for our new continuous authentication product, BlackBerry Intelligent Services, we name it BIS. BIS is gaining traction in the market as evident by high-profile wins such as the Department of National Defense in Canada and Julius Baer Group. Julius Baer Group is one of the oldest and largest banking institutions in Switzerland. And as a reminder, we only released this product in August. Next, on the customer front, our regulated industry business remained healthy and stable. We added a number of new local wins in a comparative situation across federal government agencies worldwide, including in Canada, Germany, Panama, Poland, Romania, Saudi Arabia, as well as the United States. Furthermore, in the United States State Agency, we won the Alaskan Army National Guard and the California Department of Technology, just to name a few. We also achieved notable progress in financial services and energy verticals with wins like Bank of China, the Suho Bank, Great Eastern Life Assurance. Great Eastern Life Assurance happened to be the largest life insurance company in Singapore and Malaysia. We also won Scottish Power. I'm obviously naming just a few of our new wins. On the US National Security Fund, we partnered with Kaki International and to provide the first secure and certified mobile communication applications utilizing BlackBerry Secchi Suite secure voice and secure tax technology. The initial target market will be more than 4 million United States government-issued cell phones. Our application meets the NSA's stringent commercial solution for classified program requirements and is the only solution of its kind in the FedRAMP certification. Lastly, on the product front, we introduced Silence Protect for mobile endpoints. This mobile threat defense, which now referred to from now on as MTD, this MTD product integrates AI endpoint security capabilities from Cylance and as far as the endpoint management functionality from UDM. This second generation MTD product, which we deliver only eight months after the close of our acquisition, demonstrate a collaborative teamwork of the two development teams. The teams work very well together to execute a common product roadmap and share the same vision. We have a total of 14, one four, 14 beta customer, which includes several top multinational financial institution and notable telecommunication companies. They all have shared very positive feedback. In fact, we received our first customer order during the quarter. Spark, Our secure IoT platform is progressing well with the addition of these two products, the MTD product I just mentioned and the BIS product I mentioned earlier. Moving on to our licensing business. Revenue increased double-digit percentage year-over-year growth, which is slightly ahead of our expectation for the quarter. We maintained a full-year outlook that we provided last quarter for our licensing business. Now on to the BlackBerry sign-in business. Revenue increased 13% year-over-year, 1.3%, ARR was 171 million, up 15%, 1.5, year-over-year. Our dollar-based net retention rate was 99%. And we ended the quarter with 20% year-over-year growth in active subscription customers. We anticipate stronger growth in the future as we have now released an enhanced endpoint detection and response, the EDR technology product, as well as a single-agent platform. The lack of these features in the path have prevented us from winning more deals as well as larger-sized deals, of course, until now. By adding BlackBerry resources, we were able to deliver both products at the end of the third quarter, which are the Optics 2.4, which is the EDR product that I mentioned earlier, shipped in October this year, followed by the release of our single-agent platform, our internal codename called KAKUN, last month. These new products improve our capacity to address our customer cybersecurity needs across the entire spectrum. Sidense Endpoint Security is best known for its AI-driven prediction and production. Our team has won a number of new deals in competitive environments, which are with the enterprise-sized customers. I will name a few for you, such as the MBank Group in Malaysia, the International Container Terminal Services in the Philippines, the AES Corporation, Deloitte, and Molex. in the United States. In the quarter, we also released our managed service offering, Sidelines Guard. Market demand and pipeline has been strong, especially in the SMB, small, medium, business sector. The complete offering of these products and services will no doubt help drive stronger revenue growth next year. Before I turn the call over to Steve, let me make a couple of comments regarding the Sidelines integration. but continue to be ahead in the joint integration efforts. We're achieving the product development synergies we discussed when we announced the acquisition, including the MTD product, which I discussed earlier, as well as CASE that integrated QNX and Sidense technologies together, both of which will be demonstrated at CES in three weeks. Both customer and industry analysts have told us our product meets the needs of a large, addressable market of both fixed and mobile endpoint, where management and security for endpoints are now converging. We are now ready to increase sales and marketing synergies, as well as partner cost selling. Given the operational efficiency gains so far, we remain comfortable that Sidelines will be accretive in fiscal 2021. With that, let me turn the call over to Steve Ray to provide more details about our financial performance.

Thank you, John. My comments on our financial performance for the fiscal quarter will be in non-GAAP terms unless otherwise noted. Also, please refer to the supplemental table in the press release for the GAAP and non-GAAP details. We delivered third quarter non-GAAP total company revenue of $280 million and GAAP total company revenue of $267 million. I will break down revenue shortly. Third quarter total company gross margin was 77%. Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $13 million and excludes restructuring costs of $3 million and stock compensation expense of $1 million. Operating expenses of $195 million were up sequentially by $2 million as we managed spending while continuing to invest in product development and go-to-market. Our non-GAAP operating expenses exclude $35 million in amortization of acquired intangibles, which represents about $0.06 of GAAP loss per share. Additionally, our non-GAAP operating expenses exclude $14 million in stock compensation expense, $4 million for software deferred commissions expense acquired, $7 million in restructuring costs, and a benefit of $20 million related to the fair value adjustment on the convertible debentures. Non-GAAP operating income was $20 million, and non-GAAP net income was $17 million. Non-GAAP earnings per share was $0.03 in the quarter. Our adjusted EBITDA was $38 million this quarter, excluding the non-GAAP adjustments previously mentioned. This equates to an adjusted EBITDA margin of 14%. I will now provide a breakdown of our revenue in the quarter. Total software and services revenue was $275 million, representing 98% of total company revenue broken down as follows. IOT accounted for 52% of total revenue. BlackBerry Cylance accounted for 19% of total revenue and licensing accounted for 27% of total revenue. Other revenue of 2% is solely comprised of service access fees. Service access fees were $5 million down from 9 million or 44% year over year. Service access fees were expected to decline given the continued wind down of this legacy business. Recurring software and services revenue, including BlackBerry Cylance, was above 90% in the quarter. Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents, and investments were $970 million, which increased by $32 million from the previous quarter ended August 31, 2019. Our net cash position was $365 million at the end of the quarter. Free cash flow before considering the impact of acquisition and integration expenses, restructuring costs and legal proceedings was positive $41 million. Cash generated from operations was $40 million and capital expenditures were $3 million. That concludes my comments. I'll now turn the call back to John to provide our financial outlook.

Thank you, Steve. For fiscal 2020, we are comfortable with the current consensus estimate for the total company, which is approximately $1.1 billion in non-GAAP revenue and $0.06 in non-GAAP profitability. However, based on the year-to-date performance, we expect to do better than the $0.06 in the non-GAAP profitability. A current forecast indicates more like $0.08 of earnings per share in fiscal 2020. On a longer term basis, we're executing upon our strategy of being the trusted provider of secure communication for endpoints. Customers and industry analysts agree that the endpoint management and securities markets are converging and customer demand better solution to combat increasing security threat to expanding set of diverse endpoints. All of these efforts this year, including the acquisition and the integration of Cylance, are to position BlackBerry as the leader in this emerging market. BlackBerry has the access to solve the industry problems, and we are already delivering relevant products, such as the Zero Trust platform and AI for security, as well as many other different products. We believe that we could be a winner in this fast-growing 20 billion plus market. We look forward to discussing more of our plan in our FY21 financial outlook in our next analyst day, which happened to be April 21st in San Ramon. I will now open the call for Q&A. Jack?

Certainly. We will now begin the question and answer session. To ask a question, you may press star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow an opportunity to signal for questions. Steven Fox with Cross Research, your line is open.

Hey, Steven. Hi. Good morning, everyone. Good morning. A couple questions, if I could. John, you mentioned that the UEM revenues rose quarter over quarter, but I didn't quite get the details behind that in the quarter. Can you maybe just provide some color as to what drove the sequential increase? And then looking ahead to the fourth quarter, it looks like you're looking for some further sequential increases in revenues. Can you talk about where you're most confident in revenues growing fourth quarter versus third quarter? And then I had a quick follow-up. Thank you.

Okay, great. Thank you, Stephen. Yeah, you know, the UEM product, You know, we just happened to, if you think about it, a quarter ago, we have signaled that the pipeline is still strong. We have a little bit of a conversion problems that was in Q2. Q3, we have much better focus on converting the pipeline to revenue. And so, we're fortunate to close a number of business that we're expecting. It's really general UEM as well as, you know, customer got, you know, they're impressed with the products and the roadmap and security, especially the BlackBerry intelligence security solutions, which are very, you know, quite slick, if I say so myself. And so the combination of really a better focus as well as, you know, the ability to deliver the roadmap, especially, you know, above, industry category or caliber of security help us drive more business. And yes, we expect to see a continuous strengthening of that in Q4. In UEM in particular. Yeah, UEM. Again, all three businesses have done well. I mean, all three components of that, of the enterprise software business, which are Secchi, Smart, and and ad hoc, Secchi Smart are more government-based. We have a number of pilots going. We've got the very committed partners in Kaki, which has happened to be one of the largest system integrators in the United States federal governments, as well as in the ad hoc space. The ad hoc space, we see a lot of opportunities, obviously, not only in the federal space, but as well as the stay and education sector.

Great, that's very helpful. And then just as a quick follow-up, you mentioned momentum now building with QNX on the non-auto side, and you mentioned industrial. What's the timeline for turning some of those wins into revenues? Is it much different than auto?

Yes, it should be faster than auto. So the design win could go into production a lot sooner and go through a development cycle and then deliver into production a lot sooner than because if you notice the auto business, you have to win the design win with the tier one and the OEM, and then they would then incorporate into the design of the car, and then the car comes out in a year or two later. So there is a period in there of at least two to three years that you see a low in the revenue, and then it goes up, but they ship it. In a jam market, the cycle to the market is a lot faster than the auto sectors. Okay. All right. Thank you very much. Sure. Thank you.

Gus Papagiorgio with PI Financial. Your line is open.

Hey. Good morning. Thanks for taking my question. I also just wanted to focus on the QNX progress outside the auto vertical. Can you just talk a little bit about the ASPs in that vertical versus the auto? I know that In auto, like there's several QNX modules that go into a – or potentially several modules that go into a car. But if you look at the non-auto, can you compare the ASPs there? And I guess, can you just kind of highlight what industries you're having success in?

Yeah. A quarter ago, we were having success in the energy sectors. And – I would say I didn't really focus on the ARPU or the ASP, but kind of an educated guess on my part, the numbers are probably a little lower on an ARPU basis. However, the volume is going to be a lot higher. So I would think overall revenue on a constant runway basis will probably be higher than the auto sectors. Oh, by the way, I forgot also the medical sector.

And over what timeline do you think, John, you'd see that the non-auto would eclipse auto revenue?

As I said earlier to Stephen, the timeline for the gym is going to be faster than the gestation period on the revenue is going to be faster than the auto sign.

Great. Thank you very much.

Sure.

Daniel Bartis with Bafa Securities. Your line is open.

Hi, Dan. Hey, guys. Yeah, thanks for taking my questions. First, I just want to ask about Silance. It's great to hear about the new EDR update, but can you give us a sense of how much of the customer base already buys EDR? Sure. And obviously just curious about how significant of an upsell cycle that could be.

It's interesting. So in general, this is a generalized statement. In general, the SMB market more focused on EPP. The very large institution are more focused on EDR. There has always been, even prior to BlackBerry involvement, There's always been that tuck of war in the market. It's EPP, which is protection, more important than remediation, DTEK and remediation. And this is kind of the ongoing discussion in the industry. So the good thing about this quarter is we finally just put that discussion at rest. We will provide whatever the customer would want, We have the best EPP technology the market acknowledged. And now we have a very strong EDR as well as single install. See, the other thing about the single agent was also a factor that customers, you know, find it tedious to do multiple install. So we could now do one, and then we added managed service. So very strong lineup. And so it served all spectrum of the market. The very large, which have literally thousands of people, like banks, you're familiar with. And then you have the very small SMB market, which volume-wise is quite high, but there's 10,000, 100,000 users type. So EPP, depending on what sector you're talking about, They have a little bit of bias between EPP and EDR. The good news about us is we eliminate the bias. We don't need to worry about that anymore. People want EPP. We are about the best in the industry.

Great. That's helpful. And then for my quick follow-up on licensing, could you just talk about if the recurring level is starting to grow and And is that a story for next year, perhaps? And maybe in general, if you could just give a little bit of color on what continues to drive the outperformance on the licensing. Yeah. Thanks.

Yeah. The recurring part, we kind of pretty much maintain relatively steady, roughly about 160 million a year. And then, you know, the total number, you know, bounced around about 250 million. And so... There is a lot of opportunity to do licensing business. It's just a little bit of a hard to predict quarterly. It's not like a sales cycle with a science of where you are. You could kind of predict a little bit with better accuracy and when you're going to close it. This one is a little bit hard to manage in that. But on an annual basis, you should expect us to do about $160 million in a recurring basis, and then the rest of them, we will have to bring it in as the quarter is developed. Makes sense. Thanks, guys.

Okay, thanks. Paul Steepe with Scotia Capital. Your line is open. Good morning, John.

Could you talk a little bit about the opportunity into 2021 and integrating Silence further into that EMM-based product and how you're feeling about that and what you think the timing sort of looks like for any uptick on that side?

Let's see. Very good question. Thank you. I'm feeling very good about it. And the hint is in my script. We work with a lot of industry analysts. We know from their customer contact, which are, you know, big, and our customer contact, the customer wanted to have a more orderly platform to integrate many parts of their enterprise software, especially in the security space. And this are anything from the endpoint management, the application management, the management of travelers, accessibility through the cloud, all on-premise and so forth. They have so many solutions, it's just not funny. And so we have a very strong platform in Spark that we will deliver the Zero Trust platform technology, which involve and combine everything I just named, you know, including identity management. And so we're working extremely hard. Silence was a very important part of the puzzles. We now have it. We're integrated. Team's working well together. We will deliver the Spark platform with Zero Trust capability for the combination of both management and security is not only mobile, but fixed also. So we're very excited about these things and we will do much more discussion at our analyst day with you all. But this is a great opportunity for us and we believe we're not only at the leadership and the DNA for it and the technology for it, we're early than anybody else. By the way, I'll leave it at that without getting too excited about telling you the product name.

That helps. So maybe just as a final one to follow on the teaser there, as I recall, you didn't have the capability around fixed. Should we think that either one of three options, you're either building it and have developed it in-house, would you look to acquire a large existing base? Would that be something? Or would it be a partnership? And then we'll say happy holidays. Thanks.

Why don't I wait to tell you that? I don't think acquisition is my first choice. Partnership is probably more relevant.

That makes sense. I'll wait to hear more in the new year. Thanks, guys.

Okay, thank you. Happy new year.

Tripp Chowdhury with Global Equities Research. Your line is open. Hi, Tripp.

How are you?

I'm doing wonderful. Again, congratulations on a phenomenal execution. Thank you. A couple of questions I would like to ask is when you think about security and especially the new paradigm in which Silence and BlackBerry are these days, the machine learning and and using that as a way to proactively data the security glitch before it really happens. I was wondering, what do you think is the reason that traditional security heavyweights like RSA, brand micro, Symantec, they haven't been able to pivot themselves to the new world? What is your sense? What is happening in industry that prevents them from doing something like what you guys are doing?

Well, Tripp, that's a good question. And, you know, I never underestimate competitors in the market. You know, all those good companies that you talk about that have built on, you know, the security paradigm, whether it's remote like the RSA, whether it's the MENTAC, you know, and more PC-based and so forth. You know, I'm sure that they have their development you know, roadmap and things that they're working on. BlackBerry happened just to want to leapfrog everybody by acquiring Silence. And so we go to the second generation first without even going to the first generation on the AV side. And we see the capability that is needed with machine learning as well as using machine to do the policing and the trapping and the correction of potential attack and threats. So I will only speak the fact that I'm pleased that BlackBerry is able to execute it. We have the capacity of the dollars. You know we pay $1.4 billion. It was a big – you know me well. I mean, that's a big commitment on our part. And it works out. We got great product out with the MTD, for example, only eight months. very pleased with that because teams are working well together. And we have great vision together. We will be a good player. We will be a very strong player in the IoT security world.

Beautiful. Also, I was wondering, do you have any update on your partnership with Microsoft and various initiatives that you have fostered over the last six to eight months?

Yeah, Microsoft and us, as you know, we deliver a bridge product which put all the Microsoft application on our platform in the native mode. So in a way, we are competing with Microsoft because they obviously also deliver Intune with the same capability, but then we have better security, at least we think so. And the customer doesn't have to choose to move away from security. to use the Microsoft application. And they obviously are very committed to it. Most of the customers are very committed to Microsoft applications. So I think this partnership works well for both.

Beautiful, beautiful. And Steve Capelli has become the chief revenue officer. So it seems like he hits the home run right off the bat.

Yeah, he's the one who is hitting the ball.

Yes, I was just also wondering, like, when, John, you were at Sybase, and Steve Capelli and the whole team did extremely well with the U.S. federal government. I was wondering, are we building a pipeline with the U.S. federal government with Silance or BlackBerry products, and how is it coming along?

Sorry, I didn't get the... Like, in the U.S.

federal government, the... How is that coming along? Like are we building our pipeline with the U.S. federal agencies regarding the products and services?

Yeah, Tripp, we are very strong in federal. So just for example, in only ad hoc as a product, which is the crisis management and emergency management alert systems, we have multi-millions of licenses in the United States government with the federal space. So we're very strong, and we'll continue to expand that pipeline. And I spoke a little earlier about Kaki. That's actually a very strong partnership because they're taking us into the secure communication world in the United States government. And they have the heritage to do it, and they have the credibility to do it. And our product meets the highest standard for top secret or secret. And so we're doing a lot of things together with not only ourselves directly in the Federal Space Base, also with the pioneers.

James Foster with Morgan Stanley. Your line is open.

Great. Thanks. This is Peter Marshall for James. Just one question for me. You know, you spoke about kind of seeing better discipline and the pipeline increasing amongst your sales force. And I know you were making kind of some changes to go from gatherer to hunter mentality. And just, you know, do you consider that complete? Are there still kind of some transitions underway just kind of on the sales force mentality, particularly around some of the more legacy products?

Yeah, thanks. We have a we established a framework. It took us a couple of quarters. There was some there was some A little bit of a you know glitch on our part when we make some changes So those changes are behind us So we have a good platform now all now we're doing is to concentrate on not only executing turning the pipeline into Billings Creating that momentum, but also hiring more of the salespeople that fit into that model and And so that's the metrics that we focus a lot on inside the company. So we feel good about where we are now, the management team and so forth. And we will continue to add, adding few to the fire, because maybe that's the way to think about it. So we feel we're doing pretty good right now.

Great, thanks.

Thank you. I would now like to turn the call back over to John Chen, Executive Chairman and CEO of BlackBerry, for closing remarks.

Okay. All right. Okay. Thank you, everybody, for joining us today. I hope to see your CES, and let me do a little commercial. At CES, we have a booth at the North Hall. You know, in the past, we put in there sports cars, and this time we have other demonstrated automobile, and rumor has it we're going to have a motorcycle booth. there too. What we're going to show you at CES is obviously the continuation and advancement of our QNX technology in auto, but also to show you the side lens integration into the car. I think that will attract a lot of attention. I know there are some government agency people already wanted to come see and have appointment with me. So I hope to see you there, and in the meantime, Have a very happy and safe holidays.

This concludes today's call. Thank you for your participation. You may now disconnect.