BlackBerry Limited

Good afternoon and welcome to the BlackBerry third quarter fiscal year 2022 results conference call. My name is Charlie and I will be your conference moderator for today's call. During the presentation, all participants will be in the listen only mode. We will be facilitating a 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. I would now like to turn the call over to Tim Foote, BlackBerry Investor Relations. Please go ahead, sir.

Thank you, Charlie. Good afternoon and welcome to BlackBerry's third quarter fiscal 2022 earnings conference call. With me on the call today are Executive Chair and Chief Executive Officer, John Chen, and Chief Financial Officer, Steve Ray. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Steve will 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 US 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 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. These factors include the risk factors that are discussed in the company's annual filings and MD&A, including the COVID-19 pandemic. 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 reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, CEDAR, and BlackBerry.com websites. And with that, I'll turn the call over to John.

Thank you. Thank you, Tim. Good afternoon, everybody. Thanks for joining the call today. I'm pleased to report that this quarter we deliver solid sequential billings and revenue growth in both our IoT and cyber business unit and at B's expectations. I'm also pleased that despite our ongoing investment to grow the top line, EPS come in much better than expected. Let me start my review with the IoT business unit. Revenue was $43 million, representing a 34% free fall. 34% year-over-year growth, although noting that last year was heavily impacted by the pandemic. Growth margin was 81%, and IoT ARR increased to 91 million. This is now the third consecutive quarter in which ARR has increased. This was a very positive quarter for QNX, driven by continued strength in design wins activities. We achieved record quarterly revenue from development fee, license, as well as associated professional services. In fact, demand is so strong right now that we're expanding our professional services team by hiring additional heads into QNX. In addition to the near-term revenue benefit, these strong design wins serves as a positive leading indicator of the longer-term health of the QNX business overall. Once completed, obviously, these designs will move into production and generate royalty revenue in future quarters. In terms of production-based royalty this quarter, we saw a modest increase compared to Q2. While we expect the auto industry supply chain issues to remain a meaningful headwind to vehicle production volumes through the end of this fiscal year and as well into 2022, we see the impact on QNX gradually lessening. including an improvement in Q4 versus Q3. I will now provide additional colors around the design wins in the quarter. The continuous strength we are experiencing is further evidence of our leadership position in auto. We are certainly not taking this position for granted and continue to invest in all aspects of the business. In the quarter, we have a major win with BMW. BMW entered a multi-year agreement with us to develop new level 2 and 2 plus autonomous drive system on QNX for makes and models across the entire BMW group. Autonomous drive is the clearest example of safety critical software application in a car, which as you know, is the most defensible attributes of QNX. BMW selected QNX because of our deep expertise and strong track records in safety, reliability, as well as security. In addition to licensing our technology, we will be providing a professional services team to support BMW in their aggressive development timeline. Other auto wins include a major new design for our acoustic middleware, one of our higher ASP products. We also had a number of ADARs, Advanced Driver Assist, sorry, ADOS, gateway, and digital carpet design WINS with leading OEM and Tier 1. In Q3, we have a total of 11 new auto design WINS and 13 WINS in the general embedded market. JAM, the general embedded market, WINS included a number of medical applications, such as an infectious disease diagnostic platform, as well as a next-generation robotic surgical arm. Well, we also have wins in industrial application as well as aviation, including an engine simulator with a leading aerospace company. With any luck, we'll also be able to share details of further significant auto design wins with you all at the CES in January. A word on product development. During the quarter, Google, Qualcomm, and Blackberry, three of the leaders in the autonomous digital cockpit, announced a collaboration to build a chipset that allows BlackBerry's hypervisor to seamlessly integrate with Android automotive. We are already seeing the results, securing the first design wins for this technology with a major European OEM in the quarter. Previously, to develop a digital cockpit with an Android automotive infotainment system running alongside safety-critical application on a single chip will require hundreds of hours of expert developer time for building custom iterations. This collaboration takes care of this for the customers, saving them both cost and time to market, as well as delivering a higher-quality product. The auto industry continues to move towards consolidation, particularly consolidating digital carpets with this – consolidating digital carpets. With this position, QNX is even strong – will be even more strong in that space given the safety requirements. This provides the potential to win additional designs that will improve both our hypervisor and our RTOS, our QNX operating system. Turning to the Q4 outlook for the IoT business, the strength we have seen in design activities is expected to continue into Q4, and we anticipate a slight easing in supply chain headwinds. As a result, our outlook is for a further sequential revenue growth and for Q4 revenue to be in the range of $50 to $55 million, returning to the pre-pandemic run rate. We feel very good about the IoT business right now, but investors should keep in mind that the auto industry production headwinds. I will now provide a brief update on Ivy. We released the early SS version of Ivy in October, as we have previously targeted. This version has been released to a small number of ecosystem partners and will form the basis of our product administration at CES in January. This quarter, our co-development partner, AWS, announced the launch of a complementary product for Ivy called AWS IoT FleetWise. While Ivy is cloud-agnostic and can work with any major cloud provider, AWS IoT FleetWise is a microservice that allows Ivy insights to be efficiently and intelligently uploaded to the AWS cloud where they could support cloud-side applications. Another significant development for Ivy is Bosch, the world's largest auto tier one supplier, announced that their new copper integration platform will support Ivy. This platform is built on QNX, RTOS, and Hypervisor, showing the potential for upselling Ivy in future design to the large and growing QNX install base. Our main focus for Ivey right now is on securing POC, proof of concepts, and we are hopeful that we can announce some in the near future. Overall, we appreciate the progress being made. Let me now move to the cyber side of business. This quarter, we delivered sequential billings and revenue growth for the second consecutive quarter. Revenue was $128 million. Gross margin was 59%. ARR retention was 95%. We saw continuous growth in pipeline for our unified endpoint security products, in particularly, our managed service offering guard. We are very excited about how our products perform in head-to-head bake-off against other next-gen competitor this quarter. When we get to a POC, our technology performs well. as illustrated by competitive wins against CloudStrike and SentinelOne, as well as other older signature bankers.