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spk01: 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.
spk03: 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.
spk07: 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.
spk10: Building on the winnings of the last quarter, competitive wins include an international banking group, a leading European financial services firm, and a global marketing agency. In addition to success with large... Larger companies, we're seeing a lot of interest from small and medium-sized business too. And this will continue to be an area of focus for us as the market opportunity is large.
spk07: Our automated protect and guard managed service offerings really resonate with small and medium-sized companies that don't have a large security infrastructure. POC organization. Let me highlight a few of those key ones.
spk10: The first is our focus on prevention, with customer testing demonstrating that we stop threats pre-execution.
spk07: This contrasts to the EDR approach that aims to remediate threats after the fact. The second is artificial intelligence, whereas for other AI it's relatively new, and even an optional feature, our Sidance AI Engine is a tour in the market, having learned from the analysis of trillions of files, and literally identify over 20 billion, which we have, is our EPP works both offline and online, our protection.
spk10: Endpoints are protected 24-7, and don't rely on cloud connection. which is, of course, as better than BlackBerry, is rapidly becoming one of the largest threat surfaces.
spk07: These four attributes differentiate BlackBerry security offerings from the competitor.
spk10: I'm sure you all heard about the major security incidents known as Lock4Shell, which sees
spk07: This relates to major vulnerabilities in the Apache log4j Java library, extensively used by the industry. Let me provide you with an update from a Blackberry perspective. This is obviously a rapidly evolving situation, and unlike many software companies who are still struggling to understand the impact, we track and categorize our product portfolio open source software content. This means that we're able to very quickly identify which of our products uses this library and create mitigation and release patches as the threats evolve. We can confirm that none of our core products, namely Protact, Optics, UEM, QNX, RTOS, and Hypervisor, none of those products are negatively impacted by these vulnerabilities. Furthermore, our suite of cyber products, particularly our Protect, EPP, and Guard managed service vulnerabilities. Now for a brief update on key partnerships.
spk10: In recent quarters, we have released a number of new products and announced partnerships that expand our Extended Detection and Response Offering, or XDR.
spk07: In the quarter, we were excited to announce partnership with Okta and Mindcast, as well as Stellar Cyber and XM Cyber. And then a significant XDR partnership is with Exabeam, the leading next-gen SIM provider. This part of the stability of threats by adding telemetry data from hundreds of network integration to our guard-managed XDR service. Managed HDL is a strong market opportunity, given the complexity of managing threat across the network. Finally, we are pleased that during the quarter, FE Labs, a independent leading, a few words on customer wins. Across the business units, our key vertical this quarter were government banking and insurance.
spk10: In government we who became a new secure voice customer.
spk07: The Department of Homeland Security, the Dutch government, the U.S.
spk10: Department of Education, which was happened to and the Federal Aviation Authority, FAA, and the IRS, just to name a few. Moving to the outlook for the cyber business, we expect continued sequential building growth in Q4 and for Q4 revenue to be in the range of 125 to 135 million.
spk07: As previously indicated, I think I said it last quarter, closing certain large government deal in Q4 will be important. Moving on to licensing, as you know, we have been in negotiation regarding the sale of our non-core portion of our IP patent portfolio. This process is taking much longer than we had hoped, and trust me, I share the frustration about the timeline. Negotiations are very close to a conclusion, and we are literally down to the last few important items now. Both parties are working hard to get this finished, and we expect to reach a definitive agreement very soon. we will provide shareholders an update on progress in January for the quarter. Should the sales reach a definitive agreement in January, we will suspend monetization activity and therefore expect Q4 revenue to be close to zero. However, if not, then we'll continue to expect revenue to be around the 10 million mark for the quarter. I'll now hand over to Steve to provide additional colors on the financial.
spk08: My comments on our financial performance for the third quarter will be in non-GAAP terms unless otherwise noted. Please refer to the supplemental table in the press release for the GAAP and non-GAAP details. We delivered third quarter total company revenue of $184 million. Third quarter total company gross margin was 64%. Our non-GAAP gross margin excludes stock compensation expense of $1 million. And our third quarter operating expenses were $142 million. Our non-GAAP gross margin excludes $29 million in amortization of acquired intangibles. $5 million in stock compensation expense, and a $110 million investment towards driving top-line growth in our core IoT and cyber businesses. The third quarter non-GAAP operating loss was $24 million, and the third quarter non-GAAP net loss was $1 million. We recorded a non-operating gain of $25 million as a result of gains realized in two legacy venture investment funds that make up the balance sheet. Related to this gain underlying these funds, you know, represent a passive interest we had which were sold and we received a distribution, cash distribution of approximately Non-GAAP earnings per share was breakeven in the quarter. Our adjusted EBITDA was negative $8 million this quarter, excluding the non-GAAP adjustment. I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was $128 million, and IoT revenue was $43 million. of 80 to 85% of the total with professional service.
spk10: The recurring portion of software product revenue remained at approximately 80%.
spk08: Licensing and other revenue was $13 million. given the limitations to our monetization activities due to the potential IP portfolio sale. Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $772 million as at November 30, 2021, remaining
spk10: Cash flow was negative $21 million.
spk08: Cash used by operations was $19 million. That concludes my comments, and I'll now turn it back to John.
spk07: Thanks, Steve. Before I move to the Q&A, let me summarize the key points for the quarter. We're pleased with how our new organization We saw strength in design activities for our QNX business, achieving a record quarter for design-related revenue, and it looks like it will continue. Macro supply chain headwinds are still impacting vehicle production, but we see an improvement picture heading into Q4. We made good progress with IV, including releasing the early SS version of the product. On the cyber side, we again see sequential growth in billings and revenue, including more head-to-head wins against our key competitors. The ongoing Lock4Shell incident is a great example of the huge cyber market opportunity and also showcase our capabilities. While others are struggling to identify the impact on their products from open source code, we are responding rapidly and effectively. Overall, BlackBerry delivered solid progress, beating both revenue and earnings expectation for the quarter. So, Charlie, please.
spk01: No problem, sir. And 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 line is unmuted.
spk09: Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
spk01: and we request that you limit yourself to one question and one follow-up. Our first question from today will be from Daniel Chen with TD Securities. Please go ahead.
spk06: Hi, Dan. Hi, guys. Hi, John. Hi. 364, quarter of a quarter. Just wondering if there's any churn and which products may have been affected and maybe if any products are showing.
spk07: We have a positive surprise today. with a higher revenue came in from a Secchi smart product. So that is principally what drove the numbers that you saw.
spk06: Okay. And then the guidance that you provided for next quarter, what are the puts and takes in that guidance? Thank you.
spk07: Yeah, so let me break it into two pieces. IoT versus cyber. In the IoT side, we're all feeling pretty good about it. Back to pre-pandemic level.
spk10: Design wins.
spk07: We have a good pipeline for professionals, a backlog of professional services, to help the customers to deploy our technology, as well as the developer seat. And as I said earlier, the royalty we expect to uptake a little bit from Q3. So that kind of composes a map for the guidance between 50 to 55. I don't want to jinx it, but it looks okay. On the cyber side, It relies on a number of deals that are quite big from the government side, from a revenue perspective, because of the fact that we expect these to close a little later in the quarter. So the revenue contribution will not be as big as is obviously in the beginning of the quarter, but the buildings will look fine.
spk06: Thanks, John. Happy holidays. Sure, sure, Dan.
spk09: Your next question comes from with global equities research.
spk01: Please go ahead. Oh, hi.
spk04: Hello. Thank you. Very good execution on the quarter. Few things that you had the early access program almost now for two months. Any specific data points you would like to share, maybe in terms of downloads, applications, or partners, any reaction?
spk07: And then I have a follow-up question. Yeah, okay. So, yeah, we, of course, released it to the application partners and a handful of OEMs, a common manufacturer. The feedback was very positive. As I said earlier, we're going to use that as a basis of our demonstration or at our booth. And we're also going to digitize and respond. Lots to do, a lot of activities going on. The application, as you know, we have I can't promise every single one of them you will see at our booth, but, you know, we have the battery management systems. We have a car.
spk10: Rideshare.
spk07: So I don't know whether every single one of them will make it to our booth, but I expect quite a number of them will. You also see a carpet that we collaborate with Amazon or AWS.
spk04: Beautiful. Then also if we look at the new generation EV players and also the old guard of automobile players, they seem to be now getting on the bandwagon of does your platform, whether it's provide over-the-air updates just out of the box?
spk10: QNX has an option on OTA.
spk07: Of course, IV has to have the OTA. The physical link is the simple thing, and we do have it. We talked about earlier about the new AWS... the new Amazon releases called Streetwise allow a logical link between the edge.
spk10: So, yes, we do both. It's obviously both ways, you know, from the cloud to the car and vice versa. And code, we do have OTA capabilities already existed.
spk09: Very good show. Great. Thank you. Thank you. Your next question comes from the line of Mike Walkley with Canaccord. Please go ahead. Hey, Mike.
spk10: Hi. Hey, guys. Good afternoon. This is actually Daniel on from Mike.
spk02: Thanks for taking my questions. So, yeah, I guess with, you know, John, Jim Mateo joining us,
spk10: in this area of your business, and how should we think about maybe some of the sustainability?
spk07: John joined us, and the exciting part of that is that John has enormous experience in the cybersecurity market. He ran a $3 billion business as a president of CRO of McAfee before. And so, you know, he's very relevant, and he brings in a lot of relationship, particularly with customers and partners. So that's very good. And he knows how to make salespeople successful in a cyber world. So I don't know how to describe him. that today we have 10% more quota carrier. We call it direct quota carrier. We have 10% more direct quota carrier than a year ago. Oh, the beginning of the year, sorry. Than the beginning of the year. We did the math that way. And the productivity, we start seeing that a lot of them are new. because we recently hired them, we would see those coming in the next few quarters. If you think about a sales cycle, let's say two to maybe three quarters, call it three, I should be seeing some results in either the second quarter or the third quarter next year.
spk10: Okay, great. Thanks for the details, John.
spk02: And, yeah, I guess just as a follow-up, so you noted you saw further pipeline growth within cybersecurity, and you also expect sequential billings growth in Q4. When should we expect this to start showing up in ARR?
spk07: Oh, well, next year, I hope. So I feel pretty good about mathematically that we're looking for a good ARR growth next year.
spk02: Okay, great. Thanks for the details. Sure.
spk01: Thank you. As a reminder, to ask a question, you will need to press a star 1 on your telephone keypad. Your next question at Phil Markets. Please go ahead. Hey, Paul.
spk05: Hey, John. Hey, Paul.
spk01: Good afternoon.
spk05: Good afternoon. Within IoT, I mean, it seems like a great update on the gap that can direct generation between professional server work and when it goes into production and also is there a ratio for every dollar of professional services and design developer seats to ultimate the royalty revenue that you may see?
spk07: No, there's no, there's really no direct ratio. It's really, you know, some OEMs want a very aggressive development schedule. So they used to, in that case, we, under the professional services program, typically buy a higher number of developer seats because they have, they want to put more engineers on it in parallel. Some want to do it a little bit more sequentially. I will tell you that if you ask our folks, that we're seeing the former, the people are more aggressive with timeline than not because whether you're an autonomous vehicle design or whether you're an electric vehicle design or the combination of both, competition is heating up in the auto industry, as you all know. So time to market is important to them, unlike the kind of the old rule of thumb that a new model come out in the last 10 years. And, you know, usually it takes five to seven years to get the new model out from conception to production. You know, I think those are very much collapsed, partly because by, you know, players like Tesla, the world, and a lot of the Chinese players, their development cycle and sales cycle. So there isn't really a, you know, you buy more developer seed and therefore you have a bigger production royalty, I don't think there's a real cause and effect there. Now typically, as I said, we see a developer win and then a developer see licenses as well as professional service. Usually you add about three years down, you start seeing production. Nowadays I have seen numbers that a little bit of plans I shouldn't say numbers plans are a little bit more aggressive than that but a typical cycle will be three to five years from when to seeing the royalty stop growing and once the royalty stop in excess of seven years Okay, thank you that's helpful just one follow-up question on sales and marketing in
spk05: I was under the impression that you're planning to ramp it up more significantly. It's been flat this past quarter.
spk10: How should we think about sales and marketing spending from here?
spk07: yeah sales and marketing will will definitely ramp up uh uh i could tell you john john geo mater on cyber side um we don't do as much of um because you know especially in the auto space and some of the jam vertical we we are already a reasonably known known name and known entity so We don't need to do as much. On cyber, as you know, we need to do quite a bit. And John is very focused on it. So you would see that going up and going up quite a bit, in fact.
spk05: OK. Thank you for taking my questions. Sure.
spk01: And we have no further questions at this time. I would like to turn the call back over to John Chen, Executive Chair and CEO of BlackBerry, for closing remarks.
spk07: Thank you, Charlie. Okay, thank you, everybody. And as we mentioned, we're participating at CES in Las Vegas in January. The focus will be on IoT businesses and how it addresses the benefit from the key trend in edge computing. No doubt a key highlight will be the demonstration of our Ivy technology, including illustrating how Ivy used edge computing to create insight for sensor data, both hardware and software-defined sensor. We will be hosting a hybrid in-person and live stream demonstration of the Ivy technology, followed by an investor Q&A session with Matthias Eriksson, the president of the BlackBerry IoT Group, at 8 a.m. Pacific on Thursday, January the 6th. We'll be releasing more details about this shortly. I'd like to wrap up by wishing all of you, thank you for joining us and wishing all of you and investors and everyone on the call here a happy holidays and a safe and successful new year.
spk01: Thank you for your participation.
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