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spk07: Good afternoon and welcome to the BlackBerry fourth quarter and full fiscal year 2022 results conference call. My name is Brent 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. I would now like to turn today's call over to Tim Foote, BlackFerry Investor Relations. Please go ahead.
spk02: Thank you, Brent. Good afternoon and welcome to BlackBerry's fourth quarter and full fiscal year 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 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. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them, 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 report. and four-year results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGA, CEDA, and BlackBerry.com websites. With that, I'll turn the call over to John.
spk04: Thank you, Tim. We have to change the intro of the script now. Tim has just made space precedence. Congratulations. Thank you, John. Good afternoon, everybody, and thank you for joining the call. Let me start today with the IoT business unit. I am pleased to report that we recorded the first 50 million plus quarter since the start of the pandemic, despite the ongoing challenges for the auto industry. Revenue for the quarter came in at 52 million, which is 21% sequential increase and 37% year-over-year growth. Gross margin also increased to 85%, and IOT ARR increased for the fourth consecutive quarter to $93 million, which is up 11% year-over-year. In addition to seeing a modest increase in production-based royalty, we set another new record for quarterly revenue from design activities. These revenues come from development seats and professional services used by the customers to design our QNX software into vehicles and other IoT endpoints. These strengths not only deliver near-term revenue, but also points to long-term business volume once these design enters into production. In addition, we have a good line of sight to upcoming professional services backlog from confirmed design wins and hiring additional heads to meet the demand. We also have good visibility into the pipeline for potential new design wins in FY23. In terms of royalty, as I said earlier, we saw some improvement in volume this quarter. However, the challenges for production remain. Major OEMs have indicated continuous supply chain headwinds, particularly chip shortages, although they expected the situation to largely improve as the year progresses. The conflict in Ukraine has added further disruption to an already challenging environment for the auto industry, and we will continue to monitor that impact. You may recall that over the last few years, we have seen a significant increase in the proportion of the QNX business from safety-critical foundation software, such as ADARs, Advanced Driver Assist, digital carpets, and autonomous drive. This now constitutes the largest part of the total business, overtaking infotainment. This strategy to focus on functional safety plays to QNX strength, and is validated by both the market trends towards ECU consolidation as well as software-defined vehicle. We also see significant growth in safety-critical design opportunities in our pipeline. Gross margin in the quarter improved from 81% to 85%. This is largely driven by the improvement in production royalties. Royalties are due when the vehicle is shipped, and there's little cost for us at this stage of the design lifecycle, meaning they have a high gross margin. Let me now turn to the new design wins we secured in the quarter. This was a record quarter in terms of the number of new design wins. We recorded 17 new auto designs and 28 wins in the general embedded market. ADARS registered the most wins in a quarter, followed by Digital Cockpits and Instrument Custers. Once again, we won business with leading automakers and Tier 1 suppliers, including Hyundai, NIO, Bosch, Visian, Denso, and this is a special for Tim, Sky Ships. for the new Gordon Murray T-50 hypercar. I just read it. I've seen the picture of it, I should say. Tim showed me the picture. He was quite impressed with that. In JAM, we recorded winds in multiple verticals, including defense and aerospace, industry, industrial, that is, as well as medical, our strongest JAM segment. Like in auto, we have the highest level of functional safety certification for medical, and we're seeing increased momentum there. Design wins this quarter includes analytic devices for use in medical labs as well as for surgical robots. Let me now turn to Ivy. At CES in January, we demonstrated a product running with live data on auto-grade hardware. This demonstration formed the basis of many constructive meetings with OEM, and as a result, we had multiple additional requests to start proof of concept, or we call it POC trials. We currently have more requests than we can handle, which is a nice problem to have. The first POC is with a Chinese EV automaker, that's a vehicle, Pateo, a leading Chinese Tier 1 supplier. The plan is to integrate iVE into the digital carpet. The expectation is for successful POCs to lead to design wins, i.e. a commitment from customers to design iVE into vehicles. The CES demonstration also allows us to showcase two of our many potential applications that iVE can enable. Car IQ in-vehicle payment, and Electra's AI-driven battery management application were both very well received by OENs and are included in the IV POCs. IV product development remains on track, and last month we released the latest version of the product that is POC ready. Let me now move to the cybersecurity side of business. This was the third consecutive quarter of sequential billings growth. Billings not only grew double digit versus Q3, but they also increased year over year. Cyber revenue was 122 million. Growth margin improved by 200 basis points to 61%. AR was 347 million. And dollar-based net retention was 91%. Market conditions for our cybersecurity products are positive. This is in part because of the ongoing heightened level of cyber threats. Our guard-managed XDR cybersecurity team, in line with other leaders in the space, has seen a significant increase in threats in recent weeks. In particular, WiPer malware that aims to take the victim's service offline is at an unprecedented level. Some of the most prominent examples of this currently identified across the industry, including the Hermetic WiPer, that has been seen in the cyber attack in Ukraine, Latvia, and elsewhere. Logs have shown that our product, our Protect product, Protect EPP, has been blocking this malware at BlackBerry customers' sites before it could execute. The same is also true for WhisperGate, another leading example of the Viper malware that has targeted the Ukrainian government, as well as Ukrainian nonprofit and IT organizations. In fiscal year 22, we released 48 new products. Among the cybersecurity products, pipeline growth is strongest for the following three, Gateway Zero Trust Network Access, or CTNA, Guard Managed Service, and Persona Behavioral Analytics. On the marketing front, we're going to leverage the strength of the Sidelines brand for our Sidelines products. The brands do resonate strongly with customers and across the industry. Investors have said that hearing how our products are competing out in the field is helpful. So let me provide you with a couple of recent examples of wins. The first is with a leading publicly traded medical supplies conglomerate based in the United States. The customers, like many others, were struggling to staff 24-7 security operations centers and held a competitive tender process between BlackBerry, CloudStrike, and Arctic Wolf. They bought more than 10,000 licenses of our guard-managed service due to BlackBerry performance and security credentials. The second is with a leading manufacturer based in Asia that selected BlackBerry over CloudStrike
spk00: uncovering multiple threats during the trial.
spk04: Legacy signature-based vendors still account for a significant portion of the overall market, especially with SMB customers. This was always an area focused on silence. An example of the recent wins there was with a logistic company that held a bake-off to replace their current McAfee and Microsoft customers. Defender solution after a vigorous assessment that include mega thief semantic and thousand three years license for our guard advanced product because Because we detected a number of threats that other didn't and as well as providing a higher level Let me also provide Building on the progress we made last Years in ramping the sales force We have been successful in adding further industry experience to the cybersecurity expertise we already have at BlackBerry. This quarter, we not only recruited sales leaders from direct rivals, but product development leaders also. Cyber is a hot market for talent right now, so we're really pleased about our ability to attract and retain high-quality people. As stated earlier, ARR came in at 347 million. This is a decrease of 11 million compared to a prior quarter and was driven by two key factors. The first factor was that in January, we ceased operation for legacy BlackBerry mobile devices. This move allowed us to save significant infrastructure costs going forward. However, revenue for the enhanced SIM-based licensing, or we call it ESBL, are also ended as a result. The second factor impacting ARR was the churn in smaller UEM customers. Recently, we have seen a trend towards some less features-rich UEM products being sold by some of our competitors as part of the bundles or enterprise license agreements. BlackBerry UEM, on the other hand, is a premium product that offers a very high level of security. We've seen some smaller, more price-sensitive customers chose to use the quote-unquote free UEM product that's come with their bundle to save incremental costs at the expense of security. However, these customers represent a relatively small portion of our UEM base. It is also important to note that our leading security profile continues to resonate strongly with our large core customer base of the largest bank and government agencies. To reinforce this point, this quarter we secured UEM renewal with the U.S. Air Force, the U.S. Department of Defense, the U.S. National Grid, as well as a number of international governments, including Poland Ministry of Foreign Affairs, Northern Ireland Department of Finance and Personnel, along with Swedish and Italian governments, just to name a few. Among the major banks this quarter, we renewed with Deutsche Bank, along with well-known American, Canadian, and Indian banks, two major Swiss banks, including the Swiss National Bank and the Global Credit Card Company. We also recently renewed for three years with global law firm White & Case. As a law firm, they handle confidential data on a continuous basis, and they felt that none of our competitors met their security needs better than BlackBerry. During the quarter, we also successfully upsold Silance cybersecurity product to this and other UEM customers. It is likely that we will continue to see some headwinds for UEM in the near term, but we're taking steps to minimize that impact. This includes looking at ways to bundle BlackBerry UEM with other partners' products that appeal to the mid-market, as well as continue to develop new features that our customers valued. Stay tuned for future updates on this. Before I wrap up my comments on cybersecurity, I'd like to share that going forward, we will start to provide quarterly billing information for our cyber business as part of our ongoing reporting. We believe that this will be well received by shareholders and help them more clearly see the progress that the business will be making. Moving on to licensing. On January 31st this year, we announced that we entered into an agreement for the sale of the legacy portion of our patent portfolio. The sales price is $600 million, with $450 million being due at the close and the remaining $150 million due in installments. I'm pleased to report that the transaction has successfully cleared the regulatory review stage, having received approval from the Canadian Government Investment Review Division on March 22nd, as well as the U.S. HSR approval, the antitrust approval, that is, shortly before that. Completion of the remaining closing condition, including financing, is target for the end of this quarter. Following the sale of the legacy portion of the IP portfolio, we will still retain all patents related to our core IoT and cyber software businesses. We will, of course, keep the door open for future monetization, but revenue is likely to be minimal in the near term. Upon the closure of the deal, we expect a reduction in the operating costs required to maintain our IP portfolio. Also, our cash position will be strengthened, enabling us to further invest for growth in our core markets, i.e., the QNX, IV, as well as cyber. We will invest both organically and inorganically. In the quarter, licensing revenue was $11 million, beating expectation. Growth margin came in at 55%. I'll now hand over to Steve to provide additional color on the financials.
spk03: Steve? Thank you, John. As usual, my comments on our financial performance this past quarter will be in non-GAAP terms unless otherwise noted. And also, please refer to the supplemental table in the press release for the GAAP and non-GAAP details. Total company revenue for the quarter was $185 million. Fourth quarter total company gross margin was 68%. Our non-GAAP gross margin excludes stock compensation expense of $1 million. Fourth quarter operating expenses were $117 million. Our non-GAAP operating expenses exclude $22 million in amortization of acquired intangibles, $4 million in stock compensation expense, a $165 million fair value gain on the convertible to ventures. As John mentioned, we are continuing to invest in our core IoT and cyber businesses including headcount growth and new product development to drive top-line growth. The planned investment is sizable. We expect to increase headcount by approximately 250 people across both of our core business units this fiscal year. This quarter, non-GAAP operating profit was $8 million and non-GAAP net profit was $6 million. Our basic GAAP earnings per share was $0.25 while non-GAAP earnings per share was one cent in the quarter. Our adjusted EBITDA was positive 20 million, excluding the non-GAAP adjustments previously mentioned. I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was 122 million, and IoT revenue was 52 million. Software product revenue remained in the range of 80 to 85% of the total, with professional services making up the balance. The recurring portion of software product revenue remained at approximately 80%. Licensing and other revenue was $11 million, given the ongoing limitations to monetization activity prior to closing the sale of the transaction that John referred to. I'll now move to our balance sheet and cash flow performance. Total cash, cash equivalents and investments remained consistent at 770 million as at February 28, 2022. Our net cash position remained at 405 million. Despite the ongoing investment in the business, we generated positive free cash flow of 8 million. Cash generated from operations was 10 million and capital expenditures were $2 million. That concludes my comments, and I'll now turn the call back to John.
spk04: Thank you, Steve. Let me provide the outlook for the new fiscal year. Licensing revenue is expected to be minimal, excluding anything related to the patent sale. For the cyber business, we expect to deliver a billions growth between 8% to 12% this fiscal year, mainly as a result of increased traction from our security products. In fact, we expect to see higher billings in all four quarters when compared to the same quarter in the prior year. However, we model revenue for the year in total to be broadly flat year over year, factoring in the time for billings growth to convert to revenue. Despite having delivered three consecutive quarters of billings growth for cyber, we're not satisfied with our results, particularly in ARR. We feel, however, positive about the trajectory of this business for a number of reasons. First is the cyber market is strong and demand appears to get stronger. Second, following our recent product enhancement, the performance of our product is being recognized. A good proxy for this is winning awards in independent testing, example including receiving the maximum AAA rating in the SC Labs recent Enterprise Advanced Security Test. Third is that we have increased the number of sales reps since the start of last fiscal year and will continue to step up and expand hiring. Our plan is to recruit more than 100 additional cyber go-to-market professionals in the coming fiscal year. Fourth, we continue to record head-to-head wins against our competitors. Now switch to the IoT business. For the IoT business, we expect to see continuous strong growth despite the ongoing headwind for the auto industry. We expect revenue for the year to be in the range of $200 to $210 million, representing a 12% to 18% growth year over year. Despite the macro environment for the auto industry, we base our confidence on the following factors. First, the visibility of the backlog of professional services from design wins already awarded. Second, the strong pipeline of potential new design wins this coming year. And thirdly, the upward trend in the royalty ASP in the new designs. We see a fairly even distribution of revenue across the four quarters. Before we move to Q&A, let me quickly summarize the key points for the quarter. The IoT business is executing well despite industry-level challenges, and we're encouraged by the line of sight we have for the years to come. Ivy continues to execute well with both a new product release and strong demand for POCs twice in the quarter. Our cybersecurity business is tracking in the right direction, once again delivering solid building growth and recording some encouraged head-to-head wins. And the sale of our non-core IP patent portfolio is progressing. Despite our ongoing investment in the business, we generate positive operating cash flow and net profit this quarter. That concludes my remark. Brent, could you please open the line for Q&A?
spk07: 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. Again, press star 1 to ask a question. We'll pause for a moment to compile a Q&A roster. We request, again, that you limit yourself to one question and one follow-up. Your first question comes from the line of Daniel Chan with TD Securities.
spk04: Your line is open. Hi, Daniel.
spk05: Hey, John. Hey, John. Another strong quarter of strong general embedded wins. It's been a few quarters now where you've seen more general embedded wins than auto wins. How does the lifetime revenue stream look for some of these programs with respect to production royalties versus designs? Because I assume that some of these new wins in general embedded have lower volumes than what you typically see in an autospace. So can you just remind us how the revenue streams are structured for the general embedded space?
spk04: Yeah. Are you talking about general embedded or are you talking about autos? General Embedded. General Embedded. General Embedded, you see the production being a lot sooner on average. Probably a couple of years out versus six or seven or five or six years. And typically not as big in terms of dollar on the ASP. Or it is a big organization like a hospital or medical devices, then the volume isn't as big as the car industry. But it's still very, very healthy. Now, general embedded vertical, I think we – I mentioned medical. That's a really good field. We're winning a lot. We have good momentum in there because of the safety certification. There are other general embedded markets that are really not as economically – Exciting. That's a better way to say it. So we tend to stay away from those.
spk05: That's helpful. Thanks. And then on the headcount increase, I think you mentioned you guys are budgeting for an increase of 250 people. I'm just wondering where that's going. I think you mentioned 100 going towards cybersecurity sales professionals. Where are the rest going?
spk04: To IoT. IoT. The IoT, a lot of them, I mean, of course, the sales personnel, but also we have a lot of backlog in professional services. So we need to fulfill those backlog and get the revenue.
spk05: Makes sense. Thank you.
spk04: Sure.
spk07: Your next question comes from Chip Trowdry with Global Inc. equity research. Your line is open.
spk01: Hello, John. Another very strong quarter on silence. A very quick question. I was wondering, like, if you could put some more color to it, like what kind of activity was there before the Ukraine war and why we are in the war? You're getting a lot of interest in silence. Where is that interest coming from? Is it from U.S.-based companies or European-based companies or the whole world? Just provide us some anecdotal comments, what you are hearing. We'll appreciate that. And again, a very good quarter.
spk04: Thank you. Thank you. So the cybersecurity world is, you know, there are a lot of more threats and attack. And we see Demand growing raw demand growing like everybody else in the market have seen the raw demand is really going very fast There are also a replacement market for the older generation signature based Company like McAfee and Symantec and Microsoft so So you can see the second generation, you know, the AI ML-based company like ourselves and some of the names and key names in the industry, you know, we could do a lot of, you know, a good success rate in replacing legacy's implementation. So that's the second one. Silence is particularly strong in the mid-market, small, medium, business mid-market. And I think we're seeing our activity picked up quite nicely, partly because of the guard software that we released. Probably by now it's about a year. And so we could see that trend up continuously every quarter. And so the number is starting to become meaningful. So those are probably the drivers of what is happening. And then last but not least, you know, remember we've been hiring aggressively for over a year now in the sales account. And so it's starting to pay off in some area. And last but not least, we've been able to attract some very strong industry talent from the cyber world. and particularly under John Gio Matteo because he came from McAfee, and so he knows how to recruit a lot of these people, and not only individuals but also channel partners. So things are starting to come together. Still have ways to go, but it's starting to come together.
spk01: I just have one observation, which I just wanted to share with you. Ivy platform providing machine learning, AI-driven battery management system, None of that system, which is AI-driven for BMS, battery management, exists anywhere. Not even the biggest EV manufacturer has that. I think this is very unique to your IV platform. Keep it up.
spk04: Okay, thank you. Thank you much.
spk07: Again, if you would like to ask a question, press star, followed by the number one on your telephone keypad. Your next question comes from Paul Trever with RBC Capital Markets. Your line is open.
spk06: Hi, Paul. Hey, John. Thanks very much and good afternoon. Just a question on go-to-market strategy in cyber. And it's just, you mentioned UEM is obviously strong in large enterprise, but then Silance is strong in SMB. How do you bridge those two businesses from a go-to-market perspective? Because the customer bases and your competitive advantages within each seem quite divergent.
spk04: That's a great question. So we now have three go-to-market teams that is coordinated by region under one senior management. And so... because of John G. And so the free market, go-to-market team are the, think about strategic accounts, which are the large government, as well as banks, regulated industry, the SMB markets, and the channel team. So our objective of the first team is to secure our base business in the strategic accounts and then upsell them with technology that could apply to that UEM base. For example, zero trust technology, which is the gateway is probably the most talked of right now, particularly the U.S. government. The new Biden administration budget has specific money allocated for zero trust, and they want every agency and every armed forces to do that, to be able to implement zero trust as part of the overall cybersecurity protection. So we have that business, and we're already in many of those institutions. So the upsell of Silent's product into that space is the key of growth. The second, SMB2 approach, One approach is through the guard services, the managed service, which SMB typically needs that kind of help for either augment their resources or replace their resources because they can't hire fast enough. And so that led with the Sideline product, and then we upsell UEM into it. It's more bundle-oriented. And then, of course, the channel are typically all cybersecurity. And there's some good channel partners going to come online. I'm not at liberty to talk about it right now, but, you know, in 90 days I will. I will. So that's the kind of how we go in with each different type of category of customers. I hope that answered your question.
spk06: Yeah, that was helpful, and I can't wait for the announcement in 90 days. Second question, just on the sale of the patent portfolio. To the extent that you can, can you just walk through some of the assumptions in terms of the longer-term outlook that went into that, arriving at that price? Because one of the things that investors look at is you look at the revenue in that segment in the previous year. It was quite a large number. How do we put the sale price in context to the previous revenue that you generated in that segment?
spk04: Oh, okay. So, you know... I would say there's still a lot of potential for this non-core set of patents, but two things obviously you know. One is time is ticking down in the validity of the portfolio, although we have it very young. We typically have, even with the non-core, somewhere around eight to ten years' average lifetime with the patent still remaining. If you notice that, which you pointed out, the last couple of years or last few years, we have some good success, but those are with very big name. And so now we need to go, the business need to go cultivate a pipeline for the smaller name, which typically takes a little longer time, a lot more back and forth. know big name does too but big name at least have big numbers uh so so in a way that you know the low-hanging fruits we already approached and so i think the numbers we have done we have done a market test the numbers we think is very fair to both sides okay thanks thanks for that explanation sure there are no further questions at this time
spk07: I would like to turn the call back over to John Chen, Executive Chair and CEO of BlackBerry, for closing remarks.
spk04: Thank you. I'm pleased to announce that, by the way, I'm pleased to announce that on May 18, we'll be hosting a hybrid in-person and virtual analyst day from San Ramon, California. And some of the questions asked earlier regarding your go-to-market will be addressed by John Gio Matteo and Matthias Eriksson, the two BU presidents. And I will strongly suggest you don't miss it. In the case of Matthias, we're also going to prepare to annually talk about backlog. That will be during that meeting also. So I really encourage investors to join us and hear about key developments in our product and strategy, as well as financial focus sessions that will provide additional color on the IoT and cyber business. More detail will follow in due course, so please stay tuned. Thank you for joining the call today, everyone, and have a good evening. I hope to see you in person soon.
spk07: Ladies and gentlemen, this concludes today's call. thank you for your participation you may now disconnect
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