BlackBerry Limited

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.

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.

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