BlackBerry Limited

the BlackBerry first quarter fiscal year 2023 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, Vice President of BlackBerry Investor Relations. Please go ahead.

Thank you, Brent. Good afternoon and welcome to BlackBerry's first quarter fiscal 2023 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 U.S. and Canadian securities laws. will 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 results. For reconciliation between our GAAP and non-GAAP members, 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. Thanks, Tim.

Good afternoon, everybody, and thanks for joining the call. I must first apologize after speaking for two days because we had our AGM and board meeting last My throat is a little sketchy, so I apologize for that. Anyway, this quarter, we built on the momentum from fiscal 22 and continue to execute it well, delivering solid year-over-year revenue growth. Total software and services revenue was $164 million, representing a 9% year-over-year. Let me first start my review today with the IoT business unit. Despite a tough macro environment for auto, we delivered revenue of $51 million, which represent 19% year-over-year growth. Growth margin came in at 84%. IoT ARR was $94 million, increasing 9% year-over-year. We recorded strong revenue from pre-production development seats and professional services, setting yet another quarterly record for the third quarter in a row, As you know, this is not only a positive for the current year, but also a strong indicator of future revenue once the design enters into production. Our strength in securing new design wins have driven a year-over-year increase in our royalty revenue backlog, which is now at approximately $560 million, a 14% increase from a year ago. Further, The number of vehicles with QNS software embedded has increased year-over-year from over 195 million to over 215 million. I'm pleased that the strength of our design wins once again allow us to overcome the impact of the headwind that the auto industry is currently facing. These headwind include COVID-related lockdowns in China, supply chain issues, the Ukraine war, inflation, and rising interest rates. On the supply chain front, the situation appears to be showing some sign of stabilization. While the economic issues will impact the overall auto market, demand for higher-end models and electric vehicles appears to be holding up. As mentioned, QNX continued to perform well in terms of securing new design wins. In a quarter, we gained a total of 14 new design wins, with nine in auto and five in the general embedded market. We are a market leader in ADARs, Advanced Driver Assist, that is, and digital carpets, both fast-growing safety-critical domains. In fact, strategy analytics a leading independent auto analyst, estimate a three-year CAGR for ADAS market to be 29% and digital carpet to be 40%. And within those domain, we plan to grow even faster than that as we continue to win market share. In a quarter, we have a number of large design wins in digital carpet. In addition to wins with leading tier one Bosch and Vizion, we secure a win with a global automaker based in North America. as well as BICV, a leading Chinese tier one for an augmented reality AI and hologram-enabled digital carpet to be deployed in Renault, Jiangling's latest fully electric sedan. That's quite a bit of technology. Furthermore, despite lockdown challenges, we're able to secure a number of new design wins with major Chinese automakers, including autonomous drive design with Great Wall Motor and others. Outside of auto, this quarter our QNX hypervisor was pre-certified by the independent auditor at TUV Rhineland to the highest level of safety for medical device software. We continue to make progress with medical design wins, and a good example in the quarter was for a dialysis machine with a major technology customer base in India. Let me now provide you with an update on the progress we're making with IV. As previously mentioned, we have received more proof of concept of POC trial requests than we can currently handle, and we continue to receive more. This is a strong indicator that Ivy is a product with the right strategy, in the right place, and the right time. In a quarter, we commenced a number of POCs, which include leading global automakers and tier ones. Engagement so far has been positive, and some of the learnings are helping guide our product development. Product development is advancing well, and our June release now supports an even wider range of sensors and hardware. We're also progressing well with developers' tools. Progress is also being made on the application ecosystem side, and we're currently engaged with multiple potential partners. These partners enable a wide variety of exciting use cases, including AI-driven battery management, predictive maintenance, and user-based insurance, just to name a few. And a number of them are being considered for inclusion in the current POCs. Overall, we continue to be excited by the potential opportunity for IV and are pleased with our progress this quarter. Now moving on to cybersecurity. This was a solid quarter for the cybersecurity business unit. Revenue came in at $113,113, a 6% growth year-over-year. Buildings on a total contract value basis was $89 million, a 16% year-over-year increase. Gross margin was 53%. ARR was 334, 334 million. Dollar-based net retention rate was 88%. This number, of course, does not include new local wins, nor certain perpetual license win in government. With the elevated cyber threat levels, we see a strong demand environment at present. Given this backdrop, we continue to invest in go-to-market. In the quarter, we added net direct quarter carrying headcount. We are pleased with how these additions to the team are ramping up. And of course, it will take a few quarters for them to reach full productivity. During the past quarter, we also expanded our channel presence. We added Midas Group, a partner with over 5,000 employees, and a presence in over 70 countries across the Middle East, Europe, and Africa. This significantly expand our reach in those markets. Midas brings a lot of experience in cyber, having been distributed with McAfee, Symantec, and Tram Michaels. We've also made a number of enhancements to our managed security service provider, or MSSP program. As growth in our guard MDR solution has shown, this is a very large demand. There is a very large demand for managed service in cybersecurity, and SSP allow us to greatly scale out our go-to-market. During the quarter, we secured a number of new logo wins, mainly displacing legacy vendors. The legacy vendors market remains a very large opportunity for BlackBerry, and we have been running a number of targeted campaigns. In particular, this quarter we saw a number of customers move from Kaspersky to Sidelines Protect. ScienceProtect works very well in this context, and its lightweight agent is both quick and easy to deploy. We continue to compete head-to-head and win against other next-gen cyber players. A good example of a win this past quarter was of a major US-based medical industry customer with deployments of tens of thousands of endpoints in a direct head-to-head competition against CloudStrike. The customers select BlackBerry because they were impressed by the effectiveness of our product, especially against the log4j and Kerberos, as well as our high level of customer service. Our cyber products receive further external validation in the recent MITRE ATT&CK evaluations. Our cyber suite of solution was 100% successful in preventing both the viscid spider and sandworm attacks very early in each scenario and critically before any damages occurred. Let me now provide an update for UEM. This quarter, we secure renew with some of our largest customer, including the US Air Force, U.S. Navy, U.S. Special Ops Command, the Canadian Senate, the Supreme Court of Canada, and the Royal Canadian Mint. We book a great amount of business with law enforcement agencies in the border, such as with the U.K. Serious Fraud Office, the London and Manchester Police Services, as well as the Vancouver Police Department. We were pleased to both increase the number of UEM license and deploy additional products to these customers. In addition to government, we secure, renew, and upsell a number of leading financial services customers, including leading banks and UFG. I believe they're the largest Japanese bank. Misuho and Sumimoto Misui Banking Corporation, three of Japan's four largest banks. Switzerland's Julius Baer Group, First Citizen Bank, and Liberty Bank in the United States, as well as other leading banks in both Germany and Canada. As we mentioned previously, given the competitive market, we continue to strengthen our UEM product offering, and we're pleased to partner with Google to add support for enterprise running Chrome OS and Chrome browser, support that Microsoft Intune does not offer. According to IDC, Chrome OS recently overtook Mac OS as the number two desktop OS with more than 10% market share. And Chrome is also the world's leading browser with approximately 70% market share. The strength of our UEM offering continues to be recognized. And last month, IDC MarketScape named BlackBerry as the leader in UEM for the third year in a row. Among other items, they highlight the wide range of government and industrial security and compliance certification that BlackBerry UEM hosts. These certifications help BlackBerry maintain its strong position in core regulated market. And now a brief word about licensing. In the quarter, licensing revenue was $4 million and gross margin was 50%. Earlier this month, We will issue a press release updating the status of the proposed sale of the legacy portion of our patent portfolio. The buyer, Catapult, is working to secure their financing, and we look forward to the completion of the transaction. At the same time, as we are no longer under exclusivity with Catapult, we are free to explore new options as they come our way. We will provide more details as and when appropriate. Let me now hand over to Steve, who will provide additional color on our financial results of the quarter.

Thank you, John. As usual, my comments on our financial performance this past 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. Total company revenue for the quarter was $168 million. First quarter total company gross margin was 63%. Our non-GAAP gross margin excludes stock compensation expense of 1 million. First quarter operating expenses were 132 million. Our non-GAAP operating expenses exclude 23 million in amortization of acquired intangibles, 1 million of restructuring expenses, $165 million relating to a one-time litigation settlement of a matter dating back to 2013, $6 million in stock compensation expense, and $46 million fair value gain on the convertible to ventures. This quarter, non-GAAP operating loss was $27 million, and non-GAAP net loss was $31 million. The GAAP basic loss per share of 31 cents was primarily driven by the one-time impact of the litigation settlement. Non-GAAP loss per share was 5 cents in the quarter. Our adjusted EBITDA was negative 21 million, excluding the non-GAAP adjustments previously mentioned. I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was 113 million, and IoT revenue was $51 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 $4 million. I'll now move to our balance sheet and cash flow performance. Total cash, cash equivalents, and investments were $721 million as of May 31, 2022. Our net cash position was $356 million. Q1 is traditionally a seasonal high for use of cash given the payment of annual bonuses and other annual items. And together with the ongoing investment in the business, free cash usage was $43 million. Cash used by operations was $42 million, and capital expenditures were $1 million. That concludes my comments, and I'll now turn it back to John.

Thank you, Steve. Before we commence our Q&A session, let me first provide a current year outlook. There's no change from our previous guidance. We continue to expect full fiscal year 2023 revenue for the IoT business unit to be in the range of $200 million to $210 million. and revenue for the cybersecurity business unit to be broadly in line with the fiscal year 22, with about 8% to 12% year-over-year billings growth. I'd like to thank everybody who attended our recent analyst day. I think it was May 12th. For those who weren't able to join, we provided three and five-year revenue targets for BlackBerry. We expect the total company revenue, excluding the IV, to grow with a five-year CAGR of approximately 13%, with revenue of $886 million in FY25 and $1.2 billion in FY27. Breaking this down by business unit, while the IoT SAM is expected to grow in the range of 8% to 12% over the next three years, we expect to grow IoT revenue at a five-year CAGR of approximately 20%. This doubles the industry growth rate. This faster than market growth rate is primarily driven by the market share gain in our core safety critical auto domains. In addition to auto, we also expect growth from adjacent verticals, particularly medical and industrial, broadening our addressable market. We estimate revenue in the FY25 to be approximately $307 million and approximately $443 million in FY27. This model is partially built on the multi-year revenue backlog from already confirmed designs and a line of sight to upcoming potential new design wins. It is important to note that these IoT targets do not include any revenue from Ivy, which then becomes upside to the story. For cyber, given the strong market condition, our technology portfolio and the roadmap, we expect revenue growth with a five-year CAGR of approximately 10%. The cyber business unit includes both the more mature endpoint management products as well as the higher growth endpoint security products. We target cybersecurity revenue of $579 million in FY25 and $770 million in FY27. We expect operating leverage for the business expanding gross margin by over 100 basis points per year on average and trending towards our 20% operating margin by FY27. Given the investment we're making, we expect moderately negative EPS and cash flow this current fiscal year. Approximately approaching EPS and cash flow breakeven in FY24 and becoming EPS and cash flow positive from FY25 onwards. We expect the two markets to converge and our position in both IoT and cybersecurity will place us in a very strong position to capitalize on these growing market trends. So, let me summarize the key takeaway from the quarter. One, this was a good quarter where we delivered year-over-year revenue growth in both our IoT and cyber business unit. Two, we set another quality record for design activities in IoT, offsetting the impact of macro headwinds on auto production. Three, on the cyber side, we recorded solid double-digit buildings growth and continue to make progress in expanding our market reach. One final point. This quarter we released our first ESG report with highlights including Blackberry achieving carbon neutrality. For those who haven't seen it yet, a copy can be downloaded from our website. That concludes my remark. Brent, can you please open the line for Q&A?

We will now begin the question and answer session. To ask a question, you may press star 1 on your telephone keypad. If you are using a speakerphone, please make sure your line is unmuted. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We request that you limit yourself to one question and one follow-up. Your first question comes from the line of Paul Traber with RBC Capital Markets. Your line is open. Hi, Paul. Thanks very much and good afternoon.

Hi there, John. First question, can you connect the dots in the cyber business between the decline in ARR versus the very healthy billings growth in the quarter? And more specifically, was there any contribution from perpetual license like SecuSpeed in the quarter?

Yes, actually, your second question answers somewhat partially the first question. We had a good second, third quarter selling to the government, and it's perpetual because of the way the government purchased the technology, and so that did not fully reflect it, obviously, and it cannot be reflected on the ARR. There was some minor churn for the UEM mid-market, which we have identified last last quarter. So the combination of those two explain the delta.

That's helpful. Thank you. And second question, just on the patent sale, and not so much in the details, as you mentioned, you can't disclose, you know, obviously negotiations that are ongoing. But if the sale doesn't go through and you don't find a third party, I mean, would you revert back to, you know, IP licensing? Or are you, you know, you're definitely going through with a sale, you just have to find the right, you know, buyer and the right price?

I believe for simplicity of our company's story and the focus, we should find a buyer. And I believe we will find a buyer. But we will not shy away from monetizing ourselves. We do have our team standby and ready. But my first priority is to secure a buyer. And there have been other people that are approached. But I still believe that Catapult will get it done.

Okay, great. If that is helpful, I'll pass on. Sure.

Thank you.

Your next question is from the line of Trip Chowdhury with Global Equity. Your line is open. Hey, Trip. Trip, how are you?

Hello, John. Wonderful, wonderful. Always happy. Exciting to hear about Ivy. Two questions I have. First is regarding the chip supply position. Do you think because of the depression in cryptos, some chip capacity may have been released and that may be easing out the chip shortage that automotive industry is facing? Are you seeing something to that effect?

Seeing the chip shortages. So I think it's the fact that cryptocurrency is currently depressed.

Is that freeing up chips? I'm not good enough to answer your question there, Trip. I'm not a big crypto fan. I hate to say that. So I don't follow that very closely. I know it's very depressed at this point. And I don't know the relationship with that. I'm sure there are some with the chip shortages issue. So sorry, I can't answer that question.

Don't worry. Second question I had is regarding the IV platform. It's and you're getting insurance insurance auto insurance on top of it uh what kind of a use case use cases can you think about that can evolve over a period of time and that's all for me uh-huh that's a that's a very good question i i um so we have in our partnership uh at least one if not two uh

organization is specialized in this area, in the insurance area, for example. You know, the big thing about the insurance area with auto is pay as you go. It's kind of a usage-based insurance model. And then the other one is, you know, a redefinition of how the insurance, it kind of related to the first one, how they were calculated, and it's particularly more meaningful in the fleet management side of the equation. So other use cases, there's a lot of use cases on IVY, or IVY could host a lot of use cases. Of course, we told you guys about battery management. The whole area of predictive maintenance are huge. And every OEM would want to get their hands around those data, around the action that could generate, whether it's physically or over-the-air update. So we're seeing a lot of interest of a lot of different use cases. And auto as a wallet, there's also a lot of financial technology around it. And so it's an exciting time for Ivy.

Thank you very much. All the best.

Thank you, Drew. 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 the line of Todd Coupland with CIBC. Your line is open. Hey, Todd.

Todd, how are you? Oh, hey there, John. Good evening. I'm doing well. Thank you. Good evening. I had a couple questions, first on COVID. IoT, you talked about how you're seeing the supply chain ease. Could you just talk about what you're seeing that's changed since you gave the last update?

Yeah. On the supply chain side, the OEMs around the world, they finally have a good strategy. And then, of course, each of them have their own strategy. But I see it more tilted to high-end cars being built. that they're able to manage their supply chain issue and build and release cars that are of more value to them. So high-end car being built, of course, there's a constant demand of electric vehicle, particularly given today's environment with the gas price and the environment. And the good thing about us is QNX is typically embedded the high-end cars more so than the lower-end models and in addition to that we have a strong footprint 24 the top 25 production volume producer uses qnx of the ev that is of the electric vehicle world so as their volume goes up although still a small percentage of total vehicles sold I think it's like 12% right now that, you know, we're seeing the volume uptake. So it's good trend for us.

But I guess it's not material enough to move the IoT guide for the year.

No, no, because there's a headwind. We had a... We had a little delay on some of the stuff when China has a lockdown because of COVID. And then, of course, now, as you all read, and you guys probably know this very well, that the interest rate uptake is causing a little bit of a demand slowdown for new vehicle purchases. And so those are all factors that we still need to confront with. So our strategy is we see a strong design win rate. We're winning a lot of new design win, and they typically come license, developer license, and some professional services revenue, we're strong enough in those areas that covers the shortfall on production or slowdown on production, if there's any. So we believe that our guidance is still good. And I hope I am wrong on the conservative side, but I think our guidance is still good. And there's a mix shifted a little bit.

Okay, that's helpful. And then my second question had to do on the cyber business. You talked about modest churn in SMBs, and you talked about that for a couple of quarters. What I was wondering is we're starting to see an enterprise staff being given options of BlackBerry UEM versus, let's say, a competitor UEM. And I'm just wondering if you're seeing that in other enterprise, and does that give you some concern that the churn might bleed into larger businesses? Just talk about that trend. Thanks a lot.

Yeah, currently we haven't seen that. So this is important that we continue to work on our products and partnership, which I talk about. So far, the UEM churn is, is usually in a non-regulated space and is a small, more small medium enterprise. So for the very large one, we have continuous renewal and particularly the government in the world. So no, I haven't seen that as a major trend at all, even banks. So far I've been okay, knock on wood.

Okay, great.

Thanks a lot. Thank you. Your next question comes from the line of Daniel Chen with TD Securities. Your line is open. Hey.

Hey, how are you, Daniel? Hi, John. Good, thanks. Just wondering if you can provide some color on the drivers behind the 14% increase in the QNX backlog. Is that due to recovery of production volumes, extension of some programs, or higher ASPs? If any color on that would be helpful.

Yeah, it's the result of the design wins we've been telling you folks every quarter. And so we have a very straight guideline and formula of what get counted, what didn't get counted. And we're very conservative on that. But this is as a result of what the OEM told us that this is the volume you should expect in future years on the total program, and we sometimes do a discount on it, sometimes we took it as is, and so, and it was accumulation of those, offsetting obviously the runoff, which is the royalty we got in the last 12 months, and that results in a 14% increase.

Okay, that's helpful. Thank you for that. And then I wanted to ask another question on the patent sale. You said you would explore options as they come in. I just want to know whether you guys are actively looking for other options. Are you actually going back to other bids you had during the initial process, or are you starting from the beginning again?

No, no, not at all. In fact, we've been approached by others. I'm not actively looking for a uh or starting from square one um as i said uh i i want to make sure that the shareholder knows that that we're not just stuck with one option but we do expect to see and we would like to see the previously announced deal with catapult to to happen um but what we're basically saying is we've been getting calls um and we are now responding to the cause because you know, the exclusivity has expired. Great.

Thanks, John.

Sure.

There are no further questions at this time. I would like to turn the call back over to Mr. John Chen, Executive Chair and CEO of BlackBerry, for closing remarks.

Thank you, Brian. Thank you, everybody, for joining us. I realize it's late, so back ease. And I'm looking forward to speaking with you all again soon. And have a good day. And a good evening.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now