BlackBerry Limited

Good afternoon and welcome to the BlackBerry second quarter fiscal year 2024 results conference call. My name is Rocco 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 then 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, Rocco. Good afternoon and welcome to BlackBerry's second quarter 2024 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 numbers, please see the earnings press release published earlier today, which is available on the EDGA, CEDA, and BlackBerry.com websites. And with that, I'll turn the call over to John.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us today. Let me start with the IoT business unit. Revenue for the quarter increased 9% sequentially to $49 million, and gross margin increased by 400 basis points to 84%. The most important long-term leading indicator of the health of this business is securing new design wins and royal and building royalty backlog. And we have, and that we had another strong quarter. In fact, by the end of the first half, we have secured more than two thirds of our FY24 annual target for new backlog and expect to exceed it. In a quarter, QNX secured 20 news design wins in auto, and seven in general embedded market verticals. The largest of these was an eight-figure estimate lifetime revenue ADAS win with one of the top five global automakers to deploy our QNX OS for safety. This win illustrates a strong secular trend of consolidation of software into centralized compute domains. With this ADAS module powering drive monitoring surround view, lane keep assist, adaptive cruise control, and other safety features, all on a single chip. As automotive software stacks becomes more complex and requires significantly higher compute power, it plays the QNX strength. In addition to our strong win rate for ADOS, we are also the clear market leader for foundational software in the digital cockpit. The combination of our high-performance safety-critical RTOS and hypervisors allows for mixed criticality in this domain. Given our market-leading positions, our design wins continue to be well diversified across all major global markets. In Asia, we secure a design win with LG Electronics that includes our hypervisor and will be deployed in a number of vehicle models for our top 10 global automakers. We also secure wins with Vision and leading OEM Cherry via Bosch and Mount Otis. In Europe, a digital carpet win also include our acoustic middleware. And this is exciting because feedback from customers suggests that this relatively new market opportunity for software-defined acoustic is likely to be fast-growing. As well as our strong footprint in auto, QNX is well diversified in other verticals. particularly medical and industrial. Building on our position in surgical robotics, this quarter we secure a design win for our QNX medical OS for safety to be deployed in a robotic arms for dentistry. These design wins confirm that QNX business is strongly positioned for the long term. With revenue for Q2 being largely in line with expectation, we continue to expect IoT to deliver solid year-over-year growth this fiscal year. That said, we are taking a prudent view on our IoT revenue outlook for the next two quarters. Automakers are currently addressing a number of significant challenges, including the industrial industry's strike action, the transition to software-defined vehicles, as well as the electrification's pivot and supply chain challenges. Delay to either pre-production software development programs or to production schedule could impact our revenue this fiscal year. However, we expect these to be relatively short-term timing issue. As a result, we revised and broadened our IoT revenue outlook range to $225 million to $240 million. This represents a 9% to 17% year-over-year growth. This means that we still expect a strong second half of the fiscal year. We expect further sequential growth into Q3, and we currently expect Q4 to be the strongest quarter for revenue in QNX history. This confidence is based on a combination of the pipeline of potential new design wins, our service schedule, and royalty expected from the backlog. Turning now to product, at our analyst stay in May, we announced the upcoming launch of our new generation QNX real-time operating system, QNX 8.0, targeted for December. This release will make a fundamental shift in market performance, and we expect it to further cement QNX leadership position in automotive and beyond. Feedback from the beta trial has been very positive, with customer and partners impressed with performance scalability and functionality. Perhaps some of these will convert into revenue in Q4. This significant enhancement of performance and scalability comes at a time when chip makers are focused on developing hardware to power generative AI. We believe that our QNX 8.0 software is uniquely positioned to maximize the potential of gen AI in embedded systems, particularly in safety-critical use cases. QNS8 will combine best-of-breed performance with the ability to run mission-critical process safely and securely alongside Gen-AI stack on the same chip. Now, moving on to Ivy. We were delighted to announce that Ivy was selected by Tier 1 supplier Mitsubishi Electric to power its new FlaxConnect.x in-cabin systems. IV edge technology and the high-quality real-time insight that it provides will help enhance road safety and enable new in-vehicle experience. In addition, we have solid traction with new IV proof-of-concept trials. Currently, we are progressing POC with a number of major OEMs, including a top-ten global automaker and also a leading commercial vehicle OEM, Scania. The strong level of interest for Ivy POC clearly confirms our strategy. On the product front, this month we will release an updated version with significant enhancement to cloud features and increased hardware and software support. Ivy's development has moved from the early heavy lifting phase and the focus is now on refinements, enhancing stability, expanding sensor supports and improving the developer experience. The Ivy ecosystem continue to expand and mature. We now have over 40 partners currently building on Ivy, and there are more than 20 pre-integrated solutions that are being used by customer in POC trial and at industry events. This month, the Ivy Innovation Fund make its latest investment, this time in Core Actions, an exciting Israeli startup. Core Actions has developed an AI power application that will leverage the IV platform's sensor insight to detect potential driver awareness issues. Their AI model analyze micro muscles movement, such as through steering view sensor data, to understand brain activity, and we are pleased to add them to the ecosystems. Moving now to cyber business unit. Revenue for the quarter was 79 million, and total contract value billings were 74 million. Gross margin was 54%. ARR came in at $279 million. The dollar-based net retention rate was stable at 81%. Revenue this quarter was lower than expectation due to deal slippage. BlackBerry, along with many others in the cybersecurity space, is experiencing elongated deal cycles. Deals are requiring multiple rounds of review and scrutiny, and while this isn't impacting win rates, it's having a real impact on the timing of when the deal closes. This is especially true in government, where BlackBerry has a very strong presence. In particular, a small number of large, mainly perpetual deals, which therefore had a significant portion of in-quarter revenue, slipped to later quarters. While this materially will impact Q2 reported revenue, we remain confident with how these deals are progressing and expect them to close this fiscal year. Further, we have a well-defined pipeline of significant deals that are progressing well. These deals are primarily in the government vertical, where BlackBerry is well-known and trusted, and we have strong customer relationship. Due to the overall confidence in the strong improvement in revenue in the second half compared to the first, we are reiterating the full year cyber revenue outlook for the current fiscal year. Because large government deals like these are both complex and binary, we will of course update you on the progress made in closing them during the next earnings call. Let me now highlight some of the deals closed during the quarter. In government, we secured new deals with U.S. Department of Justice, Department of State, Department of Energy, and Department of Education. Also, the Internal Revenue Services, the Canadian Revenue Agency, the U.S. National Nuclear Security Administration, Custom and Border Patrol Protection, and the Ministry of Justice in Quebec. Outside of North America, we secure business with the Bank of Italy, Netherlands Share Service Center, ICT, as well as the Federal Court of Australia, the Australian Federal Police, and the Director General of Force Intelligence in Bangladesh. In fact, we see a good pipeline of opportunities developing in Asia Pacific currently. In addition to government customers, we secure wins with leading banks, including Morgan Stanley and Santander, as well as with leading technology firms, LG, Philips, and Toshiba, just to name a few. Moving now to product, Silent is the pioneer in the use of AI in cybersecurity. with AI at the very core of its suite of products, long before it became today's buzzwords. Our battle-hardened AI model has been trained for many years, continually learning to distinguish threats from non-threats by referencing trillions of data points. Last month, we released a major update to this model, which has been rolled out to our customers, providing an increased level of protection. The model has driven even stronger threat prevention rates than before and further reduced false positives. This release is part of the investment we made in our product portfolio, and these enhancements are being well received by our customers. This is validated by Cylance Endpoint, our AI-driven prevention, detection, and response solution being placed in the top right-hand quadrant for the garnered pure insight customer's choice. This positioning is based on feedback from real customers, reflecting the experience of our product and us as a company. This pairs nicely with the same recognition received by BlackBerry UEM in February, where it was the only endpoint management solution identified as a customer choice. Let me now hand the call over to Steve, who will provide more color on our financial.

Thank you, John. As usual, my comments on our financial performance for the second quarter will be in non-GAAP terms unless otherwise noted. Total company revenue for the quarter was $132 million. IoT revenue was $49 million, cybersecurity revenue was $79 million, and licensing revenue was $4 million. Software product revenue as a percentage of total revenue remained in the range of 85% to 90% with professional services making up the balance. The percentage of software product revenue that was recurring remained at approximately 90%. Total company gross margin was 65%. Operating expenses for the second quarter were $114 million. lower sequentially in part due to one-time costs associated with the patent sale in Q1 that did not recur and the release of some IP related accruals in Q2. Non-GAAP operating expenses exclude a 6 million fair value gain on the convertible debentures, 10 million in amortization of acquired intangibles, 10 million in stock-based compensation expense, $3 million in restructuring expenses and $1 million in impairment of long-lived assets. The non-GAAP operating loss was $28 million and non-GAAP net loss for the second quarter was $23 million. The $0.04 non-GAAP basic loss per share for the quarter beat expectations. Adjusted EBITDA, excluding the non-GAAP adjustments previously mentioned, was negative $22 million. BlackBerry remains laser-focused on maximizing efficiency and expanding margins, and we remain on course for both positive operating cash flow and non-GAAP EPS in the fourth quarter and for the fiscal year as a whole. Total cash, cash equivalents and investments decreased by $59 million. to $519 million as of August 31, 2023. Net cash used by operations this quarter was $56 million. The current debentures mature in November and we intend to fully repay them. With respect to raising any new debt, the outcome of Project Imperium will obviously have a significant bearing on future needs. Accordingly, we are developing clear, executable plans for a number of potential scenarios that could arise. That concludes my comments, and I'll turn the call back to John.

Thank you, Steve. Before we open the line for Q&A, let me quickly summarize the key messages. While this quarter saw some volatility in reported revenue due to the slip deal, we remain confident in the pipeline of opportunities for our cyber business. We expect this to translate into a much stronger second half, and subject to successfully closing a number of our larger government opportunities, we expect to finish within our reiterated three-year revenue range for cyber. We also remain very confident and excited about the fundamentals of our IoT business, and like cyber, expect a stronger second half albeit we're taking a prudent view given delay in the start of some development programs as well as the auto industry labor actions. Then we also provide you an update regarding Project Imperium. The board and its advisors are very actively engaged in the process and recognize that it is in everyone's interest that it will be completed as soon as possible. All stakeholders should rest assured that we will provide an update as soon as we possibly can. That concludes my prepared remarks. We will now take your questions. Operator, could you please open the line for Q&A?

Absolutely. We will now begin the question and answer session. To ask a question, please press star 1 on your telephone keypad. 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 you limit yourself to one question and one follow-up. And ladies and gentlemen, our first question today comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Hey, Mike. Hey, John. Thank you for taking my question. The first one is just really on the cybersecurity business. Can you provide a little more granularity on which parts of the cybersecurity driving these big perpetual government contracts that you expect to close? Is it mainly SecuSmart or is it kind of evenly spread across the portfolio?

Mainly SecuSmart, also UEM. the Spark platform.

So mainly those two. Great. Thank you. And then I guess on my, on my follow-up question, just any update on how silence is, is trending in the market to have some good technology there, but you're some larger companies such as CrowdStrike and others are moving more into the SMB market. Can you maybe talk about how silence is a fairing in the marketplace?

Yeah. Um, We do actually reasonably well. The numbers are obviously smaller than the competitors, but we do reasonably well in the win rates on SMB. We actually have a pretty good quarters in new local. And it will continue. I said it many times. Our products are now up to class. It took us a while. We are working very hard with channel partners to swing them our way. And so once we have more achievement there, we'll have more leverage. But clearly the product could win and God is a good solution.

That's helpful. Thanks for taking my two questions. I'll pass the line. Thank you.

Thank you. And our next question today comes from Luke Young with Baird. Please go ahead.

Good afternoon. Thanks for taking the questions. John, for starters, last few quarters here, customer software delays have been a theme that we've seen repeat a few times. It'd just be great to get your perspective on how widespread this issue within your customer base is right now, and most importantly, what the affected customers are telling you needs to get done to get back on track. You mentioned in the script that you have confidence this will be a relatively short-term timing issue. Could you just expand on the reasons why you believe that to be the case? Thank you.

Right, okay, that's a good question. So the company that are looking at their software divine vehicle effort and to push out some and delay either the start of the design or starting into the production are the really big companies. And some of them are very visible. They announced, you know, reorg. that actually the outcome favors the software-defined vehicles strategy. And Toyota has announced reorg. VW has announced reorg. And a number of others that we have not announced reorg, and then pardon me for not being able to repeat that because that's customer proprietary information. So they will not be happy with me. So you could get that sense. However, everybody has kind of tell us it's like a, you know, not in a position way, but it's kind of like a one year move, four quarter move. And frankly speaking, we are in the third of the four quarter already. So this is one of the reason why the team has some really strong pipeline that they believe in for Q4. And as I want to repeat this, we expect Q4 the best quarter in revenue for QNX ever.

Okay, great. Thank you for that, John. And then for my follow-up, I'll stay within IoT. Going back to the analyst day earlier this year, one of the things that you mentioned strategically was looking to continue to engage more directly with OEMs as a tier one and accelerating your OEM account coverage. I'm just wondering to what extent the current delays you're seeing impact your appetite for those sorts of investments in IoT that are outward facing and just reconcile that with the overall desire to expand margins.

Right, we have, because we believe our fundamentals are so strong and because we believe our new product 8.0 scalability is so good, We are not slowing down any of our appetite at all. We are steadfast moving forward. IoT is hiring people. So we don't worry about us kind of taking our foot off the gas pedal. That's not going to happen.

Understood. Thank you.

Sure.

And our next question today comes from Trip Chowdhury with Global Equities Research. Please go ahead.

Hi, Trip. Thank you very much. Hello, John. The auto industry seems to be super, you know, exciting with QNX and now at least like companies like NXP, they term something like you talk IoT as edge square, where they put a lot of AI and and they're called tiny ML that powers these devices. I was wondering, like QNX definitely with the low footprint and real-time operating system is ideal. But I was also wondering, have you come across some new sensors, the categories that may have been created because of AI in the edge world? And these neural network processors like NXP that they make, the industry is trying to, industry structure is changing. That's my basic question is, a tiny ML, edge square, QNX, and some new use cases that may be evolving. So I was wondering if you have any thoughts on that.

Yeah, it's a good point. I think there's still, what you're explaining, I read it, it's still early in the industry. And I also want to emphasize the fact that we are a embedded operating system, real-time secure operating systems. And so we tend to go into the MPU type, the central complex, computing complex, So the edge of this, which will be driven with different new use cases, some of them are AI based and all that, but that's a level higher than us. And of course we will be benefiting from it, from needing more central compute power. So I guess we do benefit from it. We don't directly go, create a selling motion into the edge and that edge selling motion and use cases are created by the code that is on the stack that is one level above us.

Excellent. Yes, I got it. The second question is regarding Ivy. Phenomenal traction on the developer side. Apps I don't know, probably we are about six, eight months away from it. But I was wondering, have you come across any new categories of apps that may be coming on top of Ivy? And that's all for me. Thank you very much.

Well, the AI and sensing, oh, actually interesting, tied back to your first question, the different type of sensors, that's being demanded in a car, you know, we have seen different types and more increased and more complex. And like one of the example when I talk about core action was they monitor the sensors on the steering wheel. And then through that they monitor and they help define the micro muscles. of the individual. So, and then dictate or indicates, you know, what the status is of the driver. So, on an alertness basis and awareness basis. So, this is a little bit more esoteric than just, you know, measure whether the, you know, how much gas you have in the tank or how much charging amps that you still have before you need to do the next charge. So, So we have seen more and more modern type applications. But I still believe for the initial usage of IV, it's going to be very fundamentally managing the safety and the comfort of the car.

Got it. Thank you so much.

Thank you, Triv.

And our next question today comes from Paul Treber with RBC Capital Markets. Please go ahead.

Hi, John. Good afternoon. In regards to your comments about Q4 being the best quarter for IoT, how do we think about the momentum beyond Q4? Do you expect it to be carried through to the subsequent year, or is it more just a one-quarter phenomenon?

No. So it's a good question. I don't believe we're going to have a Q1 FY25 bigger than Q4. That's what you're asking. But I do believe that we're still following the 20% growth on year-over-year where we presented to you all in the May meeting. So you do expect us to have double-digit growth and pushing to a 20% growth year-over-year. And by then, I hope that these so-called software-defined vehicle efforts delay. And hopefully, you know, everybody seems to have reasonable handles on supply chain, despite the political situation between U.S., China, Western world, and so forth. And so that's gradually getting under control. Electrification is on everybody's... It's in their product SPACs, so to speak. although to us is really hoping that that drive more volume of a car, not so much as electric versus gas, we have a difference there. And so if that is removed, then we will start seeing design wins that will turn into developer seats to come into professional services engagement, and then ultimately turn into royalty backlog, royalty. So fundamentally, we see nothing concerning at all. We see this as a purely a timing issues. And we see it starting to get better in Q4, unless there's some other industry events like the UAW strikes that lasts longer, then that's a little bit out of our control. But even though, even the UAW strikes, it's not gonna last, as you probably know this very well, it's not gonna last, in perpetuity and because both sides got hurt. So I think they will resolve it. I certainly hope they will. And then we'll get back on track.

Okay, and then my second question, I don't know how much you can answer it, but I'll throw it out there. Just in regards to Project Imperium, I know you can't give specifics, but have you or the board reached a point where you've narrowed down to a few high-level paths, and can you sort of share the high-level paths?

Yes. I can comment on it, but the answer is yes. Okay, thanks for taking the question.

Sure.

And our next question today comes from Daniel Chan with TD Cowen. Please go ahead.

Hey, John. Hey. You expected the strategic review to conclude by the end of summer, and your contract with BlackBerry is quickly approaching. Would it be possible that this review goes past November, or should we expect something in the next month or so?

I think there is better than 50-50 chance you should expect something sooner.

Okay, that's helpful. And then maybe another question on the timing. To what extent do you think the uncertainty from the strategic review is having an impact on the near-term financial performance, whether it be from staff productivity or even customers waiting for a conclusion?

No, actually, I mean, really seriously, I check this a lot because that's an obvious concern. And from a customer point of view, no, I don't see. There might be one or two conversations I had, but it was like – kind of like oh by the way when i talk to a customer they say oh by the way what's good you know what's going on there you know that kind of thing and uh or somebody asked me as part of the long conversation and all of a sudden they said uh should i be concerned about this i said nope nope you have nothing to be concerned about we stand behind everything we do and build and deliver it and So not much really coming from, and the sales floor hasn't fed back to me about this being a roadblock or signage source. But having said that, the longer it lingers on, the worse it's gonna get. And even though it is not a big worse, so I have no intention, because of being an operator, I got employees, partners, customers, shareholders to worry about. So we're not going to let this thing, it might take a long time, multiple steps, but there will be some decision made.

That's helpful. Thanks, John.

Sure.

Thank you. I would like to turn the call back over to John Chen, Executive Chair and CEO of BlackBerry for closing remarks.

Okay. Thank you. Thank you, Operator. Before we end today's call, I'd like to remind everyone of an upcoming BlackBerry Summit on October 17 at the Conrad Hotel in New York downtown. The event, anchored around the theme of trust, has been expanded this year to include IoT, and we have a strong line of keynotes as well as product demos and breakout sessions. You can register to attend at blackberry.com slash summit. Stay tuned for more announcements around the event I thank everybody again for joining the call. I look forward to speaking with you very soon. Thank you.

And thank you, sir. This concludes today's call. Thank you for your participation. You may now disconnect.