BlackBerry Limited

Good afternoon and welcome to the BlackBerry third quarter fiscal year 2025 results conference call. My name is Alicia and I'll be your conference moderator for today's call. During the presentation, all the 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 Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead.

Thank you Alicia. Good afternoon everyone and welcome to BlackBerry's third quarter fiscal year 2025 earnings conference call. Joining me on today's call is BlackBerry's Chief Executive Officer John Giammatteo and Chief Financial Officer Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim 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 blackberry.com website. Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the safe harbor provisions of applicable U.S. 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. as well as risks associated with our ability to consummate the sale of the Cylance business on the timeline anticipated or at all. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today. 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 Tim will reference non-GAAP numbers in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings price release published earlier today, which is available on the EDGAR, Cedar Plus, and BlackBerry.com websites. Additionally, given that we've entered into a definitive agreement for the sale of Silance, in accordance with GAAP accounting rules, Silance's results will now be shown as a discontinued operation and its assets and liabilities as held for sale. Therefore, when referencing results for the cybersecurity division and BlackBerry in total, John and Tim will be referring to the results of both continuing and discontinued operations. We believe that this will be helpful to investors, especially given that the silence agreement was entered into after the end of the quarter. And with that, let me now turn the call over to John.

Thanks, Martha. And thanks to everyone for joining today's call. This past quarter marked a significant inflection point for BlackBerry. We delivered solid top line performance for our IoT and cybersecurity divisions, both of which exceeded the top end of our guidance ranges. This strong top line and continued focus on cost control and efficiency has enabled the company to pivot back to profitability recording both positive EBITDA and EPS in the quarter. BlackBerry was able to convert this profitability into a return to positive operating and free cash flow generation for the first time since Q3 of fiscal year 2022, when controlling for the impact of the Maliki sale last fiscal Q1. That means this is the first time in 12 quarters that BlackBerry has generated both positive operating and free cash flow. In fact, excluding the Maliki transaction, year to date for Q1 to Q3, operating cash flow is $136 million better this year than last. This strong performance illustrates just how far we've come as a company in the past year. In addition, as we announced earlier this week, we've signed a definitive agreement with Arctic Wolf for the sale of Cylance. This deal, which is subject to closing conditions, will quickly address the challenges of the Cylance financial profile and simultaneously further strengthen our balance sheet. This is a transformational move for BlackBerry that aligns with our clear strategic direction we outlined at our recent investor day and places the company on a strong trajectory going forward. So let me begin by reviewing what was another good quarter for our IoT division. IOT overcame the ongoing difficult backdrop in the automotive space to deliver revenue of 62 million above the top end of our guidance range. This represents 13% year over year and sequential growth. The strength this past quarter was predominantly driven by both royalties and development seat licenses. Automotive was the strongest performer, led by revenue from both the digital cockpit and advanced driver assistance systems, or ADAS. In terms of design wins, the two largest this past quarter were with leading automakers. The first was with a German luxury automaker for the QNX hypervisor to form the foundation of a digital cockpit software stack on a next generation chipset that will be used across a full range of vehicles. The second was with one of Asia's largest auto OEMs for the QNX operating system to be deployed in the ADAS domain. We continue to see strong traction for our next generation version of QNX operating system, SDP 8.0. Despite having only been launched earlier this year, prior to Q3, we had already secured a number of exciting partnerships and design wins. At Investor Day in October, we announced that more than 10 leading silicon vendors have already committed to supporting SDP-8. The momentum is absolutely building. This past quarter, we secured one of our largest ever gem wins with one of the leading industrial automation OEMs who elected to upgrade from version 7 to version 8. This design is for a high-performance OS to be used in a number of industrial use cases. The data point illustrates the significant market opportunity that we have in verticals outside of automotive. In fact, we made significant progress across medical, industrial, and rail verticals This past quarter in rail, we secured a number of net new logos, including universal signaling and progress rail. We are also pleased with the customer reception of our QNX cabin offering. As a reminder, this is a platform that allows for QNX development in the cloud and the creation of a digital twin of a vehicle's digital cockpit. In the quarter, we made a huge step forward by securing an order for this subscription-based product from a major Japanese OEM. They will start by developing their next generation cockpit with a cloud-first approach to drive down time to market, as well as achieve scale and cost efficiency. In addition, we are continuing discussions with a number of other leading auto OEMs. I'm very proud of the results for IoT. The solid growth in the face of a challenging backdrop reflects QNX's strong position in the markets we address. Let me now move over to our cybersecurity division. This was a really good quarter for cyber as well. We delivered revenue of $93 million, exceeding the top end of our guidance range we provided last quarter. Cyber achieved 7% sequential revenue growth when including Cylance, or 10% for the secure communications division that is UEM, Ad Hoc, and SecuSmart collectively. On a year-over-year basis, the division had a tough compare due to significant revenue relating to the large multi-year deal with the Malaysian government that we secured this time last year. Within the secure communications division, UEM endpoint management had a solid quarter recording both sequential and year over year growth. We secured a number of wins this past quarter within our core government sector and also large deals with financial services. These included renewals and expansions with leading global banks, including German bank KFW. Other deals included the Scottish Police, Johns Hopkins University, and the Dutch Water Ministry. Ad hoc also had a solid quarter. It continued to demonstrate its strong position in the US federal government by securing a significant renewal and expansion with the Department of Homeland Security. Other wins included the U.S. Department of Justice. We're further strengthening Ad Hoc's competitive position with a number of new product enhancements, including new alert approval workflows and native Android and iOS applications. Moving over to SecuSmart, we've been pleased with our ability to grow outside of Germany, where we leverage our software-based version of the product. However, Q3's solid performance was largely driven by some strong renewals within the German market, where we have strong relationships with a number of government agencies. The annual recurring revenue or ARR metric for cybersecurity, including Cylance, remained largely stable, recording a small sequential increase and a 3% increase on a year-over-year basis to $281 million. For secure communications, that is excluding Cylance, the increase was even more pronounced, where ARR increased by 3% sequentially and 8% year-over-year to $215 million. The dollar-based net retention rate, or DBNRR, for cybersecurity continued to improve, increasing by two percentage points sequentially and eight percentage points year-over-year to 90%. Similar to ARR, DBNRR for secure communications division is much stronger. The dollar-based net retention rate for this past quarter was 95%. So in summary, this was a really solid quarter for the cybersecurity division where we beat expectations. As we head towards the close of the silence deal with Arctic Wolf, we are focusing our attention on the operational strategy for our secure communications business and maximizing the growth engines within it. Turning now briefly to IP licensing. Revenue came in slightly better than guidance at $7 million, which drove a sequential improvement in gross margin to 71%. This revenue continues to relate largely to legacy deals that predate the sale of our non-core portion of the portfolio to Maliki. So bringing this all together, this past quarter, BlackBerry delivered revenue of $162 million, exceeding the upper end of the previously provided guidance range. Total company gross margins improved both sequentially and year over year to 74%. With that, let me now turn the call over to our CFO, Tim, who will provide further details on our financials.

Thank you, John, and good afternoon, everyone. As usual, the numbers I'll reference will be non-GAAP. At our investor day in October, we delivered on our commitment to provide profitability by division. And I'm happy to report that the IoT division delivered $18 million of EBITDA, representing 38% sequential growth. Given the strong top-line performance that John mentioned earlier, gross margins expanded from the prior quarter to 85%. Cybersecurity, including both Secure Communications and Cylance, delivered positive EBITDA of 8 million, which was a 14 million sequential improvement. Excluding Cylance, EBITDA for the Secure Communications division was 22 million, meaning a strong 30% EBITDA margin. Gross margins for cybersecurity improved by 12 percentage points versus the prior quarter to 67%, primarily due to a strong mix of SecuSmart software licenses. And for secure communications, gross margins were 73%. Finally, our licensing division delivered stronger than expected revenue at 7 million, which drove a solid 6 million of EBITDA. The new management team maintains a close focus on cost control and operating expenses this quarter remained broadly in line with Q2 at 101 million and significantly below the 130 million baseline for OPEX that we provided as a reference point prior to cost streamlining over the past year. Given the strong top line and tight cost control, BlackBerry has delivered solid profitability this quarter with positive adjusted EBITDA above the top end of our guidance range at $23 million. Adjusted net income for Q3 was $12 million, and non-GAAP EPS beat expectations at plus 2 cents. In addition to a return to profitability, BlackBerry achieved both positive operating and free cash flow of plus 3 million. This was one quarter ahead of schedule and represents a year-over-year operating cash flow improvement of 34 million when compared to the third fiscal quarter of the prior year. Turning now to financial outlook for the fourth fiscal quarter. Giving the pending closure of the sale of Cylance to Arctic Wolf and reporting Cylance as a discontinued operation, we are standing down all previously provided guidance relating to the cybersecurity division and with it, guidance for the full company. Instead, we'll provide guidance only for the new Secure Communications Division and then only for the current fourth fiscal quarter and we'll provide revised guidance for fiscal year 26 for both our Secure Communications Division and Total BlackBerry during our Q4 earnings. We expect revenue for the Secure Comms division to be in the range of 62 to 66 million in the fourth quarter. We also expect EBITDA for Secure Comms to be in the range of positive four to positive six million. For IoT, we expect revenue this quarter to be in the range of 60 to 65 million. which means once again, we are raising the bottom end of our full year guidance range for IoT revenue, such that the range is now 230 to 235 million. For IoT, we expect EBITDA for Q4 to be in the range of 8 to 10 million. We continue to expect revenue for our licensing business to be approximately 4 million for the fourth fiscal quarter, and for EBITDA to be approximately 3 million. At a total company level, we expect adjusted EBITDA from continuing operations for Q4 to be in the range of positive 10 to positive 20 million, meaning we expect BlackBerry on a continuing basis, that is excluding Cylance, to generate between 60 and 70 million of EBITDA this fiscal year. This is a significant shift in the profitability of this company. For non-GAAP EPS, which will include discontinued operations, we expect it to be between minus one cent to plus one cent in the fourth quarter. Finally, we expect a further sequential improvement in operating cash flow for Q4. And with that, let me now turn the call back to John.

Thanks for the summary, Tim. Now, before we move to Q&A, let me quickly summarize the key takeaways for this past quarter. Q3, as I said before, was an inflection point for BlackBerry. The announced sale of Cylance to Arctic Wolf will provide a true win-win for stakeholders, including providing BlackBerry with a rapid path to increasing profitability and cash flow generation. Even including Cylance, this past quarter, BlackBerry achieved profitability and positive cash flow ahead of expectations. This was powered in part by revenue for both IoT and the cybersecurity division, exceeding the top end of our guidance range. Standing back from this, we see that this past quarter, all three engines were profitable. Cyber generated $8 million of EBITDA and excluding Cylance, secure communications generated $22 million. IoT generated $18 million and our licensing business contributed a further $6 million. I'm excited about the tremendous progress that we've made the past year here at BlackBerry and about the path that we've charted ahead. So now why don't we move to Q&A and Alicia, maybe you can open up the lines.

Of course. We will now begin the question and answer session. To ask a question, please press star one at this time. We will 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. One moment, please. Our first question comes from the line of Todd Copeland with CIBC. Please proceed.

Oh, great. Good evening, everyone. Appreciate the additional disclosure. I was wondering if you could, this is a small adjustment question. The EBITDA by segment and for the guide, is that X corporate costs? That'd be the first question. And then my follow-up is just give us a bridge to what is very strong segmented EBITDA in Q3, and then the sequential step down on EBITDA with more or less flat revenue sequentially. Just talk us through that. Thanks a lot.

Yes, hi Todd. Always nice to hear from you. So the first part of the question, well, take the second part. So the second part is really a function of mix. Mix is the main driver there. So as I mentioned in my prepared remarks, This was a strong quarter for licensing revenue for the SecuSmart business, which is very strong margin. In Q4, we see that mix shifting more towards some of the hardware components, which is just a lower margin. On the QNX side, we had some strong royalties this time round. Next time we see that being a little bit more of a regular mix, you know, that from quarter to quarter, there can be some shifts, particularly around development seat licenses, where that goes up and down. And finally, on the QNX side, we're continuing to invest. So one of the things we said at our invest today was that pending this transaction, which we've managed to achieve much quicker potentially than some might have expected, we would focus our attention on the growth opportunities that we have for the Q and X business. So we're, we're actively increasing head count and expense in R and D and sales and marketing functions on, on that side.

And, oh, sorry.

No, please go ahead.

Well, I was just going to say, if you could just clean up is, is, these segmented results, you know, at the, at the analyst day you gave pre pre-corporate overhead EBITDA is this, is this a pre or post-corporate overhead? Thanks a lot.

Yeah. So when we, when we look at the segments, uh, the three segments of IOT, secure comms and licensing, then you also have corporate, um, you can find that in the, in the reconciliation, I think it was around about 9 million this quarter, but it doesn't show as a standalone segment. That's really just an accounting thing. So you need to add that in to the other components to get to the total for the company. Does that make sense?

That does. Thanks a lot.

Of course.

Thank you. Our next question comes from the line of Luke Junk with Baird. Please proceed.

Great, thanks for taking the questions. John, maybe if I could start just with a higher level question and your preliminary thinking just with priorities, assuming the sidelines deal closes, what you're going to do with that consideration, just allocation between strengthening the balance sheet and investing back into the business, maybe leaning into some of the things that Tim mentioned relative to QNX especially. Thank you.

Yeah, no, go ahead. Luke, it's great to get this kind of question again, because I guess this time last year we were in a little bit of a different position. So being able to talk about, you know, where we would utilize or deploy some of this capital, that's something that's definitely on our minds. As you mentioned, you know, first things first, let's get this thing to closing. We think there's a really good strong path there. The The relationship and the dynamics with Arctic Wolf has been excellent. So we're going to work diligently to kind of get to the finish line on the closing of that. And then from there, you know, we'll take a look at all the different options, as you've mentioned, like strengthening the balance sheet is something that, you know, from a conservative perspective, we love to do, but at the same time, deploying capital to drive growth to drive more earnings, to drive more shareholder value. We're gonna be exploring those kinds of opportunities as well. Most likely short term, I would say, kind of organically, through, as Tim mentioned, we still think there's tremendous growth opportunities in IoT. We're gonna make sure that we're placing the right bets to drive and propel that business forward. At some point, I would say more longer term, For sure. I think we take a look at things like, you know, a little, you know, small tuck in M&A that gives us better scale in the IoT space. And finally, you know, I think there's always a consideration that we have to have with the board on, you know, When we look at the stock price where it is today is buybacks a good utilization of some of that capital. So those are the things that once we get the Arctic Wolf transaction over the line that's on our mind right now and as we come to some more firmer decisions, both me and Tim in consultation with our board will certainly be disclosing and communicating with all of you.

Thanks for that, John. That was really helpful. Maybe for my follow-up, just for Tim, you mentioned in the remarks that strength was predominantly driven in QNX by royalties this quarter in terms of the margin flow-through, but also some seat license in there. Can you just level set us on where mix in QNX is across the major revenue streams kind of on a run rate basis right now? and maybe give us some high-level thoughts as to the moving parts into fiscal 26. Thank you.

Yeah, great question. So I think I've given you that kind of shorthand cheat sheet answer of 20% dev, 20% services, and 60% royalties. You know, that mix shifts around from quarter to quarter, particularly with the dev seat piece being the main wildcard. And as we've discussed before, You know, there's been some challenges in terms of getting design programs up and running at OEM. So as things kind of come back in and go back out, there can be some up and down. I'd say generally speaking, overall, we're still kind of tracking broadly to where we've mentioned in the long run. But yeah, just from quarter to quarter can be a little bit flexible. Going into the new year, you know, we're hopeful. I mean, it's still a challenging backdrop out there, but you know, OEMs do have to get their arms around, um, some of these challenges eventually. And when it does, we, we hope to see an uptick in, in the dev seat revenue, which has been a bit challenged this fiscal year, but then ultimately we will start to see some of these richer designs that we've been winning over the last few years, come into the number and come out of our backlog. So, um, I think we're in a good place going forward, but right now, obviously, there's still some challenges.

Got it. I'll leave it there. Thank you.

Thanks, Luke.

Thank you. Our next question comes from the line of Kingsley Crane with Canaccord Genuity. Please proceed.

Hey, thanks for taking the question. 95% DBNR for secure comms. Can you talk about how you felt that segment performed in the quarter now that that's an independent segment, like how that DBNR trended and then, you know, where we should expect it's going to move forward?

Thanks. Yeah, good question, Kingsley. It's... We're really pleased to see it move in that direction. As I'm sure you know, it's been a number that we've been working really hard at to try to stabilize, and now it's nice to see it generate some growth out of it. Across the board, I would say all the products within SecureCom pretty much contributed, mostly It was a strong, very resilient UEM quarter with some nice government renewals, a couple of big banks not only renewed but added some licenses. So I think that was helpful in this particular quarter. The ad hoc business tends to run pretty well. I would say that they're probably our best in class, strongest renewal rates, ARR, DBNRR. So, you know, I think, you know, we're always trying to target that between 95 and, you know, ambitiously or aspirationally, how do we get it to 100 plus, but there can be, you know, some fluctuations quarter to quarter you know this is um so i wouldn't wouldn't be that surprised if we did have one quarter it drop a couple of points and and in another quarter maybe it goes up um you know a couple of points closer to a hundred so a little bit of volatility in there but i think it's what you'll find is it's going to be much more stable than it was with the Silance, without the Silance business, because that drove a lot of volatility. And I think you'll probably see a much stronger performance around that going forward.

Thanks, Sean. That's really helpful. And then for Ad Hoc, that's in process for achieving FedRAMP high. I'm curious, do you think that's going to be a meaningful unlock? And then how do you think about the timing of that being finished for potentially the next fiscal 3Q?

Yeah, my guess is, to be honest, the heavy lifting is done at this point. We've done a lot of the, you know, all the configurations, the product and the networking investments. It's a big documentation component associated with FedRAMP. So a lot of that heavy. Now it's a matter of filing, going through the government's process, getting them, you know, to give us their kind of their checkmark. Uh, I'd love for it to, uh, be, um, by the end of, of, of Q4, but if I had to guess, it's probably something that'll linger on, especially right now with all the, you know, things that are going on with the government, um, things are deemed to be a little moving a little bit more slowly, but I do think it's gonna, it'll open up some opportunities, but I think even more so it's going to really strengthen our existing position because it, it will lock out a lot of competitors because to get to this level, you got to have a lot of staying power, a lot of investment, a lot of process. And I think that's really going to secure our existing footprint. And I think opportunistically open up some new ones.

That's helpful. Thank you.

Thank you. Our next question comes from the line of Paul Treiber with RBC Capital Markets. Please proceed.

Yeah, thanks very much and good afternoon. A question on the SecureCom's ARR growth in the quarter. I think I heard up 8%. It sounds like a good number. How has that been tracking over the last several quarters and has there been variability in that number from quarter to quarter?

Yeah, I'll take that one. So it's been tracking up in actual fact. So obviously we've been pleased that cyber has been largely stable, but if you take X, silence, actually the trend line is up. Occasionally it goes down one or two, but it's been trending up.

That's helpful. And the follow-up is, Just in regards to Q4 guidance for secure comms, how do we think about what it implies for the year-over-year growth in Q4? I mean, we see sequentially, but you do have that tough comp in Q3. Just trying to understand the year-over-year growth in that business. Yeah, so...

I think it's going to be a little bit down because of the Q3 compare, because we obviously had a significant amount of revenue relating to the Malaysia deal in Q3, particularly on the SecuSmart side of the house. But if you control for that, I think this is a fairly stable business year on year. Certainly it's a lot more stable than it was as the cybersecurity division. Ultimately, as we've kind of, pointed out at Invest Today, we see this as a stable business that's generating a decent profit margin. This quarter, obviously there was a couple of things in there that helped, but it was 30% EBITDA margin this quarter. So we see the QNX side of the house as being really the growth engine for BlackBerry. There are opportunities in secure comms, particularly the AppTalk and SecuSmart business, but We don't see this as a huge grower. It's more stable. John, anything you want to add to that?

I think that's right. I think it's more of a stability type. But one thing I would say relates to ARR on secure comms. We are increasingly, when we introduced the software-only product of ARR, of SecuSmart that now the business model with that is more of a subscription based. So, and which, which will drive a, I think it'll, you know, historically it was more perpetual. We sold it with a device. It was a very complex, you know, so we'd have these, these big lumpy swings because we were a device. I think over time, as we adopt more, and migrate more of our customers over to the software version as we grow our business outside of Germany, which historically has been a more hardware centric type of customer. We think that's a good kind of trajectory for us to stabilize and even grow that on a going forward basis. We'll update you on that as we go forward, but that's a fairly new phenomenon as we introduce the software version of SecuSmart and that providing some more ARR stability.

Thanks for the color there. I'll pass the line.

Thank you. Our next question comes from the line of Daniel Chan with TD Cowan. Please proceed.

Thanks. Hi, good afternoon. You mentioned that IoT strength this quarter was partly driven by higher royalties. How do we reconcile the royalty strength relative to the weak macro backdrop?

Yeah, maybe I'll start on this one, John, and feel free to chime in. I mean, ultimately, the narrative that we have for the growth in QNX is it's not really dependent on the SAR, the number of vehicles produced, as much as it is content per vehicle. So directionally, we don't necessarily need to see a growing SAR in order for QNX to grow. So directionally, there's a content piece that comes into that, Dan.

That's helpful, thanks. And then on Filance, you mentioned that you guys are keeping the tax losses there. How much tax losses do you get to keep and what's the opportunity to use those now that you're profitable?

Oh, it's significant. It's well into the hundreds of millions. So ultimately that provides a significant shelter for profits that we hope to make in our U.S. businesses. So For us, we see significant value to that. So we're really pleased that we continue to maintain those losses. Great. Thank you.

Thank you. I would now like to turn the call back over to John Giammatteo, CEO of BlackBerry, for closing remarks.

Very good. Thanks, Alicia. So before we end today's call, I'd just like to let everybody know that our BlackBerry QNX team will be participating at CES in Las Vegas from Tuesday, January 7th to Friday, January 10th at booth 4224 in the West Hall. This is always a great opportunity to catch up with the latest developments for the QNX business and see how strong we're positioned, not only within the auto industry, but also other opportunities as well. So really encourage any of you that can make it to stop by the booth and visit us down in Vegas in January. And with that, why don't I conclude by just thanking everybody for joining today. We hope you all have a great holiday season and look forward to talking to you next time. Bye for now.

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