BLACKBERRY Ltd (BB) Q1 2023 Earnings Call Transcript

Good afternoon and welcome to 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. 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 Rai. 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 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 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 a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, SEDAR, and blackberry.com websites. And with that, I will 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, 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 well, delivering solid year-over-year revenue growth. Total Software and Services revenue was $164 million, representing a 9% year-over-year increase. 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 represents 19% year-over-year growth. Gross margin came in at 84%. IoT ARR was $94 million, increasing 9% year-over-year. We recorded strong revenue from preproduction 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 designs enter into production. Our strength in securing new design wins has 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 QNX Software embedded has increased year-over-year from over $195 million to over $215 million. I am pleased with the strength of our design wins, which once again allow us to overcome the impact of the headwind that the auto industry is currently facing. These headwinds 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 signs 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 the 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 ADAS, advanced driver assistance systems, and Digital Cockpits, both fast-growing safety-critical domains. In fact, Strategy Analytics, a leading independent auto analyst, estimates a 3-year CAGR for the ADAS market to be 29% and Digital Cockpit to be 40%. And within those domains, we plan to grow even faster than that as we continue to win market share. In the quarter, we had a number of large design wins in Digital Cockpit. In addition to wins with leading Tier 1 Bosch and Visteon, we secured a win with a global automaker based in North America, as well as BICV, a leading Chinese Tier 1 for an augmented reality, AI, and hologram-enabled Digital Cockpit to be deployed in Renault-Jiangling’s latest fully electric sedan. That’s quite a bit of technology. Furthermore, despite lockdown challenges, we were 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 TÜV Rheinland to the highest level of safety for medical device software. We continue to make progress with medical design wins. A good example in the quarter was for a dialysis machine with a major technology customer based in India. Let me now provide you with an update on the progress we are making with IVY. As previously mentioned, we have received more proof-of-concept or POC trial requests than we could 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 at the right time. In the quarter, we commenced a number of POCs, which include leading global automakers and Tier 1s. 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 are also progressing well with developers’ tools. Overall, we continue to be excited by the potential opportunity for IVY 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 million, a 6% growth year-over-year. Building on a total contract value basis, it was $89 million, a 16% year-over-year increase. Gross margin was 53%, ARR was $334 million, and the dollar-based net retention rate was 88%. This number, of course, does not include new logo wins nor certain perpetual license wins 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 new direct quarter-carrying headcount. We are pleased with how these additions to the team are ramping up. It will take a few quarters for them to reach full productivity. During the past quarter, we also expanded our channel presence. We added Midis Group, a partner with over 5,000 employees and a presence in over 70 countries across the Middle East, Europe, and Africa. This significantly expands our reach in those markets. Midis brings a lot of experience in cyber, having been distributed with McAfee, Symantec, and Trend Micro, which also made a number of enhancements to our managed security service provider (MSSP) program. As growth in our Guard MDR solution has shown, there is a very large demand for managed services in cybersecurity, and MSSP allows 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 vendor market remains a very large opportunity for BlackBerry, and we have been running several targeted campaigns. In particular, this quarter, we saw a number of customers move from Kaspersky to CylancePROTECT. CylancePROTECT 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 with a major U.S.-based medical industry customer, with deployments of tens of thousands of endpoints in a direct head-to-head competition against cloud strength. The customers chose BlackBerry because they were impressed by the effectiveness of our product, especially against the Log4j and Coveris, as well as our high level of customer service. Our cyber products received further external validation in the recent minor attack evaluations. Our cyber suite of solutions was 100% successful in preventing both a Wizard Spider and Sandworm attack very early in each scenario and critically before any damages occurred. Let me now provide an update for UEM. This quarter, we secured renewal with some of our largest customers, including the U.S. Air Force, U.S. Navy, U.S. Special Ops Command, the Canadian Senate, the Supreme Court of Canada, and the Royal Canadian Mint. We booked a great amount of business with law enforcement agencies in the quarter, such as with the UK 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 licenses and deploy additional products to these customers. In addition to government, we secured renewals and upsells with a number of leading financial services customers, including leading banks MUFG, Mizuho, and Sumitomo Mitsui Banking Corporation, three of Japan’s four largest banks; Switzerland’s Julius Baer Group; First Citizens 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 enterprises running Chrome OS and Chrome browser, support that Microsoft Intune does not offer. According to IDC, Chrome OS recently overtook macOS 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 a leader in UEM for the third year in a row. Among other items, they highlighted a wide range of government and industrial security and compliance certifications that BlackBerry UEM hosts. These certifications help BlackBerry maintain a strong position in core regulated markets. Now a brief word about licensing. In the quarter, licensing revenue was $4 million, and gross margin was 50%. Earlier this month, we issued 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 for 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 debentures. This quarter, the non-GAAP operating loss was $27 million and the non-GAAP net loss was $31 million. The GAAP basic loss per share of $0.31 was primarily driven by the one-time impact of the litigation settlement. Non-GAAP loss per share was $0.05 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 remains 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 the use of cash due to the payment of annual bonuses and other annual items. 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 is no change from our previous guidance. We continue to expect through fiscal year ‘23, 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 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 12. For those who were able to join, we provided a 3 and 5-year revenue target for BlackBerry. We expect the total company revenue, excluding IVY, to grow with a 5-year CAGR of approximately 13%, with revenue of $886 million in FY ‘25 and $1.2 billion in FY ‘27. Breaking this down by business unit, while the IoT TAM is expected to grow in the range of 8% to 12% over the next 3 years, we expect to grow IoT revenue at a 5-year CAGR of approximately 20%. This is double the industry growth rate. This faster than market growth rate is primarily driven by 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 FY ‘25 to be approximately $307 million and approximately $443 million in FY ‘27. This model is still partially built on the multiyear 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 conditions, our technology portfolio, and the road map, we expect revenue to grow with a 5-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 FY ‘25 and $770 million in FY ‘27. We expect operating leverage for the business, expanding gross margins by over 100 basis points per year on average, and trending towards our 20% operating margin by FY ‘27. 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 FY ‘24, and becoming EPS and cash flow positive from FY ‘25 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 units; two, we set another quarterly 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 billings growth and continued 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 remarks. Brent, can you please open the line for Q&A?

Your first question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open.

Thanks so much and good afternoon. John, first question, can you connect the dots between the decline in ARR versus the very healthy billings growth in the quarter? And more specifically, was there any contribution from perpetual licenses like SecuSUITE in the quarter?

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

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

I believe for the 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 on standby and ready. So my first priority is to secure a buyer. There have been other people that have approached, but I still believe that Catapult will get it done.

Okay. Great. That’s helpful. I will pass it on.

Your next question is from the line of Trip Chowdhry with Global Equity. Your line is open.

Hey Trip. Trip, how are you?

Wonderful. Always exciting to hear about IVY. Two things – 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 the 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; does that free up chips? I am not good enough to answer your question there, Trip. I am not a big crypto fan. I understand. 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 am sure there is some relationship with the chip shortages issue. So, sorry, I can’t answer that question.

Second question I had is regarding the IVY platform, and you are getting insurance – auto insurers on top of it. I was wondering what kind of use cases you can think about that can evolve over a period of time? That’s all from me.

That’s a very good question. So we have, in our partnership, at least one if not two organizations specialized in this area—specifically in the insurance area. The big thing about the insurance area with auto is a pay-as-you-go kind of a usage-based insurance model. And then the other one is a redefinition of how insurance is calculated, which is particularly more meaningful in the fleet management side of the equation. Other use cases—there are a lot of use cases in IVY, or IVY could host a lot of use cases. Of course, we told you about battery management. The whole area of predictive maintenance is huge, and every OEM will want to get their hands around the data around the actions that could generate, whether it’s physically or via over-the-air updates. We are seeing a lot of interest in many different use cases in auto, and there is also a lot of financial technology around it. This is an exciting time for IVY.

Thank you very much. All the best.

Thank you, Trip.

Your next question comes from the line of Todd Coupland with CIBC. Your line is open.

Hey Todd. Todd, how are you?

How are you there, John? Good evening. Thank you. I had a couple of questions. First on IoT. You talked about how you are seeing the supply chain ease. Could you just talk about what you are seeing that’s changed since you gave the last update?

Yes. On the supply chain side, the OEMs around the world finally have a good strategy. Each of them has their own strategy, but I see it more suited to high-end cars being built—they are able to manage their supply chain issues and build and release cars that hold more value to them. High-end cars are constantly in demand, particularly given today’s environment with gas prices and environmental considerations. The good thing about us is QNX is typically embedded in the high-end cars more so than the lower-end models. In addition, we have a strong footprint—24 of the top 25 production volume producers are users of QNX in the EV world. As sales volume goes up, although it’s still a small percentage of total vehicles sold—around 12% right now—we are seeing the volume uptick. So, it’s a good trend for us.

But it’s not material enough to move the IoT guide for the year.

No, because there is a headwind. We had a delay on some of the stuff when China had a lockdown because of COVID. As you all read, the uptick in interest rates is causing a little bit of demand slowdown for new vehicle purchases. Those are all factors we still need to confront. Our strategy sees a strong design win rate. We are winning a lot of new design wins, which typically come with licenses, developer licenses, and some professional services revenue. We are strong enough in those areas to cover the shortfall in production or slowdown in production if there is any. So, we believe our guidance is still good, and I hope I am wrong on the conservative side. But I think our guidance remains solid, even with a little mix shift.

Okay. That’s helpful. And then my second question had to do with the cyber business. You talked about modest churn in SMBs. You mentioned that for a couple of quarters. I was wondering if we are starting to see an enterprise staff being given options for BlackBerry UEM versus a competitor. Are you seeing that in other enterprises, and does that give you some concerns that the churn might bleed into larger businesses? Just talk about that trend. Thanks a lot.

Yes. Currently, we haven’t seen that. It’s important that we continue working on our products and partnerships, which I talked about. So far, the UEM churn is usually in the non-regulated space and is primarily in more small, medium enterprises. For the very large ones, we have continuous renewals, particularly in the government sector. So, no, I haven’t seen that as a major trend at all. Even banks have been okay thus far, knock on wood.

Your next question comes from the line of Daniel Chan with TD Securities. Your line is open.

Hi. 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 a recovery of production volumes, extension of some programs, or higher ASP? Just any color on that would be helpful.

Yes. It’s the result of the design wins we have been telling you about every quarter. We have a strict guideline and formula on what gets counted, and we are very conservative on that. The increase results from what the OEM told us to expect in future years on the total program. Sometimes we do a discount on it, and sometimes we take it as is. It was an accumulation of those offsets, obviously, against the runoff, which is the royalty we received in the last 12 months, and that results in the 14% increase.

Okay. That’s helpful. Thank you for that. I wanted to ask about the patent sale. You said you would explore options as they come in. I just want to know whether you are actively looking for other options? Are you going back to other bids you had in your initial process, or are you starting from the beginning again?

No, not at all. In fact, we are being approached by others. I am not actively looking or starting from square one. As I said, I want to make sure that the shareholder knows that we are not just stuck with one option, but we expect to see the previously announced deal with Catapult happen. What we’re basically saying is we’ve been getting calls, and we are now responding to those calls since the exclusivity has expired.

Great. Thanks a lot.

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, Brent. Thank you, everybody, for joining us. I realize it’s late back east and I look forward to speaking with you all again soon. Have a good day—have a good evening.

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