Good afternoon, and welcome to the BlackBerry Third Quarter Fiscal Year 2023 Results Conference Call. My name is Matt, 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. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Mr. Tim Foote, Vice President of BlackBerry Investor Relations. Please go ahead.

Thank you, Matt. Good afternoon, and welcome to BlackBerry's third 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'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. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions, and expected future developments as well as other factors that the Company believes are relevant. Many factors could cause the Company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the Company's annual filings and MD&A. You should not place undue reliance on the Company's forward-looking statements. Any forward-looking statements are made only as of today, and the Company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary during the call, John and Steve will reference non-GAAP numbers in our 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 website. And with that, I'll turn the call over to John.

Thanks, Tim. Good afternoon, everyone. And thanks for joining the call today. This was a quarter where BlackBerry made good progress based on leading indicators for both the IoT and the cyber businesses. BlackBerry beat expectations for both total company revenue and earnings per share. On the IoT side, we saw the business performing very strongly, setting yet another record for design-phase revenues. The strategic decision made over five years ago to position QNX as the trusted foundation for high-performance edge compute, especially in auto, is really bearing fruit. On the cyber side, in line with what we said last quarter, we saw an improvement in the level of churn that we experienced recently. The investment being made in product and go-to-market continued to drive sequential billings growth in our cyber business. Let me start my review with the IoT business unit. As mentioned, there was another strong quarter. Revenue was $51 million, a 19% year-over-year increase; gross margin was 80%; preproduction revenue, that is revenue for development seats and professional services, set another record. This strength is being driven by significant new design wins. In fact, the first six months of this fiscal year, BlackBerry added more new royalty backlog than in any prior 12 months period. And that momentum continued this past quarter with wins in a number of verticals, but particularly into safety-critical auto ADAS, advanced driver assist, and digital cockpit domain where we are significantly gaining market share. The largest win in the quarter includes a win with Aptiv to use the QNX hypervisor and RTOS to power a digital cockpit for a European OEM. Other auto wins include design with Daimler Truck, an instrument cluster design win with Tier 1 supplier Marelli for a leading Japanese automaker and a design with a leading Chinese Tier 1 supplier for an ADAS driver assist module. In the quarter, we secured a total of 24 new design wins, with 9 in auto and 15 in the general embedded market, or GEM. In GEM, we secured design wins with medical, industrial, as well as defense and aerospace. Among the use cases was an autopilot flight control system, a naval combat system, and retinal surgery robotics to name just a few. Looking forward, we continue to see a very strong pipeline of upcoming new designs. We believe that we're in a strong position to convert this opportunity into wins given our recent success rate, a very strong reputation in the market and, of course, the strength of our technology. The industry-wide macro backdrop for auto remains mixed. We see strength in China and India, both significant markets for QNX. On the flip side, we see some tightening in North America and Europe, primarily due to ongoing supply chain and some demand challenges. However, it is important to give you some context. While production volume is an important factor in QNX total revenue, the auto industry's significant shift to the software-defined vehicle and the development program that drives this has enabled us to deliver double-digit revenue growth. This quarter we made a major product announcement for QNX in the cloud. At the Amazon re:Invent conference, AWS announced that QNX will be made available to system supply developers via their cloud-native virtual engineering workbench. Being able to assess QNX in a cloud greatly reduces the time to market for developers and provides significant additional market reach for BlackBerry. QNX will be accessible by AWS’ large and growing community of over 1 million developers across multiple verticals, not just auto. We have very positive feedback from both this demonstration and early access product made available to selected OEMs and Tier 1s. We expect to provide more details on the general availability at CES. Moving now to new and exciting use cases for our Certicom technology. In the quarter, we delivered an electric vehicle charging station PKI, public key infrastructure solution, for a leading North America automotive OEM. The solution enables the vehicle and EV charging stations to identify and establish trusted connectivity as well as allowing OEM to meet the new international standard for secure vehicle-to-grid interfaces. This capability opens a significant opportunity for BlackBerry to secure critical smart city infrastructure in the future. Given the strength of the IoT business going into Q4, we expect revenue to come in at the high end of the range we provided previously. We are, therefore, now expecting our full year revenue outlook to be in the range of $205 million to $210 million, which translates to 15% to 18% year-on-year growth. Let me now move to IVY. Proof-of-concept trials with customers continue to progress well. Product development also remains on track with the latest version released last week, as planned. We had some significant product demonstration of IVY this past quarter. Last month, at the Bosch Connected World in Berlin, the IVY platform was running in a Peugeot car and enabling predictive maintenance, in-car payments, and Amazon Alexa virtual assistant applications. IVY was also shown operating in a cloud at the AWS re:Invent conference in Las Vegas, and the development workshop held there were well attended by OEM and Tier 1s. Feedback from both events was very positive. We also added a new application from Roadside Telematics to the IVY ecosystem this quarter. Roadside Telematics is the California-based start-up aiming to use sensor data from BlackBerry IVY to provide automatic notification to 911 emergency service in the event of a crash. Let me now turn to our cybersecurity business. Revenue for the quarter was $106 million. On a sequential basis, billing increased for the second consecutive quarter to $103 million. Gross margin was 57%. ARR was $313 million. The dollar-based net retention rate was 84%. In line with our comments last quarter, we see signs that investments in product and people are starting to pay off. The rate of churn seen recently has improved this quarter with an uptick in renewal rates and with it, an improved quarter-over-quarter change in ARR. Turning now a bit to the macro environment. We've seen the same as many other software companies, including those in cybersecurity in noticing an elongation of sales cycles during the past quarters. Therefore, it is likely that the macro environment will be a headwind for the business in the near term, although we're likely to fare better than most, given our heavy skew towards regulated customers, particularly government. Furthermore, cybersecurity still remains an essential purchase. Touching briefly on the OEM market specifically. This past quarter, industry analysts noted increased adoption of UEM solutions in regulated environments. In the quarter, despite the macro challenges, we secured a great number of multiyear transactions than previously. This includes both renewals and account expansions. The customers include some of those with the highest security needs anywhere in the world, such as multiple agencies in the U.S. Department of Homeland Security, the U.S. Defense Intelligence Agency, and the National Guard. Also, the U.S. Missile Defense Agency, the pan-European missile system company, MBDA, as well as the NATO headquarters, who also approved our BlackBerry secure voice solution for official NATO communications. Also, within government, we had business with Shared Service Canada, the U.S. Department of Justice, the FBI, the U.S. Department of Treasury, as well as the U.S. Department of Energy. Outside of North America, we secured business with the Australian Federal Court, the Government of Iceland, the Government of Wales, the Scottish Police, and the German Ministry of Home Affairs. In Financial Services, we did business with Bank of China, Crédit Agricole, Blackstone Investment Management, Singapore DBS Bank, German KfW Bank, as well as the German Federal State Bank. Finally, I'll mention that we continue to win in other verticals too, with examples including Johnson & Johnson, a leading law firm Sullivan & Cromwell as well as Switzerland ABB, a leading electric equipment manufacturer. Some of you will hopefully have joined us for our Security Summit at the New York Stock Exchange in October. During the event, we announced the launch of a cyber threat intelligence subscription service that will provide customers with tailored threat briefings. This service will launch in January, and the initial response has been positive, particularly from government agencies. Turning to outlook. We expect to see improvement in both customer churn and new logo acquisitions continuing next quarter. We are not changing our outlook for cyber revenue and billings. But as previously mentioned, Q4 outlook includes some large potential government deals that the team is working hard to close. As always, with larger deals of this nature, timing can’t be predictable. However, regardless of whether we're able to close these deals in time for Q4 or if they slip into Q1, we expect to deliver sequential billings growth in the quarter. This would mean sequential billing growth for the third quarter in a row. What's more, we currently expect to see the value of billings in Q4 exceeding revenue. This is a strong leading indicator and we expect a return to ARR growth in the second half of next fiscal year. Let me now move to licensing. Revenue in the quarter came in higher than expected at $12 million. Gross margin was 67%. In the quarter, we recognized revenue related to royalties from past licensing deals, and they came in stronger than expected. Let me now turn the call over to Steve, who will provide more details on our financials.

Thank you, John. As usual, my comments on our financial performance for the third quarter will be in non-GAAP terms, unless otherwise noted. Total company revenue for the quarter was $169 million. Total company gross margin was 64%. Operating expenses for the third quarter were $137 million. These non-GAAP operating expenses exclude a $56 million fair value gain on the convertible debentures, $22 million in amortization of acquired intangibles, and $8 million in stock compensation expense. BlackBerry remains in a targeted investment mode, meaning our capital allocation strategy is for aggressive investment in our IoT business to capitalize on the strong opportunities we see in front of us there, and for strategic investments in our cybersecurity business to drive both top-line growth as well as deliver profitability. These investments are discretionary and can be eased back if required. This strategy is starting to pay off with IoT winning record levels of new designs and the trajectory of the cyber business improving. Given these investments, we continue to expect manageable EPS loss and cash usage in the near term. The GAAP operating loss for the third quarter was $2 million, and the non-GAAP operating loss was $28 million. Now, turning to the balance sheet and cash flow. Total cash, cash equivalents, and investments were $505 million at November 30, 2022. Free cash usage in the quarter before accounting for the settlement of a prior legal case was $22 million. That concludes my comments, and I'll turn the call back to John.

All right. Thank you, Steve. Before we open up the line for Q&A, let me recap the key messages. We are pleased with the progress made... sorry, because I think Steve has missed a few points in his notes. Anyway, we're pleased with the progress made by both our core business units this quarter. The IoT business unit continues to deliver a strong 19% year-over-year revenue growth, despite a macro headwind. The cybersecurity business unit trajectory is progressing with the improved level of churn and increased multiyear deals as well as new logos. And finally, a quick update on the IP patent portfolio sale. As we said before, there are two main interested parties. I'm pleased to say, tremendous progress has been made with both of them. Catapult, who you know, now has a motivated financing partners lineup and all parties are currently negotiating the final documents. The second party is a large PE firm that doesn't need external financing. They have completed their due diligence and term sheets discussions are well advanced. We obviously will keep you updated as things progress. That concludes my remarks. Matt, could you please open the line for Q&A.

And our first question will come from Luke Junk with Baird. Please go ahead.

A couple of questions related to the IoT business. First, John, can you give any additional color on the subcomponents of your auto software business in IoT? Specifically, if there's anything you'd be able to add on the preproduction parts of that business, of course, but also be interested in any commentary on royalty trends looking forward, and how that might lay out over the next few quarters or into next year in terms of launch activity that you have a line of sight to in that business. Thank you.

It didn't come across clearly. Luke?

Yes. This is Luke from Baird. Breaking down IoT revenue, you've obviously said that the preproduction piece is at record levels. Any other comments? I'm guessing around royalties.

I could tell you that typically, about 40% of our revenue comes from royalties, 40% from developers, including both seats and professionals, and the remaining 20% from services. That's our general guideline. It didn’t come across very clearly on the microphone, so I apologize for that.

Perhaps the question, Luke, if I can rephrase is, is there any color on royalties, given the strength that we've seen in design phase with preproduction base?

Well, I mean, royalty is pretty much tied to production. The industry auto productions basically were proportionately about the same, meaning that we expect, what, $85 million cost being built this year. So, it's a little probably about 10%, 15% down from previous three COVID years. So, that gives you some guideline of what the royalty is like.

I’ll just leave it there, given bad connection and take it offline. Thank you.

Our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

Just maybe a follow-up on the IoT question. Just based on some of the record levels you're seeing for the design phase of revenue and particularly in ADAS. As these cars go into production in future years, how should investors think about maybe the magnitude of royalty per car versus the current infotainment system today?

Yes, that's a good question. Our targeted average revenue per user remains $25 per car, and we are seeing substantial business from it. However, in the infotainment sector, the average is currently around $1 to $2 per car. In contrast, Advanced Driver Assistance Systems (ADAS) are generating high single digits, approximately $7 to $9. Additionally, newer features like cockpit displays, clusters, and vehicle-to-vehicle communication also have reasonable dollar amounts associated with them, especially when considering infotainment.

Thanks. That's helpful. And my follow-up question, just on the cybersecurity business and more maybe the endpoint and competitive landscape. I know there's share for Cylance to gain from like Mac and Trend Micro, but there are several next-generation competitors that are pretty price aggressive, and they're also talking about elongated deal cycles. So, could you kind of update us on what you're seeing and what's giving you that confidence to return to ARR growth in the second half of next year?

We have a comprehensive model and spreadsheets that connect the cyber business units with the finance organization. It appears that achieving ARR growth in the second half of next year is quite feasible, with stable growth anticipated in the first half. This is contingent on our current pipeline, taking into account a bit of delay and the renewal of some government contracts. One of our challenges is that we have numerous government contracts, which typically renew annually due to budget constraints. However, the positive aspect is that our government customers are consistent and their purchasing behavior is also stable.

Maybe one last question, and I'll pass the line. John, just your thoughts on the macro environment heading into next year? You guys have ample cash on the balance sheet and if you end up selling the licensing business, you should have more cash on the balance sheet. But as you look into a challenging macro, how are you guys thinking about balancing investment for growth versus preserving free cash flow?

We appreciate the questions. Currently, as Steve mentioned, we are in a careful investment phase. In the IoT sector, we are definitely focused on hiring and winning a significant number of deals, especially in the areas of ADAS, cockpit, and hypervisor technologies. We feel positive momentum and want to take advantage of it, which is why we will be bringing on more engineers and expanding our professional services and sales teams. On the cybersecurity front, John Giamatteo is focused on balancing our growth in annual recurring revenue and billings with profitability. Although we will continue to invest in this area, the pace may be slower as we consider the unpredictable macroeconomic environment. Essentially, we are looking at two different approaches: one that emphasizes growth due to existing momentum, and another that adopts a more cautious growth strategy.

Our next question will come from Todd Coupland with CIBC. Please go ahead.

Can you hear me okay?

Yes.

It seems the CIBC internet mic is functioning well. I wanted to ask about the cyber business. You mentioned that it's expected to stay flat year-on-year in the first half, with some growth anticipated in the second half. What additional efforts are needed to ensure that the updated sales team and any new product bundles you are considering will help achieve those growth targets?

I think we are net growing the sales force, meaning that our sales force size is increasing modestly. And so, we don't have to have any mysterious program or a very aggressive program of some sort in order to achieve what I just said. I think we all feel pretty comfortable and the cyber business unit feels comfortable, they'll be able to be flattish in the first half. Only reason that is flattish, by the way, as a reminder, we were expecting growth in the past for the first half is because of the so-called elongating sales cycle. So, we expect it to be flattish for 6 months and then pick up again. And that's really a lot more macro-driven rather than us having to do some special things. So by and large, I mean we have a road map of technology. But none of the stuff that I talk about, depending on a particular product, I think the products are in pretty good shape. We do need to continue to drive the channel, continue to increase the professional services, particularly the MSP. I think those are the two things that need to happen, but it's part of our plan to make happen anyway. So nothing really special.

That's helpful. And then, I had a question on, I guess, the movements on the balance sheet. So, I think in the past, the price for the patent licensing business is $600 million, does that potentially change if the second party comes in, like if they get into the mix here, is the takeaway that you're going to get to $600 million or possibly higher, or is it just they get there first and they can close the deal? What's the message on that?

Yes. I'm sorry, I shouldn't comment on it. I know the questions, and I understand, of course, I have the answer. But it’s unfair to both parties, while we're negotiating in parallel. So, if you don't mind, just hold off on that until we made the announcement. I am expecting the announcement or the conclusion of this relatively soon.

The key point is that our confidence with the second party has significantly increased since our last discussion, where financing was uncertain. The likelihood of securing that $600 million has improved substantially, along with the initial steps needed for financing.

Yes. I can't discuss the structure, but you are correct that the confidence level has significantly increased.

Okay. Should we take away given the delay in the two parties here that the structure that was announced before is potentially open to some adjustments?

Very minor.

I see. Okay. Okay. And then just sort of one follow-up balance sheet question. One of the debentures is due in about a year, any messaging on paying it down versus refinancing at this point?

I think we're going to pay it down.

The message is pay that down? Okay. All right. Great. Thanks very much.

Sure.

Next question will come from Trip Chowdhry with Global Equities Research. Please go ahead.

This is still a very good quarter considering the backdrop. Two questions I have. Whenever we are in a recession, the federal government usually opens up their budget, the budgets increase to offset the collapse of the economy. Have you seen any federal government agency or across the globe who may have at least not reduce their budgets and maybe thinking of increasing their budgets yet or you haven't seen anything like that so far?

It's a mixed situation. Regarding cyber investment, I haven't observed the government pulling back, particularly the one we work with, which includes G-7 and G-25 countries, especially those in the Five Eyes alliance. There hasn't been a reduction in the budget for IT and cyber spending, which is positive. Some specific areas are seeing increased funding, such as NATO, Germany is significantly increasing its IT defense spending, and the Canadian government is also spending more, especially in supporting Ukraine. In the U.S., there is available funding, although it seems to be leaning more towards social programs. Therefore, I can't provide a straightforward yes or no answer. It really depends on the various governments we're closely monitoring. Overall, I haven't seen any reductions in their IT budgets this year.

Very good. Second question, as we are seeing a lot of new vehicles coming into the market. And each one of them has at least 2 or 3 features. One, either the screens are really very big in the vehicles or they have multiple screens. Do you think that changes the royalty stream for you? Like if a vehicle, say, just 3 years, 4 years back, only had 1 tiny screen, now on average, there are 3 or 4 screens, front entertainment, rear seat entertainment, overhead entertainment, you name it, video conference saying, just that. Do you think there is a potential to increase some royalties because the multi-screen approach that is new, at least EV manufacturers are bringing to the market? And that's all for me. Happy holidays to all of you.

Thank you, Trip. Happy holidays to you as well. I don't think that multi-screen will result in more copies for me. However, there is a trend towards software-designed vehicles, either for redundancy or multi-MPU purposes, especially as capacity requirements increase; they are utilizing more copies of QNX. Thus, this is more about architectural design rather than display features.

I got it. I got it. I got it. Very nice. And then from the same token, I think if we go from 5G to 6G, the royalty stream because of more use cases and more QNX copies and redundancy and resiliency, we may directionally see per vehicle royalties to directionally go up rather than go down.

Oh, yes. I don't see any decline in the royalty of QNX happening anytime soon. In fact, we expect more copies per car, which should lead to an increase in revenue. Additionally, we have IVY supporting this, and as our capacity increases, the usage of IVY will also rise. I believe this will contribute to a strong revenue stream once it goes into production.

Excellent, excellent. Thank you very much. We look forward to seeing you all at the CES conference.

Thank you.

Our next question will come from Paul Treiber with RBC Capital Markets. Please go ahead.

Just hoping you can speak to, on the cyber business, the mechanics around NDR, which declined sequentially versus your comment on improved churn. Can you speak to some of the moving parts there? And then specifically, can you break out churn or the trends there in terms of UEM versus EPP?

Good question. As we mentioned earlier this year, the churn has primarily been coming from the UEM segment within small to medium enterprises. We have observed that this has been a consistent trend, but it has recently slowed down significantly. In the last quarter, we have noticed this deceleration. In fact, we see larger deals becoming more multiyear in nature. UEM has now certainly stabilized and is being viewed more strategically by the market. Recently, Gartner highlighted this point, and we are experiencing the same shift. Customers are beginning to regard UEM not just as a pricing item, but more strategically, particularly regarding cybersecurity. In the last quarter, events have prompted a reassessment of the importance of mobile infrastructure management and endpoint management. It's well-known that several banks in the United States have faced fines for using messaging technologies that are not secure or easily archivable, leading CIOs at these banks to evaluate the completeness of their infrastructures. UEM is a technology that has been around for a long time, and this applies not only to BlackBerry UEM but also to other established UEM players. To answer your question more directly, the slowdown in churn is still largely confined to the SMB and UEM sectors, and, as I mentioned, we are observing this slowdown without noticeable effects elsewhere. We have certainly not seen it in EPP, which appears to be performing well.

That's helpful to understand that. Just on your point about the settlement with the banks. I mean, does it seem, like when you look at banking or regulated industries, it seems like there's a shift away from bringing your own device, corporate-owned devices. Do you see that in other industries other than just banking? And then, how do you see that relatively speaking, helping BlackBerry from a product positioning or from a competitive position?

So, when the bank goes to corporate issues, they are typically looking at high-level security and archiveability, and that's where our strength comes in. So, we're known to be the most secure mobile platform that exists, so. And I think there's not a lot of debate over that in the industry. So, that helps us a lot. And as far as I'm seeing in the industry, maybe different government branches and law enforcement, I have not seen other major verticals that go to corporate issue debates, or at least swing back from a BYOD to corporate issue devices.

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

Thank you, operator. As mentioned, BlackBerry will be at CES in Las Vegas, where we will showcase several exciting announcements and demonstrations from our IoT business, including IVY running in the Jeep Cherokee. On January 5th, BlackBerry will co-host a software-defined vehicle award with Motor Trend, a prominent auto industry analyst. If anyone is interested in attending, please reach out to Tim, as there will be an important event that evening in Vegas. This awards ceremony will honor individuals who have made significant contributions to the automotive sector through software, with 19 awards being presented. The following day, January 6th, at 1:00 p.m. Pacific Time, we will host a hybrid investor Q&A session with management at our booth. This event will be streamed, and investors can hear about our exciting new developments. Please remember to register for the stream on our investor webpage at blackberry.com. Thank you again for joining today's call, especially those on the East Coast where it's getting late. I wish you and your families a happy and safe holiday, and I look forward to seeing you next year.

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