BLACKBERRY Ltd (BB) Q2 2024 Earnings Call Transcript

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. 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 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 US 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 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 EDGAR, SEDAR, 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 building royalty backlog, and 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 targets for new backlog and expect to exceed it. In the quarter, QNX secured 20 new design wins in the auto sector 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 become more complex and require significantly higher compute power, this plays to the strength of QNX. In addition to our strong win-rate for ADAS, 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've secured design wins with LG Electronics, including our hypervisor that will be deployed in a number of vehicle models for a top 10 global automaker. We also secured wins with Vision and leading OEM Cherry via Bosch, among others. In Europe, a digital cockpit win also includes our acoustic middleware, and this is exciting because feedback from customers suggests that this relatively new market opportunity for software-defined acoustics 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 secured a design win for our QNX Medical OS for safety to be deployed in the robotic arms for dentistry. These design wins confirm that our QNX business is strongly positioned for the long-term. With revenue for Q2 being largely in line with expectations, we continue to expand 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 facing several significant challenges, including industry strike actions, the transition to software-defined vehicles, as well as electrification and supply chain challenges. Delays to either pre-production software development programs or production schedules could impact our revenue this fiscal year. However, we expect these to be relatively short-term timing issues. As a result, we revised and broadened our IoT revenue outlook range to $225 million to $240 million, representing 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 royalties expected from the backlog. Turning now to product, at our Analyst's Day 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's leadership position in automotive and beyond. Feedback from the beta trial has been very positive, with customers 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 chipmakers 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. QNX 8 will combine the best of performance with the ability to run mission-critical processes safely and securely alongside the Gen AI stack on the same chip. Now moving on to IVY, we are delighted to announce that IVY was selected by Tier 1 supplier Mitsubishi Electric to power its new FlexConnect.X in-cabin systems. IVY edge technology and the high-quality real-time insight that it provides will help enhance road safety and enable new in-vehicle experiences. In addition, we have solid traction with new IVY proof-of-concept trials. Currently, we are progressing POCs with a number of major OEMs, including a top 10 global automaker and also a leading commercial vehicle OEM, Scania. The strong level of interest for IVY POCs clearly confirms our strategy. On the product front, this month we released an updated version with significant enhancements 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 support, and improving the developer experience. The IVY ecosystem continues to expand and mature. We now have over 40 partners currently building on IVY, with more than 20 pre-integrated solutions that are being used by customers in POC trials and at industry events. This month, the IVY innovation fund made its latest investment in CorrActions, an exciting Israeli start-up. CorrActions has developed an AI-powered application that will leverage the IVY platform's sensor insights to detect potential driver awareness issues. Their AI model analyzes micro muscle movements through steering wheel sensor data to gauge brain activity, and we are pleased to add them to the ecosystem. Moving now to the 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 expected due to deal slippage. Blackberry, along with many others in the cybersecurity space, is experiencing elongated deal cycles—deals that require multiple rounds of review and scrutiny. While this isn't impacting win rates, it's affecting the timing of when the deals close, especially 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 impacted Q2 reported revenue, we remain confident about how these deals are progressing and expect them to close this fiscal year. Furthermore, 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 relationships. Due to our confidence in 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 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 the US Department of Justice, the Department of State, Department of Energy, and Department of Education. Also, the Internal Revenue Service, the Canadian Revenue Agency, the US National Nuclear Security Administration, Customs and Border Protection, and the Ministry of Justice in Quebec. Outside of North America, we secured business with the Bank of Italy, Netherlands Shared Service Center-ICT, 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 secured 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, Cylance is a 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 buzzword. 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 CylanceENDPOINT, our AI-driven prevention detection and response solution being placed in the top right-hand quadrant for the Gartner Peer Insights, Customers' Choice. This positioning is based on feedback from real customers, reflecting their experience with 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.

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 $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 at 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 slippage in deals, 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 full-year revenue range for cyber. We also remain very confident and excited about the fundamentals of our IoT business, and like cyber, we expect a stronger second half, albeit we're taking a prudent view given delays in the start of some development programs as well as the auto industry labor actions. Then we also provide you with 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?

We will now begin the question-and-answer session. Our first question today comes from Mike Walkley with Canaccord Genuity. Please go ahead.

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 are 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 and the Spark platform. So mainly those two.

Great. Thank you. And then I guess on my follow-up question, just any update on how Cylance is trending in the market? You have some good technology there, but some larger companies such as CrowdStrike and others are moving more into the SMB market. Can you maybe talk about how Cylance is faring in the marketplace?

Yeah, we do actually reasonably well. The numbers are obviously smaller than the competitors, but we do reasonably well in the win rates in the SMB segment. We actually had a pretty good quarter in new logos, and it will continue. I have said this 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 Guard is a good solution.

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

Sure. Thank you.

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

Good afternoon. Thanks for taking the questions. John, for starters, the last few quarters here, customer software delays have been a theme that we've seen repeat a few times. It would just be great to get your perspective on how widespread this issue is in your customer base right now and most importantly, what the effective 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 companies that are looking at their software-defined vehicle efforts and are experiencing delays, are the really big companies. Some of them have been very visible announcing reorganizations that actually favor the software-defined vehicles strategy. For example, Toyota has announced a re-org, VW has announced a re-org, and there are several others that we cannot publicly discuss due to proprietary information. However, everybody has told us that, while it may not be precise, it seems like a one-year move—a four quarter move. Frankly speaking, we are in the third of those four quarters already. This is one of the reasons why the team has a really strong pipeline that they believe in for Q4, and as I want to repeat this, we expect Q4 to be 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 1 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. Thank you.

Right, we have, because we believe our fundamentals are so strong and because our new product, 8.0, has excellent scalability, we are not slowing down our appetite at all. We are steadfastly moving forward. IoT is hiring people, so we don't worry about us 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 Chowdhry with Global Equities Research. Please go ahead.

Thank you very much. Hello, John. The auto industry seems to be super exciting with QNX, and companies like NXP have coined terms like IoT as Edge Square, where they put a lot of AI and refer to it as tiny ML powering these devices. I was wondering, since QNX is definitely low footprint and a real-time operating system, if you have come across new sensor categories that may have emerged due to AI in the Edge, and these neural network processors like NXP that they make. The industry structure is changing, and that’s my basic question about tiny ML, Edge Square, QNX, and any new use cases that may be evolving. I was wondering if you have any thoughts on that?

Yeah, it's a good point. I think it's still early in the industry, and I also want to emphasize that we are an embedded operating system, a real-time secure operating system. We tend to go into the MPU type, the central computing complex, so the Edge of this will be driven by different new use cases—some of them AI-based—but that's a level higher than us. We will benefit from needing more central compute power, and I guess we do benefit from it. We don't directly create a sales motion into the Edge. The Edge selling motion and use cases are created by the code that is stacked above us.

Excellent.

Does that make sense?

Yes, I got it. The second question is regarding IVY—phenomenal traction on the developer side and apps. I don't know if we are about six to eight months away from it, but I was wondering, have you come across any new categories of apps that may be built on top of IVY? That's all for me. Thank you very much.

Well, AI and sensing are indeed interesting. Back to your first question, the different types of sensors being demanded in cars have become more complex. One example is when I discuss CorrActions; they monitor the sensors on the steering wheel and analyze micro muscle movements to assess the driver's alertness and awareness. This is more sophisticated than just measuring fuel levels or charging amps. We have seen more modern types of applications coming through, but I still believe that for the initial usage of IVY, it will fundamentally manage the safety and comfort of the car.

Got it. Thank you so much.

Thank you, Trip.

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

Hi, John. Good afternoon. Just 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 carry 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, but I do believe that we're still following the 20% growth year-over-year that we presented in the May meeting. So you can expect us to have double-digit growth and push toward 20% growth year-over-year. By then, I hope that these software-defined vehicle efforts will have resolved their delays, and hopefully, everyone will have a reasonable handle on the supply chain despite the political situation between the US, China, and the Western world. All that should gradually get under control. Electrification is prominent in all their products, and we hope it will drive more volume in car sales—not so much as electrical versus gas. If those challenges are addressed, we will begin to see design wins that turn into developer seats, professional services engagements, and ultimately into royalty backlog. We see nothing concerning at all—this is purely timing issues, and we expect improvement in Q4 unless external industry events like the UAW strikes persist, which is out of our control. However, even those strikes are not going to last indefinitely because both sides will incur losses. I believe they will resolve this soon.

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 it down to a few high-level paths? Can you share the high-level paths?

Yes. I can't comment on it, but the answer is yes.

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

Hey, John. 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's better than a 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 impacting near-term financial performance, whether from staff productivity or even customers waiting for a conclusion?

No, actually. This is a significant concern that I monitor. From a customer point of view, I haven't seen noticeable impacts. There might be a couple of conversations where customers ask about the ongoing situation, but those concerns aren’t substantial. The sales floor has not relayed any feedback suggesting it's a roadblock. However, the longer this lingers, the more concern it could bring over time. My focus is to ensure operational continuity for employees, partners, customers, and shareholders. We are not going to let this situation impede progress. The decision may take time, but a decision will indeed be 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 Downtown New York. The event, anchored around the theme of trust, has been expanded this year to include IoT, and we have a strong lineup of keynotes as well as product demos and breakout sessions. You can register to attend at blackberry.com/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.