BLACKBERRY Ltd Q1 FY2025 Earnings Call

Good afternoon, and welcome to the BlackBerry First Quarter Fiscal Year 2025 Results Conference call. My name is Carl, and I'll be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We'll be facilitating a brief question-and-answer session towards the end of the conference. And as a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Tim Foote, CFO, Cyber Security Division and Head of Investor Relations. Please go ahead.

Thank you, Carl. Good afternoon, everyone, and welcome to BlackBerry's first quarter fiscal year 2025 earnings conference call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, 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 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 EDGAR, SEDAR+, and blackberry.com websites. And with that, I'll turn the call over to John.

Thank you, Tim, and thanks to everyone for being here today. I'm happy to share that we had another strong quarter at BlackBerry. Our strategy is proving effective. In the last quarter, we made further strides in establishing our IoT and cybersecurity divisions as separate entities while also improving our cost efficiency. We achieved our third consecutive quarter of better free cash performance despite seasonal impacts. We also moved closer to profitability with improvements in both adjusted EBITDA and non-GAAP earnings per share. On the revenue side, both our IoT and cybersecurity divisions exceeded expectations, with our cybersecurity business showing improvements in key metrics like annual recurring revenue and dollar-based net retention rate. Starting with the IoT division, we reported revenue of $53 million for the quarter, surpassing our previous estimates. Our gross margin remains robust at 81%. As anticipated, revenue from development seats returned to a more typical level following a record set in Q4, but royalties and professional services have remained strong, achieving near-record levels. In fact, unexpected royalties significantly contributed to our better-than-expected IoT revenue. Approximately 80% of our total revenue this quarter came from automotive, driven by growth in digital cockpit and ADAS. Our professional services team continues to excel, and we are investing in expanding it to support our customers’ development needs and help unlock our $815 million royalty backlog. In the automotive sector, we secured several new design wins, including a top five global automaker deploying our QNX technology and a leading European OEM using a high-performance Qualcomm Snapdragon chipset. We also gained a significant win with Geely, leveraging our QNX technology for their advanced driver-assistance systems. We continued building on earlier wins for our next-generation QNX RTOS SDP 8.0, including a selection by Digicare Biomedical for a patient monitoring system and other successes in various industries. Market analysts expect stable global light vehicle production in 2024, and we anticipate that our QNX technology will continue to drive growth as vehicles become smarter and more reliant on software. Despite recent declines in electric vehicle demand, production of battery electric vehicles is projected to grow in 2024. It’s crucial to note that the systems QNX supports are relevant for both electric and internal combustion engine vehicles, which helps diversify our business. However, we are aware of ongoing challenges faced by automakers in software development, which may affect QNX's performance this fiscal year. Yet, we remain optimistic about our full-year revenue expectations of $220 million to $235 million and project Q2 revenue between $50 million and $54 million. Moving to the cybersecurity division, this was a strong quarter for us, reflecting the benefits of changes we’ve implemented in our products and go-to-market strategy. We saw positive trends in two key metrics: annual recurring revenue reached $285 million and our dollar-based net retention rate climbed to 87%. Our revenue was $85 million, above our expectations, driven mainly by improved ARR and strong performance from our SecuSmart business. The cybersecurity gross margin was 59%, down slightly due to SecuSmart's robust sales. The popularity of SecuSmart’s encryption solutions among large government clients has been notable, and we anticipate continued strong performance in this area. For Cylance, we focused on segments where we have strong competitive advantages, such as operational technology and small- to medium-sized enterprises. We believe we have significant opportunities in managed services with our newly branded Cylance MDR and an on-demand support service for customers. Customer satisfaction remains high, and over 80% of Cylance endpoints are now using the latest product versions. Our Unified Endpoint Management product also achieved impressive renewal rates, and we secured important renewals with top financial institutions and government agencies. Regarding our critical events management system, AtHoc, retention rates among federal and emergency services customers are solid. We've introduced a new geofencing feature for better tracking during critical events, which has received positive feedback. Despite a challenging macroeconomic environment affecting sales cycles, we maintain our revenue outlook for the cybersecurity sector at $350 million to $365 million for the fiscal year, with Q2 revenue expectations of $82 million to $86 million. In our licensing business, we reported slightly better revenue than expected at $6 million, with gross margins at 67%. We have received positive updates from the purchaser of our non-core patent portfolio, suggesting future revenue potential. Before I hand the call over to Steve, I want to highlight our progress in separating and streamlining our two core businesses. We've made significant advancements in customizing internal processes and delegating authority to divisional management teams. We've launched IT system projects aimed at tailoring products for each division and driving down costs. Our non-GAAP operating expenses were $109 million this past quarter, down $4 million sequentially and significantly lower than the baseline we provided last quarter, showcasing the impact of our efforts. Looking ahead, we expect further annual cost savings of around $20 million from initiatives taken this quarter. This adds to the total cost reductions from previous quarters, marking substantial achievement for BlackBerry. Given our progress, we are reaffirming our expectation of generating positive cash flow and adjusted EBITDA in the fourth fiscal quarter.

Thank you, John. Good afternoon, everyone. As a reminder, unless otherwise noted, all numbers provided during my remarks, except for revenue, will be non-GAAP. Total company revenue was $144 million, which exceeded the upper end of our previously provided outlook range. As John mentioned, revenue was comprised of $53 million for IoT, $85 million for cybersecurity, and $6 million for licensing and other. Software product was approximately 85% of revenue, and professional services was the balance at approximately 15%. Of the software product component, approximately 80% was recurrent. We're pleased that such a meaningful portion of our business is repeatable and reliable. Total company gross margin was 67%. As John mentioned, we continue to make great progress on cost reductions. Operating expenses came in $4 million lower, sequentially at $109 million. Research and development was 28% of revenue for the quarter. Sales and marketing 25% and G&A 20%. Non-GAAP operating loss was $12 million, and adjusted EBITDA meaningfully beat expectations at negative $7 million. We beat expectations for net cash used in operations at $15 million, and free cash usage was $16 million, a $1 million sequential improvement compared to Q4. Given the timing of some larger customer payments, we do expect a sequential increase in operating cash usage in Q2, although still significantly better than the $56 million used in Q2 last year. For the second half, we expect operating cash flow to improve sequentially in Q3 before achieving positive operating cash flow in Q4, as John mentioned. We expect adjusted EBITDA for Q2 to be in the range of negative $5 million to negative $15 million and non-GAAP EPS of negative $0.02 to negative $0.04. For the full fiscal year, we are reiterating our expectations. We expect adjusted EBITDA to be in the range of break-even to positive $10 million, and non-GAAP EPS to be between negative $0.03 and negative $0.07. With that, I'll pass the call back to John.

Terrific. Thank you, Steve. So why don't we go ahead and proceed now to Q&A. So Carl, if you don't mind opening the lines, we can take some questions.

Certainly. And we will now begin the question-and-answer session. And our first question today will come from Luke Junk with Baird. Please go ahead.

Good afternoon. Thanks for taking the question, John. I'm hoping on near term if you could just unpack what's driving the improvement that you're seeing in the IoT royalties? Is it the new launches coming online? Is it ramping the prior launches? And given what's driving it, just how sustainable would you think that improvement that we're seeing in the royalties is right now? Thank you.

Yes, that improvement is primarily fueled by the $815 million backlog. We have several significant design wins that are experiencing pent-up demand. It's a combination of existing design wins that are currently in production and some new implementations. Overall, we are very pleased to see an increase in volume across both segments of the business in the first quarter.

And then for my follow-up, maybe a bigger picture question. There's been some investor concern emerging about auto software suppliers and compute and whatnot being supplanted by OEM partnerships potentially in the wake of VW and Rivian last night. I'd just be curious to get your perspective on that. And especially, this is pretty real time, but I'd be maybe even more curious about just your insight from ongoing dialogue with your customers and what the OEMs you're engaged with are thinking and saying? Thank you.

I think in a lot of ways our customers kind of look to us as a trusted advisor who understands the software side of this business better than anyone. So we work really closely with them. We're definitely collaborating with them on future designs, both from EV as well as internal combustion. But overall, we feel like we're becoming an increasingly trusted advisor to them on these kinds of matters and going deeper into their organization. We're providing a little bit more value around software-defined vehicle capabilities.

I want to add that I don't believe those recent announcements really change anything. The competitive advantage around our QNX business remains very strong. To John's point, if anything, we are in a solid position as OEMs are approaching us and requesting more. Therefore, I don't anticipate any significant challenges arising from announcements like last night's.

That's helpful color. Thanks, Tim.

Thanks for taking the question. Just a comment in regards or a question in regards to the cost reductions. It's good to see more progress. And I think you're at year up to $125 million. How do we think about the path or the opportunity to achieve the remaining $25 million to reach your target of $150 million?

Yes. Thanks for the question, Paul. We feel really good about it. I think we've got a comprehensive program around it. We've obviously executed on the $125 million. We're taking further actions to simplify some of the more complex things. I mentioned before things like our IT systems that are kind of hardwired into both of the divisions as we get to the next level of unwinding some of that and building capabilities that are just right for the size of those businesses, we see a good line of sight to getting to that additional $25 million. So just as you said, $50 million in Q3, we did an additional $55 million in Q4, $20 million in Q1, and we feel really good about our line of sight to get to the rest.

And then a follow-up on the IT systems, is that the bottleneck or the constraint in terms of the separation of the business units at this point? And then once you get through that, will you be effectively ready to separate or split the two units?

Yes, I think so. When you have systems like Microsoft, Salesforce.com, or NetSuite from Oracle that are integrated across both parts of the business, the next step is to unwind the existing agreements at the parent level and align them within the divisions to create a clearer separation. However, I want to emphasize how far we've come since the beginning of the year. These systems currently connect the two business units due to how the parent has licensed them over the years. Operationally, we have separate leadership teams and distinct governance structures in place. They are making decisions faster than ever before. To me, the significant advantage is that these teams can now be more agile and respond quickly to market opportunities, which we couldn't do as effectively when we operated as a unified entity.

Thanks for taking the questions.

Thanks, Paul.

When do you expect to provide segmented results for the two units below the revenue line?

Yes, Todd, that's a great question. Top of mind for us. Honestly, we've got some pro forma things here in the room right now we're working on. And we're getting them ready for prime time and planning on introducing it to all of you at our analyst update in October.

Okay, great. So you'll break it out, I guess, with the summer quarter's results, and you'll present that at the Analyst Day?

So we'll have an earnings call, Todd, as normal. So that will be at the end of September. And then just a couple of weeks later, you can kind of run the wrap for John's prepared remarks actually, which is, that we'll have an Investor Day on October 16th.

October 16th. Okay. And October 16th is when you plan to unveil the segmented reporting below the revenue line.

Correct, absolutely.

Okay. My second question is, I didn't quite understand the headwind comment in IoT. So I got the upside from royalties in the quarter, but then you went on to talk about the mix of drive trains and that's a headwind to the business. And so, I just wanted to make sure I understood what's causing that and is that going to cause the IoT growth rate to settle below the 18% as we go through the year? Just talk through that again, please, thank you.

Yes, of course. So the point there, Todd, was that we're agnostic largely to the drivetrain. And there's obviously a lot of talk at this point around some softness on the EV side of the house. The point there was, if we see some softness in EV, that almost certainly means it's going to be strength in hybrid or ICE engines. So, we don't actually see that as necessarily a headwind due to the diversification that QNX enjoys. We did reiterate, however, though, that the programs that we've been talking about that have been delayed. Well, we still see that. We'd say there's some signs, some encouraging signs that things are getting better on that front, but it's still very much a headwind. So when we reiterated our four-year outlook, you need to keep those headwinds in mind when thinking about it. Does that help?

Yes, that does help. And those headwinds for the programs, that's not new. That's been going on for a little while, right?

Yes, we've been talking about that for several quarters now.

Yes. And what breaks the logjam on that with what you see today? Just talk through how you're thinking about that. Thanks very much.

Well, it's going to vary by OEM and ultimately we've described it as really they're having to go through a huge transformation from being traditional automakers to having to be software developers. And what they've had to do is ramp up software development team style, and that comes with huge challenges and it's not an easy task. So, yes, we've been talking about this for some time. I think ultimately this is not going to be a problem forever. The OEMs will get their hands around it and they will make progress. And I think we're seeing some early signs that that's happening. On our side, we're definitely committed to helping all our customers, and the demand for our professional services is possibly an indicator of that. And we're helping to fire that engine by adding some additional headcount into that side of the business. So we're doing everything we can to help lighten the load for OEMs, but ultimately they're going to get there in the end regardless. So, yes, stay tuned on that one.

Great. Appreciate it. Thank you.

Our next question will come from Kingsley Crane with Canaccord Genuity. Please go ahead.

Hi. Thanks for taking the question. So between Cylance MDR and MDR on demand, can you talk more about the expansion opportunities you have with respect to endpoint outside of bringing more endpoints under coverage?

Well, I think, obviously, a multifaceted approach that we have from a growth of the Cylance business. Certainly we've got a large installed base of Cylance customers that many of them which are just licensing today our software directly, and upselling and upgrading them to MDR services is one kind of track that we're running hard on. Another is focusing on particular verticals where we tend to perform exceptionally well. I think on OT, I think on healthcare customers, customers that have old operating systems that have a variety of different devices, healthcare devices that need to be secured with a small agent, and the AI capabilities that we provide is another very, very focused target for us to do there. And then third, I would say, is kind of that mid and small level market. These are smaller companies that are, say, 2,000 seats or smaller. They generally don't have the cyber talent, the cyber resources to manage those environments. So we see that as a huge opportunity. It's a growing market. MDR is a growing space because they're looking for vendors like us to provide more of that capability. So those are probably the three main tracks that we're focused on to keep that Cylance business, the renewal rates and the ARR moving in the right direction.

Right. Okay. That's really helpful. And so on the cyber business as a whole, you've done a remarkable job rationalizing costs. Can you talk about what product initiatives you are excited about investing in and how you expect those could drive growth?

Yes, I mean I would say everything we just talked about within Cylance has been investments over the course of the past few years. But one thing I would call out that maybe we don't talk enough about is our SecuSmart. Our SecuSUITE portfolio, which has been really working well for us on that, is we pivoted that business from a very hardware-centric type of approach to a more software-token-based approach, which we found has opened up a tremendous amount of new use cases and a tremendous amount of new opportunities. This was a business when you look back a few years, it was primarily coming out of this special relationship we had with the German government. When you look at the overall diversification of that business globally with some of our deployments in Canada and the U.S. and Malaysia and Bangladesh, and others that we've got some interesting pipeline. That's an investment that we made in the SecuSUITE platform to really address a completely different segment of the market. That would be another one, I would say, above and beyond that. And then we're very excited, AtHoc, we're releasing our geofencing capability. It's a unique capability that differentiates our solution from other solutions that are out there in the market. And we've seen a tremendous amount of demand in governments, police organizations, and emergency services. So, it's probably something we haven't talked enough about, but investments we've made in AtHoc and in SecuSmart that have driven growth and driven some nice pipeline for us.

Thank you. Appreciate the time. Great to see the progress.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to John Giamatteo, CEO for BlackBerry, for any closing remarks.

Terrific. Thank you, Carl. So let me just quickly one more time summarize the quarter. We still have a lot of work to do. We know that. But we do believe our strategy is starting to deliver results. We made significant progress in separating our IoT and cyber business and towards profitability. Cash usage in the quarter was better than expected, and we improved both adjusted EBITDA and non-GAAP EPS. Revenue for both IoT and cyber beat expectations. IoT had a number of design wins in the quarter, including SDP 8.0, and we saw further small but important improvements in our key metrics like cyber ARR and DBNRR. So before we end the call, I guess we kind of preempted this in one of the previous questions, but we do want to let you know that we're excited to be hosting an Investor Day at the New York Stock Exchange on October 16th, where during this event we'll perform a deep dive on the products, the markets, and some of the financial profiles that we talked about before of both divisions, and I'm sure you're going to find it valuable. The event will be hybrid with the sessions being live-streamed on the day. So thanks again for joining us today. We'll look forward to seeing you next time.

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