BLACKBERRY Ltd Q2 FY2025 Earnings Call

Good day, and welcome to BlackBerry's Second Quarter Fiscal Year 2025 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask a question. Please note, this event is being recorded. I would now like to turn the conference over to Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead.

Thank you, Dave. Good afternoon, everyone, and welcome to BlackBerry's second 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, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the Investor Information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements that are made pursuant to the Safe Harbor provisions applicable to 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 or undertakes no obligation to update or revise any of them, except as required by law. As is customary during the call, John and Tim will reference non-GAAP numbers in their summary for 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'll turn the call over to John.

Thanks, Martha, and congratulations on your new role as Director of Investor Relations for the company. Q2 was another good quarter for BlackBerry as we're making significant progress in delivering on our strategy. Both the IoT and Cybersecurity divisions delivered solid year-over-year as well as sequential revenue growth. The combination of this and the ongoing benefit from the actions to improve our cost profile drove year-over-year improvements in non-GAAP EPS and adjusted EBITDA, with BlackBerry achieving breakeven ahead of plan. Likewise, cash used by operations also came in better than expected. This past quarter, the IoT division delivered revenue of $55 million, representing 12% year-over-year growth and 4% sequential growth, and also exceeded the top end of the guidance range that we provided. Gross margin improved by 1 percentage point sequentially to 82% due to favorable product mix. This quarter followed a similar trend to last and that strong royalty revenue has driven a significant portion of the better-than-expected results. Production-based royalties were stronger both sequentially and year-over-year. This improvement is in part a consequence of the growth in royalty backlog that we've built from the considerable amount of design wins that we've secured in recent years. On the flip side, as in Q1, development seat revenue for Q2 remains somewhat subdued. Development seat consumption is generally driven by the timing of the ramp-up of automaker software development programs, and as we've mentioned in recent quarters, these programs have experienced significant delays. We've seen some improvement in recent months, but these delays continue to hold back development seat revenue in the near term. In addition to revenue recognized in the quarter, in Q2, we secured a number of new design wins that will generate future revenue. In particular, we secured a number of large automotive advanced driver assistance systems, or ADAS wins. Among them, in Japan, we secured two design wins with leading OEMs to power ADAS functionality that includes surround camera and milliwave radar for identifying objects. Among the design wins in digital cockpit, we secured a follow-on win to that announced last year with Hyundai Mobis, a subsidiary of South Korea's largest automaker, Hyundai. Running on a Qualcomm chipset, the QNX Hypervisor and advanced virtual frameworks will provide the safety-critical foundation for integrated digital cluster, infotainment, and safety applications. We've made large investments in our QNX product portfolio in recent years, resulting in a number of significant product launches being announced at CES in January. Generally speaking, new product adoption in automotive has a relatively long lead time, but we're pleased with the traction we've seen for these new products since their launch. In the quarter, we secured further design wins on our next-generation SDP 8.0 platform. SDP 8.0 is the flagship next-generation product in the QNX portfolio and provides customers with a step change increase in performance, while maintaining the incredibly high level of functional safety that QNX is renowned for. One of the world's largest industrial OEMs upgraded from SDP 7.1 to SDP 8.0 for their next generation of design for an optical guiding system to be used in airport shuttle buses. In addition, we secured a design win with a German specialized machine manufacturer for SDP 8.0 to power the control unit for pharmaceutical tablet presses. During the quarter, we announced an exciting development for QNX Sound, our new software-defined acoustics platform. HaleyTek, a Swedish developer of Android-based infotainment systems, announced that they're building QNX Sound into their digital cockpit architecture, the foundation for which is the QNX's Hypervisor. QNX Sound is a true value-add proposition enabling both significant bill of material savings by eliminating expensive audio hardware, as well as potential net new revenue streams from custom audio experiences. Finally, on the product side, you may recall that at CES, we announced that Stellantis had leveraged QNX in the cloud to develop a digital twin of their cockpit architecture. This was a specific deployment that our engineers have now productized for sale to the industry in general. We're in early discussions with a number of automakers and feel optimistic that this product will gain traction in coming quarters. In addition to our core automotive market, we also see a large opportunity to build on our presence in adjacent verticals or what we call the general embedded market. This past quarter, we took another step forward by adding a senior go-to-market executive with strong relevant experience to help drive our efforts in this space. Finally, a quick update on IVY. The auto software program delays that we've spoken about that have extended QNX development cycles have had an even greater impact on IVY. When automakers are fully focusing their efforts on delivering core systems on time, they have less bandwidth for new functionality like IVY. Despite this, we progressed multiple proof of concepts with major OEMs this fiscal year and are working on a number of potential opportunities for IVY, but it is unlikely that we'll see material revenue in the near term. On the cost side, now that IVY is through the significant investment required for its initial development, we've integrated the sales and R&D efforts into the core QNX team. We believe this not only drives efficiencies, but also leverages the reach and expertise of our QNX team. Let me now move over to our Cybersecurity division. Similar to IoT, this was a solid quarter for Cyber. Revenue was $87 million, meaning we exceeded the top end of the guidance range we provided last quarter and achieved 10% year-over-year growth. This performance was driven by the three product groups that reflect BlackBerry's strong heritage in secure communications. That is, UEM endpoint management, AtHoc critical events management, and Secusmart encrypted voice and data. All three components delivered year-over-year growth and collectively revenue increased by 24%. While the UEM market is mature and there is strong competition in cloud-based deployments, our product has a niche with on-premise deployments in particular, particularly where data sovereignty and security are a significant concern. We typically see this need most in government and financial services, and as other UEM providers have ceased to invest due to the strength of the competition, we continue to strategically enhance the features that resonate most with our target market and deepen our competitive moat. This helped UEM to deliver both sequential and year-over-year revenue growth for Q2. While there is still some churn in our broader customer base, we're offsetting this with new logos and customer expansions. In the quarter, we secured important renewal and upsells, in particular, with a number of government agencies, including the US Immigration and Customs Enforcement, the US Department of Energy, the US Army Corps of Engineers, and the UK Ministry of Defense. Similarly, AtHoc had a solid quarter with revenue growing both sequentially and year-over-year. We secured a significant renewal and expansion with the United States Department of State, as well as a large expansion with the Air Force, among other deals. Renewal rates for AtHoc remain very high at close to 100%, which speaks to how integrated our product is in US federal deployments in particular. Finally, our Secusmart business had a good year-to-date. Revenue in both Q1 and Q2 has been meaningfully ahead of the prior fiscal year. This strength has been driven by deals from its core customer base within the German government, where our full solution typically sold along with hardware is most commonly used. Because these licenses are tied to hardware, these customers typically buy new licenses to coincide with device refresh cycles. Together with the fact that the software is deployed on-premise, and therefore revenue is largely recognized upfront, this means there can be some variability in the top line for Secusmart from quarter to quarter. However, this past quarter, we saw further traction for our software-only solution, with a major net new logo government in Europe purchasing our Secusuite product for deployment in military applications. Let me now move from secure communications to our Cylance Endpoint Security business. This remains a very competitive market, and this quarter we continue to see some churn in our customer base that purchases product-only, not managed services. And this drove year-over-year decline in Cylance revenue. That said, we're pleased with the ongoing traction from the customers adopting managed services, or MDR, this quarter. Our Cylance MDR offerings provide customers with a wide range of options to suit their needs and budgets, from our on-demand product right up to our newly launched XDR-focused MDR Pro offering. New logo and upsell of MDR offset some of the churn we saw in the customer base this quarter. We've invested heavily in our Cylance product in recent years, and we're pleased that our solution was recognized by customers as the Customer’s Choice Winner in Gartner's recent evaluation. In terms of key metrics for the Cyber business, annual recurring revenue, or ARR, remains largely stable, flat year-over-year at $279 million. The dollar-based net retention rate, or DBNRR, improved year-on-year by 7 percentage points and sequentially for the fourth consecutive quarter by 1 percentage point to 88%. Let me comment briefly on our licensing business, which came in broadly in line with guidance at $3 million. This revenue relates largely to legacy deals that predate the sale of the non-core portion of the portfolio to Malikie. Gross margins remained at 67% after allowing for amortization on the patents that generated this revenue. Now, during the quarter, we announced that Tim Foote was appointed as BlackBerry's new CFO. Tim had previously served as the CFO for the Cybersecurity division and in a number of other senior finance positions of BlackBerry, including as the Head of Investor Relations. This deep knowledge of both BlackBerry and more broadly the finance function, as well as a strong appreciation for our shareholder base and what financial analysts are focused on, positions him really well in this role. I look forward to continuing my partnership with him as we keep moving the BlackBerry strategy forward. So, with that, let me turn the call over to Tim, who can provide some more color around our financials.

Thank you, John, and good afternoon, everyone. I'm incredibly proud to be joining this call as CFO. My top priority in this role is clear, to increase shareholder value. In my opinion, BlackBerry has a significant amount of value that is underappreciated. And as we continue to execute on our strategy, I'm focused on seeing that it's recognized. As usual, the numbers I'll reference, except for revenue, will be non-GAAP. As John mentioned earlier, BlackBerry's second quarter results not only met but exceeded the guidance range that we provided last quarter. Total Company revenue was $145 million, exceeding the upper end of the range of $144 million. Total Company gross margin was consistent year-on-year at 66%. This year, we've made tremendous progress on our cost structure, with operating expenses this past quarter decreasing to $99 million. That is $31 million or 24% lower than the $130 million baseline for OpEx that we provided as a reference point prior to recent cost reductions. It is also 10% lower than the guidance we gave for FY25's average quarterly OpEx of $110 million. Cost remains a key focus going into the second half. And during September, we announced a number of further back-office headcount reductions and facilities closures as we continue to streamline operations. The new management team at BlackBerry has managed to thread the needle of significantly reducing costs while at the same time managing to stabilize the top line and even drive growth. As a result, we've delivered substantially improved profitability and cash usage. For Q2, the non-GAAP operating loss was $4 million, and adjusted EBITDA beat expectations by finishing at break-even for the quarter. Adjusted EBITDA this quarter is $22 million better on a year-on-year basis. Non-GAAP EPS also beat guidance at break-even. Further, cash usage continues to improve. You may recall that during our last earnings call, we outlined that due largely to the timing of certain cash receipts and payments, we expected a sequential increase in operating cash usage. However, operating cash usage came in better than expected, improving by $2 million sequentially to $13 million. This is $43 million better than for Q2 last year, and in total, operating cash usage is $100 million better for the first half than the prior year, before allowing for the proceeds from the patent sale. Let me now provide financial outlook for Q3 and the fiscal year as a whole. For IoT, we expect revenue this quarter to increase sequentially and to be in the range of $56 million to $60 million. For the full year, we are raising the bottom end of our guidance range for IoT revenue, such that the range is now $225 million to $235 million. For Cyber, we expect revenue for Q3 to be in the range of $86 million to $90 million, and we are reiterating the four-year guidance range at $350 million to $365 million. In terms of profitability, we expect adjusted EBITDA for Q3 to be in the range of break-even to positive $10 million, and non-GAAP EPS of between minus $0.01 to positive $0.01. For the full fiscal year, we expect adjusted EBITDA to be in the range of break-even to positive $10 million, and non-GAAP EPS to be in the now higher range of between negative $0.05 to negative $0.02. Finally, we expect a sequential improvement in cash flow for Q3, and for BlackBerry to return to positive cash flow and EBITDA in Q4. And with that, let me now return the call to John.

Thanks for that, Tim. Before we move to Q&A, let me quickly summarize the key takeaways from this past quarter. This was a good quarter for BlackBerry. Both our IoT and Cyber divisions beat top-line expectations and delivered year-on-year growth. The hard work that the team has done with managing cost is really paying off, with operating expenses now significantly lower than prior year and below $100 million a quarter. BlackBerry reached a significant milestone on the path to profitability by achieving breakeven for both EBITDA and non-GAAP EPS this quarter. And finally, cash burn for the quarter was $43 million better than last year, and $100 million better year-on-year for the first half before allowing for the impact of the patent sale. I'm incredibly proud of the progress that everyone at BlackBerry has made as we find ourselves in a significantly stronger position going into the second half of the fiscal year. And with that, let's move to Q&A. So, operator Dave, can you please open up the lines?

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

Hi, and thanks so much for taking the question. Congrats on continued execution. First question, what magnitude of opportunity does QNX Containers and the HaleyTek integration and launch open up on that side of the business? How can we think about new product unlocking design wins?

Yes. Excellent question. Should I take that, John?

Yes.

We have seen a lot of discussion about containers in the industry over the past few quarters. They are an important part of the expanding total addressable market. Containers, particularly those used in cloud environments like a docker-type approach, are becoming increasingly common. As we transition QNX to the cloud, there is a growing interest in safety-certified containers. This is a natural progression. John mentioned that we are beginning to see traction from the cloud sector as we turn what we developed with Stellantis into a product, which we showcased at CES. The second part of the question was regarding sound. Yes, that refers to HaleyTek. On the sound side, we launched another new product earlier this year, and while the sales cycles can be lengthy, this development opens up new possibilities. Previously, we discussed the narrative of having more sockets and layers, emphasizing our desire to increase QNX content in every vehicle. This includes not only the operating system but also middleware enhancements. Sound is definitely a crucial element in this regard. It’s encouraging to see traction with someone committing to integrate this product into vehicles, which marks significant progress. We are pleased with this development.

Awesome. That's great to hear. And then on the financials, just your Q3 guidance implied is a modest sequential increase for Cyber before a markedly sharper increase in Q4. I think that's been a historically been a seasonally lighter quarter. So, just anything that we should consider there this year would be helpful. Thank you.

Yes, good question. I would say that at the midpoint, it's just a continuation of the trend we're observing. Traditionally, Q4 has been our strongest quarter from a billing perspective. Last year, Q3 included some significant one-time deals that contributed to a spike in that quarter. However, if you look at the midpoint, you will notice sequential growth through Q3 and Q4.

Perfect. Thank you.

And the next question comes from Luke Junk with Baird. Please go ahead.

Good afternoon. Thanks for taking the questions. First, just a question related to the EBITDA progression reaching break-even sooner than expected in the quarter. Great achievement. I'm just trying to reconcile that with the full-year EBITDA guidance being maintained in the range of break-even to $10 million. Is there something in timing we should be considering or some sort of offset in the back half? I guess if I look at the OpEx trajectory, it seems to be coming down quicker than you had anticipated, and that would seem to suggest maybe some upside to the full year. Thank you.

Yes, we are being careful with our guidance. Q1 showed a negative $7 million, but we are pleased to be break-even ahead of schedule in Q2. However, we still have some work to do to ensure the full year is positive in terms of EBITDA. You can expect sequential improvements from Q2 to Q3 and from Q3 to Q4. I hope that clarifies things.

It does. Thanks, Tim. And then, second, just hoping you could just double-click on the organizational changes in IVY and integrating that more into the QNX organization on a go-forward basis, just relative to retaining key talent there while also reducing cost, maybe if you could just kind of square the balancing of those two things.

Yes, Luke, this is John. We have invested significantly in IVY over the past few years, thanks to our dedicated team focused on developing the IVY platform as a comprehensive project. We realized that once a product reaches a certain standard with essential features and capabilities for the market, we could enhance operational efficiencies by integrating that team more closely with other QNX members, both in sales and R&D. Therefore, we decided in the first half of the year that, given our progress on the platform, it was the right time to leverage these efficiencies.

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

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

Oh, thanks very much for taking the question. Could you provide an update on the separation process? And I think the last quarter, you mentioned you're working through splitting up some of the IT systems and reorganizing that and just changes to the organizational structure. What's remaining to go from an operational perspective here?

Yes, we have made significant progress on that. Recently, we've conducted in-depth reviews, and we've mostly addressed the easier aspects of separating and aligning it with the business units. Some elements, particularly within networking and our Cyber protection solutions in the CISO organization, are more interconnected and require more time to untangle. We aim to balance the movement of resources and costs into the business units while ensuring they can operate in an agile manner, without creating dis-synergies. We believe we are finding the right equilibrium where the business is functioning well, as evidenced by our revenue generation and design wins, while also effectively reducing costs. We will keep monitoring the situation, being careful not to jeopardize our cost structure improvements by unnecessarily increasing expenses just for the sake of separation. We are committed to maintaining that balance.

That's helpful to understand. As you work to clarify the two organizations, are you noticing any differences in profitability between them? How should we consider that moving forward?

Yes. So, I would say this whole process has given us the opportunity to take a fresh look. And what I'll say is if you tune in to the Investor Day on October 16th, we're definitely going to be providing a lot more color on that around divisional profitability. So, we'll leave it till then, if that's okay, Paul.

Sure. Just one last question from me. Regarding Cyber, it appears that the mix of licensed revenue was higher this quarter. Was that one of the main factors contributing to the upside compared to guidance? Additionally, how should we view this from a timing perspective? Was it deferred from prior quarters, or was it advanced from future quarters compared to your expectations?

Yes, I believe it was a mix of both license and hardware, as we indicated. Secusmart and some of our German customers are currently going through a device refresh cycle, which resulted in some additional orders that benefited the business. We were quite pleased with the strength of the UEM business this quarter. We are also optimistic about the AtHoc business and the renewals and expansions with some of our large customers. Therefore, the success in this quarter was broad-based across license, service, and hardware.

Thanks for taking the questions.

Thanks, Paul.

Our next question comes from Daniel Chan with TD Cowen. Please go ahead.

Hi, thanks for taking my questions. Any potential impact from the proposed ban on Chinese auto software and hardware, and maybe not just in the US, but the potential of it expanding to other countries?

It's a really good question. Obviously, something we're watching very closely. The good news for QNX is we're very well diversified geographically and also from an industrial standpoint. I guess being a proud Canadian company kind of puts us slightly more in the neutral bucket. But it's fair to say we are definitely watching closely. China is an important market for us. So, we need to see what develops from that.

Thanks for that. And then the delayed or canceled programs that you design programs that you're seeing now, how should we think about those impacting the potential royalty revenue in several years?

Yes, it's a good question. Ultimately, the way we think about it, Dan, is that this work's not gone away. The secular trends are still very much there. It's just a question of timing how quickly the OEMs can actually get to the stage of developing this software and then ultimately moving it into production. The good news for us is this is a very long-term business. As you know, we win a design and we've got a revenue stream kind of locked in for the next 10 years. And we've already got $850 million in our backlog, which gives us a really solid base. So, as these kinks in this, bumps in the road, if you like, kind of get worked through, we're very confident that the secular trends that are powering this industry have not gone away and we'll continue to make progress.

Thanks, Tim. Just a couple of questions on Cybersecurity, if I may. The ARR kind of reversed trajectory. It kind of improved in Q1 and in this quarter, it kind of declined sequentially. What changed over the last three months to reverse that momentum?

Yes, that's a solid question. Overall, year-over-year performance was relatively stable. However, quarter-to-quarter results may show some variability and fluctuations. A portion of this can be attributed to the churn we've seen with Cylance over the past couple of quarters, contributing to some downward pressure. Conversely, positive trends from UEM and AtHoc have helped to mitigate some of that decline. We expect there will always be some quarterly variability due to the nature of our businesses and the markets they address. Nevertheless, from a long-term perspective, we are encouraged that stability has improved compared to the last couple of years.

Thanks. And last one for me, nice to see the net revenue retention improving. Is it improving because the churn is getting better, or are you doing a better job with the upsell and cross-sell? Any color would be helpful. Thank you.

A combination of all of it, a little bit of a mixed bag. I think there's definitely some really good upsell on the AtHoc side, some really good upsell on the UEM side. That's offset a little bit with some of the Cylance churn. So, across the portfolio, it's good to see whatever, 7 points, four consecutive quarters of moving in the right direction. Still not where we want it to be by any means, but it's good to see it stabilizing and moving in the right direction.

Great. Thank you very much.

The next question comes from Trip Chowdhry with Global Equities Research. Please go ahead.

Thank you. It’s been an exciting quarter. I view your company as a startup that has been heavily underestimated. There is tremendous potential to innovate and shape the future with your existing technologies and platforms. If your team considers three emerging opportunities with a fresh narrative, you could outperform the competition. Many analysts focus on outdated perceptions of BlackBerry, whereas viewing it as a startup reveals a much broader scope for growth. For example, there is a rise in generative AI devices, with Jony Ive and OpenAI currently developing them. This could be as influential as the iPhone in the future. Additionally, generative AI models, including smaller language models, are gaining traction, particularly on Intel AI PCs. The UEM products you mentioned are beneficial for on-premises use, thanks to your capable CEO with a background in McAfee. This opens up possibilities for leveraging AI technologies in new ways. While there are more points to explore, the core idea is to consider BlackBerry as a startup tackling new challenges with its technology and expertise. Tim, given your sharp technological insights as CFO, I’d love to hear your thoughts on this perspective. The industry is rapidly evolving, and I genuinely want BlackBerry to seize these opportunities. Congratulations on a solid quarter.

Thanks so much, Trip. John, did you want to...

I really connect with how you view this as a startup, taking a moment to assess which businesses we are involved in and how we can accelerate growth with our AI focus. One aspect that has truly benefited us is our strategy around usability. It's offered us valuable insights into our product portfolios, highlighting those that are more innovative and have the potential for dynamic growth in the markets you mentioned, as well as identifying areas where we need to be more cautious with capital allocation. Stay tuned for more details on this at our upcoming Investor Day, where we will provide a comprehensive overview of the Company and how we are directing our investments and capital allocations towards the initiatives you're discussing.

You are phenomenal. Thank you so much.

Thank you, Trip.

And the next question comes from Steven Li with Raymond James. Please go ahead.

Hey, thanks. John, I'm not sure if I misheard you, but on Cyber, I think I heard you say more customers are adopting your managed services offering, and that drove the year-over-year decline in Cylance revenue. Did I mishear or can you elaborate?

Yes, let me clarify, Steven. Within Cylance, there are essentially two components. When we acquired the company, it was primarily focused on product sales, particularly endpoint protection, and we enhanced our EDR functionality. This traditional product approach allows customers to license it solely on a product basis. We are noticing general market trends affecting that part of the business, which has resulted in some sluggishness, including lower renewal rates and some customer attrition. However, we have seen positive developments with existing customers transitioning from product-only models to managed detection and response, where we take on management responsibilities for those without the resources to handle their own environments. This segment has generated a promising pipeline, some successful conversions, and noteworthy wins this quarter, but that has been somewhat balanced out by the weaker performance in the product-only area of our customer base.

This concludes our question-and-answer session. I would like to turn the conference back over to John Giamatteo for any closing remarks.

Terrific. Thank you, Dave. So, before we wrap up, I just want to remind everybody about our upcoming Investor Day at the New York Stock Exchange on October 16th. At this event, for the first time, we're going to be providing segmented P&Ls for both our IoT and Cybersecurity divisions, as well as the new outlook for fiscal years 2026 and 2027. We'll take a deeper dive into the performance of our four Cybersecurity product groups and review our capital allocation priorities, and we'll also showcase the depth of expertise that we have in both IoT and our Cyber teams as they explain the market opportunities and where our products are positioned to capitalize on them. The event is available to the general public via webcast, and you can sign up on the Investor Relations webpage. So, thanks again for joining today and look forward to seeing you all next time.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.