Q4 2021 BlackBerry Ltd Earnings Call
[music] operations.
Good afternoon, and welcome to the Blackberry fourth quarter and fiscal year 'twenty 'twenty. One results conference call. My name is Sadie and I will 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.
Need assistance during the call. Please signal a conference specialist by pressing Star Zero as a reminder, this conference is being recorded for replay purposes of.
I'd now like the turn to the skull over at the 10 foot.
Blackberry Investor Relations. Please go ahead.
Thank you Sandeep good afternoon, and welcome to the Blackberry fourth quarter fiscal 2021 earnings conference call.
With me on the call today, Alright, thanks to the chair and Chief Executive Officer, John Chen and Chief Financial Officer, Steve right.
After I read our cautionary note regarding forward looking statements John will provide a business update with 84 will review the financial results.
We will then open the call for a brief Q&A session.
This call with the available to the general public on a call in numbers and <unk>.
The webcast in the Investor information section of Black.
Green Dot column.
The replay will also be available on the Blackberry Dot com website.
Some of the statements, we'll be making today constitute forward looking statements on the 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 from assumption 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 of 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.
As discussed in the company's annual filings in the MD&A, including the COVID-19 pandemic.
You should not place undue reliance from the Companys forward looking statements. The company has no intention and undertakes no obligation to update or revise any forward looking statements.
As required by law.
As is customary during the call John and Steve will reference non-GAAP numbers and a summary of our quarterly results.
For reconciliation between our GAAP and non-GAAP numbers. Please see the earnings press release and supplement published earlier today, which are available on the Edgar SEDAR and Blackberry Dot Com website.
And with that I'll turn the call over to John.
Thanks, Jim.
Tim sorry side.
Good afternoon, everybody and thank you for joining us today I'll begin with three headlines for the quarter.
The first headline of licensing.
This quarter, we entered into an exclusive negotiation of.
The North American party for the sale of the portion of the Companys patent portfolio, primarily related to mobile devices.
The messaging and wireless networking.
Blackberry will retain rights to use these patents Pat.
Patterns associated the company strategic software and services business, including spark to annex IV secure communications.
And critical event management will continue to be owned and managed by Blackberry.
The company has not yet reached a definitive binding agreement and negotiations are ongoing.
The company Ltd, 's licensing activities in the quarter due to the negotiations and because of accounting rules, which Steve will explain later this resulted in licensing revenue being lower than expected.
The second half of software and services. This quarter, we saw a slight sequential revenue improvement from spark.
And the continuous continuing recovery from Pts.
<unk> had a good quarter despite vehicle production headwinds from the global chip shortage.
Comprehensive emphasis billings grew strongly and are now back to the level of the year ago.
The third headline is Blackberry IV.
Discussion of the automotive more automakers and tier ones are progressing well and I'll touch on some of the exciting developments later.
Now, let me get into the more details.
Blackberry reported total company revenue of $215 million to one five.
Software and services revenue was 165, 165 licensing and others was $50 million.
<unk> zero gross margin of 73%.
Earnings per share was positive free cash.
Cash generated from operations came in at $51 million.
Total ending cash and investment.
As of February 28 was $804 million.
I'll now turn to our business commentary, starting with the software and surfaces.
Our ongoing strategy is to safeguard the internet of things with intelligence security.
We achieved this by combining our 30 years plus of expertise.
The security expertise.
The newly acquired technologies, such as <unk>, AI and machine learning.
We currently serve the market in two different ways the <unk>.
First is to provide cyber security for enterprise, particularly large highly regulated verticals, such as government financial services and healthcare.
Sure, we protect the endpoints networks and communications with our Zero Trust architecture.
The second is to amtech technology to provide safety and security to the endpoint here. Our focus is currently largely on automotive again, a very large fast growing market.
Starting from a QM actually installed base of over 175 million cars on the road today Q&A ex an IV in partnership with AWS has significant growth opportunities.
Over time these two paths that I mentioned.
The intersect.
And provide tremendous opportunity for Blackberry investment in smart mobility, and Smart city infrastructure will help drive this convergence of.
Obviously the market is too early.
We recognize the need to be louder, when communicating our strategy and who Blackberry is today.
This month, we launched a major new digital radio and print and print branding campaign across North America, and the U K to get the message our powerful the into the marketplace.
From a financial reporting perspective, starting this Q1, which is this quarter when we intend to reported software and services as two separate revenue lines.
In the cyber security and Bts.
The cyber security line of addressed in crude and address the cyber security endpoint management and critical event management markets.
Our main competitors, including other leading next generation endpoint security providers as well as notable <unk> vendors.
The address these markets with our AI driven spark a fully integrated <unk> platform, along with AD hoc and second smart.
Bts address SDN embedded software and vehicle data analytics market.
Notable competitors, including auto grade genetics.
Enjoy and proprietary operating systems are.
<unk> ex product offer the highest level of embedded functional safety and security of Blackberry IV will provide will provide an end to end solution, while harnessing data in the car.
We believe that this change will help the investor to gain greater insight into.
Into the performance and a maturity of these businesses going forward.
Moving on to the software and services metrics.
With the approximate $458 million slightly down from last quarter.
Primarily the Duke is expected through the pandemic related impact on Dts.
Dollar based net retention rate improved sequentially from 90% last quarter to 91% of this past quarter net.
Net customer churn remained low at around 1%.
Now moving onto Bts as a reminder, <unk> by far the largest component of the.
The TFS as.
Our free anticipated during last quarter earnings call, we saw improvement in both <unk> ex design win design phase revenue.
And production base royalties.
This improvement continue despite the challenges from the global ship chip shortage and is impacted and its impact on auto supply chain.
It's not really clear what the impact will be on production volumes at least not on all of it is how long will the life. However.
However, we continue to expect improvement from Dts in the upcoming fiscal year, our plan of returning to a pre pandemic normal revenue run rate of around $15 million per quarter by physical by mid fiscal year assumes that the new challenges are overcome by that point.
Looking beyond the short term headwinds flow strategy analytics, a leading research firm estimate that there will be a large expansion in a number of embedded system.
The power by 2027.
The estimated this growth will be mainly driven by a das which is advanced driver assist systems.
As well as data gateways.
The system required the highest level of safety certification and I increasingly deploy on chips with higher compute power.
The factors play to <unk> ex strength and recent wins, some of which I will mention Lou shortly.
Give real data point that support the trend this validates the strategy of focusing on safety critical application endpoints, showing increasing ASP per clock.
During the quarter Q&A ex strengthened its leadership position in of safety critical software.
We announced the enhancement to our Hypervisor, which by the way is the only one in the market certified to the highest level of functional safety the <unk>.
Also announced a number of design wins include debt, including our motion now.
A joint venture between Hyundai and active we will be using <unk> ex Black channel communication technology in its next generation driverless vehicles.
Also of Baidu announced that their machine maps.
Critical component of autonomous driving will also be built on <unk> ex and designed into the new energy ion in the models from GAC, which happened to be a leading Chinese electrical vehicle automaker.
These some of these announcements demonstrate the Q&A ex is at the heart of Data's vehicle technology developments.
<unk> the business well from future revenue growth.
U S also confirm at CES. The QM ex has been selected by Sony The <unk>.
Latest Sony New vision Eschar.
Furthermore, Scania.
The electric Q&A ex access primary operating system for a heavy truck heavy duty trucks.
Overall in the quarter to in excess of 25 design wins with nine in auto and <unk> in general embedded market or jam.
The other wins.
Dominantly Adas and digital instrument cluster of designs. The Jan wins include a mail processing control system for EPS are you.
I will now flow now for a USPS, sorry, United States Postal service.
Ah connected manufacturing plan system from GE and.
And the next generation <unk> equipment from the leading medical device company.
We are delighted to report the now that now we have win win design wins as design wins, sorry, with 23 of the World Top 25, electrical vehicle electric vehicle Oems, who together represent 68% of the global EV production.
This is an increase by the way from 19 of the top 25 last quarter with recent wins, including Toyota and Honda.
And the reason newport's the loy estimate that the CAGR the compound annual growth rate for global easy growth of sales will be around 29% over the next 10 years and current AXT is well positioned to benefit from.
Of this growth.
Let me now provide you with an update on the IV since the announcement of December the response from Oems has been very positive.
We have had held many discussions many workshops with a number of leading automakers and are pleased in how these discussions have progressed so far.
Many use cases has already been discussed showing the potential of this platform once creative app developers are able to build on it.
Most of these use cases of being develop on the NDA and can be share right. Now. However, why do we can share is the right to repair initiative.
<unk>.
The leading analyst has identified Blackberry IV ex the potential solution to the problem of safety and securely sharing standardized vehicle data with repair shops without compromising either vehicle safety or the Oems IP.
To support the development of the App ecosystems. This quarter, we made investments to grow the IV R&D team.
This includes starting of ecosystem development group led by our new executive joining us shortly from a major OEM.
We recently announced the creation of an IV innovation fund.
The final will drive use case innovation and the talk of IV adoption of IV by startups, we intended to start of the $50 million investment dollars of $50 million of investment in the fund portfolio company by the way. We will also have access to up to $100000 in AWS credit as far as <unk>.
And guidance through the AWS activate program a program.
It's already helped develop hundreds of thousands of early stage startups.
We're also soon to unveil an IV advisory council designed to shape and advise the IV development community focus on defining vertical specific use cases.
The first thing to have already sign of a leading insurance company technology company as well as the telcos and telcos.
Their input will complement the auto industry expertise provided by the top Oems in tier one.
Following our IV announcements major players, such as Florida, and Google as well as well as Bosch and Microsoft and announced commitments of the vehicle data market.
Because of IV as hardware operating system and cloud agnostic, we do not the Cds announcement of our competitive competition.
Our as competition, but rather opportunity for IV to partner and add value.
The vehicle data analytics market is both large and growing mckinsey.
And the monetizing data card data reported <unk>.
Estimate that the Tam the total available market will be in the region of $430 billion to $750 billion per year by 2030.
We recognized as the market is going to the competitive, but we feel very well positioned.
While we are already working with OEM in October we expect to release the early at the exploration of IV.
We also expect to ship, which will start shipping the product in February of next year.
Now moving onto spark as a reminder, we launch our new spark suites in may and the cyber suites in October.
Pipeline for our spark suites grew strongly sequentially.
The typical sales cycles is currently nine months. So we're expecting a good second half of the fiscal 'twenty true.
We continue to have success in upgrading our <unk> installed base to spark.
Adding unified endpoint security or EPS.
This year, we will start focusing on new logos for the <unk>.
Of course spark, we start to see strength in both renewal and upsell of in our key verticals, let me share. Some names of your some wins. These included the Q4 businesses with IRS.
The United States Department of Commerce.
The cost of development Bank.
The Scottish government as far as the Scottish police.
The London Metro police surfaces.
In the U S Marine Corp, as well as Bell Canada.
Just to name a few.
On the service front.
I must mention that none of our guard MTR managed service customer were negatively impacted by the recent solar win streak.
While I'm on that subject the happening.
Based upon the attack on Microsoft Exchange server.
Identify early this month was the example of threat actors leveraging patch vulnerabilities.
The share the scrip control of our ETP products protect.
<unk> has demonstrated we can safeguard customer from this strength.
Optics, our Edr product provides additional protection.
We're excited about two upcoming product that will launch there are launched they will launch and are important part of our.
Extended detection and response of our E. R X the our strategy.
The first of all our cloud based <unk> product optics free pointed out.
Debt due to be released this coming quarter and will expand data query and provide richer content for alert triage and threat hunting.
The second is our Blackberry gateway product that will be the first of all of the the zero Trust network access to both the SaaS environment as far as the on Prem applications.
While enabling sized silence AI from faster detection and response.
We will provide more detail at our virtual analyst day next month.
Finally, a brief word about <unk> of net hub, we have been pleased of the progress made by the <unk> spot this fiscal year.
<unk> technology is now used by 18 governments worldwide.
Average offering the highest level of security for voice and text communication.
AD hoc had a strong precision and federal government around the world, including protecting.
Over 70% of U S Federal government employees.
We see a significant opportunity for AD hog in the enterprise and.
And following the quarter end.
Most recently added.
We announced the new Blackberry alert product alert.
It's still on our critical event management expertise in the public sector, but with the additional features tailor to the needs of the enterprise.
Such as the integration with Microsoft teams and surplus now.
While it's much earlier in the stage of our sale, we have already recorded enterprise win including Fujitsu.
I'll now turn the call over to Steve to provide more details about our financial performance Steve.
Thank you John.
My comments on our financial performance for the fiscal quarter will be of non-GAAP terms unless otherwise noted.
Please refer to the supplemental table in the press release.
From the GAAP and non-GAAP details.
Please note that starting in the first quarter of our new fiscal year, we will no longer adjusted GAAP revenue for deferred revenue acquired the.
This means that GAAP and non-GAAP revenue will be the same going forward and comparative will be confirmed accordingly.
We delivered fourth quarter non-GAAP total company revenue of $215 million and GAAP total company revenue of $210 million.
Fourth quarter total company gross margin was 73%.
Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $5 million and excludes stock compensation expense of $1 million.
Fourth quarter operating expenses were $140 million.
Our non-GAAP operating expenses exclude.
$32 million in amortization of acquired intangibles.
$22 million and impairment of long term assets, primarily due to the rationalization of real estate due to the transition to remote working model.
$16 million and stock compensation expense.
$3 million for software deferred commissions expense acquired.
And 258 million.
The fair value adjustment on the convertible debentures, which is a non cash accounting adjustment largely driven by market conditions.
Needless to say this is due to the exceptionally high volatility and trading volume in the Companys shares during the fourth quarter.
Fourth quarter non-GAAP operating income was $18 million and fourth quarter non-GAAP net income of $16 million.
Non-GAAP earnings per share was <unk> <unk> in the quarter.
Our adjusted EBITDA was $35 million this quarter, excluding the non-GAAP adjustments previously mentioned.
I will now provide a breakdown of our revenue in the quarter.
Software and services revenue was $165 million.
Software product revenue remained in the range of 80% to 85% of the total with professional services comprising the balance.
The recurring proportion of software product revenue was approximately 19%.
As John mentioned earlier for the new fiscal year, we intend to report software and services revenue in two lines.
Cyber security and Bts.
Licensing and other revenue was $50 million in the fourth quarter.
Further the John's comments regarding negotiations relating to a potential sale licensing activities have been limited not only due to the ongoing negotiations, but also because revenue from additional transactions that could have been completed in the quarter would've been treated of contingent revenue and deferred to future periods.
Therefore had negotiations not been in progress we believe licensing revenue would have been higher.
Now moving to our balance sheet and cash flow performance.
Total cash cash equivalents and investments were $804 million at February 28, 2021 and.
An increase of $47 million during the quarter.
Our net cash position.
The increased to $439 million at the end of the quarter.
Fourth quarter free cash flow was 48 million of.
The cash generated from operations was $51 million and capital expenditures were three volume.
That concludes my comments I'll now turn the call back to John.
Thank you Steve.
For this coming upcoming fiscal year, our primary focus is for software and surface on it's on software and services growth.
I mentioned as mentioned earlier, we will not be making any non-GAAP adjustment of revenue starting this fiscal year. Therefore, any revenue outlook comments I'll make today and Steve will make today will be on the GAAP basis.
The control of the ongoing negotiation regarding the patent portfolio that we discussed we are unable to provide a full year licensing revenue outlook at this time, but I will give you some color.
At the at the at the end so that we had some plants, but it's still moving a lot of moving parts on that.
So first we anticipate double digit billings growth of both cyber security and Dts for the fiscal year 'twenty, two resulting in total software and services GAAP revenue in the range of.
From like a knife.
Yes.
Certainly you got out of my no flow jumbo.
Resulting in total the software and services GAAP revenue in the range of $675 million to $715 million 675 to 71 five.
This represents the growth rate of between 9% to 15%.
From fiscal year 'twenty one.
Cyber security, which will include <unk> AD hoc in fact, the smart is expected to have full year GAAP revenue in the range of 495 to $5 15, 495% to five one to five.
Millions of course.
I'm sorry.
<unk> is expected to of full year GAAP revenue in the range of $180 million to $200 million.
For both cyber security and Dts, we anticipate revenue in the second half of the fiscal year to be stronger than the first half.
Because of the ongoing negotiation regarding the patent portfolio that were discussed there is uncertainty around the licensing revenue outlook.
However, appreciate any of that it will be useful to the outlook for modeling purpose.
The most conservative scenario in which sales were.
The model that sales does not happen.
<unk> does not complete full year licensing revenue revenue will be in the region of $100 million.
In this scenario, we assume the negotiation and regulatory review continue for the first half and therefore, we expect revenue to be limited in the range of.
Maybe $10 million to $15 million per quarter.
However, we believe that the completion of the transaction will be beneficial to our shareholders.
We will of course update you on any of the major developments.
This has been an unusual and challenging year to navigate.
Despite the challenges we had a strong year executing our technology roadmap, bringing 59, new products to market. That's up from 30 last year in particular, the spark and cyber Street has made a significant step forward.
We also made significant progress with strategic partnership growth on the technology as far as the go to market perspective.
Our IV partnership with AWS of obviously has obviously been a particular standout.
I would like now to open for the for the call for Q&A.
Operator for you piece of it.
Yes.
Now we will begin the question and answer the question to answer. The question you May Press Star one on your telephone coupon.
He can Tom please make sure your mute function.
To allow you guys take notes from each outbreak.
Again from Taiwan.
To answer the question.
The plot shrinking from moment to allow everyone on the braking signals from Munich.
Do you expect from that unit sales from.
The one question on one side of the rock.
Some of our insurance question, Mike Walkley from Canaccord your.
Your line is simple.
Good afternoon.
Hey, John Congrats on all of the announcements.
Of the easier for you guys.
I guess the first question from me just trying to understand the licensing negotiations a little better.
Should you complete the sale just the vast majority of your portfolio and you won't have any licensing revenue going forward is it really the the whole portfolio or is it just a portion of that just kind of to gauge that.
Well, it's a major portion of our portfolio as I said, we cover of three major area of cellular.
Wireless communications and networking.
So.
The things to add.
It's relevant but it is not useful to us today and our strategic software part of the business and we retained.
All.
All of the embedded in all of the finance and audit encryption and security technology patents.
Okay, Great and then the.
The follow up question just on the guidance it would be great to break out the two divisions.
On the 9% to 15% growth is.
Can you maybe help us think about the two areas of which one we think will grow stronger on the assuming it's the etfs given the recovery in the idle, but any color on how the two different divisions cyber security and Pts micro yes.
Yes.
I think.
Because of the revenue first of all let me just clarify one thing billings, we expect double digit growth in both spot and Etfs.
From a revenue standpoint, because it's subscription based revenue, we expect single digit percentage growth with spark and we expect double digit percentage growth in <unk>. So you are right.
And expecting VTS two of the strong growth because of the recovery.
The double digit billings and both would be great. Okay. Thank you Chuck.
The next question, we have Daniel Chen from TD Securities Danielle Your line of anthem, Hey, Danielle.
John.
Just a question about how you are hoping to structure the deal sort of the patent sale should we expect ongoing.
The royalties to come from maybe you get a portion of of.
Of the licensing fees that you are did the buyer will take or is this more of a onetime deal.
There is a majority.
Of the deal will come in one.
The one time early but there is a tail that goes on.
I can't give you the details of it for multiple number of years.
Okay.
Now you mentioned.
And in the past that.
<unk> had offers for the entire portfolio. So what's different now thats, making you consider selling it.
The true two reasons number one is I really think of the wrong thing to sell the entire portfolio because there is so much of.
Uh huh.
We have an ongoing business in the cyber security in an ongoing business and <unk> and Dts.
Which of course includes the IBM <unk> ex <unk>.
Selling those portfolio will be extremely unwise.
For the company and for the shareholders.
So.
I think the team were able to.
The connected world.
With the parties that are willing to.
Address the portfolio of pie that is not being used by us today. So it just worked out from a business friendly point of view.
Okay.
And just one more if I may.
If the steel does go through any thoughts on how you will deploy the capital.
Yeah.
We're going to invest in.
Moving to invest in both cyber and we have an ambition in fiber to the I know we have lost a couple of years because of our integrations.
And we have a product of all caught up.
So you will see us being more aggressive in fact, we ran an AD today intelligence security everywhere and add to the day I just saw it on the New York Times, then so we're just going to step up in both people and spending and resources.
To go after the market and has the huge as you know very well.
In the huge market and no no.
No clear winner at this point in and the barrier of entry so not I'm not that high so we should be able to.
To capture some new businesses.
So we're going to invest in that and then of course, where the invest heavily on IV.
In vehicle of data platform.
It's very important to every Oems, whether they build and sell you work with somebody else of.
Work with somebody like us.
All very important so our relationship with AWS in this case.
It's a big plus so those those are the two business that was an investment.
Great. Thank you.
Absolutely.
For our next question, we have chip Cathy from global Anthony.
Hi, there.
Hello installation.
Although very challenging year very good execution, John I feel good questions I have.
The disconnect upon the popularity of Apple iOS it onto the started with the innovation fund that Apple created.
But the difference is.
It's not just the Apple, but the answer to the venture capitalists along with it.
It is called App economy, which is a multi billion dollar market and Apple is the brain beneficiary.
Look the IV platform that you have it is spectacular.
Moving really at the speed of light.
In October of the product will be launched and I mean, the kind of.
Well first of all the 12th per preview next year it will be in the market and you have the innovation fund exactly $50 part of the seed money Apple put in but I'm wondering do you have.
All of hadn't carnival answer of bringing in venture capitalist also.
And jumpstart of sub at the Hanmi automobile applications.
Applications economy, or something along those lines and you put on those and also do you think you could provide the could be very very solid differentiation for your company is if you could not get the right the money like what happened in but answer provide.
The intellectual property patent.
Each and every company.
The company that creates product.
The applications on your platform and take an equity stake in each one of those startups.
Make the company completely you know little speculative, but it could be a much better strategy that Apple had the.
I owe it.
Platform any thoughts you may have been out of a follow up question.
Great. Thank you so.
We only initially we put up $50 million of this fund and the.
And the objective so everybody. The objective is to make sure that we could build the application and we believe that although we could build a very solid data in vehicle data analytics platform.
Now without good applications and use cases.
It would not be sticky.
It will not be adopted I think there are a lot of company that can build data platform, maybe Alex more secure X y Z and simple and now having having a partner like AWS out but at the same time.
Sure.
We won't get the stickiness, so why didn't want to I didn't want to learn the experience of learned the lesson twice. So this is important debt early on I startup the.
Enablement group debt that go out of the applications.
Debt, we built some ourselves.
But the majority of you're going to have to be encourage other startups and even ex that.
Average company the interested in working with AWS cloud and working with Blackberry Q&A ex and all of the other technology that we provide.
And buildup application on the IV and also added.
We are going to.
Start of Advisory Council, which are vertical people vertical industry people as I said and they will then bring in some ideas that this is how I would see.
Ivy.
Out of my business case going forward to the answer your questions.
With the limited from that we have the established initially $50 million, we will have to work with other bdcs.
And so now.
Haven't gone through the steps of trying to pull them in and being a KOL funder.
We will have to work through that pipeline.
And identify.
Target company, there could be benefit from both the debt, what AWS software like which $100000 worth of free call usage. So that they can run their debt has been the development.
The AWS also have a lot of tools and a lot of.
Knowhow and navigate called the navigate to the help them. We of course provide them. The testbed in the end the technology support and out of.
As far as the IP is concerned I don't think we got the.
The other people is the IP.
Our net debt we see.
So.
Owning part of it.
We're going to let the company owned at the company that we invest in.
So.
I don't know whether I could I could help you protect them.
Obviously, we could help them to accelerate the IP filing we know we have a lot of people.
How to do this very well.
Very good John as you know two day intellectual property and patent the new cold.
Second question I had was regarding the intellectual property portfolio you have the law.
On the content that was more than 30000 patents.
38, 30 of 38000 to be ex that.
Wow that's amazing.
I know, it's very difficult to put a.
The details of the ongoing negotiation, but ballpark figure.
Talking about the.
20000 packages, which will be zone.
All of $15000 per day.
A ballpark top off.
That's not true.
We started to do this to provide the answer of sorry about that because it's part of our negotiation.
And.
So the category I'd put out with the it.
What is probably the best you could get the police for now the.
Categories, obviously, our cellular network gain.
And.
She is I'm missing one cellular networking.
Income and messaging the messaging of messaging the a salary of networking of messaging and then.
Encryption and security.
IV <unk> ex R. R.
Separate from this.
Our non intuitive.
I think I had my question's answer all of the best and looking for technology.
2022.
Thank you true.
For our next question, we have Paul Treiber from RBC capital markets. Paul Your line is open.
On paper, so much and good afternoon revenue.
On the patent sales at the 100 million in patent license revenue that you expect for this year.
If the sale goes through does it does the 100 million go away.
You know all of the.
License revenue of those with the sale and Conversely, if hypothetically speaking with the sale doesn't happen at all.
Should we think of.
Patent licensing revenue being in that continued at that I think $250 million in the path of what you said in April is good good day.
All of that's a good question. So this is an unusual year. So let's talk about it the patent license goes through.
The.
The sales go through we will have we will record a one time.
Okay.
A reasonably big number of followed by a tail.
A tale of up to seven years.
So it will not go away to zero or there are some recurring stuff.
The most of them will not be with us but.
So it will not be zero, but.
It will be quite small if the patent sales go through with one eight.
Next year in this fiscal year 2022.
If the patent sales does not go through the end. The first couple of quarters will be low because at the patent sale is being negotiated right now I actually.
Unable to do more other negotiation going on so the pipeline basically the frozen, but it won't go away.
So if the patent sales does not go through I may have to suffer a little bit for the first couple of two or three quarters and then we will then be assumed the the target $2 50, a year of patent licensing.
The address.
To your question yes.
Very helpful. I think the cash flow would be similarly aligned with those revenue numbers.
Unfortunately, yes, the cash flow will be similarly aligned.
Okay. That's very helpful. And then the second one is simple.
The big picture of like with the with the stock having having gone through the rally that has gone through in finance theory would pay the cost of capital the cost of equity is lower and so the question is the.
We have.
And sort of newfound enthusiasm of lower cost of capital.
Have you contemplated issuing equity.
At the levels Youre seeing how it could enhance the strategy, having more equity of more cash yes.
Yes.
The good question.
It's been a constant conversation with various bankers.
From a strategic planning growth and our M&A growth.
<unk> two day are not working on any specific thing, but well.
We are open.
We're not the Theres no.
This non principal debt that we won't do the only thing that we won't do is we want they are intentionally.
Dilute our shareholders.
Just to keep some money in the banks on the on the balance sheets.
I'd like to make sure that we have at least some idea of the use of share when people come to me and say by the way you can raise the converted zero zero percent.
And in a premium of ex percent up of.
40%, 50% of let's say.
I see that very attractive, but but then I keep asking my people. So okay. Once you get the money what are you going to do with it.
You will have you'll have a dilution of the hanging over your head.
And so I.
I don't know whether I answered your question I guess kind of.
Just kind of explain how I think about it.
Again I.
I know thats very attractive terms out there.
And at this level of equity.
So, but I wanted to make sure that we have of targeted use that to help the business first.
Maybe another way to ask <unk> question is for your strategic plan.
Require.
<unk> acquisition of our deployment of capital to execute on that debt current plan that you know we do the plan I gave you.
9% to 15% growth does not assume any acquisition.
Okay. Thank you.
Sure.
Our next question, we have Paul Keith from total shack kept from markets Hong your Lidar.
Hey, John John Kite.
Recognizing it's challenging with situation with licensing, but I guess with the proceeds if we assume this proceeds.
How would we think about deploying that capital I know you answered it earlier, but I guess the point being.
Is it the envision that you would look to do like some type of the strategic or transformative M&A to materially accelerate growth from the business I think it becomes the question.
Do you have a quick follow up that's somewhat yes.
It really is the quality of truly somehow depending on the target out there the entity of questions I'll always love to do that I really do and so.
There's also a question of affordability.
But.
Especially in the auto space and the auto Tech space I think.
Our position with <unk> from <unk>.
We are doing on IV.
With.
The <unk> technology that could go into a car I think we are well positioned in terms of what we could put in there might be some some acquisition we need to make the two.
To further our growth rate of our revenue.
That will be of target.
The interest in target.
And and.
Today.
There is no specific target I had in mind my people always have a lesser names that the take a look at but I don't have any specific thing, but the answer. Your question is the usage of those will be of a priority of usage for us.
Okay, and then maybe related let's set aside whatever is going to occur with the patent sale will transpire or not thats the case might be.
<unk> back to your comments earlier in the call can you talk to us about how we should think about the level of spend I know youre not guiding EBITDA free cash flow and I respect why but maybe just help us put it in context I think you talked about accelerating increased growth, but then when I looked at the the spend and I know.
Maybe Q4 as of the best spot to look.
Sales and marketing was up 10 year on year, 10% I know, it's got stock based comp in there, but R&D actually offset it so.
Should we think net figure actually dipping in the week might go negative a little bit or no.
That's not that's not our intent.
We have.
A reasonably large number of hires.
Mostly in sales and marketing sales and field marketing.
In our plan that I just provided you I mean.
You are right I.
I am unable to give you the EPS guidance.
Cash flow guidance only because the.
The licensing part is shifting so much so.
So we didn't want to we didn't want to go there at this point, but.
So the so the answer to your question it was not intended to reduce spending however.
We are taking reduction.
The reduction of <unk>.
The G&A.
We are also going to take reduction and.
In real estate.
If you noticed debt.
Steve had mentioned that.
We have the impairment charge of $22 million then.
Lot of them related to real estate.
It's because we decided to cut down our real estate footprint by may be up to 25%.
And this way that we will have after the pandemic.
We will have roughly about 20% to 25% of all of our team member debt will be working remotely on a radar burden from an in basis, we will provide some hotels offices and I think <unk> see that in many company, especially in kind of of software Tech company.
We decided we don't want to go off of 100% because we want to maintain the level of creativity.
And personality involvement, but so so we're going to save some money from infrastructures.
We're going to save some money from it.
And some of the consolidation work over there and then we will then fun engineering.
And most of the fund.
Go to market.
Great I'll just ask one last quick clarifying one.
Can you just comment net.
Respected it's difficult.
Obviously, we had the situation in Japan relating chips in Automotives.
What's sort of the broader meet John in terms of the base. Obviously these decisions will get made in the vacuum or overnight, but.
Is there overall, maybe a bit of a pause going on or people are still moving forward with.
Projects in all platforms. So so far with the 25 design wins, we have in the quarter with some really big name wins, Toyota Honda and EV Scania in trucks in Sweden.
And other things other other wins that we have so far the auto space is still very vibrant.
From a design win standpoint.
Then the eventually will hit us.
I'm following what GM and Ford has said publicly that GM has stated the second half of this year the chip shortage issues will be overcome.
And.
And they assume reduction of the free shutdown factories right now.
So thats why we said when we do our planning to day, we assume that we'll continue to win the design wins in <unk> ex that we will then.
Have developed the license.
And its revenue and hoping that we will do some more professional services.
And then the production obviously kicked in in the future.
It does affect us immediately a little bit but since we're in the recovery mode, I think its being absorbed and somewhat.
So all of our guidance of 180 to 200 million for the year assume that that this problem trollish problem of the planned shutdown problem.
The mid year.
Now.
That's the sustaining the ground and we have two more.
Motto is somehow some somewhere if that is that prolonged then that will prolong a recovery.
But I'm, hoping do minimize the asbestos we can not every plans of shutdown by the way obviously you know that.
Yeah that helps thanks guys.
Absolutely.
Yes.
Next we have Steven Li from Raymond James Steven Your line came from.
Hey, John.
How profitable the.
Licensing revenues in the gross margin for example, higher than your corporate average.
Yeah.
Yes, which is which is painful for us in the first couple of quarters, because we expect one way or the other it's going to be the local revenue low level.
The the answer is yes, it's higher than the corporate number.
By a significant percentage of.
So John is the patent sale goes true could your EBITDA turned negative for example.
Yeah, it could be in a more thing too.
The EBITDA EBITDA goal of negative.
I Didnt calculate EBITDA go negative the Etfs will go negative.
But I am I am hoping that we will ready to restart regulation from growth in software and surfaces to offset it.
Alright got it thanks.
Absolutely.
We don't have any further questions at this time.
Cash on hand, the call back of REIT compliance from keeping current.
Thank you Amy for closing remarks. Thank you. Thank you very much I don't know of any remarks.
Thank you all for your interest in the company.
We will have a very interesting year ahead of us here.
We believe our software services and the.
Especially.
When we separate out of the two lines.
We already know the Sparks will do some global growth in billings and.
Revenue growth will come mostly from Bts and licensed things it could go either way and we will keep you posted and so im sorry as being late in the evening in the in the.
In the East coast.
You all very much for attending today's call and have a great evening.
This concludes today's call. Thank you for your ERP.
You may now disconnect.
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