Q3 2022 BlackBerry Ltd Earnings Call
Good afternoon, and welcome to the Blackberry third quarter fiscal year 2022 results conference call. My name is Charlie and I will be your conference moderator for today's call. During the presentation. All participants will be in a listen only mode. There will be facilitating a question and answer session towards the end of the conference.
Should you 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, I would now like to turn the call over to Tim.
Blackberry Investor Relations. Please go ahead Sir.
Thank you Charlie good afternoon, and welcome to Blackberrys third quarter fiscal 2022 earnings conference call.
With me on the call today, Alright sensitive 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 and Steve will review the financial results.
We will then open the call for a brief Q&A session.
This co was available to the general public for a 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.
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 unexpected 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 discussed in the company's annual filings and M DNI, including the COVID-19 pandemic.
You should not place undue reliance on the company's forward looking statements. The company has no intention and undertakes no obligation to update or revise any forward looking statements, except as required by law.
As is customary enjoying the cool John and Steve will reference non-GAAP numbers and a summary of our quarterly results for.
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 Joe.
Thank you. Thank you Tim good afternoon, everybody. Thanks for joining the call today.
I'm pleased to report that this quarter, we delivered solid sequential billings and revenue growth in both our Iot and cyber business unit and it beats expectations.
I'm also pleased that despite all on our ongoing investment to grow the top line EPS come in much better than expected.
Let me start my review with the Iot business unit.
Revenue was $43 million, representing a 34% free for 334% year over year growth, although noting that last year was heavily impacted by the pandemic.
Gross margin was 81% and Iot, a our increased to $91 million.
This is now the third consecutive quarter in which a R has increased.
This was a very positive quarter for <unk> driven by continued strength in design win activities. We achieved record quarterly revenue from development seat license as well as associated professional services. In fact demand is so strong right now so we're expanding our professional services team.
By hiring additional Hudson <unk> X.
In addition to the near term revenue benefit. These strong design wins serves as a positive leading indicator of the longer term health of the COO and X business overall.
Once completed obviously these designs will move into production and generate royalty revenue in future quarters.
In terms of production base royalties this quarter, we saw a modest increase compared to Q2.
While we expect the auto industry supply chain issues to remain a meaningful headwind to vehicle production volumes through the end of this fiscal year and into 2022, we see the impact on <unk> gradually lessening, including an improvement in Q3, which is Q1 and Q4, which is Q3.
I will now provide additional color around the design wins in the quarter the.
The continuous strength, we are experiencing is further evidence of our leadership position in auto we are certainly not taking this precision for granted and continue to invest in all aspects of the business.
In the quarter, we have a major win with BMW.
<unk> enter a multiyear agreement with us to develop new level, two and two price autonomous drive system.
<unk> will make some models across the entire BMW group.
Autonomous drive is the clearest example of.
Safety critical software application in the car, which as you know its the most defensive attributes so Q N X.
BMW selected <unk>, because all our deep expertise and strong track records in safety and reliability as well as security.
In addition to licensing our technology, we will be providing a professional services team to support BMW in the aggressive development timeline.
Other auto wins included a major new design for all acoustic middleware one of the Ohio ESP products. We also had a number of $8 advanced driver assistance, sorry, eight dos gateways and digital cockpit design wins with leading OEM and tier one.
In Q3, we have 11, a total of 11, new auto design wins and 13 wins in the general embedded market.
Jan.
The general embedded market witnessed included a number of medical application such as a infectious disease diagnostic platform as well as a next generation robotics surgical arm.
Well, we also had wins in industrial application as well as aviation, including an engine a stimulator with a leading aerospace company.
With any luck, we'll also be able to share details. So further significant auto design wins with you all at the CES in January.
A word on product development.
During the quarter, Google Qualcomm and Blackberry three of the leaders in the autonomous digital cockpit announced a collaboration to buoy chipset that allows blackberries hypervisor to seamlessly integrate with Android auto or automotive.
We are already seeing the results securing the first design wins for this technology with a major European OEM in the quarter.
Previously to develop a digital cockpit with an Android automotive infotainment system running alongside safety critical application on a single chip will require hundreds of hours of expert develop a time for building custom integrations.
This collaboration takes care of this for the customers saving them, both cost and time to market as far as delivering a higher quality product.
The auto industry continues to move towards consolidation, particularly consolidating digital copies with this consolidating digital cockpits.
With disposition <unk> been strong maybe.
You'd be even more strong in that space given the safety requirements.
This provides the potential to win additional designs that will include both a hypervisor and I'll I'll toss out QR next operating system.
Turning to the Q4 outlook for the Iot business. The strength, we have seen in design activities is expected to continue into Q4, and we anticipate a slight easing in supply chain headwinds.
As a result, our outlook is for a further sequential revenue growth.
And for Q4 revenue to be in the range of $50 million to $55 million returning to the pre pandemic run rate.
We feel very good about the Iot business right now, but investors should keep in mind that the auto industry production headwinds.
I will now provide a brief update on IV.
We released the early access version of IV in October as we have previously targeted.
This promotion has been reached to a small number of ecosystem partners and will form the basis of a product demonstration at CES in January.
This quarter, our co development partner AWS announced the launch of a complimentary prato for IV core AWS Iot fleet wise.
Well Ivy as well are these calling allstate and can work with any major cloud provider AWS Iot fleet wise, it's a micro service that allows the IV insights to be efficiently and intelligently upload to the AWS cloud, where they could support cloud Si applications.
And then there's a significant development for IV is the bar is Bosch the world's largest auto tier one supplier announced that their new copper integration platform will support IV.
This platform is built on <unk>.
<unk> Hypervisor.
Showing the potential for Upselling, Ivy and future design to the large and growing installed base.
Our main focus for IV right now its dues unsecured POC proof of concepts.
And we are hopeful that we can announce something in the near future.
Overall, we are pleased with the progress being made.
Let me, let me now move to the cyber side of the business. This quarter, we delivered sequential billings and revenue growth for the second consecutive quarter.
Revenue was 128 million gross margin was 59%.
<unk> was 358 million dollar base net retention was 95% we saw continuous growth in pipeline for our unified endpoint security products in particularly our managed service offering God.
We're excited we're very excited about how our products with farm in head to head bake off against other next Gen competitor this quarter when we got to a POC.
Oh technology performs well as illustrated by competitive wins again cloud straight and centered on one as far as other oldest nature based players like Microsoft Mcafee and Symantec.
Among these wins was another top 10 global automaker.
Building on the win with a top 10 OEM, we told you about last quarter.
Other notable competitive wins include an international banking group, a leading European financial services firm and a global marketing agency.
In addition to success with large larger companies, we're seeing a lot of interest from small and medium sized business too and this will continue to be an area of focus for us as the market opportunity is large.
Our automated protect and guard managed service offerings really resonate with small and medium sized company that don't have a large security infrastructure.
POC all been involved customer performing vigorous testing of our product against the competitive one and the success. We are having in illustrating our competitive advantage. Let me highlight a few of those key ones.
The first is all it's all focused on prevention with customer testing demonstrating that we stop threats pre execution. This contrast to the edr approach that aims to remediate threats. After the fact.
The second is artificial intelligence, whereas for other AI strategy is new and even an optional feature outside as AI engine is central to our technology.
It is the most mature in the market having learned from the analysis analysis of trillions of files and literally identify over 20 billions characteristics.
The first event the third advantage, we have is our ETP works, both offline and online our protection.
Endpoints are protected 24, seven and don't rely don't rely on cloud connection which is of course castling, there shouldnt be could be very expensive.
Fourth we protect mobile <unk>.
Nobody in this space know mobile is better than Blackberry I hope you agree with that and it is rapidly becoming one of the largest fred surfaces.
These four attributes differentiate Blackberry security offerings from the competitor.
Hum.
I'm sure you all heard about the major security incidents known as locked for shell.
Which CSO has classified at the maximum level of Tan with severity.
This relates to major on their abilities in the Apache Apache lawful Java library extensively used by the industry.
Let me provide you with an update from a Blackberry perspective.
This is obviously a rapidly evolving situation and unlike many software companies, who are still struggling to understand the impact we track and categorized our product portfolio open source software content.
This mean that we're able to very quickly identify which of our product uses as library and create mitigation and release patches as the threats evolve.
We can confirm that none of our coal products, namely protect optics.
<unk> <unk>, our tallest and hypervisor none of those products are negatively impacted by these vulnerabilities.
Furthermore, our suite of cyber products, particularly our protect ETP and guard managed service and how customer prevents malware and ransomware that bad actors could try to execute using diesel novelties.
Now for a brief update on key partnerships.
In recent quarters, we have released a number of new products and announced a partnership to expand our extended detection and response offering or X D. R.
In the quarter, we were excited to announce a partnership with Okta and main pass as far as as far as side with Astellas Ciber.
And X M Ciber.
And then as significant Xdr partnership is with <unk>, the leading next Gen Sim provider.
This partnership allows us to greatly improve both contacts and visibility of threats by adding telemetry data from hundreds of network integration to our cars manage XD our surface.
Manage XT, all as a strong market opportunity given the complexity of managing threats across the network.
Okay.
Finally, we are pleased that during the quarter SCE lapse.
Pending independent leading a leading independent cyber security research firm ranked Blackberry as the best New endpoint protection protection solution of 2021.
A few works on customer wins.
Across our business units I'll key vertical this quarter with government banking and insurance.
In government, we close versus some of the world's leading governments and government agencies, including the U S Navy, who became a new secure voice customer.
The department of Homeland security, the Dutch government. The U S Department of education, which was happened to be a new logo wins, while at all.
The spacing of key competitors as well as Scottish government U S Central command.
February Aviation authority FAA and the IRS just to name a few.
Yeah.
Moving to the outlook for the type of business. We expect continued sequential billing growth in Q4 and for Q4 revenue to be in the range of $125 million to $135 million.
As previously indicated I think I said it last quarter closing certain large government deal in Q4, it will be important.
Moving onto licensing as you know we have been in negotiation regarding the sale of our noncore portion of our IP patent portfolio this process or taking much longer than we had hoped and trust me I shared a frustration about the timeline.
[noise] negotiation or very close to a conclusion and we are literally down to a last few important items now.
Both parties are working hard to get this finished and we expect to reach a definitive agreement agreement very soon.
We will provide shareholders an update on progress in January.
In the quarter licensing revenue was $13 million and gross margin was 54%.
This piece expectation for the quarter.
Should the sales reach a definitive agreement in January we will suspend monetization activity and therefore, we expect Q4 revenue to be close to zero.
However, it's not that we will continue to expect revenue to be around the 10 million mark for the quarter.
I'll now hand over to Steve to provide additional colors on the financial.
Thank you John.
My comments on our financial performance for the third quarter will be in non-GAAP terms unless otherwise noted.
Please refer to the supplemental table in the press release for the GAAP and non-GAAP details.
We delivered third quarter total company revenue of $184 million.
Third quarter total company gross margin was 64%.
Our non-GAAP gross margin excludes stock compensation expense of $1 million.
Third quarter operating expenses were $142 million.
Our non-GAAP operating expenses exclude $29 million in amortization of acquired intangibles.
5 million and stock compensation expense and a $110 million fair value gain on the convertible debentures.
Given our ongoing investment towards driving topline growth in our core Iot and cyber businesses.
Third quarter non-GAAP operating loss was $24 million in the third quarter non-GAAP net loss was $1 million.
We recorded a non operating gain of $25 million.
As a result of.
Gains realized in two legacy venture investment funds that make up the majority of the long term investment balance on our balance sheet.
Related to this gain these underlying the investments underlying these funds.
Represent a passive interest we had which were sold and we received a distribution cash distribution of approximately $35 million during the quarter.
Non-GAAP earnings per share was breakeven in the quarter.
Our adjusted.
EBITDA was negative $8 million this quarter, excluding the non-GAAP adjustments previously mentioned.
I will now provide a breakdown of our revenue in the quarter.
Cyber security revenue was $128 million in.
And Iot revenue was $43 million.
Software product revenue remained in the range of 80% to 85% of the total with professional services comprising the balance.
The recurring portion of software product revenue remained at approximately 80%.
Licensing and other revenue was $13 million.
Given the limitations to our monetization activities.
Due to the potential IP portfolio sale.
Now moving to our balance sheet and cash flow performance.
Total cash cash equivalents and investments were $772 million.
At November 32021.
Remaining consistent during the quarter.
Our net cash position remained at $407 million.
Again, given our investment in our core software businesses third quarter free cash flow was negative $21 million.
Cash used by operations was $19 million.
Capital expenditures were $2 million.
That concludes my comments and I'll now turn it back to John.
Thanks, Steve.
I move to the Q&A.
Let me summarize the key points for the quarter.
We're pleased with how our new organization structure is executing right now.
We saw strength in design activities for our <unk> business, achieving a record quarter for design related revenue and it looks like it will continue.
Macro supply chain headwinds are still impacting vehicle production, but we see an improvement picture heading into Q4.
We made good progress of IV, including releasing too early as escalation of our products.
On the fiber side, we again seek with sequential growth in billings and revenue, including more head to head wins against all key competitors.
The ongoing lawful show incident is a great example of the huge size of them.
Cyber market opportunity and also showcase our capabilities, while others are struggling to identify the impact on their products from open source coal, we are responding rapidly and effectively.
Overall, Blackberry deliver a solid progress we delivered solid progress, beating both revenue and earnings expectations for the quarter.
So Charlie.
<unk> started the process of Q&A.
No problem, Sir and we will now begin the question and answer session to ask a question you May press star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your line is muted against press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for a question and we request that you limit yourself to one question.
And one follow up.
Our first question from today will be from Daniel Chan with TD Securities. Please go ahead.
Hi, Dan Hi, guys Hi, John.
Can you provide any color on their cyber security or it looks like it declined to $3 $58 million from 364 quarter over quarter, just wondering if theres any churn and which products may have been affected and.
And maybe if any process showing outsized strength, yes.
Yes, we have a.
Positive surprise.
With a higher revenue came in more than we expected from pharma.
From a <unk> product.
So that that has that is principally drove to the numbers that useful.
Okay.
And then the guidance that you provided for next quarter, what are the puts and takes in that guidance. Thank you.
Yeah, so let.
Let me.
Break it into two pieces of Iot versus fiber.
In the Iot Si.
You know touch wood I think we all feeling pretty good about it.
As I said, we're going to get back to pre pre pandemic level.
Design wins are good.
That brings bell.
We have a good pipeline for professionals backlog of professional services to help the customers to deploy our technology as well as to develop a seat.
And as I said earlier, the royalty, we expect to uptick a little bit from Q3, so that kind of compose the math for the for the guidance between $50 to $55 million.
Few okay about that.
I don't want to jinx, it but it looks okay on the cyber side it relies on.
A number of deals that are quite big from the from the government side from a revenue perspective because of the fact that we expect these to close a little later in the quarter.
So the revenue contribution will not be as speak.
Obviously in the beginning of the quarter.
But the buildings will look fine.
Thanks, Sean happy holidays.
Dan.
Your next question comes from the line of trip Chowdhry with Global Equities Research. Please go ahead Hello, Hi.
Hello, Thank you very good execution.
On the quarter, a few things I would be interested in selected to IV platform.
You had the early access program almost now for two months.
Vincent.
No data point to like to shield, maybe in terms of downloads applications.
Partners any reaction and then yeah.
Okay.
So.
Yeah, we of course, we Liza two the application partners and a handful of Oems.
Comment in fact for the.
<unk> was very positive.
As I said earlier, we're going to use that as a basis of our demonstration or <unk>.
And I'll talk at.
At CES at our Booth and we also got a digit digitize and streamed at those sessions I'll talk a little bit about that later.
So positive response.
Lots to do a lot of activities going on the application.
You know, we have announced a few application I hope I can promise every single one of them you will see at our booth.
We have the battery management systems.
We have the cars the wallet.
We have other.
Rideshare.
Applications so.
So I don't know where every single one of them will make it to our booth, but I expect quite a number of them will.
And you will also see a carpet you also see accompanied by what I saw you trip you always you also will see a carpet that we collaborate with M.
M S on AWS.
Uniforms, and then also if we look at the new generation EV players and also the old <unk>.
Todd.
Automobile knows they seem to be now getting on the bandwagon.
I was wondering does your platform whether it's IV.
On Q&A.
Provide over the air.
Just out of the box.
Yes Q.
<unk> has an option on <unk> of course IV has dropped the otas.
The physical link is the simple.
And we do have it.
The more important thing that I talked about earlier about the new AWS.
The new Amazon releases call Streetwise.
Allow a logical link between the edge of the Cogs or to the cloud.
We're taking advantage of that micro surface.
So yes, we do we do both it's obviously both ways from the cloud to the car and vice versa. So so from data and code, we do have OTI Z already already existed.
So looking forward to seeing you announcements at the CES show.
Great. Thank you Tripp thanks.
Thank you. Your next question comes from the line of Mike Walkley with Canaccord. Please go ahead.
Hey, Mike.
These drugs are good afternoon. This is actually Andrew on for Mark Thanks for taking my questions.
So just so you know.
John <unk> here with Jordan.
Cyber security unit last quarter, just wanted to see how the productivity of your investments and your quota carrying sales reps are trending in this area of your business and how should we think about maybe some of the sustained investments as we move into 'twenty three.
Hum.
Good good question.
John join Us and the exciting part of that is that John has.
Almost experience.
Cyber security market.
He ran a $3 billion business as a precedent of CRO of Mcafee before.
And so he is very relevant and he brings in a lot of relationship.
And particularly with customers and partners. So that's very good and he knows how to make salespeople who are successful in the cyber world.
So I don't know how to describe productivity, but I could tell you one data point.
That two day, we have 10% more.
Quota carrier, what we call it we call the direct quota carrier, we have 10% more direct quota carrier.
Then a year ago.
At the beginning of the yes, sorry than at the beginning of the year, we did the math that way so and the productivity.
Productivity.
We will start seeing that and so a lot of them are new because we recently hired them.
We would see those coming in the next few quarters.
Think about it sales cycle, let's say two maybe three quarters call. It three I.
I should be seeing some results.
And Ah.
The second quarter over the third quarter next year.
Okay, great. Thanks for the details John.
Yes.
Just as a follow up so you noted yourself further pipeline growth within cyber security you also expect sequential sequential billings growth in Q4.
When should we expect this to start showing up in <unk>.
Oh next year I hope.
So I.
I feel pretty good about mathematically that we're looking for a good growth next year.
Okay, great. Thanks for the details.
Sure.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad. Your next question comes from the line of Paul Treiber with RBC capital markets. Please go Hey, Paul.
Hey, John Hey, good afternoon.
Hi.
Within Iot I mean, it seems like equate.
Beat on the design win related.
Avenue like developer seats.
And professional services what is the typical gap.
They can duration between professional services work and when it goes into production and then also is there a ratio.
Like for every dollar of professional services in design as a developer seats to ultimate the royalty revenue that you may see.
No there is no.
There's really no direct ratio.
It's really.
You know some some OEM.
One is a very aggressive development schedules.
So they used to in that case, they will ask us to provide some expertise.
And of course, we under the professional yourself this program.
They will typically buy a.
A higher number of developer seats.
Because they have they want to put more engineers on it and Palo.
<unk> wants to do it a little bit more sequentially.
I would tell you that if you ask our folks.
We seeing the former that people are more aggressive timeline and not because whether you're whether you're an autonomous vehicle design or whether you're in an electric vehicle design. The combination of both our competition is heating up in the auto industry as you all know.
So time to market is important to them. Unlike the kind of the old rule of thumb that a new model coming out of the last 10 years.
And usually it takes five to seven years.
To get the new model out from conception to protection.
I think those are very much collapsed, partly because by.
Players like cash flow at the World and there are a lot of the Chinese players there.
They're the vitamin cycle and sales cycles are a lot shorter manufacturing cycle.
So there isn't really a <unk>.
You buy more develop a seat and definitely you have long big pick up production royalty I don't think Theres, a real real content.
Constant factor.
Oh relationship there now.
And typically as I said.
We see it we see a developer.
And then a developer of seat licenses as well as professional service you show that you add about three years now you start seeing production.
Nowadays I have seen numbers that ILUVIEN, all plans I shouldnt say numbers plans, a little bit more aggressive than that.
But.
A typical cycle will be three to five years from when to seeing the royalty stopped rolling.
And once the royalty you stopped rolling usually loss.
The excess of seven years.
Okay. Thank you. That's helpful. Just one follow up question on sales and marketing I was in the impression that you are planning to ramp it up more significantly.
It's been flattish.
Flat this past quarter, how should we think about sales and marketing spending from here.
Yeah.
Marketing will definitely.
The ramp up.
I could tell you John John CEO Matteo on side by side.
We don't do as much of marketing.
In.
<unk> Iot.
Because especially in the auto space and some of the jam vertical.
We are already reasonably known no name and known entity. So we don't we don't need to do as much on fiber as you know we need to do quite a bit.
And John John <unk> is very focused on it so we.
You will see that going in.
Going up quite a bit in.
In fact.
Okay. Thank you for taking my questions sure.
And we have no further question at this time I would like to turn the call back over to John Chen Executive Chair and CEO of Blackberry for closing remarks. Thank.
Thank you Sean.
Okay. Thank you everybody and as we mentioned we're participating at CES in Las Vegas in January the.
The focus will be on Iot business and how it address the benefit from the key trend in edge computing.
No doubt a key highlight will be the demonstration of our IV technology, including the illustrating how IV use edge computing to create insight for a sensor data both hardware and software defined sensor will.
We will be hosting a hybrid in person and livestream demonstration of the IV technology, followed by Investor Q&A session with materials Ericsson.
The precedent of the Blackberry Iot group at eight a M Pacific on Thursday January to six.
We will be releasing more details about this shortly.
I'd like to wrap up by wishing all of you. Thank.
Thank you for joining us and wish you all you and the investors and everyone on the call here, a happy holidays, and a safe and successful new year. Thank you very much.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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Sure.
Okay.
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