Q4 2022 BlackBerry Ltd Earnings Call
[music].
Good afternoon, and welcome to the Blackberry fourth quarter and full fiscal year 2022 results conference call.
My name is Brent and I will be your conference moderator for today's call.
During the presentation all.
All participants will be in a listen only mode.
We will be facilitating a brief question and answer session towards the end of the conference.
Should you need assistance during the call. Please.
These 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 today's call over to Jim Foote.
Blackberry Investor Relations. Please go ahead.
Thank you Brian .
Good afternoon, and welcome to <unk> fourth quarter, and full fiscal year 'twenty to 'twenty two.
<unk> conference call.
With me on the call today are executive 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.
<unk> is available to the general public.
Cooling numbers I'm, sorry, a webcast in the Investor information section at Blackberry don't call.
A replay will also be available on the Blackberry Com website.
Some of the statements, we'll be making today constitute forward looking statements.
Pursuant to the Safe Harbor provisions.
U S and Canadian Securities laws.
We'll indicate forward looking statements by using words, such as expect will should model intend believe and similar expressions.
Forward looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends current conditions and expected future developments. That's why there's 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.
You should not place undue reliance on the company's forward looking statements any forward looking statements are made only as of today and the company has no intention and undertakes no obligation to update or revise any of them except as required by law.
As is customary during the call John and Steve will reference non-GAAP numbers, and a summary of our quarterly and full year 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.
<unk> com web sites and with that I'll turn the collector to Joan Thank you Tim.
We have to change the intro of the script now.
Just makes vice President's congratulations thank you Chuck good afternoon everybody.
Thank you Michael Thank you for joining the call let me start today with the Iot business unit.
I am pleased to report that we recorded the first 50 million plus quarter.
Since the start of the pandemic, despite the ongoing challenges for the auto industry.
Revenue for the quarter came in at $52 million, which is 21% sequential increase and 37% year over year growth.
Gross margin also increased to 85% and I O T. A R increased for the fourth consecutive quarter to $93 million, which is up 11% year over year.
In addition to seeing a modest increase in production base royalty, we set another new record for quarterly revenue from design activities.
This revenue is coming from development seat and professional services used by the customers to design, our <unk> software into vehicles and other Iot endpoints.
This training is not only deliver near term revenue, but also points to a long term business volume once these design <unk> into production.
In addition, we have a good line of sight to upcoming professional services backlog from confirmed design wins and are hiring additional heads to meet the demand. We also have good visibility into the pipeline for potential new design wins in FY 'twenty three.
In terms of royalty as I said earlier, we saw some improvement in volume this quarter. However, the challenges for production remain.
Major Oems have indicated continuous supply chain headwinds particular chip shortages, although they expected the situations are largely improve as the year progresses.
The conflict in Ukraine has added future further disruption to an already challenging environment for the auto industry and we will continue to monitor that impact.
You may recall that over the last few years, we haven't seen a significant increase in the proportion of the queue annex business from safety critical Foundation software such as Adas advanced driver assist.
Digital cockpit and autonomous drive.
This now constitute the largest part of the total business overtaking infotainment.
This strategy to focus on functional safety play place to <unk> strength.
And as validated by broader market trends towards <unk>, but you see you consolidation as well as software defined vehicle.
We also see significant growth in safety critical design opportunities in our pipeline.
Gross margin in the quarter improved from 81% to 85%. This is largely driven by the improvement in production royalties royalties due when the vehicle is shipped and they're just a low cost for us at this stage of the designs that lifecycle, meaning they have a high gross margin.
Let me now turn to the new design wins, we secured in the quarter. This was a record quarter in terms of the number of new design wins, we recorded 17, one 717, new auto designs and 28 wins in the general embedded market.
$8 registered the most wins in the quarter, followed by digital cockpits and instrument clusters.
Once again, we won business with leading automakers and tier one suppliers, including Hyundai Neo Bosch.
Sian Denso and this is a special for Tim Sky shifts for the New Gordon Murray <unk> 50 of hydrocarbon.
I guess I just ran in Ireland.
I see the picture of it I should say team is showing me the big pitch. He was quite impressed with that.
In June we recorded wins in multiple verticals, including defense and aerospace.
Industry industrial does as well as medical our strongest Jim segment.
Like in auto we have the highest level of functional safety certification for medical and we're seeing increased momentum there.
Design wins this quarter includes analytic analytic devices for use in medical labs, as well as for surgical robots.
Let me now turn to IV.
At CES in January we demonstrated product running with live data on auto grade hardware.
This demonstration form the basis of many constructive meetings with OEM and as a result, we have multiple additional request to start proof of concept or we call. It POC trials.
We currently have more requests than we could handle which is a nice problem to have.
The first POC issue with the Chinese.
The automaker.
The actual vehicle patio.
A leading Chinese tier one supplier.
The plan is to integrate IV into the digital cockpit.
The expectation is for successful poc's to lead to design wins I E. A commitment from customers to design IV into vehicles.
The C Cemetery should also allow us to showcase two of our many potential application does ivy can enable.
<unk> IQ in vehicle payment and <unk>.
Truss AI driven battery management application with both very well received by Oems and are included in the IV Poc's.
Ivy product development remains on track and last month, we released the latest version of the product that is POC ready.
Let me now go into the cyber security side of the business. This was the third consecutive quarter of sequential billings growth.
We really saw only grew double digit versus Q3, but they also increased year over year.
Other revenue was $122 million.
Gross margin improved by 200 basis points to 61%.
<unk> was $347 million and dollar based net retention was 91%.
Market conditions for our cyber security products are positive. This is in part because of the ongoing heightened.
Level of cyber threats, our guard managed <unk> cyber security team in line with other leaders in this space has seen a significant increase in threats in recent weeks.
In particular why for malware, though that aims to take the victims service offline is a unprecedented level.
Some of the most prominent example of this currently identified across the industry, including the Hermetic Viper that has seen seeing the cyber Italian Ukraine, Latvia and elsewhere.
Locks have shown that our products are protect product project E P.
Has been hasnt been blocking this malware blackberry customers.
Before he could execute.
The same is also true for which the case another leading sample to library malware that is target the Ukrainian government as well as the Ukrainian nonprofit organizations.
In fiscal year 'twenty, two we released 48 new products.
The cyber security products pipeline growth is strongest for the following three Gateway Zero Trust network access or a C. T N a.
Our managed service and Tucson or behavioral analytics.
Okay.
On the marketing front, we're gonna elaboration, Australia silence brand for us.
<unk> products, the brands still resonate as strongly with customer and across the industry.
Investor handset that hearing how cyber products are competing our interview is helpful. So let me provide you with a couple of recent wins.
Examples of wins.
The first is with a leading publicly traded medical surprise conglomerate based in the United States.
The customers like many others were struggling to Savi 24, seven security operation centers, and how a competitive tender process between Blackberry cloud straight and Arctic Wolf.
They bought more than 10000 license of our <unk> managed service due to Blackberry performance and security credentials.
The second is with a leading manufacturer of base in Asia selected Blackberry over cloud strife fortunate and carbon black following a deep following a detailed POC. This selective blackberry because of our product strong performance and covering multiple threats during the trial.
Legacy signature based vendors still account for a significant portion of the overall market, especially with SMB customers. This was always an area of focus on silos.
An example of the recent wins there was logistic company that how the bake off to replace their current Mcafee and Microsoft defender solution. After a vigorous assessment that include Mcafee Symantec and cloud straight they bought about they bought approximately 2003 years license for our garden advanced product because we detected a number of threats.
It didn't.
As well as providing a higher level I was customers surfaces.
Yeah.
Let me also provide you with an update on talent acquisition building on the progress we made last year in ramping the sales force we have been successful, adding further industry experienced studios cyber security expertise, we already have that Blackberry. This quarter, we not only have included sales leaders from direct rivals, but product development leaders also.
Cyber is a hot market for talent right now so we really piece of our ability to attract and retain high quality people.
As stated earlier came in at $347 million. This is a decrease of $11 million compared to our prior quarter and was driven by two key factors.
The first factor was starting in January we cease operation for legacy Blackberry mobile devices. This move allow us to save significant infrastructure costs going forward. However revenue for the enhanced Sim based licensing or we call. It SPL are also ended as a result.
The second factor impacting a or was a churn in smaller OEM customers recently, we have seen a trend towards some less features rich OEM products being sold by some of our competitors as part of the bundles or enterprise.
Since agreement.
Blackberry <unk> on the other hand is a premium product that also has a very high level of security.
We've seen some smaller more price sensitive customer chose to use a quote.
<unk> three <unk> product that has come with the bundle to save the incremental cost at the expense of security.
These customer or is that a relatively small portion of our OEM base. It is also important to note that our leading security profile continues to resonate strongly with our large core customer base are the largest bank and government agencies.
To reinforce this point this quarter, we secured <unk> renew with the U S Air Force the U S Department of defense.
Excuse me the U S national grid as far as number of international governments, including Poland Ministry of Foreign Affairs, Northern Island Department of Finance and personnel, along with Swedish and Italian governments just to name a few.
Amount of a major bank this quarter, we renew with Deutsche Bank, along with well known American Canadian and Indian banks, two major Swiss banks, including the Swiss National Bank, and a global credit card company.
We also recently renewed for three years for a global law firm White encase.
Sure.
They handle confidential data on a continuous basis and they felt that none of our competitors met their security needs better than Blackberry.
During the quarter. We also successfully essentially up so silent cyber security product to this and other OEM customers. It is likely that we'll continue to see some headwinds for <unk> in the near term, but we are taking steps to minimize that impact. This includes looking at ways to bundle Blackberry <unk> with other partners product.
The appeal to the mid market as well as continuing to develop new features that our customers that our customers valued.
Stay tuned for future updates on this.
Before I wrap up my comments on cyber security I'd like to share that going forward, we will start to provide quarterly billings information for our cyber business as part of our ongoing reporting.
We believe that this will be well received by shareholders and have them more clearly see the progress of the business will be making.
Moving onto a licensing on January 31, this year, we announced that we entered into agreement for the sale of the legacy portion of our patent portfolio. The sales price is $600 million were $450 million being due at the close and the remaining $150 million.
In installments.
I am pleased to report that the transaction is successfully cleared a regulatory review stage, having received approval from the Canadian government investment in review Division on March 22nd as far as the U S. HSR approval the antitrust approval that is surely before that.
Completion of the remaining closing conditions, including financing is target for the end of this quarter.
Following the sale of the legacy portion of the IP portfolio, we would still retain all patents related to our core Iot and cyber this sabra businesses.
We will of course keep the door open for future monetization, but revenue is likely to be minimal in the near term.
Upon the CRO show that deal, we expect a reduction in their operating costs required to maintain our IP portfolio.
Also our capital cash position will be strengthen enabling us to further invest for growth in our core markets I E. The Q&A ex IV as well as cyber we will invest both organically and inorganically.
In the quarter licensing revenue was $11 million, beating expectation gross margin came in at 55%.
I'll now hand over to Steve to provide additional color on the financials Dave.
Thank you John .
As usual my comments on our financial performance this past quarter will be in non-GAAP terms unless otherwise noted.
And also please refer to the supplemental table in the press release for the GAAP and non-GAAP details.
Total company revenue for the quarter was $185 million.
Fourth quarter total company gross margin was 68%.
Our non-GAAP gross margin excludes stock compensation expense of $1 million.
Fourth quarter operating expenses were $117 million.
Our non-GAAP operating expenses exclude 22 million and amortization of acquired intangibles 4 million and stock compensation expense.
165 million fair value gain on the convertible debentures.
As John mentioned, we are continuing to invest in our core Iot and cyber businesses, including head count growth and new product development to drive topline growth.
The planned investment is sizable.
We expect to increase head count by approximately 250 people across both of our core business units this fiscal year.
This quarter non-GAAP operating profit was 8 million.
And non-GAAP net profit was $6 million.
Our basic GAAP earnings per share was <unk> 25.
While non-GAAP earnings per share was <unk> in the quarter.
Our adjusted EBITDA was positive $20 million, excluding the non-GAAP adjustments previously mentioned.
I will now provide a breakdown of our revenue in the quarter.
Cyber security revenue was $122 million and Iot revenue was $52 million.
Software product revenue remained in the range of 80% to 85% of the total with professional services, making up the balance.
The recurring portion of <unk>.
Software product revenue remained at approximately 80%.
Licensing and other revenue was $11 million given the ongoing limitations to monetization activity prior to closing the sale of the transaction that John referred to.
Yes.
I'll now move to our balance sheet and cash flow performance.
Total cash cash equivalents and investments remained consistent at $770 million as at February .
February 28 2022.
Our net cash position remained at $405 million.
Despite the ongoing investment in the business, we generated positive free cash flow of $8 million.
Cash generated from operations was $10 million and capital expenditures were $2 million.
That concludes my comments and I'll now turn the call back to John .
Thank you Steve let.
Let me provide the outlook for the new fiscal year.
Licensing revenue is expected to be minimal.
Excluding any anything related to the patent sale.
For our cyber business, we expect to deliver billings growth between 8% to 12% this fiscal year.
<unk> increased traction from our security products.
In fact, we expect to see higher revenue higher billings in all four quarters when compared to the same quarter in the prior year.
However, we model revenue for the year in total to be broadly flat year over year factoring in the time for billings growth to convert to revenue.
Despite having delivered three consecutive quarters of billings growth cyber we're not satisfied with our results, particularly in a R. R.
We will we feel however positive about the trajectory of this business for a number of reasons.
First is the cyber market is strong and demand appears to get stronger.
Following our recent product enhancement the performance of our product is being recognized a good proxy for this is winning awards and independent testing example, including receiving the maximum AAA rating in the FC Labs reason enterprise advanced security tests.
Third is that we have increased the number of sales rep. Since the start of last fiscal year and will continue to step up and expand hiring.
Our plan is to recruit more than 100 additional cyber go to market professional professional.
In the coming fiscal year.
Fourth we continue to do to record head to head wins against our competitors.
Now I'll switch to the Iot business for the Iot business, we expect to see continued strong growth. Despite the ongoing headwind for the auto industry. We expect revenue for the year to be in the range of $200 million to $210 million.
Representing a 12% to 18% growth over year over year.
Despite the macro environment for the auto industry, we based our confidence sort of falling factors.
First <unk>.
The visibility of the backlog of professional services from design wins already awarded.
Second the strong pipeline of potential new design wins, this coming year and thirdly, the upward trend in our royalty AFP and in the new designs.
We see a fairly even distribution of revenue and cost of four quarters.
Before we move to Q&A, let me quickly summarize the key points for the quarter.
Iot business is executing well despite industry level of challenges and we incur and we are encouraged by the line of sight, we have for years to come.
<unk> continues to execute well with both a new product release and strong demand for poc's, whilst in the quarter.
Our cyber security business is tracking in the right direction once again, delivering solid building growth and recording some encourage head to head wins.
And as several of our non core IP patent portfolio is progressing.
Despite our ongoing investment in our business, we generate positive operating cash flow and net profit this quarter that concludes my remark.
Branch could you could you. Please open the line for Q&A.
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 on metrics again press Star one.
To ask a question.
For a moment to compile a Q&A roster.
We request again that you limit yourself to one question and one follow up.
Your first question comes from the line of Daniel Chan with TD Securities. Your line is Hey, Daniel.
Hey, John .
Hey, Jonathan.
Another another strong quarter of strong general embedded wins, it's been a few quarters now where you've seen more general better wins than auto.
What is how does the lifetime revenue stream look for some of these programs with respect to production royalties versus designs because I assume that some of these with new wins in general embedded have lower volumes than what you typically see in an auto space. So can you just remind us how the.
The revenue streams are are structured for the general embedded space.
Yeah, Hey, Charles.
General and better or are you talking about.
Auto.
Jim General embedded general.
That is generally better you see the.
The protection being a lot sooner.
On average probably couple of years.
<unk>.
Six or seven or five or six years.
So.
And typically not has paid.
In terms of.
Dollar down the ASP.
All it is a big organization like a hospital or.
Our medical devices and the volume isn't as big as the car industry, but it is still very very healthy now general embedded vertical I think we.
Mentioned medical that's a really good feel and we're winning a lot of we have good momentum in there and because of those safety certification or there are other general general embedded market that are really not as economically.
Exciting things, that's a better way to say it. So we are you should we tend to stay away from those.
That's helpful. Thanks.
And then on the headcount increase I think you mentioned you guys are budgeting for an increase of 250 people this year.
Just wondering where thats going I think you mentioned 100 going towards cyber security sales professionals, where the wrestling.
To Iot.
The Iot.
A lot of them are quite some sales personnel, but also we have a lot of backlog and professional services.
So we need to fill we need to fulfill those backlog and get the revenue.
Makes sense. Thank you.
Sure.
Your next question comes from Chip trial Dreams.
<unk> global.
<unk> research your line is <unk>.
John another very strong quarter on silent.
Quick question I was wondering if you could put some more color to it like.
What kind of activity was said before.
Japan War.
Ed.
We are in the war Youre getting a lot of.
Interest in silence. There is that interest is coming from is it from U S. Based companies are European based companies are.
The whole world just provide us some anecdotal comments what you are hearing I mean, I appreciate that and again a very good quarter.
Alright. Thank you. Thank you.
So.
The cyber security World.
There are a lot of more threats.
Tac.
And we see.
Demand growing raw demand growing like everybody else in the market have seen overall demand is really growing very fast.
There are.
Also a replacement market.
For the older generation signature based.
Company like Mcafee and Symantec in Microsoft.
So so.
So you can see the second generation the AI ml based company like ourselves and some of the names.
Key names in the industry.
If we could do a lot of.
A good success rate in replacing legacies.
Implementation. So that's the second one <unk> is particularly strong in the mid market small medium business and mid market and I think we're seeing our activity picked up quite nicely, partly because of the guard software that we released about probably by now is about a year.
And so and if we could see that trend up continuously every quarter.
And so the number is starting to become meaningful. So those are probably the drivers of what is happening and then last but not <unk> CEO .
Remember, we've been hiring aggressively for over a year now.
And our sales head count.
And so it's starting to pay off in some area.
And last but not least we've been able to attract some very strong industry talent from the cyber world.
Particularly under John Joe Mattel, because he came from Mcafee and so he knows how to recruit a lot of these people and not only individuals but also channel partners. So things are starting to come together.
But it's starting to come together.
I just have one observation of vessels just wanted to share with you.
Ivy platform.
Whiting machine learning AI, driven battery management system, none of that.
System, which is AI agreement for BMS battery management exists anywhere not even the biggest.
EV manufacturer has that I think this is many unique CEO of IV platform EBITDA.
Okay. Thank you. Thank you much.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question comes from Paul <unk> with RBC capital markets. Your line is open.
Hey, John Thanks, very much and good afternoon, just a question go to market strategy.
In cyber and it's just you mentioned.
<unk> is obviously strong in large enterprise, but then silence is strong in SMB.
How do you reach those too.
Business is from a from a go to market perspective, because the customer basis and your competitive advantages within each seem quite.
Quite divergent.
That's great question.
So.
We now have three go to market team that is coordinated under by region under one senior management.
And so because of <unk>.
And so the pre market go to market team.
The.
Think about our strategic accounts.
The large government.
As well as banks.
Our regulated industry.
The SMB market.
And the channel team.
So our objective of the first team is to secured.
Base business and the strategic accounts, and then upsell them into where.
Allergy that could apply to.
That OEM base for example zero Trust.
Technology, which is the gateway is probably the most top off right right now, particularly the U S government.
The new by the administration.
Our budget.
Specific money allocated for.
CRO trials and they want every agency and every armed forces to do that to be able to implement zero trust as part of the overall cyber security protection.
So we have that business and we are already in many of those.
Institution.
So the up sell of silence products into that space.
<unk> is a key or growth.
The second F&B to approach.
One approaches through the.
The card services, our managed service, which F&B typically needs that kind of helped for either augment their resources of retrace their resources, because they can't hire fast enough.
And so that led with the site and product and then we upsell <unk> enjoyed.
A smaller bundle oriented and then of course, the channel typically or cyber.
And.
Theres some good channel partners are going to come online.
At Liberty to talk about right now, but but.
The 90 days HIFU.
Will.
So so thats the kind of.
How we go in.
Each different type of category of Av.
Our customers I hope that answer your question.
Yes that was helpful and I can't wait for that announcement in 90 days.
Second question just on the sale of the patent portfolio.
To the extent that you can can you just walk through some of the assumptions in terms of like the longer term outlook that went into that arriving at that price because one of the things that investors look at it you look at the revenue in that segment in the previous year is quite a large number.
How do we put the sale price in context to the previous revenue that you generated in that segment.
Oh, okay. So.
I would say there is still a lot of potential for this non core set of patents, but two things our view obviously you know one is.
The time is ticking down in the validity of this portfolio. Although we have a very young we typically have in even with the noncore somewhere around eight to eight to 10 years type average.
Light lifetime with the patent still remaining.
But.
If you notice that you wish you pointed out the last couple of years or last few years, we have some good success.
Those are very big.
Name.
And so now we need to grow the business need to go cultivate pipeline for the small and aim.
Typically it takes a little longer time, a lot more back and forth.
Peg named Us too, but big name at least a big numbers.
So in a way that the.
Low hanging fruits.
<unk> approached and so I think the numbers we have done we have done a market test. The numbers. We think is very fair to both sides.
Okay. Thanks, Thanks for that explanation.
Sure.
There are no further questions 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 you.
I am pleased to announce that by the way I'm pleased to announce that on May 18, we will be hosting a hybrid <unk>.
In person and virtual analyst day.
San Ramon, California.
And some of the question I asked earlier regarding your go to market.
We will be addressed by John Geo Matteo unmet Mathias Ericsson.
<unk> President.
I will surely have suggest you don't missed it.
In the case of materials.
We will also going to prepare to annually talk about backlog on.
That will be doing that called that meeting also so I really encourage investors to join us and hear about key developments of our product and strategy.
As far as financial focus sessions that will provide additional color on the Iot and cyber business more detail will be will follow in due course. So please stay tuned. Thank you for joining the call today, everyone and have a good evening I'd hope to see you in person soon.
Ladies and gentlemen, this concludes today's call.
Thank you for your participation you may now disconnect.
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Yes.
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