Q1 2023 BlackBerry Ltd Earnings Call
[music].
First quarter fiscal year 2023 results conference call.
My name is Brent and I will be your conference moderator for today's call.
During the presentation, 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 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 Tim.
Vice President of Blackberry Investor Relations. Please go ahead.
Thank you, Brian and good afternoon, and welcome to <unk> third quarter fiscal 2023 earnings conference call.
With me on the call today.
<unk> Chair and Chief Executive Officer, John Chen and Chief Financial Officer.
Great.
After I read our cautionary note regarding forward looking statements John will provide efficient soft date, Steve will review the financial results.
We will then open the call for a brief Q&A session.
This call is available to the general public by combing numbers and via webcast in the Investor information section Blackberry Dot 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 <unk>.
Idea in securities laws.
We'll indicate forward looking statements by using words, such as expect will should model intend belief and similar expressions.
Forward looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends current conditions and expected future developments as well as other factors that the company believes are relevant.
Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward looking statements. These factors include the risk factors discussed in the Companys annual filings and then P&I.
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 Joe and Steve will reference non-GAAP numbers and a summary of our quarterly results.
For a reconciliation between our GAAP and non-GAAP numbers facing earnings press release.
Earlier today, which is available on the Edgar.
Blackberry Com website.
With that I'll turn the call over to Joe.
Yes, Tim.
Afternoon, everybody and thanks for joining the call.
And last question I apologize.
After speaking for two days.
We have our AGM and board meeting.
And my throw a little sketchy so.
So I apologize for that anyway. This quarter, we build on our momentum.
From fiscal 'twenty, two and continued to execute well.
Delivering solid year over year revenue growth.
<unk> software and services revenue was $164 million, representing a 9% year over year.
And when you first start my review today with the Iot business unit despite.
Despite a tough macro environment for auto we delivered revenue of $51 million, which represent 19% year over year growth.
Gross margin came in at 84% Iot.
Iot AAR was 94 million, increasing 9% year over year.
We recorded strong revenue from preproduction development seats and professional services setting yet another quarterly record for the third quarter in a row.
As you know this is <unk>.
Not only a positive for the current year, but also a strong indicator of future revenue once the design enter into production.
Our strength in securing new design wins have driven a year over year increase in our royalty revenue backlog, which is now at approximately $560 million.
560, a 14% increase from a year ago.
Further the number of vehicles with Q&A now software embedded has to increase year over year from over $195 million to over 215 to one 5 million.
I am pleased with the strength of our design wins once again allowed us to overcome the impact of the headwind that the auto industry is currently facing.
These headwinds include Covid related Lockdowns in China supply chain issues, the Ukraine wall inflation and rising interest rates.
On the supply chain front, the situation appears to be showing some signs of stabilization.
While the economic issues to impact the overall auto market demand for higher end models.
Electrical vehicles electric vehicles.
Should be holding up.
As mentioned <unk> continued to perform well in terms of securing new design wins.
Quarter, we gained a total of 14, new design wins with nine in auto and five in the general embedded market.
We are a market leader in eight hours advanced driver assist studies and digital cockpits, both fast growing safety critical domains in fact strategy analytics, a leading independent auto analyst estimate a three year CAGR for a das market to be 29% and digital.
Cockpit to be 40% and we've been dose dose domain, we plan to grow even faster than that as we continue to win market share.
In a quarter, we have a number of large design wins in digital cockpit in.
In addition to wins with leading tier one Bosch and Visteon, we secured a win with a global automaker base in North America, as well as be ICD, a leading Chinese tier one for an augmented reality augmented reality AI and hologram enabled digital cockpit to beat the prior year.
No John Laing latest fully.
Tricks sedan.
That's quite a bit of technology.
Furthermore, despite lockdown challenges, we're able to secure a number of new design wins with major Chinese automakers, including autonomous drive designed with great wall motor and others.
Outside of auto this quarter, our <unk> hyper hypervisor, sorry can I just have a lesser was pre certified by the independent auditor at <unk> led to the highest level of safety for medical device software.
We continue to make progress in medical design wins and a good example, in the quarter, what sort of dialysis machine with a major technology customer base in India.
Let me now provide you an update on the progress we're making with IV <unk> mentioned, we have received more proof of concept with POC trial requests than we can currently handle and we continue to receive more this is a strong indicator that IV is a product with the right strategy.
In our rate base in the right time in.
In the quarter, we commenced a number of Poc's, which includes Lee include leading global automakers and tier ones.
Engagements so far has been positive and some of the learnings are helping guide our product development.
Product development is advancing well.
Our June release now supports an even wider range of sensors and hardware. We're also progressing well with developers choose.
Progress is also being made on the application ecosystem side and we're currently engaged with multiple potential partners.
These partners enable a vie variety of exciting use cases, including AI, driven battery management predictive maintenance and usage based insurance just to name a field.
And a number of them are being considerably and cushion in our current poc's.
Overall, we continue to be excited by the potential opportunity for IV and are pleased with our progress this quarter.
Now moving onto the cyber security.
This was a solid quarter for our cyber security business unit.
Revenue came in at 113 million, one three a 6% growth year over year buildings on a total contract value basis was 89 million a 16% year over year increase gross margin was 53%.
<unk> was 334 334 million dollar based net retention rate was 88%. This number of course does not include new logo wins, north certain perpetual license win in government.
Sure.
With the elevated cyber threat levels, we see a strong demand environment at present.
Given this backdrop, we continue to invest in go to market.
In the quarter, we added net new <unk>.
Net of direct quota carrying head count.
We are pleased with how these additions to the team of ramping up and of course, you would take a few quarters for them to reach full productivity.
During the past quarter, we also expanded our channel presence.
We added Midas grew a partner with over 5000 employees and a presence in over 70 countries.
The Middle East Europe and Africa.
This significantly expand our reach in those markets.
Minus brings a lot of experience in cyber having been distributed with Mcafee Symantec and trend micro's. Please.
We've also made a number of enhancements to our managed service managed security service provider or FSP program.
As growth in our card MTR solution has shown this is a very large demand. There is a very large demand for managed services and cyber security and SSP allow us to greatly scaled out our go to market.
During the quarter, we secured a number of new logo wins, mainly displacing legacy vendors.
The legacy vendors market remains a very large opportunity for Blackberry and we have been running a number of targeted campaigns in particular this quarter, we saw a number of customer and move on capacity.
<unk> key.
Alright.
To finance protect.
Science protect works very well in this context it is.
Slight way agent is.
Quick and easy to deploy.
We continue to compete head to head and win against other Nextgen cyber players a good example of a win this past quarter, which is a major U S based medical industry customer loyalty prime minutes of tens of thousands of endpoints in a direct head to head competition against cloud strife.
The customers like back Barry because they were impressed by the effectiveness of our products, especially against the Los <unk> and <unk> as well as our high level of customer service.
Our cyber products received further external validation in our recent mitre attack devaluations.
Our fiber suite of solution with 100% successful in preventing both a visit versus spider and sand worm attacks very early in each scenario and critically before I answer that any damages occurred.
Let me now provide an update for you yet.
This quarter, we secure renew with some of our largest customer, including the Air Force U S Air Force.
The Us Navy U S Special Ops command, the Canadian Senate, the Supreme Court of Canada, and the Royal Canadian Mint.
We book a great amount of business with law enforcement agency in the quarter, such as the UK serious fraud office.
The London, and Manchester Police services as well as the Vancouver Police Department.
We were pleased to both increase the number of <unk> license and deploy additional products to these customers.
In addition to government, we secured renewal and upsell a number of leading financial services customer <unk>.
Including leading banks and you have Chi I believe they are the largest Japanese bank, Mizuho and sumi Moto Mitsui banking operation.
Three other large Japan four largest banks.
Switzerland, Julius Baer Group first citizens Bank and Liberty Bank in the United States as well as other leading banks in both Germany and Canada.
As we mentioned previously given the competitive market, we continue to strengthen our OEM product offering and we're pleased to partner with Google to add support for enterprise running chromo <expletive> and chrome browser supported macro cells into and does not over.
According to IDC.
Promo as recently overtook macro loss as the number two desktop OS with more than 10% market share and chrome. This also the world's leading browser, we have approximately 70% market share.
The strength of our OEM offering continues to be recognized and last month IDC market escape named Blackberry as a leader in <unk> for the third year in a row amount.
Among other items, they highlight a wide range of government and industrial security and compliance certification that Blackberry OEM host these certifications Harold Blackberry maintain a strong position in core regulated market.
And now a brief word about licensing.
In a quarter licensing revenue was $4 million.
Gross margin was 50%.
Earlier this month, we issued a press release updating the status of the proposed sale of the legacy portion of our patent portfolio. The buyer catapult is working to secure that financing and we look forward to the completion of the transaction at.
At the same time as we are no longer under exclusivity with catapult, we are free to explore a new options as they come our way.
We will provide more details as and when appropriate.
Let me now hand over to Steve who will provide additional color on our financial results for the quarter.
Thank you John .
As usual my comments on our financial performance this past quarter will be in non-GAAP terms unless otherwise noted.
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 $168 million.
First quarter total company gross margin was 63%.
Our non-GAAP gross margin excludes stock compensation expense of $1 million.
First quarter operating expenses were $132 million.
Our non-GAAP operating expenses exclude $23 million in amortization of acquired intangibles.
1 million of restructuring expenses.
$165 million related to a onetime litigation settlement of a matter dating back from 2013.
$6 million in stock compensation expense and $46 million fair value gain on the convertible debentures.
This quarter non-GAAP operating loss was 27 million and non-GAAP net loss was $31 million.
The GAAP basic loss per share of <unk> 31 was primarily driven by the onetime impact of the litigation settlement.
non-GAAP loss per share was <unk> <unk> in the quarter.
Our adjusted EBITDA was negative $21 million, excluding the non-GAAP adjustments previously mentioned.
I will now provide a breakdown of our revenue in the quarter.
Cyber security revenue was $113 million and Iot revenue was $51 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 software product revenue remains at approximately 80%.
Licensing and other revenue was $4 million.
Yes.
I'll now move to our balance sheet and cash flow performance.
Total cash cash equivalents and investments were $721 million.
As of May 31.
1000 <unk>.
Our net cash position was $356 million.
Q1 is traditionally a seasonal high for use of cash given the payment of annual bonuses and other annual items and together with the ongoing investment in the business free cash usage was $43 million.
Cash used by operations was $42 million and capital expenditures were $1 million.
That concludes my comments and I'll now turn it back to John Thank.
Thank you Steve.
Before we commence our Q&A session. Let me first provide a current year outlook.
There is no change from a period of guidance. We continue to expect full fiscal year 'twenty three revenue for the Iot business unit to be in the range of $200 million to $210 million.
And revenue for the cyber security business unit to be broadly in line with the fiscal year 'twenty two.
With about 8% to 12% year over year billings growth.
Okay.
I'd like to thank everybody, who attended our recent analyst day I thought it was I think it was may 12.
For those who weren't able to join we provided three and five year revenue targets for Blackberry.
We expect total company revenue, excluding the IV to grow with a five year CAGR of approximately 13% with revenue of $886 million in FY 'twenty, five and $1 2 billion in FY 'twenty seven.
Breaking this down by business unit, while the Iot Sam is expect to grow in a range of 8% to 12% over the next three years, we expect to grow Iot revenue at five year CAGR of approximately 20% this double the industry growth rate.
This faster than market growth rate is primarily driven by the market share gains in our core safety critical audio domains.
In addition to auto we also expect growth from adjacent verticals, particularly medical and industrial.
Broadening our addressable market.
We estimate revenue in the FY 'twenty five to be approximately $307 million and approximately $443 million in FY 'twenty seven.
This model is still is partially built.
On the multi year revenue backlog from already confirm designs and a line of sight to upcoming potential new design wins.
It is important to note that these Iot targets do not include any revenue from IV, we stand becomes upside to the story.
For fiber given the strong market condition, our technology portfolio and the roadmap, we expect revenue growth with a five year CAGR of approximately 10%.
<unk> decided this issue and that includes both a more mature endpoint management products as well as the higher growth endpoint security products.
We target cyber security revenue of $579 million in FY, 'twenty, five and $770 million in FY 'twenty seven.
We expect operating leverage for our business.
Expanding gross margin by over 100 basis point per year on average.
And trending towards our 20% operating margin by FY 'twenty seven.
Given the investment we're making we expect moderately negative EPS and cash flow. This current fiscal year, approximately approaching EPS and cash flow breakeven in FY, 'twenty, four and becoming EPS and cash flow positive from FY 'twenty five onwards.
We expect the two markets to converge and our position in both Iot and cyber security will place us in a very strong position to capitalize on this growing market trends.
So let me summarize the key takeaway from the quarter. One this was a good quarter, where we delivered year over year revenue growth in both our Iot and cyber business unit.
Two we set another quarterly record for design activities in Iot offsetting the impact of macro headwinds on auto production.
Three on the cyber side, we recorded solid double digit billings growth and continue to make progress in expanding our market reach.
One final point this quarter, we released our first ESG report with highlights, including Blackberry achieving carbon neutrality.
For those who haven't seen it yet a copy can be downloaded from our vessels from our web site.
That concludes my remark brands 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.
One on your telephone keypad.
You are using a speaker phone. Please make sure your line is on music.
Thus far one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
First that you limit yourself to one question and one follow up.
Your first question comes from the line of Paul Treiber with RBC capital markets. Your line is open hi.
Hi, Farha, thanks, very much and good afternoon.
So John .
First question can you connect the dots between in the fiber business between the decline in <unk>.
<unk> versus the very healthy billings growth in the quarter.
More specifically was there any contribution from perpetual license I guess I could speak in the quarter.
Yes actually your.
Second question and answers somewhat partially the first question.
We had a good second quarter.
Selling to the government.
And as perpetual because of the way the government purchase.
The technology and so that did not fully reflected obviously on the <unk>.
There were some minor churn for the mid market, which we have items identified us.
Last quarter.
Quarter.
So the combination of those two explain the delta.
That's helpful. Thank you.
And then second question just on the patent sale and not so much into the details can you you mentioned you can't disclose.
The negotiations are ongoing.
The sale doesn't go through and you don't find that third party I mean would you revert back to IP licensing.
Or are you.
You definitely can go through with the sale you had to have to find the right buyer and the right price.
I believe.
For simplicity of our company's story.
And the focus.
We should find a buyer and I believe we will find a buyer, but we will not shy away from monetizing ourselves, we do have our team standby and already so.
But my first priority is to secure a buyer and there has been other people that approached but I still believe that catapult will get it done.
Okay, Great that's helpful I'll pass on.
Thank you.
Your next question is from the line of chip.
Triple Calgary with global equity Youre line is hey, Chris how are you Hello, Jeff bundle called wound up on all of those.
Ill.
Hi, Thank you can you tell about the IV.
Two questions I had.
Regarding the chip supply.
Do you think because of.
That's the question.
Jos.
Chip capacity may have been.
<unk>.
And that may be evening out.
Chip shortage that automotive industry is facing.
You think something to that effect.
Seeing the chip shortages.
I think it's.
So currency is currently depressed because that freeing up shifts.
Hi, Don.
I'm not good enough to answer your question there.
I'm not a big crimp tool fans.
Can you just say, Doug So I don't follow that very closely I know, it's very depressed at this point.
And I.
I don't know the relationship with that.
Im sure there are some who do it.
Chip shortages issue.
So sorry, I can't I can't answer that question.
And my second question I had is regarding the IV platform.
So.
And in children and children auto insurers on top of that.
No.
What kind of business.
Yeah.
You think about that can evolve over a period of time and Thats all from me.
Sure.
That's a very good question.
So we have in our partnership.
At least one if not two.
Organization.
Specialized in this area.
In the insurance area for example.
The big thing about the insurance area with auto is pay as you go.
A kind of a usage based insurance model.
And and then the other one is.
A redefinition.
How the ing insurance.
I kind of related to the first one how they were calculated.
And it is particular more meaningful in the fleet management side of the equation. So other use cases, so there's a lot of use cases on IV.
Our IV to wholesale all use cases.
Because we told you guys about battery management, the whole area of predictive maintenance.
Huge.
And every OEM, we wanted to get their hands around those data around the action that could generate.
Whether it's physically or over the air update so we're seeing a lot of interest.
A lot of different use cases.
And.
Our auto SM wallet, that's also a lot of financial technology around it.
And so so it's exciting time for Ivy.
Thank you very much all the best.
Thank you Tara.
Again, if you would like to ask a question press star followed by the number one.
Keith.
Your next question comes from the line of Todd Coupland with CIBC. Your line is open.
Hey, there John .
I'm doing well thank you.
I had a couple a couple of questions first on.
Iot you talked about how youre seeing the supply chain ease could you just talk about what youre seeing that change.
You gave the last update.
Yes on the supply chain side.
<unk>.
The Oems around the world.
Finally have a good strategy.
I'll go because each of them at their own strategy, but I see is more tilted to high end cars being built.
And they are able to manage their supply chain issue and built in and release cause that.
Our value to them. So high end car being Bill of course is a constant demand of electric vehicle.
Particularly given today's environment with the gas price.
Any environment so.
And.
The good thing about us is.
<unk> X is typically embedded in the high end cars more so than.
The lower end models.
And in addition to that we have a strong footprint 24 of the top 25 production volume producer uses <unk> ex of the EV that is are the electric vehicle World. So is there is still volume goes up although still a small percentage of total vehicles. So.
I think it was like 12% right now.
Ed.
We're seeing the volume uptake so so and so is this good trend for us.
But I guess, it's not material enough to move the.
The Iot guide for the year.
No no because there.
There is a headwind we had.
We had a little delay on something some of the stuff.
When China has a lockdown.
Because of Covid.
And then of course now as you all read.
Guys, probably know this very well.
The.
The interest rate uptake is causing a little bit of a demand slowdown.
New vehicle purchases.
And so so.
So those are all factors that we still need to confront Jewett and so our strategy is we see a strong design win.
Great.
A lot of new design win and they typically come to us.
License developer license and some professional services revenue were strong enough in those areas that covers the shortfall on production or slow down production. If there is any so so we believe that our guidance is still good.
And I hope I am wrong on the Conservative side I think our guidance is still good.
And indeed it.
There is a mix shifted a little bit.
Okay.
Okay.
Helpful. And then my second question had to do on the cyber business you talked about modest churn in Smbs.
And you've talked about that for a couple of quarters. What I was wondering is we're starting to see in enterprise.
Staff being given options.
Blackberry <unk>.
Versus let's say a competitor and I'm just wondering if youre seeing that in other enterprise and does that give you some concern that the.
The churn might bleed into larger businesses, just talk about that trend. Thanks, a lot. Yes currently we haven't seen that.
<unk>.
So this is important that we continue to.
Work on our product and partnership which I talked about so far the UES churn is usually in a nonregulated space and has a small more small medium enterprise.
So for the very large one we havent continuous renewals and particularly the government in the world.
No.
I haven't seen that as a major major trend at all even banks.
So far so far have been okay don't knock on wood.
Okay, great. Thanks, a lot.
Thank you.
Your next question comes from the line of Daniel Chan with TD Securities. Your line is open.
Daniel Hi, John .
Good. Thanks, just wondering if you can provide some color on the drivers behind the 14% increase in the Q&A backlog is that due to the recovery of production volumes extension of some programs were higher ASP just any color on that would be helpful. Yes.
As a result of the design wins, we have been telling you folks every quarter.
And so we have a very strict guideline and formula of what get counted what didn't get counted.
And we're very conservative on that but this is as a result of what the OEM told US that this is a volume you should expect in future years on the total total program and we sometimes you a discount on has gone down we took a SaaS.
And so and it was accumulation of those offsetting all of you see the runoff, which used to which is the royalty. We got in we're confident in the last 12 months.
We saw a 14% increase.
Okay. That's helpful. Thank you for that.
And then I wanted to ask a question on the <unk>.
The patent sale.
You said you would explore options as they come in I just wanted to know whether you guys are actively looking for.
Other options are you actually going back to the other business. You had you are in the initial process or are you starting from the beginning again.
No no not at all in fact, we've been approached by others.
Im not actively looking for here.
Starting from square one.
As I said.
I wanted to make sure that the shareholder knows that that we're not just stuck with one option.
But we do expect to see and we would like to see the previously announced deal with catapult to happen.
But what we're basically saying is we've been getting calls.
And we are now responding to the cost because.
I would now.
Exclusive exclusivity.
Exclusivity is expired.
Great. Thanks, Sean Sean.
Yeah.
There are no further questions at this time I would like to turn the call back over to Mr. John Chen Executive Chair and CEO of Blackberry for closing remarks, Thank you Brian .
Thank you everybody who are joining us I realize the slate.
Back East.
Looking forward to speaking with you all again.
Soon.
And have a good day and a good evening.
Ladies and gentlemen, this concludes today's call. Thank you for your participation.
You may now disconnect.
And.
Yes.