BlackBerry Limited [BB] Conference call transcript for 2021 q2
2021-06-25 02:57:04
Fiscal: 2022 q1
Operator: Good afternoon, and welcome to the Blackberry First Quarter and Fiscal Year 2022 Results Conference Call. My name is Jesse, and I'll be your conference moderator for today's call. During the presentation, all participants will be in listen-only mode. We’ll be facilitating question-and-answer session towards the end of the conference. . As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Tim Foote, Blackberry Investor Relations. Sir, please go ahead.
Tim Foote: Thank you, Jesse. Good afternoon, and welcome to BlackBerry's first quarter fiscal 2022 earnings conference call. With me on the call today are Executive Chair and Chief Executive Officer, John Chen; and Chief Financial Officer, Steve Rai.
John Chen: Thank you, Tim. Good afternoon, everybody, and thank you all for joining us today. The main headline for this quarter is that we have organized our software and services business around our two biggest market opportunities, mainly IoT and cybersecurity. In the past few years, we have done a good job in product development. Last year, we launched 59 new products, and the year before, over 30. Later, I'll discuss about - more about the XDR product that we have launched this quarter, and I will provide you an update on BlackBerry IVY. As you all know, at the same time, we were delivering our products, many of you know that we've been investing in our go-to-market as well. We have in a number of -- last number of years, especially the last two quarters, we have turned up the noise on our marketing, expanded our channel and partnerships, and invested more feet on the street. Now we are pivoting the organization more heavily towards the market by creating two business units: cybersecurity and IoT.
Steve Rai: Thanks, John. So my comments on our financial performance for the fiscal 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. As John mentioned earlier, starting this quarter, we are no longer adjusting GAAP revenue for deferred revenue acquired. This means that GAAP and non-GAAP revenue will be the same going forward and comparatives have been conformed accordingly. We delivered first quarter total company revenue of $174 million. First quarter total company gross margin was 66%. Our non-GAAP gross margin excludes stock compensation expense of $1 million. First quarter operating expenses were $138 million. Our non-GAAP operating expenses exclude $32 million in amortization of acquired intangibles, $6 million in stock compensation expense and a $4 million fair value adjustment on the convertible debentures, which is a noncash accounting adjustment largely driven by market conditions. The first quarter non-GAAP operating loss was $23 million, and the first quarter non-GAAP net loss was $27 million. Non-GAAP earnings per share was a $0.05 loss in the quarter, and our adjusted EBITDA was negative $6 million this quarter, excluding the non-GAAP adjustments previously mentioned. I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was $107 million 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 was approximately 90%. Licensing and other revenue, as John mentioned, was $24 million. This is a little higher-than-expected as deals came in early. The monetization activity remains limited while negotiations for the potential IP sales continue. Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $769 million at May 31, 2021, a decrease of $35 million during the quarter. Our net cash position decreased to $404 million at the end of the quarter. First quarter free cash flow was negative $35 million. Cash generated from operations was negative $33 million, and capital expenditures were $2 million. Bear in mind, the first quarter of our fiscal year typically has a higher cash requirement due to payment of annual bonuses and other demands at this time. That concludes my comments, and I'll now turn the call back to John.
John Chen: Thank you, Steve. Before the Q&A, I'd like to update everybody on a few things. Although we have organized along the go-to-market lines, there are a number of future high-growth opportunities that our factory lab is working on that actually harness the power of all the entire technology portfolio. The first is supplying our AI/ML engine in IoT. One good example of this is using Cylance in a car. You may or may not remember at CES a couple of years ago, we demonstrated an early version of how our Persona technology that identifies inappropriate access from the user behaviors can be applied to drivers of vehicles. We also demonstrated how our protected EPP can be used to protect the connected cars from cyber threats. They are just 2 the number of potential use cases that we are currently looking at. The second is our data lake. Drawing data for an ever-increasing number of sources allow for greater visibility and determination of the real level of risk across an organization. Essential -- this is obviously essential to zero trust applications. This applies not only to XDR, but also the increasing sensor-rich auto environment, autonomous drive and smart cities. This centralization of data and insights through our data lake can enable a whole new business model in the future. The third area is related to the recent U.S. SBOM, stands for software bill of materials, the executive orders that aim to secure the software supply chain. This comes in light of the recent incidents, including Solar Winds and the Colonial Pipeline threat -- intrusions. Combining products from our IoT products, including our Jarvis code-scanning tools, our QNX-embedded operating system and our Certicom technology with our prevention-first AI-driven cybersecurity product and services, means Blackberry offers a comprehensive approach to this issue. We have begun working closely with various government and standard-setting bodies. So before we open the line for Q&A, I'd like to summarize the key messages again. We have organized our software and services business around our key market opportunity, strengthening our management team in the process. QNX made solid progress this year -- this quarter, sorry. We're pleased with the strong design activities and the pipeline of new design wins that saw royalty revenue backlog increase year-over-year. We continue to demonstrate real progress with IVY with tangible steps forward, such as the launch of the Advisory Council as well as the first investment by the Innovation Fund. We launched 2 new important products that expand our XDR strategy, and the AI-driven prevention-first approach continues to be our focus. We're also increasing headcount -- sales headcount, and pipeline is growing, particularly for our new UES products. Our main focus is on growing the top line, and therefore, we'll continue to increase investments in both our software business units as we see double-digit billing growth this year. Finally, we remain optimistic about a successful conclusion to the negotiation of the patent portfolio itself. And with that, I would like to ask Jesse to open the line for Q&A, please.
Operator: Thank you, speakers. Participants, we will now begin the question-and-answer session. . Speakers, our first question is from the line of Daniel Chan of TD Securities. Your line is now open.
John Chen: Hi, Dan.
Daniel Chan: Hi, good evening. Hi, John. So you stated that your QNX royalty revenue backlog increased to $490 million from $450 million last year. Over what period of time do you expect that backlog to be recognized over?
John Chen: Typically, the highest -- it usually is four to seven years. And typically, it's peak at 4, and then it starts moving down towards the end of the life cycle of a car. Sometime it extended more beyond that.
Daniel Chan: Okay. That's helpful. Thanks. And then you also talked about the IVY Advisory Council. Can you talk about the level of commitment partners have agreed to as part of this council and whether you plan to include major OEMs on it?
John Chen: Yes. It's a great question. But before I answer that question, let me make one more comment on the backlog because I have also gotten some feedback regarding that our backlog number is very conservative. I would tell you that it is on a conservative side, and we get it from -- directly from the OEM when we win the design win and they gave us the estimate. We also have not included professional services backlog and developer seat backlog. So in the future, when we have a very solid methodology so that we just don't kind of do much of the guessing and we get a very grounded set of math, you will see that backlog number to go up, and show you all that we're going to include that. But that may take a couple of quarters. And to go back to answer your question regarding the Advisory Council. They're there to help us to define use cases, particularly in the vertical that they operate in, that the IVY could be of great help. And I don't want to exclude any OEM, but I don't think OEM would want to do that. They tend to do it one-on-one with us directly because this is obviously value add that they don't want to share. So our proprietary to themselves. I hope that makes sense.
Daniel Chan: It does. Thank you.
John Chen: Sure.
Operator: Next question is from the line of Mike Walkley of Canaccord. Your line is now open.
John Chen: Hi, Mike.
Thomas Walkley: Hey, John. Thanks for taking my question. I was hoping you could update us on Blackberry's UEM strategy. I know there's some tough comps because of the pandemic from last year, but could you just update us on the strategy? Is it still a large piece of your cybersecurity business unit?
John Chen: Yes. Yes. That's a good question. So let's see. Our spot platform is composed of UEM and UES. And UEM is very strategic to us because it is our gateway to a lot of our major customers who are completely reliant on us on security. So our strategy is continue to expand our footprint in the regulated industry, and we're on the more price-sensitive and kind of the nonregulated industries. We want to make sure that our UES platform, which is our endpoint security platform, also connect and run on it. And obviously, one of the largest installed base outside of my space here -- outside the regulated is Microsoft Intune. So this is why that we're excited about the fact that we'll have Intune released -- connected release in end of August, I believe, yes - end of August. So basically, the strategy is continue to expand the footprint that we have in the vertical like financial, healthcare and government. That's very important to us. With the UEM, with its road map. The road map is highly geared towards security and certifications and compliance and so forth. And then to bring your own device of BYOD environment. And that's the kind of the road map that UEM focused on. And then the UES is, of course, expanding on all the cybersecurity antivirus stuff. So that's our major -- that's our strategy of how we approach the market.
Thomas Walkley: Great. No, that's very helpful. And just my follow-up question, just on the gross margin by division. Thanks for the updated business metrics. How should we think about gross margin trends for the businesses over time, particularly on the cybersecurity business? Where could those gross margins get to over time as the business ramps? And any reason why it might have fallen a bit sequentially?
John Chen: Yes. Yes. I think the best way to answer the question is that, especially with cybersecurity, we're trying to go to the enterprise software timeless model, and so we have not deviated from that. So the gross margin ought to be maybe highly competitive, but they have the high-volume growth, somewhere between 75% to 80%. I think that will be a very good target to shoot for, for the cyber business.
Thomas Walkley: Okay. And what needs to happen to maybe get there from where you are today? What would be that timeframe you think?
John Chen: Timeframe, I think probably a year out, if you want me to guess that, like based that on, because if you recall, we actually have a lot of increase of headcount feet on the street this quarter. In fact, our quarter ends in August. In fact, some of them have -- has committed to sign-on and is yet to start. And with that, if I give them the time for 9 to 12 months, 6 to 9 months getting up to speed and at the same time, cultivating the pipeline to make the sales cycle work, I think about a year out, I should see some good results from this class of incoming team members here.
Thomas Walkley: Great. No, thanks helpful. Thanks for taking my questions.
John Chen: Sure.
Operator: Next question is from the line of Paul Treiber of RBC Capital Markets. Your line is open.
John Chen: Hey, Paul.
Paul Treiber: Hi. Thanks and good afternoon. First of all, follow-up question on sales. But you mentioned in the outlook or the prepared remarks that you expect bookings -- double-digit bookings growth for the year. How should we think about the ramp or the trajectory over the year?
John Chen: No, I actually didn't get it. Paul, I missed some part of your words. Do you mind...
Paul Treiber: Yes, bookings growth. How should we think about bookings growth over this coming year? How should we think about the ramp over the year relative to where we are now?
John Chen: Yes. As I said earlier, also, we just recently had a lot of increase of headcount in sales. So the booking need to be back-ended this year and then continue on for next year, obviously. So I don't know whether that's the question you're asking.
Paul Treiber: And the rate of growth there, like where you expect it to go to?
John Chen: Yes, yes. We do -- on bookings, we do expect that towards the end of the year, we do expect a double-digit percentage growth.
Paul Treiber: Okay, that's helpful. On cybersecurity revenue, in -- for this quarter, based on the numbers -- the historical numbers and GAAP numbers, I did take a step down. I think you mentioned UEM. Can you just elaborate on what you saw customers doing? I mean, I imagine they purchased last year. Did they churn off? Did they -- can you just elaborate on what happened there?
John Chen: No. I think it's quite -- in general, it's quite steady and stable. We didn't see the growth that we're hoping for, but it will be forthcoming because we just released the EDR products. We talked about cloud -- the cloud version, the latest Optics 3.0. We just released all these new products a couple -- a quarter ago. Actually, a quarter ago. So we're seeing that pipeline being built up, and it's looking for them to come into being billings and business. So we don't -- I don't see any major movement one way or the other. But people are interested in EDR. I believe that they should be interested more in Protect. That's our job to make sure that, that message comes across. And the benefit of that could be demonstrated. And I definitely could demonstrate. One thing you can look at the Blackberry-Cylance product combo, none of these major viruses, yes. None of these major viruses have actually hit our user base, touch wood. And so -- anyway, that tells you the power of our product.
Operator: Next question is from the line of Trip Chowdhry of Global Equities Research.
Tripatinder Chowdhry: Very good execution on the product front. Two questions.
John Chen: Thank you.
Tripatinder Chowdhry: First, regarding the battery management system. I was wondering, this is definitely an incremental market for you. There are three parts of the business model, they way I look at. There could be a design win, there could be a production part of it in the software, and there could also be a subscription part to the software that is running and managing the batteries. So among these three things, is it all the three components? Or is it only the software and subscription regarding the battery management software that QNX is running?
John Chen: Yes. So thank you, Trip. So first off, it's a little early for me to answer the question. I have a preference. The preference is a usage-based revenue or a monthly subscription-type revenue. That will be my preference. Of course, that will have to be in agreement with the OEM. So demonstrating that in IVY use cases -- so it's one of the most important things that we need to do in the next 3 to 6 months. There is a demo being put together, and it will not be available until probably the end of this calendar year, as we -- as full engineering team just started working on it. So -- and in the meantime, we'll try to figure out the question -- the answer to the question that you posed. Again, I have a strong preference for this to be either usage-based or monthly recurring based.
Tripatinder Chowdhry: Wonderful. The second question I have regarding your exceptional machine learning models you have, and definitely, currently, your Cylance, machine learning AI models work with only your products. Are you exploring? Or do you think it makes a business sense to open up your machine learning models to, say, other OEMs or to other ISVs, and then charge for connection or charge per second APIs? Because your product, which is gateway security. I think that is very normal. And again, that's another incremental revenue opportunity you can get over a period of time. So I was just thinking, since you have the best training models available, just licensing them or any other business model that can give more revenues to you. Your thoughts on that would be really appreciated. And again, very good execution on the product front.
John Chen: Thank you. We haven't thought about licensing those models to other application, maybe I would say that. However, we are licensing that -- or licensing is the wrong word, sorry. We are embedding the lightweight agent in IoT devices, including like medical equipment and industrial equipment. So -- and some of those other technology we have, like the mobile threat detection and prevention, also uses the model. So it's being used in a different way. From a business perspective, we didn't think about doing licensing and where I could explore that, but we are more focused on doing embedding in endpoints.
Operator: Next question is from the line of Paul Steep from Scotia Capital.
Paul Steep: Can you maybe -- either -- this one may be for both you and Steve, and I'll just make it one question. You can parse this up as you like here. Can you give us some context around the cost base? Obviously, you disclosed last quarter that you had 3,497 employees globally. And then earlier in this call, you talked about increasing the number of reps by 23% at the end of Q2. So I'm just trying to square up how we'd want to think about your cost base maybe going forward. Whether you've just incrementally shifted resources or is this like net new adds that we should all be thinking that are temporarily going to get added and then come to productivity, as you pointed out earlier?
John Chen: Yes. We have not done any major or even minor reduction in force. We have moved some resources around, more for functional investment reasons, not for reduction of people. So it's probably best for you to think about it as incremental.
Paul Steep: That's helpful. Maybe just the last one as well. In terms of new cybersecurity products, obviously, you're talking about giving the team time to ramp up. But maybe talk to us a little bit about what you're seeing from inbound client interest because you've launched a significant number of products, been on a bit of a role here in terms of new product launches.
John Chen: You're assuming you're talking about the cyber side.
Operator: Yes. Sorry, cyber.
John Chen: Okay. Right. Probably most of the conversation center around the Protect product. I would say, if I think about the larger opportunities and sites that we have won, the key winning product, it is the Protect. So this is why you heard me say a number of times on this call today, we're going to try to double down on the Protect side because it's a differentiator for us. And in addition to that, the AI/ML model that we have could be embedded and it could embedded without having to be updated, it's been valid for a very long time. So that's probably the largest opportunities when you think about large installation. And now, what we're trying to do is to position the XDR product. We talked about the new one called Gateway, and that provides zero trust architecture, so enterprise, especially like government, are extremely interested in those two areas.
Operator: Thank you, participants. I'll now turn the call back over to John Chen, Executive Chair and CEO of Blackberry, for closing remarks.
John Chen: Thank you, Jesse. Thanks, everybody, for joining us. I know it's late in the East Coast, so I want to just -- hopefully, you are doing well. And thank some of you who have attended our annual shareholder meeting yesterday, and I'm looking forward to speaking with you folks soon. Have a great evening.
Operator: Thank you, speakers. That concludes today's conference call. Thank you all for joining. You may now disconnect.
