BlackBerry Limited [BB] Conference call transcript for 2021 q3
2021-09-22 21:41:05
Fiscal: 2022 q2
Operator: Good afternoon and welcome to the BlackBerry Second Quarter Fiscal Year 2022 results conference call. My name is Ashley 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 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 0. As a reminder, this conference is being recorded for replay purposes. I would now like to turn in today's call. Richie Tim Foote, BlackBerry Investor Relations, please go ahead.
Tim Foote: Thank you, Ashley. Good afternoon and welcome to BlackBerry's Second Quarter, fiscal 2022 earnings conference call. With me on the call today, our Executive Chair and Chief Executive Officer, John Chen, and Chief Financial Officer, Steve Rai. After I read our cautionary note regarding forward-looking statements, John will provide the business update. Steve will review the financial results. We will then open the call for a brief Q and A session. This call is available to the general public by 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 will 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, as well as other factors that the Company believes, are relevant. Many factors could cause the Company's actual results in performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors as discussed in the Company's annual filings and ND & A including the COVID 19 and Deneke. 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, joining the call, John and Steve will reference non-GAAP numbers. In our summary of our quarterly results for a reconciliation between our GAAP and non-GAAP numbers. Placing the earnings press release published earlier today, it's available on the EBCA CVA, and .com website. And with that, I'll turn the call over to John.
John Chen: Thank you, Tim. Good afternoon, everybody, and thanks for joining the call today. 1 correction, I think all the numbers -- all the revenue numbers we use will be GAAP-based, correct?
Tim Foote: Yes.
John Chen: Right. When you say non-GAAP numbers, it's actually the revenue number we referred to are all GAAP-based numbers. Okay. Starting with our headlines this quarter, the business performed well with revenue for all the free business beating expectations. The cyber security business unit delivered strong sequential billings and revenue growth. The IOT business unit performed better than expected with strong design-related activities, partially offsetting the impact of the global chip shortage on production royalties. Licensing revenue reflects the restriction on monetization activity from the ongoing patent sale negotiations, which I will talk about more in detail shortly. Licensing and other revenue came in slightly stronger than expected. This quarter, BlackBerry generated a positive operating cash flow following the strengthening of our IOT leadership team in one, we have appointed John GO. Hi, Teo to lead our cyber security business unit. Beginning or commencing November, October 4th sorry. Commencing October for which is, a couple of weeks from now, John with the McAfee President and Chief Revenue Officer running the enterprise and consumer cybersecurity businesses. Is this new appointment up to refocus our software business into two business units? I'll cover this in more detail later. Excuse me. I'll start my review with the IoT business unit. Revenue came in at 40 million, which is better than expected, primarily due to ongoing strength in the design activities area. Gross margin remains strong at 83%, We present IOT AR increased to 89 million as you are aware, the auto industry experienced some significant headwinds in Q2 due to the global 'til global semiconductor chip shortage. This impacts production volume, particularly in North America, Ford, for instance, major customers of ours, reported 700,000 launched units of production in calendar Q2, production base royalty, historically, the largest single component of our Q and X revenue. However, a significant portion. You know, the revenue you saw also we generated from design activities prior due to the vehicle entering production. This part of the business remains very vibrant and we continue to generate strong development , and professional services revenues. As a result, total IoT revenue in the quarter was better unexpected. Furthermore, these design wins will translate into future production base royalties. As we look ahead to the rest of the year, we continue to see the headwind for vehicle production. The problem is future has shifted from the surprise of wafers to the mall, the back-end assembly and testing issues, largely due to spike in COVID cases in Asia, as well as some of the accidents going on in Asia. Like some of their plants have a fire for example. feedback from OEM about the impact on production volumes in the second half is somewhat mixed and constantly evolving. For example, Diamond recently indicated they're expecting a lessening impact by Q4. Just sorry as those dragging, on the other hand, see challenges persisting in Q 2022. In terms of outlook, we continue to see depart the past quarter as the low point but significant headwinds. Are expected to continue into Q4 and -- Q3 and Q4, and perhaps even beyond that, all will be at a sequentially decreasing impact. The impact of the chip shortage on QNX quality revenue is expected to be buffer somewhat by ongoing strength in design activities. We're comfortable with the current IoT revenue consensus, meaning the full-year revenue outlook remains unchanged. As mentioned, despite a supply chain issue, QNX QNX continued to win new designs at a very solid pace. In the quarter, we had 23 new design wins, with seven in auto and 16 in the General Embedded Market. We call it GEM. Because of our market presence and leading technology. We are the trusted go-to-supplier and market leader in auto photo malls were delighted to announce that we now have design wins with 24 of the world's top 25 electric vehicle automakers, as is measured by volume. Haven't been selected most recently by Daimler as part of their design that is as part of their, ED design business. From the 23 or 25 we had last quarter, these 20 full-year items between down represent 82% of the global EV market -- for production, sorry, 82% of global EV production. This got -- this demonstrates a leading position we have in this very fast-growing part of the auto industry. I'd like to expand on a couple of design wins to get investors more colors as to why QNX was chosen and why we are the industry leader, the friends who are the automotive Q1 bet excluding food digital comp, and Gateway solution for a Chinese EV OEM using the QNX real-time operating system and hypervisor. QNX technology is well-known and trusted in China. In the Chinese automotive industry, given this reputation for safety and security. Q and actual was chosen about software solution from both domestic, our multination and as well as multinational competitors. Production is expected in 2022, which is next year, and run for around five years. The second is a leading Japanese Industrial robotics manufacturer that's also happened to be a new logo to February. The customers select QNX for an autonomous 3D robot, robot warehousing system, and head of the leading competitors. QNX was chosen for its functional safety potentials, production is expected to start this year and continue for five years. Other than design wins this quarter in auto included instrument cluster and Aidan systems in a gem space. Design wins, including medical, diagnostic, industrial process control, and a thermal control system for power plant. shifted to during the quarter we launched 2. This is a SaaS version of our software composition and analytics 2, which was previously offered as a book service engagement. Java's 2.0, which includes a market-leading binary scanner, is an important part of how BlackBerry can assist the customer to achieve compliance. With the reason , software deal and materials, software viewing materials, executive orders mandated by the Biden administration. Moving to a brief update on IVY, we're pleased with the ongoing progress being made. A home fact very in AWS has significant resources allocated a project and our timelines remain on track. We are on schedule to release an early assets version of the reduction in October. On the product side, we are scheduled to release an early assets version of the product in October that will enable further engagement with Owens and also allow demonstration at CES in January. This version will be available to certain ecosystem partners to begin actively building an application on IV. And speaking of applications for our IV to be embraced by automakers, we recognize that it is important to demonstrate IV value to them, management apps that we announced last quarter. We announced another application that we will be built on IVY. This new application enables in-vehicle payments and is being delivered through a partnership with , a California-based startup. The abrogation we used our access the data and the ash compute two of the IVs key differentiators to produce a unique digital fingerprint for the need for Duck photo vehicle. This allowed our fabrication of payments for items such as few toes, parking services, et cetera. Without the need for free credit cards or other traditional payments and methods. This opens up the possibility for OEM to participate in new revenue streams. And if another out of the many potential application that IVY will enable. In summary, IVY continues to progress nicely. Now let me turn to cyber security. This quarter to business unit delivered strong sequential billings and revenue growth. Revenue was a 120 million gross margin came in at 59% AR was $364 million. Dollar-based net retention was 95%, as we mentioned earlier, joined you will Matteo will be joining blackberry to meet the cyber security bond brings within many years of cyber security industry experience. During his six years as President and Chief Revenue Officer at McAfee, he delivered both double-digit growth and margin expansion for the enterprise, the , as well as the consumer divisions. John will be on the progress that has been made in the recent quarter with a Cybersecurity business unit, go-to-market engine. And we'll also direct old product development and business unit strategy. has decided to pursue other opportunities and release BlackBerry at the end of October. The addition of John to the team completes the split of the software and services business into two market focus versus unit bowl my OTN Ciber's are targeted. We're driving growth and we've ID showed a value. The two business units will report directly to me. As mentioned, this was a good quarter. All there is still work for the team to do like a few outstanding areas that I feel that I'd like to share with you about growth in the pipeline for our cyber security process. Farmers. High frankly is strongly for BlackBerry gateway are 0 trans networks as a quarter. To help. To realize this increased pipeline investment, if our direct sales force in particularly hiring quota-carrying sales heads, continues, we're also making further progress to the channel. As illustrated by a 32% sequential growth in channel billings this quarter. the program also has significantly increased both channels driven pipeline generation and new logo buildings mainly business unit, go-to-market engine. And we'll also direct old product development and business unit strategy has decided to pursue other opportunities and release BlackBerry at the end of October. The addition of John to the team completes the split of the software You may recall that during the Q2 earnings call a year ago, we targeted using MSSP, sorry, to quickly scale our garden-managed service offerings. Today, one of these partners I'm happy to report managed more. Then 100 thousand endpoints using BlackBerry's Cypress products. I'd like to take a closer look at some wins for the quarter that demonstrate why customers are choosing BlackBerry for their Cybersecurity needs. The first customer is one of the top ten automakers in the world. These consumers select our ProTec, EPP, and optics, EDL solutions. Following a competitive bake-off in which we went head-to-head with CloudStrike and Colin back. The customers like at BlackBerry due to us near a 100% malware detection rate, our lightweight engine, and flexible deployment options, both in the cloud as well as the stand-alone factory networks. The second is at Fortune 100 financial services Company, BlackBerry displays, Microsoft Defender would protect and . The companies select us particularly for our performance on Mac. The third is where we have continued success within the Australian state government agencies. This quarter we sold protect off-takes and a Fred 0 consulting services into a number of agency displacing. Predominantly legacy incumbents that included Trend Micro and Symantec. The customer chose BlackBerry for our next-generation prevention for its technology. On the industry recognition fund. And lab. a leading independent research firm based in London, has performed a rigorous set of tests on our EPP and EDR products and optics. This tax differs on their quarterly endpoint tests. Rod and simply loading no malware onto an endpoint, which typically mastering inability of traditional nature of these vendors for preventing dude a threat that breached tests includes, instead of price real-time, real-world of hacking tactics. They have tried comprehensive techniques to evade our defense and concluded that Protect and Optics provide complete protection -- prevention complete protection, as well as 0 false-positive. A late to the full report could be found on our Investor Relations webpage. This third-party validation of our product, not just our EV -- EPP, but also our EDR, demonstrates how we have successfully crossed the robotic app to competitors who have recent product launches. The market is now recognizing some of the unique differentiated abilities of our fiber products, one of which. Is the maturity of our AI engine. As in the previous quarters, we're seeing new malware and ransomware hitting the headline on an almost daily basis. On AI engine, the most mature in the industry continues to provide zero-day against a whole the strength in the quarter, our product consensually brought new profile ransomware, such as high long bid, Ragnar locker, and many more before they could do any damages. Back where the AI engine is firmly focused on preventing our customers from being breached. We are some of the leading competitors instead focus on showing customers other ways that system on a different way that the system to be assessed. On the UEM front, we're continuing to invest in our roadmap delivering enhancement that adds, adds, that add the most value to customers, we recently announced an enterprise can now. And it's one phone Blackberry, leading security while enjoying a seamless and native user experience with Microsoft 365 productivity apps. This is enabled by additional integration between BlackBerry UEM and Microsoft 365 primarily through the Azure active directory conditional effect. This is finally the latest version of the UEM series, which was released earlier this month. series also provide zero-day support for Android 12 and an IOS 15. This past quarter, we secured important new renewals. We've government agencies such as IRS the Department of Homeland Security, the U.S. Marine Corps, the US Army Corp of Engineers, the UK Ministry of Defense, the U.S. Air Force as well as leading enterprises such as General Dynamics and. We also won a number of new logos such as say, fresh national Industry, Institute for criminal research, and, uh, Tel - Aviv stock exchange. We continue growth in pipeline coupled with the investment and direct and channel sales. The outlook of the cyber security business units is for sequential building growth for the remaining fiscal year. This is expected to lead to modest sequential revenue growth due to the subscription model. The full-year outlook remains as before at the lower-end of four. To 5 $15 million range. Turning now to licensing, as I mentioned earlier, negotiations to sell a portion of the patent portfolio related to mobile devices, messaging, and wireless networking are ongoing. And we are making significant progress since our last earnings call, including preliminary agreement of many of the key terms of the deal. We expect to execute a definitive agreement this quarter. Closing the transaction will be subject to normal regulatory review. Normal naturally, given this backdrop, we will continue to limit monetization activities for the remainder of this fiscal year. Info revenue for both Q3 and Q4 is expected to be similar to Q2, which is Had $10 million per quarter. While we expect the seller to conclude essentially, the process has taken longer than we expected or anticipated. this quarter, we will have other options, including additional interest to parties. We will update investors on the material -- on any of the material developments in a timely manner. So let me now hand it over to Steve to further review the financials. Steve.
Steve Rai: Thank you, John. My comments on our financial performance for the second 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 the second-quarter total Company revenue of 175 million, second-quarter total Company gross margin was 65%. Our non-GAAP gross margin stock compensation expense of million. 1, 000 000 quarter operating expenses were 143 0000000. Our non-GAAP operating expenses exclude 32 million and amortization of acquired intangibles, 11 million in stock compensation expense, and 67 million. Fair value adjustment on the convertible debentures, which is a non-cash accounting adjustment prone to large swings driven by market and trading conditions. In the second quarter, non-GAAP operating loss was 30 million, from the second quarter, non-GAAP net loss was 33 million. Non - GAAP earnings per share was a $0.06 loss in the quarter. Our adjusted EBITDA was negative 14 million this quarter, excluding the non-GAAP adjustments previously mentioned. As we continue to invest in both our cyber and IOT businesses to drive top-line growth. I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was 120 million and IOT revenue was 40 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 80%. Licensing and other revenue were 15 million, as John mentioned, our IP monetization activities remain limited while negotiations for the potential sale continue. Now, moving to our balance sheet and cash flow performance. Total cash, cash equivalents, and investments were 772 million as of August 31, 2021, an increase of 3 million during the quarter. Our net cash position increased to 407 million. The second quarter's free cash flow was 10 million. The cash generated from operations was 12 million and capital expenditures were 2 million. That concludes my comments. I'll now turn it back to John.
John Chen: Thank you, Steve. Before we move to Q. I'd like to summarize this past quarter. I'm pleased with how the business performed, beating revenues expectations for all the businesses, and deliver positive cash flow. The structure of the two-market focus. This is software business unit is already delivering results, and we're adding additional relevant industry experience. We're encouraged by the growth in the cyber security pipeline and continued to invest in sales headcount. QNX design activity remains very strong, and we are weathering the impact of the chip shortage as well. We're now also making good progress with IVY, and with that, I like actually the Operator to open the line for Q&A, please.
Operator: And we will now begin the question-and-answer session. To ask a question, you may press star one on your cellphone keypad. If you are using a speakerphone, please make sure your line isn't muted. Again, press star one to ask a question. We'll phosphate just a moment to allow everyone an opportunity signal for questions. We request that you limit yourself to one question and one follow-up. Our first question today will be from Mike Walkley with Canaccord. Your line is open.
Mike Walkley: Hi, John. How are you doing?
John Chen: Very good. Thanks.
Mike Walkley: Thanks for thanks for all the updates and the guidance. I guess my first question for you is your guidance arguably implies an aggressive second-half outlook just to reach the full-year guidance, can you walk us through what needs to go right for you to achieve that guidance or stronger second half?
John Chen: Thank you for the questions. There are some assumptions. Let me break it down a little bit. Licensing, of course, we already explained, so I don't have to go into much detail on that, I think we're going to have a $10 million quarter for the next 2 quarters for the second half that is, the quarter and it had something you do with the fact that we are -- we're not going to monetize. I'll push on the monetization effort and licensing effort a while we're going through this negotiation on selling the portion of the patents that is on those areas of business that we are no longer actively involved with. Regarding IoT, the only wildcard, so to speak, is the chip shortage and the impact of that. From all the indicators, all the ups, and downs, and give and take, and we spoke to a lot of them. They OEMS. that North America seems to be getting better in Q3 Q4 to fall as it compared to Q2. A good example will be Ford believes they could, they are improving and GEM also is, although they going to shut down a couple of factories in Q3. But I think for me manage you, it's improving versus the first half of the year. So North America, you see it going back improving in the situation. Euro, however, is still had about ten to 15% impact on the product until it's the Asia Pacific. So-net of all that, if we are in that range without any dramatic departure then the numbers that we expected in the second half still hold. And a big part of that, of course, is we are winning some very strong design, wins. that bring us more developers fees, revenue, as well as professional services revenue. So, I'm pretty comfortable with that. On cyber, it really is a function of one thing. I mean I got two considerations in there. One thing, the major part is we have a. A lot of salespeople joined us in the last couple of Q3 quarters. We have a pretty young pipeline. The activities in the pipeline have been very strong in the last quarter into So putting it together, it's actually a good thing, except that it might take time to ramp up. So, the of conversion of the pipeline with the newest sales force is the only wildcard. And it is something that we have to manage very carefully. But the goodness in this area is, even if it takes longer, these things this business. Don't tend to go away. So. So that's the assumption that we made in our forecast. The other one is in Q4. We got a couple of large government deals with some of the government and especially in North America, some of those need to come to fruition. And then we expected and do so those, are the basis of our forecast second-half seem to be a bigger number, a stronger number than the first half that's correct.
Mike Walkley: Right. Thank you. And just my follow-up question. on adding John to the team. Is he going to run the rotation such keep the key position into that impacts your guidance, thoughts at all?
John Chen: It's slightly early to tell, but I'm dying to hear his experience of growth because he was being able to grow both consumer business and enterprise business as McAfee when he was running for president and McAfee and the CRO. So, I'm sure you will make some changes. I am doubtful that everything will remain exactly the same. On the other hand, the investment that we made in the channel, the investment we made in Pipeline, the investment we make in partners and engineering, and the investment we make in hiring what's . And we have a couple of quarters ago, we hired a pretty good head of professional services. I'm sure they would take full advantage of those.
Mike Walkley: Thanks for taking my questions.
John Chen: Thank you.
Operator: Your next question comes from Daniel Chan, vis TD Securities. Your line is open.
John Chen: Hey, Daniel.
Daniel Chan: Hey, John.
John Chen: Hi, Dan.
Daniel Chan: You mentioned earlier that typically your QNX revenue has a higher mix of royalty versus development. Should we expect a higher mix of developments for the next couple of years as electronics and software development become ramped up at a lot of these OEMs.
John Chen: I think you should expect. probably for this year, and I think -- I don't think in the future years it will continue to be the same. The reason I say this is that remember, I should be seeing some started to improve and he has to improve over time. Then as a huge history. And semiconductor for the whole semiconductor industry auto, it's not really that. It is not 100%, obviously, it's -- it's probably like more like 15% of the market. So, he will -- he will address that. And so, I expect that our royalty rate to go back into some kind of right in the last couple of two, three years.
Daniel Chan: Okay. That's helpful. Can you remind us how you sell these developments? Is it more like a perpetual license or is there a recurring? Proportion
John Chen: I -- it's more like a perpetual license, selling
Daniel Chan: Okay. And do you give 20% maintenance?
John Chen: Yes. Yes. We get upgrades and maintenance on it. Yes.
Daniel Chan: One more if I may, Cybersecurity ARR was flat sequentially. While you've been saying that the pipeline has been growing, just wondering when we were going to start seeing that metric. So, to take up whether there is some seasonality built into our own recorder sandwich.
John Chen: Yeah.
