BlackBerry Limited
Q4 2022 Earnings Call Transcript

Published: 31 Mar 2022

[Operator:]

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 participants will be in a listen-only mode. We will be facilitating a brief 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. Please go ahead.

[Tim Foote:]

Thank you, Brent. Good afternoon, and welcome to BlackBerry’s fourth quarter and full fiscal year 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. After I read our cautionary note regarding forward-looking statements, John will provide a business update, and Steve will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the Investor Information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we’ll be making today constitute forward-looking statements and are made pursuant to the safe harbor provisions of applicable U.S. and Canadian securities laws. We’ll indicate forward-looking statements 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 or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the Company’s annual filings and MD&A. 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 in their 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.com websites. With that, I’ll turn the call over to John.

[John Chen:]

Thank you, Tim. We have to change the intro of the script now. Tim was just made Vice President. Congratulations.

[Tim Foote:]

Thank you, John.

[John Chen:]

Good afternoon, everybody, and 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 IoT ARR 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-based royalty, we set another new record for quarterly revenue from design activities. These revenues come from development seats and professional services used by the customers to design our QNX software into vehicles and other IoT end points. This strength has not only delivered near-term revenue, but also points to long-term business volume once these design enters 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 FY23. 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, particularly chip shortages, although they expected the situation to largely improve as the year progresses. The conflict in Ukraine has added huge -- a 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 have seen a significant increase in the proportion of the QNX business from safety-critical foundation software, such as ADAS, advanced driver assist, digital cockpits and autonomous drive. This now constitutes the largest part of the total business, overtaking infotainment. This strategy to focus on functional safety plays to QNX strength and is validated by both, the market trends towards ECU 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 are due when the vehicle is shipped and there is a little cost for us at this stage of the design life cycle, 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 seven, 17 new auto designs and 28 wins in the general embedded market. ADAS registered the most wins in the quarter, followed by digital cockpits and instrument clusters. Once again, we won business with leading automakers and Tier 1 suppliers, including Hyundai, (ph), Bosch, Visteon, Denso. And this is a special for Tim, Skyships, for the new Gordon Murray T.50 hypercar. I just read it. I see the picture of that, I should say. Tim showed me the picture. He was quite impressed with that. In Jan, we recorded wins in multiple verticals, including defense and aerospace, industry, industrial that is, as well as medical, our strongest GEM 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 include analytic devices for use in medical labs as well as for surgical robots. Let me now turn to IVY. At CES in January, we demonstrated a product running with live data on auto-grade hardware. This demonstration formed the basis of many constructive meetings with OEM and as a result, we had multiple additional requests to start proof-of-concept, or we call it POC trials. We currently have more requests than we can handle, which is a nice problem to have. The first POC is with the Chinese EV automaker, electric vehicle, Pateo, a leading Chinese Tier 1 supplier. The plan is to integrate IVY into the digital cockpit. The expectation is for successful POCs to lead to design wins, i.e., a commitment from customers to design IVY into vehicles. The CES demonstration also allowed us to showcase two of our many potential applications that IVY can enable, Car IQ in-vehicle payment and Electra’s AI-driven battery management application were both very well received by OEMs and are included in the IVY POCs. IVY product development remains on track. And last month, we released the latest version of the product that is POC-ready. Let me now move to the cybersecurity side of the business. This was the third consecutive quarter of sequential billings growth. Billings not only grew double digits versus Q3, but they also increased year-over-year. Cyber revenue was $122 million. Gross margin improved by 200 basis points to 61%. ARR was $347 million. And dollar-based net retention was 91%. Market conditions for our cybersecurity products are positive. This is in part because of the ongoing heightened level of cyber threats. Our Guard-managed XDR cybersecurity team, in line with other leaders in the space has seen a significant increase in threats in recent weeks. In particular, Waifu malware, though -- that aims to take the victim’s service offline is at an unprecedented level. Some of the most prominent example of this currently identified across the industry, including the Hermetic Wiper that has been seen in the cyber attack in Ukraine, Latvia and elsewhere. Blocks have shown that our product -- our Protect product, Protect EPP, has been blocking this malware at BlackBerry customers’ sites before it could execute. The same is also true for WhisperGate, another leading example of wiper malware that has targeted Ukrainian government as well as Ukrainian nonprofit and IT organizations. In fiscal year ‘22, we released 48 new products. Among the cybersecurity products, pipeline growth is strongest for the following three

[Steve Rai:]

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 in amortization of acquired intangibles, $4 million in stock compensation expense, a $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 headcount growth and new product development to drive top line growth. The planned investment is sizable. We expect to increase headcount 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 $0.25, while non-GAAP earnings per share was $0.01 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. Cybersecurity 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 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. I’ll now move to our balance and cash flow performance. Total cash, cash equivalents and investments remained consistent at $770 million as at 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.

[John Chen:]

Thank you, Steve. Let me provide the outlook for the new fiscal year. Licensing revenue is expected to be minimal, excluding anything related to the patent sale. For the cyber business, we expect to deliver billings growth between 8% to 12% this fiscal year, mainly as a result of increased traction from our security products. In fact, we expect to see 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 of cyber, we’re not satisfied with our results, particularly in ARR. We will -- we feel, however, positive about the trajectory of this business for a number of reasons

[Operator:]

Your first question comes from the line of Daniel Chan with TD Securities. Your line is open.

[Daniel Chan:]

Another strong quarter of strong general embedded wins. It’s been a few quarters now where you’ve seen more general embedded 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 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 revenue streams are structured for the general embedded space?

[John Chen:]

Yes. You’re talking about general embedded or you’re talking about auto?

[Daniel Chan:]

GEM, general embedded.

[John Chen:]

General embedded. General embedded, you see the production being a lot sooner on average, probably a couple of years out versus 6 or 7, or 5 or 6 years. So, -- and typically not as big in terms of dollar on the ASP, or it is a big organization like a hospital or medical devices, then the volume isn’t as big as the car industry. But it’s still very, very healthy. Now general embedded vertical, I think we -- I mentioned medical, that’s a really good field. We’re winning a lot. We have good momentum in there and because of the safety certification. There are other general embedded markets that are really not as economically exciting. That’s a fair way to say. So, we use -- we tend to stay away from those.

[Daniel Chan:]

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 that’s going. I think you mentioned 100 going towards cybersecurity sales professionals, where are the rest going?

[John Chen:]

To IoT. The IoT, a lot of them -- I mean, of course, the sales personnel, but also we have a lot of backlog in professional services. So, we need to fulfill those backlogs and get the revenue.

[Operator:]

Your next question comes from Trip Chowdhry with Global Equity Research. Your line is open.

[Trip Chowdhry:]

Good morning. So, another very strong quarter on Cylance. A very quick question. I was wondering, like if you could put some more color to it. Like what kind of activity was, say, before the Ukraine war and while we are in the war, you’re getting a lot of interest in Cylance. Where is that interest coming from? Is it from U.S.-based companies or European-based companies or the whole world? Just provide us some anecdotal comments what you are hearing? I would appreciate that. And again, a very good quarter.

[John Chen:]

Thank you. So, the cybersecurity world is -- there are a lot of more threats and attack. And we see demand growing -- raw demand growing. Like everybody else in the market have seen, the raw demand is really going very fast. There are also a replacement market for the older generation signature-based companies like McAfee and Symantec and Microsoft. So, you can see the second generation, the AI/ML-based companies, like ourselves and some of the names, key names in the industry we could do a lot of -- a good success rate in replacing legacy implementation. So, that’s the second one. Cylance is particularly strong in the mid-market, small, medium business mid-market. And I think we’re seeing our activity picked up quite nicely, partly because of the Guard software that we released, probably by now, it’s about a year. And so -- 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 least, remember, we’ve been hiring aggressively for over a year now in the sales headcount. 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. And particularly under John Giamatteo 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. Still have ways to go, but it’s starting to come together.

[Trip Chowdhry:]

I just have one observation, which is -- I just wanted to share with you. IVY platform, providing machine learning, AI-driven battery management system, none of that system, which is AI-driven for BMS, Battery Management System exist anywhere, not even the biggest EV manufacturer has that. I think this is very unique to your IVY platform. Keep it up.

[John Chen:]

Okay. Thank you. Thank you much.

[Operator:]

Your next question comes from Paul Treiber with RBC Capital Markets. Your line is open.

[Paul Treiber:]

Just a question on go-to-market strategy in cyber. And it’s just -- you mentioned UEM is obviously strong in large enterprise, but then Cylance is strong in SMB. How do you bridge those two businesses from a go-to-market perspective, because the customer base is -- your competitive advantages within each seem quite divergent?

[John Chen:]

Yes, it’s a great question. So, we now have three go-to-market teams that is coordinated under -- by region under one senior management, and so -- because of John G. And so, the three market -- go-to-market team are the -- think about it, strategic accounts, which are the large government as well as banks, regulated industry, the SMB market and the channel team. So, our objective of the first team is to secure our base business in the strategic accounts and then upsell them into -- with technology that could apply to that UEM base, for example, zero trust technology, which is -- the gateway is probably the most talk about right now, particularly the U.S. government. The new Biden administration budget has specific money allocated for zero trust, and they want every agency and every arm forces to do that, to be able to implement zero trust as part of the overall cybersecurity protection. So, we have that business, and we’re already in many of those institutions. So, the upsell of Cylance product into that space is a key of growth. The second, SMB, two approaches. One approach is through the Guard services, the managed service, which SMB typically needs that kind of help for either augment their resources or replace their resources because they can’t hire fast enough. And so, that (ph) with the Cylance product, and then we upsell UEM into it as more bundled oriented. And then, of course, the channel, typically all cyber. And there’s some good channel partners that’s going to come on line. I’m not at liberty to talk about it right now, but in 90 days, I will. I will. So, that’s the kind of how we go in with each different type of category of customers. I hope that answers your question.

[Paul Treiber:]

Yes. That was helpful. And I can’t wait for the announcement in 90 days. Just a 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 as you look at the revenue in that segment, in the previous year, it was quite a large number. How do we put the sale price in context to the previous revenue that you generated in that segment?

[John Chen:]

Okay. So, I would say, there’s still a lot of potential for this noncore set of patents. But two things obviously you know. One is, time is ticking down in the validity of the portfolio. Although we have a very young -- we typically have, even with the noncore, somewhere around 8 to 10 years type average lifetime with the patent still remaining. So -- but the -- if you notice that -- which you pointed out, the last couple of years -- or the last few years, we have some good success. But those are with very big names. And so, now, we need to go -- the business needs to go cultivate pipeline for the smaller name, which typically takes a little longer time, a lot more back and forth. Big name does too, but big names have big numbers. So, in a way that the low-hanging fruit, we already approached. And so, I think the numbers we have done in market test the numbers, we think it’s very fair to both sides.

[Operator:]

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.

[John Chen:]

Thank you. I’m pleased to announce that -- by the way, I’m pleased to announce that on May 18, we’ll be hosting a hybrid in-person and virtual Analyst Day from San Ramon, California. And some of the questions asked earlier regarding our go-to-market will be addressed by John Giamatteo and Mattias Eriksson, the two BU presidents. And I will strongly suggest you don’t miss it. In the case of Mattias, we’re also going to prepare to annually talk about backlog that will be during that call -- that meeting also. So, I really encourage investors to join us and hear about key developments of our product and strategy as well as financial focused 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 hope to see you in person soon.

[Operator:]

Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.