BlackBerry Limited
Q3 2021 Earnings Call Transcript

Published: 18 Dec 2020

[Operator:]

Good afternoon. And welcome to the BlackBerry Third Quarter Fiscal Year 2021 Results Conference Call. My name is David, and I’ll 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, David. Good afternoon. And welcome to BlackBerry’s third quarter fiscal 2021 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:]

Thanks, Tim. Good afternoon, everybody. Today, I’d like to keep the financial and business updates relatively brief, because I’d like to spend a little bit more time discussing our recent BlackBerry IV announcement. This third fiscal quarter we continue to build on the momentum from our second quarter, delivering results in line with our outlook we provided. We delivered sequential revenue growth both in the Total Software and Services section and as well as BTS. We continue to deliver positive EPS and positive free cash flow this quarter.

[Steve Rai:]

Thank you, John. My comments on our financial performance for the first, sorry, 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. We delivered third quarter non-GAAP total company revenue of $224 million and GAAP total company revenue of $218 million. Third quarter total company gross margin was 70%. Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $6 million and excludes stock compensation expense of $1 million. Third quarter operating expenses were $142 million. Our non-GAAP operating expenses exclude $32 million in amortization of acquired intangibles, $11 million in stock compensation expense, $4 million for software deferred commissions expense acquired and $95 million fair value adjustment on the convertible debentures, which is a non-cash accounting adjustment driven by market conditions. Third quarter non-GAAP operating income was $14 million and third quarter non-GAAP net income was $11 million. Non-GAAP earnings per share was $0.02 in the quarter. Our adjusted EBITDA was $31 million this quarter, excluding the non-GAAP adjustments previously mentioned. And I will now provide a breakdown of our revenues in the quarter. Software and Services revenue was $168 million. Software Product revenue remained in the range of 80% to 85% of the total, with Professional Services comprising the balance. The proportion of Software Product revenue that is recurring was approximately 83% due to product mix. The decrease in ARR this quarter similar to the prior quarter is primarily due to BTS. We include QNX royalties in our ARR metric to give a total company view. We expect to see the impact of COVID on ARR normalized early next fiscal year as we return to our normal revenue run rate there. Licensing and Other revenue was $56 million. Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $757 million at November 30, 2020, a decrease of $220 million during the quarter. This is mainly due to the early redemption of the $605 million of convertible debentures and issuance of $365 million of new convertible debentures on September 1st. This represented a $240 million reduction in debt financing, partially offset by cash generated in the period.

[John Chen:]

Thank you, Steve. Before I provide outlook for the remaining of the current fiscal year, I’d like to highlight some noteworthy partnership in addition to the BlackBerry IV that we’re very excited about. This quarter we partnered with Zoom to provide a BlackBerry secure version of Zoom, which is highly secure way to hold virtual meetings in this still work from anywhere environment. It provides increased protection from corporate data leakage, as well as cyber threats. In the quarter, Verizon launch their business internet secure offering, which includes our BlackBerry Smart AV antivirus product and Cisco Umbrella Security Service. This new product is aimed at Verizon large number of small and medium-sized business customer. During the quarter, we announced the integration of AtHoc with both Microsoft team and ServiceNow platform. Team, as most of you know is the market leader in collaboration software, with over 115, 1-1-5, 515 million daily active user and the Now platform have 51% of the IT Service Management market. This integration will further enhance AtHoc reach and the ability of enterprise to protect their assets. I’ll now move on to our outlook. We continue to expect total company revenue for the year could be around $950 million, as we indicated last quarter. We expect licensing revenue will finish the fiscal year a little stronger than previously indicated. We expect revenue for BTS to continue to grow sequentially in the fourth quarter and as we talked about as to return to its normal runway early next fiscal year. This quarter we continue to make good progress. We deliver solid financial as per our outlook. We develop exciting new business model, the recurring revenue model for QNX, as well as partnership which I outlined and we deliver industry leading products as per our roadmap. With that, I’d like to turn the call over to our Operator to conduct a Q&A session, please, David?

[Operator:]

Yes. Our first question today will be from Daniel Chan with TD Securities. Your line is open.

[John Chen:]

Oh! Hi, Dan.

[Daniel Chan:]

Thanks for taking my -- hi. Thanks for taking my questions. The -- I don’t know if you guys mentioned it, but if I missed it, did you provide a metric on the billings growth?

[John Chen:]

No. We did not. We really missed it. We haven’t provided that.

[Daniel Chan:]

Okay. And then on the ARR declining, Steve, you talked about how it’s declining because of BTS. Can you just remind us what you’re including there from BTS and why that’s causing it to drop?

[John Chen:]

The numbers -- go ahead. Go ahead. Go ahead, Steve.

[Steve Rai:]

Sure.

[John Chen:]

Yeah.

[Steve Rai:]

So the -- we -- our ARR is a total company metric, well, for Software And Services. The QNX part of it, we include -- it’s basically a trailing four quarters that feeds into that metric. So there is a lag affecting. So it’s got, but with the COVID impact that we’ve been discussing, consistently that’s got a lag effect making it back into the metric as we move forward and recover.

[John Chen:]

Dan?

[Operator:]

Next question comes from the line of Mike Walkley with Canaccord Genuity. Your line is open.

[John Chen:]

Hi. Hi, Mike.

[Mike Walkley:]

Hi. Thanks. Hi, John. Thanks for taking my question and good…

[John Chen:]

Sure.

[Mike Walkley:]

… swishes to everybody on the call for the holiday season and to stay healthy.

[John Chen:]

Yeah. You too. You too.

[Mike Walkley:]

Yeah. Thank you. Yeah. Just a question for me, just building on IV, lots of interest and excitement around it. I know you’re not sizing it yet, because it’s early days, John. But as you’ve shared longer term getting to kind of ASPs in the high-teens to $20 per car, how does this help close the gap that things go really well? How do you see ASP for car developing over time.

[John Chen:]

As I said, we don’t really have all our kind of the revenue laid out yet, because the earliest will get the revenue, I believe is the model year 2023. So we do expect this to help close the gap in a very or increase ASP in a very big way. It has to do a lot to do with not only the base platform to collect sensor datas and analyzed it over the edge and into the cloud and OEM could then take advantage of all these sensor daters and the combination of those sensor datas to make certain decisions and -- either real time or in the long-term. But it also depending a lot on how many application could we spin up. So an OEM is going to build the application, the Tier 1 will build the application using our platform and so will other third parties. So if there are more applications, then obviously there are more instances that could increase our ASP per vehicle. So we’re very hopeful that this not only have a recurring part of it, but it’s also bringing us a good chunk of revenue going forward.

[Mike Walkley:]

Great. Thanks, John. And just my follow up question kind of longer term also with BlackBerry, you guys have launched several new different software security modules. As you look at your sales force, what are they feeding back to you in terms of their ability to land and expand customers? What are they leading with and what are some of the upsell opportunities that they’re excited about with the new modules that you’ve launched over the last several quarters?

[John Chen:]

Yeah. So, first off, on the product side, our cybersecurity suite is a very timely offering to the market, because of all the hacks and the vulnerability is going on right now. We have been invited to more cases nowadays because of the environment and the attention switch to cyber protection and all the hacking that’s going on out there. So, for example, knock on wood, we haven’t been successfully, I guess, intruded yet. That’s not to say this is not a challenge. This is just to say, the state of the affair at this point. So on a medium-term, when we -- our sales force are very focused on upgrading all our UEM base, which accounts for depending on who you listen to of -- in terms of analysts -- industry analysts is somewhere between 9% to 12% of the market shares of UEM space. So we are very busy upgrading that. So they sell them the UES on top of UEM. And then very soon and literally we’re talking in months, we will release our UES platform on to the competitors UEM, HR Intune, Mobileye, AirWatch and IBM MaaS360. Not all at the same time, by the way, sequentially. But we’re probably going to start with Microsoft first. So that’s another aspect of it. And the fact that we are -- so that’s the part -- that part of the cybersecurity play. So that should keep us busy for the next couple of years and give us a lot of opportunities going after the market.

[Mike Walkley:]

Okay. Thanks. And just one last question, I’ll pass the line, just on the UES, you’re going to other UEM platforms. What is the feedback or interest level for that? Is CDC even able to offer those similar capabilities for the mobile market?

[John Chen:]

The interest levels are reasonably high. I mean, I don’t have a specific quantitative answer to your question. But when I speak to customers and make groups of customers at the same time, they all think that makes sense. It gives them an ability to protect their current investment, whoever, whatever UEM that they already invested in. If you’re happy and comfortable with your pros and cons on each of the vendors about this data and then uses BlackBerry Security, which we believe is the best of the bunch in terms of technology and I laid out all the certification we got from governments and so, obviously, we have the best technology in protection -- in cyber protection. So that gave them the best of all world without having to rip out the investment, which of course, there’s no -- there’s a no big hurry to do that even if they wanted to do it in a long-term. So that -- this helps to add value to what they have and keep their investment. So everybody’s happy about at least at their choice to look at.

[Mike Walkley:]

Great. Best wishes for the year and thanks for taking my question.

[John Chen:]

Sure. Thank you.

[Operator:]

Your next question comes from the line of Trip Chowdhry with Global Equities Research. Your line is open.

[John Chen:]

Hi, Trip. Hi, Trip.

[Trip Chowdhry:]

Hello, John. Hello, John. This is -- this quarter was phenomenal, both from execution point of view and from partnership point of view, two strongest companies, Amazon, AWS and Zoom. My question is more on the IV platform. When do you think that developers can get a hand off of pre-alpha versions so that the excitement in the developer community is very strong and I was hoping that, they could start capitalizing the imagination on your platform sometime in 2021? Do you think that reasonable to expect?

[John Chen:]

I -- good question. Thank you, Trip. I know that we will have a beta version be ready in third quarter next year, third quarter, our quarter, sorry, our quarter, third quarter is a September -- September day. We will have a developer version. We’re hoping to have a developer version before that. So I would say, be safe to say that about mid-year next year, the application provider will be able to lay their hands on that.

[Trip Chowdhry:]

Beautiful. And also in terms of some OEMs, EV OEM, you did not name them. If possible, can you name a few that you think we can keep an eye on as we move forward and see what kind of applications and how they’re embracing your platform?

[John Chen:]

Well, I don’t think they will appreciate me naming them. And my -- and so -- but I would say this, the initial groups of company that we have been in contact with and have gotten positive feedback it’s in a group of about 20 people, 20 different OEMs. So obviously that -- not all 20 will sign up, but I will commit to the following thing. As we are getting customers sign up, we will try to make a public announcement when, obviously, the customer has to agree to it. Both Amazon and us are very excited and have -- I was very busy in making presentation and getting strong feedback today.

[Trip Chowdhry:]

Beautiful. Congratulations and all the best.

[John Chen:]

Thank you.

[Operator:]

Next question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open.

[John Chen:]

Hi, Paul.

[Steve Rai:]

Hi, Paul.

[Paul Treiber:]

Hi, John. Good evening.

[John Chen:]

Good evening.

[Paul Treiber:]

A couple of follow up questions, on the Amazon relationship, I know you’re not giving details on revenue. But could you speak to the details of the partnership itself, in terms of new the duration of the exclusivity period and then maybe the magnitude of Amazon’s commitment for co-development and co-marketing? And then also related to that, the agreement allow you to open it up from Amazon to other cloud providers at some point in the future?

[John Chen:]

Yes. So we agreed on multiple number of years that we will be exclusive with using like -- using the Amazon Cloud and developing that product. They will be exclusive with us. They will not market or develop with any other party with the same in the auto sector and in the same area of data platform, analytical platform. So it’s a very broad agreement. It does allow us to open it up for other clouds. But we probably won’t do that until this particular one is done. Not meaning the exclusivity is done is at least that the product out and presenting to the customer. It’s a co-development and co-marketing agreement, exclusively in both dimension. And as I pointed out, BlackBerry will hold a commercial relationship, meaning that we will transact the deal with the OEM or the Tier 1 or the application provider will lean on the help of AWS to get the ecosystem up and going with us. They have a lot of engineers assigned to this. If you will, I will refer you to a number of keynote speaker at the AWS Reinvent Conference. It’s public information. On starting with Andy Jassy, the CEO and how he describes our relationship with AWS, as well as the Head of the IoT, where he made his keynote. He specifically spend* quite a bit of time on how this particular -- this relationship. So you can see that they are very serious. This seriousness not only come from the cloud side, but it comes from the IoT side also at Amazon.

[Paul Treiber:]

All right. Thank you for those details. Very interesting. Secondly, I’m just -- looking at the transition to work-from-home globally and all the uptake of various cybersecurity and other applications. How do you see BlackBerry benefiting from that? And then also -- or how high BlackBerry benefited from that trend? And then could you dovetail that against the net revenue retention in the quarter, how -- what’s been driving the net revenue retention? It fell, I think a little bit in the quarter versus it’s transitioned to work-from-home?

[John Chen:]

Yeah. So I can only tell you that the UEM license, we’re doing well, in initially of the -- in a COVID-19 shutdown, because a lot of our customers wanted to expand their number of licenses to cover everybody to work-from-home and work remotely. As you know, most of our customers are large institutional, in the banking industry, as well as in the government. So the volumes are quite high at that time. Now, gradually, it shifted to two other areas. One in the secure voice technology area, I say, we work remote from home, both government and all the regulated industry sectors seriously looking at the secure voice and then the emergency alert systems. Now I think it’s used to be that are reasonably focused by user, have recently focused in the government space, but now the -- it’s now expanded to a medium to larger enterprise, where they want to be able to reach their employees and other constituents. So we see very good pick up in those areas that clearly is benefited from the unfortunately the pandemic situation, but the pandemic situation drove the realization of secure communications is very important. So there we see a lot. And then, of course, there is the indirect effect on Cyber Suite. Although, we just released the Cyber Suite, and as you know, we’ve been behind an EDR, but we believe we all caught up and we ran enough tests to show that. So you should see some revenue start coming from those area. So those are kind of the area related to the work from remote.

[Paul Treiber:]

And just reading between the lines, the one you didn’t mention was legacy Cylance business. The -- so is that -- should we think that…

[John Chen:]

That’s part of the Cyber Suite, sorry, sorry, sorry. Yeah, sorry, that was a…

[Paul Treiber:]

The net revenue retention the slight drop there, is that driven from just the older cyber -- the older Cylance products, you made some churn there?

[John Chen:]

That number is the total company number. So it’s not -- it’s not just the so called the older side Cylance product. It is a combination of our enterprise product.

[Paul Treiber:]

Okay. Thanks for taking my question.

[John Chen:]

Sure.

[Operator:]

Next question comes from the line of Todd Coupland with CIBC. Your line is open.

[John Chen:]

Hi, Todd.

[Todd Coupland:]

Hey, there. John, good evening.

[John Chen:]

Good evening.

[Todd Coupland:]

I just wanted to ask you about the Q4 outlook.

[John Chen:]

Yeah.

[Todd Coupland:]

$950 so million for the year. So it’s a -- I don’t know, $20 million or so higher than where street is for the year, according to FactSet and then you call out IP being higher. So I’m wondering within that mix, will Software And Services be up sequentially?

[John Chen:]

Yes.

[Todd Coupland:]

Okay. And can you sort of characterize.

[John Chen:]

I always get a trouble with lawyers, when I answered that, it is my expectation and the current model that it is up sequentially.

[Todd Coupland:]

Okay. And can you characterize sort of the puts and takes within that? I know there’s a few pieces in the bucket there, just expose that little for us on that?

[John Chen:]

Yeah. We believe secure communication will continue to do well. It’s a combination of AtHoc and SecuSMart. And we believe that UEM will be relatively flat. BTS will have a sequential up quarter and those are kind of the major pieces.

[Todd Coupland:]

Yeah. Okay. And you’ve talked in the past about sort of COVID slowing new customers deciding, and as you are -- for -- I guess, enterprise decisions, just broadly, I know there were some other questions about this earlier. But as you are thinking about the next fiscal year, is there a enough loosening now sort of post the vaccine, et cetera, where you can start to see some of those enterprise decisions loosen up? Can you just talk about your thinking on that for the next year or so?

[John Chen:]

Yeah. Our assumption is they will loosen out and we are in the process of building out a new operating plan, our ALT for next year. So our assumption that it will loosen up and get back to normal. From the auto sector point of view, we already start seeing that. So we will start seeing it also on the commercial side. I am reasonably sure. Cyber Security is, like I said earlier, it’s a topic that everybody wants to talk about and so we have to kind of double down that ourselves in terms of reaching the marketplace and we have along a number of products and channel programs and which I didn’t put. But in the interest of time, I didn’t put it in my script, but we have a very robust channel program that combined the Cylance and BlackBerry channel program together. So there are a few things that we’re doing with the leap will both see the growth and be able to execute for the growth next year.

[Todd Coupland:]

Okay. Last question, it’s -- I guess, it’s not really stock specific to certainly my thesis, but just curious, you’ve seen a few major tech companies come out, and say, back to the office by September, work three days in the office, you can still work-from-home? Have you decided how you’re thinking about BlackBerry from that perspective once that opportunity is there?

[John Chen:]

No. We have not decided. September of next year seems really far away. And although we could say, we would have been talking -- we will be speaking at least another few times…

[Todd Coupland:]

Yeah.

[John Chen:]

…before that. So -- but we’re open -- we’re open minded. I’m an applicator. I’m an old fashioned guy. I’m an applicator that we should be together to build a business together to build a team. In person, that’s just me. But I also recognize the fact that, there is some reality and there are people who would like the flexibility. So as long as it doesn’t lose productivity, I’m willing to try a couple of things.

[Todd Coupland:]

Yeah. Okay.

[John Chen:]

Okay.

[Todd Coupland:]

Appreciate your comments. Thanks very much.

[John Chen:]

Absolutely. Thank you.

[Operator:]

Your next question comes from the line of Steven Li with Raymond James. Your line is open.

[John Chen:]

Hi, Steve.

[Steven Li:]

Thank you. Hey. Hey, John. Just a clarification first, the $950 million outlook, that’s your non-GAAP revenue number. Correct?

[John Chen:]

Yeah. That’s a non-GAAP revenue number? Yes. Correct.

[Steven Li:]

Okay. And you expect that BTS to grow sequentially and you said enterprise software as well to grow a little bit sequentially in Q4?

[John Chen:]

Yes. That’s what I said.

[Steven Li:]

Okay. All right. And John on IV, do you see IV as a bit higher ARPU compared to some of the other modules or would you expect it to be in the same range?

[John Chen:]

Oh!. No. In terms of the ASP?

[Steven Li:]

Yes.

[John Chen:]

Oh! I am hoping that is -- I’m hoping is higher than -- okay. In order to be fair, let me, maybe reset here for the following. So that our current module whether is hypervisors, ADAS, clusters, , IDI ranges anywhere from the low single-digit dollars to literally high single-digit or double -- low double-digit dollars per module. So…

[Steven Li:]

Yeah.

[John Chen:]

So that’s the range. I would expect this to be more towards the higher end of that spectrum. So when I said, oh, no, earlier, I was thinking about IDI. So this compared to IDI this will be a lot more.

[Steven Li:]

Right. Okay. And then -- and but you will split that with AWS.

[John Chen:]

Yes. I will have revenue split with AWS. Correct.

[Steven Li:]

Okay. Got it. Okay. Thanks a lot.

[John Chen:]

Sure.

[Operator:]

I’d like to turn the call back over to John Chen, Executive Chairman and CEO of BlackBerry for closing remarks.

[John Chen:]

Well, thank you. Thank you, David. So thank you very much everyone for attending today’s call and I know it’s a -- this is -- we have to say now on your own early evening, most of your early evening if you’re on the East Coast. I apologize for that. But I am sheltering in the West Coast, and B, we had our Board meeting today. So this is one reason why we’re doing it at this hour. I hope not overly inconvenient to you all. Before I sign off, I’d like to wish you and your family a very safe and happy holidays and I hope to see each and every one of you in person next year. So with that, have a good day. Thank you.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.