BlackBerry Limited (NYSE:BB) Q1 2024 Earnings Call Transcript - InvestingChannel

BlackBerry Limited (NYSE:BB) Q1 2024 Earnings Call Transcript

BlackBerry Limited (NYSE:BB) Q1 2024 Earnings Call Transcript June 28, 2023

BlackBerry Limited beats earnings expectations. Reported EPS is $0.06, expectations were $-0.05.

Operator: Good afternoon, and welcome to the BlackBerry First Quarter Fiscal Year 2024 Results Conference Call. My name is Andrea, 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. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn today’s call over to Tim Foote, Vice President of BlackBerry Investor Relations. Please go ahead.

Tim Foote: Thank you, Andrea. Good afternoon, and welcome to BlackBerry’s first quarter 2024 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. And with that, I’ll turn the call over to John.

John Chen: Thanks, Tim. Hi, Tim. Good afternoon, everybody, and thanks for joining the call today. Let me start with the IoT business unit. Revenue for the quarter was $45 million and gross margin remained strong at 80%. Revenue came in lower-than-expected for two main reasons. The first related to a number of leading industry players that are revising their development plans as they step up their software-defined vehicle efforts. This has caused some programs to be delayed. While seeing our customers facing a higher priority on the SDV transition is a good thing for both QNX and IVY, the delayed roll-out of QNX Development Seat License has therefore pushed our revenue this quarter. So, this was purely a timing issue. As we have outlined in the past, from quarter to quarter, design phase revenues will fluctuate depending on the timing of large design awards and when the work begins.

However, we haven’t seen any weakening of the strong secular trends driving the business, we remain confident in our ability to win new designs. The second factor is the macro environment, which has impacted some regional production volumes and with it, royalty revenues. As has been the case in recent quarters, the impact appears to be mixed across OEMs and geographies. While production in China in the early part of this year was much softer-than-expected, elsewhere in North America, Europe, Japan, and Korea, output continues to look relatively steady, helped of course by an easing of supply-side constraints. We will closely monitor the situation and assess for any potential impact for the year. And at this time, we continue to expect to achieve the full-year revenue consensus for IoT.

Further, we are reiterating the 18% to 22% three-year revenue CAGR that we provided at our Analyst Day last month. These targets are based on a number of factors, including our strong QNX backlog, which we reported as being $640 million at last fiscal year-end. Our pipeline of upcoming potential design wins and our assessment of ongoing secular trends. A data point that illustrated those trends and our leadership position in the market is our annual vehicle count. TechInsight, a leading technology analysis and market research firm has published that QNX is now embedded in over 235 million vehicles, a year-on-year net increase of 20 million or 9%. When compared to annual global vehicle production, this supports a growing market share for QNX.

QNX remains the foundational software of choice for leading automakers and Tier 1 suppliers around the globe as we continue to add new design wins. In the quarter, QNX had seven design wins in auto and seven in general embedded market verticals. In auto, we continue to secure design wins in the digital cockpit domain. This fast-growing domain has largely led the way in consolidating various software stacks onto a single high-power chip in the car. This quarter, we recorded wins with two of the Top 5 global automakers. The first win includes our real-time operating systems, as well as our Hypervisor and acoustic middleware. The second win would deploy two instances of QNX supporting the digital cockpit and main body domain, both running on high-performance compute engines.

smartphone, app, device, mobile, tech, sales, phone Svetlana Dikhtyareva / Shutterstock.com

We also secured a win with a leading U.S.-based EV automaker with multiple instances of QNX being deployed. QNX, in that case, will support a zonal, central compute architecture, including the digital cockpit and the vehicle telematics. These wins demonstrate how we expanded both the number of domains deploying QNX and a number of layers of QNX deployed in each of the domain. Outside auto, we recorded wins supporting a range of different applications. In industrial, we secured an ADAS platform for heavy industry machinery and requires both our Hypervisor and OS for safety. We also secured wins for industrial testing and control, including a next-generation controller for use in marine and aerospace applications, and a win with a leading global household appliance, sorry, household appliance manufacturer for production line testing equipment.

In medical, wins include medical iLASER equipment with a leading surgical technology manufacturer. These designs in operational technologies like medical and industrial, demonstrate our ability to win in this very large and growing market. These verticals are showing similar trends to auto, including significantly higher compute at the edge and the need for complex safety-critical software stacks, which is where QNX is the market leader. On the product front, last month we announced the early access release of our next-generation kernel. This is a significant step change for QNX. The new release help deliver significantly higher performance in particularly scaling almost linearly as the number of cores on the underlying chip increase up to 64 cores.

While safety and reliability are essential parts of the QNX value proposition, it is also our leading performance in complex compute stack that helps differentiate us from our competitors. This release will position QNX to support the future of rapidly increased compute power at the edge for many years to come. Moving onto IVY. As planned, we have now released a general availability version of IVY. This is a much more standalone version of the product than before, requires far less support from the IVY technical team. We see this as a significant step forward for scaling our go-to-market efforts, allowing us to support a much wider range of proof-of-concept trials than before. We are making good progress rebuilding the IVY system, an important part of the overall value proposition.

This past quarter, we announced an investment in the Michigan-based CerebrumX. Ford, Stellantis, and Toyota are all currently working with CerebrumX and they offer AI-driven solutions that analyze vehicle data on driver behavior and vehicle health. They harnesses this data to deliver applications such as fleet management and personalized insurance plan. IVY end-to-end edge-to-cloud platform will provide CerebrumX with higher quality easier-to-use data in a standardized development environment. We also announced a go-to-market partnership with a leading automotive cyber security firm, Upstream Security. Upstream Security partners with BMW, Volvo, and Renault as they are already protecting over 20 million vehicles against cyber-attacks with their VDR, stand for Vehicle Detection and Response platform.

This new partnership with BlackBerry will allow them to leverage IVY’s edge capabilities to pre-process data in near real-time maintaining cyber security, while significantly reduce cloud overhead. The strategic decision by BlackBerry and AWS to develop a primarily edge-based architecture is proven to be the right call, especially as some cloud-only players such as WEJO and AUTONOMO has struggled to achieve profitability. Turning now to the Cybersecurity units. Revenue for the quarter was $93 million, representing 6% sequential growth. Like many others in this market, we have also seen delays from an elongated sales cycle, with additional layers of approval, compared to previous quarter, slowing our ability to convert our growing pipelines into revenue.

That said, a leading indicator for revenue for this business is billings and this quarter we booked total contract value or TCV billings of $122 million, significantly higher than revenue for the second consecutive quarter. TCV billings grew for the fourth consecutive quarter with 14% sequentially and 37% year-on-year growth. This growth was anchored on multi-year deals in our core government vertical where we continue to have a lot of success. In the quarter, we closed one of the deals that slipped from Q4, with the other two still progressing well and likely to close later in the year. We also see two new large potential deals in government that have entered the pipeline. Given this pipeline and billings momentum, we expect to achieve full-year revenue consensus and expect TCV billings for the year to be in the range of $430 million to $480 million.

Finally, we are reiterating the three-year revenue growth CAGR of 9% to 12% that we gave at our Analyst Day. Gross margin for the quarter improved to 60%, which is 700 basis points higher than the prior year, largely due to product mix. In addition, the decline in ARR slowed and came in at $289 million. This trend is encouraging as we remain on track for ARR to return to sequential growth in the second-half of this fiscal year. The dollar-based net retention rate or DBNRR also stabilized at 81%. As a reminder, DBNRR doesn’t include new logos. As mentioned in the quarter, we secured new renewed, and expanded business with a number of leading government institutions. These include Shared Services Canada, Transport Canada, the Canadian House of Commons, the U.S. Special Ops Command, the U.S. Navy, the U.S. Army Corps of Engineers, the White House Communication Agency, and the U.S. Transportation Security Administration, or known as TSA.

Outside North America, we secured business with the French Ministry of Defense, the German State Police, the Netherlands Ministry of General Affairs, the New Zealand Ministry of Foreign Affairs, and the British Transport Police, just to name a few. We also closed business in healthcare and financial services, including John Muir Health, Kaiser Permanente, and Hartford Healthcare, and a number of leading international banks. On the channel front, a critical element of scaling our SMB go-to-market presence, this quarter we saw promising sign of progress from our renewal channel programs. In North America, Deal Registration and new logos brought by the channel increased significantly, both sequentially and year-over-year. Turning briefly to product.

Leading independent test lab, The Tolly Group, recently performed an assessment of a number of Endpoint Protection Platforms, EPPs, including Cylance ENDPOINT, Microsoft Defender, and others, and tested performance for detection rates, CPU utilization, and total scanning time. Cylance ENDPOINT came out on top with a market-leading 98.9% detection rate, both online and offline, while also using the lowest amount of CPU capacity. In comparison, competitors allowed between 9 times to 52 times more malware through than Cylance. Moving now to licensing. The past quarter, we were pleased to have closed the deal with Key Patent Innovations for the sale of the non-core portion of the patent portfolio. The deal includes an initial $170 million cash payment, which we have received and the deal value could total as much as $900 million over time.

KPI has already started to ramp up their monetization activities, including adding to their experienced team by hiring executives and patent lawyers, as well as starting to engage with potential licensees. That said, it will take some time to be fully ramped up and we do not expect any meaningful additional revenue from the sale to be recognized this fiscal year. Under the terms of the deal, we retain ongoing revenue for any licensing arrangement in place prior to the sale. And in this quarter, this was $17 million. We expect revenue to be approximately $5 million per quarter for the remaining of this fiscal year. Let me now hand the call over to Steve, who will provide more color on our financials. Steve?

Steve Rai: Thank you, John. As usual, my comments on our financial performance for the first quarter will be in non-GAAP terms unless otherwise noted. Total Company revenue for the quarter was $373 million. IoT revenue was $45 million. Cybersecurity revenue was $93 million, and licensing revenue was $235 million. Software product revenue as a percentage of total revenue remained in the range of 85% to 90%, with Professional Services forming a balance. The percentage of Software product revenue that was recurring remained at approximately 90%. The $235 million of Licensing and other revenue represents the $17 million of revenue from pre-existing arrangements that John mentioned earlier, and $218 million relating to the patent sale.

More details will be available in our 10-Q. Related to this $147 million — there was $147 million of intellectual property assets previously classified as held for sale on our balance sheet, which were sold as part of the transaction. Accordingly, with the sale completed in Q1, these were reclassified to cost of sales. Total company gross margin was 48% and 22 percentage points higher when excluding the patent sale. Operating expenses for the first quarter were $145 million. These non-GAAP operating expenses exclude a $22 million fair value expense on the convertible debentures, $10 million in amortization of acquired intangibles, $8 million in stock compensation expense, and $5 million in restructuring expenses. Both, the non-GAAP operating profit and non-GAAP net profit for the first quarter, were $35 million.

A $0.06 non-GAAP basic earnings per share for the quarter beat expectations. Adjusted EBITDA, excluding the non-GAAP adjustments previously mentioned, was $41 million. Total cash, cash equivalents, and investments increased by $91 million to $578 million as at May 31st, 2023. Net cash generated from operations was $99 million. The cash generated from the patent sales strengthens our balance sheet and helps finance our plans for profitable growth. Given the macroeconomic backdrop, we remain selective on potential investments and remain committed to significantly reducing the level of EPS loss and operating cash flow usage this fiscal year. That concludes my comments, and I’ll now turn it back to John.

John Chen: Thank you, Steve. Before we open the lines up for Q&A, I’d like to touch on the announcement we made in May regarding the strategic review of our portfolio. Our strategy is clear. We have a robust operating plans for both our business units to address their large and growing market opportunities. In addition, we see potential upside to the thesis from the convergence of Cybersecurity with the IoT. Indeed, McKinsey recently issued a report on this trend of convergence and named BlackBerry as a — as being well-positioned to capitalize on what they estimate to be a $750 billion TAM. We believe that executing against this strategy, hitting our three-years targets, and achieving profitable growth will generate significant shareholder values.

Notwithstanding, the Board and Management are constantly focused on optimizing shareholder values and have therefore asked the question as to whether there are alternative approaches for delivering greater shareholder returns, for example, by means of the two business operating as standalone companies. As per our press release on May 1st, we have engaged leading investment bankers, Morgan Stanley and Perella Weinberg and establishing — as well as established an internal program management office to support this review, and I could tell investors that there was a lot of activity ongoing. Although the review is in the early stage, a lot of progress has already been made and the team is focusing on performing a thorough process as quickly as we practically can.

It wouldn’t be appropriate to provide further commentary until the Board has approved a specific outcome or has terminated this review. That ends my prepared remarks. Andrea, could you please open the line for Q&A?

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