BlackBerry Limited (NYSE:BB) Q3 2024 Earnings Call Transcript December 20, 2023
BlackBerry Limited beats earnings expectations. Reported EPS is $0.01, expectations were $0.00422. BB isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the BlackBerry Third Quarter Fiscal Year 2024 Results Conference Call. My name is Chuck, 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 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 Mr. Tim Foote, Vice president of BlackBerry Investor Relations. Please go ahead, sir.
Tim Foote: Thank you, Chuck. Good afternoon, everyone, and welcome to BlackBerry’s third quarter 2024 earnings conference call. I’m delighted to say that joining me on today’s call is BlackBerry’s new Chief Executive Officer, John Giamatteo; 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 US 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 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 Giamatteo: Thanks, Tim, and hello, everyone. My name is John Giamatteo and I’m delighted to be joining you all today as BlackBerry’s new CEO. I’m sure some of you will already know me from my time as President of the Cybersecurity Business unit, where, while we still have work to do, the team has made significant progress with product, go-to-market, and overall operational efficiency during the past couple of years. As President, I’ve been at the heart of BlackBerry’s operations, and I’m already very familiar with how things work, the challenges we face, and the steps we need to take going forward. I’ve stepped into this role at a pivotal time for BlackBerry as we have a lot of work ahead of us. Among my first priorities is to fully separate the IoT and Cybersecurity business units, right-sizing our operations, and driving efficiencies in the process.
But I’ll come back to this more later in the call. Let me first discuss our performance this quarter, starting with the IoT business. The IoT team delivered the strongest quarter for revenue for several years despite a number of industry-level headwinds. Revenue for the quarter increased 12% sequentially and 8% year-on-year to $55 million. Gross margin remained at a strong 84%. The main driver for revenue growth this quarter was the automotive and in particular, Advanced Driver Assistance Systems, or ADAS. Revenue from royalties increased sequentially, and while still below the long-term average, represented 44% of QNX revenue. Development seats was 32%, and services 24% of revenue in the quarter. In addition to delivering solid revenue, we maintained our design win momentum, adding meaningfully to our QNX royalty backlog.
This was a strong quarter for new ADAS-related design wins. We secured a design win for our RTOS for safety and secure C++ libraries for use in a front-facing camera solution that will be deployed by a leading European automaker. QNX will also be the foundation for an ADAS platform to be developed by a global tier-one supplier and used by two leading Asian OEMs. Among other ADAS wins was a design with one of the largest automakers in the world, who will use QNX OS for Safety as its operating system. But this wasn’t only a good quarter for automotive. We secured a number of new GEM design wins as well. The use cases secured this quarter were broad. They included displacing a rival product with QNX Hypervisor for an industrial automation controller that will be used in applications such as petroleum refineries, factory automation, and wastewater treatment.
In medical, we secured a significant design for infusion pumps for bedside medication delivery, and our Hypervisor and Black Channel products will be used in autonomous offroad defense vehicles as well. We continue to be excited about the large and growing opportunities outside of auto, where the need for safety-critical high-performance software at the Edge is growing fast. And speaking of high performance, we remain firmly on track for general access release for our QNX SDP 8.0 next-generation platform. This will be a really significant product launch, and everybody at BlackBerry couldn’t be more excited about it. The step-change in performance and scalability will enable developers to fully harness the significant levels of additional compute that next-generation processors offer.
So, look out for more information on this and other exciting developments as we gear up for CES in January. Turning now to a brief update on IVY. We continue to make progress in what is a long sales cycle business. Proof of Concept trials are progressing well and feedback from customers remain strong. We remain focused on converting POCs into design wins and hope to announce another win at CES in January. The IVY ecosystem continues to grow strongly, and at CES, we’ll be demonstrating more than 20 use cases, with 12 partners, and expect there to be three third-party booths demonstrating IVY-based products. Moving now to outlook for the IoT business in Q4. As mentioned, the strong revenue growth and continued design win momentum in Q3 was achieved despite some macro headwinds.
The first was the UAW labor disputes, which naturally has had a negative impact on production volumes for some of our largest customers, and we expect this impact to be felt in our fiscal Q4. The second is, ongoing slippage of software programs at major automakers. Leading OEMs continue to deal with the challenges of delivering very complex automotive software solutions, and while there is no change in strategic direction towards software-defined vehicles, some of the timelines have pushed back. Because of these near-term headwinds, we’re taking a more conservative view on our Q4 outlook. That said, we continue to expect QNX to have its strongest quarter ever, with revenue in the range of $62 million to $66 million. Now, let me turn to the Cybersecurity business unit.
This was a strong year for Cyber. Strong — I’m sorry, strong quarter for Cyber. Revenue in Q3 was $114 million, growing 44% sequentially, and 8% year-over-year. Gross margin improved by 14 percentage points to 68%. While ARR of $273 million showed a sequential decrease, it was the smallest decrease in the last two years, pointing to a stabilization in Q4 before an anticipated return to growth next fiscal year. The dollar-based net retention rate improved 1 percentage point to 82%. Cyber total contract value, or TCV billings, was $109 million, representing solid sequential growth of 47%, and year-over-year growth of 6%. The Cyber business has a very strong foothold in the government space, where leading governments around the world trust BlackBerry’s software to secure their environments, communications, and data.
While this type of business often has longer sales cycles, the partnerships that are built are often very long term. We are delighted to build such a partnership with the Government of Malaysia this quarter by securing a significant multi-year contract to provide a full range of products. The deal included our Cylance, UEM, AtHoc, and Secusmart offerings. As part of the deal, BlackBerry will establish a Cybersecurity Center of Excellence in Kuala Lumpur during calendar year 2024. We were also very pleased to land a significant seven-year AtHoc contract with the US Department of Homeland Security. AtHoc which is the leading critical events management solution in the US federal government with 75% market share, will be used to power the DHS’s new Personal Emergency Notification System.
Revenue recognition on some of the products in the portfolio result in significant in-quarter revenue. In particular, our Secusmart secure communication software offerings and some elements of our UEM endpoint management. The remainder, in contrast, are generally recognized on a ratable basis. Given the strong Secusmart content this quarter, this was a significant tailwind, helping in part to drive both revenue and gross margin improvements. While deals of this magnitude don’t necessarily land every quarter, we’re very pleased with the overall traction we are seeing with Secusmart outside of its core German market. Let me now switch to some of the key product developments that we have going on in Cyber. Over the past couple of years, the Cyber product team has been busy bringing leading solutions to market, closing a number of product gaps, and positioning us to compete.
During the quarter, we announced the latest of these with a launch of the generative AI-powered cybersecurity SOC assistant. This solution helps customers to quickly understand threat alerts and prioritize their response with in-line generative AI assistance without needing to be an expert in Prompt Engineering. We also announced a number of enhancements to our Secusmart product suite for secure communications. This included encrypted video and group audio calls, along with additional compliance tools and administrative features as well. Moving now to outlook for our Cyber business in Q4, we expect revenue to be in the range of $83 million to $88 million for the quarter. This is lower than our previous outlook, primarily because of the reassessment of the likelihood, size, and timing of some of the large government deals in the pipeline.
We also expect ARR to stabilize and to be flat sequentially. Touching briefly on licensing, revenue for the quarter was $6 million, and we continue to expect Q4 to be approximately $5 million, as before. So, let me now hand the call over to Steve, who will provide you more color on our financials. Steve, over to you.
Steve Rai: Thank you, John. As always, my comments on our financial performance will be in non-GAAP terms unless otherwise noted. Total Company revenue for the third quarter was $175 million. IoT revenue was $55 million. Cybersecurity revenue was $114. And licensing revenue was $6 million. The percentage of software product revenue that was recurring, decreased to approximately 70%, 7-0, primarily driven by the impact of Secusmart revenue related to the Malaysia deal that John referenced. Total Company gross margin improved to 73%, also largely driven by Malaysia. Operating expenses were $115 million, broadly flat quarter-on-quarter, but as in Q2, benefiting from some one-time items such as reaching benefit caps for the calendar year.
Non-GAAP operating expenses exclude a $13 million fair value gain on the convertible debentures, a $11 million in impairment of long-lived assets, $9 million in amortization of acquired intangibles, $9 million in restructuring expenses, and $7 million in stock compensation expense. The non-GAAP operating profit was $13 million, and non-GAAP net profit for the third quarter was $3 million. BlackBerry delivered $0.01 of non-GAAP basic earnings per share for the quarter, beating expectations. Adjusted EBITDA, excluding the Non-GAAP adjustments outlined, was $18 million. Total cash, cash equivalents, and investments decreased to $271 million as at November 30th, due in part to cash used by operating activities of $31 million, but primarily to a $215 million net reduction in outstanding debt.
During the quarter, the $365 million of convertible debentures issued in September 2020 were fully repaid as previously communicated. A smaller $150 million of short-term convertible debentures were then issued, which mature in February 2024, with an option to extend to May 2024 should both parties agree. Despite significant increases in the level of interest rates since 2020, the coupon rate on these extension debentures remains at 1.75% and the conversion price remains at $6. This provides BlackBerry with meaningful additional liquidity at attractive rates while we evaluate longer-term financing needs. That concludes my comments, and I’ll turn it back to John.
John Giamatteo: Thank you, Steve. Last week, we announced a change in strategic direction of the Company. The Board, with input from its advisors, has reassessed the earlier decision to pursue a subsidiary IPO of the IoT business. We believe, there is increased optionality for optimizing shareholder value by stepping back from that path and instead focusing on fully separating the IoT and Cyber businesses. As part of this, we will have the opportunity to optimize and streamline processes, building even stronger standalone divisions. A key focus is to return BlackBerry to profitability and positive cash flow, and this requires us to take some tough decisions on our cost structure. In Q3, we took a number of actions to reduce expenses in the Cyber business and the back office, that will reduce our cost run rate by about $50 million per year.
These decisions, along with strong collection receivables, played a part in almost halving our operating cash usage from $56 million last quarter to $31 million in Q3. Given the combination of strong billings this past quarter and the benefit of a full quarter of cost reductions, we expect to further improve operating cash flow in Q4. However, we believe that we can go further. BlackBerry hasn’t been in an investment mode, particularly in Cyber, and now that a number of key product enhancements have been brought to market, we’re in a position to return investment levels closer to industry averages. Furthermore, BlackBerry’s business has significantly pivoted and made a number of acquisitions over the years, and we see ways to streamline how our back office works.
For instance, despite recent cost reduction efforts, we still have 36 offices worldwide. We have some duplicative teams. To illustrate the potential opportunities, let me outline current OpEx expectations for Q4. As mentioned, we expect total Company revenue to be in the range of $150 million to $159 million. On a non-GAAP basis, sales and marketing is expected to be approximately 27%; while R&D, 30%; and G&A, excluding amortization, at 20%. Both R&D and G&A are high compared to our long-term targets, but we see opportunities to significantly right-size across the board while continuing to nurture the exciting growth opportunities in our two divisions. We are targeting the completion of the separation process in two fully standalone divisions with a much lighter-weight corporate overlay in calendar year 2023.
So, before we open the lines for Q&A, let me quick — quickly summarize the key messages. This was a good quarter for BlackBerry. The IoT business unit delivered its strongest quarterly revenue for the past two years, maintained strong momentum in adding royalty backlog from design wins in Auto and GEM. The Cyber business secured large government deals that helped drive strong sequential revenue growth, and ARR continues to stabilize. We took actions relating to our cost structure, that in part, contributed to a significantly lower operating cash flow usage, and we are targeting significant further reductions in the future. And we have begun to work to separate our IoT and Cyber business units into fully standalone divisions that we believe will position BlackBerry for more strategic alternatives to drive increased shareholder value.
Let’s now move to Q&A. Operator, can you please open the lines?
See also 14 Cheap DRIP Stocks To Buy Now and Top 20 Most Unfriendly States in the US.
To continue reading the Q&A session, please click here.