BlackBerry Limited (BB) Q2 2024 Earnings Call Transcript

BlackBerry Restricted (NYSE:BB) Q2 2024 Earnings Convention Name September 28, 2023 5:30 PM ET

Firm Contributors

Tim Foote – Vice President, Investor Relations

John Chen – Government Chairman and Chief Government Officer

Steve Rai – Chief Monetary Officer

Convention Name Contributors

Michael Walkley – Canaccord Genuity

Luke Junk – Baird

Journey Chowdhry – World Equities Analysis

Paul Treiber – RBC Capital Markets

Daniel Chan – TD Cowen

Operator

Good afternoon and welcome to the BlackBerry Second Quarter Fiscal 12 months 2024 Outcomes Convention Name. My title is Rocco, and I might be your convention moderator for right now’s name. Throughout the presentation, all members might be in a listen-only mode. We might be facilitating a short question-and-answer session in direction of the tip of the convention. [Operator Instructions] As a reminder, this convention is being recorded for replay functions.

I’d now like to show right now’s name over to Tim Foote, Vice President of BlackBerry Investor Relations. Please go forward.

Tim Foote

Thanks, Rocco. Good afternoon and welcome to BlackBerry’s second quarter 2024 earnings convention name. With me on the decision right now are Government Chair and Chief Government Officer, John Chen; and Chief Monetary Officer, Steve Rai. After I learn our cautionary word relating to forward-looking statements, John will present a enterprise replace and Steve will overview the monetary outcomes.

We are going to then open the decision for a short Q&A session. This name is accessible to most of the people by way of call-in numbers and by way of webcast within the Investor Info part at blackberry.com. A replay may even be accessible on the blackberry.com web site.

Among the statements we’ll be making right now represent forward-looking statements and are made pursuant to the Protected Harbor provisions of relevant US and Canadian securities legal guidelines. We’ll point out forward-looking statements by utilizing phrases reminiscent of anticipate, will, ought to, mannequin, intend, consider, and comparable expressions.

Ahead-looking statements are based mostly on estimates and assumptions made by the corporate in gentle of its expertise and its notion of historic tendencies, present situations and anticipated future developments in addition to different elements that the corporate believes are related.

Many elements might trigger the corporate’s precise outcomes or efficiency to vary materially from these expressed or implied by the forward-looking statements. These elements embrace the chance elements which are mentioned within the firm’s annual filings and MD&A. You shouldn’t place undue reliance on the corporate’s forward-looking statements. Any forward-looking statements are made solely as of right now, and the corporate has no intention and undertakes no obligation to replace or revise any of them, besides as required by regulation.

As is customary, through the name, John and Steve will reference non-GAAP numbers of their abstract of our quarterly outcomes. For reconciliation between our GAAP and non-GAAP numbers, please see the earnings press launch revealed earlier right now, which is accessible on the EDGAR, SEDAR, and blackberry.com web sites.

And with that, I am going to flip the decision over to John.

John Chen

Thanks, Tim. Good afternoon, everybody, and thanks for becoming a member of us right now. Let me begin with the IoT enterprise unit. Income for the quarter elevated 9% sequentially to $49 million, and gross margin elevated by 400 foundation level to 84%.

A very powerful long-term main indicator of the well being of this enterprise is securing new design wins and constructing royalty backlog and we now have — and that we had one other sturdy quarter. The truth is, by the tip of the primary half, we now have secured greater than two-thirds of our FY24 annual targets for brand new backlog and anticipate to exceed it.

Within the quarter, QNX secured 20 new design wins in auto and 7 typically embedded market verticals. The biggest of those was an eight-figure estimate lifetime income ADAS win with one of many high 5 world automakers to deploy our QNX OS for security.

This wins illustrate a powerful secular development of consolidation of software program into centralized compute domains. With this ADAS module powering drive monitoring, encompass view, lane maintain help, adaptive cruise management, and different security options all on a single chip.

As automotive software program stacks turns into extra advanced and requires considerably larger compute energy, it performs to the QNX energy. Along with our sturdy win-rate for ADAS, we’re additionally the clear market chief for foundational software program within the digital carpet.

The mix of our high-performance, safety-critical RTOS and hypervisors permits for combined criticality on this area. Given our market main positions, our design wins proceed to be nicely diversified throughout all main world markets.

In Asia, we safe design wins with LG Electronics that embrace our hypervisor might be deployed in a lot of car fashions for a high 10 world automakers. We additionally safe wins with Imaginative and prescient and main OEM Cherry by way of Bosch amongst others.

In Europe, a digital carpet win additionally consists of our acoustic middleware. And that is thrilling as a result of suggestions from clients means that this comparatively new market alternative for software-defined acoustic is prone to be quick rising.

In addition to our sturdy footprint in auto, QNX is nicely diversified in different verticals, significantly medical and industrial. Constructing on our place in surgical robotics, this quarter we safe a design win for our QNX Medical OS for security to be deployed within the robotic arms for dentistry.

These design wins verify that QNX enterprise is strongly positioned for the long-term. With income for Q2 being largely according to expectation, we proceed to broaden IoT to ship stable year-over-year development this fiscal yr. That stated, we’re taking a prudent view on our IoT income outlook for the subsequent two quarters.

Automakers are presently addressing a lot of vital challenges, together with the business strike motion, the transition to software-defined automobiles, in addition to the electrification, pivot and provide chain challenges.

Delay to both pre-production software program improvement packages or to manufacturing schedule might affect our income this fiscal yr. Nonetheless, we anticipate these to be comparatively short-term timing concern. Because of this, we revised and broadened our IoT income outlook vary to $225 million to $240 million. This represents a 9% to 17% year-over-year development.

Which means that we nonetheless anticipate a powerful second half of the fiscal yr. We anticipate additional sequential development into Q3, and we presently anticipate This autumn to be the strongest quarter for income in QNX historical past.

This confidence relies on a mix of the pipeline of potential new design wins, our service schedule, and royalty anticipated from the backlog. Turning now to product, at our Analyst’s Day in Could, we introduced the upcoming launch of our new technology QNX real-time working system, QNX 8.0, focused for December. This launch will make a elementary shift in market efficiency and we anticipate it to additional cements QNX management place in automotive and past.

Suggestions from the beta trial has been very optimistic. With buyer and companions impressed with efficiency scalability and performance, maybe a few of these will convert into income in This autumn.

This vital enhancement of efficiency and scalability comes at a time when chipmakers are targeted on creating {hardware} to energy generative AI. We consider that our QNX 8.0 software program is uniquely positioned to maximise the potential of Gen AI in embedded programs, significantly in security important use instances.

QNX 8 will mix better of pre-performance with the power to run mission-critical course of safely and securely alongside Gen AI stack on the identical chip. Now transferring on to IVY. We have been delighted to announce that IVY was chosen by Tier 1 provider Mitsubishi Electrical to energy its new FlexConnect.X in-cabin programs.

IVY edge know-how and the top quality real-time perception that it offers will assist improve highway security and allow new in-vehicle expertise. As well as, we now have stable traction with new IVY proof-of-concept trials. At present, we’re progressing POC with a lot of main OEMs, together with a high 10 world automaker and likewise a number one car — business car OEM, Scania.

The sturdy stage of curiosity for IVY POC clearly confirms our technique. On the product entrance, this month we launch an up to date model with vital enhancement to cloud options and elevated {hardware} and software program help.

IVY’s improvement have moved from the early heavy lifting part and the main focus is now on refinements, enhancing stability, increasing sensor helps and bettering the developer expertise.

The IVY ecosystem proceed to broaden and mature. We now have over 40 companions presently constructing on IVY and there are greater than 20 pre-integrated options which are being utilized by clients in POC trials and at business occasions.

This month, the IVY innovation fund made its newest funding, this time in CorrActions, an thrilling Israeli start-up. CorrActions has developed an AI energy software that may leverage the IVY platform’s sensor perception to detect potential driver consciousness points. Their AI mannequin analyzes micro muscle tissue motion reminiscent of by steering view sensor information to know mind exercise and we’re happy so as to add them to the ecosystems.

Shifting now to Cyber enterprise unit. Income for the quarter was 79 million and whole contract worth billings was 74 million. Gross margin was 54%. ARR got here in at $279 million. The dollar-based internet retention price was secure at 81%.

Income this quarter was decrease than expectation as a result of slippage. Blackberry, together with many others within the cybersecurity house is experiencing elongated deal cycles. Offers that require a number of rounds of overview and scrutiny, and whereas this is not impacting win charges, it is having an actual affect on the timing of when the deal closes.

That is very true in authorities the place Blackberry has a really sturdy presence. Particularly, a small variety of massive, primarily perpetual offers, which due to this fact had a good portion of in-quarter income, slipped to later quarters.

Whereas this materially will affect Q2 reported income, we are going to stay assured with how these offers are progressing and anticipate them to shut this fiscal yr. Additional, we now have a well-defined pipeline of great offers which are progressing nicely. These offers are main within the authorities vertical the place BlackBerry is well-known and trusted and we now have sturdy buyer relationship.

Because of the general confidence within the sturdy enchancment in income within the second half in comparison with the primary, we’re reiterating the complete yr cyber income outlook for the present fiscal yr. As a result of massive authorities offers like these are each advanced and binary, we are going to after all replace you on the progress made in closing them through the subsequent earnings name.

Let me now spotlight a few of the offers closed through the quarter. In authorities, we secured new offers with the US Division of Justice, the Division of States, Division of Vitality and Division of Training.

Additionally the Inner Income Providers, the Canadian Income Company, the US Nationwide Nuclear Safety Administration, Customized and Border Patrol Safety, and the Ministry of Justice in Quebec.

Outdoors of North America, we safe enterprise with the Financial institution of Italy, Netherlands Shared Service Middle-ICT, in addition to the Federal Court docket of Australia, the Australian Federal Police, and the Director Common of Power Intelligence in Bangladesh.

The truth is, we see pipeline of alternatives creating in Asia Pacific presently. Along with authorities clients, we safe wins with main banks, together with Morgan Stanley and Santander in addition to with main know-how corporations LG, Philips and Toshiba, simply to call a number of.

Shifting now to product, Cylance is the pioneer in using AI in cybersecurity, with AI on the very core of its sweets of merchandise, lengthy earlier than it turned right now’s buzzwords. Our battle-hardened AI mannequin has been educated for a few years, regularly studying to tell apart threats from non-threats by referencing trillions of knowledge factors.

Final month, we launched a serious replace to this mannequin, which has been rolled out to our clients, offering an elevated stage of safety. The mannequin has pushed even stronger risk prevention charges than earlier than and additional diminished false optimistic.

This launch is a part of the funding we made in our product portfolio and these enhancements are being nicely obtained by our clients. That is validated by CylanceENDPOINT, our AI pushed prevention detection and response answer being positioned within the high right-hand quadrant for the Gartner Peer Insights, Prospects’ Selection.

This positioning relies on suggestions from actual clients, reflecting the expertise of our product and us as an organization. This pairs properly with the identical recognition obtained by BlackBerry UEM in February, the place it was the one endpoint administration answer recognized as a buyer alternative.

Let me now hand the decision over to Steve, who will present extra colour on our monetary.

Steve Rai

Thanks, John. As common, my feedback on our monetary efficiency for the second quarter might be in non-GAAP phrases except in any other case famous.

Whole firm income for the quarter was $132 million. IOT income was $49 million, cybersecurity income was $79 million, and licensing income was $4 million. Software program product income as a share of whole income remained within the vary of 85% to 90% with skilled providers making up the steadiness.

The proportion of software program product income that was recurring remained at roughly 90%. Whole firm gross margin was 65%. Working bills for the second quarter have been $114 million, decrease sequentially partially as a result of one-time prices related to the patent sale in Q1 that didn’t recur and the discharge of some IP associated accruals in Q2.

Non-GAAP working bills exclude, 6 million honest worth acquire on the convertible debentures, 10 million in amortization of acquired intangibles, 10 million in stock-based compensation expense, 3 million in restructuring bills, and 1 million in impairment of long-lived property.

The non-GAAP working loss was $28 million and non-GAAP internet loss for the second quarter was $23 million. The $0.04 non-GAAP fundamental loss per share for the quarter beat expectations. Adjusted EBITDA, excluding the non-GAAP changes beforehand talked about was unfavourable $22 million.

BlackBerry stays laser targeted on maximizing effectivity and increasing margins and we stay on target for each optimistic working money move and non-GAAP EPS within the fourth quarter and for the fiscal yr as an entire.

Whole money, money equivalents and investments decreased by $59 million to $519 million as at August 31, 2023. Internet money utilized by operations this quarter was $56 million.

The present debentures mature in November and we intend to completely repay them. With respect to elevating any new debt, the result of Mission Imperium will clearly have a major bearing on future wants.

Accordingly, we’re creating clear executable plans for a lot of potential situations that might come up. That concludes my feedback and I am going to flip the decision again to John.

John Chen

Thanks, Steve. Earlier than we open the road for Q&A, let me rapidly summarize the important thing messages. Whereas this quarter noticed some volatility in reported income as a result of slip deal. We stay assured within the pipeline of alternatives for our cyber enterprise.

We anticipate this to translate right into a a lot stronger second half and topic to efficiently closing a lot of our bigger authorities alternatives we anticipate to complete inside our reiterated full yr income vary for cyber.

We additionally stay very assured and excited in regards to the fundamentals of our IoT enterprise. And like cyber, anticipate a stronger second half, albeit we’re taking a prudent view given delay within the begin of some improvement packages in addition to the auto business labor actions.

Then we additionally present you an replace relating to Mission Imperium. The board and its advisors are very actively engaged within the course of and acknowledge that it’s in everybody’s curiosity that will probably be accomplished as quickly as potential.

All stakeholders ought to relaxation assured that we are going to present an replace as quickly as we probably can. That concludes my ready remarks. We are going to now take your questions.

Operator, might you please open the road for Q&A.

Query-and-Reply Session

Operator

Completely. We are going to now start the question-and-answer session. [Operator Instructions] And women and gents, our first query right now comes from Mike Walkley with Canaccord Genuity. Please go forward.

John Chen

Hey, Mike.

Michael Walkley

Hey, John. Thanks for taking my query. The primary one is simply actually on the cybersecurity enterprise. Are you able to present a bit extra granularity on which components of the cybersecurity driving these massive perpetual authorities contracts that you just anticipate to shut, is it primarily Secusmart or is it form of evenly unfold throughout the portfolio?

John Chen

Primarily Secusmart, additionally UEM, the Spark platform. So primarily these two.

Michael Walkley

Nice. Thanks. After which I suppose on my follow-up query, simply any replace on how Cylance is trending out there? You’ve some good know-how there, however some bigger firms reminiscent of CrowdStrike and others are transferring extra into the SMB market. Are you able to perhaps speak about how Cylance is faring within the market?

John Chen

Yeah, we do really fairly nicely. The numbers are clearly smaller than the rivals, however we do fairly nicely within the win charges on SMB. We even have a reasonably good quarters in new logos. And it’ll proceed, you understand, I stated it many occasions, you understand, our merchandise are actually as much as class, took us some time. We’re working very arduous with channel companions to swing them our manner. And so as soon as we now have extra achievement there we’ll have extra leverage, however clearly the product might win and Guard is an effective answer.

Michael Walkley

That is useful. Thanks for taking my two questions. I am going to cross the road.

John Chen

Positive. Thanks.

Operator

Thanks. And our subsequent query right now comes from Luke Junk with Baird. Please go forward.

Luke Junk

Good afternoon. Thanks for taking the questions. John, for starters, previous few quarters right here, buyer software program delays have been a theme that we have seen repeat a number of occasions. It might simply be nice to get your perspective on how widespread this concern is in your buyer bases proper now and most significantly, what the efficient clients are telling you must get achieved to get again on monitor. You talked about within the script that you’ve confidence this might be a comparatively short-term timing concern. Might you simply broaden on the the reason why you consider that to be the case? Thanks.

John Chen

Proper, okay. That is query. So the corporate which are their software-defined car effort and to push out some and delay the both the beginning of the design so beginning into the manufacturing are the actually massive firms. And a few of them are very seen. They introduced, you understand, re-org, that truly the result favors the software-defined automobiles technique. Toyota has introduced re-org. VW has introduced re-org. And I imply a lot of others that we now have not introduced re-org after which pardon me for not having the ability to repeat that as a result of that is buyer proprietary info. So they won’t be pleased with me. So you possibly can guess that sense. Nonetheless, everyone has form of inform us, it is like a, you understand, not in a precision manner, however it’s form of like a one yr transfer, 4 quarter transfer. And albeit talking, we’re within the third of the 4 quarter already. So this is among the cause why the staff has some actually sturdy pipeline that they consider in for This autumn. And as I wish to repeat this, we anticipate This autumn one of the best quarter in income for QNX ever.

Luke Junk

Okay, nice. Thanks for that, John. After which for my follow-up, I am going to keep inside IoT. Going again to the Analyst Day earlier this yr, one of many issues that you just talked about strategically was seeking to proceed to interact extra immediately with OEMs as a Tier 1 and accelerating your OEM account protection. I am simply questioning to what extent the present delays you are seeing affect your urge for food for these types of investments in IoT which are outward dealing with and simply reconcile that with the general want to broaden margin. Thanks.

John Chen

Proper, we now have, as a result of we consider our fundamentals are so sturdy and since we consider our new product, 8.0 scalability is so good. We’re not slowing down any of our urge for food in any respect. We’re steadfast transferring ahead. IoT is hiring folks. So we do not fear about us form of taking our foot off the gasoline pedal. That is not going to occur.

Luke Junk

Understood. Thanks.

John Chen

Positive.

Operator

And our subsequent query right now comes from Journey Chowdhry with World Equities Analysis. Please go forward.

John Chen

Hello, Journey.

Journey Chowdhry

Thanks very a lot. Howdy, John. The auto business appears to be tremendous thrilling with QNX and now at the least firms like NXP, they time period one thing such as you discuss IoT as Edge Sq., the place they put a whole lot of AI they usually name tiny ML that powers these gadgets. I used to be questioning, like QNX undoubtedly with the low footprint and actual time working system is right. However I used to be additionally questioning, have you ever come throughout some new sensors, the classes that will have been created due to AI within the Edge and these neural community processors like NXP that they make. The business is making an attempt to — business construction is altering. That is my fundamental query is a tiny ML, Edge Sq., QNX and a few new use instances that could be evolving. So I used to be questioning in case you have any ideas on that?

John Chen

Yeah, it is a good level. I believe it is nonetheless, what you are explaining, I learn it, it is nonetheless early within the business. And I additionally wish to emphasize the truth that we’re an embedded working system, real-time safe working programs. And so we have a tendency to enter the MPU kind, the central advanced, computing advanced. So the Fringe of this, which might be pushed with completely different new use instances, a few of them are AI based mostly and all that, however that is a stage larger than us. So and naturally we might be benefiting from it from needing extra central compute energy. So I suppose we do profit from it. We do not immediately go create a promoting movement into the Edge. And that Edge promoting movement and use instances are created by the code that’s on the stack, that’s one stage above us.

Journey Chowdhry

Glorious.

John Chen

Is that is smart?

Journey Chowdhry

Sure, I received it. The second query is relating to IVY, phenomenal traction on the developer facet, apps, I do not know, in all probability we’re about six, eight months away from it. However I used to be questioning, have you ever come throughout any new classes of apps that could be approaching high of IVY? And that is all for me. Thanks very a lot.

John Chen

Properly, the AI and sensing, really attention-grabbing, again to your first query. , the completely different kind of sensors that is being demanded in a automotive, you understand, we now have seen, differing kinds and extra elevated and extra advanced. And like one of many instance once I speak about CorrActions was they monitor the sensors on the steering wheel. After which by that, they monitor they usually assist outline the micro muscle tissue of the person. So after which dictate or signifies what the standing of the motive force. So on an alertness foundation and consciousness foundation. So it is a little bit extra esoteric than simply, you understand, measure whether or not the, you understand, how a lot gasoline you may have within the tank or how a lot charging amps that you just nonetheless have earlier than it is advisable do the subsequent cost. So we now have seen increasingly fashionable kind functions, however I nonetheless consider for the preliminary utilization of IVY, it will be very essentially managing the protection and the consolation of the automotive.

Journey Chowdhry

Obtained it. Thanks a lot.

John Chen

Thanks, Journey.

Operator

And our subsequent query right now comes from Paul Treiber with RBC Capital Markets. Please go forward.

John Chen

Hello, Paul. Good afternoon.

Paul Treiber

Hello, John. Good afternoon. Simply with reference to your feedback about This autumn being one of the best quarter for IoT, how will we take into consideration the momentum past This autumn like do you anticipate it to be carried by to the next yr or is it extra only a one-quarter phenomenon?

John Chen

No. So it is a good query. I do not consider we’ll have a Q1 FY25 greater than This autumn. That is what you are asking. However I do consider that we’re nonetheless following the 20% development on year-over-year the place we introduced to you all within the Could assembly. So that you do anticipate us to have double-digit development and pushing to a 20% development year-over-year. And by then I hope that these so-called software-define car efforts delay. And hopefully, everyone appears to have an inexpensive handles on provide chain regardless of of the political scenario between US, China, Western world and so forth. And in order that’s regularly getting below management. Electrification is on everyone’s, it is of their product’s backs so to talk. Though to us it is actually hoping that that drive extra quantity of a automotive, not a lot as electrical versus gasoline, we now have a distinction there. And so if that’s eliminated then we are going to begin seeing design wins that may flip into developer seats to form of skilled providers engagement after which in the end flip into royalty backlog, royalty. So essentially we see nothing regarding in any respect. We see this as a purely a timing points And we see it beginning to get higher in This autumn, except there are another business occasions just like the UAW strikes that last more, then that is a bit bit out of our management. However despite the fact that, even the UAW strikes, it is not going to final, as you in all probability know this very nicely, it is not going to final in perpetuity and since either side received damage. So I believe they are going to resolve it. I actually hope they are going to after which we’ll get again on monitor.

Paul Treiber

Okay. After which my second query. I do not understand how a lot you may reply it, however I am going to throw it on the market. Simply with reference to Mission Imperium, I do know you may’t give specifics, however have you ever or the board reached some extent the place you have narrowed down to a couple high-level paths? And might you type of share the high-level paths?

John Chen

Sure. I am unable to touch upon it, however the reply is sure.

Paul Treiber

Okay. Thanks for taking the questions.

John Chen

Positive.

Operator

And our subsequent query right now comes from Daniel Chan with TD Cowan. Please go forward.

Daniel Chan

Hey, John. You anticipated the strategic overview to conclude by the tip of summer time, and your contract with BlackBerry is rapidly approaching, wouldn’t it be potential that this overview goes previous November or ought to we anticipate one thing within the subsequent month or so?

John Chen

I believe there’s higher than 50-50 probability it is best to anticipate one thing sooner.

Daniel Chan

Okay. That is useful. After which perhaps one other query on the timing. To what extent do you assume the uncertainty from the strategic opinions having an affect on the close to time period monetary efficiency, whether or not it’s from employees productiveness and even clients ready for a conclusion?

John Chen

No, really, I imply, actually severely, I verify this quite a bit, as a result of that is an apparent concern. And from a buyer standpoint, no, I do not see, there could be one or two conversations I had, however it was like, form of like, oh, by the best way, once I talked to a buyer, they stated, oh, by the best way, what’s good, you understand, what is going on on there, you understand, that form of factor. And, or any person requested me, a part of the lengthy dialog and abruptly they stated, ought to I be involved about this? I stated, nope, nope, you don’t have anything to be involved about. We stand behind every thing we do and construct and ship. So not a lot actually coming from and the gross sales flooring hasn’t fed again to me about this being a roadblock of some types. However having stated that, the longer it lingers on, the more serious it will get. And despite the fact that it isn’t an enormous, massive worse. So I’ve no intention, due to being an operator, I received workers, companions, clients, shareholders to fret about. So we’re not going to let this factor. It would take a very long time, a number of steps, however there might be some determination made.

Daniel Chan

That is useful. Thanks, John.

John Chen

Positive.

Operator

Thanks. I wish to flip the decision again over to John Chen, Government Chair and CEO of BlackBerry for closing remarks.

John Chen

Okay, thanks. Thanks, operator. Earlier than we finish right now’s name, I might prefer to remind everybody of an upcoming BlackBerry Summit on October 17 on the Conrad Lodge in New York Downtown. The occasion anchored across the theme of belief has been expanded this yr to incorporate IOT and we now have a powerful line of keynotes in addition to product demos and breakout classes. You may register to attend at blackberry.com/ summit. Keep tuned for extra announcement across the occasion. I thank everyone once more for becoming a member of the decision. I sit up for talking with you very quickly. Thanks.

Operator

And thanks sir. This concludes right now’s name. Thanks to your participation. It’s possible you’ll now disconnect.