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Good morning, and welcome to the BlackBerry Second Quarter Fiscal Year 2021 Results Conference Call. My name is James, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to Tim Foote, Investor Relations. Please go ahead.
Thank you, James. Good morning, and welcome to BlackBerry's Second Quarter Fiscal 2021 Earnings Conference Call. With me today on the call 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, including the COVID-19 pandemic. You should not place undue reliance on the company's forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements, 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 and supplement published earlier today, which are available on the EDGAR, SEDAR and blackberry.com websites. And with that, I'll turn the call over to John.
Thanks, Tim. Good morning, everybody, and thank you for joining us, and I hope everybody is safe and well. This past quarter, we delivered strong revenue and EPS results, beating expectations, despite of the continued challenge related to the COVID-19. I will start with financial highlights in the quarter and then move on to the business commentary. As usual, I will reference our financial performance in the non-GAAP numbers. Blackberry report total revenue of $266 million, increasing both sequentially and year-over-year. The core Spark platform performs well, maintaining the work-from-anywhere momentum from Q1. QNX continued to be a negative -- to be negatively impacted by the temporary slowdown in the auto production but we are seeing signs of recovery, more of this later. As we mentioned during our first quarter earnings call, we anticipated licensing to have a strong second quarter, and it did, reporting revenue of $108 million. Second quarter total company billings showed strong sequential growth in all parts of the business, except for QNX, which remained flat sequentially. Gross margin increased by 6 percentage points sequentially to 78% due to the revenue mix. Earnings per share came in at $0.11. Cash generated from operations was $31 million. Total ending cash and investment as of August 31 was $977 million, 9 7 7.The company continues to be financially healthy and in a strong position to focus on our long-term strategy. Let me start now by providing business commentary with the Software and Services group. Revenue for the quarter was $158 million. ARR was approximately 486, $486 million.Dollar-based net retention was 92%. Net customer churn was approximately 3%. Billings growth was sequential -- was strong sequentially at 23%. As I mentioned earlier, the core component of the Software and Services group is Spark. The Spark Suites combines Blackberry Unified Endpoint Management, the UEM, and Unified Endpoint Security, the UES. We combined the 2 products in one single pane of glass. The Spark Suites was launched at the end of our first fiscal quarter, and since then, customer interest has been strong and demand is growing. In the quarter, a number of high-profile customer purchases our Spark Suite, including the United States Air Force, which upgraded over 90,000 users from UEM to a Spark Suite.Other wins including U.K. Ministry of Defense, the Royal Canadian Mint, Banco de México, New Zealand Ministry of Foreign Affairs -- Foreign Affairs and Trade, sorry. New Zealand Ministry of Foreign Trade, Rolls Royce, Lloyds Bank, Société Générale and Mitsubishi, just to name a few of them. Given this early success in upgrading customers to our Spark Suites, we are optimistic about being able to secure a significant number of further upgrades from the rest of our installed base. In parallel, we are also aggressively targeting new logos and more on that later also. BlackBerry continues to have the trust of governments around the world. During the quarter, our UEM suite was added to the Department of Defense Information Network Approved Products List, DoDIN APL. BlackBerry is the only UEM vendor that has achieved this level of approval today. This achievement is based on the completion of cybersecurity and interoperability certifications. These approvals will provide us better assets and a more streamlined approval process. This should naturally lead to a greater revenue opportunity going forward. The latest release of UEM has also recently achieved a very important NIAP certification, accreditation. We have recognized the strong industry-wide demand for managed detect and response services and -- known as MDR. Frost & Sullivan recently estimated that MDR market to have a CAGR, a compounded annual growth rate of 16% and for our annual revenue to reach about $2 billion by about 2024. Our MDR offering, we call it Guard, while relatively new, continues to perform well. To take advantage of this opportunity, we plan to greatly enhance our channel programs. Certified partners will be able to deliver managed service and threat hunting on the AI-driven cybersecurity solution, greatly increasing our scale. This will differentiate us against our major competitors, who prefer to provide all the services themselves. Moving on to BTS. As you know, much of the BTS business is reliant on the strength of the auto industry. The largest piece of the BTS business is QNX. We have recently seen some recovery in the production volumes from the very low level during our first fiscal quarter. This makes us optimistic that the BTS business will show sequential revenue improvement and could be close to normal early next fiscal year. Despite auto production volumes being down and moderate, QNX continue to win new designs and develop significant partnerships. In the quarter, we have 19 new design wins, 5 in auto and 14 in a generally embedded market, we call it GEM. Alongside infotainment, the new auto wins in the quarter include design for digital cockpit, instrument cluster and domain controller, which all typically have higher ASPs or average selling price. The new GEM wins include design for next-generation blood analyzer, next-generation factory robotics and also with Schneider Electric for a solar solution gateway. Furthermore, we are pleased to announce that together with Desay SV Automotive, we have developed the autonomous driving domain controller for Xpeng. Xpeng Motor new -- well, it's a model number, Motor's new P7. It's a high-performance electric vehicle. Xpeng, as some of you may know, that it has recently been listed successfully on the New York Stock Exchange, and it's one of the China's leading electric vehicle manufacturers. QNX will also be used by StradVision, an industry leader in AI-based camera perception technology in a number of the next-generation ADAS, that's advanced driver assist, and autonomous vehicle system from South Korean automakers. QNX remains in a very strong position for the medium and long term despite the short-term macro challenges. I'm moving on to AtHoc, our critical event management platform that helps protect people and keep businesses up and running. This market is large and growing, and our technology is already well proven in the federal government sector. We see significant growth opportunities within both federal as well as state government as well as in the enterprise. New wins in the quarter include the New York Stock Exchange, the Office of the Director of National Intelligence and the Edmonton Police Service. During the quarter, we were awarded a new authority to operate or ATO for the U.S. Department of Transportation, bringing the total to 14 for the Blackberry AtHoc FedRAMP Cloud. This was also a strong quarter for our high security SecuSUITE Voice and messaging offerings, where we both strengthened our position in the United States and extended our leadership position in Germany. Major wins in the quarter included the United States Department of Homeland Security, the U.S. Internal Revenue Services and United States Federal Emergency Management Agency, FEMA. These contracts were properly awarded through our partner, CACI. SecuSUITE also received a Government of Canada security certification, clearing the way for us to provide this technology to the Canadian government at large. Including Canada, Blackberry SecuSUITE Secusmart technology is now used by 17 governments around the world. We have spoken about our focus on go-to-market for some quarters now. So go-to-market has many components and has taken time to get all of them optimized. Bringing in some new talent is just part of the process and we did that successfully, along with making sure mindset and incentives align to our growth plans. Equally as important, we have also revamped our customer success and marketing programs as well as our partnership and channel programs. A good example of the progress we have made, that I would like to cite, is in the channel program side. As you all recall, in our device days making hardware, we have strong relationship with telcos, and they are becoming increasingly interested now in our UEM, UES and AtHoc products. We recently announced a partnership with TELUS to resell and secure -- to secure AtHoc critical event management solution across Canada. This partnership adds to our previously announced partnership with Bell and Vodafone. So things are coming together nicely across all the components of our go to market. We are now seeing results and an increase in both business pipeline and new business pipeline and conversion rates. Moving on to the licensing and others. Revenue for the quarter was $108 million, as I mentioned earlier. The majority of licensing revenue comes from our IP licensing business. So with that, let me turn the call over to Steve to provide more detail about our financial performance.
Thank you, John. My comments on our financial performance for the fiscal quarter will be in non-GAAP terms, unless otherwise noted. And also please refer to the supplemental table in the press release for the GAAP and non-GAAP details. We delivered second quarter non-GAAP total company revenue of $266 million and GAAP total company revenue of $259 million. Second quarter total company gross margin was 78% versus the 75% reported in the second quarter of fiscal 2020. The increase is primarily due to the strong performance of our licensing business this quarter as expected.Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $7 million and excludes stock compensation expense of $1 million. The second quarter operating expenses were $144 million. We continue to invest in our go-to-market strategy, as John described, and while at the same time, keeping control over operating expenses, given the level of uncertainty in the macro environment. In addition, our non-GAAP operating expenses exclude $32 million in amortization of acquired intangibles, $8 million in stock compensation expense, $3 million for software deferred commissions and expense acquired, $1 million in restructuring costs, and $18 million charge related to the fair value adjustment on the convertible debenture and $21 million impairment of long-lived assets related entirely to real estate. And given the recent experience in working from home, we identified efficiencies and how much office space we need going forward. Second quarter non-GAAP operating income was $63 million. And second quarter non-GAAP net income was $62 million. Non-GAAP earnings per share was $0.11 in the quarter and our adjusted EBITDA was $81 million this quarter, excluding the non-GAAP adjustments previously mentioned. This equates to an adjusted EBITDA margin of 30%. I will now provide a breakdown of our revenue in the quarter. Software and Services revenue was $158 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 was recurring remained approximately 90%, and licensing revenue was $108 million. Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $977 million at August 31, 2020, which was an increase of $22 million from May 31, 2020. Our net cash position was $362 million at the end of the quarter. Second quarter free cash flow before considering the impact of acquisition and integration expenses, restructuring costs and legal proceedings was $29 million and cash generated from operations was $31 million and capital expenditures were $2 million.That concludes my comments, and I'll now turn the call back to John for additional comments.
Thank you, Steve. After the end of the quarter, BlackBerry completed the early redemption of its existing $605 million of convertible debenture and issued a new debenture of $365 million. This represents a $240 million reduction in debt and interest expense savings of approximately $16 million on an annualized basis. The terms of the new convertible debenture are competitive with available terms for a marketed offering at the time the refinance was announced. The Board undertook a lengthy process to consider a range of refinancing options and sought independent financial and legal advice. The level of potential dilution before and after the refinance -- sorry, and after the real financing is essentially the same. The new 3 years convertible debentures gives the company additional liquidity during this uncertain pandemic period and flexibility to continue to invest in the business and strategy, should suitable opportunity present itself. We anticipate being free cash flow positive for the fiscal year. As in the previous quarter, we are not providing a detailed financial outlook for fiscal 2021, due to the ongoing uncertainty from COVID-19. However, we can provide the following directional statements. We continue to expect total company revenue for the year to be around $950 million, as we indicated last quarter. Given the strong performance of the licensing business this quarter, we expect licensing revenue to finish the fiscal year modestly above the 250 mark that we have forecasted that we mentioned in the last earnings call. For Software and Services, excluding BTS, we expect a slight revenue growth in the second half -- second fiscal half versus the first fiscal half. For BTS, we expect revenue to sequentially improve during the second half of the fiscal year and to return to its normal run rate early next fiscal year. I also like to take this opportunity to highlight 2 product development items, which we feel very excited about. We expect by the end of the year, our Unified Endpoint Security, the UES suite, will be available as UEM agnostic. UES is the combination of the best of BlackBerry security, including Mobile Threat Defense, a Secure Web Gateway and Cylance next-generation AI and machine learning. We believe that this will greatly expand our addressable markets because new logo customer will be able to benefit from the high level of security that Blackberry UES delivers, without having to replace their UEM platform. On our critical event management platform, which is the second product-related announcement I'd like to highlight, the product AtHoc, we also made great progress. We recently announced the release of our Blackberry AtHoc Public Safety edition and Blackberry AtHoc EU Cloud, each development will further strengthen our ability to compete with a major competitor in this space. This quarter has shown that despite the challenges of COVID-19, the company has been able to deliver strong sequential billings and revenue growth and profitability. Further, the company continues to strengthen all the element of its go-to-market, building strong partnership and positioning ourselves for the long term. We remain confident that our technology is strong, the product we compete in are large and growing, and we're excited about our execution. I would like to now open for Q&A. Operator, can I have your assistance, please?
[Operator Instructions] And our first question for today will come from Daniel Bartus with Bank of America.
First, impressive outperformance on the licensing line this quarter. I was wondering if you could just remind us what the recurring base we should think about there going forward. And is the strategy still striving for recurring new deals versus onetime deals?
Yes. Yes. The strategy is absolutely driving recurring deal over onetime deal. We estimated roughly the combination of that with a healthy portion of recurring to be roughly about $50 million a quarter, that's we normally gunning for, and give and take, we're looking for $250 million a year in licensing revenue. We don't always get to -- the difficulty is, we don't always get to -- get all the revenue come in as recurring. So the Q2, for example, the deal, unfortunately, is a onetime deal, but it will recur a number of years down the road. So it's not the forever one -- only onetime forever, but it has recurring, but it's not an annual recurring that the way you think about. It probably come back 3 years from now or something like that. So it's all different, depending on the customer.
Got you. That's really helpful. And then for my follow-up, I just want to understand the dynamics of the ARR, it looks like it's down a little bit quarter-over-quarter versus the business improving quarter-over-quarter. So just on the ARR piece, can you kind of help me think about which pieces of that maybe grew quarter-over-quarter and maybe where the pressure is coming from on ARR in 2Q?
Yes. We have lost some of the business base due to the kind of the small, medium enterprise. Under COVID-19, they either delayed or they have gone on a lower cost solution. We typically see us pretty solid in the bigger company, bigger organization.
I would also add that the QNX was -- also contributed to the decline in that metric.
That's a good point. Yes, QNX has also contributed to the decline. Yes, that's a good point.
Our next question comes from the line of Mike Walkley with Canaccord.
Just following up on that. When you talked about the second half Software Services revenue recovering versus the first half, can you maybe rank order for us the biggest contributors to the recovery, is it QNX with autos restarting or maybe some other businesses that you're seeing growth also?
Yes. So we are actually, I guess, cautiously bullish, that's probably the better word, in pretty much all line of our businesses. Of course, IP will not at the same repeat, but IP is exactly where we think it's going to be. So on QNX, the continued design wins, we could now see the activities in the developer seats that will hopefully bring us more professional services opportunity. And then as well as some of the return of the production will give us the uptick in royalty. I think it's going to be modestly increasing. I mean, there will be a number -- Q3 number will be a little better than Q2 and Q4 will be a little better than Q3. And then we'll start going back to a normal state. And you'll probably see the trouble asking me what the normal say is probably around a $50 million quarter type early next year -- fiscal year. So that's one part of the component. We see a lot of demand on SecuSUITE. The work from home has actually also driven a higher demand and sensitivity about secure messaging technology as well as secure voice technology. We've seen quite a bit of demand out there and lots of pipeline. We feel good about our execution on the Spark side. Tom and team is doing very well. And I mentioned in my script that we're seeing good demand from customers who upgrade from our UEM, very interested in that. And our suites are quite elaborate because we have 6 different pillars that you could go from 1 to 6. And so that even if you come in at 1, they give us good upsell opportunities down the road. So the customer engagements are very good. Our customer success teams are doing well. So -- and then, of course, AtHoc is now quite topical in the market also. So without getting way overly bullish, I mean, I'm still cautious about people a little cautious regarding spending capital and all that, multiple sectors have shown some of those consciousness. But overall, and our pipeline growing nicely, our engagement seems to be going quite nicely. We're all getting used to now selling remote, so to speak. So knock on wood, things seems coming together.
Okay. That's helpful. And just a follow-up question since you mentioned AtHoc. Can you just update us? It's a very strong position with federal government. How do you see that platform transitioning more into the enterprise? How is the go-to-market there? And how do you see that transitioning to compete better in that segment because that could be quite a large opportunity also?
Yes, yes, very much. So we have traditionally been very strong in the federal government, particularly in the United States. And then, of course, lately, we added Canada. I think this is an opportunity that is scalable in all the other countries around the world, especially the G7 and EU and so forth. The EU also have very strong opportunities regarding -- because of the data privacy law and the alert system that they would need and life cycle system they will need. Work from home also gives us some kind of demand generations. So we just need to get the team together to go after this -- all these opportunities. It's not a lack of opportunities out there. So -- and then eventually, we'll get to enterprise side, we do have a plan to do that. But right now, as we speak today, we are -- we have 2 teams focusing on government in addition to U.S. government and Canadian government and hope to replicate the same level of success. Oh, I forgot to mention state government. That's also a very big -- state government is a little bit more price sensitive, but it's still a big opportunity out there, especially when people are now knowing that their pandemic situation and we got the -- you got to get ready for any kind of events out there, good or bad for that matter.
[Operator Instructions] Our next question comes from the line of Trip Chowdhry with Global Equities Research.
A very solid quarter and a very solid execution. I have 2 very quick questions. First is your solid win with Xpeng. Over-the-air updates is now very essential for any modern vehicles. Is QNX or BlackBerry providing Xpeng with the over-the-air update features?
I don't know that specific. I know we work with our partners on the cockpit platform. You know QNX has a very good OTA and one that a couple of chip manufacturer is using. So -- but as it related to Xpeng, I don't know that specific answer. We could find out the answer for you. But I don't have that data.
No worries. No worries. The second one is regarding AtHoc. This also had solid wins. I was wondering if you can highlight 1 or 2 technologies that makes AtHoc better than your competitor Everbridge.
Right. Thank you. I think it hold true to our value-added heritage, AtHoc -- the reason why we're successful in the federal government because of the level of security certifications. And also, we are pretty sure that the AtHoc messaging system, although it's slightly more expensive than others, are the most secure messaging system, i.e., that people cannot change messages or hack into the messaging system, change what's being sent out and fake the return messages and so forth. So it's a 2-way communication, obviously. So that everything -- the advantage that AtHoc provide is absolutely in the security and the privacy side.
Our next question comes from the line of Daniel Chan with TD Securities.
It sounds like your sales channel efforts are starting to bear fruit. Where do you think you are in building out that sales channel? And what else is there left to do?
I feel pretty good. I mean, thank you for asking that. So as you know that I've been working on this for the last couple of years, right? And I had a couple of cold start and -- but this time around, as I pointed out, it's a very elaborate, multi-disciplined areas of collaborations, and it has to come together probably to work well. It's not just about adding more people on the street. As I said earlier, the incentive plans and the assigned territorial assignments and then it goes into the partner and the channels and in everything that -- the marketing, everything that comes together. I feel very good about where we are. We should see equal or better than market growth rate next year. Assuming things in the macro market doesn't deteriorate from where it is today, we see our pipeline growing. The people are more engaging in a -- how should I say that, in a prescriptive way, maybe that's the way to say it. The training came through. So feel pretty good about that. And we have some really strong plans, even inside the sales force regarding how we look at renewal versus new logo, and it is all facet of that. So I would say that now we just need to see the work yield us some results.
Okay, that's helpful. And then I wanted to switch gears a little bit to Cylance. It's been almost a year since you've launched the EDR solution that was supposed to close the gap with some of your competitors. So just want to get an update from you to see how that EDR solution is going and if there's anything else that needs to be done to make that successful?
Yes. The biggest -- yes. Thanks. So the Cylance business for us is rather flattish. And again, EPP, we're the top leader of EDR, we caught up with the competition. There's one piece that's missing that will kick into a growth gear, which is the cloud enablement of the Optics product, which is the EDR product. That will come through either towards the end of this calendar year or beginning of this calendar year. We already -- we got the sales force priming to sell it. And so that will also be an element that will help the MDR side, the Managed Service Side also. So that's the only thing that is missing right now. Everything else, they've caught up.
Our next question comes from the line of Paul Treiber with RBC Capital Markets.
Couple of high-level questions. One, just following off the last question. When you look at the peers in the space, specifically UEM and cybersecurity, with COVID, they're seeing an acceleration, a material acceleration in growth, and in comparison, it seems that BlackBerry is not seeing that same magnitude of growth acceleration. And so what in your view is the reason why BlackBerry isn't seeing material growth acceleration in UEM and cybersecurity at the moment?
Well, we've seen some good growth in the UEM, mostly come from the installed base and so people buying more seats. We did see that activities. Now we're focusing on upgrading them to UES, so that they could use Cylance technology and then the gateway technology. And maybe it's the reason about where we are in the sales motion. As I said, we feel good about the receptivity. And we feel good about a win, which I named a few. So maybe there's a little bit of time lag and as we fix up our engine and the product releases of the UES and all that. So -- but we don't see any problem with the UEM side. People buying more seats. But the newer logo is harder to come by, but the existing installed base, the growths are quite reasonable, I would say.
So I'd take it as implying that you expect to hold market share in both those markets in the medium term?
Yes. We're holding our market share, and we have a plan -- a reasonable good plan to go after new logos with the UES platform. One of the way to hold them -- to do that is to make the UEM in our state. But on the UEM side, we're going to push more on the cloud base implementation. And so we have a little plan of both, one from the installed base and one for the new logo.
And then just my last question, and it sort of it dovetails into that. But longer term, like it looks like you're making a more permanent shift to work from home with the real estate changes that you've done. If -- like do you think that there's a permanent shift for all companies to work from home or you see it as temporary? And if there's a permanent shift to work from home, how are you adjusting BlackBerry's longer-term strategy to really drive that or address it? And is cloud much more important in a work-from-the-home environment?
Yes, cloud and mobility. And mobility is kind of where our strength has always been. So we think -- well, first of all, to answer your first question, personally, I believe if everybody worked from home forever, it will hurt productivity, it will hurt innovations. But I think there will be a hybrid model that's being developed. And most of the people -- there are a lot of very well-known CEO. And I think there was a Wall Street Journal article yesterday or earlier this week interviewing them, and most of them have said that they probably want to either everybody go back to work or a hybrid of sorts. And so either trend was something that we could benefit from. We could benefit because I think whether you're working from home or you are doing -- at the office or remotely, you will deal with mobility. And so secure mobility, endpoint mobility, endpoint security are definitely something that we don't need to change our product road map or adjust it, whether we're doing messaging or event management or UEM or the UES side of the equation. Our platforms are just fine for either the usage. I think -- again, I look at this thing as mobile computing and securing that mobile computing in as many facets as possibly can to help productivity, to help assuring data privacy and all that. It's something that we do and we do best. So that will be a good space for us.
And now I'd like to turn the call back over to John Chen, Executive Chair and CEO of BlackBerry for closing remarks.
Okay. Well, thank you. So the only thing I have is, I'd like to remind everybody that we have our BlackBerry Annual Security Summit, I think this is the 7th on October 5 to 7. This virtual event will feature live and on-demand session, including keynote address with BlackBerry Executives, product demos, case study. We have exciting outside speaker lineup also, including a high level U.S. government official, who will speak about cybersecurity legislative developments and a distinguished industry analyst from Gartner, who will talk about the market more in detail. More detail of the speakers and the event can be found on our website, blackberry.com/securitysummit, one word, securitysummit is one word. This event will help demonstrate why BlackBerry is so important and critical in today's cybersecurity landscape, we hope to see many of you there. Thank you very much for joining us for the call today, and have a great day.
This concludes today's call. You may now disconnect.