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Good morning, and welcome to the BlackBerry Fiscal Year 2020 Third Quarter Results Conference Call. My name is Jack, 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 Christopher Lee, Vice President of Finance. Please go ahead, sir.
Thank you, Jack. Welcome to the BlackBerry Fiscal Year 2020 Third Quarter Results Conference Call. With me on the call today are Executive Chairman 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 then 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 any 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, including the risk factors that are discussed in the company's annual information form, which is included in our annual report on Form 40-F and in our MD&A. 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.I will now turn the call over to John.
Thanks, Chris. Good morning, everybody, and welcome to our call. As a reminder, I will be using a -- referencing non-GAAP numbers in my summary of quarterly results, unless otherwise stated.Let me start. I'm encouraged by our progress in the third quarter as revenue grew sequentially in all of our software businesses. The total company revenue was $280 million, growing 23% year-over-year. Total software and services revenue was $275 million, it grew 26% year-over-year. This is a new record high for the quarter. We also recorded double-digit percentage billing growth in the same period.Software and services revenue growth, excluding Cylance, was 9% sequentially. Earnings per share came in at positive $0.03 and reported free cash flow was a positive $37 million.We continue to invest in product development and go-to-market to drive long-term sustainable growth.Let's move in the business segment to provide you some commentary. Let's start with the IoT business. IoT revenue grew 8% sequentially. Within IoT, both BTS and ESS, the Enterprise Software Solutions, reported sequential growth in billings and revenue.In BTS, QNX, the largest part of BTS, continued to perform well. In the quarter, we had a total of 31 design wins, of which 11 were in the automotive market and 20 were in the general embedded market. Within the general embedded market, we are experiencing good demand in the industrial vertical. As noted last quarter, growth in the general embedded market has been a stated strategic objective and priority for us this quarter -- this fiscal year, sorry, this fiscal year. There were several very positive developments in the quarter that aligned with BlackBerry QNX strategic goal of increasing ARPU and volume in the auto sectors. These developments also extend our market leadership in automotive.I'd like to share a few of them with you. First, I will highlight Hyundai Autron, a leader in electronic controls software, has selected BlackBerry QNX for 2 design wins. One is in the ADAS design, which is advanced driver assist and as well as their autonomous driving platform. This is meaningful because Tier 1 relation -- is a meaningful Tier 1 relationship that provides BlackBerry QNX, an opportunity to work directly with Hyundai. Hyundai happened to be the sixth-largest auto OEM in the world. And its affiliate -- and we also could work -- extend to work with its affiliate for the first time.In addition to winning the traditional OEMs, we are also winning with emerging smart ups. And I think -- thank you.This is a quick -- [ sneak this word in here ], smart up, like smart start-up. Anyway, as an example, Arrival, an electric commercial OEM based in the U.K. have chosen BlackBerry QNX as a safe and secure foundation, again, for the ADAS features in the self-driving vehicles.In the quarter, we also entered into a partnership with ETAS to develop a safety-critical platform using AUTOSAR Adaptive standard. Bosch, the world's largest automotive supplier and the parent of ETAS, decided to join forces with BlackBerry to develop this common software platform that will enable the production of safe and secure connected and autonomous vehicle for the future.Let me give a brief update on the Radar business. In the quarter, we added 15 new customers, 1-5, including an initial order of 2,000 units from CP Rail, and we are very pleased with that, obviously. And we have repeated purchases for a number of our customers, including Lowe's, Flexi-Van and Bimbo's bakeries. We're also starting to explore expansion in the Europe and Middle East arena.Now a few comments on our enterprise software and services business progress. The sales team is getting back into form and operating with better discipline and accountability. The team has restored a normal cadence in managing the pipeline and converting the pipeline to billings. As a result, our pipeline increased nicely in both numbers of opportunity and dollar size since the second fiscal quarter.Revenue for UEM, AtHoc and Secusmart, all grew sequentially. These included a contribution for our new continuous authentication product, BlackBerry Intelligent Services, we name it BIS. BIS is gaining traction in the market as evidenced by high-profile wins such as the Department of National Defense in Canada and Julius Baer Group. Julius Baer Group is one of the oldest and largest banking institutions in Switzerland. And as a reminder, we only released this product in August.Next, on the customer front. Our regulated industry business remained healthy and stable. We added a number of new logo wins in the comparative situation across federal government agencies worldwide. Including in Canada, Germany, Panama, Poland, Romania, Saudi Arabia as well as United States.Furthermore, in the United States, State Agency, we won the Alaskan Army National Guard and the California Department of Technology, just to name a few.We also achieved notable progress in the financial services and energy verticals, with wins like Bank of China, Mizuho Bank, Great Eastern Life Assurance. Great Eastern Life Assurance has happened to be the largest life insurance company in Singapore and Malaysia. We also won ScottishPower, [ I going to be naming ] just a few of our new wins.On the U.S. National Security Fund, we partnered with CACI International and to provide the first secure and certified mobile communication applications, utilizing BlackBerry's SecuSUITE secure voice and text -- secure text technology. The initial target market will be more than 4 million United States government-issued cellphones. Our application meet the NSA stringent commercial solution for classified program requirements and it's the only solution of this kind in the FedRAMP certification.Lastly, on the product front, we introduced CylancePROTECT for mobile endpoints. This mobile threat defense which now referred to from now on as MTD products -- this MTD product integrates AI endpoint security capabilities for Cylance and for -- as well as the endpoint management functionality from UEM.This second-generation MTD product, which we deliver only 8 months after the close of acquisition demonstrated a collaborative teamwork of the 2 development teams. The teams work very well together to execute a common product road map and share the same vision.We have a total of 14, 1-4, 14 beta customers, which includes several top multi financial institutions and notable telecommunication companies. They all have shared very positive feedback. In fact, we received our first customer order during the quarter. Spark, our secure IoT platform is progressing well, with the addition of these 2 products, the MTD product I just mentioned and the BIS product I mentioned earlier.Moving on to our licensing business. Revenue increased double-digit percentage year-over-year growth, which is slightly ahead of our expectation for the quarter.We maintained a full year outlook that we provided last quarter for our licensing business.Now on to the BlackBerry Cylance business. Revenue increased 13% year-over-year, 1-3. ARR was $171 million, up 15%, 1-5, year-over-year. Our dollar-based net retention rate was 99%. And we ended the quarter with 20% year-over-year growth in active subscription customers.We anticipate stronger growth in the future as we have now released an enhanced endpoint detection and response, the EDR technology product and as well as a single-agent platform. The lack of these features in the past have prevented us from winning more deals as well as the larger-sized deals, of course, until now.By adding BlackBerry resources, we're able to deliver both products at the end of the third quarter, which are the OPTICS 2.4, which is the EDR product that I mentioned earlier, shipped in October this year, followed by the release of our single-agent platform, our internal code name called Cocoon last month. These new products improve our capacity to address our customer cybersecurity needs across the entire spectrum.Cylance endpoint security is best known for its AI-driven prediction and production. Our team has won a number of new deals in competitive environments, which are -- with the enterprise-sized customers. I will name a few for you, such as the AmBank Group in Malaysia, the International Container Terminal Services in the Philippines, the AES Corporation, Deloitte and Molex in the United States.In the quarter, we also released our managed service offering, CylanceGUARD. Market demand and pipeline has been strong, especially in the SMB, small-medium business sector. The complete offering of these products and services will, no doubt, help drive stronger revenue growth next year.Before I turn the call over to Steve, let me make a couple of comments regarding the Cylance integration.We continue to be ahead in the joint integration efforts. We're achieving the product development synergies we discussed when we announced the acquisition, including the MTD product, which I discussed earlier, that uses the -- as well as case that integrated QNX and Cylance technologies together, both of which will be demonstrated at CES in 3 weeks.Both customer and industry analysts have told us our product meets the needs of a large addressable market of both fixed and mobile endpoints, where management and security for endpoints are now converging.We are now ready to increase sales and marketing synergies as well as partner cross-selling.Given the operational efficiency gains so far, we remain comfortable that Cylance will be accretive in fiscal 2021.With that, let me turn the call over to Steve Rai to provide more details 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. Also, please refer to the supplemental table in the press release for the GAAP and non-GAAP details. We delivered third quarter non-GAAP total company revenue of $280 million and GAAP total company revenue of $267 million. I will break down revenue shortly. Third quarter total company gross margin was 77%. Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $13 million and excludes restructuring costs of $3 million and stock compensation expense of $1 million.Operating expenses of $195 million were up sequentially by $2 million as we manage spending while continuing to invest in product development and go-to-market. Our non-GAAP operating expenses exclude $35 million in amortization of acquired intangibles, which represents about $0.06 of GAAP loss per share. Additionally, our non-GAAP operating expenses exclude $14 million in stock compensation expense, $4 million for software deferred commissions expense acquired, $7 million in restructuring costs and a benefit of $20 million related to the fair value adjustment on the convertible debentures.Non-GAAP operating income was $20 million and non-GAAP net income was $17 million.Non-GAAP earnings per share was $0.03 in the quarter.Our adjusted EBITDA was $38 million this quarter, excluding the non-GAAP adjustments previously mentioned. This equates to an adjusted EBITDA margin of 14%.I will now provide a breakdown of our revenue in the quarter. Total software and services revenue was $275 million, representing 98% of total company revenue, broken down as follows: IoT accounted for 52% of total revenue, BlackBerry Cylance accounted for 19% of total revenue and licensing accounted for 27% of total revenue. Other revenue of 2% is solely comprised of service access fees. Service access fees were $5 million, down from $9 million or 44% year-over-year. Service access fees were expected to decline given the continued wind down of this legacy business.Recurring software and services revenue, including BlackBerry Cylance, was above 90% in the quarter.Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $970 million, which increased by $32 million from the previous quarter ended August 31, 2019.Our net cash position was $365 million at the end of the quarter. Free cash flow before considering the impact of acquisition and integration expenses, restructuring costs and legal proceedings was positive $41 million.Cash generated from operations was $40 million, and capital expenditures were $3 million.That concludes my comments.I'll now turn the call back to John to provide our financial outlook.
Thank you, Steve. For fiscal 2020, we are comfortable with the current consensus estimates for the total company, which is approximately $1.1 billion in non-GAAP revenue and $0.06 in non-GAAP profitability. However, based on the year-to-date performance, we expect to do better than the $0.06 in the non-GAAP profitability. Our current forecast indicates more like $0.08 of earnings per share in fiscal 2020.On a longer-term basis, we're executing upon our strategy of being the trusted provider of secure communication for endpoints. Our customers and industry analysts agree that the endpoint management and securities markets are converging and customers demand, better solution to combat increasing security threat to an expanding set of diverse endpoints.All these efforts this year, including the acquisition and the integration of Cylance, are to position BlackBerry as the leader in this emerging market.BlackBerry has the assets to solve the industry problems, and we are already delivering relevant products such as the Zero Trust platform and AI for security as well as many other different products.We believe that we could be a winner in this fast-growing $20 billion post-market. We look forward to discussing more of our plans in our FY '21 financial outlook at our next Analyst Day, which happens to be April 21, in San Ramon.I will now open the call for Q&A. Jack?
[Operator Instructions] Steven Fox with Cross Research.
A couple of questions, if I could. First of all, John, you mentioned that the UEM revenues rose quarter-over-quarter, but I didn't quite get the details behind that in the quarter. Can you maybe just provide some color as to what drove the sequential increase? And then looking ahead to the fourth quarter, it looks like you're looking for some further sequential increases in revenues. Can you talk about where you're most confident in revenues growing fourth quarter versus third quarter? And then I have a quick follow-up.
Okay, great. Thank you, Steven. Yes, the UEM product, we just happened to -- if you think about it a quarter ago, we have signaled that the pipeline is still strong. We have a little bit of a conversion problems, that was in Q2. Q3, we have much better focus on converting the pipeline into revenue. And so we're fortunate to close a number of business that we're expecting. It's really general UEM as well as the customer got impressed with the products and the road map and security, especially the BlackBerry Intelligent Security Solutions, which are very -- quite slick. I say so myself. And so the combination of really a better focus as well as the ability to deliver the road map, especially above industry category or caliber of security, helps us drive more business. And yes, we expect to see a continued strengthening of that in Q4.
In UEM, in particular?
Yes, UEM, yes. And again, all 3 businesses done well. I mean all 3 components of that -- of the enterprise software business, which was Secusmart and AtHoc. Secusmart are more government-based. We have a number of pilots going. We've got very committed partners in CACI, which just happened to be one of the largest system integrators in the United States federal governments as well as in the AtHoc space. The AtHoc space, we see a lot of opportunities, obviously, not only in the federal space, but as well as the state and education sector.
Great. That's very helpful. And then just as a quick follow-up. You mentioned momentum now building with QNX on the non-auto side and you mentioned industrial. What's the time line for turning some of those wins into revenues? Is it much different than auto? Can you just add some color on that?
Yes, it should be faster than auto. So the design win could go into production a lot sooner and go for a development cycle and then delivering the production a lot sooner because if you notice the auto business, is you have to win the design win with the Tier 1 and the OEM. And then they would then incorporate into the design of the car. And then the car comes out in a year or 2 later. So there is a period in there, of at least 2 to 3 years that you see a low in the revenue and then it goes up as they ship it. In a GEM market, the cycle to the market is a lot faster than the auto sectors.
Gus Papageorgiou with PI Financial.
I also just wanted to focus on that -- on the QNX progress in the -- outside the auto vertical. Can you just talk a little bit about the ASPs in that vertical versus the auto? I know that in auto like there are several QNX modules that go into -- or potentially several modules that go into car. But if you look at the non-auto, can you compare the ASPs there? And I guess, could you just kind of highlight what industries you're having success in?
Yes. A quarter ago, we were having success in the energy sectors. And I would say, I didn't really focus on the ARPU or the ASP, but kind of an educated guess on my part, the numbers are probably a little lower on an ARPU basis. However, the volume is going to be a lot higher. So I would think overall revenue on a constant runway basis will probably be higher than the auto sectors. By the way, I forgot also the medical sector.
And over what time line do you think, John, you'd see that the non-auto would eclipse auto revenue?
Yes. As I said earlier to Steve, the time line for the GEM is going to be faster, the gestation period is going to be faster -- the revenue is going to be faster than the auto side.
Daniel Bartus with BofA Securities.
Dan. First, I just wanted to ask about Cylance. It's great to hear about the new EDR update but can you give us a sense of how much of the customer base already buys EDR? And obviously, just curious how significant of an upsell cycle that could be?
It's interesting. So the -- in general, this is a generalized statement. In general, the SMB markets are more focused on EPP. The very large institutions are more focused on EDR. There has always been even prior to BlackBerry involvement, there's always been that tug of war in the market. Is EPP, which is protection, more important than remediation, detect and remediation? So this is -- it's kind of the ongoing discussion in the industry. So the good thing about this quarter is we finally just put that discussion to rest. We don't -- we just -- we will provide whatever the customer would want. We have the best EPP technology that market acknowledged. And now we have a very strong EDR as well as single in-store. See, the other thing about the single agent was also a factor that customers find it tedious to do multiple installs. So we could now do one. And then we order added managed service. So very strong lineup. And so we serve all spectrum of the market, the very large, which have literally thousands of people, like banks, you'll be familiar with. And then you have the very small SMB market, which volume-wise is quite high. But there's 10, 100, 1,000 users type. So EPP, depending on what sector you're talking about, they have a little bit of a bias between EPP and EDR. I -- the good news about us is we eliminate the bias. We don't need to worry about it anymore. People want EPP. We are about the best there is in the industry.
Great. That's helpful. And then for my quick follow-up, on licensing, could you just talk about if the recurring level is starting to grow? And is that a story for next year perhaps? And maybe in general, if you could just give a little bit of color on what continues to drive the outperformance on the licensing?
Yes, yes. The recurring part, we are kind of pretty much maintain relatively steady, roughly about $160 million a year. And then the total number bounces around about $250 million. And so there is a lot of opportunity to do licensing business. So it's just a little bit of a hard to predict and it's quarterly. It's not like a sales cycle with a science of where you are, you could kind of predict a little bit with better accuracy and when you're going to close it. This one is a little bit hard to manage in that. But on an annual basis, you should expect us to do about $160 million in a recurring basis. And then the rest of them, we will have to bring it in as the quarters develop.
Paul Steep with Scotia Capital.
Could you talk a little bit about the opportunity into 2021 and integrating Cylance further into that EMM-based product? And how you're feeling about that? And what you think the timing sort of looks like for any uptick on that side?
Let's see. Very good question. Thank you. I'm feeling very good about it. And the hint is in my script. We work with a lot of industry analysts. We know from their customer contact, which are big and our customer contact, the customer wanted to have a more orderly platform to integrate many parts of their enterprise software, especially in the security space. And these are anything from the [ employee ] management, the application management, the management of travelers assessability through the cloud, to the -- or on-premise and so forth. They have so many solutions, it's just not funny. And so we have a very strong platform in Spark that we will deliver the Zero Trust platform technology, which involves and combines everything I just named, including identity management. And so we're working extremely hard. Cylance was a very important part of the puzzles. We now have it. We integrated, teams are working well together. We will deliver the Spark platform with Zero Trust capability for the combination of both management and security that is not only mobile, but fixed also. So we're very excited about these things. And we would do much more discussion at our Analyst Day with you all. And -- but this is a great opportunity for us, and we believe we not only have the leadership and the DNA for it and the technology for it, we're early than anybody else. By the way, I'll leave it at that without getting too excited about telling you the product name.
That helps. So maybe just as a final one, the follow-on, the teaser there. As I recall, you didn't have the capability around fixed. Should we think that either 1 of the 3 options, you are either building it and have developed it in-house? Would you look to acquire a large existing base? Would that be something? Or would it be a partnership? And then we'll say happy holidays.
Why don't I wait to tell you that? I don't think acquisition is my first choice. Partnership was probably more relevant.
Trip Chowdhry with Global Equities Research.
Again, congratulations on a phenomenal execution. A couple of questions. I would like to ask is, when we think about security and especially the new paradigm in which Cylance and BlackBerry are these days with machine learning and using that as a way to proactively deter the security glitch before it really happens. I was wondering, what do you think is the reason that traditional security heavyweights like RSA, Trend Micro Symantec, they haven't been able to pivot themselves to the new world. What is your sense? What is happening in the industry that prevents them from doing something like what you guys are doing?
Well, Trip, that's a good question. And I never underestimate our competitors in the market. All of those are good companies that you talked about that have built on the security paradigm, whether it's remote like the RSA, whether it's Symantec, more PC-based and so forth. I'm sure that they have their development road map and things that they're working on. BlackBerry happens just to want to leapfrog everybody by acquiring Cylance. And so we go to the second generation first without even going to the first generation on the AV side. So -- and we see the capability that is needed with machine learning as well as using machine to do the policing and the trapping and the correction of potential attack and threats. So I will only speak to the fact that I'm pleased that BlackBerry is able to execute it. We have the capacity of the dollars, you know we paid $1.4 billion. It was a big -- and you know me well, I mean, that's a big commitment on our part. And it works out. We've got great product out with the MTD, for example, in only 8 months, very pleased with that because teams are working well together. And we have great vision together. And this will -- we will be a good player. It will be a really strong player in the IoT security world.
Beautiful. Also, I was wondering, like, do you have any update on your partnership with Microsoft on various initiatives that you had fostered over the last 6 to 8 months?
Yes, Microsoft, and as you know, we deliver a bridge product, which put all the Microsoft application on our platform in the native mode. So in a way, we are competing with Microsoft because they obviously also deliver in-tune with the same capability, but then we have better security, at least, we think so. And so -- and the customer doesn't have to choose to move away from security to use the Microsoft application. And they, obviously, are very committed to -- most of the customers are very committed to Microsoft applications. So I think this partnership works well for both.
Beautiful, beautiful. And Steve Capelli has become the Chief Revenue Officer. So it seems like he hits home run right off the bat.
Yes, yes, yes. He's the one who's hitting the ball.
Yes, I was just also wondering like when -- John, you were at Sybase and Steve Capelli and the whole team did extremely well with the U.S. Federal Government. I was wondering, are we building a pipeline with the U.S. Federal Government with Cylance or BlackBerry products? And how is it coming along?
Sorry, I didn't get the...
Like in the U.S. Federal Government, the -- how is that coming along? Like, are we building our pipeline with the U.S. Federal agencies regarding the product set?
We are -- yes, Trip, we are very strong in federal. So just for example, in only AtHoc as a product, which is the crisis management and emergency management avert systems. We have multi-millions of licenses in the United States government with the federal space. So we're very strong, and we'll continue to expand that pipeline. So -- and I spoke a little earlier about CACI, that's actually a very strong partnership because they're taking us into the secure communication world in the United States government. And so -- and they have the heritage to do it, and they have the credibility to do it. And our product meets the highest standard for top secret or secret. And so we're doing a lot of things together with not only ourselves directly in the federal space, but also with the partners.
James Faucette with Morgan Stanley.
This is Meta Marshall for James. Just one question for me. You spoke about kind of seeing better discipline and the pipeline increasing amongst your salesforce? And I know you were making kind of some changes to go from gathered-a-100 mentality. And just do you consider that complete? Or are there still kind of some transitions underway? Just kind of on the salesforce mentality, particularly around some of the more legacy products.
Yes, thanks. We have -- we established a framework, it took us a couple of quarters. There were some -- there was a little bit of a glitch on our part when we make some changes. So those changes are behind us. So we have a good platform now, all now what we're doing is to concentrate on not only executing, turning the pipeline into billings, creating that momentum, but also hiring more of the salespeople that fit into that model. And so that's a metric that we focus a lot on inside the company. So we feel good about where we are now, the management team and so forth, and we will go -- we will continue to add -- adding fuel to the fire, I guess, maybe that's the word, we think the way to think about it. So we feel we're doing pretty good right now.
I would now like to turn the call back over to John Chen, Executive Chairman and CEO of BlackBerry for closing remarks.
Okay. All right. Okay. Thank you, everybody, for joining us today. I hope to see you at CES. And let me do a little bit commercial. At -- with CES, we have a booth at the North Hall. In the past, we put in there sports cars and this time, we have other demonstrated automobile. And rumor has it that we have a motorcycle there, too. And we're going to show -- what we're going to show you at CES is, obviously, the continuation of advancement of our QNX technology in auto, but also to show you the Cylance integration into the car. I think that would attract a lot of attention. And I know there are some government agency people who already wanted to come see and have appointment with me. So I hope to see you there. And in the meantime, have a very happy and safe holidays.
This concludes today's call. Thank you for your participation. You may now disconnect.