Yahoo Finance BlackBerry Limited (NYSE:BB) Q1 2025 Earnings Call Transcript
BlackBerry Limited (NYSE:BB) Q1 2025 Earnings Call Transcript June 26, 2024
BlackBerry Limited beats earnings expectations. Reported EPS is $-0.03, expectations were $-0.04.
Operator: Good afternoon, and welcome to the BlackBerry First Quarter Fiscal Year 2025 Results Conference call. My name is Carl and I'll be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We'll be facilitating a brief question-and-answer session towards the end of the conference. [Operator Instructions] And as a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Tim Foote, CFO, Cyber Security Division and Head of Investor Relations. Please go ahead.
Tim Foote: Thank you, Carl. Good afternoon, everyone, and welcome to BlackBerry's first quarter fiscal year 2025 earnings conference call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Steve Rai. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Steve will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the safe harbour provisions of applicable U.S. and Canadian Securities Laws.
We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today and the company has no intention and undertakes no obligation to update or revise any of them, except as required by law.
As is customary during the call, John and Steve will reference non-GAAP numbers in their summary of our quarterly results. For reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on EDGAR, SEDAR+ and blackberry.com websites. And with that, I'll turn the call over to John.
John Giamatteo: Terrific. Thanks Tim. And thanks to everyone for joining us today. I'm pleased to report another solid quarter for BlackBerry. We believe our strategy is working. This past quarter, we made further progress with establishing our IoT and cybersecurity businesses as stand-alone divisions, while at the same time driving additional cost efficiencies. We delivered our third consecutive quarter of sequentially better free cash usage despite the impact of seasonality. We also moved further along the path to profitability by improving both adjusted EBITDA and non-GAAP earnings per share. On the top line, both our IoT and cybersecurity divisions delivered better than expected revenue, and our cybersecurity business achieved improvements in its key ARR and dollar based new retention rate metrics.
So let me begin with the IoT division. Revenue for the quarter was $53 million, above the top end of the range we provided previously. Gross margin remains strong at 81%. As expected, due to the timing of OEM programs, development seat revenue returned to a more typical lower level than the record set in Q4. However, both royalties and professional services remain strong and at near record levels. In fact, royalties were stronger than expected and largely drove the IoT revenue outperformance. Double-clicking a little further, automotive accounted for approximately 80% of the total revenue in the first quarter, above the more typical 75%, driven in particular by digital cockpit and ADAS. Our professional services team is operating at near record levels.
To support our customers and their development programs, we continue to invest in scaling our services team. This not only helps drive near-term revenue, but also assist customers in starting production and unlocking our $815 million royalty backlog. Within automotive, this quarter we won a number of new design wins for digital cockpit and ADAS. Among the largest was a top five global automaker that is utilizing the QNX hypervisor and acoustics module as well as the QNX ADAS sensor framework in a global deployment. Another win was with a leading European OEM that will leverage a high performance Qualcomm Snapdragon chipset in the cockpit and a leading electrical vehicle OEM that will deploy QNX in their latest range of SUVs and pickups. In ADAS, we secured a win with Geely, a top-five Chinese automaker that will leverage the QNX RTOS and a Black Sesame chipset to power an L2+ ADAS stack.
The stack includes navigation on autopilot, automated lane control, adaptive cruise control, and other high performance features. Building on the initial design wins in Q4 for the latest next generation version of our RTOS SDP 8.0, this past quarter we secured further new business for this high performance, highly scalable operating system. Digicare Biomedical, a US-based medical equipment OEM, selected QNX SDP 8.0 to power a multi-parameter patient monitoring system. In other non-automotive, general embedded market winds, QNX will be used for an orthopedic surgical robot that will be utilized in knee, hip, spine, and other complex surgical procedures. In industrial automation, among other wins, was a next-generation robotic controller that will run on NXP silicon.
Last quarter, we mentioned how customers are increasingly requesting that we provide more of the software plumbing, including integrating third-party software products directly into QNX. Interest for this continues to build, and we held a number of customer workshops this past quarter. Turning to market conditions, leading analysts expect global light vehicle production in calendar year 2024 to be stable compared to 2023 at approximately 90 million units. QNX's growth is being driven by a greater penetration of this total number of units, as well as an increased content per vehicle as they become progressively smarter and more software defined. Despite a pullback in electric vehicle demand, global battery electric vehicle or BEV production is still expected to grow approximately 27% in 2024.
It's important to emphasize that the systems that QNX supports, the digital cockpit, ADAS, chassis, and others, are just as applicable to internal combustion engine vehicles as they are to EVs. QNX is well diversified and largely agnostic to the mix of powertrain. That said, in the near term, the challenges automakers are experiencing in delivering software development programs continue. These industry-level challenges remain a headwind for the QNX business this fiscal year. However, despite this, we continue to expect revenue for the full year to be in the range of $220 million to $235 million. For the second fiscal quarter, we expect revenue to be in the range of $50 million to $54 million. We expect solid revenue from royalties and professional services with potential for some sequential uplift in development seat license revenue.
So switching now to the cybersecurity division. This was a good quarter where we continue to see the benefits from the product and go to market changes that we've made. We further -- we saw further modest, but encouraging improvement in two key metrics for this division. Annual recurring revenue or ARR increased for the second consecutive quarter to $285 million. The dollar-based net retention rate or DBNRR also increased for the third consecutive quarter to 87%. Revenue was $85 million and above our guidance range. This outperformance was largely driven by improved ARR and another strong quarter for our SecuSmart business. Cybersecurity gross margin was 59% sequentially lower, again, due to the strength in SecuSmart. SecuSmart's market-leading NSA certified end-to-end encryption voice solution is really resonating in mission-critical environments, especially large governments.
This quarter, BlackBerry secured two large renewal and expansions that delivered both in-quarter revenue, as well as ARR. Given the strong book of business, we expect Q2 to be another solid quarter for SecuSmart. This is likely to mean that cyber gross margins will remain lower this coming quarter. For Cylance, over the last couple of quarters, we focused on the segments where our win rates are strongest and we're pleased with the traction we're getting. These segments include operational technology and small and medium-sized enterprises. Further, in managed services, we see a large opportunity in a highly fragmented market that has no clear leader. To better address this market, this past quarter we rebranded our GUARD solution as Cylance MDR for clarity and launched an on-demand solution that allows customers to obtain support from our MDR SOC team for issues where they need some additional help.
We see this as a bridge between software only and full 24/7 MDR coverage. We're encouraged by the pipeline that these MDR initiatives are generating, as well as the amount of new business already secured. Another focus area has been to ensure customers are using the latest versions of our Cylance product. These are the most feature rich and included capabilities such as our new AI assistant. More than 80% of Cylance customer endpoints now use version 3.0 or newer, and customer satisfaction is high. This was demonstrated by Cylance recently winning Gartner's Customers Choice Award for endpoint protection platforms for the second year in a row. The impact of this and upselling customers to our MDR offering has helped drive a third consecutive quarter of sequential DBNRR improvement for Cylance.
Our UEM product delivered better than expected renewal rates. Its high security offering, especially in on-premise environments, continues to resonate with our core customers. In the quarter, we secured a number of significant renewals in government and financial services, including a top five U.S. Bank, top five Canadian bank, CIBC, the U.S. Transportation Security Administration, or TSA, among others. Finally, turning to AtHoc, our critical events management platform, customer retention rates remain very strong, particularly among our federal government and emergency services. On the product front, this month we launched a new geofencing feature that enables more accurate tracking of key personnel in preparation for and during critical events.
Feedback from leading emerging services agencies has been very positive. In addition to revenue, costs for cybersecurity business came in better than planned, driven in part by initiatives to significantly streamline our public cloud costs. So, moving on to the outlook for the cyber business, despite a challenging macro environment that continues to elongate sales cycles across the industry, we are reiterating our full year outlook. We continue to expect cybersecurity revenue for the full fiscal year to be in the range of $350 million to $365 million. For the second fiscal quarter, we expect revenue to be in the range of $82 million to $86 million. Let me comment briefly on our licensing business. Revenue came in a little better than we expected at $6 million.
The gross margin was at 67%. We understand from Malikie, the party that purchased our non-core patent portfolio, that they're making good progress in ramping up their efforts. And while we aren't expecting any further revenue from that arrangement this fiscal year, it does present a significant potential upside for future years. So, before I turn the call over to Steve, let me provide a quick update on the efforts to separate and streamline our two core businesses. Significant progress was made this past quarter in separating and tailoring internal processes to fit the two businesses. This includes further delegating decision-making authority to the divisional management teams. Work has begun on a number of IT systems projects that we expect to deliver both a more custom-fit product for each of the two businesses, as well as drive significant cost reductions.
On costs, non-GAAP OpEx this past quarter came in at $109 million, a sequential decrease of $4 million. The $109 million was $21 million better than the $130 million baseline we gave you during the last earnings call, or $84 million better on an annualized basis. This demonstrates the significant impact of the actions that we've taken. All of this comes against the backdrop of improving fundamentals as illustrated by improvements in cybersecurity ARR and DBNRR. However, we haven't stopped there. This past quarter, we took further actions that will, in the fullness of time, drive incremental annual cost savings of approximately $20 million. The actions taken included reductions in back office headcount and facilities. The $20 million of additional cost reduction builds on the $50 million from Q3 of last year and $55 million from Q4, meeting a total of approximately $125 million to date.
This is a significant achievement by the BlackBerry team and I'm proud of how far we've come in such a short period of time. Given the progress that we've made and continue to make, we are reiterating our expectation of generating positive cash flow and adjusted EBITDA in our fourth quarter fiscal -- our fourth fiscal quarter. So let me now turn the call over to Steve, who will discuss with you our financials in more detail. Steve?
Steve Rai: Thank you, John. Good afternoon, everyone. As a reminder, unless otherwise noted, all numbers provided during my remarks, except for revenue, will be non-GAAP. Total company revenue was $144 million, which exceeded the upper end of our previously provided outlook range. As John mentioned, revenue was comprised of $53 million for IoT, $85 million for cybersecurity, and $6 million for licensing and other. Software product was approximately 85% of revenue, and professional services was the balance at approximately 15%. Of the software product component, approximately 80% was recurrent. We're pleased that such a meaningful portion of our business is repeatable and reliable. Total company gross margin was 67%. As John mentioned, we continue to make great progress on cost reductions.
Operating expenses came in $4 million lower, sequentially at $109 million. Research and development was 28% of revenue for the quarter. Sales and marketing 25% and G&A 20%. Non-GAAP operating loss was $12 million and adjusted EBITDA meaningfully beat expectations at negative $7 million. We beat expectations for net cash used in operations at $15 million, and free cash usage was $16 million, a $1 million sequential improvement compared to Q4. Given timing of some larger customer payments, we do expect a sequential increase in operating cash usage in Q2, although still significantly better than the $56 million used in Q2 last year. For the second half, we expect operating cash flow to improve sequentially in Q3 before achieving positive operating cash flow in Q4, as John mentioned.
We expect adjusted EBITDA for Q2 to be in the range of negative $5 million to negative $15 million and non-GAAP EPS of negative $0.02 to negative $0.04. For the full fiscal year, we are reiterating our expectations. We expect adjusted EBITDA to be in the range of break-even to positive $10 million, and non-GAAP EPS to be between negative $0.03 and negative $0.07. With that, I'll pass the call back to John.
John Giamatteo: Terrific. Thank you, Steve. So why don't we go ahead and proceed now to Q&A. So Carl, if you don't mind opening the lines, we can take some questions.
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