Edited Transcript of BB.TO earnings conference call or presentation 31-Mar-20 9:00pm GMT – Yahoo Finance

WATERLOO Apr 1, 2020 (Thomson StreetEvents) -- Edited Transcript of BlackBerry Ltd earnings conference call or presentation Tuesday, March 31, 2020 at 9:00:00pm GMT

* John S. Chen

RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst

* Tripatinder S. Chowdhry

Good morning, and welcome to the BlackBerry Fiscal Fourth Quarter and Fiscal Year 2020 Results Conference Call. My name is Josh, 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 would now like to turn today's call over to Christopher Lee, Vice President of Finance. Please go ahead.

Thank you, Josh. Welcome to the BlackBerry Fiscal Fourth Quarter and Fiscal Year 2020 Results Conference Call. With me on the call today are our 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 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 and the COVID-19 coronavirus outbreak, which is negatively impacting public health, financial markets and global economic activity. 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.

I will now turn the call over to John.

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John S. Chen, BlackBerry Limited - Executive Chairman & CEO [3]

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Thank you, Chris. Good afternoon, everybody. Before I speak about the BlackBerry results, I'd like to acknowledge everyone who is doing all they can to contain and overcome the COVID-19 virus. BlackBerry has taken a number of steps to help the global community, including enabling remote working for our customers and employees. And we are taking the lead by offering a limited license of our enterprise software products free to organizations around the world for 60 days.

Now on to the results. As Chris stated, I will reference non-GAAP number in my summary of our financial results, unless otherwise stated. Let me start off by some highlights for fiscal 2020, the fiscal year entirely.

BlackBerry achieved another year of profitable growth. We're pleased with $1.1 billion in total company revenue, (inaudible) 20% growth year-over-year. Software and Services revenue grew 26% year-over-year. Earnings per share of $0.13, this amount exceeds the expectation we raised during the year. Positive free cash flow of $14 million.

Perhaps the best news is the strong set of products released in the past fiscal year. We released over 30 new products. I'd like to give you some highlights of the one that we're really excited about, QNX Hypervisor 2.0 for Safety, which achieves the highest ISO safety standard in the industry.

The second product, BlackBerry Intelligent Security, which uses AI to provide a depth of security and continuous authentication to overcome the FedEx security vulnerabilities. Third, the CylanceOPTICS 2.4, our enhanced endpoint detection and response product. Then followed by the single-agent platform to deploy both CylancePROTECT as well as CylanceOPTICS, followed by our Mobile Threat Defense product, MTD, product that integrates our AI-based endpoint security capabilities with our portfolio of endpoint management technologies. Our peers do not have a full mobile solution like we do.

And last, but not final, the BlackBerry Digital Workplace, which delivers lightweight secure desktop virtualization, while eliminating the need for VPN and having AI-based protection. Digital Workplace can be deployed on corporate and personally owned devices used by the entire sales force -- or the work force, sorry, excuse me, the work force. This is a must-have for secure remote work activity and business continuity.

Additionally, we made tremendous progress in development of the Spark platform. I will speak more about that later.

Now let me provide some highlights for the fourth quarter, fourth fiscal quarter. Total revenue came in at $291 million. We achieved positive year-over-year Software and Services billing growth. We also have a healthy sequential billing performance from enterprise software and services. Gross margin was 77%. Operating income was $51 million, and operating margin was 18%.

Both of these are very strong results. Compared sequentially, it's an increase from $20 million and 7%, respectively, from Q3. EPS came in at $0.09, which is $0.05 higher than expectations we had for the quarter. Free cash flow was $32 million, contributing to a total ending cash and investment balance of $990 million.

Let's move into the business commentary, and let me start with the sentence on licensing business. Revenue increased 9% year-over-year, were better-than-expected performance due to some business that actually came in early.

Moving on to the IoT business. The IoT business underperformed in the quarter, due primarily to BTS. BTS has been unexpectedly impacted by the slowdown of the auto industry supply chain due to the COVID-19. Unfortunately, we expect this trend to continue for the near future due to a temporary global auto production shutdowns and related slowdowns of auto sales.

Customers and prospects have become more cautious in the decision-making related to capital expenditure and development. The leading indicator to us was that we expected 2 large transactions with reliable customers that were unfortunately delayed. While our fourth fiscal quarter results were impacted, we believe these 2 delayed transactions will occur as the business environment return to normal.

On a positive note, BlackBerry QNX continued to gain design wins. We were chosen for 31 design wins in the quarter. 16, 1-6, were in the automotive market and 15 were in the general embedded market. Within the auto market, the vast majority of the design wins came in were ADAS, the advanced driver assistance program, and digital instrument cluster applications. These wins secured for our customer like Bosch, Continental and Visteon, just to name a few of those Tier 1, continue the trend of increasing ARPU and volume in the future, and we continue to be the leading provider of safety certified software to the industry.

Within the general embedded market, we saw increased demand in the industrial and medical verticals, including being chosen by Wabtec Corporation, a global leader in transportation solutions who merged with GE Transportation last year. And as noted in the last few quarters, growth in the general embedded market has been a stated priority -- a strategic priority for us at BlackBerry.

A brief update on our Radar business. In the quarter, we saw continued growth in both the number of shipped units and service revenue. We added 7 new customers, resulting in 50 new customers, 5-0, in the fiscal year. Additionally, we continue to have steady repeat buying from existing customers.

Moving on to our enterprise software and services business. The sales team executed well, resulting in sequential billing growth in the high teens percentage. Our fourth quarter ESS billing was at its highest level in fiscal 2020. The billing strength was across all the ESS businesses, led by strong performance on both the UEM, the Endpoint Management, as well as AtHoc.

On the customer front, our regulated industry business, such as government, financial services and health care, remains healthy and stable. We also experienced strength in our nonregulated industry business, most notably the energy and utility vertical as well as the manufacturing vertical. We added several large size wins, both new logos and upsell, in competitive situation. Let me highlight a few.

General Dynamics, a Fortune 100 aerospace and defense leaders. CGI, a global professional services and consulting company. Johns Hopkins Aramco Healthcare, a leading health care provider in Saudi Arabia. EVN Group, one of the largest producers and transporters of electricity in Europe. And Nippon Steel, one of the world's largest steel producers. Our pipeline is building for our new product as well, notably for the MTD, the Mobile Threat Defense; and the BlackBerry Intelligent Security.

Now on to our Finance -- BlackBerry Finance business. Revenue was up slightly year-over-year against a reasonably tough comp. Billing increased sequentially, as we anticipated. We are highly competitive against other next-generation AV players because of the following reasons. Number one, BlackBerry Finance is the best mobility solution in the market. Number two, our lightweight solution protect all endpoints, whether they're connected or not. Other next-gen AV players only protect when the endpoint is connected to the cloud. Number three, instead of being cloud-only, we support cloud-managed, on-premise and hybrid deployment models. And last, but not least, we're compatible with both the current and legacy device operating system, especially on the desktop.

This was a strong quarter of new logo, Cylance won over 300 new customers. Some of the new logos won in the competitive environment include the Fonterra Co-operative Group, the world's largest dairy exporters; a notable state health care organization in Australia, unfortunately, we don't have permission to name the name; a Fortune 500 financial services company based in the Midwest of the United States; Mizuho Security, which was a cross-sell opportunity to leverage our UEM relationships; and Hartford Financial Services Group, a leading insurance -- a leader in insurance vertical that was won through our managed service partner with Verizon.

As a result, ARR was $167 million, up 9% year-over-year. Our dollar-based net retention rates continue to be over 90%. And we ended the quarter with 18% year-over-year growth in active subscription customers. And as I previously said, we believe the momentum will only continue now that BlackBerry Cylance is a pooled portfolio plus other BlackBerry capabilities in a market.

Before I turn the call over to Steve, let me update you on the Spark platform and the Cylance integration. We have made tangible progress in the development of Spark, our secure IoT platform. This past February, we announced the release of our unified endpoint security or UES layer within the Spark platform that leverages AI machine learning and automation to deliver zero-trust security across all the fixed and mobile endpoints.

The UES layer is supported by 6 initial products, which are endpoint protection platform, the EPP; endpoint detection and respond, the EDR; the Mobile Threat Defense, the MTD; continuous authentication; Data Loss Prevention, known as DLP; and Secure Web Gateway. These products work seamlessly together to analyze and define risk, make contextual decision based on large amount of shared data and dynamically apply a set of policy control to address the risks of our customer environment.

Our platform development -- this platform development is in line with the marketplace convergence noted by Gartner. We've seen the consolidation of MTD offerings with EDR and EPP tools and calling this combined stack Unified Endpoint Security. Gartner sees this stack forming a single solution during the next 3 to 5 years and indicated their organization should invest with UES in mind. Gartner also noted that 70% of organization will need a combined endpoint management counsel by 2024, and 50% of the organization will have to have Mobile Threat Defense by 2022, which is up from 20% this year.

Given our product and the marketplace progression, we are now ready to increase go-to-market synergies and go after these big UES and UEM opportunities. Accordingly, we have successfully integrated the entire Cylance organization, including sales and R&D teams, into our IoT business segment effective March 1, 2020, which was just a month ago.

We believe the unified team needs to broader customer coverage, a richer product road map, a clearer sales message, and most importantly, very differentiated offerings. The value proposition to a customer is that BlackBerry Spark provide the highest level of security and management with a simpler and more productive user experience on any endpoint, fixed or mobile, from any location over any network.

Many of you actually have asked me over the past several quarters about BlackBerry's prospect in the competitive landscape, especially against much larger players. I could not provide you a complete answer then, only to tell you that we're working on it, because the solution at the time was under development. We now have a differentiated technology architecture that is ready to ship in the market. Today, our UES products work with BlackBerry UEM. However, we recognize that customer may be using a competitor's who offers more than one UEM products. Therefore, in the near future, as part of our road map, our UES solution will be made compatible with Intune, AirWatch and other competitors' UEM products to give customer the best of both worlds, mainly preserving investment, while enjoying the benefit of the higher security and management that BlackBerry provides.

We believe UES changes the competitive dynamics, and our operating objectives now is to gain market share, because UES is complementary too, but not a direct competitor of the non-Blackberry UEM products. And also, Blackberry UEM will maintain our leadership in the regulated industry due to our continued focus and commitment on security and management. In time, we believe this Spark architecture expands our total addressable market including in the IoT security area.

With that, let me turn over to Steve to provide more details about our financial performance.

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Steve Rai, BlackBerry Limited - CFO [4]

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Thank you, John. My comments on our financial performance for the fiscal quarter will be in non-GAAP terms unless otherwise noted. Please refer to the supplemental table and the press release for the GAAP and non-GAAP details and reconciliation.

We delivered fourth quarter non-GAAP total company revenue of $291 million and GAAP total company revenue of $282 million. I will break down revenue shortly. Fourth quarter total company gross margin was 77%. Our non-GAAP gross margin includes software deferred revenue acquired, but not recognized of $9 million and excludes stock compensation expense of $2 million.

Fourth quarter operating expenses of $172 million were down sequentially by $23 million. And we continue to invest in product development and go-to-market. At the same time, we continue to demonstrate cost discipline across the entire company and gain operating leverage, in particular at Cylance. Our non-GAAP operating expenses exclude $35 million in amortization of acquired intangibles, which equates to about $0.06 impact to GAAP earnings per share.

Additionally, our non-GAAP operating expenses exclude $27 million in goodwill and long-term asset impairment charges, $15 million in stock compensation expense, $3 million for software deferred commissions expense acquired, $1 million in acquisition and integration costs, $1 million in restructuring costs and a charge of $5 million related to the fair value adjustment on the convertible debenture. Fourth quarter non-GAAP operating income was $51 million, 5-1. And fourth quarter non-GAAP net income was also $51 million.

Non-GAAP earnings per share was $0.09 in the quarter. Our adjusted EBITDA was $68 million this quarter, excluding the non-GAAP adjustments previously mentioned. This equates to an adjusted EBITDA margin of 23%.

I'll now provide a breakdown of our revenue in the quarter. Total Software and Services revenue was $287 million, representing 99% of total company revenue. Other revenue is solely comprised of service access fees, which were $4 million and were expected to decline, given the continued wind down of this legacy business. Recurring Software and Services revenue, excluding IP licensing and professional services revenue, was about 90% in the quarter.

Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $990 million at February 29, 2020, which increased by $20 million from November 30, 2019. Our net cash position was $385 million at the end of the quarter. Fourth quarter free cash flow before considering the impact of acquisition and integration expenses, restructuring costs and legal proceedings was positive $36 million. Cash generated from operations was $35 million and capital expenditures were $3 million.

That concludes my comments. I'll turn the call back to John to provide our financial outlook for fiscal 2021.

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John S. Chen, BlackBerry Limited - Executive Chairman & CEO [5]

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Thank you, Steve. Currently, I'm sure you all agree, there's a lot of uncertainty across the global economy due to the COVID-19. Therefore, it is not prudent for BlackBerry to provide any specific fiscal 2021 financial outlook, as things are changing on almost on a daily basis. However, I'd like to make some macro comments on our business.

Our revenue most likely will be negatively impacted by continued headwinds to global auto production and sales. We anticipate continued delay in capital spending in the auto as well as the other industry. At the same time, this negative impact could be partially offset, because our product and services portfolio is well suited to help enterprise meet the challenges of business continuity, driven by the dramatic expansion of remote workers -- the number of remote workers. We are known for offering the best security and productivity solution. These products and services, including our UEM product; Cylance; digital workspace; Secusmart, which is secure voice and text solution; as well as AtHoc, our crisis communication solution, including the new Situation Response product, which is the entire life cycle of managing crisis.

In fact, we are experiencing increased demand. More transaction and increase comes in daily from new and existing customers, resulting in more licenses being deployed.

Furthermore, our finance products, including CylanceGUARD, which is our cloud-based managed detection and response offering, are helping customer to combat growing cyber security and privacy risk, as the number of BYOD endpoints increases in a remote working environment.

While it is difficult to predict the volume of business year-over-year, the company will remain strongly focused on the overall financial health in fiscal 2021. The management team has managed through in certain times in the past and has a track record in balancing profitability and investment for our long-term growth.

As it related to the shape of the fiscal '2021, we anticipate a tough first quarter due to the COVID-19 impact on our business. This may linger into the second quarter, but we do anticipate a stronger second half of fiscal year versus the first half of the fiscal year. When looking beyond 2021, we do not believe this current global crisis changes BlackBerry's strategy and the thesis of any of our long-term profitability growth and value creation.

I would now like to open up for Q&A. Josh?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Daniel Chan with TD Securities.

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Daniel Chan, TD Securities Equity Research - Research Analyst [2]

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Now given the macro uncertainty, how are you thinking about capital requirements? In particular, how much do you need? And what are your plans for the convert?

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John S. Chen, BlackBerry Limited - Executive Chairman & CEO [3]

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Yes, we have -- after paying off the convert, we have $385 million of cash or equivalent. And so we have made some assumptions under a stress test environment. A couple of assumptions. Number one, we will pay back our convert. The good news of paying back our convert is that we would save roughly about $23 million a year in interest payment. Obviously, the cash balance will go down quite a bit. We also assume there is no financing work being done. And part of the reason is, as you know very well, you probably know much better than I do. Last couple of weeks, the market isn't really available. I think it's starting to loosen up a little bit, but we assume no financing. We assume no dramatic cutback of headcount or investment for the future. This is why I said earlier, we're going to balance profitability and long-term growth. We know this will pass. We know things will come back to normal. And we believe we have very competitive strategy and products. So we don't want to compromise the future. At the same time, we don't want to put ourselves in the financial difficult position. So we're going to be working on balancing that. But we're not saying that we're going to hold or halt anything to disrupt our investment thesis. Given those, that's kind of the background. We went through the scenario of revenue coming down by 20%, by 30%, by 50%, you would expect anybody to do in modeling. And we believe we are quite comfortable. Unless it's in very extreme conditions, which we are not anticipating, we're quite comfortable to be able to last the liquidity and the health -- financial health for a couple of years.

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Daniel Chan, TD Securities Equity Research - Research Analyst [4]

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That's very helpful. I want to shift gears a little bit to the enterprise software side. It sounds like things are improving there. Can you give us a sense on whether the enterprise software segment grew year-over-year? And maybe give us a sense of how well you see your go-to-market and your channel, is it developing the way that you anticipated?

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John S. Chen, BlackBerry Limited - Executive Chairman & CEO [5]

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Yes. I don't have -- and I think it's just the year-over-year numbers. So -- but I could tell you, from a billings growth perspective, we saw very healthy Q4, better than double digit over Q3. And so that feels good. The businesses are there. We have a hiccup. I think we overcame the hiccup. We have people very committed going after the business. We've got infrastructure build out for both the renew and new businesses that we won't let fall through the crack. A lot of that, it was really us doing -- our doing for not being more diligent on some of the stuff. So now I think those are all overcome. We have a number of layers that watches our business, as I said, both in the renewal and in new logo -- going after the new logo. We have a bigger sales force now. And the combination of the Cylance into this IoT portfolio with the UES makes it even more exciting, because now, each of our sales rep has small things to sell. The Cylance sales rep who sell the UEM, AtHoc and other products, mainly UEM, I believe, and vice-versa, they now -- the UEM sales force now combined as one could sell the UES product, which included a lot of the Cylance and AI technology. So we feel good about the focus. We feel good about how we aligned the territories. So majority of our sales is still going direct. We are building channel business, but that's probably -- that benefit will probably kick in midyear this year or maybe towards the end of the year.

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Operator [6]

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And your next question comes from Daniel Bartus with Bank of America.

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Daniel Bartus, BofA Merrill Lynch, Research Division - Research Analyst [7]

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First, I wanted to ask about the competitive environment for endpoint security. So on the one hand, we have CrowdStrike growing very well, and they have a similar approach, it seems like, the Cylance. And then you have others like VMware and Microsoft that can follow your moves to integrate the classic UEM business with the endpoint security potentially. So it'd be great to just get an update on the competitive landscape you're seeing for Cylance. And I'm curious if the combined UEM security is a real conversation yet with customers? And then I have a quick follow-up.

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John S. Chen, BlackBerry Limited - Executive Chairman & CEO [8]

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Okay. Okay, that's a good question. So I took a little while to label -- to lay down, sorry, not label -- to lay down why we win some of the Cylance deal. As I said earlier, Cylance have secured over 300 new logos in the quarter. And so we're winning against somebody. I don't want to name names who we're going against. And it looks like -- to summarize, it looks like where the Cylance won -- the win rate basically comes from: a, we are the mobile leader; b, we don't always need the cloud, so we do secure protection on the endpoint, both offline and online, and that's the differentiators. We have now managed service and a full suite of products. So that also was a factor. So those are -- among other things, those are 3 that I feel jumped out at me when I look at the win. The combination of that whole set of Cylance portfolio with the managed service and the management tools that UEM have is exactly where the market is going and is verified and confirmed by Gartner. That's what they named as whole segment called UES, Unified Endpoint Security, which is a combination of mobile and fixed, cloud and on-premise, and also manages and threat detection and protection. So we just happened to be an early provider of the product, and I'm hoping that, therefore give us a much more competitive advantage against some of our big players and big competitors out there. And then we'll win, hopefully, a fair share of the deals. Finally, most of you have asked me the question about there are some of our traditional competitors that provide site licenses. And if you look at everything that we offer, we are above, for example, a license called ELA 5 -- will be a lot cheaper than ELA 5 and much better security product. So ELA 5 is not free, unlike the ELA 3. So I believe that we could be competitive out there.

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Edited Transcript of BB.TO earnings conference call or presentation 31-Mar-20 9:00pm GMT - Yahoo Finance

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