Good morning. And welcome to the BlackBerry Fiscal Year 2020 Second Quarter Results Conference Call. My name is Lisa and I'll be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question-and-answer session towards the end of the conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to our host for today's call Christopher Lee, Vice President of Finance. Please go ahead.

Thank you, Lisa. Welcome to the BlackBerry fiscal year 2020 first quarter results conference call. With me on the call today are Executive Chairman and Chief Executive Officer, John Chen, and Chief Financial Officer, Steve Capelli. 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 will 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, 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 and annual 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.

Thank you, Chris. Good morning, everybody. In our second fiscal quarter, total company revenue was $261 million. It grew 22% year-over-year. Total software and services was $256 million, growing 30% year-over-year and driven by double-digit percentage growth in software and services billings in the same period. Earnings per share were breakeven and free cash flow was positive as we continued to increase our investment in product development and go-to-market to drive long-term sustainable growth. All of our business performed at or better than our revenue expectation except for Enterprise Software and Services, or what we call ESS. I will speak more about that later. We're executing upon the full operational priorities for fiscal 2020 that we spoke about at our analyst day, which many of you have attended. Now, let me remind you what those are. They are developing BlackBerry Spark, the product, integrate BlackBerry Cylance [with] [ph] the UEM product and then with the QNX product, broadening our reach in regulated industry verticals and expanding into new verticals. Proof points of this execution during the quarter will include the following. First, the release of BlackBerry Intelligent Security, our initial use case on the Spark platform with positive validation from both the industry and customer alike. BlackBerry Intelligent Services is the foundation of our zero trust architecture. Secondly, the integration of Cylance AI technology into our product with the combined UEM and Cylance product scheduled for release in early calendar 2020 as we have previously communicated. Thirdly, new logo wins in ESS and BlackBerry Technology Solutions, or BTS, came in in government, financial services and transportation, signifying deeper penetration into regulated industry verticals. And last, but not least, expansion into new industry verticals such as of oil and gas industry. I would now move to our business commentary, starting with…

Thank you, John. I'm excited about my new role as Chief Revenue Officer. With the acquisition of Cylance and the leading-edge product launches ahead of us, this is the right time to drive a number of programs to increase the synergies of our products, people and go-to-market activities across all of our businesses. The transition of the CFO role to Steve Rai should be a smooth one as we have been working on this for a number quarters. Now on to my discussion of our Q2 financial performance. As usual, my comments on our financial performance for the fiscal quarter will be in non-GAAP terms unless specified otherwise. 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 $261 million and GAAP total company revenue of $244 million. I will break down revenue shortly. Second quarter total company gross margin was 75%. Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $17 million and excludes stock compensation expense of $1 million and restructuring costs of $1 million. Operating expenses of $193 million were down sequentially by $1 million as we optimize our spending while investing in product development and go-to-market. Our non-GAAP operating expenses exclude $36 million in amortization of acquired intangibles and $2 million in acquisition and integration costs, which collectively represents about $0.07 of our GAAP loss per share. Additionally, our non-GAAP operating expenses exclude $13 million in stock compensation expense, $4 million for software deferred commissions expense acquired, $2 million in restructuring costs and a benefit of $23 million related to the fair value adjustment of the convertible debenture. Non-GAAP operating income was $2 million and non-GAAP net income was $1 million. Non-GAAP earnings per share was zero…

Thank you, Steve. Based on the comment on this call, our financial outlook for FY 2020 for the total company year-over-year, non-GAAP revenue growth is in the range of 23% to 25%, driven by a double-digit percentage increase in billings year-over-year. We anticipate BTS and Cylance performance to be in line with the financial outlook we provided in the beginning of the fiscal 2020. We expect the softness on ESS and the retooling of the sales force to be offset by growth in Licensing. We also continue to expect total revenue non-GAAP profitability for the fiscal 2020. I will now open the call for Q&A. Lisa?

Thank you. [Operator Instructions]. And our first question comes from the line of Paul Steep from Scotia Capital. Your line is open.

Great. Good morning.

Good morning.

Could you talk a little bit more about the management changes you made? Anything in particular in terms of the leadership at Cylance or other management changes within the organization and the focus of those changes going forward?

Yeah. So, you know we made a management change by recruiting Bryan Palma. And he's running our IoT division. And he's been bringing a number of executives in. We have moved our head of Americas, I guess, to head of Europe with an emphasis of, obviously, the major markets like France and Germany and UK in addition to expanding our footprint in the Middle East. So, we have hired a new sales executive to run Americas and who's very experienced on more the entrepreneur, smaller company. I think his last role – one of his last roles was with [Lockout] [ph]. So, we are hiring a number of key executives, especially in field marketing for lead generations. So, the list goes on. And Bryan is recruiting a new team for growth. So, that's number one. On the Cylance side, we have promoted Daniel Doimo, who was the Chief Operating Officer for Cylance when we acquired them, to be the President of Cylance. Stuart McClure has unfortunately – after the integration is completed, has decided to move on. I would have wanted him to stay longer, but he had made a personal decision which we have to respect. However, the bench there are quite strong, both in sales – a gentleman by the name of Dave Castignola, he actually used to run RSA sales for many, many years. Think he's been at RSA like 15 to 20 years. It's a very long time. Very committed to the mission. The engineering team are all intact. The data scientists, the development head, the chief product officers are all staying and working very hard, integrating Cylance's business into - Cylance's technology with our CTO and our development head. So, I feel very comfortable with that. In addition to that, the cofounder of Cylance, Ryan Permeh, is now the chief security architect of BlackBerry. So, he has actually increased his role. And I can't speak for him, but he looks happy. And so, that is that. I finally got rid of Steve Capelli, so that he doesn't bother me at all. Then I have – obviously, Steve will help out to making sure that we have synergy really across different functional units, both in the go-to-market and in the kind of the strategic side of the equation. So, that, of course, will also include what is other part of the IoT which is the BTS arena, which is the QNX technology. And he continues to manage the licensing program as well as the radar program. Of course, we've got Steve Rai step into the CFO job. Steve being with the company for, as I said, five years. I had recruited him. I remember that. So, he's very qualified to do the job and we've been working in this transition for a while, as you could tell, by increasing of his involvement and role in the financial side of the house. So, let me see. Have I missed anything, Paul? I think that's about it.

That's helpful. The one follow-up, I guess, I'd have is if we think through the rest of this year for Cylance, are you guys still comfortable with a 25% to 30% growth rate that we talked about on the prior call or has that sort of moved out a little bit?

No. No, we're still comfortable with the 25% to 30% range.

Perfect. Thank you.

Okay, thank you.

Our next question comes from the line of Paul Treiber from RBC Capital Markets. Your line is open.

Thanks very much and good morning.

Good morning.

Just want to focus on the billings growth relative to revenue growth. Billings, I think you've mentioned for the last several quarters now, it's been double-digit growth. Seems like a little bit of disconnect versus revenue growth. Can you just elaborate more on billings? Perhaps where the strongest growth is in billings. Perhaps maybe on the duration of billing that you're signing. And maybe more importantly when you expect that billings growth to translate to revenue growth.

Most of the billing is on annual. Most of our terms of our contracts. There are some that multiyear, but it's not the majority of it.

Okay. And then, honing a bit more into ESS segment, based on my numbers, it looks like the revenue for ESS is probably down in the mid-teens maybe. First, is that correct? And then, just given the high mix of recurring revenue that's in your segments, does the decline stem primarily in the non-recurring side? Or could you speak to the customer renewal rates on the ESS side?

Thanks for the question. When we look at the ESS, your decline numbers are relatively correct in that component. I would not overly emphasize the non-recurring versus the recurring. So, they are somewhat balanced in the two. We're looking forward to bringing up the new products and bringing the new team on board. And I think ESS, we can expect, after a couple quarters, will be back where we wanted it to be.

Yeah. I would say that the weakness of ESS is really on execution. We did not do as well in closing the deal. And I think that might be the familiarity of the new people with either the customers or just the process of it. I did not look at it from a breakdown of recurring versus non-recurring at all. In fact, we have not wanted the team to do any non-recurring. So, today, when we talk about businesses, we are talking mostly on recurring.

Okay, that's helpful. I'll pass the line.

Thanks.

Our next question comes from the line of Daniel Chan from TD Securities. Your line is open.

Hi. Good morning.

Hi, Dan. Good morning.

Just to drill into this ESS business a little bit more, I just want to confirm, are you seeing any changes in the competitive landscape as you go out for these bids?

Yeah. We see Microsoft being a little bit more aggressive. But we also have new products coming out that we believe will – one came out already, the BIS product, and a couple of new products going to come out in the short terms which is the next six months. We believe we could be very competitive. So, we have to compete obviously, but we do see some of the landscape changes.

Okay. And then, on a related note, any thoughts on VMware's acquisition of Carbon Black and your view of how Cylance will compete in your…?

Yeah. yeah. That's really a welcome news for us. First of all, for any of you, and maybe none of you, who thought that we paid too much for Cylance, we actually paid the lowest multiple of all. Carbon Black, I think the transaction was $2.1 billion, $2.2 billion, somewhere around that number. Carbon Black is pretty much the same size as Cylance and we paid $1.4 billion. So, that tells you one thing. Secondly, I think the more important, like I said in the script, it really is a good validation of the strategy of this whole endpoint security market which we are seeing. Customer want one platform now. They don't want multiple platforms. They don't want to do the integration. And they wanted to have anywhere from the MDM all the way to the endpoint security and antiviral software, all in one platform, one console, one agent, one cloud. So, we believe that is the advantage of BlackBerry. And, obviously, VMware will always be a formidable competitor, maybe that's the way to say it. And this also helps squeeze out – change the landscape and squeeze out a lot of the one product player, smaller player. So, we absolutely believe in the one platform, we see the one platform needs especially the big industrial player and we went there first. I thought the VMware/Carbon Black thing was pretty logical.

Great. Thank you.

Our next question comes from the line of Maynard Um from Macquarie. Your line is open.

Hey, Maynard.

Good morning. I had a couple of questions. In your release, you talked about QNX being at or better than your expectations. And just a number of interesting dynamics in the auto industry, right? On the one hand, you benefit from a lot of big secular tailwinds in the market and where your content is growing per vehicle. But on the other hand, the global SAR has been weak globally and the auto-related names we cover have all been taking guidance down. So, can you just help us understand the puts and takes? When you say QNX was in line or better, were you expectations already building in end market softness or is the content growth story coming in much better than you expected?

It's more the latter than the former. We did not factor in the number of auto sales down by 2%. But on the other hand, what we have been seeing is more and more – the higher content of each car is now in software. And because we're well-positioned, A, first, on the operating system side for the safety functionality and then expanded more into the cockpit and the display and the ADAS, so kind of more the application layer. And our partnership with all the tier one as well as the chip manufacturers, like Nvidia, the NXP, the Qualcomm. So, as they increase the content of ECU, the electronic control unit, in a car, and as each of the manufacturer increase the number of software components, that benefit us. So, the content increase help us to move the ARPU up.

Got it. Okay. And then, just separately on ESS, it's down year-over-year, but also looks down sequentially as well. And I'm just wondering if we should expect ESS to remain flat from the Q2 levels until the sales management benefits take hold in a couple of quarters or if you think that the new products that are coming to market, BlackBerry Intelligent Security, et cetera, will help to drive growth in the back half? Thanks.

The current outlook looks like it's going to uptick a little bit in Q3 and Q4. We're going to see a little bit better second half than the first half. But I will be modest about it.

And is that just primarily driven by new product offerings?

It's primarily driven by new product, but it's really not that – new product always takes six to nine months. The sales cycles are not – it's not as much as that – as the sales force get orientated more correctly and they get more familiar with the account it's really the time of maturity.

Okay, great. Thank you.

Right, thanks.

Our next question comes from the line of Todd Coupland from CIBC. Your line is open.

Hi, Todd.

Just wanted you get you to look out a little bit farther. How much of integrating Cylance into ESS is required to get that back on track and where you expected it? In fact, this one platform is the key to winning longer-term. So, just talk about your thoughts out the next couple of quarters.

Yeah. As we talked about earlier, VMware and Carbon Black and the advantage of the platform, obviously we have to build that one platform. And how tightly integrated the two organization is, there are pros and cons in both extremes. Obviously, you're going to have to be tighter than today. That's for sure. All joking aside, this is where Steve Capelli needs to work on, although he doesn't want to, I know. He needs to work on that because we've got to make sure it's an efficient go-to-market, and also strategically it makes us stronger. So, I would say it remains work in progress. Maybe that's the way to say it. Hopefully, in the next quarter or two, we have a much better decision or a much better view of that and we will share about that then.

Okay, great. Thanks for the color.

Sure.

And our final question today will come from the line of James Faucette from Morgan Stanley. Your line is open.

Hi, James.

Thank you. Hey, good morning. Thank you so much. Just a couple of couple questions. First, when you look at kind of your investment and that kind of thing, how are you allocating resources? I know you're trying to manage the cash flow and earnings and how are you allocating resources to the different businesses and how are you prioritizing that? Because I think on top of the ESS, I think one of the things that's a little bit concerning for people is that it looks like Cylance has fallen to roughly flat sequentially and it sounds like you're probably looking for that to improve in the second half of your fiscal year. But just wondering how you're thinking about allocating resources.

Yeah, yeah. Good question. Currently, the resources are mainly going to Cylance. As you know, they are not making money, but we keep – we do keep increasing our investment there. And, obviously, BTS. Those are the main two engines that we are funding the most. And then, we will retool the ESS sales force and balancing the expenses there. So, those are the kind of the operating priority. We are spending – we're hiring a lot of people, especially in sales, both in ESS and Cylance. We are spending as much as we possibly can, but not losing money. And that's kind of the operating principle or guidelines and keeping a positive cash flow whenever we can.

Got it. And then, when you look at the increasing sales effort in hiring than you're doing there, how are you thinking about, like, time to productivity and some of those other metrics, particularly around Cylance and the new Spark platform offering. Just wonder how we should think about that ramp and change in trajectory.

On ESS, it's quite traditional six to nine sales cycle. So, for a relatively fully productive, we will probably take a year because people get in there, learn the principle of the business, the technology behind it and then we obviously hand them over a pipeline which included new territories, existing account base and so forth. And so, that process, when you ramp a full person up, it's probably going to take a year. But we expect to see some kind of progress before that. So, somewhere between six – starting in the six months mark, we should be seeing some progress. That's the kind of the platform, the ESS side and so forth. On Cylance side, it's a little shorter. Probably shorter by a quarter. And the reason is, well, A, that market is growing and there's a lot of demand there, but, more importantly, their product are more singular purposes, especially now what we're pushing to sell is the managed service solution called the GUARD. And the GUARD usually, a relatively easier sell than a platform sell because it's a managed service sell. So, those are kind of how we factor in and how we picture it.

Great. Thank you very much.

Sure, thank you.

I would now like to turn the call back to John Chen for closing remarks.

Oh, okay. So, thank you for all the comments and the question. So, in closing, although we are all disappointed with the short-term results, there's is no doubt, but, strategically, we are in a very strong position to win the $22 billion secure IoT software market, as well as the auto market an extension of that. We have great products and a number of new leading-edge products launching in the next six months. In addition to launching these leading-edge products, we're also working on a number of exciting partnership announcement. So, stay tuned. We're also investing heavily in our go-to-market. We just spoke about it just a minute ago. And our focus is now on execution and on growth. Thank you very much for your today. I'm sure we're going to talk soon.

This concludes today's call. Thank you for your participation. You may now disconnect.