Good afternoon, and welcome to the BlackBerry Third Quarter Fiscal Year 2024 Results Conference Call. My name is Chuck, 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 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 today's call over to Mr. Tim Foote, Vice president of BlackBerry Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good afternoon, everyone, and welcome to BlackBerry's third quarter 2024 earnings conference call. I'm delighted to say that joining me on today's call is BlackBerry's new 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 Harbor provisions of applicable US 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 a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, SEDAR+, and blackberry.com websites. And with that, I'll turn the call over to John.

Thanks, Tim, and hello, everyone. My name is John Giamatteo and I'm delighted to be joining you all today as BlackBerry's new CEO. I'm sure some of you will already know me from my time as President of the Cybersecurity Business unit, where, while we still have work to do, the team has made significant progress with product, go-to-market, and overall operational efficiency during the past couple of years. As President, I've been at the heart of BlackBerry's operations, and I'm already very familiar with how things work, the challenges we face, and the steps we need to take going forward. I've stepped into this role at a pivotal time for BlackBerry as we have a lot of work ahead of us. Among my first priorities is to fully separate the IoT and Cybersecurity business units, right-sizing our operations, and driving efficiencies in the process. But I'll come back to this more later in the call. Let me first discuss our performance this quarter, starting with the IoT business. The IoT team delivered the strongest quarter for revenue for several years despite a number of industry-level headwinds. Revenue for the quarter increased 12% sequentially and 8% year-on-year to $55 million. Gross margin remained at a strong 84%. The main driver for revenue growth this quarter was the automotive and in particular, Advanced Driver Assistance Systems, or ADAS. Revenue from royalties increased sequentially, and while still below the long-term average, represented 44% of QNX revenue. Development seats was 32%, and services 24% of revenue in the quarter. In addition to delivering solid revenue, we maintained our design win momentum, adding meaningfully to our QNX royalty backlog. This was a strong quarter for new ADAS-related design wins. We secured a design win for our RTOS for safety and secure C++ libraries for…

Thank you, John. As always, my comments on our financial performance will be in non-GAAP terms unless otherwise noted. Total Company revenue for the third quarter was $175 million. IoT revenue was $55 million. Cybersecurity revenue was $114. And licensing revenue was $6 million. The percentage of software product revenue that was recurring, decreased to approximately 70%, 7-0, primarily driven by the impact of Secusmart revenue related to the Malaysia deal that John referenced. Total Company gross margin improved to 73%, also largely driven by Malaysia. Operating expenses were $115 million, broadly flat quarter-on-quarter, but as in Q2, benefiting from some one-time items such as reaching benefit caps for the calendar year. Non-GAAP operating expenses exclude a $13 million fair value gain on the convertible debentures, a $11 million in impairment of long-lived assets, $9 million in amortization of acquired intangibles, $9 million in restructuring expenses, and $7 million in stock compensation expense. The non-GAAP operating profit was $13 million, and non-GAAP net profit for the third quarter was $3 million. BlackBerry delivered $0.01 of non-GAAP basic earnings per share for the quarter, beating expectations. Adjusted EBITDA, excluding the Non-GAAP adjustments outlined, was $18 million. Total cash, cash equivalents, and investments decreased to $271 million as at November 30th, due in part to cash used by operating activities of $31 million, but primarily to a $215 million net reduction in outstanding debt. During the quarter, the $365 million of convertible debentures issued in September 2020 were fully repaid as previously communicated. A smaller $150 million of short-term convertible debentures were then issued, which mature in February 2024, with an option to extend to May 2024 should both parties agree. Despite significant increases in the level of interest rates since 2020, the coupon rate on these extension debentures remains at 1.75% and the conversion price remains at $6. This provides BlackBerry with meaningful additional liquidity at attractive rates while we evaluate longer-term financing needs. That concludes my comments, and I'll turn it back to John.

Thank you, Steve. Last week, we announced a change in strategic direction of the Company. The Board, with input from its advisors, has reassessed the earlier decision to pursue a subsidiary IPO of the IoT business. We believe, there is increased optionality for optimizing shareholder value by stepping back from that path and instead focusing on fully separating the IoT and Cyber businesses. As part of this, we will have the opportunity to optimize and streamline processes, building even stronger standalone divisions. A key focus is to return BlackBerry to profitability and positive cash flow, and this requires us to take some tough decisions on our cost structure. In Q3, we took a number of actions to reduce expenses in the Cyber business and the back office, that will reduce our cost run rate by about $50 million per year. These decisions, along with strong collection receivables, played a part in almost halving our operating cash usage from $56 million last quarter to $31 million in Q3. Given the combination of strong billings this past quarter and the benefit of a full quarter of cost reductions, we expect to further improve operating cash flow in Q4. However, we believe that we can go further. BlackBerry hasn't been in an investment mode, particularly in Cyber, and now that a number of key product enhancements have been brought to market, we're in a position to return investment levels closer to industry averages. Furthermore, BlackBerry's business has significantly pivoted and made a number of acquisitions over the years, and we see ways to streamline how our back office works. For instance, despite recent cost reduction efforts, we still have 36 offices worldwide. We have some duplicative teams. To illustrate the potential opportunities, let me outline current OpEx expectations for Q4. As mentioned, we…

Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

Great. Thanks for taking my questions. And John, congratulations on promotion to CEO.

Thank you.

I just want to dig in, I guess to start with on the Cybersecurity outlook, given the probability of some of the larger government deals. Are these deals just taking longer to close, which is common for some of the large deals in this tougher macro environment, or have some been lost? And I guess given the lumpiness within Cybersecurity, how should we think maybe about a run rate for the business off of what your guidance is this year into 2025? I know you're not providing long-term guidance, but do you think this business grows off of what you put up for 2024? Thank you.

Yes. Great questions, across the board, and I think, a couple of things. One, to the first question around the deals and the lumpiness of them, and did they go away or is it timing? A couple of things. I think a number of them are more timing-related activities. That tends to be the way it is. I think some of the dynamics that's happening right now with whether it's the continuing the resolution activity in the US government, that tends to slow things down a little bit. And there are similar kinds of things happening in the German government, which obviously we have a big footprint with our Secusmart business. So, I think a number of them are more timing-related. And some of them -- there is one deal in particular where they decided to go more towards an IoT -- iOS solution than an Android solution, and that lowers a little bit of the addressable market for us as they make a decision to operate or adapt another operating system. So, on that perspective, it's some of it is timing, a little bit of a customer moving into a different technology that tends to use a little bit less of what we offer. But I think that's how I would address that. As far as longer-term with governments, which it does represent, it's naturally a pretty lumpy business, just the way that works. We were fortunate enough, this quarter the lumps went our way, with Malaysia and DHS, and a couple of other things. So, my commitment is to just give you the best, transparent, realistic view of this business that I possibly have, which is why I'd love to be able to say, some of these opportunities are in the forecast and give you a bit of a higher guidance, but I want to be balanced and prudent and pragmatic about it. And that's my commitment as I move into this new role, to try and give you as much transparency as I can.

Okay. Great. And maybe just a follow-up question for you on a bigger picture. It sounds like you've already made some really hard decisions on cutting costs on the Cybersecurity side, but it sounds like maybe IoT, you're leaving alone or does that business have areas you can streamline also? Just how -- I know you've been in the CEO seat for a short time, but how are you thinking about allocating resources to the two businesses as you work towards reporting them separately?

Yes. I think that's probably something it's worth coming back to next quarter as we dig into it. I mean I think it's fair to say, the IoT business is much -- in a better, and a more stable place. It's definitely been more of a growth trajectory. So, naturally, we take that into account. We don't want to disrupt the momentum that we're seeing on the IoT side at all. But since it's day seven in the job in this new role, if you give me a little more time, we'll come back to you with some more insights next quarter.

Yes, fair enough. Best wishes for success in your new role and happy holidays to everybody on the call.

Same to you. Thank you.

The next question will come from Paul Treiber with RBC Capital Markets. Please go ahead.

Thanks for taking the question, and good afternoon. Just a high-level question, just in regards to the separating of QNX and Cyber, you mentioned, better position the Company for strategic alternatives. What specifically do you mean by that? I mean, are you looking at divesting some segments or an entire segment here?

I think it gives us, Paul, just more flexibility. I think in the past, they've been a little bit blended. We had Cyber, we had IoT, we had a corporate convergence strategy, which sometimes I think limits some of the optionality that we have out there. So, making a very decisive decision around two business units, independent, driving towards profitability, we think that gives us more optionality, whether -- whatever they may be, whether that's a spin-off, a sale, a -- we're going to -- our board will consider the best options that maximize our shareholder value. And in the interim, getting them aligned independently, focused on their large -- each of them have large respective TAMs in the industry. We kind of just felt that's a better approach and gives us better options for the future.

Okay. Thanks for that color. The second question, just on liquidity and cash flow, when you comment on Q4 cash flow improving, it's helpful, but how do we think about liquidity here, particularly with the converts, there's an option to extend them, but as you separate the two businesses, how do you think about managing cash and how much cash would be consumed in the short term, just with any restructuring payouts?

So, a couple of things, Paul. So, we're -- obviously, as John said, next quarter, which would be our year-end, we'll all be in a position to provide more color concretely on those plans. And there will be updates, of course, with respect to the financing structure there. Certainly we're pursuing and exploring longer-term financing and looking at the different options to put that in place, where which is being actively worked. We've got sufficient liquidity and access to capital to kind of execute on the plan. Obviously, the goal in the very short term is to get both businesses generating positive cash flow. So, there isn't a -- there shouldn't be a significant drag in the business after a relatively short period of time. But we're working on those plans.

And then just last question for me just back to John. The -- I mean, you've been Head of the Cyber business for a couple of years. You've seen the investments in product and go-to-market. Where do you see the business at strategically, in terms of product, in terms of trying to capture mind share with customers, and how do you see the growth trajectory going forward in that business?

Yes. The Cyber business unit, it -- a number of different dynamics, because we have a number of different products that address different -- but one thing I will call out was, like, the Malaysia deal was actually an interesting example of how they bought into our whole vision of the portfolio. And maybe one product in the portfolio, maybe it's -- maybe there is a better product out there, maybe -- but the overall holistic solution and how we delivered it really caught their attention and convinced them that we were the right company to partner with. So, I do think the entire portfolio approach is helpful in certain accounts, like a big government like that, that's looking for a broad set of solutions. But from -- our AtHoc business is firing on all cylinders, gaining market share. Our Secusmart business, very, very strong in the German government, and we've got some nice wins outside of Germany this year, which we think is a step in the right direction. UES, we've been focused on the Cylance platform to really get that product back to where we need it to be. There were some gaps in the portfolio, there were some quality issues. So, each of them have a number of -- and UEM is a very mature product that has a little bit less growth. So, holistically, we think there is an opportunity for this business to grow. We're looking very closely at what -- or as we think about next year's plans and AOP, and we'll come back to you with a projection for next quarter. But a lot of different dynamics in the Cyber business, which is why sometimes it's hard to handicap growth because of these factors that kind of run within it. So, we'll come back to you with more details next quarter, but hopefully, that gives you a few snippets.

Thanks.

The next question will come from Luke Junk with Baird. Please go ahead.

Good afternoon. Thanks for taking the questions. I want to start with IoT. Just hoping you could comment at a high level on the bookings environment in automotive. Just wondering if you're seeing any impact of moderating EV demand on the software side, realizing that these macro issues we've been dealing with have been pre-existing for a few quarters now, but is EV interplaying with that at all, John?

Yes. We -- we've definitely seen that, EV. Some of the big next-generation EV projects, there's been some delays by some of the big OEMs. So, absolutely we're seeing. But I would say on this one, we are more -- the underlying fundamentals of our IoT business I believe just couldn't be stronger right now. But when I think about the backlog that we have for our royalties, when you think about the design wins, we had a number of design wins, automotive and otherwise, with GEM and in other things that we're getting, we think that's an opportunity. IVY as a bit of a -- when we think of how well-positioned we are into that market, I think we're in a really good position to weather some of these headwinds that come from time to time. And this -- the last couple of quarters, there's been some headwinds between the strikes with UAW, between some of the -- as a result, some of the manufacturers pull back a little bit on some of their more sophisticated vehicles. But I think all in all, we're really well positioned. As these headwinds subside and we start seeing more things rolling off the lines and more of these new designs which inevitably are going to come to market, we think we're really well positioned. Very strong backlog, which I think sets us up well for the future.

Thanks for that. And then, a bigger picture, I appreciate the color on -- you're looking at the cost structure, cash flows, those sorts of things, and John, I'm just hoping to understand your approach and really just wading of time between looking at BlackBerry overall operations at the segment level, should we think of you having sort of a player-coach mentality?

A player-coach mentality, well, maybe that's an interesting way to describe it. We do -- we got a great team in IoT, great strong leadership, so built a really strong business there. So, absolutely, we want to give them the resources, the support, the financial back, anything that the bigger Company can provide. So, I definitely look at it as two companies on their own, driving their own businesses, and with kind of a holding Company structure that's there to support them with all the things that they need to drive their business forward. So, I don't know if you call that player-coach, but certainly maybe parent-child, you want your children to get up and run and reach for the stars, and we're going to do everything we can to give them everything they need to do it.

Okay. I'll leave it there. Thank you.

Thanks, Luke.

The next question will come from Trip Chowdhry with Global Equities research. Please go ahead.

Thank you so much, and a very good quarter. I had a couple of questions. First, on Cybersecurity. Traditional machine learning created a new set of challenges in Cybersecurity which Cylance and BlackBerry addressed very well. And now we have -- we are having these generative AI, including transformer models, which are coming into the marketplace. I was wondering what kind of a market expansion you see these new technologies pose to BlackBerry, and how does BlackBerry plan to monetize or capitalize on these new threats that are going to come because of these new generative technologies? And then I have a follow-up.

Thanks, Trip. Yes, absolutely. We think AI has a big role to play in this industry. It's actually one of the things that we think is one of our differentiators, is our machine learning, our AI technology that underpins our entire portfolio. Cylance was, I would say, the inventor, the creator of AI/ML cybersecurity. We're on our seventh generation of machine learning where our efficacy rates are the best that they've ever been. So, this is something that we watch closely. We invest close. We incorporate some of the technology not only into our cyber threat intelligence but just how we even in our EDR capabilities. When a notification comes up, how can we help our SOC analysts, our customers, identify these issues much more quickly using AI technology. So, we think it has a very big role to play. We're going to continue to invest in it and leverage it as a way for us to grow our revenue.

Perfect. The second question is, like some of the previous people also asked about software in these new generation cars, including EVs, and even as of today, Porsche has not got your software system in place. The software continues to be their weakest link, including these new-generation companies, Lucid, Fisker, you name them, and traditional companies too. So, I was wondering like, what is preventing these established automakers from fully embracing BlackBerry and QNX, and why are they still going in the -- on the path of pretty much failure to do it themselves when they can't even -- they don't even have the software skills? I think they can just buy-versus-make decision should be no brainer. Why are these companies not embracing QNX and have a jumpstart on the software-defined vehicles? Any thoughts, I'll appreciate it. And thanks again. Good execution this quarter.

Thanks, Trip. Trip, I was just wondering if you want to come over and join our sales team, because I love it. Absolutely, we have -- we feel the same that there is software-defined vehicles, and bringing that technology in just is good for everybody. It's good for the OEM, it's good for their customers, good for us. We're fortunate, the team has done a great job. We are very entrenched. We're -- with over 235 million vehicles that have QNX today. The design wins with our big customers today, I think positions us really well. I think we're getting our fair share of the market, and I think there is more to be had. I think there has been some headwinds this year with just everything going on with the economy and strikes and whatever, that's maybe having them pull back a little bit. But when the floodgates open and they bring in these next generation EV vehicles and that have more software in them than ever before, I think we couldn't be better positioned to capture even more of that market share, particularly with things like our most recent release, SDP 8.0. I think that leverages the processor capacity and that next-generation capability. So, some we're all over, we're going to continue to be all over, and we're hopeful to be announcing more and more design wins for you guys in the future.

Thank you so much. All the best

Thanks, Trip.

The next question will come from Todd Copeland with CIBC. Please go ahead.

Yes. Good evening. I just had a couple of cash questions. What's the expectation for cash or restructuring cost relating to Cyber?

So we're working through that, but it's not going to be astronomical. It'll be well within our means to handle with the available resources.

Okay. And will that -- is that expected to be booked in the fourth quarter?

You'll have to stay tuned, but we'll provide an update. We're working through that.

Okay. And at this point, what is the expected timing to get Cyber cash flow positive, with the track you're getting yourself on?

Todd, I think that's something we're going to have to come back to you on. We are -- made great strides over the course of the last couple of years. We've got more plans that we're working through now, and I think it's probably best for us to give you a more comprehensive update in next quarter after we've done some of that work.

I see. Okay. And then, I just wanted to make sure I had this right. It sounded like you said you expected to have the separation complete next fiscal year, so it sounds like it's going to take a little while to work through the redundancies, the 36 offices, and whatever other optimization plans you want to put in place. Can you just talk us through a rough timeline on that? Thanks a lot.

Yes. I think on this one, it's -- I think it's going to be one of those things where as we go through the process, there is going to be some low-hanging fruit, some quick wins, some things that we can do really quickly that will save us some money, get the teams aligned, etc. And then there'll be other ones that are going to take a little bit longer. But I think mid-calendar year, getting into a position where we can have the majority of the functions and capabilities within the two business units up and running and standalone, I think that would be success for us. I think there'll be some straggling things. There might be some IT-related things that take a little bit longer to untangle and unwind and get them set up properly within the divisions, but that's how we feel about IT. We want to move as fast as we possibly can.

That's all for me. Thanks a lot.

Thanks, Todd.

The next question will come from Daniel Chan with TD Cowen. Please go ahead.

Yes. Thanks. John, I think your contract calls out some incentive for you to get the business to cash flow positive by Q1 fiscal 2025, which isn't a lot of time considering how much work there is to do. So, appreciate that you highlighted some of the organic cost cuts that you're thinking about. Just wondering if there are any other options you're weighing at this point. In particular, your predecessor said he didn't -- he wasn't really considering any asset sales to bring the business to profitability. Just wondering whether there are other options outside of the organic cost cuts you're thinking about.

Yes. As I come into this, just a different fresh -- new approach, not fresh, but just it's, I want to look at all of our options. I think obviously, the organic things that you mentioned, Daniel, to me those are -- that should be the majority of our time. Let's streamline things, and let's get the divisions up and running. That's where the big money is going to be. At the same time, me coming in with a just a different perspective. I've been with the Company for a couple of years. I've come from this, so to take a look at some of the other assets that we have and decide whether or not do they make sense to be part of the Company, should -- or is there opportunity to monetize it in some other way? The answer is yes. I we'll -- my -- I would be open to looking at all those kinds of things, but kind of in the spirit of 80%-20%, 80% of getting to cash flow positive is probably going to come from the organic stuff, but to the extent that we can find the 10%, 15%, 20% through some other things, that's something we'll absolutely take a look at.

That's helpful. Thanks. Can you get to your targets just by cost cuts alone?

How about we'll come back to you next quarter? I'd love to. But honestly, I'd love for us to get a little more growth out of the business. There's two ways of getting to cash flow positive, and part of that is growth and part of that is taking the cost structure down. Obviously, since we -- revenue has been a little bit lumpy, we've been focusing more on the cost side of things. But between trying to drive revenue, trying to focus on the cost, maybe looking at some of the assets, as you mentioned, all of these things go into the equation to get us to a better place a year from now.

Okay. That's great. Maybe on the ARR a little bit. That metric continues to decline, and as you pointed out, it's slowing, its declined. But I think the expectation was for that to have stabilized or even growing by now. What has been the source of its continued declines? And you called out, it's stabilizing by next quarter. What's giving you the confidence that it's going to stabilize next quarter? Thank you.

Yes. We've had -- from a stabilizing ARR perspective, we've had some -- I would say, some churn that mostly has come from some of our UES customers, the smaller UES customers. We've had a little bit of UEM churn. So, renewal rates is something that we are focused on, and some of that will be improving the product, making it more stable. Our customers will stay with it. That's part of the equation. The other is, some customers that maybe bet and said they're going to move on, that -- that'll get flushed out. We'll get to that low point. And I really do believe between the product stabilizing and the customers that maybe vocally said they were unhappy and have moved on, I think we're really getting now to a point where we hit the -- we're bottoming out. We're hitting that point. And now as we get wins like Malaysia onto the board, that'll start moving us in the other direction. We've had some other net new logo wins. That will start us moving in a better direction. So, I know we might be a quarter or so behind where we hope to be at this point, but I really am optimistic that we're leveling that off and looking for -- seeing prospects for growth as we go into next year.

Thanks, John.

All right. Thanks, Daniel.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Giamatteo, CEO of BlackBerry, for any closing remarks. Please go ahead, sir.

Perfect. Thank you, operator. So, let me just finish today just by reminding everybody that our IoT division will be showcasing a number of exciting developments in both QNX and IVY at CES in Las Vegas from January 9th to the 12th, as well as, we'll be hosting the MotorTrend Software-Defined Vehicle Innovator Awards as well. So, there'll be an investor-focused Q&A on Wednesday, January 10th, featuring members of the IoT leadership team. So, please look out for further details earlier in the new year on how you can join via live stream. So, thank you all for joining us here today, and I look forward to speaking to you again soon. Bye, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.