Good day, and welcome to BlackBerry's Second Quarter Fiscal Year 2025 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask a question. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to [Martha Gonder] (ph) Director of Investor Relations, BlackBerry. Please go ahead.

Thank you, Dave. Good afternoon, everyone, and welcome to BlackBerry's second 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, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim 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 that are made pursuant to the Safe Harbor provisions applicable to 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 or undertakes no obligation to update or revise any of them, except as required by law. As is customary during the call, John and Tim will reference non-GAAP numbers in their summary for 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, Martha, and congratulations on your new role as Director of Investor Relations for the company. Q2 was another good quarter for BlackBerry as we're making significant progress in delivering on our strategy. Both the IoT and Cybersecurity divisions delivered solid year-over-year as well as sequential revenue growth. The combination of this and the ongoing benefit from the actions to improve our cost profile drove year-over-year improvements in non-GAAP EPS and adjusted EBITDA, with BlackBerry achieving breakeven ahead of plan. Likewise, cash used by operations also came in better than expected. This past quarter, the IoT division delivered revenue of $55 million, representing 12% year-over-year growth and 4% sequential growth, and also exceeded the top end of the guidance range that we provided. Gross margin improved by 1 percentage point sequentially to 82% due to favorable product mix. This quarter followed a similar trend to last and that strong royalty revenue has driven a significant portion of the better-than-expected results. Production-based royalties were stronger both sequentially and year-over-year. This improvement is in part a consequence of the growth in royalty backlog that we've built from the considerable amount of design wins that we've secured in recent years. On the flip side, as in Q1, development seat revenue for Q2 remains somewhat subdued. Development seat consumption is generally driven by the timing of the ramp-up of automaker software development programs, and as we've mentioned in recent quarters, these programs have experienced significant delays. We've seen some improvement in recent months, but these delays continue to hold back development seat revenue in the near term. In addition to revenue recognized in the quarter, in Q2, we secured a number of new design wins that will generate future revenue. In particular, we secured a number of large automotive advanced driver assistance systems, or…

Thank you, John, and good afternoon, everyone. I'm incredibly proud to be joining this call as CFO. My top priority in this role is clear, to increase shareholder value. In my opinion, BlackBerry has a significant amount of value that is underappreciated. And as we continue to execute on our strategy, I'm focused on seeing that it's recognized. As usual, the numbers I'll reference, except for revenue, will be non-GAAP. As John mentioned earlier, BlackBerry's second quarter results not only met but exceeded the guidance range that we provided last quarter. Total Company revenue was $145 million, exceeding the upper end of the range of $144 million. Total Company gross margin was consistent year-on-year at 66%. This year, we've made tremendous progress on our cost structure, with operating expenses this past quarter decreasing to $99 million. That is $31 million or 24% lower than the $130 million baseline for OpEx that we provided as a reference point prior to recent cost reductions. It is also 10% lower than the guidance we gave for the FY25's average quarterly OpEx of $110 million. Cost remains a key focus going into the second half. And during September, we announced a number of further back-office headcount reductions and facilities closures as we continue to streamline operations. The new management team at BlackBerry has managed to thread the needle of significantly reducing costs, while at the same time managing to stabilize the top-line and even drive growth. As a result, we've delivered substantially improved profitability and cash usage. For Q2, the non-GAAP operating loss was $4 million, and adjusted EBITDA beat expectations by finishing at break-even for the quarter. Adjusted EBITDA this quarter is $22 million better on a year-on-year basis. Non-GAAP EPS also beat guidance at break-even. Further, cash usage continues to improve. You…

Thanks for that, Tim. Before we move to Q&A, let me quickly summarize the key takeaways from this past quarter. This was a good quarter for BlackBerry. Both our IoT and Cyber divisions beat top-line expectations and delivered year-on-year growth. The hard work that the team has done with managing cost is really paying off, with operating expenses now significantly lower than prior year and below $100 million a quarter. BlackBerry reached a significant milestone on the path to profitability by achieving break-even for both EBITDA and non-GAAP EPS this quarter. And finally, cash burn for the quarter was $43 million better than last year, and $100 million better year-on-year for the first half before allowing for the impact of the patent sale. I'm incredibly proud of the progress that everyone at BlackBerry has made as we find ourselves in a significantly stronger position going into the second half of the fiscal year. And with that, let's move to Q&A. So, operator Dave, can you please open up the lines?

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kingsley Crane with Canaccord Genuity. Please go ahead.

Hi, and thanks so much for taking the question. Congrats on continued execution. First question, what magnitude of opportunity does QNX Containers and the HaleyTek integration and launch open up on that side of the business? How can we think about new product unlocking design wins?

Yes. Excellent question. Should I take that, John?

Yes.

So, containers is something that we've heard a fair amount in this industry in the last few quarters. Ultimately, it is just part of the expansion, the ongoing expansion of the TAM, Kingsley, to be honest. It's -- containers is something that people are very familiar with working in a cloud environment, sort of docker type approach. So, as we move QNX towards the cloud, people are obviously looking towards safety-certified containers as a way of working. So, this is a natural evolution of that. And John mentioned in his remarks that we're starting to see some traction from the cloud side of things as we productized what we did with Stellantis that we showed you at CES. What was the second part of the question? It was around sound. Yes, so -- yes, it was HaleyTek. So, on the sound side of things, this is another one of the new products that we launched earlier this year. And we're pleased that, although there are long sales cycles here, it just opens up another aspect. So, in the past, we talked about the more sockets, more layers narrative, which is about saying we want more QNX content in each and every vehicle. And not only just the operating system but adding elements of middleware up the stack. And sound is definitely one of those elements. So, seeing traction, seeing someone actually commit to build this product into vehicles, obviously is significant progress. So, we're pleased with that.

Awesome. That's great to hear. And then on the financials, just your Q3 guidance implied is a modest sequential increase for Cyber before a markedly sharper increase in Q4. I think that's been a -- historically been a seasonally lighter quarter. So, just anything that we should consider there this year would be helpful. Thank you.

Yes, good question. So, I would say actually, at the midpoint, it's kind of -- it's just a continuation of the trend of what we're seeing. Traditionally, Q4 was strongest for us, actually, from a billing standpoint. Q3 last year, we had some significant one-time deals, which helped drive the hump in Q3. But if you take the midpoint, Kingsley, actually, you'll see sequential growth through Q3, Q4.

Perfect. Thank you.

And the next question comes from Luke Junk with Baird. Please go ahead.

Good afternoon. Thanks for taking the questions. First, just a question related to the EBITDA progression reaching break-even sooner than expected in the quarter. Great achievement. I'm just trying to reconcile that with the full-year EBITDA guidance being maintained in the range of break-even to $10 million. Is there something in timing we should be considering or some sort of offset in the back half? I guess if I look at the OpEx trajectory, it seems to be coming down quicker than you had anticipated, and that would seem to suggest maybe some upside to the full year. Thank you.

Yes. So, we're obviously trying to be prudent with our guidance here, Luke. So, Q1 was at negative $7 million. We're delighted to be break-even ahead of schedule in Q2. But at the midpoint, we still got a little bit to do to make the full year positive for the -- in terms of EBITDA. So, if you take -- you can assume that there'd be sequential improvements going from Q2 into Q3 and Q3 into Q4. So, hopefully, that helps.

It does. Thanks, Tim. And then, second, just hoping you could just double-click on the organizational changes in IVY and integrating that more into the QNX organization on a go-forward basis, just relative to retaining key talent there while also reducing cost, maybe if you could just kind of square the balancing of those two things.

Yes, Luke, this is John. It's -- we've actually -- we've invested a lot into IVY over the last few years, really, and we did it by virtue of a very dedicated team that was really focused on building out the IVY platform as a holistic project. I think we came to the conclusion that now, once you get a product to a certain level where there's a baseline, you're meeting a lot of the features and capabilities that we're looking to deliver to the market, we kind of felt like there's some operational efficiencies that we could gain by bringing that team together very synergistically with other QNX members, whether it's on the sales -- front-end sales side or on the R&D side. So, I think we kind of came to the conclusion in the first half of the year that leveraging some of those efficiencies, since we've made so much progress on moving that platform along, that this was the right time to do that.

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

And the next question comes from Paul Treiber with RBC Capital Markets. Please go ahead.

Oh, thanks very much for taking the question. Could you provide an update on the separation process? And I think the last quarter, you mentioned you're working through splitting up some of the IT systems and reorganizing that and just changes to the organizational structure. What's remaining to go from an operational perspective here?

Yes, Paul, we made tremendous progress on that. In fact, we were just having some deep-dive reviews on that over the course of the last couple of weeks. And a lot of the kind of low-hanging fruit of splitting it out, aligning it to the BUs, we think we've achieved that. We've got that largely in place. There are some components within the networking, some of our Cyber protection solutions within the CISO organization. I think we probably mentioned before, some of these things are naturally a little bit more intertwined. That takes a little bit more time to unravel. So, we're trying to strike the right balance on move these resources, move the cost, put them into the BUs, let them operate them in a very agile way. But at the same time don't go too far where we start to introduce dis-synergies. So, we kind of feel like we -- we're striking the right balance where the business is operating. You can see we're generating the revenues that we want, the design wins, the progress that we're making in how we operate it, but at the same time, driving the significant costs out of the business. So, we feel like we're striking in it right at the right balance at this point. We'll continue to look at that, but with an eye towards don't -- we made so much progress on reducing our cost structure, we don't want to overstep it and now start to introduce additional costs just for the sake of saying things are separated. So, we're trying to strike that right balance.

That's helpful to understand. Just on -- as you sort of untangle the two organizations, are you seeing structural differences in profitability between the two? How should we think about that here?

Yes. So, I would say this whole process has given us the opportunity to take a fresh look. And what I'll say is if you tune in to the Investor Day on October 16th, we're definitely going to be providing a lot more color on that around divisional profitability. So, we'll leave it till then, if that's okay, Paul.

Sure. Just one last one for me. The -- just on Cyber, it does look like the mix of licensed revenue was higher this quarter. Was that the primary driver of one of the major drivers of the upside relative to guidance? And then how do we think about that from a timing point of view? Was that -- was it patched from prior quarters? Was it pulled forward from future quarters versus your expectations?

Yes, I think it was a combination of both license and hardware, as we mentioned. Secusmart and some of our German customers, they had a device refresh cycle that they're working through, that generated some upside orders that were helpful to the business. But we were really encouraged with the durability of the UEM business this quarter. We're encouraged with the AtHoc business and some of the large customers that we renewed and did some expansions on. So, I think it's been -- the achievement for this particular quarter was really kind of broad-based across license, service, and hardware.

Thanks for taking the questions.

Thanks, Paul.

[Operator Instructions] Our next question comes from Daniel Chan with TD Cowen. Please go ahead.

Hi, thanks for taking my questions. Any potential impact from the proposed ban on Chinese auto software and hardware, and maybe not just in the US, but the potential of it expanding to other countries?

It's a really good question. Obviously, something we're watching very closely. The good news for QNX is we're very well diversified geographically and also from an industrial standpoint. I guess being a proud Canadian company kind of puts us slightly more in the neutral bucket. But it's fair to say we are definitely watching closely. China is an important market for us. So, we need to see what develops from that.

Thanks for that. And then the delayed or canceled programs that you design programs that you're seeing now, how should we think about those impacting the potential royalty revenue in several years?

Yes, it's a good question. Ultimately, the way we think about it, Dan, is that this work's not gone away. The secular trends are still very much there. It's just a question of timing how quickly the OEMs can actually get to the stage of developing this software and then ultimately moving it into production. The good news for us is this is a very long-term business. As you know, we win a design and we've got a revenue stream kind of locked in for the next 10 years. And we've already got $850 million in our backlog, which gives us a really solid base. So, as these kinks in this, bumps in the road, if you like, kind of get worked through, we're very confident that the secular trends that are powering this industry have not gone away and we'll continue to make progress.

Thanks, Tim. Just a couple of questions on Cybersecurity, if I may. The ARR kind of reversed trajectory. It kind of improved in Q1 and in this quarter, it kind of declined sequentially. What changed over the last three months to reverse that momentum?

Yes, that's a good -- really good question. I would say overall, year-over-year was relatively flat. I think from quarter to quarter, there's going to be a little bit of variability and some bumps in it. It's probably more of it is associated with some of the Cylance churn that we've experienced over the course of the last quarter or two. So, that was probably part of some of the downward pressure. But at the same time, some of the trends that we've seen with UEM and AtHoc were offsetting some of that. So, there will always be, I think, a little bit of variability from quarter to quarter, just based on the nature of our businesses and the markets that they serve. But the -- from a long-term perspective, we're pleased that it's much more stable than it's been in the last couple of years.

Thanks. And last one for me, nice to see the net revenue retention improving. Is it improving because the churn is getting better, or are you doing a better job with the upsell and cross-sell? Any color would be helpful. Thank you.

A combination of all of it, a little bit of a mixed bag. I think there's definitely some really good upsell on the AtHoc side, some really good upsell on the UEM side. That's offset a little bit with some of the Cylance churn. So, across the portfolio, it's good to see whatever, 7 points, four consecutive quarters of moving in the right direction. Still not where we want it to be by any means, but it's good to see it stabilizing and moving in the right direction.

Great. Thank you very much.

The next question comes from Trip Chowdhry with Global Equities Research. Please go ahead.

Thank you. Thank you. Very exciting quarter. I think the way I look at your Company is a very underappreciated startup. Why I say that is, in every business you are, there is so much opportunity to create and shape the new and the new future based on the technologies and the platforms you have. I was just thinking, if your team is thinking on these three emerging opportunities that I think, if you have a different narrative and a different perspective, you could be doing a lot better versus if I'm looking at other analysts' questions, they're very backward looking because they're thinking BlackBerry from a very traditional sense versus if you look at the BlackBerry as a startup, which is not well understood. Let me give a point -- two, three points here. First, there's an emergence of generative AI devices. There's only one instance right now where Jony Ive and OpenAI are trying to create those devices. And if we can fast forward it, it could be no less popular than iPhones down the road. This is, I'm extrapolating, but that's one new thing that has emerged over the last three, four months. Second, when you think in terms of generative AI and various models that are coming, including small language models, and now a lot of intelligence is being done on Intel AI PCs, for example. Now, as in the prepared remarks, you talked about UEM products being very good for on-premises if we extrapolate it because you have a wonderful CEO who came from McAfee. That is an opportunity when you have AIs and there is so much, they call it injection, that is prompt injections that are happening. It is just old paradigm in a new situation. So, something that is dead is getting exciting now. The only thing that -- and there are many others we can go offline, but the way I'm thinking is we should be looking at BlackBerry as a startup, attacking new problems with the technologies and the experiences you have. So, Tim, since I happen to know you very well, and you're one of the most sharpest, I would say, technologist CFOs, I was thinking if you have thought about it and what are your initial views on it. Of course, this industry is being created right in front of our eyes. I really want BlackBerry to go and capture it. So, that's all for me. And congratulations on a good quarter.

Thanks so much, Trip. John, did you want to...

Just one thing I would -- I really resonate, Trip, with how you talk about it as a startup, taking a step back and taking a look at what businesses are we in, what could we turbocharge growth with our AI-centric. And I think one of the things that really has helped us is this whole strategy around setting up to be used. It's really given us some interesting insights on to our product portfolios and which ones are more next-generation things that can lead to more dynamic growth in the markets that you're describing and which ones may be from a capital allocation we've got to pull back on. So, definitely tune in more for some more details on that at the upcoming Investor Day, where we'll share kind of more of a portfolio look at the Company and how we're shaping our investments and our capital allocations to invest in the kinds of things that you're talking about, Trip.

You are phenomenal. Thank you so much.

Thank you, Trip.

And the next question comes from Steven Li with Raymond James. Please go ahead.

Hey, thanks. John, I'm not sure if I misheard you, but on Cyber, I think I heard you say more customers are adopting your managed services offering, and that drove the year-over-year decline in Cylance revenue. Did I mishear or can you elaborate?

Yes, let me -- maybe I wasn't clear, Steven. Just so, within Cylance, there's kind of two components. Our historical, when we bought the Company, it was a very product-centric Company, endpoint protection, and we built out our EDR capability with optics. And that's the very -- the classic product where our customers license it on a product-only basis. That part of the business, we're seeing that as just trends in the market in general. That's where we've had some sluggishness. That's where we've had some renewal rates, some defections, but where we saw some upside is existing customers that moving from product-only scenario to MDR, where we manage, people that don't have the resources or the wherewithal to manage their own environments, and they look for us to do it from an MDR perspective. So, that part of the business, we've actually seen a good pipeline, some good conversions, some interesting wins in the quarter, but that was kind of offset by some of the downside weakness on the product-only segment of our customer base.

Got it. That's helpful. Thanks, John.

This concludes our question-and-answer session. I would like to turn the conference back over to John Giamatteo for any closing remarks.

Terrific. Thank you, Dave. So, before we wrap up, I just want to remind everybody about our upcoming Investor Day at the New York Stock Exchange on October 16th. At this event, for the first time, we're going to be providing segmented P&Ls for both our IoT and Cybersecurity divisions, as well as the new outlook for fiscal years 2026 and 2027. We'll take a deeper dive into the performance of our four Cybersecurity product groups and review our capital allocation priorities, and we'll also showcase the depth of expertise that we have in both IoT and our Cyber teams as they explain the market opportunities and where our products are positioned to capitalize on them. The event is available to the general public via webcast, and you can sign up on the Investor Relations webpage. So, thanks again for joining today and look forward to seeing you all next time.

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