Good afternoon, and welcome to the BlackBerry Third Quarter Fiscal Year 2023 Results Conference Call. My name is Matt, and I will 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 today's call over to Mr. Tim Foote, Vice President of BlackBerry Investor Relations. Please go ahead.

Thank you, Matt. Good afternoon, and welcome to BlackBerry's third quarter fiscal 2023 earnings conference call. With me on the call today are Executive Chair 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 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 U.S. and Canadian Securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors that the Company believes are relevant. Many factors could cause the Company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the Company's annual filings and MD&A. You should not place undue reliance on the Company's forward-looking statements. Any forward-looking statements are made only as of today, and the Company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary during the call, John and Steve will reference non-GAAP numbers in our 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 website. And with that, I'll turn the call over to John.

Thanks, Tim. Good afternoon, everyone. And thanks for joining the call today. This was a quarter where BlackBerry made good progress based on leading indicators for both the IoT and the cyber businesses. BlackBerry beat expectations for both, total company revenue and earnings per share. On the IoT side, we saw the business performing very strongly setting yet another record for design-phase revenues. The strategic decision made over five years ago to position QNX as the trusted foundation for high-performance edge compute, especially in auto, is really bearing fruit. On the cyber side, in line with what we said last quarter, we saw an improvement in the level of churn that we experienced recently. The investment being made in product and go-to-market continued to drive sequential billings growth in our cyber business. Let me start my review with the IoT business unit. As mentioned, there was another strong quarter. Revenue was $51 million, a 19% year-over-year increase; gross margin was 80%; preproduction revenue, that is revenue for development seats and professional services, set another record. This strength is being driven by significant new design wins. In fact, the first six months of this fiscal year, BlackBerry added more new royalty backlog than in any prior 12 months period. And that momentum continued this past quarter with wins in a number of verticals, but particularly into safety-critical auto ADAS, advanced driver assist, and digital cockpit domain where we are significantly gaining market share. The largest win in the quarter includes a win with Aptiv to use the QNX hypervisor and RTOS to power a digital cockpit for a European OEM. Other auto wins include design with Daimler Truck, an instrument cluster design win with Tier 1 supplier Marelli, for a leading Japanese automaker and a design with a leading Chinese Tier…

Thank you, John. As usual, my comments on our financial performance for the third quarter will be in non-GAAP terms, unless otherwise noted. Total company revenue for the quarter was $169 million, Total company gross margin was 64%. Operating expenses for the third quarter were $137 million. These non-GAAP operating expenses exclude $56 million fair value gain on the convertible debentures, $22 million in amortization of acquired intangibles and $8 million in stock compensation expense. BlackBerry remains in a targeted investment mode, meaning our capital allocation strategy is for aggressive investment in our IoT business to capitalize on the strong opportunities we see in front of us there, and for strategic investments in our cybersecurity business to drive both top line growth as well as deliver profitability. These investments are discretionary and can be eased back if required. This strategy is starting to pay off with IoT winning record levels of new designs and the trajectory of the cyber business improving. Given these investments, we continue to expect manageable EPS loss and cash usage in the near term. The GAAP operating loss for the third quarter was $2 million, and the non-GAAP operating loss was $28 million. Now, turning to the balance sheet and cash flow. Total cash, cash equivalents and investments were $505 million at November 30, 2022. Free cash usage in the quarter before accounting for the settlement of a prior legal case was $22 million. That concludes my comments, and I'll turn the call back to John.

All right. Thank you, Steve. Before we open up the line for Q&A, let me recap on the key messages. We are pleased with the progress made -- sorry, because I think Steve has missed a few points in his notes. Anyway, we're pleased with the progress made by both our core business units this quarter. The IoT business unit continues to deliver a strong 19% year-over-year revenue growth, despite a macro headwind. The cybersecurity business unit trajectory is progressing with the improved level of churn and increased and multiyear deals as well as new logos. And finally, a quick update on the IP patent portfolio sale. As we said before, there are two main interested parties. I'm pleased to say, the tremendous progress has been made with both of them. Catapult, who you know, now has a motivated financing partners lineup and all parties are currently negotiating the final documents. The second party is a large PE firm that doesn't need external financing. They have completed their due diligence and term sheets discussions are well advanced. We obviously will keep you updated as things progress. That concludes my remarks. Matt, could you please open the line for Q&A.

[Operator Instructions] And our first question will come from Luke Junk with Baird. Please go ahead.

A couple of questions related to the IoT business. First, John, can you give any additional color on the subcomponents of your auto software business in IoT? Specifically, if there's anything you'd be able to add on the preproduction parts of that business, of course, but also be interested in any commentary on royalty trends looking forward, and how that might lay out over the next few quarters or into next year in terms of launch activity that you have a line of sight too in that business. Thank you.

It didn't come across clearly. Luke?

Yes. This is Luke from Baird. Breaking down IoT revenue, you've obviously said that the preproduction piece is at record levels. Any other comments? I'm guessing around royalties.

I could tell you a typical year -- typical quarter or year, actually, our general guideline is about 40% of our revenue coming from royalty, 40% coming from developers, seats as well as professionals. And then -- sorry, and then 20% come from services. That's kind of our rule of thumb. It didn't come across very clear on the microphone. So, Luke, sorry about it. So, if you could...

Perhaps the question, Luke, if I can rephrase is, is there any color on royalties, given the strength that we've seen in design phase with preproduction base?

Well, I mean, royalty is pretty much tied to production. The industry auto productions basically were proportionately about the same, meaning that we expect, what $85 million cost being built this year. So, it's a little probably about 10%, 15% down from previous three COVID years. So, that gives you some guideline of what the royalty is like.

I’ll just leave it there, given bad connection and take it offline. Thank you.

Our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

Just maybe a follow-up on the IoT question. Just based on some of the record level you're seeing for the design phase of revenue and particularly in ADAS. As these cars go into production in future years, how should investors think about maybe the magnitude of royalty per car versus the current infotainment system today?

Yes. So -- yes, that's a good question. So, the ARPU, which is you're asking basically the ARPU questions, our targeted ARPU remains to be $25 a car. And, of course, we’re quite a big business from it. However, if you look at the infotainment world, infotainment world now down to probably $1 to $2 a car. On the other hand, ADAS is probably pushing high-single-digit dollars, $8, $9 -- $7, $8, $9. So, that's how -- and then any newer features, cockpit, clusters, vehicle-to-vehicle communications and stuff, they all have a reasonable dollar amount tied to it, certainly a factor about the infotainment.

Thanks. That's helpful. And my follow-up question, just on the cybersecurity business and more maybe the endpoint and competitive landscape. I know there's share for Cylance to gain from like the Mac [ph] and Trend Micro, but there are several next-generation competitors that are pretty price aggressive, and they're also talking about elongated deal cycles. So, could you kind of update us on what you're seeing and what's giving you that confidence to return to ARR growth in the second half of next year?

Yes. We have a pretty elaborate model and spreadsheets between the cyber business units and the finance organization of the company. And it looks like that returning to ARR second half of next year is quite real -- I mean, ARR growth, sorry, year-over-year growth for the second half of next year, probably pretty stable in the first half. And that's obviously based on the pipeline we have today. We factor in a little bit of the push out, and then, of course, the renewal of some of the government contract. One of our challenges is we have so many government contracts and they typically buy on an annual basis, because that's all the budgets they have and they can only -- they can only spend what they have approved budgets on. So, that's one thing that we face. But on the other hand, the good news in there is that the government customers are quite steady and stable and their buying patterns are pretty steady also.

Maybe one last question, and I'll pass the line. John, just your thoughts on the macro environment heading into next year? You guys have ample cash on the balance sheet and if you end up selling the licensing business, you should have more cash on the balance sheet. But as you look into a challenging macro, how are you guys thinking about balancing investment for growth versus preserving free cash flow?

Good questions. Where we are right now, you listen to what Steve has outlined, we are in a kind of very careful investment mode. In IoT, we are definitely investing in hiring. We are winning a lot of the deals. I wouldn't say all the deals, but a majority of the deals, particularly in the ADAS world and the cockpit world and the hypervisor world. So, we believe the momentum, the kind of the tailwind is there for us, and we wanted to capture it. So, we will be hiring engineers, we'll be hiring professional services people. We are expanding our sales force, our partnered programs and everything else. On the cyber side, John Giamatteo is balancing the growth of the ARR and the billings, balancing that with the profitability. So, the growth -- the investment there will still be there, but probably it’d be a little slower with an eye to the bottom line given the uncertainty of the macro, as you pointed out. So, it's kind of a little bit of a tale of two cities here. One is just keep growing because we got the momentum; and the other one is we want to do a more balancing, more guarded growth.

Our next question will come from Todd Coupland with CIBC. Please go ahead.

Can you hear me okay?

Yes.

All right. It sounds like the CIBC internet mic is working fine. I wanted to ask you about -- first on the cyber business. So, you're basically saying flat year-on-year in the first half with some growth in the second half. How much more work is needed to bring the updated sales team and whatever other new product bundles you're contemplating to actually get to those ranges that you're talking about?

I think we are net growing the sales force, meaning that our sales force size is increasing modestly. And so, we don't have to have any mysterious program or a very aggressive program of some sort in order to achieve what I just said. I think we all feel pretty comfortable and the cyber business unit feels comfortable, they'll be able to be flattish in the first half. Only reason that is flattish, by the way, as a reminder, we were expecting growth in the past for the first half is because of the so-called elongating sales cycle. So, we expect it to be flattish for 6 months and then pick up again. And that's really a lot more macro driven rather than us having to do some special things. So by and large, I mean we have a road map of technology. But none of the stuff that I talk about, depending on a particular product, I think the products are in pretty good shape. We do need to continue to drive the channel, continue to increase the professional services, particularly the MSP. I think those are the two things that need to happen, but it's part of our plan to make happen anyway. So nothing really special.

That's helpful. And then, I had a question on, I guess, the movements on the balance sheet. So, I think in the past, the price for the patent licensing business is $600 million, does that potentially change if the second party comes in, like if they get into the mix here, is the takeaway that you're going to get to $600 million or possibly higher, or is it just they get there first and they can close the deal? What's the message on that?

Yes. I'm sorry, I shouldn't comment on it. I know the questions, and I understand, of course, I have the answer. But it’s unfair to both parties, while we're negotiating in parallel. So, if you don't mind, just hold off on that until we made the announcement, I am expecting the announcement or the conclusion of this relatively soon.

I see. But the takeaway is that the confidence level with the second party has gone up from the last time we talked about this, where financing was in question to where it's -- the probability of getting that $600 million has gone up materially with that and then the other -- the initial part of getting financing.

Yes. Again, I can't go into the structure, but the initial party, the confidence level has -- you're right, has dramatically gone up.

Okay. Should we take away given the delay in the two parties here that the structure that was announced before is potentially open to some adjustments?

Very minor

I see. Okay. Okay. And then just sort of one follow-up balance sheet question. One of the debentures is due in about a year, any messaging on paying it down versus refinancing at this point?

I think we're going to pay it down.

The message is pay that down? Okay. All right. Great. Thanks very much.

Sure.

Next question will come from Trip Chowdhry with Global Equities Research. Please go ahead.

This is still a very good quarter considering the backdrop. Two questions I have. Whenever we are in a recession, the federal government usually opens up their budget, the budgets increase to offset the collapse of the economy. Have you seen any federal government agency or across the globe who may have at least not reduce their budgets and maybe thinking of increasing their budgets yet or you haven't seen anything like that so far?

Well, it's a mixed bag, Trip. So, as far as cyber investment, I have not seen government back away from it, particularly the government that we deal with, which is probably about G-7, G-25 depending on the level that we're at, Five Eyes country, for example. So, we have not seen the budget being cut or reduced in IT spending and cyber spending. So, that's good news. There are some very selected pockets, NATO, spending a little bit more; Germany, spending a lot more from an IT defense point of view; and Canadian government also spend more and supporting Ukraine, for example. So, U.S., the money are there, a little bit more driven towards the more social program. So, it's kind of a -- I can't give you a yes or no answer. It kind of depends on the various governments that we're keeping very close tag with. But on an overall scale, I haven't seen the governments reduce their IT budget year.

Very good. Second question, as we are seeing a lot of new vehicles coming into the market. And each one of them have at least 2 or 3 features. One, either the screens are really very big in the vehicles or they have multiple screens. Do you think that changes the royalty stream for you? Like if a vehicle, say, just 3 years, 4 years back, only had 1 tiny screen, now on an average, there are 3 or 4 screens, front entertainment, rear seat entertainment, overhead entertainment, you name it, video conference saying, just that. Do you think there is a potential to increase some royalties because the multi-screen approach that is new, at least EV manufacturers are bringing to the market? And that's all for me. Happy holidays to all of you.

Thank you, Trip. Happy holidays to you, too. I don't believe -- I mean, I don't know, multi-screen will bring me more copies. However, there is a trend in software designed vehicle, either for redundancy purposes or multi-MPU purposes, particularly as the capacity requirement goes up, they are using more copies of QNX. So, it is more of an architectural point rather than a display point.

I got it. I got it. I got it. Very nice. And then from the same token, I think if we go from 5G to 6G, the royalty stream because of more use cases and more QNX copies and redundancy and resiliency, we may directionally see per vehicle royalties to directionally go up rather than go down.

Oh, yes. I don't see -- I mean, there are two points to it. Number one, we have not seen the royalty of QNX going to go down anytime soon. In fact, more copies expected per car and the revenue should have gone -- should go up. In addition to that, don't forget we have IVY behind it, which when the capacity goes up, our usage of IVY also goes up. So, we do -- that get into production. And I'm hopeful that that will bring us also a good revenue stream.

Excellent, excellent. Thank you very much. We look forward to seeing you all at CES conference.

Thank you.

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

Just hoping you can speak to, on the cyber business, the mechanics around NDR, which declined sequentially versus your comment on improved churn. Can you speak to some of the moving parts there? And then specifically, can you break out churn or the trends there in terms of UEM versus EPP?

Good question. So in general, as we have indicated in the beginning of the year, the churn is coming from the UEM based small-medium enterprise. We have seen that as a consistent scheme -- consistent theme, but that has slowed down now quite a bit. At least the last quarter, we are seeing the slowing. In fact, we are seeing the bigger deal going a little bit more multiyear with us. I think UEM is now definitely stabilized. It's also being viewed more strategic by the market. And Gartner actually recently wrote a note on it, and we are seeing the same thing. Customers are starting to see, to treat UEM, rather than a price item is now starting to look at it a little bit more strategically, particularly on the cybersecurity side as a factor of the cyber security. The last quarter, something that's happened that causes the infrastructure, mobile infrastructure’s management and endpoint management to be relooked at in importance. You probably know this, obviously, a number of banks in the United States has been fined for using messaging technology that are not the most secure or archiveable. I think that forces all the banks CIOs starting to look at the completeness of the infrastructure. So obviously, the UEM is a technology that's been around for a long time. This is not just BlackBerry UEM, other established player UEM also, obviously. So I'm answering your question in kind of a long run about way. The churn slowdown still kind of contained within the SMB and the UEM space. And we -- as I said, we see a slowdown. We haven't seen it anywhere else. We definitely have not seen it on EPP. EPP seems to be holding its own.

That's helpful to understand that. Just on your point about the settlement with the banks. I mean, does it seem, like when you look at banking or regulated industries, it seems like there's a shift away from bringing your own device, corporate-owned devices. Do you see that in other industries other than just banking? And then, how do you see that relatively speaking, helping BlackBerry from a product positioning or from a competitive position?

So, when the bank goes to corporate issues, they are typically looking at high-level security and archiveability, and that's where our strength comes in. So, we're known to be the most secure mobile platform that exists, so. And I think there's not a lot of debate over that in the industry. So, that helped us a lot. And as far as I'm seeing and the industry, maybe different government branches and law enforcement, I have not seen other major verticals that go to corporate issue debates, or at least swing back from a BYOD to corporate issue devices?

I would like to turn the call back over to John Chen, Executive Chair and CEO of BlackBerry for closing remarks.

Okay. Well, thank you. Thank you, operator. As we pointed out, BlackBerry will be at CES in Las Vegas, where we have a number of exciting announcements and demonstration by IoT business, including the IVY running in Jeep Cherokee. On the 5th of January, BlackBerry will be cohosting a software-defined vehicle award with Motor Trend, a leading auto industry analyst. In fact, if you guys want to get in there, I don't know whether we could -- we have tickets, but please contact Tim. There's a big event on the 5th evening in Vegas. They will recognize those who have made outstanding contributions to the automotive industry through software. I know there's been a 19 -- 19 award. So the following day, by the way, which is a 6th, at 1:00 p.m. Pacific Time, we will be hosting a hybrid investor Q&A session with management at a booth. This event will be streamed, and investors will be able to hear details about the exciting new developments. Please make sure you register for the stream on blackberry.com/investor webpage. Thank you all again for joining today's call, especially those of you on the East Coast, where I know it's getting late. I hope all of you and family have a happy and safe holiday. And see you next year.

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