BlackBerry Limited (BB) Earnings Call Transcript

Good morning, and welcome to BlackBerry's Second Quarter Fiscal Year 2027 Earnings Conference Call. My name is Betsy, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Suzanne Spera, Senior Director of Investor Relations of BlackBerry. Please go ahead.

Thank you, Betsy. Good morning, everyone, and welcome to BlackBerry's Second Quarter Fiscal Year 2027 Earnings Conference Call. Joining me on today's call is BlackBerry's Chief Executive Officer; John Dematteo, and Chief Financial Officer, Tim Food. After I read our cautionary note regarding forward-looking statements, John will provide a business update, and Tim will review the financial results. We'll 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. As part of today's webcast presentation slides will be displayed. The slides are also available on the Investor Information section at blackberry.com as well as the replay of today's call. 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. Those 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 certain 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, let me now turn the call over to John.

Thanks, Suzanne, and thanks to everyone for joining us. We're pleased to report another very strong quarter for BlackBerry, reflecting meaningful progress, both financially and strategically. Revenue grew 26% year-over-year while adjusted EBITDA grew 81%, resulting in our second consecutive Rule of 40 quarter. We also generated $29 million of operating cash flow, delivered our sixth consecutive quarter of positive GAAP net income and adjusted earnings per share, again exceeded our target -- our expectations. QNX had a record quarter, and strategically, we reached an important milestone with our first Alloy Kore design win, the largest design win in our history. So when you put all of that together, Q2 gives us another clear proof point that the profitable growth model we've been building is working. It also gives us increased confidence as we head into the second half. And as Tim will discuss in more detail, we are raising our full year revenue and adjusted EBITDA outlook. Let me start my review of the quarter with QNX. QNX delivered record quarterly revenue of $80 million, representing 27% year-over-year growth and coming in well above the high end of our guidance. Combined with expanded profitability, QNX once again comfortably exceeded the Rule of 40 benchmark for the quarter. Performance was broad-based across development licenses, professional services and royalties. In particular, Q2 was our strongest quarter ever for design win dollars with the value of design wins secured in the first half, exceeding our previous record for any full fiscal year. Development license activity also remained healthy in Q2 with recurring development license revenue holding strong quarter-over-quarter. That matters because customers typically purchase these tools early in a program making them a useful leading indicator of future design wins and royalty opportunities. So in Q2, we saw strength not only in the revenue being recognized today. but also an activity that can support future growth. As you may recall, our QNX strategy is built around 3 growth pillars. The first is our core automotive business. Second is moving further up the software stack with Alloy Kore. And third is expanding beyond auto into adjacent general embedded markets. Now let me start with the first pillar. QNX's core auto business, which was the main driver behind this quarter's strong performance. That strength is being supported by the auto industries transition to our software-defined vehicles and more centralized compute architectures. Let me put some numbers around that because I believe they help explain the opportunity. Roughly 90 million vehicles are produced globally each year. Today, about 1/3 of them have the type of high-performance centralized compute architecture, where QNX's capability is most relevant, and we have a very strong market share in that segment. Industry forecasts indicate that this segment could expand to roughly 3/4 of the market over the next 5 years. That means our addressable market could more than double over that period. In addition to more vehicles becoming addressable to QNX, as more domains become software-defined, we see potential for greater QNX content in each of those vehicles as well. We've already secured design wins with multiple instances of QNX in a single vehicle, and we expect those design wins to continue to move into production over the next several years. So QNX does not need global vehicle production to increase to enable revenue growth, but rather through greater penetration of the market and greater dollar content per vehicle. We're also seeing increasing adoption of SDP 8, our next-generation platform designed for these higher performance compute architectures. We are working with major -- multiple major global OEMs and Tier 1 suppliers as they evaluate and develop on SDP 8. Importantly, some of the programs we've won over the past several years are now entering production, allowing higher QNX content secured in those designs to begin translating into royalty revenue. As our software content within the vehicle increases, so does the value of that opportunity. The transition to SDP 8 and the greater value it delivers is also creating an opportunity to evolve our commercial model. For new commercial arrangements, we are increasingly securing minimum contractual volume commitments rather than noncontractual forecasts. This is giving us greater certainty around volumes, revenue and cash flow from new design wins and the potential for us to both receive cash and recognize a portion of revenue earlier. Over time, we believe this could improve both the visibility and economics of our customer relationships. We're also seeing a lot of opportunity in China. New government-mandated safety requirements for assisted and automated driving systems reinforce the importance of proven safety-certified foundational software, and we continue to see strong momentum in China. The second QNX growth pillar builds on our core automotive business by moving us further up the software stack. As we have discussed, Alloy Kore expands QNX from a foundational operating system towards a broader software platform. This quarter, we reached an important milestone with our first Alloy Kore design win. Coretura, the commercial vehicle software joint venture between Volvo Group and Daimler Truck selected Alloy Kore as the foundational software platform for its next-generation high-performance compute architecture. Coretura plans to deploy Alloy Kore across multiple software domains in its next-generation vehicles and is expected to substantially increase QNX software content and royalty per vehicle compared with traditional QNX operating system deployments. In fact, for this first design win, the ASP per instance, is approximately 3x higher than the customer's current deployment of QNX operating system. This is an important commercial validation of Alloy Kore and demonstrates the opportunity to expand QNX from individual foundational software components to a broader software platform within the vehicle. Alloy Kore addresses one of the biggest challenges facing OEMs today, the cost and complexity of integrating the foundational software stack. By bringing QNX foundational software, common automotive services and Vector Middleware together in a pre-integrated safety-certified platform Alloy Kore can reduce integration complexity and allow OEMs to focus more engineering resources on differentiated applications. The magnitude of this first award also demonstrates the potential of the platform. The value of future royalties from this design win is estimated to be more than $100 million making it the largest design win in QNX's history despite annual commercial vehicle volumes being significantly smaller than for passenger cars. As with traditional QNX design wins, there will be a lead time before the majority of the value is realized through production royalties. So we do not expect this design win to materially change our revenue profile this fiscal year. The more important takeaway is that Alloy Kore has moved from a strategic opportunity to commercial validation. And we believe this is just the beginning. We are actively working with a number of global OEMs and major Tier 1s on Alloy Kore opportunities around the globe, but particularly in Europe and Asia with potential further wins in coming quarters. And the third QNX growth pillar is expansion beyond automotive into adjacent general embedded markets. Today, GM represents approximately 20% of QNX revenue and is an important part of our longer-term growth opportunity. We're excited about the opportunity because the same capabilities that differentiate QNX in automotive, including real-time determinism, functional safety, security and reliability are increasingly relevant in adjacent verticals. We're seeing this across physical AI, robotics, industrial automation, medical devices, aerospace and defense, rail and more. We're also investing in programs that help us engage earlier across the GEM ecosystem. QNX Everywhere is free for noncommercial use and puts the platform into the hands of more developers. At the same time, our QNX Launchpad program is designed to lower the barriers to entry for commercial development on QNX, helping early-stage companies build on and continue using our platform as their business grows. Using a baseball analogy, if you think about this as a 9-inning game, I'd say we're really just about the beginning of the second inning. We're seeing real customer activity, a growing pipeline and meaningful ecosystem development with some markets starting to mature, and others still relatively early in their adoption cycles and needing more time to become material financial contributors. One area we are particularly excited about is physical AI. At a high level, physical AI is what happens when AI moves beyond the digital world and begins interacting with the physical world. Robotaxis are a great example of physical AI in practice. They are intelligent systems that must not only make decisions but execute them safely and predictably in the real world. AI can recognize objects and understand the environment around the vehicle but the underlying system still has to translate those decisions into physical action like steering, braking and acceleration safely and reliably every time. That is exactly where QNX's deterministic safety-certified foundation becomes essential. And the robotaxi market is beginning to transition from concept towards production at scale. This quarter, we're excited to announce that we've secured a new design win with Uber, which selected QNX as the foundation for software in its next generation of vehicles providing an important proof point of the opportunity we see in physical AI. Momenta and XHEART also selected QNX OS for safety built on SDP 8 as the foundation for a production-ready autonomous driving platform certified to ISO 26262. The same principles that apply to robotaxis also apply to autonomous robots operating in a factory or a warehouse. Beyond Uber, we're also seeing a growing pipeline of robotics and physical AI opportunities including more than 20 companies currently engaging with us around NVIDIA-based platforms. Within the pipeline, we have a number of humanoid robot OEMs as well as surgical robots, autonomous mobile robots or AMRs, as well as autonomous tractors, drones and plans. While many gen markets remain early, the combination of a broadening pipeline, growing customer base and increasing demand for safety-critical software gives us confidence that Jim can materially expand QNX's long-term addressable market. Taken together, core automotive, Alloy Kore and GEM give QNX multiple paths to growth across different time horizons. Turning to Secure Communications. The business performed broadly as expected following a particularly strong first quarter. Revenue was $61 million, up 2% year-over-year and within our guidance range. Annual recurring revenue, or ARR, was approximately $221 million, up 4% year-over-year, while our dollar-based net retention rate, or DBNRR remained relatively stable at 91%. ARR provides a stable recurring revenue base, while larger government opportunities can provide incremental growth and profitability when they convert. Those opportunities can have long sales cycles and do create variability from quarter-to-quarter. Importantly, for the first half of 2027, Secure Communications revenue grew 13% year-over-year. We also continue to see customer activity across government, critical infrastructure and other highly regulated sectors during the quarter, including renewals and expansions with customers across the U.S., Canada, Europe, Asia and the Middle East. These included organizations such as a number of agencies in the U.S. federal government as well as internationally with the Dutch Police, the U.K.'s National Grid Rolls-Royce, the Saudi National Bank and Babcock. So while quarterly timing can vary, the underlying business remains stable and profitable. Touching briefly on licensing. Revenue was approximately $22 million, significantly above our expectations. The upside was driven primarily by a new licensing arrangement secured during the quarter. So while Q2 was strong, we would not view this level of activity as a new quarterly run rate. With that, let me now turn the call over to Tim, who will provide more detail on our financial results.

Thank you, John, and good morning, everyone. As John mentioned, Q2 was another very strong quarter for BlackBerry and one that demonstrated the strong operating leverage in our financial model. Based on our revenue growth and adjusted EBITDA margin, we actually delivered a Rule of 50 quarter. We also recorded our strongest quarterly GAAP net income since Q4 of fiscal 2022, while QNX achieved its highest quarterly revenue in history. What stands out to me is how efficiently our revenue is translating into higher profitability and cash generation, while we continue to invest for growth. With that, let me walk through the quarter in more detail. Revenue for BlackBerry as a whole was $163 million, up 26% year-over-year and above the high end of our guidance range. Total company adjusted gross margin expanded 3 percentage points year-over-year to 78%, while adjusted EBITDA almost doubled and exceeded expectations at $47 million, representing 29% of revenue. Adjusted net income for the quarter was $43 million, and GAAP net income was $34 million. Adjusted EPS was $0.07, also above our expectations. Importantly, the combination of solid revenue growth gross margin expansion and disciplined management of operating expenses drove significant operating leverage in the quarter. That leverage was particularly evident in the higher-margin areas of the business including QNX royalties and licensing. We also generated strong operating and free cash flow, which I'll discuss in more detail shortly. Turning first to the segments. QNX revenue was $80 million, exceeding the high end of guidance and growing 27% year-over-year. Adjusted gross margin expanded 4 percentage points year-over-year to 87%, matching the highest reported quarterly level in the business' history. Adjusted EBITDA increased 41% to $29 million, representing a margin of 36% for the quarter. This performance reflects the benefit of meaningful revenue growth and a favorable mix, particularly higher-margin royalty revenue, while we continue to invest in go-to-market and R&D. The combination of continued growth and profitability, again for QNX comfortably above the rule of 40 benchmark in Q2. In Secure Communications, revenue was $61 million, representing 2% year-over-year growth and within our guidance range. Adjusted gross margin for Secure Comms was 61% and reflecting lower margin Secusmart device revenue in the quarter. Adjusted EBITDA was $8 million, representing a margin of 13% with disciplined expense management, partially offsetting the lower gross margin. Overall, the segment delivered a stable and profitable performance we expected following a particularly strong first quarter. Licensing revenue was $22 million, well above our expectations, with adjusted EBITDA at $20 million. The strong conversion of incremental licensing revenue into adjusted EBITDA reflects the high incremental operating leverage of this business. As always, the timing of larger licensing transactions can vary between quarters. Importantly, we converted the expanded profitability in the quarter into cash. We generated $29 million of operating cash flow in Q2, significantly above our guidance range. For the first half of fiscal 2027, we generated $34 million of operating cash flow compared with a usage of cash of $14 million in the prior year period. representing a year-over-year improvement of $48 million. The story was very similar for free cash flow given BlackBerry's CapEx-light operating model, with free cash flow for the quarter at $28 million and $30 million year-to-date. We ended the quarter with approximately $447 million of cash and investments. representing net cash of approximately $247 million. Our improving cash generation continues to strengthen our balance sheet and gives us significant financial flexibility in how we allocate capital. Our priorities remain unchanged and are centered on 3 areas: first, investing for growth in QNX. We continue to prioritize what we believe are our largest long-term organic value creation opportunities, including investment behind core automotive, Alloy Kore and GEM. Second, disciplined share repurchases. We retained significant capacity under our current NCIB buyback program, and we'll continue to evaluate repurchases and when we believe they represent an attractive use of capital relative to other opportunities. And third, selectively evaluating M&A. We continue to assess potential value-accretive opportunities that could accelerate our strategy, particularly with a view to fast tracking the GEM opportunity. We have the balance sheet to act when the right opportunity arises but the strategic and financial bar remains high. Overall, our approach remains disciplined and focused on creating long-term shareholder value. With that, let's turn to our outlook. Following the strong first half performance, we are raising our full year QNX revenue outlook for the second consecutive quarter by $17 million at the midpoint to $315 million to $325 million and adjusted EBITDA by $20 million at the midpoint to between $95 million and $105 million. For Q3, we expect QNX revenue to be between $82 million and $88 million, which is 24% year-over-year growth at the midpoint and adjusted EBITDA of between $27 million and $32 million. The increased outlook reflects the strength and trajectory we continue to see across the business. while maintaining an appropriate level of flexibility for normal quarter-to-quarter variability. This is not a quarterly business and we continue to encourage investors to focus on longer-term growth trends rather than focus on growth from quarter-to-quarter. The Secure Communications, an already dynamic backdrop in the U.S. where Secure Comms has a substantial footprint with the U.S. federal government is being further complicated by recent geopolitical developments including trade tensions between Canada and the United States. As a result, we're prudently updating our full year revenue outlook. While we haven't yet seen anything material rising from this issue, nor have we seen a slowdown in pipeline generation outside of North America, we consider it appropriate to be cautious as we head into the second half. Accordingly, we are revising the full year revenue forecast for Secure Comms to $260 million to $270 million. And adjusted EBITDA outlook to be between $50 million and $58 million. For Q3, we expect revenue to be between $55 million and $60 million and adjusted EBITDA between $6 million and $10 million. For licensing, we are raising our full year revenue outlook by $12 million to approximately $41 million and adjusted EBITDA outlook to approximately $36 million. Following the unusually strong performance in Q2 for Q3 and Q4, we expect licensing to return to a more typical quarterly revenue level of approximately $6 million. with adjusted EBITDA of approximately $5 million. As noted earlier, the timing of larger licensing transactions can vary from quarter-to-quarter, so we continue to take a measured approach to the quarterly outlook. So for the second consecutive quarter, we are raising our full year total company outlook for both revenue and EBITDA, reflecting the strength of our first half execution and increased confidence in the business. For revenue, we are increasing guidance by $19 million at the midpoint to $616 million to $636 million. representing 14% year-over-year growth. We're also raising our adjusted EBITDA outlook by $21 million at the midpoint to $141 million to $158 million which is 43% year-over-year growth. For Q3, we expect total company revenue of between $143 million and $154 million and adjusted EBITDA of between $28 million and $37 million. We expect to deliver adjusted basic earnings per share of between $0.04 and $0.05 for the quarter, and are increasing our full year outlook to be between $0.19 and $0.22. We also expect another quarter of positive operating cash flow of between $20 million and $30 million and are raising our full year outlook by $15 million to approximately $115 million as we continue to materially strengthen our balance sheet. The increased full year outlook reflects the solid execution we have seen in the first half, while maintaining a measured approach to the second half. And with that, let me hand the call back to John.

Thanks, Tim. And before we move to Q&A, let me leave you with 3 things I think are most important from the quarter. First, the financial model is solid and scalable. We delivered another strong quarter, achieved better than Rule of 40 performance generated robust cash flow and raised our full year outlook. Second, the QNX opportunity is becoming broader and more tangible. Our core automotive business is delivering record performance today. Alloy Kore has moved from strategic opportunity to commercial validation and we continue to build the long-term opportunity in gym and physical AI. And third, expanded profitability and cash generation are giving us greater strategic flexibility. This allows us to keep investing in the business while remaining disciplined in how we approach buybacks and selectively evaluate M&A. The progress we're seeing today reflects the foundation we built through the transformation work over the past 2 years, and we're now seeing that translate into stronger growth margins and cash generations. So as we head into the second half, we feel very good about the position of the business and the opportunities in front of us. And with that, let's move to Q&A. Betsy, could you please open up the lines?

[Operator Instructions] The first question today comes from Suthan Sukumar with Stifel.

Congrats on the quarter. The first question for me is on the improving profitability outlook. Could you guys speak to what the mix of royalty revenues that have been converting from backlog. How has that been trending quarter-over-quarter, year-over-year? And how much of that full year guide raise on the profitability side is led by the license strength you saw in the quarter?

Suthan, thanks for the question. Some good stuff there. So yes, we're feeling great about the leverage in our model. I think we've got a really tight cost structure, and we continue to invest, but very a very disciplined manner. So that incremental top line is very rapidly translating into expanded bottom line margins and also efficiently converting into cash as well. So we see a very strong balance sheet right now. So yes, in this quarter, the QNX was the star of the show. And within that, royalties was also the start of the show. So what we're seeing is, obviously, we've had Significant growth in our backlog over the last few years as we've secured newer, larger design wins. And what we're seeing is some of those are now moving into production. And that backlog that $950 million that we last reported, is starting to convert. So it's a great line of sight for us in terms of revenue. That's why we feel good about raising our outlook for the rest of the year. for the second quarter in a row. And right now, we feel like we've definitely got the wind at our backs in that business. It's really on fire in terms of the core automotive side of things.

That's good color. For my next question, I just wanted to touch on the fiscal AI opportunity here. How does the revenue model in GEM compared to a typical automotive program? I'm just wondering if it's still kind of a per unit type model or is it different? And secondly, is there an Alloy Kore opportunity in the GEM market?

So I'll take the first part and then maybe hand over to John for the second part. So in terms of the model, it's fundamentally the same, Suthan. So it's a volume-based royalty model. And with some pre preproduction royalty stream similar to the automotive side of things such as development licenses and services as well. You can because the volumes tend to be lower. You can see some higher per unit economics there. But as we start to see GEM expand in some of these more nascent markets actually move towards higher production volumes, I would expect to see then to move down the price curve per unit, but ultimately with a much higher scale. So I wouldn't think of it much differently. It's pretty much the same model and Ultimately, it's the same software, and that's 1 of the beauties of the market is that we're able to leverage the investment that we've made, the products that we battle tested in the automotive side and roll them out across into these adjacent verticals. So relatively similar. But John, on the Alloy Kore opportunity.

Yes. Thanks. Yes, on the alloy core, what I would say about it in the GEM space and the physical AI space, is it's definitely early days. It's a market that's really forming now. And our approach has really been to take a broader type of ecosystem approach. So you're seeing us with these programs like QNX everywhere, getting QNX into the hands of as many developers as we possibly can in the early stages of them building the software platforms for a lot of these devices that are coming. This quarter, we actually launched the QNX Launchpad program. There's another kind of way for us to engage with the industry more broadly. So we kind of use our core assets of that real-time performance operating system and how that helps manage this whole physical world, a digital world collision that's starting to happen. And I do think there's going to be tremendous opportunities for us to play a broader role long term. And the final thing, I guess, I would mention is just how the engagement with silicon players. Our partnership with NVIDIA is very quickly starting to build a strong pipeline of opportunities. So this broader ecosystem player with the silicon players with the QNX Everywhere and Launchpad programs, puts us square into I think, a leadership position long term, whether that develops into a broader platform stack along the lines of what we're doing with alloy, that's probably something that will develop over time.

The next question comes from Paul Treiber with RBC Capital Markets.

Congrats on a strong quarter. Just trying to understand the cadence of QNX's growth here. And just looking at the typically, the year is back-end loaded based on our calculations, guidance does imply that Q4 revenue for QNX is down slightly from Q3 and the growth slows. Can you just speak to that cadence through the year? And then what, if anything, is driving that slower growth in Q4.

Yes. I think I'll start, Paul. Tim, you can chip in. We continue to try to encourage everybody. I mean this is a -- this is a long-term business with long sales cycles and long production. So kind of the longer-term growth trend, we think is the important thing for everybody to focus on. Quarter-over-quarter variations is not how we manage the business, not how we invest, it's not how we partner with our customers. So from quarter-to-quarter, things can be there. But overall, when you look at the year, at the midpoint level, where we're at now, we're projecting it to be 19% growth year-over-year, which is, I think, really strong growth. It's above what we thought we would be at the start of the year. The fact that the other thing I would say is the design wins and the fact that we booked more design wins in the first half of the year, and we booked in any full fiscal year ever in the business' history. These are all, to me, they point to strong long-term fundamentals of the QNX business side. I'd avoid getting too fixated on quarter-to-quarter on what that might look like because I think the long-term trajectory of the business is really in a healthy place.

Yes. QNX is definitely not slowing down. It's -- if anything, it's accelerating. But from quarter-to-quarter, that's not going to be linear.

Okay. That's good to hear. Second question, just on -- you mentioned in the prepared remarks that there's now contracted minimum royalties and that led to some of revenue being recognized in an earlier stage. Can you elaborate on that? In particular, when did you start to see a larger number of these contracted minimum royalties in contracts? And what is the magnitude of contribution from that in Q2.

So we -- yes, this is a really good opportunity for us as part of our transition to SDP 8 and a significant incremental value that we bring to our customers. Ultimately, it gives us greater certainty as we look forward. And as John mentioned, it's moving away from noncontractual forecast towards contractual fixed minimums. And for us, that -- in addition to certainty also accelerates receipt of cash, which, obviously, every company is looking to do. As part of that, there is potential for a portion of revenue to be to be recognized earlier. I mean we're kind of feeling our way into this right now. It's for new contracts. And over time, we should see this start to grow. But for us, this is great. I mean, it's just credit certainty, earlier cash and ultimately, potential for some revenue too.

The only thing I would add to it, Paul, is what we -- all the things Tim said, really help the business in so many ways. But the customer dynamic, what we love about it also, the conviction that our customers have with our product. This is a strong statement because typically, in the automotive industry, they give you an estimate and they'll adjust it. Now our customers are coming in and say, we're bought into you guys for the long term to the point where we'll actually make a minimum commitment. That's a new dynamic, and I think that is attributable to how the strength of the product is and our vision and where we're going, that they want to make a longer-term firm commitment with us which is definitely an inflection point from where we were a few years ago.