Good afternoon and welcome to the BlackBerry First Quarter Fiscal Year 2023 Results Conference Call. My name is Brent and I will be your conference moderator for today's call. [Operator Instructions].

I would now like to turn today's call over to Tim Foote, Vice President of BlackBerry Investor Relations. Please go ahead.

Tim Foote - Vice President, Investor Relations

Thank you, Brent. Good afternoon and welcome to BlackBerry's First 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 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 will be making today, constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of applicable U.S. and Canadian securities laws. We will 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 will turn the call over to John.

John Chen - Executive Chairman & Chief Executive Officer

Thanks Tim. Good afternoon, everybody and thanks for joining the call. I must first apologize, after speaking for two days, because we had our AGM and Board meeting, my throat is a little sketchy. So apologize for that.

Anyway, this quarter, we built on the momentum from fiscal '22 and continue to execute it well, delivering solid year-over-year revenue growth. Total Software and Services revenue was $164 million, representing a 9% year-over-year.

Let me first start my review today with the IoT business unit. Despite a tough macroenvironment for auto, we delivered revenue of $51 million, which represents 19% year-over-year growth. Gross margin came in at 84%. IoT ARR was $94 million, increasing 9% year-over-year. We recorded strong revenue from preproduction development seats and professional services, setting yet another quarterly record for the third quarter in a row. As you know, this is not only a positive for the current year, but also a strong indicator of future revenue, once the design enter into production.

Our strength in securing new design wins have driven a year-over-year increase in our royalty revenue backlog, which is now at approximately $560 million, a 14% increase from a year ago. Further, the number of vehicles with QNX software embedded has increased year-over-year from over $195 million to over $215 million. I am pleased that the strength of our design wins once again allow us to overcome the impact of the headwind that the auto industry is currently facing. These headwinds include, COVID-related lockdowns in China, supply chain issues, the Ukraine war, inflation and rising interest rates.

On the supply chain front, the situation appears to be showing some signs of stabilization. While the economic issues will impact the overall auto market, demand for higher end models and electric vehicle appears to be holding up.

As mentioned, QNX continued to perform well in terms of securing new design wins. In the quarter, we gained a total of 14 new design wins, with nine in auto and five in the general and embedded market. We are a market leader in ADAS, Advanced Driver Assist that is, and Digital Cockpits, both fast growing safety-critical domains. In fact, Strategy Analytics, a leading independent auto analyst, estimate a three-year CAGR for ADAS market to be 29%, and Digital Cockpit to be 40%. And within those domains, we plan to grow even faster than that, as we continue to win market share.

In the quarter, we had a number of large design wins in Digital Cockpit. In addition to wins with leading Tier-1 Bosch and Visteon, we secured a win with a global automaker based in North America. As well as BICV, a leading Chinese Tier-1 for an augmented reality, AI and hologram-enabled digital cockpit, to be deployed in Renault-Jiangling's latest fully electric sedan. That's quite a bit of technology. Furthermore, despite lockdown challenges, we are able to secure a number of new design wins with major Chinese automakers, including autonomous drive design with Great Wall Motor and others.

Outside of auto, this quarter, our QNX Hypervisor - sorry, QNX Hypervisor, was pre-certified by the independent auditor at TUV Rheinland to the highest level of safety for medical device software. We continue to make progress with medical design wins. And a good example in the quarter was for a dialysis machine, with a major technology customer base in India.

Let me now provide you with an update on the progress we are making with IVY. As previously mentioned, we have received more proof-of-concept or POC trial requests than we could currently handle, and we continue to receive more. This is a strong indicator that IVY is a product with the right strategy, in the right place at the right time. In the quarter, we commenced a number of POCs, which include leading global automakers and Tier 1s. Engagement so far has been positive, and some of the learnings are helping guide our product development. Product development is advancing well, and our June release now supports an even wider range of sensors and hardware. We are also progressing well with developers' tools.

Progress is also being made of the application ecosystem side and we currently engage with multiple potential partners. These partners enable a wide variety of exciting use cases, including AI-driven battery management, predictive maintenance and user-based insurance, just to name a few, and a number of them are being considered for inclusion in the current POCs. Overall, we continue to be excited by the potential opportunity for IVY and are pleased with our progress this quarter.

Now, moving on to cybersecurity. This was a solid quarter for the cybersecurity business unit. Revenue came in at $113 million, a 6% growth year-over-year. Billings on a total contract value basis, was $89 million, a 16% year-over-year increase. Gross margin was 53%, ARR was $334 million, dollar-based net retention rate was 88%. This number, of course, does not include new logo wins nor certain perpetual license win in government.

With the elevated cyber threat levels, we see a strong demand environment at present. Given this backdrop, we continue to invest in go-to-market. In the quarter, we added net new –net direct quarter carrying headcount. We are pleased with how these additions to the team are ramping up. And of course, it will take a few quarters for them to reach full productivity.

During the past quarter, we also expanded our channel presence. We added Midis Group, a partner with over 5,000 employees and a presence in over 70 countries across the Middle East, Europe and Africa. This significantly expands our reach in those markets. Midis brings a lot of experience in cyber, having been a distributor with McAfee, Symantec and TrendMicro. We have also made a number of enhancements to our managed security service provider or MSSP program.

As growth in our Guard MDR solution has shown, there is a very large demand for managed service in cybersecurity and MSSP allow us to greatly scale out our go-to-market. During the quarter, we secured a number of new logo wins, mainly displacing legacy vendors. The legacy vendors market remains a very large opportunity for BlackBerry, and we have been running a number of targeted campaigns. In particular, this quarter, we saw a number of customers move from Kaspersky [Phonetic] –sorry, to CylancePROTECT. CylancePROTECT works very well in this context, and its lightweight agent is both quick and easy to deploy.

We continue to compete head-to-head and win against other next-gen cyber players. A good example of a win this past quarter was of a major U.S.-based medical industry customer, with deployments of tens of thousands of endpoints in a direct head-to-head competition against CrowdStrike. The customers select BlackBerry because they were impressed by the effectiveness of our product, especially against the Log4j and [Indecipherable] as well as our high level of customer service.

Our cyber products received further external validation in the recent minor attack evaluations. Our cyber suite of solution was 100% successful in preventing both a Wizard Spider and Sandworm attacks very early in each scenario, and critically before any damages occurred.

Let me now provide an update for UEM. This quarter, we secured renewal with some of our largest customers, including the U.S. Air Force, U.S. Navy, U.S. Special Ops Command, the Canadian Senate, the Supreme Court of Canada and the Royal Canadian Mint. We booked a great amount of business with law enforcement agency in the quarter, such as with the U.K. Serious Fraud Office, the London and Manchester Police Services, as well as the Vancouver Police Department. We were pleased to both increase the number of UEM license, and deploy additional products to these customers.

In addition to government, we secured renewal and upsell a number of leading financial services customers, including leading banks MUFG - I believe they are the largest Japanese bank, Mizuho and Sumitomo Mitsui Banking Corporation, three of Japan's four largest banks, Switzerland's Julius Baer Group, First Citizens Bank and Liberty Bank in the United States, as well as other leading banks in both Germany and Canada.

As we mentioned previously, given the competitive market, we continue to strengthen our UEM product offering, and we're pleased to partner with Google to add support for enterprise running Chrome OS and Chrome browser, support that Microsoft Intune does not offer. According to IDC, Chrome OS recently overtook macOS as the number two desktop OS with more than 10% market share, and Chrome is also the world's leading browser, with approximately 70% market share.

The strength of our UEM offering continues to be recognized. In last month, IDC MarketScape named BlackBerry as a leader in UEM for the third year in a row. Among other items, they highlight a wide range of government and industrial security and compliance certification, that BlackBerry UEM holds. These certifications help BlackBerry maintain a strong position in core regulated markets.

And now a brief word about licensing. In the quarter, licensing revenue was $4 million, and gross margin was 50%. Earlier this month, we issued a press release updating the status of the proposed sale of the legacy portion of our patent portfolio. The buyer, Catapult, is working to secure their financing, and we look forward to the completion of the transaction. At the same time, as we are no longer under exclusivity with Catapult, we are free to explore new options, as they come our way. We will provide more details, as and when appropriate.

Let me now hand over to Steve, who will provide additional color on our financial results for the quarter.

Steve Rai - Chief Financial Officer

Thank you, John. As usual, my comments on our financial performance this past quarter will be in non-GAAP terms, unless otherwise noted. Also, please refer to the supplemental table in the press release for the GAAP and non-GAAP details.

Total company revenue for the quarter was $168 million. First quarter total company gross margin was 63%. Our non-GAAP gross margin excludes stock compensation expense of $1 million. First quarter operating expenses were $132 million. Our non-GAAP operating expenses exclude $23 million in amortization of acquired intangibles, $1 million of restructuring expenses, $165 million relating to a one-time litigation settlement of a matter dating back to 2013, $6 million in stock compensation expense and $46 million fair value gain on the convertible debentures.

This quarter, non-GAAP operating loss was $27 million and non-GAAP net loss was $31 million. The GAAP basic loss per share of $0.31 was primarily driven by the one-time impact of the litigation settlement. Non-GAAP loss per share was $0.05 in the quarter. Our adjusted EBITDA was negative $21 million, excluding the non-GAAP adjustments previously mentioned.

I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was $113 million and IoT revenue was $51 million. Software product revenue remained in the range of 80% to 85% of the total, with professional services making up the balance. The recurring portion of software product revenue remains at approximately 80%. Licensing and other revenue was $4 million.

I'll now move to our balance sheet and cash flow performance; total cash, cash equivalents and investments were $721 million as of May 31, 2022. Our net cash position was $356 million. Q1 is traditionally a seasonal high for use of cash, given the payment of annual bonuses and other annual items, and together with the ongoing investment in the business, free cash usage was $43 million. Cash used by operations was $42 million and capital expenditures were $1 million.

That concludes my comments, and I'll now turn it back to John.

John Chen - Executive Chairman & Chief Executive Officer

Thank you, Steve. Before we commence our Q&A session, let me first provide a current year outlook. There is no change from our previous guidance. We continue to expect full fiscal year '23 revenue for the IoT business unit to be in the range of $200 million to $210 million, and revenue for the cybersecurity business unit, to be broadly in line with the fiscal year '22, with about 8% to 12% year-over-year billings growth.

I'd like to thank everybody who attended our recent Analyst Day. I think it was May 12. For those who were able to join, we provided three and five year revenue target for BlackBerry. We expect the total company revenue, excluding the IVY, to grow with a five year CAGR of approximately 13%, with revenue of $886 million in FY '25 and $1.2 billion in FY '27.

Breaking this down by business unit, while the IoT TAM is expected to grow in the range of 8% to 12% over the next three years, we expect to grow IoT revenue at a five year CAGR of approximately 20%, this is double [Phonetic] the industry growth rate. This faster than market growth rate, is primarily driven by the market share gain in our core safety critical auto domains. In addition to auto, we also expect growth from adjacent verticals, particularly medical and industrial, broadening our addressable market.

We estimate revenue in the FY '25 to be approximately $307 million and approximately $443 million in FY '27. This model is still –is partially built on the multiyear revenue backlog, from already confirmed designs, and a line of sight to upcoming potential new design wins. It is important to note that these IoT targets do not include any revenue from IVY, which then becomes upside to the story.

For cyber, given the strong market condition, our technology portfolio and the roadmap, we expect revenue to grow with a five year CAGR of approximately 10%. The cyber business unit includes, both the more mature endpoint management products as well as the higher growth endpoint security products. We target cybersecurity revenue of $579 million in FY '25 and $770 million in FY '27. We expect operating leverage for the business, expanding gross margin by over 100 basis points per year on average, and trending towards our 20% operating margin by FY '27. Given the investment we're making, we expect moderately negative EPS and cash flow this current fiscal year, approaching EPS and cash flow breakeven in FY '24 and becoming EPS and cash flow positive from FY '25 onwards. We expect the two markets to converge and our position in both IoT and cybersecurity will place us in a very strong position to capitalize on these growing market trends.

So let me summarize the key takeaway from the quarter. One, this was a good quarter where we delivered year-over-year revenue growth in both our IoT and cyber business unit. Two, we set another quarterly record for design activities in IoT, offsetting the impact of macro headwinds on auto production. Three, on the cyber side, we recorded solid double-digit billings growth and continue to make progress in expanding our market reach.

One final point; this quarter, we released our first ESG report, with highlights including BlackBerry achieving carbon neutrality. For those who haven't seen it yet, a copy can be downloaded from our website.

That concludes my remarks. Brent, can you please open the line for Q&A?

Question & Answers

Operator

[Operator Instructions] Your first question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open.

John Chen - Executive Chairman & Chief Executive Officer

Hi, Paul.

Paul Treiber - RBC Capital Markets - Analyst

Thanks so much and good afternoon. John, first question, can you connect the dots between –in the cyber business, between the decline in ARR versus the very healthy billings growth in the quarter. And more specifically, was there any contribution from perpetual license like SecuSUITE in the quarter?

John Chen - Executive Chairman & Chief Executive Officer

Yes. Actually, your second question answers somewhat partially the first question. We had a good SecuSUITE quarter selling to the government and it's perpetual, because of the way the government purchased the technology, and so that did not fully reflect on obviously on –and it cannot be reflected on the ARR. There was some minor churn for the UEM mid-market, which we have identified last quarter. So the combination of those two explain the delta.

Paul Treiber - RBC Capital Markets - Analyst

That's helpful. Thank you. And second question, just on the patent sale, and not so much - you know, in the details you mentioned you can't disclose –obviously, negotiations are ongoing. But if the sale doesn't go through and you don't find a third-party, I mean would you revert back to IP licensing, or are you –you are definitely going to go through with the sale. You just have to find the right buyer and the right price?

John Chen - Executive Chairman & Chief Executive Officer

I believe for simplicity of our company's story and the focus, we should find a buyer, and I believe we will find a buyer. But we will not shy away from monetizing ourselves. We do have our team standby and ready. So –but my first priority is a secure buyer, and there has been other people that have approached, but I still believe that Catapult will get it done.

Paul Treiber - RBC Capital Markets - Analyst

Okay. Great. That is helpful. I will pass it on.

John Chen - Executive Chairman & Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Trip Chowdhry with Global Equity. Your line is open.

John Chen - Executive Chairman & Chief Executive Officer

Hey Trip. Trip, how are you?

Trip Chowdhry - Global Equity - Analyst

Wonderful. Always exciting to hear about IVY. Two questions I have, first is regarding the chip supply position. Do you think because of the depression in cryptos, some chip capacity may have been released and that may be easing out the chip shortage that automotive industry is facing? Are you seeing something to that effect?

John Chen - Executive Chairman & Chief Executive Officer

Seeing the chip shortages…

Tim Foote - Vice President, Investor Relations

So, I think it's the fact that cryptocurrency is currently depressed, is that freeing up chips?

John Chen - Executive Chairman & Chief Executive Officer

I am not - I am not good enough to answer your question there, Trip. I am not a big crypto fan. No, I got you. So, I don't follow that very closely. I know it's very depressed at this point, and I don't know the relationship with that. I am sure there are some, with the chip shortages issue. So sorry, I can't answer that question.

Trip Chowdhry - Global Equity - Analyst

All right. Second question I had is regarding the IVY platform, and it's –and you are getting insurance –auto insurers on top of it. I was wondering, what kind of use cases can you think about, that can evolve over a period of time? And that's all from me.

John Chen - Executive Chairman & Chief Executive Officer

Actually, that's a very good question. So we have, in our partnership, at least one if not two organizations, specialized in this area –in the insurance area, for example. The big thing about the insurance area with auto, is pay-as-you-go, a kind of usage-based insurance model. And then the other one is a redefinition of how the insurance –kind of related to the first one, how they were calculated and it's particularly more meaningful in the fleet management side of the equation. So, other use cases, there is a lot of use cases in IVY or IVY could host a lot of use cases. Of course, we told you guys about battery management. The whole area of predictive maintenance are huge, and every OEM will want to get their hands around the data, around the actions that could generate, whether it's physically or over-the-air update. So, we are seeing a lot of interest - a lot of different use cases and auto as a wallet, there is also a lot of financial technology around it. And so it's an exciting time for IVY.

Trip Chowdhry - Global Equity - Analyst

Thank you very much. All the best.

John Chen - Executive Chairman & Chief Executive Officer

Thank you, Trip.

Operator

[Operator Instructions] Your next question comes from the line of Todd Coupland with CIBC. Your line is open.

John Chen - Executive Chairman & Chief Executive Officer

Hey Todd. Todd, how are you?

Todd Coupland - CIBC - Analyst

Oh, hey there John. Good evening. I am doing well. Thank you. I had a couple of questions. First on IoT, you talked about how you are seeing the supply chain ease. Could you just talk about what you are seeing that's changed, since you gave the last update?

John Chen - Executive Chairman & Chief Executive Officer

Yeah. On the supply chain side, the OEMs around the world, they finally have a good strategy. And then - of course each of them has their own strategy, but I see it more suited to high-end cars being built, that they are able to manage their supply chain issue and build and release cars that are of more value to them. So high-end car being built, of course, there is a constant demand of electric vehicle, particularly given today's environment with the gas price, and the environment. So –and the good thing about us is, QNX is typically embedded in the high-end cars, more so than the lower-end models. And in addition to that, we have a strong footprint, 24 of the top 25 production volume producer uses QNX - of the EV that is, of the electric vehicle world. So, as their volume goes up - although still a small percentage of total vehicles sold, I think it's like 12% right now, that we are seeing the volume uptick. So, it's a good trend for us.

Todd Coupland - CIBC - Analyst

But it's –I guess it's not material enough to move the IoT guide for the year.

John Chen - Executive Chairman & Chief Executive Officer

No, because there is a headwind. We had a little delay on some of the stuff when China has a lockdown because of COVID. And then of course, now, as you all read, and you guys probably know this very well, that the interest rate uptick is causing a little bit of the demand slowdown for new vehicle purchases, and so those are all factors that we still need to confront with. And so our strategy is, we see a strong design win rate. We are winning a lot of new design win and they typically come with license, developer license and some professional services revenue. We are strong enough in those areas, that covers the shortfall on production or slowdown of production, if there is any. So, we believe that our guidance is still good, and I hope I am wrong on the conservative side, but I think our guidance is still good, and the mix shifted a little bit.

Todd Coupland - CIBC - Analyst

Okay. That's helpful. And then my second question had to do on the cyber business, you talked about modest churn in SMBs and you talked about that for a couple of quarters. What I was wondering is, we are starting to see an enterprise staff being given options of BlackBerry UEM versus, let's say, a competitor. And I am just wondering if you are seeing that in other enterprise, and does that give you some concern that the churn might bleed into larger businesses? Just talk about that trend. Thanks a lot.

John Chen - Executive Chairman & Chief Executive Officer

Yes. Currently, we haven't seen that. So, this is important that we continue to work on our products and partnerships, which I talked about. So far, the UEM churn is usually in the non-regulated space and is a small –more small, medium enterprise. So, for the very large one, we have continuous renewal, and particularly the government world. So no, I haven't seen that as a major trend at all. Even banks so far have been okay, knock on wood.

Todd Coupland - CIBC - Analyst

Okay, great. Thanks a lot.

John Chen - Executive Chairman & Chief Executive Officer

Thank you.

Operator

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

John Chen - Executive Chairman & Chief Executive Officer

Hi. How are you Daniel?

Daniel Chan - TD Securities - Analyst

Hi John. Good. Thanks. Just wondering if you can provide some color on the drivers behind the 14% increase in the QNX backlog? Is that due to a recovery of production volumes, extension of some programs or higher ASP? Just any color on that would be helpful?

John Chen - Executive Chairman & Chief Executive Officer

Yes. It's the result of the design wins we have been telling you folks every quarter. So we have a very strict guideline and formula of what got counted, what didn't get counted. And we are very conservative on that. But this is as a result of what the OEM told us, that this is the volume you should expect in future years on the total [Phonetic] program, and we sometimes do a discount on it, sometimes we took it as is. And so –and it was accumulation of those offsetting obviously the runoff which is the –which is the royalty we got in the last 12 months, and that results a 14% increase.

Daniel Chan - TD Securities - Analyst

Okay. That's helpful. Thank you for that. And then I wanted to ask another question on the patent sale. You said you would explore options as they come in. I just want to know, like whether you guys are actively looking for other options? Like are you actually going back to other bits you had in your initial process, or are you starting from the beginning again?

John Chen - Executive Chairman & Chief Executive Officer

No, not at all. In fact, we are being approached by others. I am not actively looking for or starting from square one. As I said I want to make sure that the shareholder knows that, we are not just stuck with one option, but we do expect to see, and we would like to see the previously announced deal with Catapult to happen. But what we are basically saying is, we have been getting calls and we are now responding to the calls, because now the exclusivity has expired.

Daniel Chan - TD Securities - Analyst

Great. Thanks John.

John Chen - Executive Chairman & Chief Executive Officer

Sure.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. John Chen, Executive Chair and CEO of BlackBerry for closing remarks.

John Chen - Executive Chairman & Chief Executive Officer

Thank you, Brent. Thank you, everybody, for joining us. I realize it's late back east, and looking forward to speaking with you all again soon. And have a good day –have a good evening.

Operator

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