BlackBerry Ltd (BB) 2016 Q2 法說會逐字稿

Good day and welcome to the BlackBerry second-quarter FY16 conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Joe del Callar.

Please go ahead, sir.

Thank you, operator.

With me on the call today are Executive Chairman and CEO John Chen; and Chief Financial Officer James Yersh.

After I read our cautionary note regarding forward-looking statements, John will provide a business update and James will then review the second-quarter results.

We will then open up the call for a 30-minute Q&A session.

In order to let as many people as possible ask questions, please limit yourself to one question.

This call is available to the general public via call-in numbers and via webcast in the Investor Relations section of 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 US 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, including the risk factors that are discussed in the Company's annual information form which is included in our annual report on Form 40-F and in our MD&A.

You should not place undue reliance on the Company's forward-looking statements.

The Company has no intention and undertakes no obligation to update or revise any forward-looking statements except as required by law.

I will now turn the call over to John.

Thank you.

Good morning, everyone, and welcome.

I'll take you through the summary of the Q2 results and highlights and where we're making progress in our strategy and then I'll discuss the key development and area of focus for driving towards near-term and long-term objectives.

First, a summary of our quarterly results.

Everything, by the way, I cover here will be non-GAAP based.

James will then cover the detailed financials later.

Total revenue was $491 million with an EPS loss of $0.13.

We generated positive cash flow of $100 million and positive EBITDA of $68 million.

This was the sixth consecutive quarter of positive free cash flow and seven consecutive quarters of positive EBITDAR.

Our total cash balance now increased to $3.35 billion from $3.32 billion last quarter.

The net increase of $37 million takes into account already the $47 million of cash used for the stock buyback last quarter.

Excluding IP licensing, our overall software business continues to expand, up 19% year over year and 9% quarter over quarter.

Software license revenue grew 33% year over year and 14% quarter over quarter.

This represents the fourth consecutive quarter of double-digit year-over-year growth in software licensing.

BES12 software and QNX were the largest contributor to the growth in the quarter.

We booked a total of 2,400 software transactions in Q2.

The notable customers include Airbus, Berenberg Bank, TD Bank, Peugeot, Herbalife, Nippon Express, Siemens, Viseon and LG Electronics.

We made good progress moving our software business from perpetual to subscription.

With AtHoc, which recently closed, I think this week, and Good Technology, which is pending closure, we will increasingly shift our revenue mix in this direction.

I am encouraged that we continue to deliver positive free cash flow, EBITDAR and software growth.

These are all key to achieving sustainable profitability going forward.

That said, I'm not satisfied, and I'm sure James shares the same sentiment, where we are in the overall revenue and profitability, especially the performance of our handset business.

If you'll recall in my opening remarks, I alluded to the fact that software license revenue is growing faster than the overall software.

This is a function of our T-Support business.

A portion of the T-Support is declining due the legacy BBOS user base.

But, more importantly, we have a shift from perpetual to subscription, and also provided a negative drag for that because the subscription base -- maintenance is now in the subscription revenue.

To address these issues, we are focusing on three main areas -- one, growing the device volume profitably; two, generate recurring revenue from the IP licensing; and, three, making our software business larger.

I'll take you through each and every one of them.

To address the device growth and profitability, we're launching a new slider phone later this calendar year.

I'm confirming today, much leaked rumor, that an Android phone, differentiated by BlackBerry core strength and security and productivity, will have access to the Google Play app systems, this phone, we're announcing that phone today.

I'm sorry for my English.

I didn't write it down correctly.

This phone is the answer for former BlackBerry user who miss the physical keyboard but also needs app.

By the way, it also have a curve or touchscreen.

We announced this morning that the name of the phone is Priv -- spelled P-R-I-V, which is derived from BlackBerry core mission of protecting our customer's privacy.

So Priv is really for the privacy and privilege.

That's how we thought about it.

When you manage this device using Android for Work on BES12, you have the most secure Android device broadly available in the market.

It also highlights the ability of our EMM platform to secure cross-platform device in the enterprise.

On the BB10 front we shipped 10.3.2 last quarter with new features added to a BlackBerry Protect, mainly the anti-theft protections and security enhancement to both the messaging Hub as well as the [plan].

We have two confirmed new releases, 10.3.3 and 10.3.4 on the road map.

These releases will further emphasize security and privacy and maintaining BB10 as the industry's most secure device platform.

The key takeaway here is really that we continue to lead in mobile security and now we're bringing the BlackBerry security know-how into the Android ecosystems.

As a result, we believe we can address a larger and growing segment of the enterprise space and we believe we could be a leader in this space.

To address profitability directly, we continue to streamline our infrastructure and reduce operating costs from our device business.

We took additional action in Q2 and we will see the benefit more meaningfully in Q4 and beyond.

We also reallocated a lot of internal resources to align with our growth strategy.

For example, as of now over 50% of our headcount in the Company is in software and global sales.

The second area of focus related to monetization of the IP patents.

In Q2, we did not generate any IP licensing revenue after closing two significant transactions in Q1.

Licensing of IP assets is part of our strategy to increase profitability and growth.

We have a reasonable pipeline opportunity in second half of the FY16.

However, we are working to generate royalty revenue where possible to make our business more recurring and more predictable.

Lastly, I'm focused on increasing the size of our software business to accelerate revenue growth.

There were both organization and product developments in the past quarter to highlight.

And of course our M&A strategy is also important to this end.

In mid-July Carl Wiese joined BlackBerry as President of Global Sales.

Carl has spent 13 years at Cisco in sales leadership role focused on growth strategy for their collaborative business which is now running, I believe, at $4 billion.

I'm looking to Carl to bring a similar focus to BlackBerry enterprise software business.

On the product front, we're differentiating our platform with an ongoing emphasis on security and cross platform capabilities.

During the quarter, we shipped new releases of BES12 -- 12.2, for those who care -- the cloud version of the BES, as well as the integration of WatchDox -- had a new release of WatchDox software, also.

WatchDox, of course, is our secure electronic file-sync-and-share platform.

Each of these releases includes enhancement support for Samsung KNOX and Android for Work.

In addition, the BES12.2 is designed to support the NIAP certification for the BB10 in the government space.

On the M&A front, we stepped up investment in software.

This, of course, reflects our confidence in our free cash flow outlook and our current cash situation.

Our recent announced investment in AtHoc and Good Technology will provide both near- and long-term benefit.

By the way, a AtHoc, as I said, closed this week, at the beginning of the week, and Good Technology will close towards the end of the year, I hope towards the end of November.

I need to clarify two misperceptions from reading the research notes from our Good announcement.

The first deals with the degrees of product overlap between BlackBerry and Good.

The second is on opportunity for our cost synergy.

So, take the first one first, BlackBerry and Good have strength in non-overlapping areas.

This was one of the major reasons why this acquisition is so attractive to us.

BlackBerry is strong in cross-platform MDM and a lot of the value-added service, as you know.

We also have a growing base of Android users to go with our BB10 base as well as the BBOS base.

Good is good at -- sorry for the -- it's not pun -- Good is good at mobile apps management and bringing a larger base of iOS users.

And I believe they have 64% of their licenses on iOS.

And we share a common heritage in privacy and security.

Combined, we'll have the broadest and deepest platform in the EMM space.

On the cost synergy side, we'll have full integration plan on day one.

We will move quickly, especially in the back office functions and by eliminating duplicated infrastructures.

We're targeting a 30% reduction in combined enterprise infrastructure cost at the start.

To reiterate the expectation we provided on September 4, we expect significant operating expense synergies, allowing us to be cash flow and earnings accretive within the first years of the combined acquisitions.

We anticipate approximately $160 million in GAAP revenue from Good in the first year.

This includes the impact of an expected write-down of certain deferred revenue of Good.

Our model also excludes deferred IP license revenue from BlackBerry and factors in a modest degree of revenue attrition due to the limited product overlap.

Moving on to AtHoc, which is a software company specializing in secure cloud-based communication, this is a business extremely well aligned with our strategy and our core verticals such as government and public sector.

A case in point is AtHoc recent win with the TSA, Transportation Security Agency, which will enable protection and crisis communication to over 200 major airports.

A win like this highlights the opportunity we have to leverage AtHoc solution in our core verticals and across our much larger global footprint and much larger government customer base.

On longer term, AtHoc will be integrated with our BBM and some of the enterprise offering, and will be a key component of our IoT platform.

Both Good and AtHoc have subscription revenue model.

We will focus on growing this based on recurring revenue going forward.

Before summarizing and hand the call to James, I'd like to make a final point on balancing cost reduction versus investment in growth areas.

To be sustainably profitable, we need to grow the top line.

In Q2 we decided to invest in our Android strategy which we outlined just now and a go-to-market effort in software.

Obviously there's a balance between making these investments and the near-term focus on cost reduction and profitability.

But to be clear, this does not change our FY16 objectives.

We're planning to be free cash flow positive each quarter and profitable in Q4 and going forward.

Device revenue should be stable next quarter and we'll see the benefit in Q4 from the launch of Priv, our new Android device.

Software should continue to grow in double digit.

IP licensing should also contribute in the next two quarters.

For Q3, we should see a slight uptick in total revenue from Q2.

By Q4 our model shows that software and services revenue should offset the decline in SAF.

This will be the first time in three years.

And a further sequential uptick on overall revenue at that time.

So, we believe we are on track to reach our $500 million software and services revenue for the full year.

We will continue to pursue the current M&A strategy to drive our growth in software and IoT.

However, we'll be more likely focused on tuck-in opportunity in the near term.

I expect to maintain a cash balance of $2.5 billion, as we communicated in the past -- for the foreseeable future, that is, $2.5 billion, taking into account the recent and future potential M&A investments.

Based on our expectation for continued free cash flow I'm announcing our intention -- or actually I got the Board approval -- to increase our current stock buyback program by up to another additional 15 million shares.

I believe our current buyback that we announced a couple months ago has 6 million shares left, so this will become 21 million shares.

Now I will turn the call over to James for a detailed review of our financial performance.

Thank you, John.

And good morning, everyone.

Today we reported Q2 GAAP revenue of $490 million and non-GAAP revenue of $491 million, with GAAP EPS of $0.10 and a non-GAAP loss per share of $0.13.

Before I dive into our details, as you probably noticed, we are changing our non-GAAP income statement presentation to exclude purchase accounting deferred revenue write-down, stock-based compensation expense, and amortization of purchased or acquired intangible as part of the M&A transaction.

This presentation is consistent with the predominant practice in the software industry.

We also believe this methodology is appropriate because of our increased emphasis on software and our acquisitions of software firms with material recurring revenue streams.

With this in mind, my comments on our financial performance for the quarter will be in non-GAAP terms unless otherwise specified.

For reconciliation GAAP and non-GAAP numbers please see the earnings release and the supplement published earlier today.

Now let me begin with the income statement.

Our total revenue for the second quarter of $491 million excludes the impact of a $1.3 million purchase accounting deferred revenue write-down for watched stocks.

Software and services represented 15% of revenue and grew 19% on a year-over-year basis.

Service access fees or SAF were 43% of revenue.

The SAF decline was in line with our expectations for roughly 15% quarter-over-quarter decline.

And we continue to model a decline of approximately 15% for the next quarter.

Lastly, our hardware business represented 41% of revenue.

We recognized revenue on approximately 800,000 units.

ASP was approximately $240, roughly in line with last quarter.

Turning to margins, gross margin was 40.9% compared to 47.5% in the same prior-year quarter and in line with our expectations.

Gross margin was negatively impacted by low hardware volumes and the continued decline of SAF.

We continue to expect gross margin in the 40% range for the next quarter.

Operating expenses were $285 million, down from $415 million in the same prior-year quarter.

Our non-GAAP operating expenses exclude $71 million in restructuring charges, $11 million in amortization of acquired intangibles, $13 million in stock-based compensation expense, and a non-cash credit of $228 million for the convertible debt.

As a reminder to everyone, as I do every quarter, this non-cash adjustment to the debt has no impact on its face value, on our liquidity or operations and cash flow.

Operating loss was $84 million, largely due to amortization expense, excluding acquired intangibles of $152 million.

Our adjusted EBITDA this quarter, which excludes restructuring charges, the debenture adjustment and stock comp, was a positive $68 million.

In the quarter we had a non-cash tax recovery of $30 million.

Now moving on to our balance sheet and working capital performance, our cash balance increased by $37 million compared to last quarter.

And, as John previously mentioned, this increase reflects $47 million spent during the quarter on the buyback.

Total cash, cash equivalents and investments ended at $3.35 billion.

Our net cash position adjusting for the $1.25 billion face value of the debt stands at $2.1 billion.

Aggregate contractual obligations, which includes purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations, amounted to approximately $1.1 billion, down from $1.6 billion in the same year-ago period.

Purchase orders with contract manufacturers represented approximately $248 million of the total, down from $344 million in the same year-ago period.

Moving to the cash flow statements, excluding the impact of foreign exchange, we generated positive free cash flow of $100 million.

This is our sixth consecutive quarter of positive free cash flow.

Looking forward, we expect to remain cash flow positive and forecast sustainable profitability in the fourth quarter of FY16.

Given the derisking of our balance sheet and our continued ability to deliver positive free cash flow, we expect to maintain a balance of $2.5 billion or higher including the impact of our acquisitions and our buyback.

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

Thank you.

Operator, we're ready for Q&A, please.

(Operator Instructions)

We'll go first to Daniel Chan with Scotiabank.

Thanks for taking my question.

John, BB10 has been out for nearly three years now.

You've launched a number of new products like the Passport and the Classic recently.

But that business continues to lose market share, device volumes continue to decline.

And with only 800,000 devices in the last quarter, when do you throw in the towel on BB10 and just say -- I'm going to focus on Android?

First of all, we'll have to make sure that Android's successful first.

It's a good question.

There is a very loyal base in BB10, especially the government, and some highly regulated industry customers.

So, we will have to see whether we could make money on that base.

But in addition to that, if our plan of doing the BlackBerry Android type of implementation works well and the security side of the equation is well accepted by the government and this space, of course we could then replace them or merge them into it.

Does that make sense?

Yes, it does.

Then the follow-up -- you say you're going to be securing Android on your own.

Is that going to be your own security solution or is that going to be using Samsung KNOX?

No, no, it's not Samsung KNOX.

We're actually working with Google on this.

Okay, thank you.

We'll go next to Mark Sue with RBC Capital.

Thank you.

It's actually Paul Treiber at RBC.

Mark is unfortunately traveling at the moment.

Just what's the magnitude of the investment needed to bring the Android device to market in comparison to supporting a BlackBerry 10 device?

Or, in other words, is it more cost effective to bring the Android device to market than the BlackBerry 10 device?

Absolutely, because a lot of the drivers for all the chipsets are already in place.

I don't have to spend any time, energy and money for drivers.

I also don't have to do anything regarding the apps ecosystem or the API surrounding that.

So, all I need to do is to concentrate on the security and the privacy features and add it to that ecosystems.

Is there a similar relationship that you have with your contract manufacturers where they're taking on some of the inventory management or are you taking that on in the reference design?

We have both.

So, to clarify that, we have both arrangements.

We have ones that we will take inventory or at least parts -- I call it the unique parts exposure.

Then we have ones that we don't, as you well know.

This, of course, will continue, whether it's an Android device or BlackBerry 10 device.

So, there's no difference there.

Good to understand.

One last one from me, just in regards to the 33% growth in software license revenue, what's your organic growth excluding recent acquisitions?

Mostly are organic.

You could see the difference between the WatchDox non-GAAP, GAAP, is like $1 million-point-some.

And we just finished AtHoc.

And we haven't finished Good yet.

They're all mostly organic.

Okay.

Thank you.

We will go next to Maynard Um with Wells Fargo.

Good morning.

Thank you.

Can you just clarify if your guidance includes the Good Technology acquisition, because you noted before that it would be accretive within the first year.

But I'm curious if you could talk about immediately after close will you still have non-GAAP profitability and continued positive free cash flow?

Yes.

First of all, continued free cash flow taken into everything including the Good Technology acquisitions and the integration of that.

You're talking about the non-GAAP profitability in Q4, correct?

Right.

That also includes all the acquisition.

Okay.

It is inclusive of the acquisition.

So, how do we think about, then -- well, I guess you gave the [cell phone] numbers.

Just the other question I had, it just seems like on the revenue growth is partially predicated on the new Priv handset.

But can you just talk about your plans for distribution?

Because if I look at the Android market it's very highly competitive, so I'm just curious, one, how you distribute it, two, what the ASPs look like, and then, more importantly, the gross margin profile of the device.

We have not released the ASP, the gross margin part.

You have to wait for a little bit on that one.

The reason why I kind of, quote, unquote, jumped the gun to make the announcement today is because it's leaking everywhere and I didn't think that it makes total logical sense for us to have this conversation when it's leaking everywhere and I won't talk about it.

So, we're confirming the fact that we are bringing our security know-how onto the Android ecosystem.

And we built a phone with the help of a lot of people including working with Google, which tie up to also the Android for Work and the BES12 strategy.

So, everything comes together.

We've been working on this strategy for a long time.

Unfortunately, it leaked so I think it's best to let everybody know and then so we have a very sensible, much more sensible discussion.

As far as pricing, we have a pricing.

We're working with literally all the major carriers.

The distribution strategy, you have to wait a little bit on that because we do have some choices.

Okay.

And should we expect any BB10 devices, as well, through this calendar year?

For another new phone, you mean?

Yes.

No, we don't have a plan for another BB10 device for this year.

Okay, thank you.

We will take our next question from Steven Li with Raymond James.

John, if I recall, EZ Pass had until July to deploy their traded in licenses.

How much of EZ Pass have now converted?

And if they have not deployed does that mean they plan to use something else?

I don't actually know.

I haven't tracked that number, so I'm sorry for that.

But we will be able to tell you later and we'll find out.

But I haven't really focused on the EZ Pass right now because we took a little different direction.

We're driving a lot of the license into subscription and so wasn't really focusing on converting that base.

I mean, we're obviously focusing converting the base but we're not focusing on moving the EZ Pass.

So, the 33% growth year over year in software licenses, earlier you mentioned BES12 is a driver.

So, this is not EZ Pass driving that growth?

No.

Well, it may have motivated by EZ Pass as a conversation to start with the account but, no, it is not.

And we are driving very hard on subscription, so it's been moving up quite a bit.

All right.

Great.

Thanks.

We'll go next to Richard Tse with Cormark Securities.

A quick one here.

Our math basically, when you look at the pricing of the software, it seems like you guys have priced this fairly aggressively based on how we back into the gross margin.

Is that the case here or are we missing something in terms of that calculation?

Well, aggressively -- I would say that, yes, we believe we price it at market and our competitors are giving very large discount.

We don't normally give those large discount at all.

That's probably the best way to think about it.

And, Richard, it's James.

Just one thing to add with that.

Remember, John said that there is a movement towards subscription, so depending on what it is your math is doing, that may be skewing it, as well.

That's true.

That's a good point.

We can take that one offline.

That's a good point.

Okay.

Thank you for clarifying.

We'll go next to Amitabh Passi with UBS.

Good morning.

Hi, guys.

I had a couple of questions for you.

I might have been mistaken but I think it's the first time you disclosed the acquisition price for AtHoc.

Given the $250 million you're paying for the company, I'm just curious, should we expect something like $40 million, $50 million contribution to revenues next quarter from AtHoc or is that number too high?

Not next quarter.

If it's next quarter, my friend, you send me those deals all day long.

(laughter) I think that's a good representation.

You're in the ballpark.

Thank you.

Because I know some of the software multiples have been all over the place, so I just wanted to clarify.

We don't pay that high.

We pay strategically.

We don't pay that high.

Got it.

And then, James, just on the OpEx, that's a lever you guys have continued to flex quite nicely.

I'm just curious, as we look over the next two or three quarters, four quarters, from the $285 million, how should we be thinking about OpEx going ahead?

We've got a number of things going on to add to the complexity, Amitabh, because, as John kind of said, as I had said, the trend has been down.

We've done some things that we only had partial impact of Q2 which you would continue to think you get the full quarter in Q3.

So, the trend for our, let's call it, regular business would be down, or our legacy business, if you want to call it that.

We will go up because of AtHoc.

And OpEx will go up because of the Good transaction once that closes and we get clearance there.

But, remember, we'll get revenue and margin contributions from that, too.

If you sum it all up it's probably flattish, I would say, maybe even slightly up once we're done with all of that.

But it's important also to recognize in that comment what we're going to get on the top line, as well.

Actually let me add one thing.

It's a good point, James.

Remember, we all said about a year ago, we were talking about stabilizing the Company and the business and focusing on cash flow from operations.

I think we have a accomplished that.

This year, as we said, we're going to stabilize the revenue.

Unfortunately we have a very low point here.

But we do expect Q3 to level up and maybe even up a little bit, and then Q4 to go up from that level.

And, as I pointed out, I think we're all very focused on one key psychological win, which is our software revenue eventually will cover -- the growth will cover the decline of the [SAFs].

And those two equations will converge, maybe that's a way of -- and that we expect in Q4.

We do have to invest a little bit in growth but, as James pointed out, that growth will come with some revenue and will come with some revenue with good margin.

Okay.

All right.

Thanks, guys.

We'll go next to Todd Coupland with CIBC.

I just wanted to clarify your expense expectations on Good.

I think you said you'd get a 30% reduction immediately or early on.

Could you just ballpark the base you're starting from on Good?

Is that a --?

If you think about, we're expecting $160 million GAAP revenue for the next 12 months -- I mean the 12 months after we close, sorry -- 12 months after we close, so it's November until November, I suppose, if we close it in November.

And in one year we'll be accretive, both cash flow and profitability.

Then you know that we would not be able to spend $160 million.

That's not the path.

I think initially we could take 30% out of that cost infrastructure and then it will continue to tick down in expenses until we reach that point in Q4.

We don't really disclose the actual number of Good because I don't think that's appropriate for me to do that.

You have to kind of think around that a little bit.

They're not part of us yet.

Okay.

I thought I'd seen a number out there of $240 million that was in their filing.

Maybe.

Definitely not from us, Todd.

Not from us.

And then just to clarify James' recent statement on total OpEx, are you saying by Q4, with all the puts and takes, the two acquisitions and the reduction in SAF cost, that total OpEx will still be at $285 million including Good?

Yes, I think that's a fair comment, Todd.

Okay.

Great.

Thanks very much, guys.

We will go next to Rod Hall, JPMorgan.

Good morning, guys.

Thanks for the question.

I'm going to back up and ask a bigger picture question.

John, it seems like you've maybe accelerated your acquisition strategy a little bit or increased it a little bit.

I'm just curious if you could maybe walk us through what your strategic thinking is now on the turnaround.

Have you changed your point of view, given numbers really haven't come through quite as well as you thought they would or is this still Plan A?

I wonder if you could comment on that and then I've got a follow-up.

Good question.

I think Q2, the numbers are lower than I expected and like.

But that set us up for reasonable trend up in Q3 and 4. So, I would say that I'm still at where I started with the so-called Plan A. I think those acquisitions that we made will help a lot, go a long way.

We have some very exciting product we're developing in-house here.

We haven't seen the full impact of our IoT investment and that will come.

So yes, I'm still on my plan.

Okay.

Thanks for that.

And then the follow-up, I just wonder if you guys -- I don't know if you mentioned it, I don't think so, the proportion of you units coming out of Foxconn.

Can you update us on how that deal's going and what the unit proportions look like?

The deal is going fine.

I just need more volume.

The deal is fine.

The relationship is great.

They've been helpful and nothing's wrong there.

Can you quantify the proportion or --?

No, no, I don't think I should split out.

Sorry, I don't think we should split out that.

But as far as the relationship and the handshake, all the working things, it's all working as planned.

Okay.

Great.

Thank you.

We'll go next to Michael Kim with Imperial Capital.

Hi.

Good morning, guys.

Can you talk a little about BBM and where you're seeing the strongest reception, meaning the protectors and the bundles, and where you might need to see more work or education of the customer base?

General comments on how that's progressing.

Okay.

BBM, the contribution of BBM is still below our expectation on revenue.

But if you only look at the year-over-year growth it's almost infinity because of that.

Everybody's laughing here, by the way.

So, ignore that comment, please.

We do have a trend up in revenue.

Mostly the receptivity areas are really more in Asia, particularly in Indonesia.

Our BBM MAU has been relatively stable.

It's about $91 million MAU.

And we're pursuing a lot of plans and partnerships to drive that up.

BBM Protected is starting to see pipeline and we need to close some of those.

That's the only thing that we have to do.

But the interests are definitely out there.

We have closed a few very big accounts but we need to close more of them.

Got it.

And then earlier in your prepared comments you talked about QNX as a growth driver in the quarter.

Was that primarily in the automotive vertical or were there other use cases that are starting to gain more momentum as IoT?

And how are you seeing that maybe cross leverage?

Mainly automotive.

On the IoT side, we just finished our cloud about a quarter ago and we're putting a little bit of a finishing touch around some of the products.

So, we really haven't been completely, quote, unquote, rolled out and delivered into the customers' hands.

We're still in the early stage of that.

We are building both professional services organization, as well as sales organizations around it.

That's the new investment that we've been making in Q2 -- we've been making all along, but we also make that in Q2.

And we will make more of that in Q3.

And when the go-to-market team is ready, you will see IoT revenue or we should expect to see IoT revenue.

But, so far it's still very skewed to automotive.

Okay.

Great.

We won a couple of big ones.

[Viseon] is tied to that.

Got it.

Great.

Thank you much.

We'll take our next question from Tim Long with BMO Capital Markets.

Good morning.

Thank you.

Two, if I could.

First, just getting back to the device gross margin, it looked like we were back firmly in positive territory.

James, I know you said volume.

Was there anything else in the sell-in and sell-through or any other dynamics that caused that to be more deeply negative there than what we've seen the last few quarters?

And then back to the integration with Good, I think John you said it will start day one.

Just curious, BlackBerry historically with the migrations through BES there's often been some backward compatibility challenges.

How do you think that's going to work with Good?

You'll have multiple platforms, not just one that's been fully internally developed.

So how do you think customers will feel about the ability to leverage their existing architectures?

Thank you.

Tim, back to your first question.

Can you clarify what you said around devices margins, what your model's showing?

Yes.

It looks to us as if software margins were stable.

We were down in the negative teens for hardware gross margins.

So, just curious, after a few quarters of breakeven or slightly positive why that went much more negative.

It is back to my prepared remarks, and thanks for clarifying that.

It is mostly a volume case.

There's nothing sell-in, sell-through, accounting or anything else really going on there.

As you know, we still have a big pocket of fixed costs that are related to devices and if we're not getting the volume contribution, that's really going to weigh on margins and overall device profitability.

So nothing else going on there.

Okay.

Okay.

On the BES, Tim, and the integration, I can only tell you a limited and we'll be ready to tell the market on the first day when we get approval.

I just want to remind everybody, we are in the process of getting HSR antitrust approval.

So, all my remarks have to be extremely careful, not to skew any of the decision or directions.

I have not made any public comment regarding this.

The only thing you need to know is we thought about it long and hard and decided on Good Technology because of the fact that our MDM solutions is more modern and robust, maybe I should say that.

And their application management layers are a lot better than ours, which we were starting to build our own.

So there is some natural synergy there and the customer actually sees it.

And the customer likes our support infrastructures and that's come through loud and clear.

So, I think the customer will all, once they see our plans and road map, I think they will be very comfortable.

I already got some very strong customer endorsements.

I just couldn't engage with them at this point.

Okay.

Thank you.

We'll go next to Deepak Kaushal with GMP Securities.

Hi, guys.

Thanks for taking my questions.

I've got one admin one and then a follow-up, bigger picture, if I may.

You've given us a sense of Good and AtHoc revenues and WatchDox.

What kind of revenue contribution have you been getting from Secusmart and Movirtu acquisitions?

Movirtu is virtually none because right now it's being tested at Vodafone in Germany and in UK.

I think there's final testing going through and they were supposed to have rolled out sometime second half of this year.

So, somewhere between Q3, Q4 it will be rolling out to the market.

So Movirtu is very early.

When we acquired Movirtu they did not have any revenue.

I think they had one salesperson, that was it.

So, zero on that.

Secusmart, our levels are low, very single-digit type million.

And it's mainly primarily because of the great relationship we then have with the German government and a lot of different governments around the world.

So, it will start growing.

There's a new product, and it's called SecuVOICE, which is a software-based product of the Secusmart SD card version.

That will be a lot more easier to implement with enterprises rather than -- because the SD card version are mainly very government oriented.

So, we should see some of those.

We have not really gotten a lot of M&A oriented revenue but it was planned as such anyway.

Great.

Thanks.

That's very helpful.

When you look at your cash balance, your war chest for acquisitions, you talked about tuck-in acquisitions.

But I wanted to ask you, John, most of your acquisitions so far have been around EMM or device security.

What about the broader enterprise security market?

Do you see opportunities to do acquisitions in that front or are you just content to consolidate the device management market or grow new technology in that market?

So far our strategy is really all the acquisition strategy surrounding different modes of communication in mobile.

Secusmart is voice and text.

Movirtu Is personalizations, containers, two numbers.

Good, of course, is EMM.

WatchDox is file sharing collaborations, mobile-based obviously.

And AtHoc is emergency messaging, secure messaging transport.

If you could think about it, you could write it on a piece of paper, you figure out very soon, quickly, that it is about mobile communications, everything we do from data to voice to text, the messaging.

It fits well with our current BES12 strategy.

Fits well with the BBM strategy.

That's been focusing on that.

I'm not wandering off to a different space at this time because I think it's important for us to be very focused and win a segment of the market.

But that's not to say that in the future we wouldn't be interested.

But we've got to rebase ourselves and start growing consistently first.

Does that make sense to you?

Yes, it makes a lot of sense, thanks.

I appreciate that very much.

I'll pass the line.

We'll go to our last question from Anil Doradla with William Blair & Company.

A big question -- when I look at the enterprise mobility management market, when I look at your competitors such as MobileIron and look at you guys, I think the bigger question I have is are we dealing with a business model where the pricing is depressed?

When I looked at this whole Good Technology and MobileIron, the belief was that this is a high growth area.

But we're not seeing that.

So, I'm trying to understand what is going on in this market.

I have two views on this.

First of all, the reason why everybody expect it to be high growth is I think the market, the number of licenses combined in all the players are about 10% of the available mobile space, mobile devices out there.

So there are 90% of this open space that we could tap into.

And everybody's thinking about it that way.

I think about it differently.

I think about managing end points.

I think about managing IoT.

I don't think about managing only EMM.

But EMM just happens to be the next monetizeable space.

One of these days we should sit down and talk about that.

This is why we're spending so much money on the IoT side and the embedded side, because the BES, if it's only doing EMM I'm afraid that one of these days we'll all wake up and then these EMM are given away for free.

There are two things we've been doing.

Number one is to focus on making a much broader strategy than just EMM of our BES.

And this is where the IoT and the embedded space and QNX comes in.

And the other part of the strategy is the value-added surfaces.

This is reason why we're so focused on having WatchDox and AtHoc and all that, because we believe the customers will probably pay very little for the base platform, which is the EM platform, but they will pay a lot for the application that runs on the base platform which is, of course, my file sharing, sync, my alert messaging systems.

It really is a horizontal apps to them.

I don't know whether that makes sense to you, but it is our plan.

We agree with you that just based on the EMM strategy, it may be okay for a little while but it's not going to be a very long-term thing.

Great.

Thanks a lot.

Of course.

Okay, I should wrap up.

Thank you for joining our call today.

And we'll look forward to talking to you guys throughout the quarter and definitely next quarter and where we should see an uptick in revenue.

Thank you and have a good day.

That concludes today's conference call.

Thank you for your participation.