BlackBerry Ltd (BB) 2016 Q4 法說會逐字稿

Welcome to BlackBerry's 2016 fourth-quarter conference call.

(Operator Instructions)

I will turn the call over to Debbie Tuck, VP Finance and Head of Investor Relations for BlackBerry.

Thank you, operator.

Welcome to BlackBerry's FY16 fourth-quarter results conference call.

With me on the call today are Executive Chairman and Chief Executive Officer, 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 fourth-quarter results.

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

(Caller Instructions)

This call is available to the general public via call-in numbers and via webcast in the Investor Relations section at BlackBerry.com.

A replay will also be available on the BlackBerry com website.

Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of applicable US and Canadian Securities Laws.

We will indicate forward-looking statements by using words such as expect, will, should, [ought to], 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 lines 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.

Thank you, Debbie.

Good morning, everybody, and welcome.

This morning, I'll take you through the summary of our Q4 results, as well as the highlights from our fiscal year.

Then I'll provide more details on the main area of our business focus.

Our overall Q4 performance was reasonably good.

We made progress on all our strategic priorities.

I'd like to remind everybody what they are.

First and foremost is to grow our software business faster than the market.

Two, we're going to get towards a profitable device business.

And third, but not last -- or, last but not least, is to continue to generate positive cash flow.

In fact, on the first one, we have more than doubled our software business, growing faster than the mobility software market.

We increased our overall gross margin and continued to generate cash and we made significant progress in moving our device business towards profitability, which I'm going to talk a little bit -- and James and I both are going to talk about that later.

In all but one area, we were in line with or ahead of our key business metrics and the metrics in the analyst model.

The one area of shortfall was in hardware revenue, which declined from last quarter, and I'll talk about plans to address this later in the call.

On the plus side, we reduced the loss in hardware, achieved positive device gross margin, and average selling price was steady from the last quarter, from Q3.

As I mentioned before, software was clearly the highlight in Q4.

We are increasing in both scale and gaining market share, and consistent with the strategy we laid out.

Like in Q3, growth in software more than offset the decline in our SAF revenue in the quarter.

Our enterprise business finished the quarter and the year very strong, enabling us to exceed our goal of $500 million in enterprise software and licensing revenue for the full year.

This of course excludes the BBM consumer revenue.

Thus is more than double the amount compared to last year.

We have multiple growth engines in software and I continue to expect above-market growth in FY17.

Now a summary of our Q4 results.

All the number I use is non-GAAP.

Revenue came in $487 million; software and service revenue was $153 million, up 106% from year-over-year; non-GAAP EPS loss was $0.03 a share.

We also achieved our ninth consecutive quarter of positive EBITDA, which was $78 million in the quarter.

Free cash flow was $6 million, our eighth consecutive quarter of positive free cash flow.

Ending Q4 cash balance was slightly above $2.6 billion.

As usual, James will take you through the financials in much more detail.

In FY16, we achieved some significant business accomplishments.

I'd like to point out some of the highlights.

One, positive free cash flow of approximately $229 million; total software and service revenue of $527 million, up 113% year-over-year; software order with over 10,000 enterprise customers.

We completed the acquisition of WatchDox, AtHoc, Good Technology, and Encription to drive the cross-platform software and Internet of Things strategy.

We launched two new devices, Leap and PRIV.

PRIV represents BlackBerry's first Android device and supports our cost platform strategy and our ability to provide a secure end-to-end mobile platform for Android in enterprise.

Now let me provide various details on our key businesses, starting with the hardware.

Our strategy called for a profitable device business and I'm encouraged at least by the progress we're making here.

At the same time, our device volume was below our expectation.

The softness the high end of the smartphone market is certainly a headwind, but the main reason, the main issues that we face -- that we need to address is the distribution.

As planned, PRIV is now available in 34 countries, up from four last quarter.

Unfortunately, contract negotiations took longer than planned with certain major carriers including Verizon.

It pushes the Verizon launch out of the quarter.

However, PRIV continues to receive very positive reviews and Net Promoter Scores.

Our value proposition, that is to offer the most secure Android smartphone for the enterprise, is actually quite strong.

We believe this market opportunity, while it may be small today, will continue to develop and open up, and we are leveraging this through increased channel coverages.

Here are some things that we're working on.

With March, we launched PRIV with Verizon enterprise in all 1,700-plus retail stores.

We're working on six more countries and 14 more additional carriers.

In the last week, we formally launched in Japan and next week we are planning to launch in Mexico.

We are also focusing on expanding the e-commerce channel and ramping up enterprise direct activity for PRIV, as well as for BB10.

A word on our overall device road map: we are planning our Android Marshmallow release, known as the M release, for late April or early May.

On BB10, the 10.3.3 releases that we are all waiting for have been released and started the NIAD with the security certificate program, the NIAD Certification testing in Q1, as we had planned, with the official release pending technical acceptance targeted for mid-June.

We're waiting on the certificate testing and this is a little outside of our control.

A 10.3.4, the next release, is already being planned for BB10 for later in the FY17 and early FY18.

From a financial standpoint, we have made significant progress on margin improvement and moving the business towards profitability.

In fact, in Q4, we reduced our device business operating loss by one-half from Q3.

ASP was steady and consistent with Q3, came in approximately $315, and we achieved positive device gross margin.

We are still on track with our plans calling for achieving device business profitability sometime in this fiscal year, FY17.

Moving on to the enterprise software, as I noted at the beginning, our software business is performing well and we're gaining share.

I'm very pleased that we slightly exceeded our enterprise goal of $500 million in revenue for the full year.

There were a number of deltas when we first set this goal in November 2014, but this milestone now shows the scale and the traction that we're achieving.

In addition, we landed 3,600 customer orders in Q4, giving us over 10,000 customer orders for our fiscal year, FY16.

The mix of recurring revenue was about 70%, which is consistent with last quarter.

Some notable enterprise customer wins in the quarter, including the US Department of Veteran Affairs, which awarded us a $20 million multi-year order for our secure crisis communication platform, covering about over 600,000 VA personnel.

We also further wins with Dell, Commonwealth Bank, and Rabobank.

The Good Technology organization is now fully integrated in BlackBerry and our go-to-market functions are operating as one.

In addition, we are now delivering BlackBerry level customer support to Good customers.

All customers are good, but to the Good customers, which has been very well received.

In January, we launched five secure Enterprise Mobility Management, our management suite, combining the best-of-breed of capabilities from BlackBerry and Good Technology.

These suites provided a secure mobile platform for messaging, collaboration, application enablement, device management, as well as content management.

Customer feedback since we launched this suite has been extremely encouraging and positive.

Besides they were amazed that we were able to do this so quick after the coming of the two companies together.

The best evidence of this is the traction we've seen right out of the gate.

We had 90 wins in the first 60 days of the release.

The examples including the [Hard Rock] in Germany, Jones Day, and in [Case National Assurance] I'm sure that's in France.

Either that or Quebec.

I also want to emphasize that these integrated suites are important for our cross-platform story.

We're seeing this resonate well across our customer base, as well as with the analyst community.

To accelerate adoption of the suite, we're expanding our professional services practice by adding additional billable resources.

Looking forward, we feel very good about the outlook of our software business.

We have multiple growth engines in place.

I count a total of five.

I'll give you some quick recap here.

Number one, obviously our EMM, Enterprise Mobility Management suites, and we being the market leader with 19% market share.

Our high value-added application stack, and with all the capability I just mentioned, give us clear differentiation versus our competition.

Secure messaging and content management came from our acquisition of AtHoc and WatchDox that are now fully integrated, also provide us differentiation as an entry point to new customers and new verticals.

Third, which is a major focus of this year, the strength of our QNX business, especially in automotive, helps drive growth in the IoT.

I'll give you some data points.

The QNX kernel is embedded in over 60 million cars around the world, with more than 50% market share in the infotainment systems.

At CES, in the beginning of the year, calendar year, we launched new capabilities in advanced driver assist system [8-Rs] and the vehicle-to-vehicle communications, as some of you might have seen it on the CES floor.

These innovations demonstrate our commitment to the connected car and autonomous driving technology.

We also launched our latest IoT initiative, our assets tracking, branded as BlackBerry Radar, which we just announced yesterday and demonstrated at the Mid-America Trucking Shows.

We are starting a pilot program and there are already a number of customers signed up to do that.

The general availability of this product is in summer of this year.

Asset tracking and connected cars is a $6 billion market opportunity, growing at 20% year-over-year.

Fourth, we formed a cyber security consulting practice to build on our security heritage that includes the experience in managing hundreds of millions of mobile [employees].

We made an acquisition and announced that at Mobile World Congress, a UK-based Company by the name of Encription Limited.

This helps accelerate the efforts, as well -- the efforts of putting this practice together, as well as supporting our auto and IoT initiative.

This practice, combined with our existing security offering, will address strategic and technical security of the latest cyber security threats and risk mitigation.

This address a $18 billion market opportunity today, growing to $23 billion in 2019 according to the Gartner Group.

Of course, we're going to use both our internal resources and try to leverage a lot of the system integrators and pioneers around the world to deliver the services.

Last but not least, although we did not generate any IP licensing revenue in Q4, as we had predicted in Q3, we are working on building a base of recurring IP revenue.

So with these five growth engines, we do expect to grow faster and take share in the market for mobile software and services.

We have been ramping up investments in all these areas in FY16 and we'll continue to do that in FY17.

We see the mobile software and service market growth at about 20% to 25%, depending which segment because we cover a huge segment of it, so we're targeting our software growth at 30% in FY17.

We expect quarterly software and service growth to exceed the decline in SAF revenue, cumulatively over the full year.

I will now turn the call over to James for a detailed look at the financials.

James?

Thank you, John, and good morning everyone.

Today we reported Q4 GAAP revenue of $464 million and non-GAAP revenue of $487 million, with a GAAP loss per share of $0.45 and a non-GAAP loss per share of $0.03.

Our non-GAAP income statement presentation excludes purchase accounting deferred revenue write-down, debenture fair value adjustments, stock compensation expense, restructuring program charges, amortization of purchased intangibles, and business acquisition and integration charges.

My comments going forward on our financial performance for the quarter will be based in non-GAAP terms unless otherwise specified.

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

Now let me begin with the income statements.

Our total revenue for the fourth quarter was $487 million and $2.2 billion for our FY16.

Software and services represented 32% of revenue and grew over 106% on a year-over-year basis for the fourth quarter.

Total software and services revenue for the full fiscal year was $527 million, up 113% year-over-year, and to be clear, this includes both IP and BBM revenue.

Roughly 70% of total software and services revenue, including contributions from acquisitions, was recurring in nature.

Our target, as we've previously discussed, is to get to 80% in FY17.

Service access fees, or SAF, were 29% of revenue.

The sequential staff decline of 17% was in line with our expectations and was fully offset, as John mentioned, by the growth in software.

We are modeling a sequential decline in SAF revenue of roughly 18% next quarter, as well.

Lastly, our hardware and other revenue represented 39% of revenue.

We recognized revenue on roughly 600,000 units in the quarter.

ASP was approximately $315.

Hardware volumes and revenue declined from last year, yet we delivered solid results overall, as our gross margins on hardware improved in the quarter, and at an operating income level, we cut the loss in hardware by one-half compared to the prior quarter.

Turning to margins, gross margin was 48.7%, up from 44.9% last quarter.

Gross margin increased sequentially due to strong performance in software and services.

The reduction in fixed royalty costs, slightly offset by low hardware volume and continued decline in SAF, also helped gross margins in the quarter.

Our model reflects a gross margin in the mid to high 40%s for the next quarter.

Operating expenses were $258 million, down from $280 million last quarter.

Our non-GAAP operating expenses exclude $188 million in restructuring and acquisition charges, $28 million in amortization of acquired intangibles, $17 million in stock comp expense, and a non-cash credit of $40 million from our convertible debt.

As a reminder, this non-cash adjustment to the debt has no impact on the face value, on our liquidity, or on our operations in cash flow.

Operating loss was $21 million, largely due to amortization expense, excluding acquired intangibles of $99 million.

Our adjusted EBITDA this quarter, which excludes the non-GAAP adjustments previously mentioned, was a positive $78 million.

We had a non-cash tax recovery of $18 million in the quarter.

Now moving on to the balance sheet and our working capital performance.

Total cash, cash equivalents, and investments ended at $2.62 billion.

This reflects net cash used for the purchase of Encription and $36 million used for share repurchases.

Our net cash position is $1.37 billion.

Aggregate contractual obligations, which includes purchase orders, operating lease obligations, interest payments, and other goods and services utilized in operations, amounted to approximately $862 million, down from $1.3 billion in the same year-ago period.

Purchase orders with contract manufacturers represented approximately $391 million of the total, down from $697 million in the same year-ago period.

Moving to the cash flow statements, we generated positive free cash flow of $6 million in the fourth quarter.

This reflects the increased investments we made in working capital leading up to the PRIV launch.

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

Looking forward, we expect to maintain our positive free cash flow and positive EBITDA for FY17.

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

Thank you, James.

Before we start our Q&A, I'll share some thoughts or repeat some of the thoughts that we laid out a little earlier.

As I stated earlier, we're modeling our software growth at around 30% in FY17.

I expect continued gain in market share at that level.

I also expect quarterly software and service growth to offset the decline in SAF cumulatively over the full year.

Work remains in the device to drive higher volume and we have plans to accomplish that.

The path to profitability, however, in device looks quite reasonable.

To provide transparency on our progress, we plan to report on multiple operating segments, known as segment reporting, including device as one segment, software service as one, and SAF.

We expect this to begin reporting in the [basis] starting in this fiscal year, FY17.

So with that, operator, we are ready for the Q&A.

(Operator Instructions)

And our first question comes from the line of Maynard Um from Wells Fargo.

Your line is now open.

Hi.

Thank you.

Your software revenue this quarter annualized is about $612 million, so I presume your software guidance on a like-for-like basis is around 11% year-over-year growth, which is lighter than I would have expected relative to your markets.

You talked about the growth drivers, but maybe talk about are there areas that are slower than expectations and does your guidance assume further M&A and IP revenue?

And then just quickly on hardware, if you can just help us understand the cost structure.

How much of the cost structure is now related to hardware and how strategic do you think that is because you can obviously grow your software business even without the hardware?

Thanks.

Okay.

First of all, I couldn't follow your math, in terms of the $600 million -- I don't know what the normalized $600 million-some.

Maybe you could--?

I just took your software revenue from the quarter and then annualized, multiplied it by four.

You obviously did acquisitions through the year, so I normalized for that.

I see.

That might not be the most accurate, partly because now, A, we're pushing more and more the subscription; B, there is a, what do you call it, not a timing but seasonalization factors.

And I don't think you take that number and multiply it by four, and then you said the growth is.

I'm literally basically, say okay the year is that, assuming there is seasonalization, assuming we've been pushing harder on to subscription, the last couple of quarters, subscription is at 70%, our plans go to 80% subscription for FY17, so all these are factors in.

We literally are looking at 30%.

Then the 30% growth does not include acquisition, but it does include some level of IP.

In fact, I would tell you my plan of the IP number is actually lower than the IP number that we received in FY16, so that should give you a general idea.

Truly, I believe it's truly organic.

So that's one.

There are no segments of the market that are growing less than in the 20%s.

When we did our -- all the segments we're talking about in QNX and in secure messaging and all that, the lowest one was about 20%.

Maybe on the secure messaging, the growth rates, because it's all subscription and user count, that may be a little bit lower than 20% but not much after that, so everything else is above that.

Maynard, it's James.

For your second part of your comment on hardware, in terms of the cost base, obviously, as we had said, we cut the operating loss in one-half, with some benefit from fixed royalties and margin, but obviously the cost base continues to come down in terms of hardware and the proportion that's dedicated to it.

So we're not going to give an actual number, but we continue to make progress in taking that down, as well.

Okay.

John, just the other part of that question, you can obviously grow your software business pretty strongly and your EMM business without significant hardware growth, so I'm just curious how strategic that is to you?

Thank you.

My goal is -- my plan has always been -- I wanted to get to a breakeven or better device business.

It does have some tied in.

A number of our major accounts, for example, is [restructuring governments, so] they actually buy both the hardware and the software to create a more robust and more secure environment.

So it has some tie-in.

I would agree, in the general industry side, maybe not as much of a tie-in.

Though there are some relationships.

You're right, right now the number one focus that I have, or the Company now has, is to continue to ramp the software and services program.

Great.

Thank you.

And our next question comes from the line of Daniel Chan from TD Securities.

Your line is now open.

Thanks.

Good morning, everyone.

Good morning.

The hardware units have come down to 600,000 units and we've seen a number of new flagships with more modern hardware launched recently and even one of your competitors moved to a lower tier product as the high-end market gets saturated.

How do you see yourself competing, given these market dynamics?

That's a good question.

I'm not really prepared to talk about -- first of all, I would say that I agree with what you said.

I, too, are looking at a more of a mid-range corporate-owned type of devices with good security for Android, but I'm not prepared to make an announcement of such.

The first thing I want to do is to get my cost equation and expenses and capability lined up correctly in the device business.

I truly believe that we're very, very close in being able to break even or start making money in device.

And as you all know, and I said it many times, if we, despite of all the effort that we put in, if we cannot make money on the device business and it becomes a burden to the consolidation, then I will have to get out of that particular business.

But that's not a big secret.

I say it.

I say it and that hurts me in front of the customers.

A lot of times I go to a show with a customer, they keep wanting me to explain that.

But I explain it as a reasonable good business person and that people get that but I still believe that we have a shot at it.

Hopefully I'm not naive, but we do have a pretty good plan with multiple engines firing at the exact same time.

That's where we are, but we will have to take -- you hit it right on the nose.

One of the problems that we ran into in the last quarter, people does like our PRIV, but there's a much more limited audience, and that particular market, that segment seems to be quite saturated at this point.

So people would love [the whole] PRIV but it would be a move down one level in price point, and so we're looking to address that.

Okay.

Then just related to the part about once you've hit breakeven, that's your first goal, but beyond that what would you -- what would make you consider the hardware business successful for you to continue participating in that business?

I will need to start seeing growth and contribution to the bottom line.

Okay.

Thank you.

Our next question comes from the line of Tim Long from BMO Capital Markets.

Your lines is now open.

Hey, Tim.

Hi, how you doing?

One clarification and then a question for you.

I want to understand the revenues from software.

As I understood it, for the full year, that revenue growth should be higher than the SAF decline in absolute numbers.

Running my math, it would seem like the SAF revenues would go down a lot less or have to go up.

Am I missing something in the interpretation of that comment?

Then on the -- want to talk about all the new customers and the move to some of these integrated suites.

Could you talk a little bit about deal sizes and what are you seeing with these integrated deals?

Are you seeing a meaningful move up in revenue opportunities with some of these newer customers?

Thank you.

Thanks, Tim.

It's James.

In terms of the coverage of SAF, I assume you're talking about FY17.

Yes, the cumulative.

Ultimately, that's been our objective all along.

And when we talk about covering the SAF, it's not like we're looking at total FY16 versus total FY17.

We're talking about covering the first dollar we lose in SAF from day one of FY17 through to that last dollar we do in FY17, as well.

So it's that decline.

So that's the definition of it, and as we have both said, that yes, we expect software growth to fully cover that.

Right.

Okay.

So the answer to your question, actually the suites are quite encouraging.

The average transaction rate ticked up.

I am seeing high six figures, seven figures deal, but cautionary note is that usually is subscription-based for multi-year, so we're going to have to take it on a monthly basis.

But it's quite encouraging.

Okay.

Thank you.

Our next question comes from the line of Ben Bollin from Cleveland Research.

Your line is now open.

Good morning.

Thanks for taking the question.

James, I wanted to start by looking at the last question.

You talked about the coverage of the SAF decline.

If we model your software target at this 30% year-on-year growth and then an 18% sequential in SAF decline on a go-forward basis, you lose $400 million in service revenue on the SAF side, and you pick up $250 million, $260 million in software revenue.

So where is the delta in terms of the coverage?

And then I have a follow-up.

Ben, go back to my last answer.

I'm not looking it as a full FY16 versus full 2017.

So for example, if you think of where we ended up in Q4, take 18% off of that.

You'll lose somewhere between $25 million and $30 million, and then so on and so forth.

Even if I took the $30 million and multiplied it by four, compared to your $400 million, I'm losing $120 million.

That's the way I'm looking at it.

The total number of dollars that I'm losing in FY17 will be replaced by this software growth.

Okay.

Okay.

The other item, when you look at the software engagement, what is the average contract duration and what is the strategy to migrate from the 70% recurring piece to 80% recurring?

Thanks.

Okay.

Duration usually is two to three years.

There are one-year deals but they had don't tend to be dominant.

They're usually two to three years.

Three years renew cycle, very common.

That's point number one.

The strategy, it's actually reasonably simple.

We have a lot of common customers between Good Technology and BlackBerry.

Good Technology tends to have a higher percentage of the recurring revenue and BlackBerry used to be more perpetual based, or term license, maybe I should say.

So what we're doing is to work with the customers and come up with a go-forward combined purchasing and commitment.

Of course, at the same time, upsell them new capability, like the suites, and provide professional services for migration, for the cross-platform migration.

But the quoting process and our own commission plan process tends to bias our people to push on a more subscription base, so that's basically the strategy.

We do, do some [perpetual] licenses but really almost at the insistence of the customers.

Thank you.

Our next question comes from the line of Paul Treiber from RBC Capital Markets.

Your line is now open.

Thanks very much and good morning.

Good morning.

Looking at the software revenue growth exceeding the decline in SAF, how should we think about the profitability, the EBITDA profitability, of those two businesses over the year?

They are actually reasonably comparable because I do have a lot of infrastructure supporting the SAF, so it doesn't come as pure margin.

And our software, because we own a lot of software, we sell them third-party software only a couple of them.

[ISEC, or something, ISEC7.] Other than that -- so our margins are reasonably high.

They are very comparable.

Paul, I'd also remember just that the infrastructure that John talked about is also involved in delivering some of these enterprise services, too.

So one of our tasks, of course, is to make sure it's efficient, but there is a reuse for that functionality from SAF across to the new services, as well.

Okay.

We should think, as the mix shifts from SAF to software, the profitability would be essentially a wash as that mix happens?

Yes, very similar, yes, correct.

And since day one I have always been -- since I cannot stop the SAF from declining, given all the dynamics out there, I have always been very focused in replacing that SAF revenue and eventually go the other way because the SAF revenue will come down.

That's always been my strategy, and then fortunately, luckily, Q3, Q4, we made that happen and I hope to continue on.

Okay.

Just one follow-up, in regards to the hardware business.

Has the hardware -- the breakeven point for hardware declined from the 5 million units previously indicated?

Yes.

It's roughly about 3 million now.

Okay.

Thank you.

It all has to do with ASP.

It's 3 million units at the $300 or so ASP that we experienced.

So as we move downstream, which we [want to occur] this conversation, then I have to increase that sales.

But my problem really is more on the channel.

We sell secure enterprise really literally executive and up, a much more different kind of a profile, despite of the fact AT&T and T-Mo and Verizon in the United States and all the three cell phone companies in Canada have been extremely supportive, and their audience, we need to shift to their enterprise audience more so and that's what I'm working on.

Thank you.

Our next question comes from the line of Rod Hall from JPMorgan.

Your line is now open.

Hi, guys.

Thanks for the question.

Just a couple of things to clarify, then I had a question.

I wanted to see, on the software revenue, can you guys talk about the Good plus AtHoc revenue for fiscal Q4, give us any idea how big that was, just so we can calculate underlying organic revenue there more easily?

Okay.

And then I also --

Sorry.

Go ahead, Rod.

Finish.

Sorry.

Go ahead, James, and then I can follow up with my other question.

This is John.

Oh, sure.

Here's the thing.

I will give you a number because we expected on this call people would want that organic number.

I will give you a number, but I have to first explain that we completely integrated, and we have common customer base.

So we talk about going back to all our customers and they have been well received and say, here are the suites, here are your renewals for BlackBerry, here are your renewals for Good Technology.

It's really one and the same now because we offer one suite, so it's really hard to say whether you take that part as an MDM from BlackBerry, you take the application servers from Good Technology.

So it really is a combined -- we don't even have to use those names anymore.

We basically have a combined suite with a base platform and five offerings.

So with that, so I would hopefully appreciate the fact that there is no special SKUs to identify is this from the old or is this from the new.

But I know that, that would not satisfy any one of you guys so I'm going to give you a number.

We did a lot of work in calculating, to the best of our ability, to identify it's 24% organic growth, Q4.

We feel pretty good, because we look at everybody in the industry.

That's better than anybody that we know of, okay?

That's the number.

I can't really break everything out going forward for you because of everything (multiple speakers).

Okay.

Can you just -- that's quarter -- year-over-year organic?

Quarter-over-quarter?

24% growth, it's year-over-year.

Year-over-year.

Okay.

And then the other thing I wanted to ask, John, is you made this comment in the response to the last question that were you thinking about distribution.

You talked about distribution a couple times.

Are you saying you want to go outside the carriers and just go direct to the enterprises and distribute these devices or what is it you're doing with distribution exactly there because it seems like it would make sense to go direct to enterprises, but--?

Some of the carriers -- great questions.

We have a history that are very much tied to the retail side of the carriers.

We do a lot of emphasis on that, where everybody's really trying their best and I mean it, everybody.

We have great relationships with AT&T, T-Mo, Bell, Rogers, Telus, everybody likes the product, trying it, but the movement is slow, slower than I like, obviously.

But they all have an enterprise arm, so we're going to [move] more emphasis working the joint marketing thing with the enterprise arm.

So I'm not running away from the carriers, but at the same time I also need my direct sales force, especially with government and financial and healthcare, we're selling software, I like my sales force to also represent selling hardware to them.

And we seem to have, in very selective -- this is extremely early, some reasonably good example of wins in the last quarter.

But we just did it in literally the last month.

Seems to be a strong amount of interest for us to do that.

And I want to extend that answer to one other thing.

Notice that we are putting together professional services for both security services, like intrusion detection and management of that, as well as helping people to move on the cross-EMM platform.

Two professional services organizations are being built up right now in the Company, and the pipelines are very, very good.

Although our capability, or our capacity, is very constrained, as much as I keep adding people to it, it's still very constrained.

So we are now trying to branch out to work with professional services firms that have a lot more people that they could deploy around the world.

So I feel good about that, because of the volume of business that's being generated, the interest of that, and I feel good about going directly to the enterprise.

Okay.

And then I know it's three questions, but I wanted to double check with you on this Foxconn deal.

Is that still a big part of the getting to profitability or do you feel like that's popped out now in terms of the proportion?

I know you've been reluctant to give us the proportion of you units, but if you can give us any idea how big that is terms of relative units, just be curious?

The Foxconn built out classic and it's a -- from my limited experience in the last 2.5 years here, has been extremely, extremely successful.

In fact, people still want the classic.

I unfortunately are getting to the point that I can't make it anymore because of the fact that the memory components and all that is changing.

I'm working on that issue also.

The Foxconn is an important component but it's not a huge components of it.

That's number one.

But maybe we could work on something else with Foxconn.

The financials arrangements works for both sides, and [there are] other ODM will offer us the same thing now.

So that environment has completely changed.

I thank Foxconn for leading the charge for us when I first joined, but now other people are doing the same thing with us now.

Okay.

Thanks for all the questions.

I appreciate the answers.

Our next question comes from Paul Steep from Scotia Capital.

Your line is now open.

On QNX design wins, could you talk about what the backlog was from 2015 that will fuel the 2017 -- sorry, FY16 that will fuel the 2017 results?

And then I've got one quick follow-up?

QNX, in fact our people are [common] design wins.

This is why it's a more longer-term revenue.

We don't lose much, knock on wood, on this side.

And it's building, it's book, and [yearbooks] now, by now you know that we're working very much more broader and closely with Ford because of Sync 3 and an extension of that.

We're creating new modules.

We've got definitely over 250 customers in automotive around the world.

We don't tend to lose customers, maybe onesies and twosies, but not many.

As I added more modules to it, we will get more royalty going forward.

I'm sorry I don't give you specific numbers because, first, I haven't looked at it for a while and secondly I don't think I should just disclose these data.

Okay.

And then maybe in core software, how far through the transition are you from a perpetual model towards a subscription model when we think about your 70% recurring, specifically?

How much of that is traditional maintenance that is up for annual renewals?

Good question.

The 70% is not a maintenance at all.

It really is a subscription base count.

As I said, we'd like to get to 80%.

As time progresses, there are more renewal that's going to come up.

When a renew comes up for licensing, either on the Good Technology side or the BlackBerry side, and the maintenance renewal on the BlackBerry side came out, which is a [fee] support, we tend to work with the customer to move a pure subscription-based model.

From our modeling of the pipeline, we believe we could get to 80% a year from today, but that's the push that we're on.

So it's quite on its way.

There's no negative here.

We just continue to push it.

One quick follow-up, sorry.

Just on the EMM business, you mentioned it before.

How significant is the government as a customer percentage-wise?

I know you're obviously not going to give a specific, but is it 50% of the EMM maintenance base or is it--?

Not 50%.

Not 50% Lower than that, but it's still significant.

If I have to guess, and this is not a scientific guess, by just running around, seeing customers and stuff, I'd say about 30%.

Okay.

Thank you.

That may be even higher -- higher than actual.

But it's significant.

The government is an important customer base for us.

Thank you very much.

And our next question comes from the line of Steven Li from Raymond James.

Your line is now open.

Hey, Steven.

Thank you.

John, the 24% organic growth for software you just provided, that looks like it would place Q4 organic software at about $80 million, which is flat from Q3.

Does that sound about right?

I didn't look at it that way.

We were just counting, knowing that you folks -- $80 million, [$]150 [million], [$]155 [million], 24%.

It sounds low, Steven.

Like I said, there's a lot--

It sounds a little low.

There's a lot of subjectivity in that 24% because of the bundling that's going on, so we wanted to give you a rough ballpark.

So because last Q4 2015 last year you reported $67 million.

So I can't just do $67 million plus 24% and get the organic software for Q4?

I don't know.

I have to think a little bit about that.

I don't know whether that is the way to think about it.

$67 million plus 24% -- we need to get back to you on that.

It sounded low to me.

Okay.

I can follow up.

And then James, in your prepared remarks, you said hardware losses, you cut it in one-half.

Does that [codie] reflect the fixed royalties step function decline or is there more to come?

Thanks.

It's a combination.

It's the fixed royalty, it's some consolidation of our resources and headcount.

So it's a combination of a number of things and some of the design costs that we ask a lot of our partners to bear a little bit more.

So it's really literally every little thing that we spend money on, running this business.

But is there more fixed royalties decline coming or is that done?

Steven, as you know, the one particular deal took us to the end of December calendar 2015, so conceptually there's one more month of that benefit to come into Q1.

Okay.

Great.

Thanks.

Our next question comes from the line of Michael Kim from Imperial Capital.

Your line is now open.

Hi, good morning, guys.

You talked a little about the strategy around expanding into the cyber security service and professional services with the Encription acquisition, maybe more specifically how you think about scaling that business globally, given the shortage in skilled talent, and Encription had somewhere around 40 folks?

Yes, yes.

The reason why Encription is important to us is, first of all, their main customers are basically UK government agencies and we could learn a lot from them about the process of delivering that.

In addition to that, my IoT strategy -- in order for IoT to move forward that we could offer more to our customers, we really do need to have a security services and certification program that our customers are more than willing to pay for.

Those two are my immediate focus.

We do have a pretty big security team, actually quite close to where Encription is physically.

Our big security team is in UK.

So we believe that some of our security people could turn into revenue producers, into billables.

They're very keen on doing so.

So that's one part of expansion, but I'm not naive to think that somehow I'm going to build a huge professional services organization and be profitable.

I've been in that business for a while.

It's a really, really tough business to be in to have good margin because of capacity planning and where all the resources are.

So we're going to be very, very specialized in those two areas that we talk about, for government agencies, intrusions, and large corporation, intrusion detections, and threat analysis and so forth, as well as for the IoT cloud certification services.

In the meantime, I've been reaching out to various [SI of the world], which they love to have a partner likes us that could create and provide know-how and they would like to take it out and then we could do some kind of revenue sharing process going forward.

A number of them have resonated with me.

None of them where I could announce today because we're still working on how they work together.

Those are -- so I'm going to try more leverage on partners with some very specialized verticals on our own.

Does that make sense?

Yes, that makes sense.

Great.

Thank you very much.

Thank you.

Our next question comes from the line of Vijay Bhagavath from Deutsche Bank.

Your line is now open.

Good morning, John and James.

Good morning.

This is actually -- this is AJ Shrestha in for Vijay Bhagavath.

Just a real quick one from me.

I just wanted to get some demand trend based on the geo current macro on the smartphone and PRIV.

Any granularity would be great?

Okay.

Partly it's driven by our own distribution capability, so I'll give you as much as makes logical sense on a global basis.

Because of the tiering of the PRIV, it came out of $799 and $699.

Because of tiering of the PRIV and it's a pretty high-end product, it tends to be in more of the developed economies.

So we've done reasonably well in the US.

We've done reasonably well, given our levels, in Canada, in Hong Kong, in major metro cities like in Singapore and so forth.

We're going to expand into -- as I said, we're going to expand into Tokyo, or Japan, sorry, Japan, and some of the western European states like UK, as well as Germany.

So those are what we see a better demand than a different tier of the market.

Okay.

Great.

Thanks.

And at this time, I would like to pass the call back to John Chen for any closing remarks.

Okay.

All right.

That's it.

That's all the--?

I don't really have much closing remarks.

As I said, I'd like to repeat the fact that we're not satisfied with our hardware volume, but we're satisfied with the ability to get to profitability.

So the gross margin, ASP, and the plans surrounding continue to improve that and then now working on distribution, there's some good hope there.

Software services doing very well.

Teams are great.

They are charged and energized and they will continue to do well on that.

SAF, we'll do what we can, but I don't think I could change much of where the SAF is, but eventually, in a year or so, you could see that the SAF impact of us, although painful, is going to be a lot less, and then our of software growth will be a lot higher then.

We thank you for your patience and thank you for support and we'll talk next time.

Have a good day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect.

Everyone have a great day.