BlackBerry Ltd (BB) 2017 Q2 法說會逐字稿

Welcome to BlackBerry's FY17 second-quarter conference call.

(Operator Instructions)

I'll turn the call over the to Debbie Tuck, Vice President, Finance and Head of Investor Relations for BlackBerry.

Thank you, operator.

Welcome to BlackBerry's FY17 second-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 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.

The 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 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 you, John.

Thank you, Debbie.

Good morning, everybody, and welcome to BlackBerry's FY17 second-quarter results conference call.

We have a lot to cover today and I'm looking forward to our Q&A session.

I'll start with an update on overall strategy and the traction that we're seeing, then I'll cover the highlights of our Q2 results.

As is customary I will reference all numbers using non-GAAP numbers.

There is a reconciliation table of GAAP to non-GAAP results in the press release.

So when I first started at BlackBerry, I laid out a strategy based on three key principles.

Number one, repairing the balance sheet and return to profitability.

Number two, investing in growth areas such as enterprise software, IoT, connected cars.

And number three, creating a new business model through licensing both our technology and our intellectual property.

Coming out of Q2, I feel that we're reaching a good inflection point with our financial picture stable and our pivot to software taking hold.

In line with this pivot, we are announcing a new strategic direction in our mobility solutions business focused on developing and licensing of our security device software, as well as the BlackBerry brand.

As part of this strategy we have decided to discontinue all the handset hardware development, only hardware, and to leverage third-party partners to provide that function.

I'll provide some details a little later.

We believe that this is the best way to drive profitability in the device business.

We saw a number of positive proof points that validate this new direction.

I'll expand on it.

First, some key take-aways that demonstrate our positive momentum with the Company and where our strategy is taking hold.

In Q2 we continued to show solid progress on overall operating profitability which was positive for the second consecutive quarter at $16 million, up from $14 million a quarter ago.

This was driven by improving margin across all business segments, including mobility solutions.

As you saw in the press release, we delivered the highest gross margin in the Company's history, at 62%.

Our financial strength gave us the ability to refinance our convertible debt earlier this month at a lower interest rate, while reducing the debt principal by over half.

This reflects our confidence, as well as the Board's confidence, in our ability to generate and manage cash.

Obviously, the refinancing benefits both the income statement and the balance sheet, while preserving our ability to invest in growth.

This transaction will save us over $50 million per year in interest payments going forward.

We also made notable progress on our two key areas of business focus, enterprise software growth and technology licensing.

Total software and services growth was robust at 111% year-over-year.

Equally as important, maybe more so, we signed two strategic licensing agreements in the quarter.

This should bring us good high-margin growth in the future.

They both happen to be partners in Indonesia which is somewhat coincidental.

However, Indonesia is one of our strongest markets.

One of the agreements involve our global BBM consumer business.

I'll provide more details later when we're talking about that segment.

The other agreement involves licensing our device software and brand.

Let me spend a few minutes on this agreement as this is quite strategically important to BlackBerry going forward.

This is the first major agreement under our new strategic direction in mobility solutions.

In conjunction with this deal, a joint venture was formed.

If I butcher the name, I apologize, BB Merah Putih.

This JV is led by Tiphone, a mobile operator in Indonesia, a leading telco with the largest distribution network in the country.

Tiphone Is an affiliate of Telkomsel, for those of you who are familiar with Indonesia market, Telkomsel is the largest carrier in Indonesia, with over two times the subscriber base of the next larger carrier.

The joint venture and its affiliate accounts for nearly half of the total Indonesian mobile market.

This JV will source, distribute and promote handsets, BlackBerry handsets, with our secure Android software and the BlackBerry brand in Indonesia.

The transaction reflects our new strategy, as I pointed out, and the model works as follows.

BlackBerry will focus on providing state-of-the-art security and device software.

BlackBerry will discontinue internal hardware development and fully outsource this function to the third party.

BlackBerry will receive royalty per unit.

There are important benefits for BlackBerry with this approach.

A, we focus all of our effort on where we can deliver differentiation, in software and security.

By the way, this plays into our strength and it's aligned with where the market is going.

B, partner will bring us a hardware portfolio with competitive hardware specs going forward.

C, we will also leverage partners and third parties with scale is critical.

This obviously includes distribution, manufacturing, logistics and repair.

We believe this will lead to expanded market access, increased unit volumes and higher profit margins.

And last but not least, this approach also eliminates BlackBerry's need for working capital or greatly reduced, I don't know whether eliminate is a good word, greatly reduced our need for working capital and capital investment related to inventory and manufacturing.

This de-risks our financial model, not to mention enhancing earnings, cash flow, and return on invested capital.

Overall, we believe this is a very viable model, as we are getting lots of interest around the world for bringing BlackBerry brand device to market with the security and user experience we are known for.

Now let me provide a summary of the Q2 results.

Revenue came in at $352 million.

Total software services revenue was $156 million, up 111% year over year.

Mobility solution revenue was $105 million.

SAF came in slightly better than expectation, at $91 million.

As I mentioned, we delivered the highest gross margin in the Company's history at 62%.

This number was up from 53% last quarter and 41% a year ago same quarter.

This was driven by improvement in device margins and a more favorable revenue mix.

Operating income was $16 million.

We also achieved our 11th consecutive quarter of positive EBITDA which came in at $45 million in the quarter.

This translates to about 13% EBITDA margin.

EPS was breakeven.

Ending Q2 cash flow was $2.5 billion.

So let me now provide some specific highlights and detail on our key business segments.

In software, Q2 year-over-year growth was again driven by strong performance in enterprise mobility, crisis management of software and QNX.

There was no IP revenue in the quarter.

The mix of recurring revenue came in at 81%.

As a reminder, we set a target of 80% by the end of this fiscal year, therefore, we achieved this milestone early.

We had 3,000 customer orders in Q2.

This would include about 692 customers purchasing our suites.

This compared to 520 last quarter.

Recent high-profile wins included the US Army, the Transportation Safety Administration which is TSA, the US Coast Guard and [DENSO].

In IoT and connected cars we achieved two firsts.

The first of the firsts, Caravan Transport Group is our first customer live in production on BlackBerry Radar.

And they were nice enough to put out an article on that.

Our SS tracking services with 500 units installed on their trucks today.

They plan to roll more units a across their fleet of 1,500 vehicles.

Product Radar starts shipping in late August.

Secondly, Hama Automotive is our first paying customers in connected cars.

They purchased our over-the-air software update applications.

Our leadership in mobile security was reinforced in a Gartner report published last month, titled Critical Capabilities for High-Security Mobility Management.

Gartner ranked BlackBerry number one in each of the six critical categories.

As I mentioned earlier, we signed an important partnership and licensing deal in the quarter involving our global BBM consumer business with a Company called AMtech.

AMtech happens to be the largest media content and technology business in Indonesia.

This partnership will strengthen and drive growth for BBM consumer which has nearly 60 million MAU, monthly active users, in Indonesia and 90 million MAUs worldwide.

There are a number of important benefits to BlackBerry.

AMtech is a major video and content provider.

They will invest in people, technology and ecosystems to facilitate growth and enrich content and new application on the BBM platform.

These efforts should result in increased MAU, monthly active user; ARPU, average revenue per user; and revenue growth for the BBM consumer business altogether.

The license agreement also allows us to reduce infrastructure costs related to the consumer business and increase the profitability of the business.

Now let me move to the mobility solutions segment.

I already covered our new strategic direction at the beginning of the call, so I will ask you to focus on the financial results for the segment.

In Q2 we recognized revenue on approximately 400,000 devices at an average selling price of $271.

While our mobility solution revenue was down compared to last quarter, we are making good progress in moving the segment towards profitability.

We improved the gross margin to 26% this past quarter in Q2 from 8% last quarter in Q1.

This was instrumental in cutting the Q2 operating loss by nearly two-thirds to $8 million compared to the last quarter loss of $21 million.

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

Thank you, John.

Today we reported Q2 GAAP revenue of $334 million and non-GAAP revenue of $352 million, with a GAAP loss per share of $0.71.

Non-GAAP EPS was breakeven.

Our non-GAAP income statement presentation excludes purchase accounting deferred revenue write-down, debenture fair value adjustment, stock comp expense, restructuring program charges, inventory write-down, amortization of purchased intangibles, non-cash losses on assets held for sale and business acquisition and integration charges.

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

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

I will begin with a consolidated review of our Q2 FY17 income statement results and move on to the individual segments thereafter.

Now let me begin with the consolidated income statements.

Our total revenue for the second quarter was $352 million.

Our consolidated gross margin for the second quarter was 62%, up from 53% last quarter.

Our non-GAAP gross margin excludes an inventory impairment of $96 million and restructuring program charges of $7 million.

Gross margin increased to a record percentage due to improved hardware margins, strong performance in software and services and more favorable revenue mix.

We have updated our model which reflects gross margin in the high 50%s for the next quarter.

OpEx, operating expenses, were $203 million, down from $212 million last quarter.

GAAP net loss for the quarter of $372 million was primarily attributable to three major components which we do not expect the first two to recur.

The first is a $123 million write-down of data center assets held for sale.

To continue to drive cost savings and efficiencies in the Company, we took steps to reduce the fixed costs associated with software and services, as well as the SAF business.

The results of the decision was the non-cash write-down of those assets, as well as the reclassification of the carrying value of the assets to current assets on the balance sheet.

Going forward, we expect the cost basis to be lower in light of these changes.

The second component relates to our mobility solutions strategy.

We performed analysis of the net realizable [book] value of our inventory and concluded that some inventory required a reduction in its carrying value.

The result of the analysis was a $96 million inventory impairment as I mentioned earlier.

The third component associated with the GAAP net loss was due to the fair value adjustment related to the debentures of approximately $62 million.

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

In addition to those items I just mentioned our non-GAAP operating expenses also exclude $15 million in restructuring charges, $28 million in amortization of acquired intangibles, $18 million in stock comp expense and $4 million in business acquisition and integration charges.

Non-GAAP operating income was a positive $16 million.

Our adjusted EBITDA was approximately $45 million this quarter, excluding the non-GAAP adjustments previously mentioned.

I will now break down the three business segments.

First is software and services.

Our software and services revenue represented 44% of total revenue.

Total software and services revenue for the second quarter was $156 million, up 111% year over year.

Roughly 81% of total software and services revenue was recurring in nature.

Our total software and services gross margin for the second quarter was 80%.

Our total software and services operating expenses were $96 million.

Software and services operating expenses consist primarily of headcount and third-party costs relating to our enterprise solutions and services, BlackBerry Technology Solutions, AtHoc, Secusmart, BBM, and professional cyber security business.

Operating profit and software and services was $29 million or approximately 19%.

Now on to SAF.

Our Service Access Fees, or SAF, was 26% of revenue.

Total SAF revenue for the second quarter was $91 million, down 14% quarter over quarter.

The sequential decline in SAF was slightly lower than our expectations that we mentioned last quarter.

We model a sequential decline in SAF revenue of approximately 20% for the next quarter.

Our total SAF gross margin for the second quarter was 74%.

Lastly, I will discuss the results of our mobility solutions business.

Mobility solutions revenue represented 30% of revenue.

Total mobility solutions revenue for the second quarter was $105 million.

We recognized revenue on roughly 400,000 units and ASP was approximately $271.

Mobility solutions gross margin for the second quarter was 26%, up from 8% in the last quarter.

Total mobility solutions operating expenses were $35 million.

Mobility solutions operating expenses consist primarily of headcount-related costs associated with the development, manufacturing and sale of devices.

Mobility solutions operating loss was $8 million in the quarter, down from $21 million in the previous quarter.

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

Total cash, cash equivalents and investments ended at $2.5 billion.

This reflects $34 million of net operating cash used during the quarter.

Our net cash position was approximately $1.2 billion at the end of the quarter.

Aggregate contractual obligations which include purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations, amounted to approximately $761 million, down from $1.1 billion in the same year-ago period.

Purchase orders with contract manufacturers represented approximately $71 million of the total, down from $248 million in the same year-ago period, and $150 million in the prior quarter.

We've also shortened our lead times for ordering which allows us to manage our commitments more effectively.

As John mentioned, we retired our convertible debt of $1.25 billion, just after quarter end, and replaced it with a convertible note of $605 million.

By retiring the previous debt early, we will save over $50 million a year in interest payments.

The transaction will be reflected in our financial statements next quarter.

Moving to the cash flow statement.

Use of free cash was $37 million in the second quarter which consisted of net cash used in operating activities of $34 million, minus capital expenditures of $3 million.

Looking forward, we expect to be free cash flow positive in Q4 and maintain our positive EBITDA outlook for the full FY17.

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

Thank you, James.

So before I share some thoughts on our outlook, there's an update in the management team to cover.

You are all aware by now that James Yersh has decided to leave BlackBerry for personal reasons.

James has been with the Company since 2008 and our CFO since November of 2013 when I came on board.

We have accomplished a lot together, especially stabilizing our financial and strong cash management.

I'm grateful for James' leadership, numerous contributions and long-standing commitment to BlackBerry.

This will be his last earnings conference call and he will remain with the Company until October 31 to assist with the transition to our new CFO.

Let me say a few words to introduce our new CFO, Steve Capelli, who will become BlackBerry's CFO at the end of September.

We are fortunate to have Steve join our management team.

He has long proven track records on executive leadership in enterprise software and technology.

He started his career in finance and accounting, serving in controller roles at Digital Equipment Corporation, Unisys and W.R. Grace.

Steve and I worked together in two companies prior that I served as CEO.

At Siemens-Pyramid, he served as CFO.

More recently, at Sybase, Steve was President of Worldwide Fuel Operations and was instrumental in growing software and services revenue to over $1 billion.

Steve is a strong business partner and I'm confident in his ability to drive value for BlackBerry shareholders.

I hope all of you will have an opportunity to meet Steve in the coming quarter.

Now on to the outlook.

We reiterate our expectation for software and services growth of around 30% for the full fiscal year.

In mobility solutions, I'm very encouraged with the proof point we are seeing with our new strategy.

We are pursuing similar device software licensing agreements like the one we discussed in Indonesia, which of course was the first of its kind for us.

The pipeline includes a late-stage discussion in China and several initiatives in India.

The outlook here is promising but those, of course, are not guaranteed.

We are revising upward our full-year EPS outlook.

We are now expecting a range of breakeven to $0.05 loss.

This takes into account improving margin as well as reduced interest expense from refinancing our debt.

It also assumes increased investment in growth areas such as software, IoT, licensing efforts and others.

This is a significant improvement over the current consensus of $0.15 loss and a second straight quarter we have raised our full-year EPS outlook above the consensus.

Now I would like to open the call for Q&A.

Operator, could you please facilitate that?

(Operator Instructions)

Daniel Chan, TD Securities.

Hi, thanks for taking my question.

My understanding is that you've pretty much already outsourced all your hardware development.

So what is the incremental move here?

How much savings are expected to be generated from this?

Quite a bit.

We really have not outsourced all our hardware development or handset development effort.

We have taken one or two products, outsourced it to others.

But we've been developing our own handset also.

With what I announced today, we will end that activity and rely completely on partners.

Working with partners -- relying is too strong a word.

Working with them to make sure their hardware portfolio is up to spec and competitive.

This, of course, reduced a lot of expenses, not only on operating expenses but capital we talk about.

We don't have inventory we need to carry anymore.

So it's a long list of savings, people, equipment and so forth.

Any thoughts on how much OpEx you can save from this?

No, I don't have the number right in front of me.

But we obviously expect reasonable savings.

Okay.

So it sounds like you're still going to be playing in the device business.

If I read the Gartner report on Security for Mobility Management, it claims that the Priv is not considered a substitute for the BB10 platform [by highly regulated] customers.

If you do continue with hardware, how do you plan on migrating your key customers from BB10 onto your Android platform?

It's always been the strategy for us to make sure that we could take Android up to the same level of security of BB10.

And we're working very hard at it, with a big team of people working on it.

And when we get to that point, our customer will be quite happy migrating.

In addition to that, we also have the NOCs and the server software that help differentiate ourself with the customer in terms of managing their mobility security.

We're comfortable with our plan on that one.

When do you think you'll be able to get your version of Android to the same level as BB10?

When we get there, we'll let you know (laughter).

All right.

By the way, those are three questions instead of one.

Okay.

Thanks, Steven.

Maynard Um, Wells Fargo.

Hi, good morning, thanks.

I want to make sure I understand what you're doing with the hardware business.

In terms of revenue recognition, will you no longer be recognizing hardware revenue?

And then the only revenue recognition is a license fee per device sold?

And I guess since it's the JV, should we expect that you'll consolidate your portion of the JV below the line?

I'm trying to understand the mechanics of how to think about the hardware revenue and profits going forward.

Good question.

When we prepared the script, it was the one area that I was trying to make clear and it's hard to write it.

We have nothing to do with the JV.

We are not part of the JV.

We are licensing our technology and brand to this JV.

The JV was set up -- the JV partners are not only the distributors of Telcos and the telephone companies in, a number of them, by the way, it's just led by this particular organization called Tiphone, which is the largest, I guess, holders of the JV.

The JV is actually an Indonesian entity developed and put together by them, specifically focused on BlackBerry and distributing BlackBerry handsets in Indonesia.

All we did was we licensed to this JV our brand and all the software.

So that's number one.

Before I move on, that's clear, right?

Yes.

Okay.

So, therefore, it's definitely above the line, not below the line.

We are no part of the JV.

The second thing is we're taking royalty per unit, and not going to detail the description of how much and what's the minimum and all that, but it will be above-the-line royalty revenue.

Now, as to whether we will distribute, in this particular case, we will not, most likely not.

We have the option to take that product and distribute it to other parts of the world and not Indonesia, of course.

But we don't plan to do so at this point.

And so the majority of all our revenue in this new model are royalty-based.

So just to be clear, so you will still have hardware revenue outside of Indonesia, and then inside Indonesia you will only have the per-device fee?

No, actually my new model tells us to ramp down the selling of hardware anywhere.

But we might help our partners to sell it.

Okay, thank you.

It's a royalty-based business plan.

Okay, thanks.

Sure.

Steven Lee, Raymond James.

Great, thanks.

So the changes in mobility solutions, do you have to take a charge or is that cost being transferred to your partner?

We will have to transition.

Let's call this, this isn't a one-time event, Steven.

I think it's a process that we'll have to go through.

So as we've talked about before, some of those charges could be winding down liabilities, could be severance costs associated with it.

So there will be charges, definitely, as we migrate towards that model from the legacy one.

Steven, we also actually have taken the charges this past quarter in the revaluation of some of the assets.

Of inventory.

Of inventory.

So it's because of this pivot.

Great.

And, John, your response to the earlier question, does that mean at some point mobility solutions become discontinued operations for you?

(Multiple speakers) mobility solutions will become a more software-oriented business.

Okay, got it.

And for working capital, what is the -- again, the changes in the mobility solution group, how much of a positive impact do you expect to pick up in the second half?

Steven, if you just look at the balance sheet and that number for inventory, once we're fully transitioned to this model, should be zero.

Zero, yes.

We reported just under $50 million with a whole bunch of ups and downs in terms of outflows for the most part, and that's evidenced by the charge that John mentioned, so $50 million-plus if you're counting just on what we reported.

And then the second place you need to look is our purchase obligations that I referenced in my script.

That's down; we cut that in half quarter over quarter, and that's reflective of us transitioning to the new model.

So just with those two numbers together, that's over $100 million in efficiency there.

That's great.

Thanks, James.

Tim Long, BMO Capital Markets.

Hi, thank you.

Just a two-parter on the software business: John, you talked a little bit about the pipeline for the licensing deals.

Could you update us on how the IPR, the patent pipeline, looks?

It's been a few quarters since we've had some revenues there.

And then, John, you also mentioned a pretty positive move in the number of customers taking suites.

Could you talk a little bit, at least at a high level, about what that's doing for revenues?

Is that helping increase revenue per customer or at this point has that not yet hit the model?

Thank you.

The IPR side, as I spoke about a couple or two quarters ago, we want to build a more recurring model.

There are a lot of activities going on.

So I'm encouraged something's going to come, but I don't know the timing of it.

For those of all of you who know something about this market, it takes a long time to get started, in other words, to get the agreement done.

And then once we get the agreement done, it will be relatively easy to maintain; that's the model.

That's what we've been pushing for.

I think we need to be a little bit patient with the IPR side of the equation.

But the activity's a lot.

As you know, we have strong and fresh IP that a lot of people would either want or need or have to have.

So it depends on which part of it.

As far as suite's concerned, absolutely, the ARPU's gone up quite a bit.

Because the suite is a combination of -- sensible combination of functionalities by collaborations, messaging, communications, security.

So that, of course, makes it the higher revenue for us.

You used the word ARPU, but it would be per user -- it would be a higher revenue for us, yes.

We already have seen some of those.

Tim, just to add to that, I think one important aspect that both John and I touched on is the recurring percentage and the fact that it's up over 80%.

We've always said that was our objective, and ultimately we're making significant strides towards that.

Okay, thank you.

And good luck, James.

Thanks.

Paul Treiber, RBC Capital Markets.

Thanks very much, good morning.

Wanted to focus on the software business, could you speak to the decline in revenue from Q1?

And also, was there any material contribution from IP licensing revenue last quarter that didn't repeat this quarter?

That's exactly where -- you hit it right on the head of the nail.

We had some revenue, IP revenue, in Q1, but not very big, that was not reflected in Q2.

Q2 was zero.

Therefore, you see the differences there.

Again, Paul, the other thing to add is, as a recurring percentage goes up, that's another reason why revenue would be down sequentially.

So we're adding to the balance sheet but it's not hitting the P&L yet.

So it would be a combination of IP license plus perpetual license that would decline on a quarter-over-quarter basis?

Not perpetual.

Perpetual declining -- the recurring increases.

You're talking about the enterprise side.

Okay, yes.

Okay.

Then on software again on the maintenance revenue on BES, have you seen any change in maintenance renewal rates or drop-off in BES maintenance revenue?

No, not at all.

Okay.

One last one from me, just on the software business as well: The mix of enterprise users on non-BlackBerry handsets, what's the growth of non-BlackBerry handset users?

Well, we have -- from the good technology side we're 70% plus are all iOS devices.

We don't see any changes there.

We seem to see a lot of Samsung or Android devices, like Android, not necessarily Samsung, but Android-based users.

So I would say it's going up.

I don't really have a number that I track.

Okay, thank you.

I'll pass the line.

Paul Steep, Scotia Capital.

Great, good morning.

John, could you talk a little about your view on the software business, obviously the focus of the Company now?

But in terms of M&A what do you think you'd need to add to the asset mix, given the assets you have today in terms of bringing the portfolio more together?

Seems to be very distinct buckets, or from the outside it looks to be operating distinctly.

Then I've got two quick clarifications.

So could you tell me how it is distinct?

The whole idea of us pulling all the suites together, of defining the suites and the stack, is everything based on the enterprise servers of BlackBerry.

Application servers is all based on good technology and good dynamics and so forth.

And then on top of that are the integrations of secure voice and messagings and collaboration software and -- so to me, the pictures are quite tied together.

And I got those from our customers, too, so it was not just me saying it.

So it's not -- where do you see the distinction?

To me, I was just looking -- clearly you've got an enterprise business that's focused on exactly what you're talking about.

You've got connected car.

We've got IP licensing.

I'm looking at -- how are you looking to leverage those?

Or are they going to always stay distinct?

Or are you going to carry down a path of potentially divesting certain of those assets?

We don't have any plans to divest any of the assets.

But I guess anything in life is about a price.

So I'm trying to enhance the value of the Company, but we don't have any operating plans to divest any part of the Business.

IP takes time.

It is a little bit more standalone on IP, but it's more a licensing move on that.

But the connected cars, all the QNX and Radar and all that technology, are building, aiming at market, at vertical market.

This happened to be more of a transportation market and an embedded market.

Eventually it will have to come together in this so-called IoT, or enterprise of everything, of things, and eventually has to be -- even the enterprise stack that we have today is about managing end points efficiently and securely.

And if you look at car or a QNX-enabled devices as an end point, you could see how they might come together in the future.

We will work towards putting it together over time, but we're not in a hurry because we want each business to be profitable.

Fair enough.

Then, quick clarifications: On the timing for the transition, you've alluded to it.

Is it fair to think, based on the POs out there, that this would effectively be completed by middle of Q4?

What transition?

The transition of the hardware business.

Oh, yes.

It will be this fiscal year, absolutely.

I don't know about by middle of Q4, particularly, but it will complete in this fiscal year.

And to also be clear, James alluded to a number of divestitures or assets held for sale in the data center side.

When should we expect resolution there, and meaningful number or not material?

If you look at the balance sheet, Paul, it is a meaningful number, at least in terms of that line item.

We'll have that done this fiscal year as well.

We'll strive to get it done all in this fiscal year.

Okay, thanks, guys.

Okay, absolutely.

Michael Kim, Imperial Capital.

Hi, guys.

Could you talk a little about the pipeline for Radar?

And now that you have a pretty significant reference customer, if you are already seeing an increase in POCs or requests?

Yes, increased a lot of POC.

In fact, my guys are complaining, standard thing, not enough people, too much work, everybody wants to talk.

That's directly quoted from Sandeep.

Was that a competitive win?

Did you have an eval that went head to head with some of the other competitors?

In Caravan, I think in general we have a really new -- think about refreshed technology of a lot of the old proprietary that hasn't really used the cloud, that hasn't really used the kind of lightweight technology we have, the embedded technology and the sensing technology.

You need to think about it as there's a whole bunch of them installed out there, but these are all older technology and we came in with basically all new stuff.

So we don't have a lot of competition.

The competition will be the people who still ship a lot of these proprietary technology that uses their own software console, doesn't go through the cloud, couldn't do analytics and doesn't measure everything, very clunky measurements.

The fences are huge and battery life is limited, that kind of situation.

You need to think about it that way.

I don't really see a lot of the same type of people coming at us, so it's not a competitive win from that.

I just need to go in and hit the replacement cycle.

Got it.

And one quick financial question: What was the pro forma cash after the debt restructuring?

The change in the balance was about $700 million.

$700 million.

Yes.

About $1.3 billion something, including all interest, in billion, and then take in [$605 million].

Let's call it $1.8 billion, if you will, Michael.

All right, great.

Thank you very much.

Vijay Bhagavath, Deutsche Bank.

This is Brian Yun on for Vijay.

Thanks for taking the question.

My question was on the hardware business.

I think you highlighted last quarter that hardware was still an important aspect for some of your government customers, especially given the added security actually built into the hardware.

Does the shift to ending hardware development change the conversation you're having with those customers?

No, because we are -- some of the hardware security features, we will either license and provide to the third party we talked about.

Some might not take it.

So a lot of them are injection, for example in key injection, it's going to be coming from the chips they got from Qualcomm or somebody else.

It's a mix, to your answer.

There will be hardware out there that will focus more on the higher end with more security.

Okay, got you.

Helpful, thanks.

And then on the IoT and connected cars opportunity, I think you mentioned Karma Automotive, is there any color you can provide on the deal there?

And also a follow-up to that: Karma's a fairly niche manufacturer, but is there an opportunity with the technology at any of the larger automotive OEMs?

Yes.

Let me answer the second question first.

The first question is easy.

I really couldn't give you any more color.

Detail customers saying I have to respect what the customer would or would not allow me to do.

Since I haven't checked with them, it's probably inappropriate for me to comment on it.

And the comments, obviously we love have them being a proof point of our solutions.

This, of course, will be taken to all the OEMs and all the car manufacturers around the world.

Okay, thanks.

Sure, absolutely.

James Faucette, Morgan Stanley.

Thanks very much.

Hey, just a couple of follow-up questions.

First, on the reduction in interest expense, how much are you expecting that is contributing to your improved EPS outlook for the year?

On our arithmetic, it looks like it might be about $0.10 of the improvement, but I want to double check that math.

$50 million a year is $0.10 a year.

We have two quarters left.

That's $0.04 to $0.05.

Okay, $0.04 to $0.05, okay, great.

Thank you.

The other question I had was back on the software, James mentioned that there had been some increase in subscription-related revenue.

When we look at the entirety of the year, are we anticipating that percentage of ongoing will continue to increase?

And as you look at the software target for the year, are you also building into that any IP-related revenue?

Thanks a lot.

It is included -- IP is included in the number.

We don't expect a big chunk of that from IP this year.

Our expectation is 30% growth from last year's number.

On the recurring piece, James, we had always said that 80% was our target and have modeled that.

Obviously we're there.

So obviously maintenance are hopefully slightly growing, I think, would be a safe way to think about it.

Thanks a lot.

Thanks, James.

Simona Jankowski, Goldman Sachs.

Hi, there.

Hi, thank you.

Just wanted to clarify a couple of things.

First, in terms of the royalty per unit, is that a fixed amount?

Or is that a function of the price of the device or something else?

In the case in Indonesia, it was a fixed amount.

In other discussions we have, haven't signed yet, but in other discussions we have, it's a little bit of mixed model.

One of them, particularly for example, is a percentage of the total sale.

And in some cases it's a fixed amount but tier pricing.

Okay.

And in terms of the assets that are held for sale, what exactly are you selling there?

The data centers that we own, Simona.

The data centers?

Yes.

Okay.

And lastly, when you talked about the 81% of the software segment being recurring, are you including the $18 million of amortized deferred revenue in there?

$18 million of amortized deferred revenue?

Definitely the denominator, the denominator would be the total reported software number, so I think the answer to your question is yes.

So the numerator, the 81%, does that include that $18 million as well?

No.

Okay, thank you.

Thank you.

I'm showing no further questions at this time.

I'd like to hand the call back over to John Chen for any closing remarks.

Okay, thank you.

So to close, I'd again like to thank James and wishing him the best in everything he does.

Steve will be joining James on all the analyst one-on-one calls to follow.

And thank you, everybody, for joining the call and have a good day.

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

That does conclude today's program.

You may all disconnect.

Everyone, have a great day.