BlackBerry Ltd (BB) 2018 Q1 法說會逐字稿

Welcome to BlackBerry's Fiscal 2018 First Quarter Conference Call.

(Operator Instructions) I'll turn the call over to Charlie Chen, Vice President, Investor Relations for BlackBerry.

Thank you, operator.

Welcome to BlackBerry's Fiscal 2018 First Quarter Results Conference Call.

With me on the call today are Executive Chairman and Chief Executive Officer, John Chen; and Chief Financial Officer, Steve Capelli.

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

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

(Operator 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 will be making today constitute forward-looking statements and are made pursuant to the safe harbor provisions of applicable U.S. and Canadian securities laws.

We will indicate forward-looking statements by using words such as expect, will, should, model, intend, believe and similar expressions.

Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are relevant.

Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements, including the risk factors that are discussed in the company's Annual Information Form, which is included in our annual report on Form 40F 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.

Thank you, Charlie.

Good morning, everybody, and welcome to our call.

As is customary, I will reference non-GAAP number in my summary of our quarterly results.

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

In the first quarter, we made good progress in strengthening our strategic position in high-growth emerging markets, and particularly, the connected car and the cyber security space.

We secured key design wins and expanded our ecosystem to set the stage for long-term growth.

I'll provide some highlights later in the script here.

Notably, our balance sheets continue to strengthen with the completion of our transition to a software business model and the increase of cash on a -- as well as the increase of cash from the positive outcome of the Qualcomm arbitration.

This gives us increased capacity for driving shareholder value, both short term and long term.

Again, I'll come back -- I have a brief update on that later on.

First, let me now provide a summary of our Q1 results.

Total revenue was $244 million.

Total company software and services revenue was $169 million.

Gross margin for the quarter came in at 67%.

Operating income was $14 million.

We earned $0.02 per share.

This is the third consecutive quarter of positive EPS and the fifth consecutive quarter of positive operating income.

Total ending cash was $2.6 billion, up $855 million from last quarter.

In our strategic area of focus, we continue to execute well and win important opportunities.

As a reminder, I'd like to cover the 4 growth engines that we have in front of us.

The first one being unified endpoint management.

We refer to it a lot of time as enterprise software.

The second area is embedded software enabling mobile endpoints, such as connected cars.

The third area is in the IoT appliances, such as the BlackBerry Radar.

And finally, the fourth area is in technology licensing.

Each of these above area represent large and expanding market.

Now let me cover some of the key accomplishment in the quarter and broken down by these areas.

So in the enterprise area, we again saw good performance in UEM and solid year-over-year growth in billings.

As a reminder to everybody, this follows how strong -- the billings was -- follows a strong Q4, which was our highest-ever billing quarters in the history of the company.

The growth was due to strong uptick of our new UEM platform, which was launched in December of '16.

We processed over -- in the quarter, we processed over 3,000 customers' orders.

We had a number of competitive takeout wins: a law firm, Morgan Lewis; we replaced Mobilion; provisional [rhineland] -- providence, not provisional, I'm sorry, sorry, apology, [Providence, Rhode Island] and Banque de France were both AirWatch replacement.

Banque de France is the central bank of France.

This adds to our growing list of European national banks as customer, which now total 12.

Another key wins including Magna International, a tier 1 global automotive suppliers headquartered here in Canada.

Earlier this month, we were named a leader in Gartner Magic Quadrant for EMM.

It stands for Enterprise Mobility Management, the EMM suite for the second year in a row.

Notably, we were the only vendor with positive movement in both vision and the ability to execute.

Our development team continues to perform well.

Earlier this week, we announced 2 key enhancements to the UEM platform, which I just referenced.

First is the Microsoft Window integrations.

This will expand the number of endpoints we can manage with our platform to include PC, laptops and bring your own computer.

The second one area -- the second area is in the third-party cloud enablement.

This allow us to put the entire UEM product platform onto a cloud.

In addition to that -- on that, we have list -- a host of features in analytics, user analytics, and as well as applications.

On the security front, there was good progress in both the go-to-market area and the certification, the security certification achievement.

In the go-to-market area, we closed an initial win with the Giuliani Partners and our cyber security service pipeline is building nicely.

We also launched in the quarter, BlackBerry SHIELD, an assessment tool for cyber security risk management, and partnered with Allied World to make the tools available to their cyber insurance policyholders.

In the certification area, we achieved the United States NIAP certification, which was operated by the National Security Agency, with our Seki Smart Solutions or Seki suite solutions.

We started piloting Q1, and we'll be taking this solution more broadly to government -- governmental customers all over the world.

We achieved also certification with the German government for our secured voice solutions on the Samsung S7 and S8 devices.

Finally, we launched in the quarter, we launched AtHoc ACCOUNT, which is a program that gets the FedRAMP certification in the United States.

The solution enables government agency and large organizations to account for personnel in real time.

We are the only vendor, by the way, to achieve FedRAMP status in crisis communication solution.

And in together with our AtHoc Connect -- at AtHoc solutions, also achieved the same status of certification.

The second growth area is in the embedded software area.

Here, we have important design wins in high-growth area of our automotive businesses.

We are also expanding and strengthening our partnership with important ecosystem partners.

Recently, we announced our Hypervisor 2.0 solution.

This technology creates virtual software containers to reduce the risk of security breach in a vehicle solution -- software solutions.

For example, using our Hypervisor, you could use a single system-on-a-chip to run both infotainment and a digital instrument cluster, but the 2 domains will be isolated from each other in our container.

A breach in the infotainment system will not corrupt the digital instrument cluster.

Apologize for that.

We had 2 significant wins in the quarter.

Qualcomm announced that it is adopting our Hypervisor in support of its digital cockpit solution in automotive.

The second is Nvidia, who announced the usage of QNX real-time operating system on its DRIVE PX 2 platform.

QNX was chosen based on the performance and safety benefits.

We are also working with other ecosystem player such as Intel, TI, Renesas.

And we support both x86 architecture as well as ARM architecture for both the 32-bit and the 64-bit computing.

Also in the quarter, we have some significant wins, design wins in the advanced driver assist and in the digital instrument cluster.

Later this year, we'll be bringing to our market, the [2 to] market, our vehicle management portal, a comprehensive cyber security solution for automobiles.

This will target a large and growing market in the automotive technology service, which today is about $30 billion and expect to grow at a 30% CAGR over the next 15 years.

Initially, the solution would be provided to OEMs, then we will expand distribution through a subscription-based referring -- recurring revenue model.

And please stay tuned for the details in the future.

The third area of growth is our IoT appliance.

With Radar, we had our first win of a major global logistics company in the quarter.

We are also continuing to build our pipeline and convert proof-of-concept trials to customer wins.

Some of our early customer wins have come back for repeat purchases, so this demonstrates the strength and the value of the Radar proposition.

I'm pleased to announce that FedEx has chosen Radar for its custom critical services.

This is obviously an important sign of momentum for us in the business.

We have 2 add-on wins with existing customer, mainly Titanium and Caravan.

Our overall win rates and conversion rate of POC, or proof of concepts, to win has been very, very high.

5 POCs completed last quarter successfully and are moving into commercial discussions.

We have a potential 8 POC this quarter: 4 are scheduled to start, and we're pursuing the other 4.

We are also planning to launch Radar Lite in the fall.

This version of Radar is cost optimized, and we have a feature set suitable for an expanded set of containers.

This will significantly expand the total addressable market for Radar from 8 million units to 28 million units.

In summary, with Radar, we feel good about -- we feel great about our products and especially what we're hearing from customers.

Given the amount of market runway, we want to move much faster.

Therefore, we're going to be more aggressive investing to expand on our go-to-market effort.

This will obviously include expanding our reseller channels, as well as adding feet on the street.

The fourth area is -- the fourth and final area is our technology licensing.

In the quarter, we took steps to expand our BlackBerry Secure licensing program beyond the BlackBerry-branded devices.

The first area is -- what we worked on is, obviously, the handset OEM, OEM partners, and allowed them to use our security software.

We are focusing beyond the traditional handset market to other connected device going forward.

We signed a memorandum of understanding with a firm, STK, which will integrate BlackBerry Secure into the STK future product lines, including smartphone and a desktop 4G voice-over-LTE phone.

Based in the U.K., STK manufactures smartphone and other mobile devices with an emphasis on design and innovation.

Both sides are working on signing a definitive agreement in the near future.

In addition, we are also working on a licensing agreement with another designer-oriented mobile product company in Europe, which we do expect to sign in Q2.

The second area of focus is working with semiconductor companies to embed our security directly onto the chip.

The early response has been very positive.

The first 2 device through our licensing program shipped in Q1.

The BlackBerry Aurora with BB Merah Putih and the key -- a KEYone with TCL have both launched and went well.

The KEYone was launched at U.K., Germany and North America at the very end of Q1.

Initial receptivity and demand for the KEYone has been quite good.

The device is sold out in many markets based on higher-than-expected customer demand.

The Aurora device has been rolled out to 655 retail locations in Indonesia.

BBMP is emphasizing the security capabilities with our software.

With the device now shipping, we are now generating royalty revenue from these agreements.

Our partners in India, Optiemus, is planning to launch its first BlackBerry-branded device in Q2, with a follow-on device on the roadmap.

Earlier this month, our CPaaS solution, which is Communication Platform as a Service, the CPaaS offering, which happens to be BBM Enterprise SDK, was released for general availability.

We have more than 60 ISVs developing on our SDK.

And we are starting to generate revenue there, too.

I'd like to spend a minute -- and that concludes my update on the business.

I'd like to spend a minute on capital deployment priorities, which include investment in growth area as well as plans to return capital to shareholders.

There are mainly 3 buckets: organic investment, merger and acquisition, and as well as shareholder's return in the form of buybacks.

Our product priorities, which I touched on earlier, are enhancement to our Unified Endpoint Management platform, the vehicle management portal and Radar Lite.

These products are aligned to our key growth areas.

We are also planning organic investments to support these areas in both go-to-market and the development headcount.

In the strategic M&A area, a high-level area of focus remains to be the cyber security, which will probably also touch on the machine learning in AI, and as well as the [enterprise] of things focused on connected cars and asset tracking.

This will be complementary to our embedded software and Radar businesses.

I'm sure all of you have seen our stock buyback announcement this morning, which cover up to 31 million shares.

This is obviously part of our long-term capital allocation strategy.

Returning an appropriate amount of excess capital to shareholders will enhance shareholder value by providing long-term earnings accretion benefits and offsetting potential dilution from the convertible debt and our Equity Incentive Plan.

So I will now turn the call over to Steve for a detailed look at our financials.

Thank you, John.

Today, we reported Q1 GAAP revenue of $235 million and non-GAAP revenue of $244 million with fully diluted GAAP EPS of $1.23.

Non-GAAP EPS was a positive $0.02.

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

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

I will begin with a consolidated review of our Q1 FY '18 income statement results.

Our total revenue for the first quarter was $244 million.

Our consolidated gross margin was 67% compared to 65% last quarter and 53% a year ago.

Our non-GAAP gross margin includes software deferred revenue acquired, but not recognized, of $9 million, and excludes restructuring program charges of $3 million and stock comp expense of $1 million.

The gross margin improvement of 1,400 basis points over a year ago is attributed to the increase in contribution from software and services to our overall revenue mix.

We continue to model consolidated gross margin of approximately 70% for the full year of FY '18.

Operating expenses were $149 million, down from $181 million last quarter.

As John mentioned earlier, we are increasing investments in channels and development areas.

In addition, Q1 OpEx benefited from legal expense reimbursed related to the Qualcomm arbitration in the amount of $8 million.

As a result, we expect Q2 OpEx to increase accordingly.

GAAP net income for the quarter was $671 million.

Our non-GAAP operating expenses exclude $25 million in amortization of acquired intangibles, $14 million in restructuring charges, $12 million in stock comp expense, $11 million in business acquisition and integration charges, $218 million of fair value adjustment related to the debentures, and an $815 million expense recovery related to the outcome of the Qualcomm arbitration.

Non-GAAP operating income was a positive $14 million, and non-GAAP net income was $10 million.

Our adjusted EBITDA was $40 million this quarter, excluding the non-GAAP adjustments previously mentioned.

I will now provide a breakdown of our revenue.

Total software and services revenue was $169 million, representing 69% of total revenue.

Handset device revenue was $37 million, representing 15% of revenue.

The last of our remaining inventory will be sold by the end of June.

As a result, our handset device revenue is expected to be minimal in Q2.

Total SAF revenue for the first quarter was $38 million, representing 16% of revenue.

SAF revenue was down 23% quarter-over-quarter.

We continue to model a sequential decline in SAF revenue of roughly 25% next quarter.

As committed last quarter, I will now provide a further breakdown of our software and services revenue.

The largest contributor was enterprise software and services at 60%.

BlackBerry Technology Solutions accounted for 21%, and 19% came from licensing, IP and other.

Please refer to the supplemental table in the press release for the GAAP and non-GAAP details.

Roughly 79% of software and services revenue, excluding IP, licensing and professional services, was recurring in nature.

Now moving onto our balance sheet and working capital performance.

Total cash, cash equivalents and investments increased to $2.6 billion, up $855 million from $1.7 billion last quarter.

Our net cash position was approximately $1.9 billion at the end of the quarter.

Aggregate contractual obligations, which include purchase obligations, operating lease obligations, interest payments and other goods and services utilized in operations, was approximately $384 million at the end of Q1.

This is down from $885 million a year ago.

There were no purchase orders with the contract manufacturers at the end of Q1.

This is compared to none at the end of Q4 and down from $150 million a year ago.

Moving to the cash flow statement.

Free cash flow was a positive $860 million for the first quarter, which consisted of cash flow from operations of a positive $863 million and capital expenditures of $3 million.

Looking forward, we expect positive free cash flow and EBITDA for the full 2018 fiscal year, excluding the benefit of the Qualcomm arbitration award.

That concludes my comments.

I'll now turn the call back to John.

Thank you, Steve.

Before I open the Q&A session, let me make some comments of our outlook.

We have no change to our guidance for the FY -- the full year FY 2018.

Software and services business, we expect growth at or above our overall market, which is in the range of 10% to 15%.

For the full year, we expect to be profitable on a non-GAAP basis.

And as Steve pointed out, we expect to be full year -- on a full year basis, positive free cash flow.

So now I'm ready for the Q&A.

Operator, could you please administrate that?

(Operator Instructions) Our first question comes from the line of Daniel Chan, TD Securities.

Good to hear that the billings was the highest you've ever had.

But can you comment on some of the software and services?

It was up about 2% year-over-year.

Oh, no, so the billings -- the highest quarter, I kind of fumbled the -- when I briefed while reading that statement.

We had the best billing in Q4 last year and then follow through with a pretty nice billing growth year-over-year in Q1.

So as far as the software number is concerned, it's really based on -- because of the services.

The professional services were down quarter -- Q4 to Q1.

And I think a lot of the people have baked in a different number in ProServ.

So from a license perspective, we feel comfortable.

Okay.

So then as you ramp up some of these other handsets coming in the pipe, do you expect the ProServ to kind of come back over the next couple of quarters?

Yes, it's the -- you get it -- I guess you get the right question on that.

It kind of depends on who we are licensing it to, whether they have the capability to do it themselves or they have to get our help.

Okay.

And then you've announced the NCIB to offset some of the dilution from the converts.

Have you taken any additional dilution protection measures for the remainder?

Like for example in?

You only got 31 million -- you only -- the NCIB is only approved for 31 million shares, but your converts...

So let me answer the kind of the equation of it, and then if there's any detail, then Charlie and Steve would add onto it.

So what we have decided to do is to offset the dilutions for the equity pool that we just approved a couple of days ago and that -- and obviously in 1 year dilutions of that, and then the debenture has 3 years left.

And so we offset 1/3 of the dilution for the debenture, and that came up to be roughly about 31 million, give or take, shares, assuming it's $10 a share.

And let's see, did I miss anything on that?

No.

So the -- yes, the NCIB covers 12 months, and then we would address it after that 12-month period.

I'm sorry.

Thank you.

It's a 1-year coverage at this point.

Our next question comes from the line of Gus Papageorgiou of Macquarie.

John, could you just give us a little more detail on this vehicle management portal that you're suggesting?

You're saying it's a $30 billion market growing at 30% CAGR over the next 15 years.

Can you talk a little bit about what kind of (inaudible) you're planning on launching, when you plan on launching it and maybe give us a hint at what kind of economics we can expect?

It's going to be -- so it's going to be in the fall, and we're going to start with the OEM first, meaning directly to the car manufacturers, and obviously, they have to agree to uptake it.

Let me comment on a little bit about the market itself.

And when I said $30 billion, it is the so-called automotive services business.

It obviously included things like over the air and a lot of different kind of a recurring services business, automotive.

So this is a good entry into that $30 billion market, and this also allow us some differentiation and growth, especially as it relate to cyber security.

So we're bullish about the product, and -- but you have to stay tuned a little bit as we get closer into the rollout state, and then we're going to have more information.

Okay.

Sorry, just to follow up, if I can.

On Radar Lite, can you give us a sense of what the economics are for Radar Lite versus the existing solution?

And then the existing solution is roughly a $300 piece of hardware and then kind of $30 a month recurring fee.

What kind of economics could we expect on Radar Lite?

Yes.

Don't hold me to it.

We're still working on the pricing, but it will probably be more like $200 and more like $10 a month.

I mean, I'm right in the ballpark, but we have not completely nailed down the pricing yet.

But that's kind of the design center of why we're doing this.

And our next question comes from the line of Paul Steep of Scotia Capital.

John, 2 quick questions.

The first one would be -- thanks for your update on the capital deployment.

With regards to M&A and how you're thinking about it, should we think about the M&A activity as being focused on more purchasing IP?

Or is it to scale the business by buying a large existing recurring revenue stream within one of those buckets?

And then I've got one fast follow-up just operationally.

So I normally say IP buyer, so -- but I think we're very comfortable in our -- with our development direction and our development team, and so we have plenty of IP.

And in some cases like the Radar and Radar Lite, the QNX areas, we really need the -- we really need to focus on go-to-market.

And so we'll probably fit more into your second category, which is a company or companies that allows us to expand the reach into the market.

Our channel is currently the thing that I'm focusing most on.

So I'll answer the question that way.

I really -- at this point in time, I don't see major gap in our product.

Perfect.

I guess related directly to that, we talked a little bit about the ramp in hiring.

You've sort of touched on it.

How's hiring going?

And how should we think about -- you alluded this year to the fact that you were going to staff up meaningfully.

Where's that in terms of progress and...

Good question.

On the enterprise side, the hiring has been doing very well.

We are ramping nicely, and thanks to also the seasonalization of a lot of students' graduation [wraps], they could come in and help us on the demand generation side of the equation.

So -- and so we're doing quite well on that side.

I need to do the same thing more on the IoT appliances side as well as the QNX side.

Our next question comes from the line of Maynard Um of Wells Fargo.

The gross margin was a little bit softer than we expected.

I guess, what was the primary driver for the softness?

And how should we think about that going into next quarter?

Because I guess what I'm trying to figure it is if there's something structural, like SAF gross margins continuing to come under pressure as you lose revenue scale, and then if that causes gross margins to remain under pressure as we go forward.

This is Steve.

I think it was really the mix between hardware and software, and some of the benefit we got in COGS in the past as we were unwinding the hardware business for devices.

I think going forward, you'll see an uptick in that, probably in line with what you expected as they'll be virtually -- not quite 0, but a very, very low device number in Q2 and beyond.

I think Maynard -- Steve, correct me if I'm wrong, I think we are targeting 70%.

For the year.

Correct?

For the year.

So Maynard, you could just kind of model it that way.

Okay.

And then just on the OpEx side, I guess I'm a little surprised to see your sales and marketing dollars declining as -- you talked a lot about building out your channel, your go-to-market.

Has there been some change there?

Or where are you seeing your savings on that line item?

And is -- has there been any change in the strategy that's altering sort of the dynamics of the direction of sales and marketing?

Yes.

So on that line, it's actually sales, marketing and administration, and most of that decline is -- I should say all of that decline is administration-related.

One example of that, we had -- I think it's $32 million quarter-to-quarter.

We had a $16 million swing just in legal expenses, and that's based on Q4 to Q1.

We had a positive number in Q4, and we had a negative $2 million in Q1.

And then we had some other onetime events in Q4, like bad debt expense and some of those other smaller items that contributed mostly to that.

So I just want to reassure you, it's on the administrative side and not on the sales and marketing side.

Yes.

I think our G&A, in general, could do more.

And as we streamline the business, there will be opportunity there continuously.

So it's not going to be coming out from sales and marketing.

In fact, those are ramping up.

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

Just 2 related ones on the revenue line.

I guess first quarter of software revenues is low single-digit growth.

So could you just give us a little flavor on how -- what accelerates?

Which piece of the business do you think gets us to that double-digit growth for the year?

And then related to that, it looks like the -- thanks for the revenue breakdowns.

The enterprise software and services group was actually down year-over-year.

Was there something onetime in nature?

Or is that business just maturing and it's tough to find growth?

No, no, no.

It's not that, but I'll let Steve tell you the onetime.

Sure.

So that business -- first of all, we got the credit in the past of deferred revenue from acquisitions.

And as you look at our GAAP to non-GAAP revenue, that delta is related to that.

And surely, as the year goes by or as the time passes, that number becomes less and less.

If the growth -- if we pull that out, there was a $15 million difference year-to-year.

So we actually grew, I think it's roughly 12%, in that category.

That being said, you asked for how we're going to accelerate the growth in the second half.

Part of it is -- and where that might come from.

So on the enterprise software piece, we have accelerated billings in, we expect, professional services, plus some of the other areas that are on our suite that will accelerate that growth in that category.

And then in BlackBerry technical services, we're expecting continued growth from the historical space, but also the growth that we would expect from Radar in the second half with some of the wins and proof-of-concepts that we have.

Yes.

To recap that a little bit, the deferred write-down because of -- not write-down, but deferred credit from the acquisitions a year ago versus now, obviously, we have a delta.

And as Steve pointed out, it's in the table we provided.

It's a 12% growth.

I look at it very closely.

It's 12% growth in our enterprise business year-over-year.

In addition to that, like Steve pointed out, Radar and the BBM SDK are both areas that we expect to see some good growth, and then some professional services anchor of that will also come in.

And then we don't have much of an IP contribution.

And I'm hoping that the second half, we'll see some of that.

Yes.

So those are the areas that I think will get us to the double digit that we talked about.

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

I just wanted to speak about the win with FedEx.

I'm just hoping you can elaborate a bit on it, and particularly in regards to custom critical and the number of trailer opportunity there and then if you see any opportunity, more broadly, at FedEx.

We do a good job at the critical services, which are smaller numbers.

I'm hoping and I'm believing that we could have opportunity for a much, much bigger piece of the pie.

I really cannot comment on it because it took me begging and whatever to even allow me to mention the name, because I know many of you have always wanted to know when are we going to have one of the global -- breakthrough global name and so forth.

It really got down to this week before I was allowed to even mention the name.

So I'm very grateful just to allow to mention the name.

So forgive me if I can't give you the detail, but I have a gag order.

And if I say anything more than that, they'll probably come arrest me or something.

Yes, sir, I understand.

Just moving on to QNX and the Hypervisor.

How much do you see that -- the Hypervisor as a competitive advantage within the automotive, like, embedded software space?

It's very, very big.

It's -- this allowed us -- this technology allows both efficiency in -- of the manufacturers and Tier 1 providers to provide functions together on the same pieces of hardware, and -- but also allow the separation for cyber security.

So if one module got attacked, it will not affect the other modules.

And you could think about other areas of usage, like redundancy and fail-safe.

So it's a very unique differentiator.

So we feel good about it.

Okay.

And then just one last one, just to clarify.

Just in regards to professional services in the quarter, I think it's $27 million.

You broke it out last quarter.

I didn't hear a number.

Is there any number you could disclose regarding professional services this quarter?

In that, $27 million is almost nothing.

Correct.

[It's not] the professional services, but related to that, as John pointed out, that was...

The entire delta.

I think if I look at all your model, and not that I study your model, I don't want you all to think that we study your model and -- but we do.

We have people that know exactly what you're thinking or trying to figure out what you're thinking.

And if I look at your model, I think that's the disconnect between what you're seeing right now, us and you, in the quarter is the professional services piece, which I was hoping that Steve tell you guys in the last 90 days that it was not a repeatable thing because it was helping to get on our -- using our technology.

So it's not an ongoing technology services.

It's really a ramp-up services so that we could train people on that.

Steve obviously didn't do a very good job on that, but...

Okay.

I'll forgive Steve.

Yes, that's fine.

Okay.

I'll give him this pass one time also.

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

Steve, the deferred revenues balance on your -- on the balance sheet, it's been in decline since the Good acquisition.

Is there some revenue bucket within enterprise software that is in decline?

What's the factor that's driving this deferred revenue trend?

The largest piece of that deferred revenue is actually related to handheld, where devices were shipped but we couldn't take revenue until there was sell-through; and the SAF revenue.

Those are the largest components of the decline.

And as that number comes -- as those numbers come down, I think you'll start to see a build-up and ramp-up of our deferred revenue.

So how much more is there left, Steve?

We haven't disclosed on that.

It's still a fairly large number, and I think you can look on some balance sheet information and get a close approximation.

It can -- I mean, it's going to be drained off this year.

For those components.

For that component, it will be completely...

And SAF will be very minimal after this year.

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

Just circling back on Radar Lite and the potential opportunity for TAM expansion.

The 28 million units, I think, if I've written this down correctly, quite a bit -- are quite well above the number of trailers worldwide.

Are you talking about expanding the intermodal containers?

Or where do you think the use -- potential use cases are?

Exactly.

That's exactly right.

The intermodal containers and also assets that -- like with the government, there are many assets that are not just a container asset.

So there's some specialized use also.

Okay, got it.

And then just switching gears on the federal [SoC], are you building capacity ahead of some anticipated contract awards?

Or how do you feel about your opportunities for awards later this year?

It's there -- I mean, obviously, with all the talk going on, it's positive.

I really -- I'm not really planning a huge thing because I -- the details remain to be seen.

I know the monies are being spent in the armed forces and -- in the United States, and I know the money is being spent in law enforcement and -- or at least, the budget has been assigned to law enforcement and so forth.

So a lot of our FedRAMP-based solution is to allow the customer to use a cloud-based implementation.

So yes, we are ready for it, but I don't think we have an unrealistic expectation that something's going to jump way off the chart.

If that happens, wonderful.

We'll take it.

But it's not baked into the -- let's say it's not baked into the 10% to 15% increase that we talked about.

(Operator Instructions) Our next question comes from the line of James Faucette of Morgan Stanley.

So 2 quick questions or 2 questions.

First, on the arbitration award from Qualcomm, are you -- are we clear now that there won't have to be any taxes paid associated with that award and the cash transfer?

Yes, we are clear, and there wasn't any taxes because of our NOLs that we had.

Okay, great.

And then on -- just longer-range question, I guess for both John and Steve.

As we look at the opportunity sets and the ones that you're developing in the automotive market, how should we think about like the pacing and -- of acceleration in growth and revenue contribution from those?

And how much of a headwind is the pricing decline on infotainment that you talked about in the past likely to be against that growth?

And how long should that headwind persist?

Yes.

So we've seen the infotainment saturation and the pricing a while back.

And in our Analyst Day in the beginning of the year, we have outlined that.

And the strategy has always been -- even in the last 2, 3 years, is adding additional modules, and so to -- so that we could continue to -- because we have a very big base of auto manufacturing out there, and we have 60 million cars with our infotainment and some of the operating systems in it out there today, and so we have a very large base to sell -- up-sell into.

So this is why we've been so concentrated and so focused on adding cluster technology, vehicle-to-vehicle or V2X implementation and telematics and so forth.

So those are all major areas that we have products.

And we're starting to see some movement of that, meaning people have uptake on that technology.

So I'm not concerned about the whole infotainment saturation.

It's kind of in our expectation.

Hypervisor, I use the example of Hypervisor is to tell -- is hopefully to tell everybody that even if other people's infotainment in there, we still have products we could sell on top that embody and embrace the infotainment implementation.

I would like it to be mine, but -- so but -- we could definitely do that.

So I'm very bullish of the business.

We're well positioned.

Our products and technologies are solid.

We're definitely ahead of everybody.

My issue is we just don't have enough people working on more deals and -- as simple as that.

So on the channel side, through Tier 1, we've been doing pretty good.

But Tier 1s are limited in this world in how many of them, and so we just have to go out and directly work on more opportunities ourselves.

And that statement is more true in Radar than in the QNX software.

So I'm not worried about that business at all.

But -- and I can appreciate that.

So how should we think about like the ramp on the design wins that you mentioned?

I mean, is this something that we should see an acceleration next year or the following?

Or how does that -- how are you thinking about like getting that strength to come through the P&L?

We should see some reasonable growth next year that -- and probably the year after.

Yes.

And then stronger the...

Yes.

And so it's a function of -- because this is a design win business on the QNX side.

And every time we win the design, we win the design, it's probably a 2-years out model car that's [go] shipped.

And one of the areas that I -- that we're all very focusing on is the whole area of services.

And that's why I spent a little bit of time and talk about our plan in tapping that market with cyber security services on auto and so-called -- the so-called [code scanning] project.

And so those, we're hoping to have recurring revenue on a monthly basis per car.

So that kind of get the revenue growth a little bit more visible and a little bit more sooner and more consistent.

So let's see how well we...

And the vehicle portal as well should -- right?

Yes.

So let's just see how well we do on our service side.

So I -- if on purely design win in QNX, you're probably looking at next year, do a little bit better, and the year after, doing a little bit better than that.

And it kind of depends on how many design wins that we have, and we feel comfortable that we're going to win our fair share.

Our next question comes from the line of Anil Doradla of William Blair.

So couple of questions, John, Steve.

So is it fair to say, when I look at the OpEx, R&D and SG&A combined, we've hit a bottom?

It sounded like John is going to be investing.

So if I look at, say, call it, the next 8 quarters, next year or 2, we've hit a bottom, we should start seeing an increase.

And can you provide some color how should we be perhaps modeling it over the next year or 2?

Are we going to see more growth in R&D or more growth in SG&A?

Yes.

I think we're going to see growth in sales and marketing, more so than the growth in R&D.

Well, the growth in R&D will be steady, but I think the -- what I'd like to spend -- I mean, in a kind of a big picture, a very big summary way is that the market we're aiming, whether it's a cyber security market for enterprise, whether it's the UEM market for endpoint management, whether it's the auto markets for the QNX and whether it's the Radar markets and whether it's the licensing market, these are all high-growth market.

And you all know our capability and products line up against each and every one of those markets.

I don't think you hear a lot of BlackBerry products lagging behind or this, that and the other.

I think we're very competitive.

So now our issue is get it out there and get the deal done.

And so we really need to ramp up our distribution channels, whether it's the -- on the partner channel side or on the organic feet-on-the-street side.

So you see most of those there.

And we're starting to be more aggressive in marketing, in not only the traditional advertising, but running developer conferences, running security conferences, with -- meeting with customers on kind of a small group advisory basis or a vertical basis.

You're seeing us getting more aggressive in that.

That will continue.

And so those are the 2 major areas that we are spending the money on, and development are -- have been pretty stable and pretty good.

Adding to that, I'd like to say that we'll have a little bit of bounce back between Q1 and Q2 because of some extraordinary events that I mentioned.

And then naturally, we'll have -- our expense growth will be maybe 1/2 to 2/3 of our revenue top line growth, because we're certainly not going to grow the expenses faster than our revenue.

That's not the expectation.

But you should build that -- okay.

Our next question comes from the line of Kulbinder Garcha of Crédit Suisse.

Just 2 questions.

On the free cash flow, you said it was $860 million, I assume that assumes -- includes the Qualcomm payment.

So backing that out, the underlying business burned cash this quarter, that's one clarification.

And the second one is when you talk about the [bid] -- the software business growing in line with the market, 10% to 15%, should I think about that growth being applied to software and service or just software within software and service?

Then given the decline this quarter, we're going to have to have quite a meaningful reacceleration over the next 3. So what exactly is giving you the confidence to drive that?

Let me answer the second question.

I'll get Steve to answer the first one.

Yes, it's the -- when I talk about 10% to 15% growth, I talk about both software licenses and services.

And this is -- one of the earlier question I answered, is part of the growth is going to come from a professional services increase and some of the recurring services also.

So -- and as I pointed out, we expect Radar to see uptakes.

We expect the good billings in the last 2 quarters to convert in -- to come in as revenue, and we expect licensing revenue to also ramp up and also the IP side of the equation.

So it'll be a component -- it'll be 3, 4 different components that will get us to the ramp.

It's going to be a more of a second half growth, I think, given where we -- all the products are positioned and when it's going out and how long it takes to get into the market, so -- but we still remain comfortable with the 10% to 15%.

John, is there any major IP kind of onetime licensing deals included in that?

Or -- and/or any M&A?

Or is it just all organically that you can do that?

Not the M&A.

The IP, we have some -- we have a list of IP things we're working on, and IP takes a long time.

And so yes, there are some -- I don't know what your onetime means, but we're obviously pushing on recurring or an annual license fee.

Sometimes, we don't always get our way.

So hard to answer your question on that one, but yes, there -- it depend on IP.

IP is part of the equation.

IP is part of it.

Absolutely.

Yes.

And then on the cash side, we still have some lag getting out of the hardware business.

But if you look at our balance sheet, you'll see of the unrelated free cash flow usage in the quarter, which was approximately $70 million, about $55 million is actually -- you'll see it in just the change in our payables balance.

And so I think -- we all think that, that number or that burn will obviously come down quickly and then start be increasing throughout the year.

But just to be clear, if it wasn't for the Qualcomm payment this quarter, you would have burned cash, correct?

Correct.

Yes.

And some of that, Kulbinder, as well was -- Steve had mentioned the decline in payables and accrued liabilities as well, and some of that was settling some of the hardware obligations for exiting that business.

Hardware obligations.

Our next question comes from the line of Gus Papageorgiou of Macquarie.

I was going to ask you on the FedEx question, but since it was already asked -- since you're planning to do some M&A and you're saying you have a problem with, basically, the channel for Radar, is there any opportunity to maybe buy a channel in that sector and be helpful to your...

I can't -- you should ask your bankers.

I can't comment on that.

There's obviously opportunities, obviously.

I mean, it's not a market that we created.

The market already existed, right?

And would that be a big ticket?

I can't tell you that.

I mean, it's unfair for me to comment on that.

All right.

Thank you, Gus.

All right.

I think we're about the time.

And thank you all very much for tuning in and chatting with us, and I hope to see you guys soon, if not 90 days from now.

Thank you.

Have a good day.

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

The does conclude today's program.

You may all disconnect.

Everyone, have a great day.