BlackBerry’s (BBRY) CEO John Chen on Q2 2017 Results – Earnings Call Transcript，来自seekingalpha
BlackBerry Ltd. (NASDAQ:BBRY)
Q2 2017 Results Earnings Conference Call
September 28, 2016, 08:00 AM ET
Debbie Tuck – VP of Finance and Head of IR
John Chen – Executive Chairman and CEO
James Yersh – CFO
Daniel Chan – TD Securities
Maynard Um – Wells Fargo
Steven Li – Raymond James
Tim Long – BMO Capital Markets
Paul Treiber – RBC Capital Markets
Paul Steep – Scotia Capital
Michael Kim – Imperial Capital
James Faucette – Morgan Stanley
Simona Jankowski – Goldman Sachs
Welcome to BlackBerry’s Fiscal 2017 Second Quarter Conference Call. [Operator Instructions]. I will turn the call over to Debbie Tuck, Vice President, Finance and Head of Investor Relations for BlackBerry.
Thank you, operator. Welcome to BlackBerry’s Fiscal 2017 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 to ask questions, please limit yourself to one question.
This call is available to the general public via call-in numbers and via webcast in the Investor Relations section 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 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 fiscal2017 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 number. 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. N umber one, repairing the balance sheets and return to possibility; number two, investing in growth areas such as enterprise software, IoT, connected cars; and number three, creating new business model through licensing both our technology and our intellectual property.
Coming out of Q2, I feel that we are reaching a good inflection point where our financial picture is 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 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 to validate this new direction, and I’ll expand on it.
First, some key takeaways that demonstrate our positive momentum with the company and where our strategy is taking hold. In Q2, we continued to show a 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 highest gross margin in the company 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 in both the income statement and the balance sheet, while preserving our ability to invest in growth. This transaction will save us over $15 million per year in interest payment 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 refer to the – 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 called, 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 the Indonesian market, this is — 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 handset – BlackBerry handset 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. We focus on: A, we focus all of our efforts on where we can deliver differentiation in software and security and by the way this plays into our strength and it’s aligned with where the market is going.
B, partner will bring us the hardware portfolio with competitive hardware specs going forward. C, will also leverage partners and third parties where scale is critical. This obviously includes distribution, manufacturing, logistics, and repair. We believe this will lead to expanded market access, increased unit volume, and higher profit margins.
And last but not least, this approach also eliminates BlackBerry’s need to working capital or greatly is reduced, I don’t whether eliminate is a good word, greatly reduce our need to working capital and capital investment related to inventory and manufacturing. This de-risksour 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 all know 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 solutions revenue was $105 million. SAF came in slightly better then expectation at $91 million.
As I mentioned, we delivered the highest gross margin in the company history at 62%. This number was up from 53% last quarter and 41% a year ago same quarter. This was driven by the improvement in device margins and a more favorable revenue mix.
Operating income was $16 million. We also achieved our eleventh consecutive quarter of positive EBITDA, which came in at $45 million in a quarter. This translates to about 13% EBITDA margins. EPS was breakeven and in Q2 cash flow was $2.5 billion.
So, let me now provide some specific highlights in detail on our key business segments. In software, Q2 year-over-year growth was again driven by strong performance in enterprise mobility, crisis management 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 earlier – early.
We had 3,000 customer orders in Q2. This is to include about 692 customers purchasing our suite. This compared to 520 last quarter. Recent high-profile wins included the U.S. Army, the Transportation Safety Administration which is TSA, the US Coast Guard, and DENSO.
In IoT and connected cars, we achieved two firsts. First the one – the first of the first, 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 across their fleet of 1,500 vehicle. Radar, our product radar started 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 Capability 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 of BBM consumer, which has nearly 60 million MAU, monthly active users, in Indonesia and 90 million MAU 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 the ecosystems to facilitate growth in enriched content and new application on the BBM platform. These efforts should result in increased MAU, monthly the active user, ARPU, average revenue per user, and revenue growth for the BBM consumer business altogether. The license agreement also allows 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 would largely 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 last quarter loss of $21 million.
I will now turn the call over to James for a much more detailed look at our financials.