Prepared remarks
Good afternoon, and welcome to the BlackBerry Fourth Quarter and Full Fiscal Year 2024 Results Conference Call. My name is MJ, and I'll be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question-and-answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Tim Foote, CFO, Cybersecurity Division and Head of Investor Relations. Tim, please go ahead, sir.
Thank you, MJ. Good afternoon, everyone, and welcome to BlackBerry's fourth quarter and full fiscal year 2024 earnings conference call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Steve Rai. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Steve will provide business updates. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the safe harbor provisions of applicable U.S. and Canadian securities laws. We'll 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. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them except as required by law. As is customary, during the call, John and Steve will reference non-GAAP numbers in their summary of our quarterly results.
For reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, SEDAR+, and blackberry.com websites. And with that, I'll turn the call over to John.
Terrific. Thanks, Tim. And thank you all for joining us today. BlackBerry delivered a solid quarter where we either met or exceeded expectations and in the process set a number of new records. We beat expectations for earnings per share and, given our laser focus on profitable growth, further improved operating cash flow as we said we would. In fact, this quarter, we more than halved operating cash usage. And despite being prudent and measured with our top line outlook, we expect to be both cash flow and EBITDA positive this coming fiscal year. In the quarter, our IoT business recorded its best ever quarter for revenue. Despite the delays automakers have experienced with their software development programs, we also achieved our strongest year for adding royalty backlog from new design wins. This design win momentum has driven an all-time high QNX royalty backlog of approximately $815 million, or 27% year-over-year growth.
On the cyber side, we saw a very important data point with ARR stabilizing and even growing a little sequentially. We believe this demonstrates the impact of the many improvements the team has been enacting recently. Cyber also recorded solid year-over-year growth from a revenue standpoint as well. So let me start my review with the IoT business unit. As you know, the QNX business benefits from its strong multiyear customer relationships. Given this long time horizon, the key metric for the health of the business is royalty backlog. This gives a view on estimated lifetime royalty revenue from the design wins that we have secured. And this metric has never been better reaching approximately $815 million this past quarter. As I mentioned, it was a strong year for adding new backlog from design wins surpassing last year. And this past quarter, we secured a number of design wins that contributed to this achievement.
Within automotive, we continue to dominate the digital cockpit domain and among the wins was Hyundai Mobis who selected the QNX hypervisor to enable mixed criticality in the cockpit without sacrificing performance. Beyond our core RTOS, we recorded a design win with a Japanese OEM for our acoustics middleware that will enable audio in the digital cockpit across a range of vehicles. Outside of automotive, we have a strong and growing position in a number of general embedded markets, especially medical. And among the wins this quarter was one of the five largest medical OEMs in the world who selected the QNX RTOS as the foundation for a next-generation medical imaging machine for assessing blood and heart health. We also secured a win with a leading U.S.-based OEM where our QNX real-time operating system will provide a secure, reliable platform for their fifth-generation surgical robot. In other applications, our QNX real-time operating system has been selected for use in a digital display for recreational power sport vehicles demonstrating the potential for BlackBerry to expand into new verticals as the edge becomes progressively more intelligent.
So moving to the quarter's financials, we delivered revenue at the top end of our guidance range. Revenue came in at $66 million, representing 20% sequential and 25% year-over-year growth. Gross margin remained at a very strong 85%. Revenue growth was primarily driven by automotive and very strong QNX development seat revenue, which is relatively lumpy from quarter to quarter and reflects the strength of the recent new design wins. Within automotive, the digital cockpit and ADAS remain the largest revenue drivers. And royalties and professional services were broadly in line with the strong quarter we recorded in Q3. In January, we had a very successful CES event in Las Vegas. Our booth was incredibly busy, and we held many productive meetings with current and potential customers. In addition, we made a number of very important product announcements. The first was the launch of our next-generation QNX operating system SDP 8.0.
This offers a very significant step change in performance on high-powered silicon scaling almost linearly even up to 64 cores. This allows BlackBerry to offer performance similar to and in some cases better than Linux without the fundamental open-source safety limitations and future-proof software designs as new more powerful chips become available. We see this as a significant step in expanding our competitive moat in our core safety-critical use case, while also expanding our addressable market into non-safety critical as well. The industry response since CES has been very encouraging including engaging this past quarter with one of the world's leading automotive chip suppliers to purchase our SDP 8.0 development tools. Another key announcement was that our hypervisor has joined our RTOS in being available in the cloud. This allowed Stellantis to develop the world's first digital twin of their digital cockpit, allowing their software development teams to collaborate from anywhere around the world, greatly reducing the need for physical hardware and significantly increasing productivity.
In addition, we made some announcements regarding our various middleware offerings. The Mobility and Harmony Consortium selected IVY for its Project X electrical vehicle platform. Further, we launched QNX Sound, a complete audio and acoustics platform that enables software-defined audio experiences without the need for heavy and expensive hardware in the car. And we've already recorded our first design win with a major European automaker. So moving to the outlook for the IoT business. Due to the timing for potential upcoming design wins, we expect Q1 to be relatively quiet for potential new development seat sales compared to this past quarter. In addition, as we've spoken about throughout the past fiscal year, the auto industry continues to face material delays in software-defined vehicle programs. While this clearly presents challenges for the near term, it actually represents potential upside to the long-term view for the business.
In order to address delays in developing next-generation software-defined platforms for their vehicles, automakers are increasingly discussing the potential for greater support from BlackBerry to help them solve undifferentiated software development tasks. In fact, rather than OEMs attempting to address this themselves, having a trusted expert like BlackBerry handle the complex integration of middleware on top of the RTOS frees up their development teams to focus on the differentiating experiences further up the stack. Allowing BlackBerry to create what is sometimes referred to as a vehicle OS has the potential to greatly simplify and accelerate software development, while allowing automakers to retain full control over their platform. Further, we're expanding our professional services team to provide greater support to our customers in integrating our software into their development projects.
So with all these dynamics in mind, we expect revenue for Q1 to be in the range of $48 million to $52 million, which is approximately 11% year-over-year growth at the midpoint. For the fiscal year, we expect revenue to be in the range of $220 million to $235 million. Now let me turn to the cybersecurity division. Revenue for the quarter beat expectations and came in at $92 million, representing 5% year-over-year growth. The strength this quarter came from our Spark product group that is Cylance and UEM. Now we consider annual recurring revenue or ARR to be one of the key indicators for our cyber business. As outlined during our last earnings call, this quarter we delivered stabilization of ARR on a sequential basis. In fact, ARR even increased slightly by 3% to $280 million. DBNRR also increased by 3 percentage points sequentially to 85%. These small but very important steps in the right direction for these key metrics illustrate the impact that a number of the improvements we've made are having within the business.
In fact, the CEM and UEM renewal rates have been improving, and the past two quarters have been the best renewal rates in the past four years. In particular, this was a strong quarter for our CylanceGUARD managed service offering as well as net new logos. We see CylanceGUARD as being a driver for growth this coming year, and we're doubling down on this and other areas where we have demonstrated we are winning. During the quarter, we successfully deployed a number of products and services that were part of the significant deal with the Malaysian government that we announced in November. In addition, you may have seen that last week we were proud to officially open our Cybersecurity Center of Excellence in Kuala Lumpur. This center will provide a wide range of globally recognized training courses that will help Malaysia grow a skilled cybersecurity workforce. Some examples of the wins for the cyber division this quarter included renewals and upsells with leading government agencies such as the U.S. Air Force, Department of Homeland Security, as well as wins across the globe such as the Netherlands Police, UK's National Crime Agency, Greater Manchester Police, and British Transport Police.
In financial services, in addition to major U.S. and Canadian banks, we secured business with Swisserich and Julius Baer in Switzerland and the Bank of India. So moving now to the outlook for the cybersecurity business. From a longer-term standpoint, the addressable market for security software is so large and our customers' needs so diverse that no single vendor is in a position to dominate this market. Despite any near-term dynamics, we see significant opportunities for growth for our cybersecurity business in the years ahead. That said, in the near-term, given the ongoing budget constraints of some of the leading government customers, which is a large portion of our customer base, we take a prudent view on both the timing and ability to close large deals that can drive near-term revenue as was the case in Q1 of last year. For our enterprise and mid-market customer base, security remains a mission-critical priority, and we see a broadly unchanged although somewhat challenging macroeconomic environment compared to recent quarters.
This consistent backdrop gives us confidence that we can continue to stabilize our core recurring revenue base, and we expect ARR to be flat sequentially into Q1. Therefore, we expect a more predictable revenue stream as we head through this new fiscal year. Allowing for a smaller impact from large lumpy government deals and the ongoing macroeconomic environment, we expect revenue for the first quarter to be in the range of $78 million to $82 million and for the full year to be in the range of $350 million to $365 million. So touching briefly on licensing, revenue for the quarter came in stronger than expected at $15 million. Looking to the coming fiscal year, we expect revenue to be approximately $4 million in each of the four quarters. So now, let me turn the call over to Steve who will provide you a little more color on our financials. Steve?
Thank you, John. As always, my comments on our financial performance will be in non-GAAP terms unless otherwise noted. Total company revenue for the quarter was $173 million. IoT revenue was $66 million, cybersecurity revenue was $92 million, and licensing revenue was $15 million. The percentage of software product revenue that was recurring increased to approximately 90%. Total company gross margin improved to 75%, while operating expenses decreased to $113 million. Non-GAAP operating expenses exclude a $35 million goodwill impairment charge, $20 million of restructuring expenses, $8 million in amortization of acquired intangibles, $5 million in stock compensation expense, and $4 million in impairment of long-lived assets. Both non-GAAP operating profit and net profit for the fourth quarter were $16 million. BlackBerry delivered $0.03 of non-GAAP basic earnings per share for the quarter, beating expectations.
Adjusted EBITDA, excluding the non-GAAP adjustments previously mentioned, was $21 million. Total cash, cash equivalents, and investments increased to $298 million as at February 29. Cash used by operating activities more than halved sequentially to $15 million. As a reminder, two quarters ago this was $56 million and Q3 was $31 million. Traditionally, Q1 is a seasonal low for cash flow, driven by the annual billings and payments profile. Therefore, we would expect a sequential increase in operating cash usage. However, a year-on-year improvement will factor in the impact of the sale of our non-core patent portfolio in Q1 of last year. We expect EPS for Q1 to be in the range of negative $0.04 to negative $0.06 and adjusted EBITDA to be in the range of negative $15 million to negative $25 million. For the full fiscal year 2025, we expect EPS to be in the range of negative $0.02 to negative $0.06 and adjusted EBITDA to be in the range of breakeven to positive $10 million.
We also expect to exit the year with both positive EPS and positive operating cash flow in Q4. This quarter, we recorded a $35 million non-cash accounting impairment of goodwill for the Spark reporting unit. This represents a non-cash charge of $0.06 to GAAP earnings per share. In accordance with accounting rules, we were required to perform a goodwill impairment review by determining a fair value for all reporting units, the total of which is required to reconcile to our market cap. Further details will be disclosed in our Form 10-K. As we announced during the past quarter, we successfully completed a $200 million five-year convertible debt raise. The level of interest in the offering was high, and we were able to achieve competitive rates. As a result, we were able to fully repay the $150 million of short-term extension debentures that had been in place since the previous debentures matured last November. With this long-term financing in place, BlackBerry has a solid balance sheet, and we are well-positioned to execute on our strategy.
Thank you, Steve. Okay. So as Steve mentioned, we are currently executing on our strategy to establish two profitable standalone divisions. During the quarter, we provided an update on actions we expected to take, and I can confirm that we delivered as planned. We have appointed divisional leaders such as finance, HR, and legal, and those leaders are currently building out their teams to address the specific needs of the businesses they support. In regards to cost, you may recall that during Q3, we executed on approximately $50 million of run rate savings, predominantly within the cybersecurity business and including approximately 200 headcount reductions. During this past quarter, we went further and took actions that will enable an additional $55 million worth of savings. Approximately $35 million of this came from the cybersecurity business, and $20 million came from our central G&A functions.
We understand how important it is for shareholders to see the benefits of these cost reductions starting to realize in the P&L. So in order to make it easier to track the cost improvements, starting this quarter, we are reporting sales and marketing separately from general and administrative. This new split aligns to how we're tracking towards our long-term targets as a percentage of revenue. Also, we think it is helpful to provide a cost run rate from before we started the reductions described as a baseline for comparison. Without getting into too many various one-time takes in the reporting OpEx for Q1 and Q2 of this past year, we consider the average of the two to be a fair baseline to use. Non-GAAP OpEx for Q1 was $145 million, and Q2 was $114 million, giving an average of $130 million a quarter. This past quarter, non-GAAP OpEx was $113 million. That is $17 million lower than the $130 million baseline or $68 million lower on an annualized basis.
This shows that the actions we've taken are already having a significant effect, although you can expect it will take time for them to fully reflect in the run rate. We expect the average quarterly OpEx run rate for this coming fiscal year to be approximately $110 million, that is approximately $80 million lower than the baseline on an annualized basis. This reconciles to the $105 million of savings by allowing for timing, reductions in fixed cost of goods sold in addition to OpEx and incremental targeted investments, particularly in our IoT business. In addition to the savings outlined, we are working towards further incremental run rate reductions. And as you can expect, these will take a little longer to action due to having more complex dependencies like systems or process efficiencies. Given the impact of the various cost reductions, we are modeling for positive operating cash flow and adjusted EBITDA for fiscal year 2025.
So before we open the lines for Q&A, let me quickly summarize the key messages. This was a solid quarter for BlackBerry in which we set a number of new records. The IoT business recorded its best ever quarter for revenue, its best ever year for adding new backlog from design wins, and its highest ever royalty backlog of approximately $815 million. Cyber ARR stabilized as we said it would, in fact showing some modest sequential growth and revenue for the quarter grew 5% year-over-year. In addition to the positive news for the top line, we're also very focused on the bottom line. We executed on a number of significant cost-saving actions that build on those from the previous quarter and are helping drive positive EBITDA and cash flow this coming fiscal year. So that concludes my prepared remarks. So, MJ, why don't I turn it over to you so we can open the lines for Q&A.
Questions and answers
Our first question today will be from Mike Walkley with Canaccord Genuity. Please go ahead.
Just wanted to delve in a little bit to the improving ARR on the cybersecurity business. With the endpoint market still over 40% legacy solutions, and it sounds like Cylance was part of the improvement this quarter. Can you just talk about how BlackBerry's position relative to some of the legacy players and how you see maybe growth in this segment over the course of the year?
Yes, absolutely, Mike. Hey, we're really pleased. It's been a long journey to get our ARR to where it's starting to stabilize and pivoting for growth. So a lot of heavy lifting in the product and in our customer engagement activities. So we're pleased that we're kind of starting to see that stabilize. As we think about future growth, you still think there's a tremendous amount out there. When you think about the legacy endpoint providers like the Trellix of the world, like the Trend Micros of the world, like the Broadcom Symantec install base, there's a lot of opportunity that we think is up for grabs for a next-generation endpoint capability along the lines of what we offer in Cylance. So, it was actually telling a lot of new logos, albeit smaller logos, but a lot of new logos over the course of the last quarter. And between that and our GUARD platform, we're cautiously optimistic for opportunities to move that in the right direction in the next fiscal year.
And just for my follow-up question on the IoT business, strong close to the year and a lot of records in that strong royalty backlog. But you've laid out some delays, and the guidance kind of suggests maybe mid-single-digit growth this year. Based on your conversation with customers and some of these delays, are these multiyear delays? As you talk about the opportunity to grow that backlog, or do you see things kind of ramping through this year and picking up in calendar '25?
Yes. We haven't seen the improvements we expected regarding the delays we mentioned last quarter, which may extend over several quarters. The complexity of software-defined vehicles and the skill sets of the OEMs, which are not their primary focus, make this process a bit more complicated and challenging. We're doing everything possible to assist them. We're planning to boost our engineering support at the edge with our customers to aid in the integration with their development projects. However, we're being cautious because we're not witnessing significant progress at this time. There are still some delays in launching new software-defined vehicle programs, which is why we are being careful and prudent based on our observations.
The next question is from William Kerwin with Morningstar.
Maybe just to keep it on the IoT business, obviously, a lot of positive announcements at CES. Just curious how those have been received so far over the course of the past three months and are they already gaining some traction in the pipeline as you look going forward? And just maybe as a follow-up to that the path to get towards kind of a double-digit growth profile in this business. Understand it's still growing but slower than you would probably like.
There are a few key points to highlight. The product pipeline is very promising. SDP 8.0 generated a lot of excitement at CES, which is a significant advancement in our capabilities and places us in a strong position. Having a leading chip supplier purchase some of our development tools is a testament to the impact we are making. Our acoustics and cloud capabilities, coupled with several design wins, are noteworthy. We're assisting Stellantis in utilizing the cloud to enhance their productivity. The pipeline is expanding well, and we are enthusiastic about our base-level platform, RTOS, and ADAS, while these additional capabilities further strengthen our position. We are keen about the future pipeline. However, we do wish that some of the $815 million backlog would clear more quickly. We believe that when it does, it will present excellent opportunities to enhance our business model.
And if I could just tack one more on, obviously, some good progress on the cost savings already. Just curious if you could talk through why you think the targets that you've laid out are the right size for the business and how you see the progress going forward, I guess, longer term past fiscal '25?
To me, there are two key impacts from the cost perspective. First, this has clarified our investment strategy as we transitioned to two divisions, prompting us to evaluate where to invest and where to scale back. We engaged renowned industry consultants to benchmark our position against the industry, helping us target appropriate levels and benchmarks. Second, much of the focus has been on optimizing our cybersecurity expenses. We aim to achieve efficiencies in cyber operations, which expanded through multiple acquisitions over the years. We have worked on rationalizing R&D, believing it won't hinder our innovation cycle while also enhancing the overall business. Thus, by collaborating with consultants on the division split and concentrating on cyber efficiencies, we feel confident that we are positioned correctly from a cost perspective.
The next question comes from Paul Treiber with RBC Capital Markets. Please go ahead.
It's helpful that I think next quarter you're breaking out sales and marketing from G&A. You touched on the split of the company into IoT and cyber. What should we expect in terms of the disclosures around segmented profitability by between IoT and cyber and the time frame for that?
There is significant internal activity regarding business separation, cost streamlining, and restructuring. While we understand the interest in having a complete profit and loss statement for each business unit, we are currently unable to provide that information. However, we appreciate your patience as we work towards it.
Kind of feel, like, you said think of it as the breakout of sales and marketing and G&A. That's a down payment on giving you more transparency to our overall cost structure. And as Steve articulated in the quarters ahead, I think we'll be in a better position to kind of take that to the next level. So hang in there with us and we'll provide you updates as we go throughout the year.
And my second question just relates to the future opportunities for cost savings. I mean, also with that what's the timeframe that you're targeting to make those announcements? And does that also relate to the split of those segments so we may get everything at once? And then can you also elaborate on the nature of those reductions that you're considering?
I can begin with that. We have several structural issues to address, including simplifying our corporate legal entity structures and improving our IT systems and back office infrastructure. These are significant challenges that cannot be resolved quickly. We are actively exploring how to tackle these issues and are putting together plans to implement them. We expect to make some progress in these areas this year, but in general, most of this work will extend beyond the current fiscal period.
Since November of last year, we have made significant progress by eliminating $105 million in real costs, which is evident in our current run rate. This effort includes closing down facilities and rationalizing our labs, as well as fine-tuning our cyber go-to-market strategy. We are committed to continuing these efforts to improve efficiency, although some areas are more complex and interdependent, requiring us to be careful and deliberate to maintain our business momentum. We have accomplished a lot in the past six months, but there is still more to do, and we will keep you updated as we move through the year.
Seeing no further questions, I would like to hand the call back to John Giamatteo, CEO of BlackBerry, for his closing remarks.
Thank you, MJ, and thanks everyone for joining the call today. We had a solid quarter, setting new records in the IoT sector. It's encouraging to see the cyber business stabilizing and the opportunities ahead of us. We're executing our strategy to split the company into two divisions and are making progress toward profitability for both. We're pleased with what we've achieved so far and are committed to providing more transparent updates as the fiscal year progresses. Thanks for being with us today, and we look forward to speaking with you next quarter.
This concludes today's call. Thank you for your participation. You may now disconnect your lines.