BlackBerry Limited 2027 Q2 Earnings Call

Please go ahead. Thank you, Betsy.

Good morning, everyone, and welcome to BlackBerry's second quarter fiscal year 2027 earnings conference call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update, and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via calling numbers and via webcast in the investor information section at blackberry.com. As part of today's webcast presentation, slides will be displayed. The slides are also available on the investor information section at blackberry.com, as well as the replay of today's call. 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. Those 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 or undertakes no obligation to update or revise any of them, except as required by law.

As is customary during the call, John and Tim will reference certain non-GAAP numbers in their summary of our quarterly results. For a 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. With that, let me now turn the call over to John.

Thanks, Suzanne. Thanks to everyone for joining us. We are pleased to report another very strong quarter for BlackBerry, reflecting meaningful progress both financially and strategically. Revenue grew 26% year-over-year, while adjusted EBITDA grew 81%, resulting in our second consecutive Rule of 40 quarter. We also generated $29 million of operating cash flow, delivered our sixth consecutive quarter of positive GAAP net income, and adjusted earnings per share again exceeded our target, our expectations. QNX had a record quarter, and strategically, we reached an important milestone with our first Alloy Kore design win, the largest design win in our history. When you put all of that together, Q2 gives us another clear proof point that the profitable growth model we have been building is working. It also gives us increased confidence as we head into the second half.

As Tim will discuss in more detail, we are raising our full-year revenue and adjusted EBITDA outlook. Let me start my review of the quarter with QNX. QNX delivered record quarterly revenue of $80 million, representing 27% year-over-year growth, and coming in well above the high end of our guidance. Combined with expanded profitability, QNX once again comfortably exceeded the Rule of 40 benchmark for the quarter. Performance was broad-based across development licenses, professional services, and royalties. In particular, Q2 was our strongest quarter ever for design win dollars, with the value of design wins secured in the first half exceeding our previous record for any full fiscal year. Development license activity also remained healthy in Q2, with recurring development license revenue holding strong quarter over quarter.

That matters because customers typically purchase these tools early in a program, making them a useful leading indicator of future design wins and royalty opportunities. In Q2, we saw strength not only in the revenue being recognized today, but also in activity that can support future growth. As you may recall, our QNX strategy is built around three growth pillars. The first is our core automotive business. Second is moving further up the software stack with Alloy Kore. Third is expanding beyond auto into adjacent General Embedded Markets. Now let me start with the first pillar, QNX's core auto business, which was the main driver behind this quarter's strong performance. That strength is being supported by the auto industry's transition towards software-defined vehicles and more centralized compute architectures. Let me put some numbers around that because I believe they help explain the opportunity.

Roughly 90 million vehicles are produced globally each year. Today, about one-third of them have the type of high-performance centralized compute architecture where QNX's capabilities are most relevant, and we have a very strong market share in that segment. Industry forecasts indicate that this segment could expand to roughly three-quarters of the market over the next five years. That means our addressable market could more than double over that period. In addition to more vehicles becoming addressable to QNX, as more domains become software defined, we see potential for greater QNX content in each of those vehicles as well. We have already secured design wins with multiple instances of QNX in a single vehicle, and we expect those design wins to continue to move into production over the next several years.

QNX does not need global vehicle production to increase to enable revenue growth, but rather through greater penetration of the market and greater dollar content per vehicle. We are also seeing increasing adoption of SDP 8.0, our next-generation platform designed for these higher-performance compute architectures. We are working with multiple major global OEMs and tier 1 suppliers as they evaluate and develop on SDP 8.0. Importantly, some of the programs we have won over the past several years are now entering production, allowing higher QNX content secured in those designs to begin translating into royalty revenue. As our software content within the vehicle increases, so does the value of that opportunity. The transition to SDP 8.0 and the greater value it delivers is also creating an opportunity to evolve our commercial model. For new commercial arrangements, we are increasingly securing minimum contractual volume commitments rather than non-contractual forecasts.

This is giving us greater certainty around volumes, revenue, and cash flow from new design wins, and the potential for us to both receive cash and recognize a portion of revenue earlier. Over time, we believe this could improve both the visibility and economics of our customer relationships. We are also seeing a lot of opportunity in China. New government-mandated safety requirements for assisted and automated driving systems reinforce the importance of proven safety certified foundational software, and we continue to see strong momentum in China. The second QNX growth pillar builds on our core automotive business by moving us further up the software stack. As we have discussed, Alloy Kore expands QNX from a foundational operating system towards a broader software platform. This quarter, we reached an important milestone with our first Alloy Kore design win.

Coretura, the commercial vehicle software joint venture between Volvo Group and Daimler Truck, selected Alloy Kore as the foundational software platform for its next-generation high-performance compute architecture. Coretura plans to deploy Alloy Kore across multiple software domains in its next-generation vehicles and is expected to substantially increase QNX software content and royalty per vehicle compared with traditional QNX operating system deployments. In fact, for this first design win, the ASP per instance is approximately three times higher than the customer's current deployment of QNX operating system. This is an important commercial validation of Alloy Kore and demonstrates the opportunity to expand QNX from individual foundational software components to a broader software platform within the vehicle. Alloy Kore addresses one of the biggest challenges facing OEMs today, the cost and complexity of integrating the foundational software stack.

By bringing QNX foundational software, common automotive services, and Vector middleware together in a pre-integrated safety certified platform, Alloy Kore can reduce integration complexity and allow OEMs to focus more engineering resources on differentiated applications. The magnitude of this first award also demonstrates the potential of the platform. The value of future royalties from this design win is estimated to be more than $100 million, making it the largest design win in QNX's history, despite annual commercial vehicle volumes being significantly smaller than for passenger cars. As with traditional QNX design wins, there will be a lead time before the majority of the value is realized through production royalties. We do not expect this design win to materially change our revenue profile this fiscal year.

The more important takeaway is that Alloy Kore has moved from a strategic opportunity to commercial validation, and we believe this is just the beginning. We are actively working with a number of global OEMs and major tier 1s on Alloy Kore opportunities around the globe, but particularly in Europe and Asia, with potential further wins in coming quarters. The third QNX growth pillar is expansion beyond automotive into adjacent general embedded markets. Today, GEM represents approximately 20% of QNX revenue and is an important part of our longer-term growth opportunity. We are excited about the opportunity because the same capabilities that differentiate QNX in automotive, including real-time determinism, functional safety, security, and reliability, are increasingly relevant in adjacent verticals. We are seeing this across Physical AI, robotics, industrial automation, medical devices, aerospace and defense, rail, and more.