Canada markets closed

Edited Transcript of BB.TO earnings conference call or presentation 31-Mar-20 9:00pm GMT

Q4 2020 BlackBerry Ltd Earnings Call

WATERLOO Apr 6, 2020 (Thomson StreetEvents) -- Edited Transcript of BlackBerry Ltd earnings conference call or presentation Tuesday, March 31, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Lee

BlackBerry Limited - VP of Finance

* John S. Chen

BlackBerry Limited - Executive Chairman & CEO

* Steve Rai

BlackBerry Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Daniel Bartus

BofA Merrill Lynch, Research Division - Research Analyst

* Daniel Chan

TD Securities Equity Research - Research Analyst

* Gus Papageorgiou

PI Financial Corp., Research Division - Head of Research

* Paul Steep

Scotiabank Global Banking and Markets, Research Division - Analyst

* Paul Michael Treiber

RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst

* Thomas Michael Walkley

Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst

* Tripatinder S. Chowdhry

Global Equities Research, LLC - MD of Equity Research & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the BlackBerry Fiscal Fourth Quarter and Fiscal Year 2020 Results Conference Call. My name is Josh, and I will be your conference moderator for today's call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn today's call over to Christopher Lee, Vice President of Finance. Please go ahead.

--------------------------------------------------------------------------------

Christopher Lee, BlackBerry Limited - VP of Finance [2]

--------------------------------------------------------------------------------

Thank you, Josh. Welcome to the BlackBerry Fiscal Fourth Quarter and Fiscal Year 2020 Results Conference Call. With me on the call today are Executive Chairman and Chief Executive Officer, John Chen; 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 then 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 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 and the COVID-19 coronavirus outbreak, which is negatively impacting public health, financial markets and global economic activity. 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.

As is customary during the call, John and Steve will reference 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 and supplement published earlier today, which are available on the EDGAR, SEDAR and blackberry.com websites.

I will now turn the call over to John.

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [3]

--------------------------------------------------------------------------------

Thank you, Chris. Good afternoon, everybody. Before I speak about the BlackBerry results, I'd like to acknowledge everyone who is doing all they can to contain and overcome the COVID-19 virus. BlackBerry has taken a number of steps to help the global community, including enabling remote working for our customer and employees. And we are taking the lead by offering a limited license of our enterprise software products free to organizations around the world for 60 days.

Now on to the results. As Chris stated, I will reference non-GAAP number in my summary of our financial results, unless otherwise stated. Let me start off by some highlights for fiscal 2020, the fiscal year entirely.

BlackBerry achieved another year of profitable growth. We are pleased with $1.1 billion in total company revenue, resulting in 20% growth year-over-year. Software and Services revenue grew 26% year-over-year. Earnings per shares of $0.13, this amount exceeds the expectation we raised during the year. Positive free cash flow of $14 million.

Perhaps the best news is the strong set of products released in the past fiscal year. We released over 30 new products. I'd like to give you some highlights of the one that we're really excited about, QNX Hypervisor 2.0 for Safety, which achieves the highest ISO safety standard in the industry; the second product, BlackBerry Intelligent Security, which uses AI to provide a depth of security and continuous authentication to overcome the FedEx security vulnerabilities; third, the CylanceOPTICS 2.4, our enhanced endpoint detection and response product, then followed by the single-agent platform to deploy both CylancePROTECT as well as CylanceOPTICS; followed by our Mobile Threat Defense product, MTD, product that integrates our AI-based endpoint security capabilities with our portfolio of endpoint management technologies. Our peers do not have a full mobile solution like we do; and last, but not final, the BlackBerry Digital Workplace, which delivers lightweight secure desktop virtualization while eliminating the need for VPN and adding AI-based protection. Digital Workplace can be deployed on corporate and personally owned devices used by the entire sales force -- or the workforce, sorry, excuse me, the workforce. This is a must-have for secure remote worker productivity and business continuity. Additionally, we made tremendous progress in the development of the Spark platform. I will speak more about that later.

Now let me provide some highlights for the fourth quarter -- fourth fiscal quarters. Total revenue came in at $291 million. We achieved positive year-over-year Software and Services billing growth. We also have a healthy sequential billing performance from enterprise software and services. Gross margin was 77%. Operating income was $51 million. And operating margin was 18%. All of these are very strong results. Compared sequentially, it's an increase from $20 million and 7%, respectively, from Q3. EPS came in at $0.09, which is $0.05 higher than expectations we had for the quarter. Free cash flow of $32 million, contributing to a total ending cash and investment balance of $990 million.

Let's move into the business commentary. Let me start with the sentence on licensing business. Revenue increased 9% year-over-year. We had better-than-expected performance due to some business that actually came in early.

Moving on to the IoT business. The IoT business underperformed in the quarter due primarily to BTS. BTS has been unexpectedly impacted by the slowdown in the auto industry supply chain due to the COVID-19. Unfortunately, we expect this trend to continue for the near future due to a temporary global auto production shutdowns and related slowdowns of auto sales.

Customer and prospect have become more cautious in the decision-making related to capital expenditure and development. The leading indicator to us was that we expected 2 large transactions with reliable customers that were unfortunately delayed. While our fourth quarter -- fourth fiscal quarter results were impacted, we believe these 2 delayed transaction will occur as the business environment return to normal.

On a positive note, BlackBerry QNX continued to gain design wins. We were chosen for 31 design wins in the quarter. 16, 1-6, were in the automotive market, and 15 were in the generally embedded -- general embedded market. Within the auto market, the vast majority of the design wins came in were ADAS, the Advanced Driver Assist program, and digital instrument cluster applications. These wins secured through our customer like Bosch, Continental and Visteon, just to name a few of those Tier 1, continue the trend of increasing ARPU and volume in the future, and we continue to be the leading provider of safety certified software to the industry.

Within the generally -- general embedded market, we saw increased demand in the industrial and medical verticals, including being chosen by Wabtec Corporations, a global leader in transportation solutions who merged with GE Transportation last year. And as noted in the last few quarters, growth in the general embedded market has been a stated priority -- a strategic priority for us at BlackBerry.

A brief update on our Radar business. In the quarter, we saw continued growth in both the number of shipped units and service revenue. We added 7 new customers, resulting in 50 new customers, 5-0, in the fiscal year. Additionally, we continue to have steady repeat buying from existing customers.

Moving on to our enterprise software and services business. The sales team executed well, resulting in sequential billing growth in the high teens percentage. Our fourth quarter ESS billing was at its highest level in fiscal 2020. The billing strength was across all the ESS businesses, led by strong performance on both the UEM, the Endpoint Management, as well as AtHoc.

On the customer front, our regulated industry business such as government, financial services and health care remains healthy and stable. We also experienced strength in our nonregulated industry business, most notably the energy and utility vertical as well as the manufacturing vertical. We added several large size wins, both new logos and upsell, in competitive situation. Let me highlight a few. General Dynamics, a Fortune 100 aerospace and defense leaders; CGI, a global professional services and consulting company; Johns Hopkins Aramco Healthcare, a leading health care provider in Saudi Arabia; EVN Group, one of the largest producers and transporters of electricity in Europe; and Nippon Steel, one of the world largest steel producers. Our pipeline is building for our new product as well, notably for the MTD, the Mobile Threat Defense, and the BlackBerry Intelligent Security.

Now on to our Finance -- BlackBerry Finance business. Revenue was up slightly year-over-year against a reasonably tough comp. Billing increased sequentially, as we anticipated. We are highly competitive against other next-generation AV players because of the following reasons. Number one, BlackBerry Finance is the best mobile solution in the market. Number two, our lightweight solution protect all endpoints, whether they're connected or not. Other next-gen AV players only protect when the endpoint is connected to the cloud. Number three, instead of being cloud-only, we support cloud-managed, on-premise and hybrid deployment models. And last but not least, we're compatible with both the current and legacy device operating system, especially on the desktop.

This was a strong quarter of new logo. Cylance won over 300 new customers. Some of the new logos won in the competitive environment include the Fonterra Co-operative Group, the world's largest dairy exporters; a notable state health care organization in Australia. Unfortunately, we don't have permission to name the name; a Fortune 500 financial services company based in the Midwest of the United States; Mizuho Security, which was a cross-sell opportunity to leverage our UEM relationships; and Hartford Financial Services Group, a leading insurance -- a leader in insurance vertical that was won through our managed service partner with Verizon.

As a result, ARR was $167 million, up 9% year-over-year. Our dollar-based net retention rates continue to be over 90%. We ended the quarter with 18% year-over-year growth in active subscription customers. And as I previously said, we believe the momentum will only continue now that BlackBerry Cylance is a full portfolio plus other BlackBerry capabilities in the market.

Before I turn the call over to Steve, let me update you on the Spark platform and the Cylance integration. We have made tangible progress in the development of Spark, our secure IoT platform. This past February, we announced the release of our Unified Endpoint Security or UES layer within the Spark platform that leverages AI machine learning and automation to deliver zero trust security across all the fixed and mobile endpoints.

The UES layer is supported by 6 initial products, which are endpoint protection platform, the EPP; endpoint detection and respond, the EDR; the Mobile Threat Defense, the MTD; continuous authentication; Data Loss Prevention, known as DLP; and Secure Web Gateway. These products work seamlessly together to analyze and define risk, make contextual decision based on large amount of shared data and dynamically apply a set of policy control to address the risks of our customer environment.

Our platform development -- this platform development is in line with the marketplace convergence noted by Gartner. We see the consolidation of MTD offerings with EDR and EPP tools and calling this combined stack Unified Endpoint Security. Gartner sees this stack forming a single solution during the next 3 to 5 years and indicated their organization should invest with UES in mind. Gartner also noted that 70% of organization will need a combined endpoint management council by 2024. And 50% of the organization will have to have Mobile Threat Defense by 2022, which is up from 20% this year.

Given our product and the marketplace progression, we are now ready to increase go-to-market synergies and go after these big UES and UEM opportunities. Accordingly, we have successfully integrated the entire Cylance organization, including sales and R&D teams, into our IoT business segment effective March 1, 2020, which was just a month ago. We believe the unified team leads to broader customer coverage, a richer product road map, a clearer sales message and, most importantly, very differentiated offerings. The value proposition to a customer is that BlackBerry Spark provide the highest level of security and management with a simpler and more productive user experience on any endpoint, fixed or mobile, from any location over any network.

Many of you actually have asked me over the past several quarters about BlackBerry prospect in the competitive landscape, especially against much larger players. I will -- I could not provide you a complete answer then, only to tell you that we're working on it because the solution at the time was under development. We now have a differentiated technology architecture that is ready to ship in the market. Today, our UES products work with BlackBerry UEM. However, we recognize that customer may be using a competitor's or often more than one UEM products. Therefore, in the near future, as part of our road map, our UES solution will be made compatible with Intune, AirWatch and other competitors' UEM products to give customer the best of both worlds, mainly preserving investment while enjoying the benefit of the highest security and management that BlackBerry provides.

We believe UES changes the competitive dynamics, and our operative objectives now is to gain market share because UES is complementary, too, but not a direct competitor of the non-BlackBerry UEM products. And also, BlackBerry UEM will maintain our leadership in the regulated industry due to our continued focus and commitment on security and management. In time, we believe this Spark architecture expand our total addressable market, including in the IoT security area.

With that, let me turn over to Steve to provide more details about our financial performance.

--------------------------------------------------------------------------------

Steve Rai, BlackBerry Limited - CFO [4]

--------------------------------------------------------------------------------

Thank you, John. My comments on our financial performance for the fiscal quarter will be in non-GAAP terms, unless otherwise noted. Please refer to the supplemental table and the press release for the GAAP and non-GAAP details and reconciliation.

We delivered fourth quarter non-GAAP total company revenue of $291 million and GAAP total company revenue of $282 million. I will break down revenue shortly.

Fourth quarter total company gross margin was 77%. Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $9 million and excludes stock compensation expense of $2 million.

Fourth quarter operating expenses of $172 million were down sequentially by $23 million. And we continue to invest in product development and go-to-market. At the same time, we continue to demonstrate cost discipline across the entire company and gain operating leverage, in particular, at Cylance.

Our non-GAAP operating expenses exclude $35 million in amortization of acquired intangibles, which equates to about $0.06 impact to GAAP earnings per share. Additionally, our non-GAAP operating expenses exclude $27 million in goodwill and long-term asset impairment charges, $15 million in stock compensation expense, $3 million for software deferred commissions expense acquired, $1 million in acquisition and integration costs, $1 million in restructuring costs and a charge of $5 million related to the fair value adjustment on the convertible debenture.

Fourth quarter non-GAAP operating income was $51 million, 5-1. And fourth quarter non-GAAP net income was also $51 million.

Non-GAAP earnings per share was $0.09 in the quarter. Our adjusted EBITDA was $68 million this quarter, excluding the non-GAAP adjustments previously mentioned. This equates to an adjusted EBITDA margin of 23%.

I will now provide a breakdown of our revenue in the quarter. Total Software and Services revenue was $287 million, representing 99% of total company revenue. Other revenue is solely comprised of service access fees, which were $4 million and were expected to decline given the continued wind down of this legacy business. Recurring Software and Services revenue, excluding IP licensing and professional services revenue, was about 90% in the quarter.

Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $990 million at February 29, 2020, which increased by $20 million from November 30, 2019. Our net cash position was $385 million at the end of the quarter. Fourth quarter free cash flow before considering the impact of acquisition and integration expenses, restructuring costs and legal proceedings was positive $36 million. Cash generated from operations was $35 million, and capital expenditures were $3 million.

That concludes my comments. I'll turn the call back to John to provide our financial outlook for fiscal 2021.

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [5]

--------------------------------------------------------------------------------

Thank you, Steve. Currently, I'm sure you all agree, there's a lot of uncertainty across the global economy due to the COVID-19. Therefore, it is not prudent for BlackBerry to provide any specific fiscal 2021 financial outlook as things are changing on almost on a daily basis. However, I'd like to make some macro comments on our business.

Our revenue most likely will be negatively impacted by continued headwinds to global auto production and sales. We anticipate continued delay in capital spending in the auto as well as the other industry.

At the same time, this negative impact could be partially offset because our product and services portfolio is well suited to help enterprise meet the challenges of business continuity, driven by the dramatic expansion of remote workers -- or the number of remote workers. We are known for offering the best security and productivity solution. These product and services, including our UEM product; Cylance; Digital Workspace (sic) [Digital Workplace]; Secusmart, which is secure voice and text solution; as well as AtHoc, our crisis communication solution, including the new Situation Response product, which is the entire life cycle of managing crisis. In fact, we are experiencing increased demand. More transaction and inquiries comes in daily from new and existing customer, resulting in more licenses being deployed.

Furthermore, our finance products, including CylanceGUARD, which is our cloud-based managed detection and response offering, are helping customer to combat growing cybersecurity and privacy risk as the number of BYOD endpoints increases in a remote working environment.

While it is difficult to predict the volume of business year-over-year, the company will remain strongly focused on the overall financial health in fiscal 2021. The management team has managed through uncertain times in the past and has a track record in balancing profitability and investment for our long-term growth.

As it related to the shape of the fiscal '2021, we anticipate a tough first quarter due to the COVID-19 impact on our business. This may linger into the second quarter, but we do anticipate a stronger second half of fiscal year versus the first half of the fiscal year. When looking beyond 2021, we do not believe this current global crisis changes BlackBerry's strategy and the thesis of any of our long-term profitability growth and value creation.

I would like -- now like to open up for Q&A. Josh?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Daniel Chan with TD Securities.

--------------------------------------------------------------------------------

Daniel Chan, TD Securities Equity Research - Research Analyst [2]

--------------------------------------------------------------------------------

Now given the macro uncertainty, how are you thinking about capital requirements? In particular, how much do you need? And what are your plans for the convert?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [3]

--------------------------------------------------------------------------------

Yes, we have -- after paying off the convert, we have $385 million of cash or equivalent. And so we have made some assumptions under a stress test environment. A couple of assumptions. Number one, we will pay back our convert. The good news of paying back our convert is that we would save roughly about $23 million a year in interest payment. Obviously, the cash balance will go down quite a bit. We also assume there is no financing work being done. And part of the reason is, as you know very well, you probably know much better than I do, last couple of weeks, the market isn't really available. I think it's starting to loosen up a little bit, but we assume no financing. We assume no dramatic cutback of headcount or investment for the future.

This is why I said earlier, we're going to balance profitability and long-term growth. We know this will pass. We know things will come back to normal. And we believe we have very competitive strategy and products. So we don't want to compromise the future. At the same time, we don't want to put ourselves in a financial difficult position. So we're going to be working balancing that. But we're not saying that we're going to overhaul anything to disrupt our investment thesis.

Given those as kind of the background, we went through the scenario of revenue coming down by 20%, by 30%, by 50%, you would expect anybody to do in modeling. And we believe we are quite comfortable. Unless it's in very extreme condition, which we are not anticipating, we're quite comfortable to be able to [lap] the liquidity and the health -- financial health for a couple of years.

--------------------------------------------------------------------------------

Daniel Chan, TD Securities Equity Research - Research Analyst [4]

--------------------------------------------------------------------------------

That's very helpful. I want to shift gears a little bit to the enterprise software side. It sounds like things are improving there. Can you give us a sense on whether the enterprise software segment grew year-over-year? And maybe give us a sense of how well you see your go-to-market and your channel. Is it developing the way that you anticipated?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [5]

--------------------------------------------------------------------------------

Yes. I don't have -- and I think it's just the year-over-year numbers. So -- but I could tell you, from a billings growth perspective, we saw very healthy Q4, better than double digit over Q3. And so that feels good. The business are there. We have a hiccup. I think we overcame the hiccup. We have people very committed going after the business. We got infrastructure buildup for both the renew and new businesses that we won't let fall through the crack.

A while back, it was really us doing -- our doing for not being more diligent on some of those stuff. So now I think those are all overcome. We have a number of layers that want to sell business, as I said, both in the renew and the new logo -- going after the new logo. We have a bigger sales force now. And the combination of the Cylance into this IoT portfolio with the UES makes it even more exciting because now each of our sales rep has more things to sell. The Cylance sales rep could sell the UEM, AtHoc and other products, mainly UEM, I believe, and vice versa. They now -- the UEM sales force, now combined as one, could sell the UES product, which included a lot of Cylance AI technology.

So we feel good about the focus. We feel good about how we align the territories. So majority of our sales is still going direct. We are building channel business, but that's probably -- that benefit will probably kick in midyear this year or maybe towards the end of the year.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And your next question comes from Daniel Bartus with Bank of America.

--------------------------------------------------------------------------------

Daniel Bartus, BofA Merrill Lynch, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

First, I wanted to ask about the competitive environment for endpoint security. So on the one hand, we have CrowdStrike growing very well, and they have a similar approach, it seems like, to Cylance. And then you have others like VMware and Microsoft that can follow your moves to integrate the classic UEM business with the endpoint security potentially. So it'd be great to just get an update on the competitive landscape you're seeing for Cylance. And I'm curious if the combined UEM and security is a real conversation yet with customers. And then I have a quick follow-up.

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [8]

--------------------------------------------------------------------------------

Okay. Okay, those are good questions. So I took a little while to label -- to lay it out, sorry, not label, to lay it out why we win some of the Cylance deal. As I said earlier, Cylance have secured over 300 new logo in the quarter. And so we're winning against somebody. I don't want to name names who we're winning against. And it looks like -- to summarize, it looks like where the Cylance won -- the win rate basically comes from: a, we are the mobile leader; b, we don't always need the cloud. So we do secure protection on the endpoint, both offline and online, and that's the differentiators; we have now managed service and a full suite of products. So that also was a factor. So those are -- among other things, those are 3 that I feel jumped out at me when I look at the win.

The combination of that whole set of Cylance portfolio with the managed service and the management tools that UEM has is exactly where the market is going and is verified and confirmed by Gartner. That's what they named this whole segment called UES, Unified Endpoint Security, which is a combination of mobile and fixed, cloud and on-premise, and also manages and threat detection and protection. So we just happened to be an early provider of the product, and I'm hoping that, therefore, give us a much more competitive advantage against some of our big players and big competitors out there. And then we'll win, hopefully, a fair share of the deals.

Finally, most of you have asked me the question about there are some of our traditional competitors that provide site licenses. And if you look at everything that we offer, we are above, for example, a site license for a year, ELA 5, will be a lot cheaper than ELA 5 and much better security product. So ELA 5 is not free, unlike the ELA 3. So I believe that we could be competitive out there.

--------------------------------------------------------------------------------

Daniel Bartus, BofA Merrill Lynch, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

Great. That's very helpful. And then just quickly on the licensing strength. When we entered this year, you guys were thinking that segment might be down 5% or so year-over-year. And then it turned out to really surprise, up 15%. So I was wondering if you could just kind of walk through what changed throughout the year. And more importantly, did this strength come at the expense of some fiscal '21 licensing strength?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [10]

--------------------------------------------------------------------------------

Yes. Yes, I like to be quite conservative. The problem with the -- I mean, it is a good business because it's very good margin. And unfortunately, you all know very well that it's somewhat lumpy. And the timing is a little hard to predict than just kind of enterprise transactions. So because of that, I'm always conservative. I think -- I prefer to still plan it at about a 250 mark for the FY '21 and hoping would do better. I mean -- but it is really hard to predict. Now this quarter, I didn't expect it to come in that strong, honestly. It's been strong for the entire year.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Your next question comes from Paul Treiber with RBC Capital Markets.

--------------------------------------------------------------------------------

Paul Michael Treiber, RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst [12]

--------------------------------------------------------------------------------

Just trying to understand the BTS segment a little bit more. Could you speak to the magnitude of the decline in the quarter? And then, is that driven predominantly from, like, royalties and the volume of production? Or are there other nonrecurring items in there like professional services, I guess, the licenses of tools that may have contracted?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [13]

--------------------------------------------------------------------------------

Yes. Paul, unfortunately, it's a little bit of everything. So first off, royalties are down. We have projects, we believe, that we were going to get the developer seats that has been delayed. And once the project -- the new projects are being delayed, I remind you, they didn't go away at all. It's just been delayed because a lot of these are Tier 1 and OEM. They start looking at the auto sales figures, and they started to become a little concerned. They'll be a little more cautious. We still won the projects. There's no question about it. And -- but then the developer seats business have gone down. And those are the higher, you call it, onetime, the immediate revenue type. And then once the developer seats got slowed down, normally, they come with some portion of professional services so that they have us help them to deploy it and to start the new projects. That, of course, has also slowed down because of that.

So it is a rather unusual situation, and I don't expect it to last long. Our game plan is to do more the professional services work on a remote basis. Then, of course, we have to get the authorization from the customers, which they are working remote also. And so we should be able to get that. And second thing is to go after more of the GEM growth because then, they would need to buy developer seats. So those are the 2 and continue working with our auto customers, obviously, because they will come back. I mean this is not going to just end. So they will come back. It may take a quarter, another quarter, but that's about where I expect it to be.

--------------------------------------------------------------------------------

Paul Michael Treiber, RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst [14]

--------------------------------------------------------------------------------

Okay, that's helpful. Just shifting to COVID-19. In regards to the promotions that you've implemented or announced, could you provide some uptake -- some metrics on the uptake of that? And what do you expect in terms of potential conversion longer term?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [15]

--------------------------------------------------------------------------------

Yes. Okay, this is -- my people are probably going to yell at me, but I'll give you the update. In the first week, I think we saw our pipeline grew at least $30 million. And these are good pipeline because this is the one that actually came to us with strong needs. Customers are able, in some cases, process appeal in record time. I mean you guys know all this. So I'm not saying anything that you don't. So -- and I don't -- I'd say we do have that situation and so is a lot of different software company. So I'm not saying anything to you that are very standout-ish and very unique. But I just want you all to know that we do have a piece of business in an environment like this, unfortunately, benefit from the -- from this whole crisis. And so we do okay in that area. And so that's about the only metrics I could share with you. That's more than what anybody will tell you.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from Mike Walkley with Canaccord Genuity.

--------------------------------------------------------------------------------

Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [17]

--------------------------------------------------------------------------------

Just following up a little bit on cost structure. How should we think about kind of the investment level? It sounds like you guys feel good with the team in place and want to invest for the long term, but OpEx was a little lower than expected this quarter. And I imagine it could be lower again just given lack of travel, entertainment-type projects, things like that. But is there an OpEx rate you're looking at maybe on a run rate for the calendar year to think about?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [18]

--------------------------------------------------------------------------------

I did not calculate that. We know we have a number of level. So for example, in our plan, there are, of course, replacement of attrition of headcount. We probably -- again, given this environment, we'll still be hiring people. Well, we actually made some offers lately. But we're going to hire in areas of quota carriers, people that are billable. So that could help us on the revenue side. And then the other areas, unless it's very specific, like we just recently hired a very strong data scientist. And so of course, we'll always be looking for excellent people like that. But other areas, we might slow down.

We probably -- not might, we are slowing down. And partly, because it's just everybody is working from home. And we have a global work from home now. And it's just difficult to do the interview and the processing, the background check and the references check. And so it just takes much longer. So there will be some natural reduction of cost built in. Obviously, we look at our capital spending very carefully. And that's also -- like you pointed out, travel goes down literally 95%, probably even conservative when I say that. Nobody is traveling at all. And there are other areas that we could take some costs out, infrastructures, facilities, that kind of areas.

--------------------------------------------------------------------------------

Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [19]

--------------------------------------------------------------------------------

And just for my follow-up question, just circling back to the licensing, which was strong, as you laid out this year. Can you share with us, just kind of heading into this year, what the recurring revenue run rate is? I know 250 might be a good number for the year. But is there a recurring piece you feel pretty solid for the calendar year coming up?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [20]

--------------------------------------------------------------------------------

Yes. So in my model, I mean, as the statement last year, I realized that I probably don't have a whole ton of credibility, because I told everybody it was about 250. I'm going to tell you it's going to be about 250 for the coming fiscal year. But I hope this time you will believe me a little bit more. Last year, we have a lot of things -- a lot of deals in play. And so -- and they came in through the various time of the year, so different quarters. I believe this year, planning on 250 is reasonable.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question comes from Gus Papageorgiou with PI Financial.

--------------------------------------------------------------------------------

Gus Papageorgiou, PI Financial Corp., Research Division - Head of Research [22]

--------------------------------------------------------------------------------

Just a couple of questions. Steve, on the $27 million goodwill impairment, can you just tell us a little bit what was that for?

--------------------------------------------------------------------------------

Steve Rai, BlackBerry Limited - CFO [23]

--------------------------------------------------------------------------------

The impairment, I think, was $22 million.

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [24]

--------------------------------------------------------------------------------

$22 million, yes.

--------------------------------------------------------------------------------

Steve Rai, BlackBerry Limited - CFO [25]

--------------------------------------------------------------------------------

And that related to the BBM consumer. It was a while back. We licensed -- this was a licensing arrangement, and we were no longer operating the consumer BBM piece. And eventually, it was known there were certain amounts that we were going to receive under the agreement. And naturally, this -- we had to allocate some goodwill to it back in time. And since that service has been shut down during the year, the impairment results from that.

--------------------------------------------------------------------------------

Gus Papageorgiou, PI Financial Corp., Research Division - Head of Research [26]

--------------------------------------------------------------------------------

And then just, I guess, on QNX and the auto. So obviously, we're seeing volumes under pressure here in the short term. But I guess, part of the plan for QNX is that you should increase your market share, but also, the ASP per car should go up as car manufacturers adopt more software modules. Do you think the -- kind of the ASP growth is going to get pushed back as well? Or do you think that just -- it's just a volume issue in the short term, but you should still -- we should still see ASPs increase this year and then increase again next year?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [27]

--------------------------------------------------------------------------------

It is short term in a volume base, not the ASP. The ARPU has gone up. Because if you look back in the last 3, 4, 5 quarters when we announced the results, we talked about the design win in clusters, instrumentation, Hypervisors, ADAS, OTA. We talk about those wins. Those wins all carry a higher ARPU -- ASP than the traditional IVI business.

--------------------------------------------------------------------------------

Gus Papageorgiou, PI Financial Corp., Research Division - Head of Research [28]

--------------------------------------------------------------------------------

Okay. So they're not getting deferred at all. This is just largely...

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [29]

--------------------------------------------------------------------------------

Not that we could see. We are basically based on -- at this point, it's really more volume versus less volume.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Your next question comes from Paul Steep with Scotiabank.

--------------------------------------------------------------------------------

Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [31]

--------------------------------------------------------------------------------

John, can you maybe touch just one -- a little bit about AtHoc and what we've seen there? Obviously, that's one area that I'm assuming you're seeing a lift in. And then I'll give you one quick follow-up.

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [32]

--------------------------------------------------------------------------------

Yes. AtHoc in an environment like this -- so for those of you who were not -- haven't really followed our AtHoc business, it's very strong in the federal government and a more of a kind of -- and I meant federal government, I actually meant the United States federal government. And we have over 2 million seats in the United States federal government space, including armed forces and so forth. And then, of course, in Canada, AtHoc is in the parliament. And the other G-15 countries, a lot of them uses AtHoc and coordinate security and crisis.

So -- but we don't really -- we haven't really got out of the government and the federal space, which we are beginning to see us getting into. There's a company called Everbridge, a public company, and they do exactly what we do, but they are more on the state, local and education market, which we're interested in. So we're hiring people building that up. And so it is -- this is opportunity of growth. And it looks like that we are quite competitive. And we just released our latest product, which we're very proud of, which is the life cycle management of a crisis. And so -- anyway, so I think this is going to be a good growth engine.

--------------------------------------------------------------------------------

Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [33]

--------------------------------------------------------------------------------

Great. And then the last one from me would be, maybe you could talk a little bit about where you see the organization being -- you've obviously changed things around, integrated Cylance. And it looks like you got a new head of field operations and marketing or presumably sales is what that title means. How should we think about any changes to the sales force? And then secondly, how would you recapture any of the cost saves from letting go a few people in the Cylance area? Would you redirect that capital to growth? Or are you just going to sort of hold on to it in the current environment?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [34]

--------------------------------------------------------------------------------

Yes. So first off, I'm very pleased to -- when you combine 2 organization like that who have traditionally their own infrastructure and sales management, I got the luxury to pick the A team between the so-called legacy BlackBerry and Cylance. And it helped save a lot of the management infrastructure costs that we will then throw it back into hiring reps around the world. So the equation works out fine with us and for us. And Dave Castignola is picked to run sales, field marketing and customer services for Spark, which is a combination for the UEM and Cylance products. And so we now have one organization do that. And we -- as we cascade down to a number of levels, whether it's the regional manager or country managers and so forth, we obviously have the luxury of picking one versus the other person. So that, in my mind, give us a cleaner structure and also give us an opportunity to pick the better person.

At the same time, there are a number of opportunity out there and geographies and regions that actually have both very strong person and very promising person. We're able to deploy 1 of the 2 to a solutions side of the business, which are AtHoc, Secusmart and QNX. So like, for example, we now have a solution team in Asia-Pac leading by some really good people. And so we're taking advantage of the talent pool and the simplification of the organizations.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Your next question comes from Trip Chowdhry with Global Equities Research.

--------------------------------------------------------------------------------

Tripatinder S. Chowdhry, Global Equities Research, LLC - MD of Equity Research & Senior Analyst [36]

--------------------------------------------------------------------------------

Very good execution in a terrible environment. I have 2 quick questions, first, regarding your digital workplace. I think you are giving this product free for 6 months. Do you see that business to give you some uplift, as you mentioned in your prepared remarks, in the second half? Do you think that product is playing an important role? The second question I have is, Zoom Video is getting more popular, but they are terrible in providing the security and privacy. Do you think some sort of OEM engagement or relationship with companies like Zoom could be -- if they use digital workplace, those issues could be put to rest? Any thoughts on that?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [37]

--------------------------------------------------------------------------------

Thank you. So the first question is Digital Workspace (sic) [Digital Workplace]. It's a brand new product for us. We just released it probably no more than a couple of months. And it's slightly early to tell. But through this process of remote working from home, we've been seeing some good license movement on Digital Workspace (sic) Digital Workplace , not big enough to make a dent. So I will reserve my comment on this, probably wait until a quarter or 2 from now. But it certainly have picked up already and partly because of the environment we're in. Not having to deal with VPN and be able to put it on BYOD, it's a huge deal. It's a huge deal. So -- and we're now integrating, by the way. Every one of those desktop, we're putting CylancePROTECT on it. And so I'm hopeful we're certainly doing the right thing. So that's one area.

Zoom is obviously picking up quite a bit because of the reason of it. And yes, there were some concerns of security and privacy, and not just Zoom, other players, too. Zoom is part of our containerized program, meaning that Zoom works in our container. If you are a UEM customers, our BlackBerry UEM customers running Zoom, you'll already be secured both in the data privacy and the security of it.

--------------------------------------------------------------------------------

Tripatinder S. Chowdhry, Global Equities Research, LLC - MD of Equity Research & Senior Analyst [38]

--------------------------------------------------------------------------------

That's very wonder -- good to know. So the container, is it -- we're talking about containers in the context of dockers? Or -- and -- or is this containerized is in some different context? Basically, if I'm a customer of, say, your Unified Endpoint Management and whatever service I put into that container, by default, they will have the same level of security as the underlying platform provides. Is that the correct way to think about it?

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [39]

--------------------------------------------------------------------------------

Yes. Yes. So the container I was referring to is our endpoint management software, which is a combination of mobile device management and application management, and we use the container technology there. So that wraps around every application and protect the threat and intrusion of that -- of outside agents. So I'm talking about that container.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

That is all the time we have for questions. I would like to turn the call back over to John Chen, Executive Chairman and CEO of BlackBerry, for closing remarks.

--------------------------------------------------------------------------------

John S. Chen, BlackBerry Limited - Executive Chairman & CEO [41]

--------------------------------------------------------------------------------

Okay. Thank you. I was just having fun. But thank you very much for your time today. We look forward to speaking with you at our Analyst Day, which unfortunately, we now need to be on webcast because of the work-in -- shelter-in-place. It will be webcast on April 21 -- coming April 21.

Lastly, I'd like to take this opportunity to hope you and your family to stay healthy and stay safe as we work together through these challenged times. And I added one statement, this crisis shall pass. So looking forward to interacting with all of you. Thank you very much for your time.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

This concludes today's call. Thank you for your participation. You may now disconnect.