Good afternoon, and welcome to the BlackBerry third quarter fiscal year 2022 results conference call. My name is Charlie, and I will 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 toward the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star zero. As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to Tim Foote, BlackBerry Investor Relations. Please go ahead, sir.
Thank you, Charlie. Good afternoon, and welcome to BlackBerry's third quarter fiscal 2022 earnings 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 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, including the COVID-19 pandemic. 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 published earlier today, which is available on the EDGAR, SEDAR, and blackberry.com websites. With that, I'll turn the call over to John.
Thank you. Thank you, Tim. Good afternoon, everybody. Thanks for joining the call today. I'm pleased to report that this quarter we delivered solid sequential billings and revenue growth in both our IoT and cyber business unit and met these expectations. I'm also pleased that despite our ongoing investment to grow the top line, EPS come in much better than expected. Let me start my review with the IoT business unit. Revenue was $43 million, representing a 34% year-over-year growth, although noting that last year was heavily impacted by the pandemic. Gross margin was 81%, and IoT ARR increased to $91 million. This is now the third consecutive quarter in which ARR has increased. This was a very positive quarter for QNX, driven by continued strength in design wins activities.
We achieved record quarterly revenue from development fee, license, as well as associated professional services. In fact, demand is so strong right now that we're expanding our professional services team by hiring additional heads into QNX. In addition to the near-term revenue benefit, these strong design wins serves as a positive leading indicator of the longer-term health of the QNX business overall. Once completed, obviously, these design will move into production and generate royalty revenue in future quarters. In terms of production-based royalty this quarter, we saw a modest increase compared to Q2. While we expect the auto industry supply chain issues to remain a meaningful headwind to vehicle production volumes through the end of this fiscal year and into 2022, we see the impact on QNX gradually lessening, including an improvement in Q3 versus Q2 in Q4 versus Q3.
I will now provide additional colors around the design wins in the quarter. The continued strength we are experiencing is further evidence of our leadership position in auto. We are certainly not taking this position for granted and continue to invest in all aspects of the business. In the quarter, we have a major win with BMW. BMW enter a multi-year agreement with us to develop new Level 2 and 2+ autonomous drive system on QNX for makes and models across the entire BMW Group. Autonomous drive is the clearest example of safety-critical software application in a car, which, as you know, is the most defensible attributes of QNX. BMW selected QNX because of our deep expertise and strong track records in safety, reliability, as well as security.
In addition to licensing our technology, we will be providing a professional services team to support BMW in their aggressive development timeline. Other auto wins include a major new design for our acoustic middleware, one of our higher ASP products. We also had a number of ADAS, Advanced Driver Assist, sorry, ADAS, gateway, and digital cockpit design wins with leading OEM and Tier 1. In Q3, we have a total of 11 new auto design wins and 13 wins in the general embedded market. GEM, the General Embedded Market, wins included a number of medical applications, such as an infectious disease diagnostic platform, as well as a next-generation robotic surgical arm. We also have wins in industrial applications as well as aviation, including an engine simulator with a leading aerospace company.
With any luck, we'll also be able to share details of further significant auto design wins with you all at the CES in January. A word on product development. During the quarter, Google, Qualcomm, and BlackBerry, three of the leaders in the autonomous digital cockpit, announced a collaboration to build a chipset that allows BlackBerry's Hypervisor to seamlessly integrate with Android Automotive. We are already seeing the results, securing the first design wins for this technology with a major European OEM in the quarter. Previously, to develop a digital cockpit with an Android Automotive infotainment system running alongside safety critical application on a single chip would require hundreds of hours of expert developer time for building custom integrations. This collaboration takes care of this for the customers, saving them both cost and time to market, as well as delivering a higher quality product.
The auto industry continues to move towards consolidation, particularly consolidating digital cockpits. With this position, QNX is even stronger; it will be even stronger in that space given the safety requirements. This provides the potential to win additional designs that will include both our Hypervisor and our RTOS, our QNX operating system. Turning to the Q4 outlook for the IoT business. The strength we have seen in design activities is expected to continue into Q4, and we anticipate a slight easing in supply chain headwinds. As a result, our outlook is for further sequential revenue growth and for Q4 revenue to be in the range of $50 million-$55 million, returning to the pre-pandemic run rate. We feel very good about the IoT business right now, but investors should keep in mind that the auto industry production headwinds.
I will now provide a brief update on IVY. We released the early access version of IVY in October, as we have previously targeted. This version has been released to a small number of ecosystem partners and will form the basis of our product demonstration at CES in January. This quarter, our co-development partner, AWS, announced the launch of a complementary product for IVY called AWS IoT FleetWise. While IVY is cloud agnostic and can work with any major cloud provider, AWS IoT FleetWise is a microservice that allows IVY insights to be efficiently and intelligently uploaded to the AWS cloud, where they could support cloud-side applications. Another significant development for IVY is Bosch, the world's largest auto Tier 1 supplier, announced that their new cockpit integration platform will support IVY.
This platform is built on QNX RTOS and Hypervisor, showing the potential for upselling IVY in future design to the large and growing QNX install base. Our main focus for IVY right now is on securing POC, proof of concepts, and we are hopeful that we can announce some in the near future. Overall, we're pleased with the progress being made. Let me now move to the cybersecurity side of the business. This quarter, we delivered sequential billings and revenue growth for the second consecutive quarter. Revenue was $128 million. Gross margin was non-GAAP 59%. ARR was $358 million. Dollar-based net retention was 95%. We saw continuous growth in pipeline for our unified endpoint security products, in particular our managed service offering, Guard.
We are very excited about how our products perform in head-to-head bake-off against other next-gen competitors this quarter. When we got to a POC, our technology performs well, as illustrated by competitive wins against CrowdStrike and SentinelOne, as well as other older signature-based players like Microsoft, McAfee, and Symantec. Among these wins was another top 10 global automaker building on the win of a top 10 OEM we told you about last quarter. Other notable competitive wins include an international banking group, a leading European financial services firm, and a global marketing agency. In addition to success with larger companies, we are seeing a lot of interest from small and medium-sized businesses too, and this will continue to be an area of focus for us as the market opportunity is large.
Our CylancePROTECT and CylanceGUARD managed service offerings really resonate with small and medium-sized company that don't have a large security infrastructure. POC often involve customer performing vigorous testing of our product against the competitors one. The success we are having in illustrating our competitive advantage. Let me highlight a few of those key ones. The first is our focus on prevention, with customer testing demonstrating that we stop threats pre-execution. This contrasts to the EDR approach that aims to remediate threats after the fact. The second is artificial intelligence. Whereas for other AI is relatively new and even an optional feature, our Cylance AI engine is central to our technology. It is the most mature in the market, having learned from the analysis of trillions of files and literally identify over 20 billion characteristics.
The third advantage we have is our EPP works both offline and online, our protection. Endpoints are protected 24/7 and don't rely on cloud connection, which is of course, cloud connection could be very expensive. Fourth, we protect mobile. Nobody in this space know mobile as better than BlackBerry. I hope you agree with that. It is rapidly becoming one of the largest threat surfaces. These four attributes differentiate BlackBerry security offerings from the competitor. I'm sure you all heard about the major security incidents known as Log4Shell, which CISA has classified at the maximum level 10 for severity. This relates to major vulnerabilities in the Apache Log4j. This is obviously a rapidly evolving situation, and unlike many software companies who are still struggling to understand the impact, we track and categorize our product portfolio open source software content.
This means that we're able to very quickly identify which of our products use this library and create mitigation and release patches as the threats evolve. We can confirm that none of our core products, namely Protect, Optics, UEM, QNX, RTOS, and Hypervisor, none of those products are negatively impacted by these vulnerabilities. Furthermore, our suite of cyber products, particularly our Protect, EPP, and Guard managed service, can help customers prevent malware and ransomware that bad actors could try to execute using these vulnerabilities. Now for a brief update on key partnerships. In recent quarters, we have released a number of new products and announced partnerships that expand our extended detection and response offering or XDR. In the quarter, we were excited to announce partnership with Okta and Mimecast, as well as Stellar Cyber and XM Cyber.
A significant XDR partnership is with Exabeam, the leading next-gen SIEM provider. This partnership allow us to greatly improve both context and visibility of threats by adding telemetry data from hundreds of network integration to our Guard managed XDR service. Managed XDR is a strong market opportunity given the complexity of managing threat across the network. We are pleased that during the quarter, SE Labs, a leading independent cybersecurity research firm, ranked BlackBerry as the best new endpoint protection solution of 2021. A few words on customer wins. Across the business units, our key vertical this quarter were government, banking, and insurance. In government, we closed business with some of the world's leading governments and government agencies, including the U.S. Navy, who became a new Secure Voice customer.
The Department of Homeland Security, the Dutch government, the U.S. Department of Education, which happened to be a new AtHoc win for displacing a key competitor, as well as Scottish Government, U.S. Central Command, the Federal Aviation Administration, FAA, and the IRS, just to name a few. Moving to the outlook for the cyber business, we expect continued sequential billing growth in Q4 and for Q4 revenue to be in the range of $125 million-$135 million. As previously indicated, I think I said it last quarter, closing certain large government deal in Q4 will be important. Moving on to licensing. As you know, we have been in negotiation regarding the sale of our non-core portion of our IP patent portfolio. This process is taking much longer than we had hoped, and trust me, I share the frustration about the timeline.
Negotiations are very close to a conclusion, and we are literally down to the last few important items now. Both parties are working hard to get this finished, and we expect to reach a definitive agreement very soon. We will provide shareholders an update on progress in January. In the quarter, licensing revenue was $13 million and gross margin was 54%. This beats expectation for the quarter. Should the sales reach a definitive agreement in January, we will suspend monetization activity and therefore expect Q4 revenue to be close to zero. However, if not, then we'll continue to expect revenue to be around the $10 million mark for the quarter. I'll now hand over to Steve to provide additional colors on the financial.
Thank you, John. My comments on our financial performance for the third quarter will be in non-GAAP terms unless otherwise noted. Please refer to the supplemental table in the press release for the GAAP and non-GAAP details. We delivered third quarter total company revenue of $184 million. Third quarter total company gross margin was 64%. Our non-GAAP gross margin excludes stock compensation expense of $1 million, and our third quarter operating expenses were $142 million. Our non-GAAP operating expenses exclude $29 million in amortization of acquired intangibles, $5 million in stock compensation expense, and a $110 million fair value gain on the convertible debentures. Given our ongoing investment towards driving top line growth in our core IoT and cyber businesses, the third quarter non-GAAP operating loss was $24 million, and the third quarter non-GAAP net loss was $1 million.
We recorded a non-operating gain of $25 million as a result of gains realized in two legacy venture investment funds that make up the majority of the long-term investment balance on our balance sheet. Related to this gain, the investments underlying these funds, you know, represent a passive interest we had, which were sold, and we received a cash distribution of approximately $35 million during the quarter. Non-GAAP earnings per share was breakeven in the quarter. Our adjusted EBITDA was -$8 million this quarter, excluding the non-GAAP adjustments previously mentioned. I will now provide a breakdown of our revenue in the quarter. Cybersecurity revenue was $128 million, and IoT revenue was $43 million. Software product revenue remained in the range of 80%-85% of the total, with professional services comprising the balance.
The recurring portion of software product revenue remained at approximately 80%. Licensing and other revenue was $13 million, given the limitations to our monetization activities due to the potential IP portfolio sale. Now moving to our balance sheet and cash flow performance. Total cash equivalents and investments were $772 million as at November 30, 2021, remaining consistent during the quarter. Our net cash position remained at $407 million. Again, given our investment in our core software businesses, third quarter free cash flow was -$21 million. Cash used by operations was $19 million, and capital expenditures were $2 million. That concludes my comments, and I'll now turn it back to John.
Thanks, Steve. Before I move to the Q&A, let me summarize the key points for the quarter. We're pleased with how our new organizational structure is executing right now. We saw strength in design activities for our QNX business, achieving a record quarter for design-related revenue, and it looks like it will continue. Macro supply chain headwinds are still impacting vehicle production, but we see, and we are going to identify the impact on the products from open source code. We are responding rapidly and effectively. Overall, we've delivered solid progress beating both revenue and earnings expectations for the quarter. Charlie, please start the process of Q&A.
Sure. No problem, sir. We will now begin the question-and-answer session. To ask a question, you may press star one on your telephone keypad. If you're using a speakerphone, please make sure your line is unmuted. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for a question. We request that you limit yourself to one question and one follow-up. Our first question from today will be from Daniel Chan with TD Securities. Please go ahead.
Hi, Dan.
Hi, guys. Hi, John.
Hi.
Can you provide any color on their Cybersecurity ARR? It looks like it declined to $358 million from $364 million quarter-over-quarter. Just wondering if there's any churn and which products may have been affected and maybe if any products are showing outsized strength.
Yeah. We have a positive surprise with a higher revenue came in more than we expected from our Secusmart product. So that has principally drove the numbers that you saw.
Okay. The guidance that you provided for next quarter, what are the puts and takes in that guidance? Thank you.
Yeah. Let me just break it into two pieces, you know, IoT versus cyber. In the IoT side, you know, touch wood, I think we're all feeling pretty good about it. You know, as I said, we're gonna get back to pre-pandemic level. Design wins are good. That brings, we have a good pipeline for professional services, a backlog of professional services to help the customers to deploy our technology, you know. I don't want to jinx it, but it looks okay. On the cyber side, it relies on a number of deals that are quite big from the government side, from a revenue perspective.
Because of the fact that we expect these to close a little later in the quarter, the revenue contribution will not be as big as is obviously in the beginning of the quarter, but the billings will look fine.
Thanks, John. Happy holidays.
Sure, Dan.
Your next question comes from the line of Trip Chowdhry with Global Equities Research. Please go ahead.
Oh, hi.
Hello. Thank you. Very good execution on the quarter. Few things I would be interested is related to IVY platform. You had the early access program almost now for two months. Any specific data points you would like to share, maybe in terms of downloads, applications or partners, any reaction? I have a follow-up question.
We of course released it to the application partners and a handful of OEMs, car manufacturer. The feedback was very positive. As I said earlier, we're gonna use that as a basis of our demonstration or our talk at CES at our booth. We're also gonna digitize and stream those sessions. I'll talk a little bit about that later. Positive response. Lots to do, a lot of activities going on. The application, as you know, we have announced a few applications. I can't promise every single one of them you will see at our booth, but you know, we have the battery management systems, we have the car as a wallet, we have other rideshare applications.
I don't know whether every single one of them will make it to our booth, but I expect quite a number of them will.
Also if you look at.
You'll also see a concept car that we collaborate with Amazon or AWS, by the way. Sorry, Trip.
Beautiful. Also, if we look at the new generation EV players and also the old guard of automobile players, they seem to be now getting on the bandwagon of over-the-air updates. I was wondering, does your platform, whether it's IVY or QNX, provide over-the-air updates, just out of the box?
Yes. QNX has an option on OTA. Of course, IVY has to have the OTA. The physical link is a simple thing, and we do have it. The more important thing that I talked about earlier about the new AWS, the new Amazon release is called FleetWise allows a logical link between the edge of the car to the cloud, and we're taking advantage of that microservice. Yes, we do both. It's obviously both ways, you know, from the cloud to the car and then vice versa. From data and code, we do have OTA capabilities already existed.
Very good. Looking forward to seeing your announcements at the CES show.
Oh, great. Thank you, Trip.
Thank you.
Thanks.
Thank you. Your next question comes from the line of Mike Walkley with Canaccord. Please go ahead.
Hey, Mike.
Hi. Hey, guys. Good afternoon. This is actually Daniel on for Mike. Thanks for taking my questions.
Okay.
With you know John Giamatteo joining your cybersecurity unit last quarter, just wanted to see how the productivity of your investments in your quota-carrying sales reps are trending in this area of your business. How should we think about maybe some of the sustained investments as we move into 2023?
Good question. John joined us, and the exciting part of that is that John has enormous experience in the cybersecurity market. He ran a $3 billion business as President of CRO of McAfee before. You know, he's very relevant, and he brings in a lot of relationship, and particularly with customers and partners, so that's very good. He knows how to make salespeople successful in a cyber world. I don't know how to describe productivity, but I could tell you one data point, that today we have 10% more quota carrier. We call it direct quota carrier. We have 10% more direct quota carrier than the beginning of the year.
We did the math that way. The productivity, we will start seeing that as a lot of them are new because we recently hired them. We will see those coming in the next few quarters. If you think about a sales cycle, let's say two to maybe three quarters, call it three, I should be seeing some results in either the second quarter or the third quarter next year.
Okay, great. Thanks for the details, John. Yeah, I guess, just as a follow-up, so you noted you saw further pipeline growth within cybersecurity, and you also expect sequential billings growth in Q4.
Mm-hmm.
When should we expect this to start showing up in ARR?
Oh, well, next year, I hope. I feel pretty good about mathematically that we're looking for a good ARR growth next year.
Okay, great. Thanks for the details.
Sure.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone keypad. Your next question comes from the line of Paul Treiber with RBC Capital Markets. Please go ahead.
Hey, Paul.
Hey, John.
Hey, Paul.
Within IoT, I mean, it seems like you're quite upbeat on the design win-related revenue, like developer seats and professional services. What's the typical gap like in duration between professional services work and when it goes into production? Is there a ratio like for every dollar of professional services and design so developer seats to ultimate the royalty revenue that you may see?
No, there's really no direct ratio. It's really, you know, some OEM want a very aggressive development schedules, so in that case, they will ask us to provide some expertise, and of course we under the professional services program, and then they will typically buy a higher number of developer seats, because they want to put more engineers on it in parallel. Some want to do it a little bit more sequentially. I would tell you that if you ask our folks, that we see whether you're in electric vehicle design or the combination of both, competition is heating up in the auto industry, as you all know.
Time to market is important to them, unlike the kind of the partly because by players like Tesla of the world and a lot of the Chinese players, their development cycle and sales cycle are a lot shorter of the manufacturing cycle. There isn't really a you buy more developer seat and therefore you have long bigger production royalty. I don't think there's a real constant factor or relationship there. Now typically, as I said, we see a developer win and then a developer seat licenses as well as a professional service. Usually, you add about three years down, you start seeing production. Nowadays I have seen numbers that are a little bit or plans, I shouldn't say numbers.
Plans are a little bit more aggressive than that. A typical cycle will be three to five years from win to seeing the royalties start flowing. Once the royalties start flowing, it usually lasts in excess of seven years.
Okay. Thank you. That's helpful. Just one follow-up question. Sales and marketing, you know, I was under the impression that you're planning to ramp it up, you know, more significantly, you know, it's been flat this past quarter. How should we think about sales and marketing spending from here?
Yeah. Sales and marketing will definitely ramp up. I could tell you, John Giamatteo on cyber side, we don't do as much of marketing in QNX or IoT because, you know, especially in the auto space and some of the GEM vertical, we are already a reasonably known name and known entity, so we don't need to do as much. On cyber, as you know, we need to do quite a bit. John G. is very focused on it. We, you know, you would see that going up quite a bit, in fact.
Okay. Thank you for taking my questions.
Sure.
We have no further question at this time. I would like to turn the call back over to John Chen, Executive Chairman and CEO of BlackBerry, for closing remarks.
Thank you, Charlie. Okay. Thank you, everybody. As we mentioned, we're participating at CES in Las Vegas in January. The focus will be on IoT business and how it will address the benefit from the key trend in edge computing. No doubt, a key highlight will be the demonstration of our IVY technology, including illustrating how IVY use edge computing to create insight for sensor data, both hardware and software-defined sensor. We'll be hosting a hybrid in-person and live stream demonstration of the IVY technology, followed by an investor Q&A session with Mattias Eriksson, the President of the BlackBerry IoT group, at 8:00 A.M . Pacific on Thursday, January the 6th. We'll be releasing more details about this shortly.
I'd like to wrap up by wishing all of you thank you for joining us and wishing all of you and investors and everyone on the call here a happy holidays and a safe and successful new year. Thank you very much.
This concludes today's conference call. Thank you for your participation. You may now disconnect.