Earnings Call: Q1 2018

Jun 23, 2017

Welcome to the BlackBerry's Fiscal 2018 First Quarter Conference Call. Please note that all participants have been placed in a listen only mode. I'll turn the call over to Charlie Tien, Vice President, Investor Relations for BlackBerry. Thank you, operator. Welcome to BlackBerry's fiscal 2018 Q1 results conference call. With me on the call today are Executive Chairman and Chief Executive Officer, John Chen and Chief Financial Officer, Steve Capella. After I read our cautionary note regarding forward looking statements, John will provide a business update, and Steve will then review the Q1 results. We will then open up the call for a 30 minute Q and A session. In order to let as many people as possible ask questions, please limit yourself to one question. This call is available to the general public via call in numbers and via webcast in the Investor Relations section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we will be making today constitute forward looking statements and are made pursuant to the Safe Harbor provisions of applicable U. S. And Canadian securities laws. We will indicate forward looking statements by using words such as expect, will, should, model, intend, believe and similar expressions. Forward looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward looking statements, including risk factors that are discussed in the company's annual information form, which is included in our annual report on Form 40F and in our MD and A. You should not place undue reliance on the company's forward looking statements. The company has no intention and undertakes no obligation to update or revise any forward looking statements except as required by law. I will now turn the call over to John. Thank you, Charlie. Good morning, everybody, and welcome to our call. As in customary, I will reference non GAAP number in my summary of our quarterly results. There is a reconciliation table of GAAP to non GAAP results in a press release. In the Q1, we made good progress in strengthening our strategic position in high growth emerging markets, and particularly, the connected car and the cybersecurity space. We secured key design wins and expanded our ecosystem to set the stage for long term growth. I'll provide some highlights later in the script here. Notably, our balance sheets continue to strengthen with the completion of our transition to a software business model and the increase of cash from the as well as the increase of cash from the positive outcome of the Qualcomm arbitration. This gives us increased capacity for driving shareholder value, both short term and long term. Again, I'll come back I have a brief update on that later on. First, let me now provide a summary of our Q1 results. Total revenue was $244,000,000 Total company software and services revenue was 169,000,000 dollars Gross margin for the quarter came in at 67%. Operating income was $14,000,000 We earned $0.02 per share. This is the 3rd consecutive quarter of positive EPS and the 5th consecutive quarter of positive operating income. Total ending cash was $2,600,000,000 up $855,000,000 from last quarter. In our strategic area of focus, we continue to execute well and win important opportunities. As a reminder, I'd like to cover the 4 growth engines that we have in front of us. The first one being unified endpoint management. We refer it a lot of time as enterprise software. 2nd area is embedded software enabling mobile endpoints such as connected cars. The 3rd area is in the IoT appliances such as the BlackBerry radar. And finally, the 4th area is in technology licensing. Each of these above area represent large and expanding market. Now let me cover some of the key accomplishments in the quarter and broken down by these areas. So in the enterprise area, we again saw good performance in UEM and solid year over year growth in billings. As a reminder to everybody, this follows our strong the billings was follows our strong Q4, which was our highest ever billing quarters in the history of the company. The growth was due to strong uptick of our new UEM platform, which was launched in December of 2016. We processed over in the quarter, we processed over 3,000 customers' orders. We had a number of competitive takeout wins. Law firm, Morgan Lewis, we replaced MobileIron. Provisional Rhineland Province, not Provisional, sorry, sorry, apology. Province Ryland and Banque de France were both air wash replacement. Banque de France is the Central Bank of France. This add to our growing list of European National Banks as customer, which now total 12. Another key wins including Magna International, a Tier 1 global automotive suppliers headquartered here in Canada. Earlier this month, we were named a leader in Gartner Magic Quadrant for EMM, it stands for Enterprise Mobility Management, the EMM suite for the 2nd year in a row. Notably, we were the only vendor with positive movement in both vision and the ability to execute. Our development team continues to perform well. Earlier this week, we announced 2 key enhancements to the UEM platform, which I just referenced. First is the Microsoft Window integrations. This will expand the number of endpoints we can manage with our platform to include PC laptops and bring your own computer. The second one area the second area is in the 3rd party cloud enablement. This allow us to put the entire UEM product platform onto a cloud. In addition to that, we have a list a host of features in analytics, user analytics and as well as applications. On the security front, there was good progress in both the go to market area and the certification the security certification achievement. In the go to market area, we closed an initial win with a kuliani partner and our cybersecurity service pipeline is building nicely. We also launched in the quarter BlackBerry Shield, an assessment tool for cybersecurity risk management and partnered with Allied World to make the tools available to their cyber insurance policyholders. In the certification area, we achieved the United States NIAP certification, which was operated by the National Security Agency with our Secchi Smart solution or Secchi Suite solutions. We started pilot in Q1 and we'll be taking this solution more broadly to governmental customers all over the world. We achieved also certification with the German government for our Secure Voice solution on the Samsung S7 and S8 devices. Finally, we launched in the quarter, we launched ad hoc account, which is a program as gets the FedRAMP certification in the United States. The solution enables government agency and large organizations to account for personnel in real time. We are the only vendor, by the way, to achieve FedRAMP status in crisis communication solution. And in together with our ad hoc connect and ad hoc solutions also achieved the same status of certification. The 2nd growth area is in the embedded software area. Here, we have important design wins in high growth area of our automotive businesses. We are also expanding and strengthening our partnership with important ecosystem partners. Recently, we announced our Hypervisor 2.0 solution. This technology creates virtual software containers to reduce the risk of security breach in the vehicle software solutions. For example, using our hypervisor, you could use a single system on a chip to run both infotainment and the digital instrument cluster. But the two domains will be isolated from each other in our container. A breach in the infotainment system will not corrupt the digital instrument cluster. I apologize for that. We had 2 significant wins in the quarter. Qualcomm announced that it is adopting our hypervisor in support of its digital cockpit solution in automotive. The second is NVIDIA, who announced the usage of QNX real time operating system on its DRIVE PX2 platform. QNX was chosen based on the performance and safety benefits. We are also working with other ecosystem player such as Intel, TI, Renesys, and we support both X86 architecture as well as ARM architecture for both the 32 bit and the 64 bit computing. Also in the quarter, we have some significant wins, design wins in the advanced driver assist and in digital instrument cluster. Later this year, we'll be bringing to our market to the market our vehicle management portal, a comprehensive cybersecurity solution for automobiles. This will target a large and growing market in the automotive technology surface, which today is about $30,000,000,000 and expect to grow at a 30% CAGR over the next 15 years. Initially, the solution will be provided to OEMs. Then we will expand distribution through a subscription based recurring revenue model, and please stay tuned for the details in the future. The 3rd area of growth in our IoT Appliance. With Radar, we had our first win of a major global logistic company in the quarter. We are also continuing to build our pipeline and convert proof of concept trials to customer wins. Some of our early customer wins have come back for repeat purchases. So this demonstrates the strength and the value of the Radar proposition. I'm pleased to announce that FedEx has chosen radar for its custom critical surfaces. This is obviously an important sign of momentum for us in business. We have 2 add on wins with existing customer, mainly titanium and caravan. Our overall win rate and conversion rate proof of concepts to win has been very, very high. Five POCs completed last quarter successfully and are moving into commercial discussions. We have a potential APOC this quarter, 4 are scheduled to start and we're pursuing the other 4. We are also planning to launch RADAR LIGHT in the fall. This version of RADAR is cost optimized and will have a feature set suitable for a expanded set of containers. This will significantly expand the total addressable market for radar from 8,000,000 units to 28,000,000 units. In summary, with Radar, we feel good about we feel great about the product and especially what we're hearing from the customer. Given the amount of market runway, we want to move much faster. Therefore, we're going to be more aggressive investing to expand on our go to market effort. This will obviously include expanding our reseller channels as well as adding feet on the street. The 4th areas the 4th and final areas is our technology licensing. In the quarter, we took steps to expand our BlackBerry secure licensing program beyond the BlackBerry branded devices. The first area is what we worked on is obviously the handset OEM, OEM partners and allow them to use our security software. We are focusing beyond the traditional handset market to other connected device going forward. We signed a memorandum STK, which will integrate Backwell Secure into the STK future product lines, including smartphone and a desktop 4 gs voice over LTE phone. Based in the U. K, STK manufactures smartphone and other mobile devices with an emphasis on design and innovation. Both sides are working on signing a definitive agreement in the near future. In addition, we are also working on a licensing agreement with another design oriented mobile product company in Europe, which we do expect to sign in Q2. The second area of focus is working with semiconductor companies to embed our security directly onto the chip. The early response has been very positive. The first two device through our licensing program shipped in Q1, The BlackBerry Aurora with BB Mariputis and the KEY1 with TCL have both launched and went well. The KEY1 was launched in UK, Germany and North America at the very end of Q1. Initial receptivity and demand for the KEY1 has been quite good. The device is sold out in many markets based on higher than expected customer demand. The Aurora device has been rolled out to 655 retail locations in Indonesia. DBMP is emphasizing the security capabilities of our software. With the device now shipping, we are now generating royalty revenue from these agreements. Our partners in India, OptiMose, is planning to launch its 1st BlackBerry branded device in Q2 with a follow on device on the roadmap. Earlier this month, our CPaaS solution, which is communication platform as a service, the CPaaS offering, which happened to be BBM Enterprise SDK was released for general availability. We have more than 60 ISVs developing on our SDK and we're starting to generate revenue there too. I'd like to spend a minute and that concludes my update on the business. I'd like to spend a minute on capital deployment priorities, which include investment in growth area as well as plans to return capital to shareholders. There are mainly 3 buckets: organic investment, merger and acquisition and as well as shareholders' return in the form of buybacks. Our product priorities, which I touched on earlier, are enhancement to our UNIFY endpoint management platform, the vehicle management portal and the RADAR Lite. These products are aligned to our key growth areas. We are also planning organic investment support these areas in both go to market and the development headcount. In the strategic NMA area, our high level area of focus remains to be the cybersecurity, which will probably also touch on the machine learning and AI and as well as the enterprise of things focused on connected cars and access tracking. This will be complementary to our embedded software and radar businesses. I'm sure all of you have seen our stock buyback announcement this morning, which cover up to 31,000,000 shares. This is obviously part of our long term capital allocation strategy. Returning an appropriate amount of excess capital to shareholders will enhance shareholder value by providing long term earnings accretion benefits and offsetting potential dilution from the convertible debts and our equity incentive plan. So I will now turn the call over to Steve for a detailed look at our financials. Thank you, John. Today, we reported Q1 GAAP revenue of $235,000,000 and non GAAP revenue of $244,000,000 with fully diluted GAAP EPS of $1.23 Non GAAP EPS was a positive $0.02 My comments on our financial performance for the quarter will be in non GAAP terms unless specified otherwise. For a reconciliation between our GAAP and non GAAP numbers, please see the earnings press release and supplement published earlier today. I will begin with a consolidated review of our Q1 FY 2018 income statement results. Our total revenue for the Q1 was 244,000,000 dollars Our consolidated gross margin was 67% compared to 65% last quarter and 53% a year ago. Our non GAAP gross margin includes sulfur deferred revenue acquired but not recognized of $9,000,000 and excludes restructuring program charges of $3,000,000 and stock comp expense of $1,000,000 The gross margin improvement of 1400 basis points over a year ago is attributed to the increase in contribution from software and services to our overall revenue mix. We continue to model consolidated gross margin of approximately 70% for the full year of FY 2018. Operating expenses were $149,000,000 down from $181,000,000 last quarter. As John mentioned earlier, we are increasing investments in channels and development areas. In addition, Q1 OpEx benefited from legal expense reimbursed related to the Qualcomm arbitration in the amount of $8,000,000 As a result, we expect Q2 OpEx to increase accordingly. GAAP net income for the quarter was $671,000,000 Our non GAAP operating expenses exclude $25,000,000 in amortization of acquired intangibles, $14,000,000 in restructuring charges, dollars 12,000,000 in stock comp expense, dollars 11,000,000 in business acquisition and integration charges, dollars 218,000,000 of fair value adjustment related to the debentures and an $815,000,000 expense recovery related to the outcome of the Qualcomm arbitration. Non GAAP operating income was a positive $14,000,000 dollars and non GAAP net income was $10,000,000 Our adjusted EBITDA was $40,000,000 this quarter, excluding the non GAAP adjustments previously mentioned. I will now provide a breakdown of our revenue. Total software and services revenue was $169,000,000 representing 69% of total revenue. Handset device revenue was $37,000,000 representing 15% of revenue. The last of our remaining inventory will be sold by the end of June. As a result, our handset device revenue is expected to be minimal in Q2. Total SaaS revenue for the Q1 was $38,000,000 representing 16% of revenue. SaaS revenue was down 23% quarter over quarter. We continue to model a sequential decline in SaaS revenue of roughly 25% next quarter. As committed last quarter, I will now provide a further breakdown of our software and services revenue. The largest contributor was enterprise software and services at 60%. BlackBerry Technology Solutions accounted for 21% and 19% came from licensing, IP and other. Please refer to the supplemental table in the press release for the GAAP and non GAAP details. Roughly 79% of software and services revenue excluding IP licensing and professional services was recurring in nature. Now moving on to our balance sheet and working capital performance. Total cash, cash equivalents and investments increased to 2,600,000,000 dollars up $855,000,000 from $1,700,000,000 last quarter. Our net cash position was approximately 1,900,000,000 at the end of the quarter. Aggregate contractual obligations, which includes purchase obligations, operating lease obligations, interest payments and other goods and services utilized in operations was approximately $384,000,000 at the end of Q1. This is down from $885,000,000 a year ago. There were no purchase orders with the contract manufacturers at the end of Q1. This is compared to none at the end of Q4 and down from $150,000,000 a year ago. Moving to the cash flow statement. Free cash flow was a positive $860,000,000 for the Q1, which consisted of cash flow from operations of a positive $863,000,000 and capital expenditures of $3,000,000 Looking forward, we expect positive free cash flow and EBITDA for the full 2018 fiscal year, excluding the benefit of the Qualcomm Arbitration Award. That concludes my comments. I'll now turn the call back to John. Thank you, Steve. Before I open the Q and A session, let me make some comments about outlook. We have no change to our guidance for the FY the full year FY 2018. In our Software and Services business, we expect growth at or above the overall market, which is in the range of 10% to 15%. For the full year, we expect to be profitable on a non GAAP basis. And as Steve pointed out, we expect to be full year on a full year basis, a positive free cash flow. So now I'm ready for the Q and A. Operator, could you please administrate that? Thank Our first question comes from the line of Daniel Chan of TD Securities. Your line is now open. Hi, guys. Good morning. Good morning. Good to hear that the billings was the highest you've ever had. But can you comment on some of the softwares and services business? It was up about 2% year over year. Oh, no. So the billings, the highest quarter, I kind of fumble the when I brief while I'm reading that statement. We had the best billing in Q4 last year and then follow through with a pretty nice billing growth year over year in Q1. So as far as the software number is concerned, it's really based on because of the services. The professional services were down quarter Q4 to Q1. And I think a lot of the people have baked in a different numbers in ProServe. So from a license perspective, we feel comfortable. Okay. So then as you ramp up some of these other handsets coming in the pipe, do you expect the ProServe to kind of come back over the next couple of quarters? Yes. It's the you get I guess you get the right question on that. It kind of depends on who we are licensing it to, whether they have the capability to do it themselves or they have to get our help. Okay. And then you've announced the NCIB to offset some of the dilution from the converts. Have you taken any additional dilution protection measures for the remainder? Like for example in You only got 31,000,000. The NCIB is only approved for 31 1,000,000 shares, but your converts So let me answer the kind of the equation of it. And then if there's any detail, then Charlie and Steve would add on to it. So what we have decided to do is to offset the dilutions for the equity pool that was just approved a couple of days ago, and that's in obviously in 1 year 1 year dilutions of that. And then the debenture has 3 years left. And so we offset onethree of the dilution for the debenture. And that came up to be roughly about 31,000,000 give or take shares, assuming it's $10 a share. And let's see, did I miss anything on that? No. So Dan, yes, the NCIB covers 12 months and then we would address it after that 12 month period. That's right. Thank you. Yes, it's a 1 year coverage at this point. Okay. Thank you. Sure. Thank you. Thank you. Our next question comes from the line of Gus Tabakseo of Macquarie. Your line is now open. Hi. Thanks. Hi. John, could you just give us a little more detail on this vehicle management portal that you're suggesting? You're saying it's a $30,000,000,000 market growing at 30% CAGR over the next 15 years. Can you talk a little bit about what kind of service you're planning on launching? When you plan on launching it? And maybe give us a hint at what kind of economics we can expect? It's going to be in the fall and we're going to start with the OEM first, meaning directly to the car manufacturers and obviously they have to agree to uptake it. Let me comment on a little bit about the market itself. And when I said $30,000,000,000 it is the so called automotive surfaces business. Obviously, included things like over the air and a lot of different kind of recurring services business in the automotive. So this is a good entry into that $30,000,000,000 market and it's also allow us to have some differentiation and growth, especially as it relates to cybersecurity. So we're bullish about the product. But you have to stay tuned a little bit as we get closer into the rollout state and we're going to have more information. Okay. Sorry, just a follow-up if I can. On RADAR Lite, can you give us a sense of what the economics are for RADAR Lite versus the existing solution? Know the existing solutions roughly a $300 piece of hardware and then $10 to $30 a month recurring fee. What kind of economics would we expect on radar light? Yes. Don't hold me to it. We're still working on the pricing. But it will probably be more like $200 more like $10 a month. Okay. I mean, I'm right in the ballpark, but we have not completely nailed down the pricing yet. But that's kind of the design center of why we're doing this. Great. Thank you very much. Yes. Thank you. Thank you. And our next question comes from the line of Paul Steep of Scotia Capital. Your line is now open. Great. Thanks. John, two quick questions. The first one would be, thanks for your update on the capital deployment. With regards to M and A and how you're thinking about it, should we think about the M and A activity as being focused on more purchasing IP or is it to scale the business by buying a large existing recurring revenue stream within one of those buckets? And then I've got one fast follow-up just operationally. So I normally is an IP buyer. So but I think we're very comfortable with our development direction and our development team. And so we have plenty of IP. And in some cases like the radar and radar like the QNX areas, we really need to focus on go to market. And so we will probably fit more into your 2nd category, which is a company or companies that allow us to expand the reach into the market. A channel is currently the things that I'm focusing most on. So I'll answer the question that way. I really at this point in time, I don't see major gap in our product. Perfect. I guess related directly to that, we talked a little bit about the ramp in hiring. You've sort of touched on it. How is hiring going? And how should we think about you alluded this year the fact that you were going to staff up meaningfully. Where is that in terms of progress? Thanks. Good question. On the enterprise side, the hiring has been doing very well. We are ramping nicely and thanks to also the seasonalization of a lot of students, graduation, reps that could help come in and help us on the demand generation side of the equation. And so we're doing quite well on that side. I need to do the same thing more on the IoT appliances side as well as the QNX side. Perfect. Thank you. Thank you. Thank you. Our next question comes from the line of Maynard of Wells Fargo. Your line is open. Hi, Maynard. Hi, thanks. Good morning. Good morning. So the gross margin was a little bit softer than we expected. I guess what was the primary driver for the softness and how should we think about that going into next quarter? Because I guess what I'm trying to figure out is if there's something structural like SaaS gross margins continuing to come under pressure as you lose revenue scale And then if that causes gross margins to remain under pressure as we go forward? Hi. This is Steve. I think it was really the mix between hardware and software and some of the benefit we got in COGS in the past as we were unwinding the hardware business for devices. I think going forward, you'll see an uptick in that, probably in line with what you expected as there'll be virtually not quite 0, but a very, very low device number in Q2 and beyond. I think Steve, correct me if I'm wrong. I think we are targeting 70%. For the year. For the year. So maybe you could just kind of model it that way. Okay, thanks. And then just on the OpEx side, I guess I'm a little surprised to see your sales and marketing dollars declining as you talk a lot about building out your channel, your go to market. Has there been some change there? Or where are you seeing your savings on that line? And then has there been any change in the strategy that's altering sort of the dynamics of the direction of sales and marketing? Thanks. Yes. So on that line, it's actually sales, marketing and administration. And most of that decline is I should say all of that decline is administration related. One example of that, we had I think it's $32,000,000 quarter to quarter. We had a $16,000,000 swing just in legal expenses Then that's based on Q4 to Q1. We had a positive number in Q4 and we had a negative $2,000,000 in Q1. And then we had some other one time events in Q4 like bad debt expense and some of those other smaller items that contributed mostly to that. So I just want to reassure you, it's on the administrative side and not on the sales and marketing side. Yes. I think our G and A in general could do more. And as we streamline the business, there will be opportunity there continuously. So it's not going to be coming out from sales and marketing. In fact, those are ramping up. Great. Thank you. Thank you. Thank you. Our next question comes from the line of Tim Long of BMO Capital Markets. Your line is now open. Hi, Tim. Thank you. Hi, hey, Don. Just 2 related ones on the revenue line. I guess, the first quarter of software revenues is low single digit growth. So could you just give us a little flavor on how what accelerates, which piece of the business do you think gets us to that double digit growth for the year? And then related to that, it looks like the thanks for the revenue breakdowns the Enterprise Software and Services Group was actually down year over year. Was there something one time in nature? Or is that business just maturing and tough find growth? Thank you. No, no, no, it's not that, but I'll let Steve tell you the one time. So that business, first of all, we got the credit in the past of deferred revenue from acquisitions. And if you look at our GAAP to non GAAP revenue, that delta is related to that. And surely, as the year goes by or as the time passes, that number becomes less and less. The growth if we pull that out there was a $15,000,000 difference year to year. So we actually grew, I think it's roughly 12% in that category. That being said, you asked for how are we going to accelerate the growth in the second half? Part of it is and where that might come from. So on the enterprise software piece, we have accelerated billings when we expect professional services plus some of the other areas that are on our suite that will accelerate that growth in that category. And then in BlackBerry Technical Services, we're expecting continued growth from historical space, but also the growth that we would expect from radar in the second half with some of the wins and proof of concepts that we have. Yes. To recap that a little bit, the defer write down because of not write down, but defer credit from the acquisitions a year ago versus now. Obviously, we have a delta. And as Steve pointed out, it's in the table we provided. It's 12% growth. I look at it very closely. It's 12% growth of our enterprise business year over year. In addition to that, like Steve pointed out, RADAR and the BBM SDK are both areas that we expect to see some good growth and then some professional surfaces anchor of that will also come in. And then we don't have much of an IP contribution. And I'm hoping that the second half, we'll see some of that. Yes. So those are the areas that I think will get us to the double digit that we talk about. Okay. Thank you. Sure. Thank you. Our next question comes from the line of Paul Treiber of RBC Capital Markets. Your line is now open. Thanks very much and good morning. Good morning. Just wanted to speak about the win with FedEx. Just hoping you can elaborate a bit on it, particularly in regards to custom critical and the number of trailer opportunity there and then if you see an opportunity more broadly at FedEx. We do a good job at the critical services, which are smaller numbers. I'm hoping and I'm believing that we could have our opportunity for a much bigger piece of the pie. I really cannot comment on it because it took me bagging and whatever to even allow me to mention the name because I know many of you have always wanted to know when are we going to have 1 of the global breakthrough, global name and so forth. Forth. It really got down to this week before I was allowed to even mention the name. So I'm very grateful just to allow mention me. So forgive me if I can give you the detail, but I'm under GAAD order. And if I say anything more than that, they'll probably come and arrest me or something. Okay, that's fair. I understand. Just moving on to QNX and the hypervisor, how much do you see that the hypervisor as a competitive advantage within the automotive like embedded software space? It's very, very big. This technology allows both efficiency of the manufacturers and Tier 1 providers to provide functions together on the same pieces of hardware and but also allow the separation for cybersecurity. So if one module got attacked, it will not affect the other modules. And you could think about other areas of usage like redundancy and FOCE. So it's a very unique differentiator. So we feel good about it. Okay. And then just one last one, just to clarify. Just in regards to professional services in the quarter, I think it's $27,000,000 you broke out last quarter. I didn't hear a number. Is there any number that you could disclose regarding professional services this quarter? In that $27,000,000 is almost nothing. Correct. Okay. There's other professional services related to that as John pointed out that was The entire delta, I think if I look at all your model and not that I study your model, I don't want you all to think that we study your model and but we do. We have people that know exactly what you're thinking or try to figure out what you're thinking. And if I look at your model, I think that's the disconnect between what you're seeing right now, us and you, in the quarter is the professional services piece, which I was hoping that Steve told you guys in the last 90 days that it was not a repeatable thing because it's helping to get on our using our technology. So it's not an ongoing technology services. It's really a ramp up services so that we could train people on that. Steve obviously didn't do a very good job on that, but Okay. I'll forgive Steve. I'll pass the line. Thanks. I'll give him this pass one time also. Thank you. And our next question comes from the line of Steven Li of Raymond James. Your line is now open. Thanks. Steve, the deferred revenues balance on the balance sheet, it's been in decline since the Good acquisition. Is there some revenue bucket within Enterprise Software that is in decline? What's the factor that's driving this deferred revenue trend? Thank you. The largest piece of that deferred revenue is actually related to handheld, where devices were shipped, but we couldn't take revenue until there were sell through and the SaaS revenue. Those are the largest components of the decline. And as that number comes as those numbers come down, I think you'll start to see a buildup and ramp up of our deferred revenue. So how much more is there left, Steve? We haven't disclosed on that. It's still fairly large number and I think you can look on some balance sheet information and get a close approximation. I mean, it's going to be drained off this year. For those components. That component will be completely drained off. Yes, the sap will be very minimal after this year. Okay, that's great. Thanks. Got it. Thank you. Thank you. Our next question comes from the line of Michael Kim of Imperial Capital. Your line is now open. Hi, good morning guys. Just circling back on Radar Light and the potential opportunity for TAM expansion, The 28,000,000 units, I think, if I have written this sound correctly, quite a bit are quite well above the number of trailers worldwide. Are you talking about expanding to intermodal containers? Or where do you think the use potential use cases are? Exactly. That's exactly right. The intermodal containers and also assets that like with the government, there are many assets that are not just a container asset. So there's some specialized use also. Okay, got it. And then just switching gears on the federal SOC, are you building capacity ahead of some anticipated contract awards or how do you feel about your opportunities for awards later this year? It's I mean, obviously with all the talk going on, it's positive. I really I'm not really planning a huge thing because the details remain to be seen. I know the monies are being spent in the armed forces and in the United States. And I know the money is being spent in law enforcement and or at least the budgets has been assigned to law enforcement and so forth. So a lot of our fat RAM based solution is to allow the customer to use a cloud based implementation. So yes, we are ready for it, but I don't think we have an unrealistic expectation that something is going to jump way off the chart. If it happens, wonderful, we'll take it. It's not baked into the let's say it's not baked into the 10% to 15% increase that we talk about. Got it. Great. Thanks very much. Okay. Thank you. Thank you. Our next question comes from the line of James Faucette of Morgan Stanley. Your line is now open. Hey, how are you? Good, good. Thank you very much. So two quick questions or two questions. 1st, on the arbitration award from Qualcomm, are you are we clear now that there won't have to be any taxes paid associated with that award and cash transfer? Yes, we are clear and there wasn't any taxes because of our NOLs that we've had. Okay, great. And then on just longer range question, I guess, for both John and Steve, as we look at the opportunity sets and the ones that you're developing the automotive market, how should we think about like the pacing of acceleration and growth and revenue contribution from those? And how much of a headwind is the pricing decline on infotainment that you've talked about in the past likely to be against that growth? And how long should that headwind persist? Thanks. Yes. So we've seen the infotainment saturation and the pricing a while back. And in our Analyst Day in the beginning of the year, we have outlined that. And the strategy has always been, even in the last 2, 3 years, is adding additional modules. And so to so that we could continue to because we have a very big base of auto manufacturing out there and we have 60,000,000 cars of our infotainment and some of the operating systems in it out there today. And so we have a very large base to sell upsell into. So this is why we've been so concentrated and so focused on adding cluster technology, vehicle to vehicle or V2X implementation and telematics and so forth. So those are all major areas that we have products and we're starting to see some movement of that, meaning people have uptake on that technology. So I'm not concerned about the whole infotainment saturation because kind of in our expectation. Hypervisor, I used the example of Hypervisor is to tell is to hopefully to tell everybody that even if other people with infotainment in there, we still have products who could sell on top that embody and then embrace their infotainment implementation. I would like to be mine, but we could definitely do that. So I'm very bullish of the business. We're well positioned. Our products and our technologies are solid. We're definitely ahead of everybody. My issue is we just don't have enough people working on more deals and as simple as that. So on the channel side through Tier 1, we've been doing pretty good, but Tier 1s are limited in this world in how many of them. And so we just have to go off and directly work on more opportunities ourselves. And that statement is more true in radar than in the QNX software. So I'm not worried about that business at all. And I can appreciate that. So how should we think about like the ramp on the design wins that you've mentioned? Is this something that we should see an acceleration next year or the following? Or how does that how are you thinking about like getting that strength come through the P and L? We should see some reasonable growth next year that and probably a year after. And then stronger deals. Yes. So and it's a function of because this is a design win business on the QNX side. And every time we win the design, we win the design, it's probably a 2 years old model car that's go shipped. And one of the areas that we are all very focusing on is the whole area of services. And that's why I spent a little bit of time and talk about our plan in tapping that market with cybersecurity services on auto and so called co scanning project. And so those we are hoping get recurring revenue on a monthly basis per car. So that's kind of get the revenue growth a little bit more visible and a little bit more sooner and more consistent. So let's see how well we work. Yeah. And portal as well should, right? Yeah. So let's see how well we do on our service side. So if on purely design win on QNX, you're probably looking at next year do a little better and the year after do a little better than that. It kind of depends on how many design wins that we have and we feel comfortable that we're going to win our fair share. That's really great. Thank you. Okay. Thanks. Thank you. Our next question comes from the line of Anil Adarla of William Blair. Your line is now open. Hi, guys. Good morning, guys. Hi, good morning. Good morning. So a couple of questions, John, Steve. So is it fair to say when I look at the OpEx, R and D and SG and A combined, we've hit a bottom. It sounded like John is going to be investing. So if I look at, say, call it the next 8 quarters, next year or 2, we've hit a bottom. We should start seeing an increase. And can you provide some color, how should we be perhaps modeling it over the next year or 2? Are we going to see more growth in R and D or more growth in SG and A? Thanks. Okay. Yes. I think we're going to see growth in sales and marketing more so than the growth in R and D. The growth in R and D will be steady, but I think the what I like to spend I mean, in a kind of a big picture, a very big summary way is that the market we're aiming, whether it's a cybersecurity market for enterprise, whether it's just the UEM market for endpoint management, whether it's the auto markets for the QNX and whether it's the radar markets and whether it's a licensing market, these are all high growth market. And you all know our capability and products line up against each and every one of those market. I don't think you hear a lot of BlackBerry products are lagging behind or this that and the other. I think we're very competitive. So now our issue is get it out there and get the deal done. And so we really need to ramp up our distribution channels, whether it's the on the partner channel side or on the organic feed on the street side. So you see most of those there. And we're starting to be more aggressive in marketing, in not only the traditional advertising, but running developer conferences, running security conferences with meeting with customers on kind of a small group advisory basis or a vertical basis, you're seeing us getting more aggressive in there. That will continue. And so those are the 2 major areas that we are spending the money on and development have been pretty stable and pretty good. Adding to that, I'd like to say that we'll have a little bit of bounce back between Q1 and Q2 because of some extraordinary events that I mentioned. And then naturally, we'll have our expense growth will be maybe onetwo to twothree of our revenue top line growth because we're certainly not going to grow the expenses faster than our revenue. That's not the expectation. Thank you. Okay. Thank you. Our next question comes from the line of Kolbinder Garciap of Credit Suisse. Your line is now open. Thank you. Just two questions. On the free cash flow, you say it was $860,000,000 I assume that assumes includes the Qualcomm payment. So backing out, the underlying business burned cash this quarter. That's one clarification. And the second one is, when you talk about the software business growing in line with the market of 10% to 15%, should I think about that growth rate being applied to software services or just software within software and services? And given the decline this quarter, we're going to have to have quite a meaningful reacceleration over the next 3. So what exactly is giving you the confidence to drive that? Many thanks. All right. Let me answer the second question. I'll get Steve to answer the first one. Yes, it's the when I talk about 10% to 15% growth, I talk about both software licenses and services. And this is one of the earlier question I answer is part of the growth is going to come from a professional services increase and some of the recurring services also. So and as I pointed out, we expect Radar to see upticks. We expect the good billings in the last two quarters to convert in to come in as revenue. And we expect licensing revenue to also ramp up and also the IP side of the equation. So it will be a component, it will be a 3, 4 different components that will get us to the ramp. It's going to be a more of a second half growth, I think, given where we all the products are positioned and when it's going out and how long it takes to get into the market. So but we still remain comfortable with the 10% to 15%. John, is there any major IP kind of one time licensing deals included in that and or any M and A or is it just organically that you can do that? Not the M and A. The IP, we have some we have a list of IP thing we're working on and IP takes a long time. And so yes, there are some I don't know what you one time means, but we always be pushing on recurring or on an annual license fee. Sometimes we don't always get our way. So hard to answer your question on that one. But yes, it depends on IP. IP is part of the equation. Absolutely. And then on the cash side, we still have some lag getting out of the hardware business. But if you look at our balance sheet, you'll see of the unrelated free cash flow usage in the quarter, which was approximately $70,000,000 about $55,000,000 is actually you'll see in just the change in our payables balance. And so I think we all think that that number or that burn will obviously come down quickly and then start being increasing throughout the year. But just to be clear, if it wasn't for the Qualcomm payment this quarter, you would have burned cash, correct? Correct. Okay. Thank you. Yes. And some of that, Colt Bender, as well was, Steve had mentioned the decline in payables and accrued liabilities as well. And some of that was settling some of the hardware obligations for exiting that business. Okay. Thank you. Sure. Thank you. Our next question comes from the line of Gus Papageorgiou. Hi, sorry. I had a follow-up. I was going to ask you on the FedEx question, but since it was already asked. Since you're planning to do some M and A and you're saying you have a problem with basically the channel for radar, is there any opportunity to maybe buy a channel in that sector and maybe help your distribution? Hey, I can. You should ask your bankers. I can comment on that. There's obviously opportunities, obviously. I mean, it's not a market that we created. The market already existed, right? And would that be a big ticket? I can't tell you that. I mean, it's unfair for me to comment on that. Okay. Thanks. All right. Thank you, Gus. I think we're about the time. And thank you all very much for turning for tuning in and chatting with us. And I hope to see you guys soon, if not 90 days from now. Thank you. Have a good day. Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You all disconnect. Everyone have a great day.