Good morning and welcome to the BlackBerry Investor Update conference call. My name is Drew, 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 towards 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 would now like to turn today's call over to Tim Foote, CFO, Cybersecurity division, and Head of Investor Relations. Please go ahead.
Thanks, Drew. Good morning, everyone, and thanks for joining today's investor briefing. Joining me on the call today is John Giamatteo, BlackBerry's CEO, and Steve Rai, BlackBerry's CFO. Before we begin today's call, I'd like to draw your attention to the Safe Harbor Statement. If you're following on the webcast, this should be on your screen right now. If you've dialed in via call-in numbers, you can find it on slide two of today's presentation that is available to download from the BlackBerry.com/investors web page. A replay of today's briefing will also be available on the BlackBerry.com website. With that, let me turn the call over to John.
Thanks, Tim. A nd hi, everyone, and thanks for joining today's call. I'm pleased to share a number of updates on the significant progress that we've made in both the separation of our IoT and cybersecurity divisions, as well as our path to profitability and positive cash flow. Well, let me start real quickly by taking a few moments to recap our corporate priorities. It was just a little over three months ago that we announced that BlackBerry is in the process of establishing our core businesses as two standalone divisions. While there are similarities in that both divisions have great technology and blue-chip customer bases, there are relatively few synergies between them. They have different end customers and different go-to-market motions, and therefore benefit from increased freedom to move quickly and focus on their respective market opportunities.
In addition, we believe that increased visibility into the financial profile and performance of these businesses will generate opportunities to enhance shareholder value. These businesses have had standalone sales, marketing, and R&D functions for some time now. But for them to be truly standalone, corporate functions like IT, legal, finance, and HR also need to be separated and more integrated directly into the business unit themselves. While we separate these functions, we are confident that we're going to optimize our cost structure. As we previously outlined, we have been investing significantly in R&D as a percentage of revenue, and that our G&A back-office functions cost BlackBerry more as a percentage of revenue than you'd expect for a company of our size. During our last earnings call, we indicated that for this current quarter, Q4, R&D was expected to be approximately 20% of revenue.
But the target is closer to being more like 20% is where we want to go. Likewise, G&A is expected to be approximately 20% of revenue, whereas the target is around 10%-12%. Achieving this target cost profile will drive significant improvements to profitability and cash flow for BlackBerry. So, let's now take a look at the progress we've made with streamlining our cost structure and getting the company back on the path to profitability. You may recall that in Q3 we took a number of actions, primarily in the cybersecurity business, to reduce the annualized cost run rate by approximately $50 million per year. One of the largest items was from a headcount standpoint, where we took tough decisions and reduced our workforce by approximately 200. Other items included rationalization of our global facilities footprint.
As previously mentioned, due to timing, some of the actions taken, such as facilities rationalization, resulted in cost savings that weren't realized immediately in Q3, but that will instead be realized over the next few quarters. However, we're not stopping at the $50 million of savings. In fact, we have targeted a further $100 million of annualized net profit improvements, meaning $150 million in total. We expect the additional $100 million to come predominantly from cost savings, but we also expect some operating leverage, particularly from the IoT business in our fiscal year ending February 2025. Of the $100 million target, in the current quarter we have identified and expect to take actions that will drive approximately $55 million of improvements on an annualized basis. Approximately $35 million of this will come from the Cybersecurity division and $20 million from G&A.
The cybersecurity actions we're taking this quarter include further targeted reductions in force that we expect to total approximately $27 million on an annualized basis. Further, we have identified opportunities to rationalize non-headcount-related spending by approximately $8 million, things such as cloud usage, third-party consultants, and various marketing events. The largest reductions are within cost of goods sold, which we expect to drive gross margin expansion and within R&D. When taken together, the cost reductions for the cybersecurity business in the current and prior quarters are significant. However, the cyber management team is confident, despite taking these difficult but necessary decisions, the organization going forward will be leaner, more agile, and more focused. We are streamlining our reporting structures, streamlining our processes, and laser-focusing our resources on the areas that we believe will generate the most value for our customers and ultimately our shareholders.
Indeed, it is important to stress that we are, without question, continuing to invest in our product offerings. The change is that we're now investing at more industry-typical and more sustainable rates. Further, we are reiterating our expectations for total company revenue outlook in Q4 to be between $150 and $159 million, and for the Cybersecurity ARR to stabilize sequentially this quarter as well. Now, turning to our G&A functions, we expect $7 million of savings from further facilities rationalization. During our last earnings call, I mentioned that BlackBerry had 36 global office locations. This quarter, we've exited or combined six of these, including high-cost locations like San Ramon, California. We've also identified further reductions in force that we expect to generate annualized savings of approximately $13 million. The cost associated with making the company-wide reductions this quarter is expected to be approximately $12 million.
Given the significant steps we've taken to improve BlackBerry's bottom line, we also expect to see a significant benefit to our cash flow profile. You may recall that this fiscal year, operating cash flow usage in the Q2 was $56 million. Usage reduced significantly to $31 million in Q3, and we continue to expect further sequential improvement in the current fiscal quarter. We won't be providing full guidance for revenue and profitability for the next fiscal year today. Instead, we'll provide that during our next earnings call on April 3rd. That said, let me give you some color on our cash flow outlook. For those of you who have followed BlackBerry for a while, you'll recall that the Q1 is our seasonal low for cash. This is due to seasonality in both billings and payment of some annual expense items.
Therefore, we expect Q1 to have a sequentially higher cash usage than Q4. That said, given all the steps that we've taken, we expect to see sequential improvement in Q2, further improvement in Q3, and to achieve positive cash flow in Q4. And importantly, we expect to maintain a positive net cash balance throughout fiscal year 2025. Let me now spend a few minutes to update you on the progress that we've made in the separation of the business into two standalone divisions. A big step we made this quarter was to establish divisional leadership teams in both IoT and cyber. This includes appointing divisional CFOs, Chief People Officers, and General Counsel. And these leaders are wasting no time in building out their teams with work already well underway. As part of this exercise, we are leveraging the expertise of leading consultants in firm Alvarez & Marsal.
Their experience from working on similar engagements with companies of all sizes around the globe is helping guide us to streamline and optimize the way we work and to build strong, independent functions. Finally, I'd like to touch on our balance sheet. Since we last spoke, BlackBerry has successfully issued $200 million of five-year Convertible Senior Notes at very competitive rates. As we've been indicating for some time, we intended to replace the $365 million of convertible debt that was due in November of last year with a smaller amount of long-term financing. We were able to negotiate a three-month extension of $150 million of that debt, but clearly, we had to find a longer-term solution. Working with Morgan Stanley, we were pleased with the strong level of interest in the offering and were able to raise $200 million.
This represents a 45% reduction in our level of debt when compared to the previous $365 million. Having now secured this long-term liquidity and given the expected return to positive operating cash flow this coming fiscal year, we have a solid balance sheet for the long term. We feel that BlackBerry is now very well positioned to execute on its strategy. So before we open the lines for Q&A, let me very quickly summarize the key points from the call today. In the three months since we announced that we were separating our IoT and cybersecurity divisions and streamlining our costs, we've made significant progress. In the prior quarter, we took actions to reduce our cost run rate by approximately $50 million. In addition to that, we've set ourselves a target of a further $100 million in savings and margin improvement.
This quarter, we've identified and will take actions to achieve $55 million of this target. Given these expected improvements to our bottom line, we also expect to see improvements in our cash flow and expect to generate positive operating cash flow in the Q4 of next fiscal year. The significant improvement in our cash flow outlook, together with the $200 million of long-term financing that we secured last month, means that we feel good about BlackBerry's solid balance sheet and our ability to execute on our strategy. Finally, we're pleased with the business progress in separating our businesses. We've appointed divisional leadership and are working with leading consultants to build out the IoT and cybersecurity teams. In just a few months, we've made significant progress against our corporate objectives, and we remain very focused on the path ahead.
So with that, operator, why don't we open up the lines for some Q&A?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star one on your touch-tone telephone. 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 questions. We request that you limit yourself to one question and one follow-up. The first question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Great. Thanks for taking my questions. And it sounds like y'all are quite busy restructuring the businesses. I guess the first question for you, John, is just on the cybersecurity business with the deeper cuts there. Do you still feel like you have the sales team to support this business and can give us kind of a sense? You talked about maybe IoT creating some leverage in the model, but is this a growth business going forward, or is it more a shrinking business that you're cutting costs to adjust to the size of the business?
Hey, Mike. Thanks for the question. It's a good one. I mean, when you think about the costs that we're adjusting from the cybersecurity side of the business, I actually think we're striking the right balance. We've seen some headwinds in parts of the cyber business, and we're adjusting the cost structure accordingly. Our litmus test, when we think about are we investing the right levels, from an R&D perspective, we invested a lot over the last couple of years to get the products in a much better place. And now that we've achieved that, I believe we're at a good point in time for us to dial that back and get those ratios into a better place by a more focused approach to our product. From a go-to-market perspective, I think we've got the right alignment.
The teams are focused on the right opportunities. I think when we talk about really focusing on those segments of the industry where we can be successful and we can grow, that's really, I think, going to make a difference for us in our very, very focused approach around cyber. From an IoT perspective, we absolutely are expecting some leverage, some business model leverage from there. We're really not as focused on cost-cutting in IoT. We're more focused on the growth-driving incremental margin improvement to the overall company. All the metrics, all the backlog, all the key drivers of that business continue to be strong. So we're really focused on growth on the IoT side and generating business model leverage as we grow.
Maybe just a follow-up question. You talked about leverage driving improved gross margins. We also identified costs coming out of cost of goods sold. I know you're going to give better guidance in April, but any hints or direction on how we should think about gross margin trends for the two businesses as you make these cuts?
Yeah. We'll provide you more updates for sure at the next earnings. But absolutely, from a cost of goods sold, a lot of what we're focusing on here, we think there's opportunities to rationalize some of our cloud costs, some of our development labs. I'd mentioned in the past, we had a lot of different labs all around the world. There's a lot of infrastructure that goes along with that, that the cloud costs in particular drive higher overall costs. So those are some of the areas that we're really focused on, but we'll provide you a more comprehensive update next time.
All right. Last question for me, and I'll pass the line. Just, Steve, for you on the headcount reductions and the cash flow, how should we think about maybe timing of the cash payments involved in restructuring? Are they more front-end loaded or spread out over time as it relates to you reaching positive cash flow exiting fiscal 2025?
Yeah. As John mentioned, I mean, the actions that were outlined are we did some in Q3, and the ones and there's additional ones, the bulk of them are in the current quarter and in the coming quarter. So, they're very near term. So that's the timeframe that would also relate to those costs.
Okay. Thank you.
The next question comes from Paul Treiber with RBC Capital Markets. Please go ahead.
Thanks very much, and good morning. Just as you've been going through this exercise of the separation and the evaluation, you indicated that the synergies between the two segments is low. Are there subsegments of either business that you think are even less synergistic or less relevant to a long-term strategy that you consider divesting?
I think, Paul, at this point, our step one is get them separated, get them focused on their respective markets in a much more laser-like way than we have in the past. Step two is getting these things, both divisions, to profitability. IoT is definitely further ahead, but we're making significantly good progress on the cyber side of things. So when we get to step one and step two, I think step three is going to represent itself as we look at the portfolio of what we have, as both businesses are firing on all cylinders, opportunities to look at whether we divest something, or I think those will represent themselves, and all options will be on the table. But right now, that's not front and center for us.
We're really more focused on step one and step two, and then step three will present itself in a logical way, in a way that we feel will be the best result for our shareholders. So hopefully, that gives you some perspective. It's not front and center that we're thinking about divesting things. We're more focused on getting the business right, and then we'll look at those opportunities.
And you mentioned as you separate the business, you did need to add some employees on the G&A side. How do you think about or how are you accounting for potential dissynergies on the G&A side as you separate them? And are the cost savings that you outlined, are those net of any potential additional expenses, or could some of that offset some of the savings?
Good question, Paul. Absolutely, t hey're net. Everything is net that we're talking about of any kind of increment as we build up these divisional teams in HR, finance, legal, IT. It's one of those things. There might be some incremental costs as we build up those teams, but overall, we'll be reducing the cost significantly from some of the larger infrastructure that we have in place at the corporate level. So, we definitely expect to see significant cost reductions as we outlined associated with this split.
Thank you. I'll pass the line.
Thanks, Paul.
The next question comes from Luke Junk with Baird. Please go ahead.
Good morning. Thanks for taking the questions. John, just hoping you can maybe expand a little bit more on the actions that have already been taken from a structural standpoint to establish standalone divisions. You mentioned things in terms of segment leadership, but just wondering if there's anything else you can share on that front.
Yeah. A lot of these things are literally happening as we speak, so a little bit cautious of getting into it in too much detail. But basically, as we kind of outlined, targeting $100 million, $55 million of that, we've already identified in actions and things that we're already doing and will have actioned by over the course of the next couple of weeks. $35 million of that, $50 million, is in cyber. A significant portion of that is from R&D and go-to-market, and as we streamline that organization focused on the markets where we can really win. And then the other portion, the other $20 million, we're already starting to see some of the cost savings out of that corporate G&A function that have built up over time as we were a bigger BlackBerry.
In a short period of time, we've already identified $20 million of that, $7 million, which were just some facilities-related decisions, and $13 million as we streamline some of those corporate functions and align them into the corporate. So those are kind of what I would say, the outline of what we've accomplished today, Luke. We'll be in probably a better position to maybe show a little more color on it in the weeks and months ahead.
Appreciate that, John. And then for my follow-up, just I don't think that there's anything impacting IoT in terms of the actions you're talking about today, but just want to verify that. Then maybe just thinking broadly about the impacts of the actions you are taking in terms of reducing G&A, just how that might interface with the Cybersecurity business. I don't think there's an impact, but just want to, again, verify that. Thanks, John.
On the IoT side, like we said, that's a business. It's on a nice trajectory for us. We're going to continue to grow that business, continue to invest in that business. Obviously, any business, I think this is the time of year you take a step back and you say, "Okay, how do you want to turn the dials? Do you want to slow the investment on some programs while you ramp up the investment in other areas?" I think that's kind of just the normal, natural part of running a growing business. I don't think we're as focused on the IoT side from a on cost reduction, more how do we accelerate the growth and the momentum that the team has already got there. So hopefully, that helps on the IoT side.
From a G&A perspective, we really think that's the area that we're going to continue to generate financial benefits by a leaner, more focused structure with the two divisions. Like we said, we've already identified $20 million. We think there's more, much more to come, and we'll provide you regular updates on that. But those are the two segments of where we expect to kind of generate that $100 million of cost and margin improvement coming into the next year.
I'll leave it there. Thank you.
Thanks, Luke.
The next question comes from Steven Li with Raymond James. Please go ahead.
Hey, thanks. Hey, John and Steve. So, on the cash flow positive by Q4, can I infer adjusted EBITDA positive as well, or is there a possibility I just said EBITDA turned positive a little bit earlier? Thanks.
So we'll see what we can provide with respect to that in terms of EBITDA. But the focus right now in terms of these comments is really just getting to positive cash flow, also to profitability as well. That's going to come, but we'll reserve further comments on that until year-end.
Yeah. We don't want to get too far ahead of ourselves, Steve. We're literally kind of finalizing the plans for next year as we speak. Obviously, at the next earnings, we'll give you a more comprehensive update.
Right. But Steve, from everything you're modeling, are both metrics expected to turn positive about the same time?
That's probably a fair working assumption. Let's just put it that way.
Okay. Great. And then once you get to that point, CFO positive, do you guys fully expect for that to be sustainable beyond Q4 2025? Thanks.
Absolutely, Steve. We're doing all this heavy lifting to get ourselves onto a path of sustained profitability and positive cash flow generation. So yeah, that's absolutely the intent of what we're building as a team.
That's great. Thanks, John. Thanks, Steve.
Thanks, Steven.
Again, if you have a question, please press star, then one. The next question comes from Todd Coupland with CIBC. Please go ahead.
Good morning. I had a couple of questions. So firstly, John, I think your CEO contract had some performance benchmarks that included free cash flow positive by fiscal Q1. So I guess the takeaway from this update is that's more or less off the table with the reset to the end of fiscal 2025. Is that the right way to read that?
Well, we're putting the best plan in absolutely, the compensation and all of that has got the best of intentions in terms of driving where the company wants to go. The plan that we're putting together in place, we feel that we're confident that we're going to get to a cash flow positive space. We're going to maintain net cash, positive net cash all along the way. And that aligns with whatever the bonus payouts are for me or for anybody else, then the bonus payouts will be what the bonus payouts will be. But we're going to do the right thing for the business, the right thing for the shareholders, and kind of let those things fall as they like.
Okay. And then the second question I had is there had been talk of divestiture of cyber. Should our working expectation in the past, that is, should our working expectation now be BlackBerry is focused on putting cyber on a path to positive free cash flow and separating the business, so a divestiture is less likely until all of that plays out, meaning post the end of fiscal 2025? Is that the right way to think about that? Thanks a lot.
Thanks, Todd. Yeah. I think as I kind of mentioned before, step one, get these things separated and really laser-like focus on their respective markets. Step two, get them both to cash flow, generating positive cash flow. And then from there, we'll see what opportunities represent ourselves with the company. Getting healthy, getting strong, getting cash flow positive, stopping the burn that we've been on over the course of the last couple of years, that's our main focus across both of the business units. And I'm confident once we do that, that'll represent the opportunities will come our way one way or the other in terms of cyber or IoT. So that's how I think about any talk about divestiture with cyber. Let's get it healthy first, and then we'll take it from there.
Right. Okay. Appreciate the color. Thanks a lot.
Thanks, Todd.
I would like to turn the call back over to John Giamatteo, CEO of BlackBerry, for closing remarks.
Terrific. Thank you, operator. And thanks again for everybody for joining the call. Just to reiterate some of our key points, a lot of progress has been made over the course of the last three months. We took $50 million out last quarter, targeting $100 million in addition for a total of $150 million of overall improvement in the profitability and cash flow of the company. $55 million of this $100 million has already been identified and actioned. We've secured ourselves the $200 million, giving us a really strong balance sheet and liquidity position to execute on this strategy. And I'm confident of the actions that we're taking and with the help of the entire BlackBerry team driving the business forward into a much better and more healthier place long term.
So, thanks again for being with us. We appreciate your support and interest, and we look forward to providing you another comprehensive update as we get to earnings in April. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.