Charlie Chen - Vice President, Investor Relations John Chen - Executive Chairman and Chief Executive Officer Steve Capelli - Chief Financial Officer

Daniel Chan - TD Securities Maynard Um - Wells Fargo Paul Treiber - RBC Capital Markets Steven Li - Raymond James James Faucette - Morgan Stanley Michael Kim - Imperial Capital Simona Jankowski - Goldman Sachs

Welcome to BlackBerry’s Fiscal 2017 Third Quarter Conference Call. [Operator Instructions] I will turn the call over to Charlie Chen, Vice President, Investor Relations for BlackBerry.

Thank you, operator. Welcome to BlackBerry’s fiscal 2017 third quarter results conference call. With me on the call today are Executive Chairman and Chief Executive Officer, John Chen and Chief Financial Officer, Steve Capelli. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Steve will review the third quarter results. We will then open up the call for a 30-minute Q&A session. In order to let as many people as possible to 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 the risk factors that are discussed in the company’s annual information form, which is included in our Annual Report on Form 40-F and in our MD&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. For the call here today, I will reference the non-GAAP number in my summary of our quarterly results. There is a reconciliation table of GAAP to non-GAAP results in the press release. In the quarter – in Q3, we continued to make good progress on our financial objectives and I am pleased to report the non-GAAP EPS profitability this quarter. We also completed a number of significant milestones to transform BlackBerry into a software and services company. I would like to highlight four of them. Well, number one, we signed important agreements with Ford and TCL in support of our growth initiatives in connected car and device software licensing. Second, we launched BlackBerry Secure, a comprehensive enterprise mobility platform for managing and securing all endpoints and connected things. Third, to extend our leadership in security, we launched a new innovation center in Ottawa. That was yesterday. The innovation center will focus on developing software for connected cars and autonomous driving. Fourth, but not the least – the last, but not the least, we announced plan to establish a new Cybersecurity Operations Center in the U.S., focused on achieving FedRAMP and strengthening our competitive position in the U.S. government. We will be working with various other governments in the similar fashions. We firmly believe that the move to a software business model will be positive for revenue growth going forward, sustainable profitability and long-term shareholder value. Let’s start with a summary of our financial results very quickly. Our revenue in Q3 is $301 million. Total company software and services came in at $172 million, accounted for 57% of the Q3 revenue. Excluding IP, this represents year-over-year growth of 49%. Recall that last year, there was a significant contribution from IP licensing. In Q3 of this year, we were able to secure a multiyear IP deal of the similar total value. However, revenue will be taken over multiple years and hence the contribution to the quarter was much smaller compared to the year ago. In Q3, we achieved the highest gross margin in the company history and a non-GAAP of 70%. This is up from a historical high of 62% achieved last quarter and significantly higher than the 45% reported a year ago. This was driven obviously by the improvement in mobility solutions margin, growth in software and services and a favorable overall revenue mix. All business segments, including mobility solutions, achieved operating profitability in the quarter. Therefore, operating income was $12 million, our third consecutive quarter of operating profitability. EBITDA was positive for the 12 consecutive quarters, coming in at $37 million. EPS was a positive $0.02. Ending Q3 cash balance was about $1.6 billion. Recall that we refinanced our convertible debt in early September, reducing our debt principal by over half and reducing annual interest expenses by over $50 million. Now, let me talk about some key accomplishments. I will focus on area where we see increasing opportunity for growth and synergies across our business. This includes, one, the enterprise mobility; two, the embedded software; three, the IoT, which includes both the endpoint management IoT devices as well as security; and four, software licensing. We have a good quarter in enterprise mobility. We processed over 3,000 – 3,035, to be exact, customer order in Q3 versus roughly about 3,000 last quarter, so a slight uptick. Recent high profile wins included Bombardier, Toronto Hydro, ITOCHU Corporation, Government of Canada, Mackenzie Health, Marathon Oil and Buckeye Partners. In early December, we launched BlackBerry Secure, our next-generation enterprise mobility suite. The new suite brings all of our enterprise offerings together. Our consumer benefits from this fully integrated platform through simplified management, our market-leading security and lower total cost of ownership. Our foundational capability of this release is unified endpoint management or simply called UEM, I may refer that in the future as UEM. The platform supports all major operating systems. BlackBerry UEM can manage heterogeneous endpoint for IoT, including QNX based devices. We see good synergy opportunities across all of our software businesses. We also designed a platform to support ISV application development and growth in our partner ecosystem, a growing set of APIs and a software development kit, SDK, will make it seamless for developers to write and manage mobile apps on our platform. This obviously has the added benefit of increasing customer stickiness on our software. The second major growth is embedded software. Early in the quarter, we announced that Ford Motor Company is expanding its use of BlackBerry QNX and security software. Some of you may remember, Ford uses QNX for SYNC 3 in all the 2016 model car and beyond. So, this is a very importation validation of how our technology can enable automobiles – automakers, sorry – to enable automakers to deliver next-generation connected cars. It also highlights how our security leadership can be expanded into broader automotive and connected car markets. We will have large teams of engineer working with Ford on expanding its use of QNX technology in a number of automotive applications in both connected cars and in the mobile services area. The next growth area is in IoT. This is a tremendous market opportunity for all BlackBerry assets to come together. We have three layers in IoT across BlackBerry. By the way, we have been working quite a bit of time on this. So, we finally get it altogether, the three layers. They are the endpoint management, security and embedded software technology. First, on the endpoint management, endpoint management will be delivered by this BlackBerry Secure, which is designed to manage heterogeneous IoT things. This solution is developed by our enterprise business group. In security, we have multiple capabilities. We have ownership at the operating system level in any as well as over-the-air communications. Security is also covered within our vast IP portfolio. In embedded, we obviously have our industry leading QNX technology to power connected things. These include IoT devices, appliance and other endpoints. The power of this vision is to enable our customers to leverage these three components together, in an end-to-end BlackBerry solution or they can use them independently in a heterogeneous environment. I know many of you are interested in Radar, our SS tracking solution. We continue to ramp up this effort. I am pleased to announce that Titanium Transportation chose radar in Q3. Titanium is a North America trucking and logistics company with over 1,200 trailers. Our focus is on building the pipeline and scaling go-to-market activities in this area. Currently, we are engaged in six additional customer pilots on Radar and a handful of partners have started to engage to broaden our channels. The fourth and the final area is in device software licensing. We continued to see positive proof point with the new strategy focused on device software and brand licensing as we launched that in last quarter. Recall that our first agreement announced last quarter was with a JV in Indonesia, BB Merah Putih, sorry, in this model, our hardware partners sought, distribute and promote handsets with our secure Android software and the BlackBerry brand. In Q3, we secured our second licensing deal. The latest agreement is with TCL. For those of you who don’t know much about TCL, TCL is one of the top 10 vendor in the global smartphone market and a top five manufacturer and distributor in China. They have also been our manufacturer partners of the DTEK50 and 60 devices, which currently is in the market. The agreement covers most of all the major global markets, including China. So we should benefit from TCL global scales. As a reminder, this licensing model allows BlackBerry to generate ongoing high margin royalty revenue from a device software based on the number of units sold. We have a pipeline of additional opportunities that are focusing on, including a late discussion in India that are ongoing Before I turn the call over to Steve, I would like to touch on investment we are making in security. Of course, this is an important area to our business and important to BlackBerry a strategy and in all our product areas, especially our government vertical. So I have a few remarks to make on that. Number one, we announced a new Innovation Center in Ottawa yesterday. We are very fortunate that the Prime Minister came in and helped kick us off – helped kick off the center. This center will focus on developing secure software for connected cars and autonomous driving. Separately, we received Canadian government approval to begin testing the driverless car, sorry, driverless car in Ontario. We have two sites actually. So our first project will be a concept vehicle powered by QNF software and in collaboration with University of Waterloo and Renesas Electronics. Late last quarter, we announced a plan to launch a federal cyber security operations center in the U.S. to achieve FedRAMP and other government security certifications and eventually that will apply to all our software products that BlackBerry offer. This will strengthen our position in the government vertical. This center will be led by Bob Day, a retired Rear Admiral in the U.S. Coast Guard with 34 years of experience in federal information technology and cyber security. Another important development in security for our government and regulated industry customers is BlackBerry 10.3.3, which is now available for download. 10.3.3 has major enhancement to the BB10 security. I am pleased to report that we recently achieved the common criteria that NIAP – for NIAP certification. Lastly, we will be ramping up cyber security consulting practices to help accelerate our software growth in enterprise and automotive space. A small acquisition we did earlier this year, I think that aligned with MWC, Mobile World Congress, the name of encryption is from the UK from the basis of this practice, encryption in some very high profile clients for its vulnerability assets and penetration testing services. A good example is Capgemini. Capgemini has been a long-term customers and partners with new engagements they have brought to us every quarter. I will now turn the call over to Steve for a more detailed look at our financials.

Thank you, John. Today, we reported Q3 GAAP revenue of $289 million and non-GAAP revenue of $301 million with a GAAP EPS loss of $0.22. Non-GAAP EPS was a positive $0.02. Our non-GAAP income statement presentation excludes purchase accounting deferred revenue write-down, debenture fair value adjustment, write-down of assets held for sale, stock comp expense, restructuring program charges, amortization of purchased intangible and business acquisition and integration charges. 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 Q3 FY ‘17 income statement results and move on to the individual segments thereafter. Now let me begin with the consolidated income statement results. Our total revenue for the third quarter was $301 million. Our consolidated gross margin for the third quarter was 70%, up from 62% last quarter. Our non-GAAP gross margin excludes restructuring program charges of $5 million. Gross margin increased to a record percentage due to improve mobility solutions margins, strong performance in software and services and a more favorable revenue mix. As a result, we have increased our outlook for consolidated gross margin, which we see in the mid-60s for Q4. Operating expenses were $198 million, down from $203 million last quarter. GAAP net loss for the quarter was $117 million. GAAP net loss was impacted by the write-down of data center assets held for sale of $42 million. Our non-GAAP operating expenses also exclude $17 million in restructuring charges, $28 million in amortization of acquired intangibles, $15 million of stock comp expense, $5 million in business acquisition and integration charges and $2 million of fair value adjusted revenue related to the debentures. Our non-GAAP operating income was a positive $12 million and non-GAAP net income was $9 million. FX movement had an unfavorable impact of $6 million on net income of approximately $0.01 per share of EPS. Our adjusted EBITDA was approximately $37 million this quarter excluding the non-GAAP adjustments previously mentioned. I will now move to our three business segments, starting with software and services. Our software and services segment represented 55% of total revenue. Software and services segment revenue was $163 million. Roughly 80% of software and services segment revenue, excluding IP licensing and professional services, was recurring in nature. Our total software and services gross margin for the third quarter was 80%. Our total software and services operating expenses were $91 million. Operating profit in software and services was $40 million or approximately 24%. Moving on to our mobility solutions business, our mobility solutions revenue represented 23% of revenue. Total mobility solutions revenue for the third quarter was $70 million. Total mobility solutions gross margin for the third quarter was 44%, up from 26% last quarter. Our total mobility solutions operating expenses were $26 million. Mobility solutions operating profit was $5 million, up from an $8 million loss last quarter. Lastly, turning to our SAF business, Service Access Fees or SAF were 22% of revenue. Total SAF revenue for the third quarter was $67 million, down 26% quarter-over-quarter. We model a sequential decline in SAF revenue of roughly 25% next quarter. Our total SAF gross margin for the third quarter was 72%. Now moving on to our balance sheet and working capital performance, total cash, cash equivalents and investments ended at $1.6 billion. Early in the quarter, we retired convertible debentures with the face value of $1.25 billion and put in place a new convertible note with a face value of $605 million. Our net cash position was approximately $1 billion at the end of the quarter. Aggregate contractual obligations, which includes purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations was approximately $505 million, down from $1.1 billion in the same year ago period. Purchase orders with contract manufacturers represented approximately $35 million of the total, down from $298 million in the same year ago period and $71 million in the prior quarter. Moving to the cash flow statement, use of free cash was $154 million in the third quarter, which consisted of net cash used in operating activities of $150 million and capital expenditures of $4 million. The majority of free cash used was attributed to working capital and supplier purchase commitments related to the transition of our device business to a software licensing model. Looking forward, we expect approximately breakeven free cash flow in Q4 and maintain our positive EBITDA for the full 2017 fiscal year. That concludes my comments. Back to you, John.

Thank you, Steve. Let me comment on our outlook before the Q&A. For the balance of the fiscal year 2017, we reiterate our expectation for growth in total company software and services revenue of around 30% for the full fiscal year. We also expect this growth in software and services to cover the expected decline in SAF revenue in Q4. For the third time this year, we are revising upward our full year GAAP – non-GAAP EPS outlook. We now expect that – to achieve profitability for the full year, up from the current range of breakeven to a $0.05 loss. This is, of course, a very significant improvement from where we have started the year with the consensus estimate at the time as $0.33 loss per share. For Q4, we expect the non-GAAP EPS to come in at breakeven. This assumed Q4 investment in the growth area that I outlined earlier. We also expect free cash flow to be approximately breakeven in Q4. Now, I will open the call for Q&A. Operator, please arrange that.

[Operator Instructions] Our first question comes from the line of Daniel Chan of TD Securities. Your line is now open.

Well, hi, good morning guys.

Hi, good morning.

If you are still looking for 30% software growth in the full year, that implies 30% growth in Q4, is that a software growth rate we should be expecting going forward?

No. I think that number is too high and we haven’t really given the guidance for future quarters, I mean, the FY ‘18 yet, but no, I think that’s – I do expect, however, to grow our software to be better than the market.

Okay. Congratulations on the Ford agreement. If I recall correctly, previous QNX licenses had an upfront licensing component for the use of your programming tools and then you collected royalties on each car that was driven off the lot. How was this license structured and when do you expect it to materially contribute?

Well, this is a good question. So, it’s pretty much the same. We have upfront development fee license that is normally not a very big number and then we will collect royalty per copy as car got driven off the lot, right the same arrangement. The difference this time, Ford has made a much longer term commitment with us. And you know that we are getting the current SYNC 3 revenue, our royalty and Ford is now intended to expand QNX into many different modules. So, instead of getting one copy per car rolling off the lot, we in the future cars, we are going to get hopefully a much more number of copies per car. So that’s just a broadening use of our technology in areas beyond the infotainment system.

Okay, thank you.

Sure.

Thank you. Our next question comes from the line of Maynard Um of Wells Fargo. Your line is now open.

Hi, thank you. Just in terms of the software revenue for the fourth quarter, can you just talk about what drives that revenue and the visibility you have to that? And then just in terms of the OpEx related to the autonomous car and yesterday we talked about the security facility in the U.S., I assume there won’t be revenue related to things like the autonomous car. So, do you think you will go through an investment phase period that results in limited or negative leverage beyond the fourth quarter? Thanks.

Okay. I could answer the second – no, everything – well, let me try it this way. In Q4, definitely when we startup all the other autonomous car innovation center, the cybersecurity operation centers, all those costs are baked into our guidance in Q4 and we don’t have any intention – to the extent that we could help it, we don’t have any intention to lose money going forward and so therefore in the future quarters, it included all these investment also. So, it will not create a negative leverage. I think on the broader picture, I really do believe that BlackBerry is now at a level that’s financially stable and we are looking for growth and we are engineering growth and we are just investing in growth. So – but we will be very careful not to get kind of ahead of our headlights and so that’s kind of our philosophy and that’s kind of the general thing you could think of in FY ‘18 and beyond. The area of growth is continue to going to come from enterprise. And I think that will probably be the biggest area of growth in Q4 on the software side. And as we released our new UEM product which we told you about and we expect a pretty healthy uptick from the market.

Great, 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. I was wondering could you clarify the difference between company total software revenue and the reported software revenue line, it’s about $8 million. Is that – does that reflect the license on handsets in the quarter?

Not the license. We have some professional services in the handset business and so that’s included in that number. It’s a software services number.

Okay, thank you. That’s helpful. The – I mean there is a number of moving parts in software. One is have you had any thoughts on providing a more detailed breakdown of software revenues at some point? And then also just more at a high level, could you speak to where you are seeing the greatest amount of growth within software and then perhaps where growth is being a little bit slower than what you may have expected?

Okay, good question. Yes. Once we settle in – settle down in probably a couple of more quarters and get when we have our hardware business truly turn into a licensing business, we will start thinking about how we could provide more details in different buildings. In software, the way we think about it are really now have three pillars in it. We have the enterprise software, which was the biggest and the – all the acquisition that we have made has now completely integrated in it, including WatchDox and Good Technology and everything is now as one unified platform. So that’s one area. The other bucket of really good growth is obviously QNX and the Radar and so – but Radar is small right now, because the way we sell Radar is a very small upfront and then a monthly fee on monitoring and services. So that will come in a little – kick in a little bit longer in a longer term. And the third area is obviously the area of our software licensing. We – the first set of phones we believe from partners in this case of a customer that will be shipped is right around Chinese New Year. So I put it – Chinese New Year, by the way, for people who like to follow it that is January 28 in 2017, so probably be around that or a couple of weeks later and that goes off Indonesia first and then the rest, I have not publicly provide any of our roadmap data done. Obviously, we have to work with our partners. So, those are kind of the three pillars that will give us a lot of the software growth we are always going to come from and so in the future, when the appropriate time, we will start spinning it out.

Great, thank you.

Thank you. Our next question comes from the line of Steven Li of Raymond James. Your line is now open.

Yes, hi, great. Thanks.

Hi.

John, the announcement yesterday for autonomous driving, what are some of the milestones we should be watching for? The other partnerships have set timelines in the 2019, 2020, is that what you are gunning for?

2019 and 2020, we’ll better get some revenue. It’s probably a pretty good bet. I am hoping that we’ll get something more in 2018. The whole autonomous driving effort is really to highlight our technology and we have a bunch of services and software products that we are working on that we would like to provide to all the automotive customers around the world. So – and then it will take a little while for us to develop some of this stuff and prototype some of this stuff. We have some prototypes that are pretty exciting, but that needs to continue to harden it. And so we will be working with a lot of the manufacturers around the world and I hope that we sooner than 2019, but it will not be sooner than – it will not be in 2017.

And John, the relationship with Renesas, is this exclusive or they would have similar relationships with other players?

Similar relationships, none of those are exclusive.

Okay, great. And then if I can, one question for Steve, I have about $7 million to $8 million in IP licensing revenues for software, Steve is that in the ballpark for this quarter?

For – you say in Q4?

No, for Q3?

Well, I think it’s on our published statement.

Yes. It’s about – it’s in the right ballpark.

Yes.

It is in the right ballpark. Thank you. Got it.

Thank you. Our next question comes from the line of James Faucette of Morgan Stanley. Your line is now open.

Hi.

Hi. Thanks a lot for the question. Just a couple of follow-ups, is that on a sequential growth that you are looking for, for the fourth quarter, how much of that maybe related to IP or one-time versus some new products, I am just trying to gauge like how that takes a big swap and the like? And then I guess, you also indicated that you expect to continue to grow faster than the market, what is your kind of current market growth outlook in the more medium-term to long-term? Thank you very much.

Okay. So in the Q4, we do expect some IP but quite modest, not a huge sum at all, not – and we actually think that we could make our numbers obviously, we are – always nice to have some IP revenue. But we think we can make our numbers without the IP revenue and so this will give you some idea. Now the growth rate out there, it’s kind of – all with the placement, I look at the analysts, it all ranges about 10% to 15% that’s where the industry is gunning for in the enterprise software based space on mobility. And I need to do dig into it a little deeper and our guys are all doing that, because we are working on our AOP right now.

Great. Thank you.

Sure.

Thank you. [Operator Instructions] Our next question comes from the line of Michael Kim of Imperial Capital. Your line is now open.

Hi Michael.

Hi, good morning guys. Just regards the federal stock that you are launching, can you talk about when you expect that will be operational, some staffing plans and then timeline to achieve FedRAMP certification?

Okay. Well, the first part of our FedRAMP is messaging from the AtHoc and we have a major agency in the federal government sponsoring that. Our operating center should be in place in about March timeframe and we are looking – we actually identified a couple of countries – sorry, identified a couple of places in the U.S. for that center. So I suspect that we will kick it off in March. And the first FedRAMP certification will be in somewhere sometime, and then of course it will pick up the rest of the FedRAMP certification of the rest of the product.

Do you think that gives you enough runway to achieve some contract awards in the current federal fiscal year or should we think about that as the next fiscal year event?

Well, not in this Q4. If it does, it’s only as a commitment to the government and they may look at it favorably that we make that commitment and give them the timetable. But definitely for FY ‘18 which is next – starting next quarter, not the current quarter, but the quarter after. Obviously, the biggest quarter is going to be coming up in September of next year and that’s the federal quarters.

Got it. And if I can just squeeze one more on Radar, did Caravan continue to rollout across their entire fleet during the quarter, I mean how did that progress?

Yes. They are very happy and they intend to roll it out in every single truck.

Okay, great. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Simona Jankowski of Goldman Sachs. Your line is now open.

Hi Simona.

Hi, Simona Jankowski. Just wondering if you can share any details around the economics of the software licensing model in terms of any parameters in their revenue per unit or anything else you can share?

Revenue per unit, I am sorry.

For the device software.

Correct.

For the device software, okay. Well, no, because I think these are all confidential to the – unfortunately to the contracts that we signed. I don’t think they would appreciate I disclose it, but it’s – obviously, we like the numbers. So I don’t know how to describe by disclosing it or by not disclosing it. So I am sorry, Simona.

Is that about 100% gross margin revenue for you guys?

Yes, it will be. I would say 90%, let’s say 90% because I assume that there will be some supporting staff in Tier 3, Tier 4 type – I mean, so I say 90%.

Okay. And then how should we think about OpEx for this quarter and then where you see that stabilize on a go-forward basis?

Well, John had spoken about continuing to make some investments and so that will have some increase. But we do expect significant decreases in our OpEx this quarter and that’s still part of the unwinding of the manufacturing of devices. So primarily, that would come from our mobility segment.

Thank you. And then just last question on the pace of declines in the SAF business, which has now been declining at a more accelerated pace, how do you see that getting impacted by the transition of the hardware business to the licensing model?

Yes, we see the uptick. We normally expected about 20%. I think we will see the up-tick because there was some confusion out there that we no longer have phones and that is obviously not true. We will have phones because we are party to this whole portfolio. We just released ourselves on inventory logistics and supply chain issues and cash requirements and capital. So I think – so that’s why we are not modeling a little bit aggressive decline and that I think is the real impact to us last quarter.

Thank you.

Sure.

Thank you. I am showing no further questions. At this time, I would like to hand the call back over to management for any closing remarks.

Great, wonderful. Alright. Thank you, operator and thank you everybody for joining us this morning. I just want to remind you that if you happen to be at CES, please drop by our BlackBerry QNX booth. We have a couple – I think we have three very exciting cars to demo, the autonomous driving and connected cars and advanced drivers assist and functionalities. And so I am sure I will see most of you in between the quarters and I am looking forward to meeting you all again. Thank you and have a very happy holiday.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.