BlackBerry Q4 Earnings Conference Call: Full Transcript

Operator: Welcome to Blackberry's 2016 Fourth Quarter Conference Call. Please note that all participants have been placed in a listen-only mode. I will turn the call over to VP of Finance and Head, Investor Relations for Blackberry. BBRY: Thank you, Operator. Welcome to Blackberry's fiscal 2016 fourth quarter results' conference call. With me on the call today are Executive Chairman and Chief Executive Officer, John Chen, and Chief Financial Officer, James Yersh. After I read our cautionary notes regarding forward-looking statements, John will provide a business update and James will then review the fourth 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 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 40F 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. John Chen: Executive Chairman & Chief Executive Officer: Thank you, Debbie. Good morning, everybody and welcome. I will take you through this morning I'll take you through the summary of our Q4 results as well as the highlights from our fiscal year than I'll provide more details in the main areas of our business focus. Our overall Q4 performance was reasonably good. We made progress on all our strategic priorities. I'd like to remind everybody what they are. First and foremost is to grow our software business faster than the market. Two; we're going get towards a profitable device business and third but not last, but last but not least, is to continue to generate positive cash flow. In fact on the first one we have more than doubled our software business growing faster than the mobility software market. We increased our overall gross margin and continue to generate cash and we made significant progress in moving our device business towards profitability which I'm going to talk a little bit and James and I both will talk about that later. In all but one area we were in line or ahead of our key business metrics and the metrics in the analysts' model. The one area of shortfall was in hardware revenue which declined from last quarter and I'll talk about plans to address this later in the call. On the plus side we reduced a loss in hardware, achieved positive device gross margin, and average selling price was steady on the last quarter from Q3. As I mentioned before, software was clearly the highlight in Q4. We are increasing in both scale gaining market share and consistent with the strategy we laid out. Like in Q3, growth in software more than offset the decline in SAF revenue in the quarter. Our enterprise business finished the quarter and the year very strong enabling us to exceed our goal of $500 million in enterprise software and licensing revenue for the full year. This of course excludes the BBM consumer revenue. This is more than double the amount compared to last year. We have multiple growth engines in software and I continue to expect above market growth in FY17. Now a summary of our Q4 results. All the numbers I use is non-GAAP, so revenue came in $487 million, software and service revenue was $153 million up 106% from year-over-year, non-GAAP EPS loss was $0.03 a share. We also achieved our ninth consecutive quarter of positive EBITDA which was $78 million in the quarter. Free cash flow was $6 million, our eighth consecutive quarter of positive free cash flow. Ending Q4 cash balance was slightly above $2.6 billion. As usual James will take you through the financials in much more detail. In FY16, we achieved some significant business accomplishments. I'd like to point out some of the highlights. One, positive free cash flow was approximately $229 million. Total software and service revenue of $527 million, up 113% year-over-year. Software orders was over 10,000 enterprise customers. We completed the acquisition of WatchDox, AtHoc, Good Technology, and Encyption to drive the cost from software and Internet of Things strategy. We launched two new devices, Leap and PRIV. PRIV Blackberry's first Android device and support our cross-platform strategy and our ability to provide a secure end-to-end mobile platform for Android in enterprise. Now, let me provide various details on our key businesses starting with the hardware. Our strategy call for a profitable device business and I am encouraged at least by the progress we are making here. At the same time, our device per volume would be low at our expectation. The softness in the high end of the smartphone market is certainly a headwind, but the main reason, the main issues that we faced is that we need to address is distribution. As planned, PRIV is now available in 34 countries, up from four, last quarter. Unfortunately contract negotiations took longer than planned with certain major carriers including Verizon. It pushes the Verizon launch out of the quarter. However, PRIV continues to receive very positive review and net promoter scores. Our value proposition that is to offer the most secure Android smartphone for the enterprise is actually quite strong. We believe this market opportunity while maybe small today will continue to develop and open up and we are leveraging this through increased channel coverages. There are some things that we're working on. With March, we launched PRIV with Verizon enterprise in all 1700 plus retail stores. We are working on six more countries and 14 more additional carriers. In the last week, we formally launch in Japan and next week we are planning to launch in Mexico. We're also focusing our expanding the e-commerce channel and ramping up enterprise direct activity for PRIV as well as for BB10. A word on our overall device roadmap. We are planning our Android Marshmallow release for late April or early May. On BB10, the 1033 releases that will already or has been released and started the NIAD the security specific program, the NIAD certification testing in Q1. As planned, as we have planned. With the official release pending technical acceptance targeted for mid-June, we are waiting on the certificate testing and this is a little outside of our control. A 10.3.4, the next release is already being planned for BB10 for later in the FY17 and early FY18. From a financial standpoint, we will make significant progress on margin improvements and moving the business towards possibility. In fact in Q4, we reduced our device operating loss by half from Q3. ASP was steady and consistent with Q3, came in approximately $315 and we achieved positive device gross margin. We are still on track with our plans following for achieving device business profitability sometimes in this fiscal year FY17. Moving on to the enterprise software, as I noted at the beginning, our software business is performing well and we are gaining share. I am very pleased that we slightly exceeded our enterprise score of $500 million in revenue for the full year. There were a number of doubters when we put this goal in November 2014. That this milestone now shows the scale and the traction that we're achieving. In addition, we landed 3600 customer orders in Q4 giving us over 10,000 customer orders for our fiscal year FY16. The mix of recurring revenue was about 70% which is consistent with last quarter. Some notable enterprise customer wins in the quarter including the US Department of Veteran Affairs which awarded us a $20 million multi-year order for our secure crisis communication platform covering above over a 600,000 VA personnel. We also have further wins with Dell, Commonwealth Bank, and Robel Bank. The Good Technology organization is now fully integrated in Blackberry and our go-to-market functions are operating as one. In addition, we are now delivering Blackberry level of customer support to good customers, all customers are good but the good customers, which has been very well received. In January we launched five secure enterprise mobility management, and management suite, combining the best-to-breed of capabilities from Blackberry and Good Technology. These suites provide a secure mobile platform for messaging, collaboration, application enablement, device management, as well as content management. Customer feedback since we launched this suite has been extremely encouraging and positive. Besides, they were amazed that we were able to do this so quick after coming of the two companies together. The best evidence of this is the traction we've seen right out of the gate. We have 90 wins in our first 60 days of the release. I also want to emphasize that these innovative suites are important for our cross platform story. We're seeing this resonating well across our customer base as well as towards the community. To a fairly adoption of the suites we are expanding our professional services factors by adding additional billable resources. Looking forward, we feel very good about the outlook of our software business. We have multiple growth engines in place, I count total of 5, I'll give you some quick recap here. Number one obviously our EMM, Enterprise Mobility Management suite and we being the market leader with 90% market share. Our higher value added applications facts and with all the capability I just mentioned give us clear differentiation versus our competition. Secure messaging and content management came from our acquisition of AtHoc and WatchDox are now fully integrated also provide us differentiations as an entry point to new customers and new verticals. Third, which is a major focus of this year, the strength of our QNX business specially in automotive helps drive growth in the IoT. I'll give you some data points. The QNX kernel is embedded in over $60 million cars around the world with more than 50% market share in the infotainment systems. At CES in the beginning of the year, calendar year, we launched new capabilities in Advanced Drivers Assist System, ADAS, and a vehicle to vehicle communications and as some of you might have seen it at CES, these innovations demonstrate our commitment to the connected car and autonomous driving technology. We also launched our latest IoT initiative, our assets tracking box branded as Blackberry Radar which we just announced yesterday and demonstrated at the mid America trucking shows. While we have starting a pilot program and there are already a number of customers signed up there. The general ability of this product is in summer of this year. Assets tracking and connected cars is a $6 billion market opportunity growing at 20% year-over-year. Four, we formed a cyber-security consulting practice to build on our security heritage that included the experience in managing hundreds of millions of mobile employees. We made an acquisition and announced that at Mobile World Congress, a UK based company by name Encryption Limited. This help accelerates the effort as well the efforts of putting this practice better as well as supporting our auto and IoT initiatives. This factors combined with our existing security offering will address strategic and technical security, the latest cyber security threats and risk mitigation. This address a $18 billion market opportunity today going to $23 billion in 2019 according to the Gartner Group. Of course we are going to use our internal resources and try to leverage a lot of the system integrators and partners around the world to deliver these services. Last but not least, we do not generate although we didn't any generate any IP licensing revenue in Q4, as we have predicted in Q3, we are working on building a base of recurring IP revenue. So with these five growth engines, we do expect to grow faster and fix share in the market from mobile software and services. We have seen ramping up investment in all these area in FY ‘16 and we will continue do that in FY ‘17. We see the mobile software and service market growth at about 20% to 25% depending on which segment, because we cover a huge segment of it. So we are targeting our software growth at 30% in FY ‘17. We expect software and service growth to exceed the decline in sales revenue cumulatively over the full year. I will now turn the call over to James for a detailed look at the financials. James? James Yersh: Chief Financial Officer: Thank you, John and good morning everyone. Today we're reporting Q4 GAAP revenue of $464 million and non-GAAP revenue of $487 million with the GAAP loss per share of $0.45 and a non-GAAP loss per share of $0.03. Our non-GAAP income statements presentation exclude purchase accounting deferred revenue write-down, the venture fair value adjustments, stock compensation expense, restructuring program charges, amortization of purchased intangibles and business acquisition and integration charges. My comments going forward on our financial performance for the quarter will be based on non-GAAP terms unless otherwise specified. For reconciliation between GAAP and non-GAAP numbers, please see the earnings press release and supplement published earlier today. Now let me begin with the income statements. Our total revenue for the fourth quarter was $487 million and $2.2 billion for our fiscal year ‘16. Software and services represented 32% of revenue and grew over 106% on a year-over-year basis for the fourth quarter. Total software and services revenue for the full fiscal year was $527 million up a 113% year-over-year and to be clear this includes both IP and BBM revenue. Roughly 70% of total software and services revenue including contributions from acquisitions was recurring in nature. Our target, as we previously discussed, is to get 80% in fiscal year ‘17. Service access fees or SAF were 29% of revenue. The sequential SAF decline of 17% was in line with our expectations and was fully offset as John mentioned by the growth in software. We are modeling a sequential decline in SAF revenue of roughly 18% next quarter as well. Lastly our hardware and other revenue represented 39% of revenue. We recognized revenue on roughly 600,000 units in the quarter. ASP was approximately $315. Hardware volumes in revenue declined from last quarter yet we delivered solid results overall as our gross margins on hardware improved in the quarter and at an operating income level we cut the loss in hardware by half compared to the prior quarter. Turning to margins, gross margin was 48.7%, up from 44.9% last quarter. Gross margin increased sequentially due to strong performance in software and services. The reduction in fixed royalty cost slightly offset by low hardware volume and continued decline in SAF also helped gross margins in the quarter. Our model reflects a gross margin in the mid to high 40s for the next quarter. Operating expenses were $258 million, down from $280 million last quarter. Our non-GAAP operating expenses exclude $188 million in restructuring and acquisition charges, $28 million in amortization of acquired intangibles, $17 million in stock comp expense, and the non-cash credit of $40 million from our convertible debt. As a reminder, this non cash adjustment to the debt has no impact on the face value, on our liquidity or on our operations in cash flow. Operating loss was $21 million largely due to amortization expense excluding acquired intangibles of $99 million. Our adjusted EBITDA this quarter which excludes the non-GAAP adjustments previously mentioned was a positive $78 million. We had a non-cash tax recovery of $18 million in the quarter. Now, moving on to the balance sheet and our working capital performance. Total cash, cash equivalents and investments ended at $2.62 billion. This reflects net cash used for the purchase of Encryption and $36 million used for share repurchases. Our net cash position is $1.37 billion. Aggregate contractual obligations which includes purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations amounted to approximately $862 million down from $1.3 billion in the same year ago period. Purchase orders with contract manufacturers represented approximately $391 million of the total down from $697 million in the same year ago period. Moving to the cash flow statements. We generated positive free cash flow of $6 million in the fourth quarter. This reflects the increased investments we made in working capital leading up to the PRIV launch. This is our eighth consecutive quarter of positive free cash flow. Looking forward we expect to maintain our positive free cash flow and positive EBITDA for fiscal ‘17. That concludes my comments and I'll turn it back to John. John Chen: Okay, Ron thank you, thank you James. Before we start our Q&A I'll share some thoughts or repeat some of the thoughts that we laid out earlier. As I stated earlier we are modeling our software growth around 30% in FY ‘17. I expect continued gain in market share at that level I also expect quarterly software and service growth to offset the decline in SAF cumulative over the full year. Work remains in the device to drive higher volumes and we plan to accomplish that . The path to profitability in are every device looks quite reasonable. To provide transparency on our progress, we plan to report a multiple operating segment known as segment reporting including device as one segment, software services as one, and SAF. We expect this to begin reporting in the basis starting in this fiscal year FY'17. So with that Operator, we are ready for the Q&A. Question & Answer Operator: [Operator Instructions] And our first question comes from the line of Maynard Um from Wells Fargo. Your line is now open. Maynard Um: Wells Fargo: Hi. Thank you. Your software revenue this quarter annualized is about $612 million. So I presume your software guidance on a like-for-like basis around 11% year-over-year growth which is kind of lighter than I would have expected relative to your markets. You talked about the growth drivers but maybe talk about are there areas that are slower than expectations and does your guidance assume further M&A and IP revenue and then just quickly on hardware if you can just help us understand the cost structure, how much of the cost structure is now related to hardware and how strategic you think that is because you can obviously grow your software business even without the hardware. Thanks. John Chen: Okay. The first of all, I couldn't follow your math in terms of the 600 I don't know what the normalized 600 some and may be you could... Maynard Um: Yes I just took your software revenue from the quarter and then annualized multiplied by quarter. because you obviously did acquisitions through the year. John Chen: I see. Yes I think that might not be the most accurate partly because now A we are pushing more and more to subscription, B; there is what you call it not timing but seasonalization factors and I don't think you take that number multiply by four and then you said the growth is. I am really basically sales getting year is that assuming there is the seasonalization, assuming we even pushing harder onto subscriptions. We -- the last couple of quarters subscriptions that 70%, our plans go to 80% subscription for FY17 so all of these are factors in and we literally are looking at 30%. Then the 30% growth does not include acquisitions but it does include some level IP in fact I would tell you that my plan of the IP numbers is actually lower than the IP numbers that will be seen in FY16. So that should you give another general idea. Truly I believe is truly organic. So that's one, there are no segment of the market that are going less than like in the 20s, when we did our all the segment we're talking about in QNX and secured messaging and all that with the lowest one was about 20 maybe on the secured messaging the growth rates because it's all subscription and used accounts that might be a little bit lower than 20 but not much after that. So everything else is above that. James Yersh: And may not assumes for your second part of comment on hardware in terms of the cost base obviously as we had said we cut the operating loss in half with some benefit from fixed royalties and margin but obviously the cost base continues to come down in in terms of hardware and the proportion as dedicated to it. So I am not going to give an actual number, but we continue to make progress and taking that down as well. Maynard Um: Okay, and then John just the other part of that question. You can obviously grow your software business pretty strongly in your EMM business without sort of significant hardware growth. So I guess I am just curious how strategic that is to you. Thank you. John Chen: Well my goal is I mean my plan is always been I wanted to get to a break even or better device business. It does have some tide in a number of our major accounts for example is recession in government so far they actually buy both the hardware and the software to create a more robust and more superior environment. So it has some high end I would agree in a general industry side maybe not as much of it high end, and though there are some relationships, you are right, right now the number one focus that I have or the company now have is to continue to ramp the software and services program. Maynard Um: Great. Thank you. John Chen: Good job. Operator: And our next question comes from the line of Daniel Chan of TD Securities. Your line is now open. Daniel Chan: TD Securities: Thanks. Good morning everyone. John Chen: Good morning. Daniel Chan: So the hardware units come down to 600,000 units and we've seen a number of interactions with more modern hardware launch recently and even one of your competitors move to a lower tier product as the high end market that saturated. So how do you feel yourself competing given these market dynamics? John Chen: That's good question. I am not really prepared to talk about. First of all I would say that I agree with we what -- I to be looking at a more of the mid-range, profit owned type of devices with good security for Android. So and I am not prepared to make an announcement of such. The first thing I wanted to, is to get my cost deflation expenses and capability lined up directly and in the device process. I truly believe that we are very, very closed and being able to break even or start making money and device and as you all know and I said a many times if we despite of all the efforts that we put in, if we cannot make money on the devices business and it became a burden to the consolidation then I will have to get out that particular business. But that's not a big secret I say is I said it and that hurt me in front of the customers that a long time I go share with the customer they keep running me to explain that, but I think I explained it as a reasonable good business person and then people gets it. But I still believe that we have a short at it hopefully I am not naive, but we do have the previous plans with multiple engines firing at the same time, that's where we are. But we will we will have to take you hit it right eye under nose one of the problem that we are ran into in a last quarter people does like our PRIV, but there is they much more limited audience and that particular market that segment seemed to be quite saturated at this point. So people will love to hold PRIV, but it will be a kind of a moved down one level in pipeline and so we are looking to address that. Daniel Chan: Okay. So then just related to the part about ones you've said break even that's your first goal, but beyond that what would you what would make you consider the hardware business is special to for you will continue for this --. John Chen: I will I will need to start to seeing growth and contribution to our online. Daniel Chan: Okay. Thank you. John Chen: Sure. Operator: Our next question comes from the line of Tim Long from BMO Capital Markets. James Yersh: Hey, Tim. John Chen: Hi, Tim. Tim Long: BMO Capital Markets: Hi how are you doing? Just one clarification and then a question for you. Just I want to understand the revenues from software I think as I understood it for the full year that revenue growth should be higher than the SAF decline in absolute numbers that I mean running my math I would see might the SAF revenues would go down a lot lesser have to go -- am I missing something in that interpretation of that comment and then on the -- just want to talk about all the new customers and the move is somebody's integrated suites could you talk a little bit about deal sizes and what are you seeing with these integrated deals are you seeing a meaningful move up in revenue opportunities with some of these newer customers? Thank you. James Yersh: Okay thanks James. In terms of the coverage of SAF I assume you're talking fiscal ‘17? Daniel Chan: Yes the accumulative to get James Yersh: So ultimately that's been our objective all along and when we talk about covering SAF it's not like we are looking at total fiscal ‘16 versus total fiscal ‘17, we are talking about covering the first dollar we lose since SAF from day one of fiscal ‘17 due to that last dollar we view in fiscal ‘17 as well so with that decline. So that kind of a definition of it and as we have both said that yes we expect software growth to fully cover that. Tim Long: Right. John S. Chen: So the answer to your question actually the suits are quite encouraging. The average transaction rates ticked up I am seeing high six figures seven figures deal but cautionary note is that usually is subscription base for multi-year so we're going to have take it on monthly basis. So , but it's quite encouraging. Tim Long: Okay, thank you. Operator: And our next question comes from the line of Bib Bond from Cleveland Research. Your line is now open. Analyst: Good morning, thanks for taking the question. James, I wanted to start by looking at the last question, you talk about the coverage of the SAF decline, so, if we model your software target at this 30% year-on-year growth and then kind of an18% sequential in SAF decline on a go forward basis, you lose $400 million in service revenue on the SAF side you pick up $250, $260 million in software revenue, so where is the delta in terms of the coverage? and then I have a follow up. James Yersh: Then I go back to my last answer, I am not looking at as the full fiscal ‘16 versus full ‘17. So for example, if you think of where we ended up in Q4 take 18% also that, you lose somewhere between $25 and $30 million and then so on and so forth, so even if I took the 30 and multiplied it by four compared to your 400 I am losing a $120 million. That's the way I am looking at it. The total number of dollars that I am losing in fiscal ‘17 will be replaced by this software growth. Analyst: Okay. The other item when you look at the software engagement what is the average contract duration and what is the strategy to migrate from kind of the 70% recurring is to 80% recurring? Thanks. John Chen: Okay. Duration usually is two to three years. There are one year deal but they don't tend to be dominant they're usually two to three years. Three years renewal cycle very common . So that's point number one. The strategy its actually reasonably simple. We have a lot of common customers between Good Technology and Blackberry, and Good Technology you tends to have a higher percentage of the recurring revenue, and so and Blackberry use to be more perpetual base or term license maybe I -- that so what we are doing is to work with the customers and come up with the go-forward combined purchasing and commitment, and so and of course at the same time up-sell them new capability like the suit and provide professional services from migrations, and for the cross-platform migrations. So but its coding context and our own commission plan process, hence to buy as our people which we will push on a more subscription base. So that's basically attracting. We do to some perpetual licenses, but really almost at system of the customers. Analyst: Thank you. Operator: Your next question comes from the line of Paul Treiber from RBC Capital Markets. Your line is now open. Paul Treiber: RBC Capital Markets: Thanks very much and good morning. John Chen: Good morning. Paul Treiber: I going looking at the software revenue growth exceeding the decline in SAF. How should we think about the profitability the EBITDA profitability of those two businesses over the year? James Yersh: They are actually reasonably comparable. So because I do have a lot of infrastructure to supporting the SAF. So it doesn't come in pure margin. So and our software because we owned lot of software we sell themselves through third party resell software only a couple of them. I SAF or something. So other than that so our margins are reasonably high. So they are very comparable. James Yersh: And Paul I would also remember just that the interest -- John talked about is also involved in delivering some of these enterprise services to. So one of our task of course is to make sure it sufficient but there is kind of a reuse for that functionality from SAF across to the new services as well. Paul Treiber: Okay. So we should think as a mix shifts from software just our from SAF to software the profitability would be essentially a launch between as that mix happens. John S. Chen: Very, very yes. It's very similar. Yes, correct. James Yersh: I think since day one I have always been since I cannot stop the SAF was declining given all the dynamics out there I have always been very focused in replacing that SAF revenue and eventually go the other way because the SAF revenue will come down and so that's always been my strategy and then fortunately luckily Q3, Q4 with make that happen and I hope to continue here on. Paul Treiber: Okay. Just one follow up just in regards to the hardware business. How's the hardware to break-even point for hardware declined from the 5 million units previously indicated.? John S. Chen: It's roughly about 3.5. Paul Treiber: Okay. Thank you. John S. Chen: Now provide --, but it all has to do with ASP. Its 3 million units the 300 -- also ASP that we're experienced. So I mean as we moved downstream which we one of -- competition that I have to increase that sales. But my problem really is more on the channel we sale secured enterprise really literally executive and up a much more different kind of a profile despite of the fact AT&T and Verizon and in United States and all the three -- company in calendar has been extremely supportive and you know their audience we need to shift to there and a price audience also and that's what I am looking on. Operator: Our next question comes from the line of Rod Hall, JPMorgan. Your line is now open. Rod Hall: JPMorgan: Hi guys thanks for the question. Just a couple of things to clarify and then a question. I just wanted to see on the software revenue can you guys talk about the good plus AtHoc revenue for fiscal Q4 I guess any kind of idea how big that was just so we can calculate underlying organic revenue there what usually John Chen: Sorry Rod, finish yes, sorry. Rod Hall: No go ahead James and then I can follow-up with my other question. John Chen: This is John, so here is I will give you a number because we kind of expected on this cost people will want that organic number. I will give you a number but I have to first explain that we completely integrated and we have common customer base and so we talk about going back to all our customers and I think where we sees and say there are other suites here are your renewal for Blackberry, here are your renewal for Good Technology and it's really one and the same now because we offer one suite so it's really hard to say whether you tick that parts it's an MDM from Blackberry you tick the application servers from Good Technology so it really is a combined we don't even have the used store names anymore we basically as a combined suite we have a base platform and five offering okay. So with and so I will hopefully you appreciate us that there is no special SKUs that identify is this from the old or is just from the new, so I know that would not satisfy anyone of you guys, so I am going to give you a number, we did a lot of work in calculating to the best of our ability to identify its 24% organic growth too full. And we feel pretty good because we look at everybody in the industry that's better than anybody that we know okay, so that's the number so I can't really kind of bring everything out going forward for you because of everything. Rod Hall: Okay. Can you just that quarter or year-over-year organic quarter-over-quarter. John Chen: Its year-over-year. Rod Hall: Year-over-year, okay and then the other thing I wanted to ask John as you made this comment and the answer to respond to the last question that you were thinking about distribution you talked about distribution a couple of times. Are you saying you want to go outside the carriers and just go direct to the enterprise industry with these devices or what either you're doing with distribution exactly. Things like that would make sense to go direct to the enterprises? John Chen: Yes, I so some of the carriers -- great question. We have a history of that are very much tie to the to do retail side of the carriers. We do a lot of emphasis on that where everybody is really trying to -- and I mean it everybody I mean we have regulation show of AT&T and T-Mos -- everybody is likes the product trying it but the movement of flow and so what and I like obvious. So but they all have an enterprise arm so we are going to more offices working the joint marketing thing with the enterprise arm, so I am not running away from the carriers but at the same time I also need my direct sales force especially with government and financial and healthcare. We are selling software I like my sales force to also represent selling hardware to them and we seems we'll have in very selective business extremely early some recently good example of win in the last quarter. But we just did it in a like literally in a last month seems to be the strong amount of interest to do that and I don't want to extend that answer to one other thing notice that we are putting together a professional services for both security services like inclusion, detection and management of that as well as helping people to move on the cross EMM platform. Two professional services of organization are being built up right now in the company, and the pipelines are very-very good. Of course although our capability or our capacity is very constrain while as much as I keep adding people to it, it still very constrain. So, we are now trying to branch out to work with professional services firms that have a lot more people that could deploy around the world. So I feel good about that, because of the volume of business that being generated the interest of that and I feel good about going directly to the enterprise. Rod Hall: Okay, and then I just, I know its three questions. But I wanted double check with you on this smartphone deal these is that still a big part of that getting profitability or do you feel like that's kind of -- now in terms of the proportion and I know you've been reluctant to give us the proportion of units, but if you can give us any idea how big that is in terms of relative units so I am just be curious. John Chen: So, first on build our classic and is a from my limit experience in a last 2.5 years era has been extremely, extremely successful in fact people still wanted --. I unfortunate I getting to the point and I can't make anymore, because of the fact that the memory components and all that is changing. So I am working on that if you also the Foxconn is an important component, but it's not a huge component of it. That's number one, but maybe with the work on something else with Foxconn there financial arrangements works for both side, and their other ODM will offer us the same thing now. So that environment have completely changing, and Ben I think Foxconn for leading the charge with us when I have first joint, but now other people are doing the same thing with us now. Rod Hall: Okay, great. That's all of my questions. Appreciate your answers. John Chen: Thanks so much. Operator: And your next question comes from Paul Steve from Capital. Your line is now open. Analyst: Great, thanks. On QNX designs wins, could you talk about what the backlog was from ‘15 that will fuel the 27 if I guess sorry fiscal ‘16 that will fuel the ‘17 results and then I have got one quick follow-up. John Chen: QNX in fact our people have common design wings, this is why is with some more longer term revenue. We don't lose much -- with all the time and its building and you hooks now by now you saw that we are working very much more broader and closely with board and because things free and extension of that we are creating new modules. We've got definitely over 250 customers in automotive around the world. So and I don't we don't tend to lose customers maybe 1C and 2Cs but not many. So as I added more modules to it we will get more royalty going forward. So I am sorry I don't give you specific numbers, because first I don't haven't look at it for a while and secondly I don't think I should disclose this data's. Rod Hall: Okay and then maybe in core software how far through the transition are you from a perpetual model towards the subscription model when we think a bit your 70% recurring specifically. How much of that is traditional maintenance that is up for Annual renewals. John Chen: No, -- a good question. The 70% is not a maintenance at all. It really is a subscription base account. We as I said we'd like to get to 80% there are as times progresses there are more renewal that's going to come up and when the renew comes up for licensing either on the Good Technology side or the Blackberry side and the maintenance renewal on the Blackberry side came up which is we tend to work for the customer to move through a pure subscription base model. From our modeling of the pipeline we believe we could get to 80% a year from today that's the push that we're on. So it's quite on its way it's there is no negative here we just still continue to pushing. Analyst: One quick follow up sorry. Just on the EMM business you mentioned it before how significant is the government as a customer percentage was I know you're obviously not going to give us specific but is it 50% of the EMM maintenance base? or is it.. John Chen: Not 50%. Not 50% we lowered as that but it still significant if I have to guess and this is not a scientific -- by just buying around the customer is up I say about 30% Analyst: Okay. Thank you. John Chen: That maybe even high that maybe even higher, higher than actual but it's significant you know the government it's an important customer base for us. Analyst: Thank you very much. John Chen: Absolutely. Operator: And our next question comes from the line of Steven Li from Raymond James. Steven Li: Raymond James: Thank you. Hey John the 24% organic growth for software you just provided, so that looks like you would place Q4 organic software at about $80 million which is start from Q3 does that sound about right? John Chen: I didn't look at it that way, we were just counting knowing that you could really 155, 24% it sounds low Steven, yes it sounds a low a lot of subjectivity in that 24% because of the bundling that's going on. So we want to Steven Li: So because last Q4 ‘15 last year you reported 67 so I can just do 67 plus 24% and get the organic software for Q4? John Chen: I don't know, I have to think a little bit about that, I don't know what is the way to think about it, it's actually somewhere between 24%. We need to get back to you on that. I think I sounded low to medium term. Steven Li: Okay I can further up. And then James in your prepared remarks you said the hardware losses you've cut it in half does that for the reflect that the fixed royalties there is quite some decline or is there more to come? Thanks. James Yersh: Yes it is common as I think royalty is some consolidations of our and headcounts so it's a combination of a number of things, and some of the designs costs are that we have a lot of our partners to bare a little bit more. So it's really a literally every literal thing that we spend money on running this business. Steven Li: But is there are more fixed royalties declined coming or is that done. James Yersh: Even as you know we the one particular deal took us to the end of December in calendar 2015. So conceptually there is one more month to that's fit to come into Q1. Steven Li: Okay, great. Thanks. James Yersh: Yep. Operator: And your next question comes from the line of Michael Kim from Imperial Capital. Your line is now open. Michael Kim: Imperial Capital: Hi. Good morning guys. Can you just talk a little bit about the strategy around expanding it just I was just curious here is with the -- services but the encryption acquisition maybe more specific how you think about scaling that business globally kind of given the short digits goals a skill talent and I think encryption at somewhere around 40 to 44. James Yersh: Yes. So the reason why encryption is important to us is first of all there are main customers are basically UK government agencies, and we have to learn a lot about from them about the process of delivering that. In addition to that my IoT strategy in all the IoT to move forward that we can offer more to our customers. We've really do need to have a security services and certification program, but our customers are more than willing to pay for. So those two are my immediate focus. We do have a security a pretty big security team actually quite close to where encryption is physically. A big security team is in the UK . So we believe that some of our security people could turn into revenue producers into -- and they are very keen on doing so. So I that's one part of expansion, but I am not interesting that somehow I am going to build a huge professional services organization and be profitable and I have been in that business for a while. It's a really, really tough business to be in to have good margins, because of capacity planning and were all the resources are and so we are going to be very, very specialized in those two areas that we've talked about. While government agencies, inclusions and large corporations, inclusion detection and fair announces and so far and as well as for the IoT car certification services. In the mean time I've been reaching out to various SI of the world which they love to have a partner like us that would create and provide know how and they would like to pick it out and then with the some kind of revenue sharing of process going forward. A number of them have resonated would be none of them I could announced today, because we're still working on kind of the how they work together I think. So those are the so I am going try more leverage on partners we have some very specialized verticals on our own. That make sense. Michael Kim: Yes. That make sense. Great. Thank you very much. James Yersh: Sure. Operator: Thank you. Our next question comes from the line of Vijay Bhagavath of Deutsche Bank. Your line is now open. AJ Shrestha: Deutsche Bank: Good morning, John and James. James Yersh: Good morning AJ Shrestha: This is AJ Shrestha in for Vijay Bhagavath. James Yersh: Hi. AJ Shrestha: Hey, Just a real quick one for me I just wanted to get some kind of a demand trend on based on the geo curve macro on the smartphone and PRIV any kind of granularity would be great. John Chen: Yes okay. I think highly it's driven by our own distribution capabilities. So I'll give you as much as I, I think the logical sense and in both global basis. Because of the tearing of the it came out as $799 and $699 because its that's a pretty high-end product it tends to be in more of the developed economy and so we done reasonably well in the US we done reasonably well given our levels in Canada in Hong Kong in major metro cities like in Singapore -- I think we got, we go expand to as I say we're going to expand into Tokyo, Japan and sorry, Japan and in some of the western European states like UK as well as Germany. So I think those are what we see a better demand than a different tier at the market. AJ Shrestha: Okay. That's great. Thanks. Operator: And at this time I would to like to pass the call back to John Chen for any closing remarks. John Chen: Okay alright that's it. That's all -- so I don't really have much closing remarks and you know as I said like we see the fact that we are not satisfied with our hardware volume but we satisfied with the ability to get to compatibility and so the gross margin ASP and the plans surrounding continue to improve that and then we're working on distribution. I think there is some good hope that software surfaces doing very well teams are great they are charged and I think that will continue to do well on that. So SAF we'll do what we can but I don't think I could change much where the SAF is. But, eventually in a year or so you could see that the SAF impact of us although painful it's going to be a lot less and then our software growth will be a lot higher. So, we thank you for your patience and thank you for your support and now we'll talk next time. Have a good day. Operator: Ladies and gentlemen thank you for participating today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.