BlackBerry Limited  (NYSE: BB) Q1 2021 Earnings Call Transcript

BlackBerry Limited  (BB) Q1 2021 earnings call dated June 24, 2020

Corporate Participants:

Christopher Lee — Vice President, Finance

John Chen — Executive Chairman and Chief Executive Officer

Steve Rai — Chief Financial Officer

Analysts:

Gus Papageorgiou — PI Financial — Analyst

Daniel Chan — TD Securities — Analyst

Trip Chowdhry — Global Equities Research, LLC — Analyst

Mike Walkley — Canaccord Genuity — Analyst

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Paul Treiber — RBC Capital Markets — Analyst

Todd Coupland — CIBC Capital Markets — Analyst

Presentation:

Operator

Good afternoon and welcome to the BlackBerry First Quarter Fiscal Year 2021 Results Conference Call. My name is Josh, and I will be your conference moderator for today’s call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn today’s call over to Christopher Lee, Vice President of Finance. Please go ahead.

Christopher Lee — Vice President, Finance

Thank you, Josh. Welcome to the BlackBerry fiscal 2020 first quarter results conference call. With me on the call today are Executive Chair and Chief Executive Officer, John Chen; and Chief Financial Officer, Steve Rai.

After I read our cautionary note regarding forward-looking statements, John will provide a business update and Steve will then review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the Investor Information section of blackberry.com. A replay will also be available on the blackberry.com website.

Some of the statements we’ll be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of applicable US and Canadian securities laws. We’ll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors that the company believes are relevant.

Many factors could cause the company’s actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company’s annual filings and MD&A and the COVID-19 pandemic, which is negatively impacting public health, financial markets and global economic activity. You should not place undue reliance on the company’s forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements except as required by law.

As is customary during the call, John and Steve will reference non-GAAP numbers in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release and supplement published earlier today, which are available on the EDGAR, SEDAR and blackberry.com websites.

I will now turn the call over to John.

John Chen — Executive Chairman and Chief Executive Officer

Thank you Steve — Chris, sorry, I was looking at Steve. Thank you, Chris. Good afternoon, everybody. I hope that all of you and your families and your loved ones are staying safe and healthy during this very unprecedented times. This fiscal quarter of ours, which happened during March, April and May, overlap directly with COVID-19 business constraints, resulting in both headwinds and tailwinds. The entire company moved to working from home in early March, and operation has been reasonably smooth.

I will start with the financial highlights in the quarter and then move into the business commentary. I will reference non-GAAP numbers in my summary. In our first fiscal quarter, we reported total company revenue of $214 million. All the businesses performed in line or better than our expectation, except for QNX, which was negatively affected by global auto production shutdowns. However, our enterprise products and services that feature security and productivity benefit from the increase in remote working, business continuity and crisis management use cases with our customers. Total company billings were also down year-over-year due to the pandemic, but the billings decline rate was less than the revenue decline rate. This is of course big positive for future revenue.

Gross margin was 71%. We achieved a profit of $0.02 per share. BlackBerry continues to balance profitability and investment for the long-term. Cash used in operation was $31 million versus $64 million in cash used in operation last year. As you are aware, our first fiscal quarter typically has the high use of cash due to the commission and the annual bonuses payment. This year, we spread the annual bonus payment over to — the first two quarters. Total ending cash and investment balance at May 31st was $955 million.

Before I move on to business commentary, please be reminded that we have fully integrated Cylance into BlackBerry on March 1, the start of our current fiscal year. As a result, we are now operating in two reporting groups, the software and services group and the licensing and others group.

Let me start with the licensing and other groups. Revenue was $58 million in the quarter, in line with our expectation. The vast majority of the revenue is from IP licensing. We’re off to a solid start for the fiscal year. Moving on to the software and services group, revenue came in at $156 million, ARR was approximately $500 million, and the dollar-based net retention rate was 93%. Going forward, we intend to provide these metrics on a quarterly basis. Net customer churn was close to 0% and there has been no change to that this net churn rate for the last several quarters.

Let me click down on a key product component of the Group, let’s start with QNX. Development seat, professional serviced and royalty revenue were all negatively impacted, primarily due to the auto-shutdown, production shutdown and the project delays. That said, we’re starting to see signs of recovery in the auto sector evidenced by the reopening of the production facilities. Engagement with our auto and general embedded customer has increased on projects that we were working on prior to the shutdown as well as new opportunity that came out. We anticipated a slow and gradual recovery for QNX throughout the year. It will take time for the production to ramp back to full capacity.

In the quarter, QNX was chosen with 10 design wins, six of which were in the general embedded market for industrial and medical applications. The remaining four were in auto, including ADAS, advanced driver-assistance software, design wins with Hyundai Autron — sorry, Hyundai Autron, and an acoustic win — design win we have with Volvo. The other two auto design awards were for the secure gateway and infotainment systems. This continued design win momentum supports our leadership positions. Our latest automotive installed base number is over 175 million, an increase from 150 million last year. These metrics, which we generally update once a year, have been validated by strategy analytics and independent third-party.

In an attempt to provide more information about — on QNX business, we have decided to share our royalty revenue backlog on an annual basis. The backlog is based on the customer estimate of lifetime volume of the design win it is awarded. As of today, the estimated royalty revenue backlog is at $450 million. QNX is a recognized name associated with safety and trust, and we continue to expect that QNX will be selected for many design wins in the future. These design wins will add on incremental revenue from development seats, professional services as well as royalties.

Our full-year historical compound annual growth rate, or CAGR, is 13%, which is well ahead of the 5% market CAGR over the same period. Over the next five years, we plan to achieve a CAGR above the market growth rate of 11% which is cited by McKinsey for automotive operating system and middleware over the next decade. Our plan to accelerate the QNX growth rate includes increased investment to gain market share in both the auto and general embedded markets and to grow our professional services business. We recently launched our first service package that offers cyber security assessments and testing.

Moving on to AtHoc, our crisis communication lifecycle solution, AtHoc was a performance leader this quarter. AtHoc is very well suited for business continuity, preparedness and execution in the current environment. We had a number of new customer wins and competitive wins — competitive situations. sorry, including wins first responder agency and energy companies. We also had a strong quarter expansion and renewals. After the quarter, we announced several notable new logos including United States Department of Transportation and the U.S. Federal Trade Commission. We also expanded our business with the U.S. Department of Health and Human Services. Moving on to Cylance and UEM, which going forward will be referred to as the Spark platform. BlackBerry Cylance was slightly ahead of consensus expectation for the quarter.

We added 279 new customers and new active subscription customer growth was about 15%, 1-5. This is the measure on a year-over-year basis. Notable new customers include General Motors, Becton, Dickinson, Philips Healthcare, SKF which is one of the Sweden largest manufacturer. The New Zealand Defence Force and the United States Census Bureau, just to name a few. We have seen revenue steadily increase for the bundle that includes OPTICS, which is our EDR product and PROTECT, which happens to be our EPP product. Interest in our managed service offering GUARD continues to be strong since its launch last July resulting in sequential revenue growth of over 85%, which is, but I have to caution, this is of a small base.

BlackBerry Cylance performed extraordinarily well in the recent [Indecipherable] evaluation, which is regarded by the industry as the most subjective and transparent standards currently in the market. We clearly demonstrate that our AI-led solution and managed service protect customers from global threat actors. We were especially pleased by the performance of OPTICS, which surpassed many EDR players who happen to be ranked above us in industry analyst report. Our UEM business also executed well, benefited from the increased need to prepare more endpoint especially in mobile. Demand was strong from our regulated industry customers. Now, let me name you some notable wins, notable customers. They include American Express, CIBC, The European Bank for Reconstruction and Development, Qatar National Bank, The National Commercial Bank, [Indecipherable] Bank, The Development Bank of Singapore, Mitsubishi UFJ Financial Group and the Republic of India.

With the Republic of India win, we now have 18 of the G20 government as customers. These wins, I hope you agree, will solidify our strength in the financial services and government vertical. Let me wrap up with the Spark suites. Enterprise today based on increasingly chaotic environment with cyber threats are ever more sophisticated and pervasive. Attacker primary target endpoints in 70% of successful breaches, especially in the form of mobile. The 5G rollout will lead us to a significant increase in attack on mobile endpoints. At the same time enterprise endpoint and the amount of data shared at the Edge are also growing exponentially. Together, cyber security threats and endpoint chaos are putting organizations at risk while cutting into the employee productivity and increasing the IT costs.

A recent assessment by Frost & Sullivan defines the cyber threats to the entire IoT landscape. This report recognize how BlackBerry Solutions address over 96% of the collective threats. A copy of this assessment is available on our website. A big part of BlackBerry value proposition is our ability to address these threats with our Spark suites, a platform that combines endpoint security, as well as endpoint management. Though the Spark suites were only launched on May 19, which is maybe four or five weeks ago, they have been extremely well received by both customers and partners. Since the launch over 15, 1-5, 15 customers have purchased one of our Spark suites, one of the largest providers of financial market transaction, infrastructure worldwide.

After the quarter we announced a partnership with Bell Canada. BlackBerry becomes Bell Canada’s preferred partner for mobile threat detection — in defence, sorry, MTDs sometime used as mobile defence will. Bell will offer our MTD product to their enterprise customers. Our AI-driven MTD product is one of the core pillars in our Spark suites. We’re adding more features; protection and secure gateway later this year. We anticipated these additional pillars will increase revenue. We also believe this will increase our addressable market because of the way we architect our UES security layer to interoperate with competitors UEM solution. Let me wrap up this on this session on a personal front. We recently announced that Tom Eacobacci has been appointed as BlackBerry’s newest President.

Tom’s role will be to lead all business activities for the Software and Services Group; an executive from Citrix, with over 20 years of enterprise customer facing experience. Tom has led all facet of the global sales organization. In addition to Tom, we also have recently recruited two other senior-level industry leaders. The first is our new Head of Software Services Business Development. The second is our Head of Corporate Marketing. Both started on June 15 already. The hiring, I hope is a good indicator of industry talent interested in joining BlackBerry and demonstrate our conviction to build a stronger go-to-market engine.

With that said, let me turn the call over to Steve to provide more details about our financial performance.

Steve Rai — Chief Financial Officer

Thank you, John. My comments on our financial performance for the fiscal quarter will be in non-GAAP terms, unless otherwise noted. Please refer to the supplemental table in the press release for the GAAP and non-GAAP details and reconciliations. We delivered first quarter non-GAAP total company revenue of $214 million and GAAP total company revenue of $206 million. I will break down revenue shortly. First quarter total company gross margin was 71% versus 75% reported in the first quarter of fiscal 2020. The change is due primarily to a decline in QNX royalty revenue. Our non-GAAP gross margin includes software deferred revenue acquired but not recognized of $8 million and excludes stock compensation expense of $2 million. First quarter operating expenses of $150 million were down sequentially by $22 million. We continued our investment in product development and go-to-market, while maintaining strong control over spending given the current macro landscape.

And of course the global shutdown did help to reduce spending. Our non-GAAP operating expenses exclude a $594 million non-cash accounting goodwill impairment charge. This represents an impact of $1.06 to GAAP earnings per share. This assessment was required in accordance with accounting rules and was driven by the broad-based economic decline and corresponding impact on our market capitalization. Further details will be available in our Form 10-Q. In addition to our non-GAAP operating expenses exclude $33 million in amortization of acquired intangibles, $12 million in stock compensation expense, $3 million for software deferred commissions expense acquired, $1 million in restructuring costs and a charge of $1 million related to the fair value adjustment on the convertible debenture.

First quarter non-GAAP operating income was $3 million and first quarter non-GAAP net income was $12 million. Non-GAAP earnings per share was $0.02 in the quarter. Our adjusted EBITDA was $20 million this quarter, excluding the non-GAAP adjustments previously mentioned. So this equates to an adjusted EBITDA margin of 9%.

I will now provide a breakdown of our revenue in the quarter. In our software and services group, our product revenue was between 80% and 85% of the Group’s revenue mix, with professional services comprising the rest of the mix. Recurring software product revenue was above 90% in the quarter. In our licensing and other group, as John noted earlier, the vast majority of revenue is from IP licensing. And service access fees were about $2 million, and we anticipate about this amount for each remaining quarter in fiscal 2021.

Now moving to our balance sheet and cash flow performance. Total cash, cash equivalents and investments were $955 million at May 31st, 2020, which decreased by $35 million from February 29, 2020. Our net cash position was $350 million at the end of the quarter. First quarter free cash flow before considering the impact of acquisition and integration expenses, restructuring costs and legal proceedings was negative $30 million, and cash used in operations was $31 million with capital expenditures at $1 million.

That concludes my prepared remarks. I’ll now turn the call back to John for additional comments.

John Chen — Executive Chairman and Chief Executive Officer

Thank you, Steve. BlackBerry remains strongly focused on achieving profitability growth — a profitable growth while investing for the long-term. Now given the continued uncertainty across the global economy due to the pandemic, it is still prudent for us not to provide a specific fiscal 2021 outlook.

However, that said, I’d like to provide some directional comments on the rest of the BlackBerry fiscal year. We are expecting a good second fiscal quarter because, one, we anticipated modest sequential growth for our software and services group; and two, we expect a strong sequential growth in our licensing group. We anticipating — we anticipate licensing revenue to be around $250 million for the full fiscal year — not Q2, full fiscal year. In line with our normal intra-year season like — seasonality, we anticipated also a strong fiscal fourth quarter.

I also want to reiterate that BlackBerry continue to be financially healthy. Even during these uncertain times, we demonstrated fiscal discipline, generated profitability and maintained liquidity. We ran recently another set of financial stress test, assuming up to 30% of revenue decline and no new financing. The result showed that we continue to be solved and liquid for the next several years. We anticipate ending the year in a positive free cash flow position and therefore adding to our cash balance, and we plan to redeem the debenture this coming November when they mature. This will save about $23 million a year in interest payment going forward.

We believe BlackBerry will capitalize on the secular trends on securing and connecting endpoints. Our business strategy and technology are definitely in place. We are competing in the right markets. And now, the most important task right now is profitable revenue growth and market share expansion, and we are very focused on that.

Before I open up for Q&A. I would like to make a statement about yesterday’s Annual Shareholder Meeting. To clear up any confusion, the fact that we did hold a Q&A session, unfortunately only one registered shareholder submitted the question. We answered the question. There may have been others who wish to ask question but could not because they were actually guests. So there was no bridge on the technology. Our proxy materials are clear that guests will not be able to ask questions.

I will now open the question up for Q&A. Josh?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Gus Papageorgiou with PI Financial. Please go ahead.

Gus Papageorgiou — PI Financial — Analyst

Thanks. Thanks for taking my question. Just a couple of questions. Just first on QNX, we issued a press release, I believe, it was yesterday that showed you — your increase — installed base increased by about 25 million automobiles, which is about 25% of the market year-over-year. I’m wondering if you could comment on the market share within automobiles year-over-year. So if it’s roughly 25% now, what was it a year ago?

And then just secondly, thanks for giving some sort of sense of what the rest of the year is going to pan out like. Just on your — kind of on the enterprise software side, obviously you said you saw strong demand in this quarter. What do you expect demand will be like for the rest of the year in that segment?

John Chen — Executive Chairman and Chief Executive Officer

Okay, Gus. Thank you. So, 175 million cars, actually I know you have done a ton of research on the auto space as we spoke many times in the past. They are roughly — in big numbers, there are roughly 1 billion in the world running around every day. And I would there say, maybe 60% plus are the cars that are in the connected car, obviously very little in the autonomous car. But in the connected cars, I would dare to — I mean, I guess it’s going to be about 60% to 70%.

And so, if you look at that number and you look at the fact that we are 175 million cars that have our software on the road today. I mean you can calculate the market share. I mean, we definitely are — if you take about 600, you divide by that, I’m guessing were monthly about 30% market share. That’s — that will be my best guess non-scientific. I just walk you through how I look at the numbers. I’m sure somebody else might point out maybe [Indecipherable] in my thinking, but that’s that.

So regarding the year, I think when I look at — maybe I’ll start with the industry consensus. We will start with that. The consensus in about mid-$900 million for the year looks reasonable, definitely in the ballpark, and we expect small sequential growth in the software and services business. We expect our IP business — licensing piece of business to come in about $250 million for the year. So, you could kind of triangulate that back to the consensus. I think we’re in the — we’re pretty much in the same ballpark as you guys are.

Gus Papageorgiou — PI Financial — Analyst

Okay. On the…?

Steve Rai — Chief Financial Officer

Profitability?

Gus Papageorgiou — PI Financial — Analyst

Sorry. Kind of profitability?

Steve Rai — Chief Financial Officer

Oh, on profitability, I think it’s a good shot of us being profitable. We demonstrated, yeah, for the full year, yes.

Gus Papageorgiou — PI Financial — Analyst

Great. Thank you so much.

Steve Rai — Chief Financial Officer

And I already said, Gus, that we will — we’re looking like we’re going to be cash flow positive for the year — free cash flow positive for the year. So, I believe we’ll be able to being profitable for the year also on a non-GAAP basis.

Gus Papageorgiou — PI Financial — Analyst

Perfect. Thank you very much.

Steve Rai — Chief Financial Officer

Thank you, Gus.

Operator

Your next question comes from Daniel Chan with TD Securities. Please go ahead.

Daniel Chan — TD Securities — Analyst

Hi. Thanks for taking my questions. The QNX royalty backlog, did I hear correctly it was $450 million?

Steve Rai — Chief Financial Officer

Yes, $450 million.

Daniel Chan — TD Securities — Analyst

So how did you guys calculate that number? I actually thought the number would be higher considering you do annual QNX revenue. I know there’s a whole bunch of other stuff in there, but annual QNX revenue, that’s about, what, like around $200 million or so. So, how do you calculate that backlog considering this, a lot of the programs that you’re involved have a long life cycle?

John Chen — Executive Chairman and Chief Executive Officer

Yeah. So, we generate — I’ll give you some historical number, not this year obviously, in the year ago we generate roughly of $150 million in royalty in the year. Some of those will become revenue in the year. We also generated somewhere between — in a ballpark, $70 million to a $100 million from developer seats and professional services. So if you add that together I think you get close to the number that you just cited.

Daniel Chan — TD Securities — Analyst

Okay.

John Chen — Executive Chairman and Chief Executive Officer

Is that helpful?

Daniel Chan — TD Securities — Analyst

Yeah, yeah. That’s helpful. I just assumed that the lifecycle of some of these automotive programs were really long. So when you win one of the design wins, you’ve got a very long tail of continued royalty revenues. I thought it would probably add up to, I suspect, I expected a much larger number than that. Okay.

John Chen — Executive Chairman and Chief Executive Officer

Yeah, I would say that we’re probably on a conservative side ourselves. These are the numbers that was given to us by the customers. At the time of the win, they usually adjusted. And so, I mean, it could go down or it could go up and then also the derivative win, like for example when we win certain model with an OEM they’d like — they most likely will give us different models at the same thing. And we have seen that rather repeatedly. I think one thing you could take away that we are very comfortable with our competitiveness and our relationship with our customers on a global basis. So as the business start returning — awarded, we will get a good share of it.

Daniel Chan — TD Securities — Analyst

Yeah, that’s helpful, thanks. And then on the delayed programs that started to kick in last quarter, it sounds like things are starting to move again. Any word on some of the delayed programs picking back up?

John Chen — Executive Chairman and Chief Executive Officer

Yes, we — our team had told me that — to us that the customers are back talking about the design and talking about new projects and talking about the schedules of the new project, their schedules. That’s the number one most important thing is they have to have the schedule first. Then we’ll enhance our ability to win. So that’s where we are. It’s a good start.

Daniel Chan — TD Securities — Analyst

Okay, thank you.

John Chen — Executive Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from Trip Chowdhry with Global Equity Research. Please go ahead.

Trip Chowdhry — Global Equities Research, LLC — Analyst

Thank you. Hello, hello. A lot better numbers than I was expecting. I think good execution in a very difficult environment. I had a couple of questions. Would you be comfortable saying that the one — first quarter was pretty much the bottom and you are seeing signs of economy opening up and recovery happening?

John Chen — Executive Chairman and Chief Executive Officer

Well, in my kind of early — when I told Gus that — that I’m comfortable we’re in the right ballpark with the consensus is to assume a gradual reopening of the economy and like earlier we talk about QNX design wins. Despite of a very difficult quarter, I was actually positively surprised that we won 10 designs in a quarter. I mean, it doesn’t translate to — I thought that was actually better than I thought. So, I have a certain or we have a certain expectation that things are getting better although we are being very cautious. We believe you are going to get better slowly. So this is where I said okay, we’re going to see incremental — small incremental improvement in software and services on the enterprise side, a slow incremental improvement in QNX. Maybe same — a difficult quarter in Q2 but we expect the second half to be better. And then we feel comfortable the pipeline of our IP. This is how we all grew everything together and our spending and everything else. So that leads to our belief that we could be profitable over the year. We have positive cash flow. So for the year — so that’s kind of the — Trip, that’s the environment that I’m expecting and that’s tied to the number.

Trip Chowdhry — Global Equities Research, LLC — Analyst

Beautiful, beautiful. John, you’re always being very innovative and always ahead of the curve. We all are working from home. We are doing remote working. But there’s a challenge when it comes to selling in terms of more selling. So I was wondering like, knowing you from Sybase, you turned the whole industry upside down. When we think about remote selling, what you think you are putting in place and how are you differentiating and making it feasible because your numbers definitely tell that the sales execution is a lot better than I was expecting. So what processes you may have put in place to have success and win rates better in an environment where remote selling is going to be somewhat of a norm?

John Chen — Executive Chairman and Chief Executive Officer

Well, thank you. We’re not as good as you said we are, but because we’ve done it from the trend that I think most of all my peers in the industry see that and because we provide security software, cybersecurity software, because we provide crisis management software and mobile, that helps facilitate the remote working from home. And what we have seen in the first three months or the three months that was the most severely impacted. What we have seen is new customers are extremely hard to come by. Existing customers, up selling to them and they have a build-in requirement to need more software, more seats, more licenses and in some cases AtHoc where people are on the fence and say, well, I don’t really know I need it — whatever, they have decided they need it.

And so there — and because unfortunately because of the price, it’s kind of like the only silver lining to this pandemic situation. So but I traded analysis with other CEO of other tech company and pretty much everybody is saying the same thing. Upselling and especially, you have the right type of software, it’s a good expansion. It’s okay to sell the remote. This is where the relationship are very important and we fortunately BlackBerry has a lot of good relationship, especially in the regulated industry like the banks and the medical field and the government. So that help us to put some kind of anchor into the business. The new project or the new customer base, I will have to say, is much more difficult to come by.

Trip Chowdhry — Global Equities Research, LLC — Analyst

Thank you, John. All the best.

John Chen — Executive Chairman and Chief Executive Officer

Thanks. Thank you Trip.

Operator

Your next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

John Chen — Executive Chairman and Chief Executive Officer

Hey, Mike.

Mike Walkley — Canaccord Genuity — Analyst

Hey, John. A question for you.

John Chen — Executive Chairman and Chief Executive Officer

Sure.

Mike Walkley — Canaccord Genuity — Analyst

Yeah, hi. Yeah, with — you talked about AtHoc on the call as an area of strength — with the changing working government safety environment how are you leveraging AtHoc strong position with federal government into opportunities to compete more maybe at the state, local and even enterprise level — compete more with Everbridge offering?

John Chen — Executive Chairman and Chief Executive Officer

That’s great questions. So the federal space, the G20, the FVEY countries, United States, Canada; we do have good customer recognition and we have a big install base, especially in the United States, for example, multi-million licenses that we have. So those are all good thing. We have traditionally not been strong in stay local and that is about to change. We’re putting a team of people that’s just responding to RFP an RFI, a dedicated team. We also recognize the fact that we need a more SMB-type sales force rather than a enterprise sales force like selling to the government agency. That’s larger. So we’re resources in both areas that I talked about. So we go after the RFP with the state and local, then education market and the other SMB market we go after with a more than SMB sales team. And I think it will work well. The good news is, we also have upgraded our product and to have a complete lifecycle product and we also deliver the managed service product. And so that fits to the smaller enterprise because we never have to add the managed service product. That’s just recently announced that got literally days, right. So, we will equip now both in the managed service with the way we laid out our services approach, and it’s a great market. I have to say, time like this, it’s a really great market.

Mike Walkley — Canaccord Genuity — Analyst

Thanks. And just following up on that, is there any metrics you can share on the business, maybe the size a bit [Phonetic] on an annual basis or growth metrics. And then also, how do you view the positioning? Are you adding salespeople to attack the EU mandated opportunities for mass notification over there in the upcoming years?

John Chen — Executive Chairman and Chief Executive Officer

I don’t have the answer to your question right now. But let me do this. Yeah, let me see what metrics I could deliver and provide, because we’re early — we’re actually early to a non-federal play. The federal play is very easy metrics. You know our wins, you know our no-goes. The renewal is a the strong, and we have seat site [Phonetic] in the United States. Our licenses are over 2 million seats. So — but they are very concentrated to the federal government and the armed forces so far. So we are starting to expand. So it’s still a little early for me to give you these metrics, but I will go work on it and look into it and I would like to know too.

Mike Walkley — Canaccord Genuity — Analyst

Okay, great. Last question for me. Just switching gears, any update on radar and the IoT business, and will that be mapped into software and services going forward also? Thank you.

John Chen — Executive Chairman and Chief Executive Officer

Yeah. We wrote it on in. Radar is actually doing reasonably well. Unfortunately the numbers are not high. They did get affected somewhat by the pandemic because we are unable to visit customers because radar is really very — the radar team is very focused on winning new customers because we win new customer we got recurring revenue for radar. And so, that’s the focus on. But it’s been — it’s done well. I mean, it was nothing negative. We have some wins, increased some usage, but nothing to — at this point, nothing moved the needles on that. On the IoT, they are all now merging under software and services. So, I don’t really look at it that way. I’ll separate it at all.

Mike Walkley — Canaccord Genuity — Analyst

Great. Thank you very much. Best wishes for the year.

Steve Rai — Chief Financial Officer

Sure.

John Chen — Executive Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Daniel Bartus with Bank of America. Please go ahead.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Hello there.

John Chen — Executive Chairman and Chief Executive Officer

Great.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Hey, John. Yeah, thanks for taking the question. First I just wanted to clarify, what was the ARR number that you said in the beginning?

John Chen — Executive Chairman and Chief Executive Officer

Above $500 million.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Okay, got you. Is that up year-over-year?

John Chen — Executive Chairman and Chief Executive Officer

This is the first time we actually collected and disclosed it. So, I don’t know whether it’s up year-over-year at all.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Okay. Okay, got you. And then, just — what was the Cylance consensus number that you referenced? And I’m just wondering if [Phonetic] Cylance grew year-over-year.

John Chen — Executive Chairman and Chief Executive Officer

Yeah. Year-over-year is relatively flat. And I think the Cylance number is like $48 million, $49 million for the quarter.

Steve Rai — Chief Financial Officer

That’s probably right.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Okay.

John Chen — Executive Chairman and Chief Executive Officer

Yeah, yeah.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Got it.

John Chen — Executive Chairman and Chief Executive Officer

[Indecipherable] that number

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Got you. And then just last one, I’m surprised SG&A is so low. Can you just talk about if you feel like you’re investing enough for growth and does it make sense this is kind of the trough level for SG&A? Thanks.

John Chen — Executive Chairman and Chief Executive Officer

Yes. I’m glad you asked this question. We are spending — we did two things to fund our go-to-market engine. We move a lot of the headcounts, and unfortunately some of the headcounts, we have to reduce and then hire back in some other area. We’ve done a little bit of that. But in the beginning early on, not during this pandemic period. We have — we move the resources from the back offices to the front-line. So the bank offices has reduced and streamlined quite a bit, and which is pretty much across the board, whether it’s finance, HR, legal, IT, we have really streamlined it because one of the good — one of the benefit of grouping the company — the businesses together is we actually could reduce overhead.

So, for example, you don’t need three different finance team, you only need one. You don’t need three different groups of contracts people, you only need one. So, maybe a bigger one, but one, so it helps a lot. And then we move that — this is by design, and we move that, I call it a 10% move. We moved 10% our resources from the back office to the front, and then hire the people that way. So, a lot of these people are going though trainings and stuff. We also increased our executive ranks by recruiting more talents from the outside and augment the people we have here today. So, we’re basically all-in and to do sales and marketing, feeling very comfortable in that we’re actually hiring a lot of people. I’ll name you a couple of executives, we probably had 100 reps that are being recorded right now in sales and marketing at this — as we speak.

Daniel Bartus — Bank of America Merrill Lynch — Analyst

Great. It’s really helpful. Thank you.

John Chen — Executive Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber — RBC Capital Markets — Analyst

Hi.

John Chen — Executive Chairman and Chief Executive Officer

Hi Treiber.

Paul Treiber — RBC Capital Markets — Analyst

Thanks so much.

John Chen — Executive Chairman and Chief Executive Officer

Sure.

Paul Treiber — RBC Capital Markets — Analyst

First, high-level question on strategy. With this environment, we’ve seen tremendous uptake of video conferencing. BlackBerry is known for secure communications we have across email, BBM and voice, but no video. Bow do you think about video as a category, is it something that you see is critical or not synergistic with your — the bigger portfolio that you’re building?

John Chen — Executive Chairman and Chief Executive Officer

It’s not critical. It’s — I mean, it could get synergistic but I’d rather do it with partners like, for example, we’ve done — we’re doing a ton of security work with a number of the name players that you could probably close your eyes and recite. So, we want to do it that way. Now messaging and voice is different. We have good products and we’re pushing that in messaging and voice. But the reason why I didn’t really attend into video, if I find out a really crowded place and I’m not pretty sure that I wanted to dilute, I would sell yet to yet one more thing. Now eventually, if the market and therefore our customers say, hey, you got to integrate video. By the way, we integrate Zoom, the Webex, and all the other team [Phonetic], and so nobody have called me and said, I can buy your software because it didn’t work with a video conferencing that I want it. And in some cases, we use container under UEM to manage the security of some of these conferences. So, today, I’m trying not to dilute more, so you’ll get my UEM-UES launch properly. In the future might something would be of interest, but I would rather go through partner.

Paul Treiber — RBC Capital Markets — Analyst

Okay, thanks. That’s helpful perspective. Just in regards to the IP licensing, I mean, obviously you sound positive going into this quarter. Now, given there are travel restrictions and social distancing and whatnot challenges, what’s the process for closing deals in this environment? And can you do a lot of it or all of it remotely or are you assuming some relaxation of the measures to have in-person negotiating — negotiations?

John Chen — Executive Chairman and Chief Executive Officer

Right. You know I’m — I hope everybody will give me credit as a reasonably safe guy, conservative guy. So when I tell you that we’re going to have a reasonable Q2 and a good Q2, especially with the licensing. We pretty much — I mean, I wouldn’t use the word in the bag, but we’ll deliver that.

Now, the answer to your question really is at stages. If I’m approaching a licensee — potential licensee for the first time, especially overseas, that is going to be delayed. It could be delayed indefinitely. And that’s a function of — in the beginning, you don’t send people a letter and sale by the way why do you license from me. You really have to have a face-to-face conversation and talk about design, talk about plain charts, presenting plain charts. So there is a process of this sales. So, now, at the end, we’re really talking terms like, okay, so how long would I be cross-licensing with? What category are not included? When you’re down to that conversation, you could do all that by video conferencing or phone. So it’s really the stages of the pipe. So in this particular case, we believe that we have the Q2 under control.

Paul Treiber — RBC Capital Markets — Analyst

One last one for me is I think last quarter you mentioned you had $30 million of new pipeline from that free trial that you’re offering. Can you provide an update on the pipeline or perhaps how the conversions have been going?

John Chen — Executive Chairman and Chief Executive Officer

I don’t, I didn’t keep track of it, but the conversion usually of those price is reasonably good. Pipeline at that stage, I think normally you convert 2.5 to 1 and this one, maybe a little better than that because the trial is a pretty much driven by special circumstances. So, I say the conversions are reasonably good.

Paul Treiber — RBC Capital Markets — Analyst

Okay, thanks for taking my question.

John Chen — Executive Chairman and Chief Executive Officer

Absolutely.

Operator

Your next question comes from Todd Coupland with CIBC. Please go ahead.

Todd Coupland — CIBC Capital Markets — Analyst

Hi.

John Chen — Executive Chairman and Chief Executive Officer

Hi, Todd.

Todd Coupland — CIBC Capital Markets — Analyst

Good evening there. Quick question on opex follow-up from the SG&A question. So if we think about the $151 million in the quarter, how should we think about that flexing over the course of the year?

John Chen — Executive Chairman and Chief Executive Officer

Okay. We are — okay, so we are — like Steve has mentioned, we benefited a lot from no travel, we benefited a lot from the shutdown, but I would tell you I’m here right now sitting in our San Ramon office unfortunately looking at, Chris, but I have to do what I have to do. And we are gradually opening up. There are six offices in multiple phases around the world that’s open up. And so and there are about another 20 or so that will be opening up. Now we say opening up — this is a good time to talk about. We have internal process that’s industry well-accepted, which is A, we follow the government guidelines around the world; B, we do it by phases. Right now San Ramon is opening on the Phase 1 meaning about only 20% of our populations are allowed to return back to work.

And then, everybody else still remain working from home. And then the 50% in Phase 2, which have to do a lot to do with the country, the county, the provisions and the provinces and so far so to see how this health situation progresses. So, and then the Phase 3 is 90% and it ties to school opening and childcare and all that good stuff. So we have a very thoughtful process that we laid out. Now the reason I take you down this on answering your question on a lot of expenses is that we will see expenses to start going up. And in addition to that we are hiring a lot of people on a global basis. Interestingly enough, this is not a bad time to hire talents. I don’t know why. As far as I’m the beneficiary of this, that’s okay. I’m not complaining. And so, you see our sales and marketing costs to go up. Now, the virtual — since we’re doing most of the thing virtual, we should still save money on travel. We will save money on actual shows that we go to that we no longer going to, for example. So there is a give and take that you should see trending up.

Todd Coupland — CIBC Capital Markets — Analyst

Okay, that’s very helpful. And then my second question, you gave a few hints on longer term growth rates. It seems like for software and services group, the new bundle you’re giving hints in the 10% to 15% range. Is that the way to think about that business once we get through the pandemic?

John Chen — Executive Chairman and Chief Executive Officer

Well, yeah, I mean, I would like to see double-digit growth. Yes.

Todd Coupland — CIBC Capital Markets — Analyst

Great. Thank you.

John Chen — Executive Chairman and Chief Executive Officer

Sure, of course. Thank you.

Operator

I would like to turn the call back over to John Chen, Executive Chair and CEO of BlackBerry for closing remarks.

John Chen — Executive Chairman and Chief Executive Officer

Thank you, Josh. Okay, look, before I close, I’d like to mention one of our recent announcement in demonstrating our commitment to The Sustainable Development Goals initiated by the United Nation. I’m very proud that BlackBerry continues to contribute towards making the world a better place and I hope a lot of you agree with me. I’m sure you do and we have made significant progress towards our goal to be carbon-neutral by 2021. We’ll get to carbon-neutral by next year. So I’m sorry, this is later in the day for the East Coast friends of ours. But thank you very much for joining us today and stay safe, stay healthy. I hope to see you guys in person soon.

Operator

[Operator Closing Remarks]