Debbie Tuck - VP of Finance and Head of IR John Chen - Executive Chairman and CEO James Yersh - CFO.

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

Welcome to BlackBerry’s Fiscal 2017 Second Quarter Conference Call. [Operator Instructions]. I will turn the call over to Debbie Tuck, Vice President, Finance and Head of Investor Relations for BlackBerry..

Thank you, operator. Welcome to BlackBerry’s Fiscal 2017 Second 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 note regarding forward-looking statements, John will provide a business update and James will then review the second quarter results. We will then open up the call for a 30-minute Q&A session. In order to let as many people as possible to ask questions, please limit yourself to one question.

This call is available to the general public via call-in numbers and via webcast in the Investor Relations section at BlackBerry.com. A replay will also be available on the BlackBerry.com website. Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of applicable U.S.

and Canadian securities laws. We will indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions.

Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant.

Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements, including the risk factors that are discussed in the company's annual information form, which is included in our Annual Report on Form 40-F and in our MD&A.

You should not place undue reliance on the company's forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements except as required by law. I will now turn the call over to you John..

A, we focus all of our efforts on where we can deliver differentiation in software and security and by the way this plays into our strength and it’s aligned with where the market is going. B, partner will bring us the hardware portfolio with competitive hardware specs going forward.

C, will also leverage partners and third parties where scale is critical. This obviously includes distribution, manufacturing, logistics, and repair. We believe this will lead to expanded market access, increased unit volume, and higher profit margins.

And last but not least, this approach also eliminates BlackBerry’s need to working capital or greatly is reduced, I don’t whether eliminate is a good word, greatly reduce our need to working capital and capital investment related to inventory and manufacturing.

This de-risksour financial model not to mention enhancing earnings, cash flow, and return on invested capital. Overall, we believe this is a very viable model as we are getting lots of interest around the world for bringing BlackBerry brand device to market with the security and user experience we all know we are known for.

Now let me provide a summary of the Q2 results. Revenue came in at $352 million. Total software services revenue was $156 million, up 111% year-over-year. Mobility solutions revenue was $105 million. SAF came in slightly better then expectation at $91 million. As I mentioned, we delivered the highest gross margin in the company history at 62%.

This number was up from 53% last quarter and 41% a year ago same quarter. This was driven by the improvement in device margins and a more favorable revenue mix. Operating income was $16 million. We also achieved our eleventh consecutive quarter of positive EBITDA, which came in at $45 million in a quarter. This translates to about 13% EBITDA margins.

EPS was breakeven and in Q2 cash flow was $2.5 billion. So, let me now provide some specific highlights in detail on our key business segments. In software, Q2 year-over-year growth was again driven by strong performance in enterprise mobility, crisis management software, and QNX. There was no IP revenue in the quarter.

The mix of recurring revenue came in at 81%. As a reminder, we set a target of 80% by the end of this fiscal year. Therefore we achieved this milestone earlier – early. We had 3,000 customer orders in Q2. This is to include about 692 customers purchasing our suite. This compared to 520 last quarter. Recent high-profile wins included the U.S.

Army, the Transportation Safety Administration which is TSA, the US Coast Guard, and DENSO. In IoT and connected cars, we achieved two firsts. First the one - the first of the first, Caravan Transport Group is our first customer live in production on BlackBerry Radar and they were nice enough to put out an article on that.

Our SS tracking services with 500 units installed on their trucks today. They plan to roll more units across their fleet of 1,500 vehicle. Radar, our product radar started shipping in late August. Secondly, Hama Automotive is our first paying customers in connected cars. They purchased our over-the-air software update applications.

Our leadership in mobile security was reinforced in a Gartner report published last month titled Critical Capability for High Security Mobility Management. Gartner ranked BlackBerry number one in each of the six critical categories.

As I mentioned earlier, we signed an important partnership and licensing deal in the quarter involving our global BBM consumer business with a company called AMtech. AMtech happens to be the largest media content and technology business in Indonesia.

This partnership will strengthen and drive growth of BBM consumer, which has nearly 60 million MAU, monthly active users, in Indonesia and 90 million MAU worldwide. There are a number of important benefits to BlackBerry, AMtech is a major video and content provider.

They will invest in people, technology, and the ecosystems to facilitate growth in enriched content and new application on the BBM platform. These efforts should result in increased MAU, monthly the active user, ARPU, average revenue per user, and revenue growth for the BBM consumer business altogether.

The license agreement also allows to reduce infrastructure costs related to the consumer business and increase the profitability of the business. Now let me move to the mobility solutions segment. I already covered our new strategic direction at the beginning of the call, so I would largely focus on the financial results for the segment.

In Q2, we recognized revenue on approximately 400,000 devices at an average selling price of $271. While our mobility solution revenue was down compared to last quarter, we are making good progress in moving the segment towards profitability. We improved the gross margin to 26% this past quarter in Q2 from 8% last quarter in Q1.

This was instrumental in cutting the Q2 operating loss by nearly two-thirds to $8 million compared to last quarter loss of $21 million. I will now turn the call over to James for a much more detailed look at our financials..

Thank you, John. Today we reported Q2 GAAP revenue of $334 million, a non-GAAP revenue of $352 million with a GAAP loss per share of $0.71, and non-GAAP EPS was breakeven.

Our non-GAAP income statement presentation excludes purchase accounting deferred revenue write-down, debenture fair value adjustment, stock comp expense, restructuring program charges, inventory write-down, amortization of purchased intangibles, losses on noncash -- noncash losses on assets held for sale, and business acquisition and integration charges.

My comments on our financial performance for the quarter will be based on non-GAAP terms unless specified otherwise. For reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release and the supplement published earlier today.

I will begin with the consolidated review of our Q2 FY '17 income statement results and move on to the individual segments thereafter. Now let me begin with the consolidated income statement. Our total revenue for the second quarter was $352 million. Our consolidated gross margin for the second quarter was 62%, up from 53% last quarter.

Our non-GAAP gross margin excludes an inventory impairment of $96 million and restructuring program charges of $7 million. Gross margin increased to a record percentage due to improved hardware margins, strong performance in software and services, and more favorable revenue mix.

We have updated our model which reflects gross margin in the high 50s for the next quarter. OpEx - operating expenses were $203 million, down from $212 million last quarter. GAAP net loss for the quarter of $372 million was primarily attributable to three major components, which we do not expect the first two to recur.

The first is a $123 million write-down of data center assets held for sale. To continue to drive cost savings and efficiencies in the company, we took steps to reduce the fixed costs associated with software and services as well as the SAF business.

The results of the decision was there was noncash breakdown of those assets as well as the reclassification of the carrying value of the assets to current assets on the balance sheet. Going forward, we expect the cost basis to be lower in light of these changes. The second component relates to our mobility solutions strategy.

We performed analysis of the net realized book value of our inventory and concluded that some inventory required a reduction in this carrying value. The results of the analysis was a $96 million inventory impairment as I mentioned earlier.

The third component associated with the GAAP net loss was due to the fair value adjustment related to debentures of approximately 62 million. As a reminder, this adjustment has no impact on the face value of our debt, on our liquidity, or on our operations or cash flow.

In addition to those items I just mentioned, our non-GAAP operating expenses also exclude $15 million in restructuring charges, $28 million in amortization of acquired intangibles, $18 million of stock comp expense, and $4 million in business acquisition and integration charges. Non-GAAP operating income was a positive $16 million.

Our adjusted EBITDA was approximately $45 million this quarter, excluding the non-GAAP adjustments previously mentioned. I will now break down the three business segments. First is software and services. Our software and services revenue represented 44% of total revenue.

Total software and services revenue for the second quarter was $156 million, up 111% year-over-year. Roughly 81% of total software and services revenue was recurring in nature. Our total software and services gross margin for the second quarter was 80%. Our total software and services operating expenses were $96 million.

Software and services operating expenses consist primarily of headcount and third-party costs relating to our enterprise solutions and services, BlackBerry Technology Solutions, AtHoc, Secusmart BBM, and Professional Cyber Security business. Operating profit in software and services was $29 million or approximately 19%. Now on to SAF.

Our service access fees, or SAF, was 26% of revenue. Total SAF revenue for the second quarter was $91 million down 14% quarter-over-quarter. The sequential decline in SAF was slightly lower than our expectations that we mentioned last quarter. We model a sequential decline in SAF revenue of approximately 20% for the next quarter.

Our total SAF gross margins for the second quarter was 74%. Lastly, I will discuss the results of our mobility solutions business. Mobility solutions revenue represented 30% of revenue. Total mobility solutions revenue for the second quarter was $105 million. We recognized revenue on roughly 400,000 units and ASP was approximately 271.

Mobility solutions gross margin for the second quarter was 26%, up from 8% than in last quarter. Total mobility solutions operating expenses were $35 million. Mobility solutions operating expenses consist primarily of headcount-related costs associated with the development, manufacturing, and sale of devices.

Mobility solutions operating loss was $8 million in the quarter, down from $21 million in the previous quarter. Now moving onto the balance sheet and working capital performance. Total cash, cash equivalents, and investments ended at $2.5 billion. This reflects $34 million of net operating cash used during the quarter.

Our net cash position was approximately $1.2 billion at the end of the quarter. Aggregate contractual obligations, which includes purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations amounted to approximately $761 million, down from $1.1 billion in the same year ago period.

Purchase orders with contract manufacturers represented approximately $71 million of the total, down from $248 million in the same year ago period and $150 million in the prior quarter. We've also shortened our lead times for ordering, which allows us to manage our commitments more effectively.

As John mentioned, we retired our convertible debt of 1.25 billion just after quarter end and replaced it with a convertible note of $605 million. By retiring the previous debt early, we will save over 50 million a year in interest payments. The transaction will be reflected in our financial statements next quarter.

Moving to the cash flow statement, use of free cash was $37 million in the second quarter, which consisted of net cash used in operating activities of $34 million, minus capital expenditures of $3 million. Looking forward, we expect to be free cash flow positive in Q4 and maintain our positive EBITDA outlook for the full 2017 fiscal year.

That concludes my comments and I'll turn it back over to John..

Thank you, James. So before I share some thoughts on our outlook, there's an update to the management team to cover. You are all aware by now that James Yersh has decided to leave BlackBerry for personal reasons. James has been with the company since 2008 and our CFO since November 2013 when I came on board.

We have accomplished a lot together, especially stabilizing our financial and strong cash management. I'm grateful for James leadership, numerous contribution and long-standing commitment to BlackBerry. This will be his last earnings conference call and he will remain with the company until October 31 to assist with the transition to our new CFO.

Let me say a few words to introduce our new CFO Steve Capelli, who will become BlackBerry CFO at the end of September. We are fortunate to have Steve join our management team. He has long proven track records on [indiscernible] leadership in enterprise software and technology.

He started his career in finance and accounting serving in controller roles at Digital Equipment Corporation, Unisys and W.R. Grace. Steve and I worked together in two companies prior that I served as CEO. At Siemens-Pyramid, he served as CFO.

More recently, at Sybase, Steve was President of worldwide field operations and was instrumental in growing software and services revenue to over $1 billion. Steve is a strong business partner and I'm confident in his ability to drive value for BlackBerry shareholder.

I hope all of you have an opportunity - will have an opportunity to meet Steve in the coming quarter. Now on to the outlook. We reiterate our expectation for software and services growth of around 30% for the full fiscal year. In mobility solution, I'm very encouraged with the proof point we are seeing with our new strategy.

We are pursuing similar device software licensing agreement like the one we discussed in Indonesia, which of course was the first of its kind for us. The pipeline includes a late stage discussion in China and several initiatives in India. The outlook here is promising, but those of course are not guaranteed.

We are revising our full year EPS outlook, we are now expecting a range of breakeven to $0.05 loss. This takes into account improving margins, as well as reduced interest expense from refinancing our debt. It also assume increased investment in growth areas such as software, IoT, licensing efforts and others.

This is a significant improvement over the current consensus of $0.15 loss and a second straight quarter we have raised our full year EPS outlook about the consensus. Now I would like to open the call for Q&A. Operator, could you please facilitate that..

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

Hi. Thanks for taking my question..

Sure..

My understanding is that you've pretty much already outsourced all your hardware development.

So what is the incremental move here? How much savings are expected to be generated from this?.

Quite a bit. We really have not outsourced all our development - hardware development or handset development effort. We are taking one or two products outsource it to others, but we've been developing our own handset also. So with what I announced today, we will end that activity and rely completely on partners.

So working with partners, relying is too strong a word, and working with them to make sure their hardware portfolio is up to spec and competitive, is of course reduce a lot of expenses, not only on operating expenses, but capital that we talk about, we don't have inventory we need to carry anymore.

So it’s a long list of savings, you know, people, equipment and so forth..

Any thoughts on how much OpEx you can save from this?.

I don't have - I don't have the number right in front of me. But we obviously expect reasonable savings..

Okay. So it sounds like you're still going to be playing in the device business. If I read the Gartner report on Security for Mobility Management, it claims that the Priv is not considered a substitute for the BB10 platform by highly regulated customers.

So if you do continue with hardware, how do you plan on migrating your key customers from BB10 onto your Android platform?.

It’s always been the strategy for us to make sure that we could take Android up to the same level of security of BB10 and we're working very hard at it with one big team of people working on it and when we get to that point customer will be quite happy migrating..

. :.

When do you think you'll be able to get your version of Android to the same level as BB10?.

When we get there we'll let you know. By the way those are three questions, not one..

Okay..

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

Hey, Maynard..

Hi, good morning, thanks. I want to make sure I understand what you're doing with the hardware business.

In terms of revenue recognition, will you no longer be recognizing hardware revenue? And then the only revenue recognition is a license fee per device sold? And I guess since it's the JV, should we expect that you'll consolidate your portion of the JV below the line? I'm trying to understand the mechanics of how to think about the hardware revenue and profits going forward..

Good question. When we prepared the script it was the one area that I was trying to make clear and it’s hard to write it, we have nothing to do with the JV, we are not part of the JV. We are licensing our technology and brand to this JV.

The JV was set up - the JV partners are not only the distributors of telcos and the telephone companies in - a number of them by the way is just led by this particular organization called Tiphone, which is the largest I guess holding - holders of the JV.

The JV is actually an Indonesian entity, developed and put together by them, specifically focused on BlackBerry and distributing BlackBerry handset in Indonesia. All we did was we licensed this JV our brand and the - and all the software. So that’s number one. Before I move on that that’s clear, right, I mean, okay.

So therefore it’s definitely above the line not below the line because we are no partner to JV. Second thing, is we are taking royalty per unit and not going to detail the description of how much and what's the minimum and all that. So what – but it will be above the line royalty revenue.

Now as to whether we will distribute, in this particular case we will not, most likely not, we have the option to take that product and distribute it to other part of the world and not Indonesia of course. But we don't plan to do so at this point. And so the majority of all our revenue in this new model are royalty based..

So just to be clear, so you will still have hardware revenue outside of Indonesia, and then inside Indonesia you will only have the per-device fee?.

No, actually my new model tells us to ramp down the selling of hardware anywhere, but we might help our partners to sell it..

Okay. Thank you..

So it’s a royalty based business plan..

Okay. Thanks..

Sure..

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

Hi. Morning, Steven..

Great, thanks.

So the changes in mobility solutions, do you have to take a charge or is that cost being transferred to your partner?.

Well, we will have to transition, let’s call it, this isn’t a one-time event. Steven I think it's the process that we'll have to go through. So as we’ve talked about before some of the charges could be winding down liabilities, could be severance costs associated with it.

So there will be charges definitely as we migrate towards that model from the legacy one..

Steve, we also actually taken the charges this past quarter in the reevaluation of some of the assets - inventory, so it’s because of this pivot..

Great.

And, John, your response to the earlier question, does that mean at some point Mobility Solutions become discontinued operations for you?.

No, Mobility Solutions will become a more software oriented business..

Okay, got it.

And for working capital, what is the -- again, the changes in the Mobility Solutions group, how much of a positive impact do you expect to pick up in the second half?.

Steven, if you just look at the balance sheet and that number for inventory once we're fully transitioned to this model, should be zero. So we reported just under $50 million with a whole bunch of ups and downs in terms of outflows for the most part and that’s evidenced by the charge that John mentioned.

So you know $50 million plus, if you're counting just on what we reported and then you know the second place you need to look is our purchase obligations that I referenced in my script, that's down, we cut that in half quarter-over-quarter and that’s reflective of us transitioning to the new model.

So just with those two numbers together that's over $100 million in efficiency there..

That’s great. Thanks, James..

Thank you. Our next question comes from the line of Tim Long of BMO Capital Markets. Your line is now open..

John, you talked a little bit about the pipeline for the licensing deals. Could you update us on how the IPR, the patent pipeline, looks? It's been a few quarters since we've had some revenues there. And then, John, you also mentioned a pretty positive move in the number of customers taking suites.

Could you talk a little bit, at least at a high level, about what that's doing for revenues? Is that helping increase revenue per customer or at this point has that not yet hit the model? Thank you..

Yeah, okay. So IPR side you know, as I spoke about couple of two quarters ago, we want to build a more recurring model. There are lot of activities going on, so I'm encouraged something is going to come, but I don't know the timing of it.

For those of all you who know something about this market it takes a long time to get started, in other words to get the agreements done and then once you get the agreement done it will be relatively easy to maintain if there is – that’s kind of the model. So that’s where we're been pushing.

Also, I think we need to be a little be patient with the IPR side of the equation. But the activity are a lot, as you know we have strong and fresh IP that a lot of people would either want or need or have to have. So it depends on which part of it.

So far as suites, so absolutely the ARPU gone up quite a bit because the suite is a combination of sensible kind of combination of functionalities by collaborations, messaging, communications, security. So that of course makes it the higher revenue for us and what you used the word ARPU, but it will be per user higher revenue for us.

And then we already had seen some of those..

And to maybe just add that, I think one important aspect that both John and I touched on is the recurring percentage and the fact that it’s up over 80%, we’ve always said that that was our objective and ultimately we're making significant strides towards that..

Okay. Thank you. And good luck, James..

Thanks..

Thank you. Our next question comes from the line of Paul Treiber of RBC Capital Markets. Your line is now open..

Hi..

Thanks very much, good morning.

Just wanted to focus on the software business, could you speak to the decline in revenue from Q1? And also, was there any material contribution from IP licensing revenue last quarter that didn't repeat this quarter?.

Right. That's exactly what you – you hit it right on the head of the nail. We have some revenue, IP revenue in Q1 but not very big, that was not reflected in Q2, Q2 was zero and therefore you see the differences there..

Again Paul, the other thing that I'll add is as our recurring percentage goes up, that's another reason why revenue would be down sequentially. So we're adding to the balance sheet, but is not hitting the P&L yet..

So it would be a combination of IP license plus perpetual license that would decline on a quarter-over-quarter basis?.

Not perpetual..

The recurring increase….

[Indiscernible] on the enterprise side, yes..

Okay.

And then just software again on the maintenance revenue on BES, have you seen any change in maintenance renewal rates or drop-off in BES maintenance revenue?.

No, not at all, no..

Okay. One last one from me, just on the software business as well.

The mix of enterprise users on non-BlackBerry handsets, what's the growth of non-BlackBerry handset users?.

Well, we have – from the Good Technology side where 70% plus all iOS devices we don’t see a difference - any changes there. We've seem to see a lot of Samsung or android devices, not necessarily Samsung but android based users. So I would say it’s going up, I don't - I don't really have a number that I track..

Okay. Thank you. I'll pass the line..

Sure..

Thank you. Our next question comes from the line of Paul Steep of Scotia Capital. Your line is now open..

Great, good morning.

John, could you talk a little about your view on the software business, obviously the focus of the company now? But in terms of M&A what do you think you'd need to add to the asset mix, given the assets you have today in terms of bringing the portfolio more together? Seems to be very distinct buckets, or from the outside it looks to be operating distinctly.

Then I've got two quick clarifications..

Okay. So could you tell me how distinct because the whole idea was pooling all of the suites together, of defining the suites and the stack, is everything based on the enterprise servers of BlackBerry. Application server is all based on Good Technology and Good Dynamics and so forth.

And then on top of that, all the integrations, all SecuVOICE and messaging and collaboration software. So to me the pictures are quite tied together and I got those from our customers too.

So it’s not just we saying it so it’s not – so where do you see the distinction?.

To me, I was just looking -- clearly you've got an enterprise business that's focused on exactly what you're talking about. You've got connected car. We've got IP licensing.

I'm looking at -- how are you looking to leverage those? Or are they just going to always stay distinct? Or are you going to carry down a path of potentially divesting certain of those assets?.

Well, we don't have any plans to divest any of the assets. But I guess anything in life is about price, so since I - I'm trying to enhance the value of the company. So - but we don't have any operating plans to divest any part of the business. IP takes time, it is a little bit more stand-alone on IP, but you know, it’s more of a licensing move on that.

But the connected cars, or the QNX and Radar and all that technology are building - aiming at market, at vertical market. This happened to be more of a transportation market and an embedded market.

And eventually you will have to come together in this so called IoT or enterprise of everything - of things and eventually has to be the - even the enterprise stack that we have today is about managing endpoints efficiently and securely.

So and if you look at car or a QNX enabled devices, it’s an endpoint and you could see how they might come together in the future. We will work towards putting it together over time but we’re not in a hurry because we want each business to be profitable..

On the timing for the transition, you've alluded to it.

Is it fair to think, based on the POs out there, that this would effectively be completed by middle of Q4?.

What transition?.

The transition of the hardware business?.

Yes. Oh, yes. It will be this fiscal year, absolutely, yes. I mean, by I don’t know about middle of Q4 particularly, but it will be – it will complete in this fiscal year..

And to also be clear, James alluded to a number of divestitures or assets held for sale in the data center side.

When should we expect resolution there, and meaningful number or not material?.

If you look at the balance sheet Paul, it is a meaningful number, at least in terms of that line item, we'll have that done this fiscal year as well..

Yes, we always try to get it done all in this fiscal year..

Okay. Thanks, guys..

Okay, absolutely..

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

Hi, guys.

Could you talk a little about the pipeline for Radar? And now that you have a pretty significant reference customer, if you are already seeing an increase in POCs or requests?.

Yes, increased a lot POC. In fact my guys are complaining there’s not enough people, too many - too much work, everybody wants to talk, that’s directly quoted from Sandeep..

And was that a competitive win? Did you have an eval that went head to head with some of the other competitors?.

In Caravan, I think in general we have a really – if you think about refresh technology of a lot of the old proprietary that hasn't really used the cloud, that hasn't really used the kind of light weight technology we have, the embedded technology and the sensing technology.

So you need to think about it at – you know, there is a whole bunch of them in store out there but these are all older technology and we came in with basically all new stuff. So we don't have a lot of competition.

The competition will be the people who still ship a lot of the proprietary technology that uses their 1own software console, doesn’t go to the cloud and couldn’t do analytics and doesn't measure everything, very clunky measurements like the sensors are huge, battery life is limited, that kind of situation. So you need to think about that way.

I don't really see a lot of the same type of people coming at us. So it’s not that competitive win from that I just need to go in the hit and replacement cycle..

What was the pro forma cash after the debt restructuring?.

The change in the balance was about $700 million, its above one, three something including all interest, a billion and then taken in six - 605, so lets call it 1.8 if you will, Michael..

All right. Great. Thank you very much..

Thank you. And our next question comes from the line of Vijay Bhagavath of Deutsche Bank. Your line is now open..

Hi. This is Brian Yun on for Vijay. Thanks for taking the question. My question was on the hardware business. I think you highlighted last quarter that hardware was still an important aspect for some of your government customers, especially given the added security actually built into the hardware.

So, does the shift to ending hardware development change the conversation you're having with those customers?.

No, because we are - some of the hardware security features, we will either license and provide to the third party we talk about, some might not take it. So a lot of them are the injection, for example key injection, its going to be coming from the chips they got from Qualcomm or somebody else.

So it’s a mix to your answer, there will be hardware out there that will focus more on a higher end with the more security..

Karma's a fairly niche manufacturer, but is there an opportunity with the technology at any of the larger automotive OEMs?.

Yes, let me answer the second question first, the first question is easy I really couldn't give you any more color. – detailed customers saying I have to respect what the customer would or would not allow me to do, and since I haven't checked with them, it's probably inappropriate for me to comment on it.

And the Karma , obviously we love to have them being a proof point of our solutions, it is of course we'll be taken to all the OEMs and all the car manufacturers around the world..

Okay. Thanks..

Sure, absolutely..

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

Hi, James..

Thanks very much. Hey, just a couple of follow-up questions.

First, on the reduction in interest expense, how much are you expecting that is contributing to your improved EPS outlook for the year? On our arithmetic, it looks like it might be about $0.10 of the improvement, but I want to double check that math?.

$50 million a year, it’s a $0.10 a year. We have two quarters left that’s up $0.04 to $0.05..

Okay, $0.04 to $0.05, okay, great. And then, thank you. And the other question I had was back on the software, James mentioned that there had been some increase in subscription-related revenue.

When we look at the entirety of the year, are we anticipating that percentage of ongoing will continue to increase? And as you look at the software target for the year, are you also building into that any IP-related revenue? Thanks a lot..

Yes, it is included, IP is included in it in a number we don't expect a big chunk of that from IP this year. So and our expectation is 30% growth from last year's number..

And on the recurring piece James, we also always said that 80 was our target and have model that, obviously we're there. So obviously maintenance are hopefully slightly growing, now I think it would be a safe way to think about it..

Thanks a lot..

Thank you..

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

Hi, there..

Hi, thank you. Just wanted to clarify a couple of things.

First, in terms of the royalty per unit, is that a fixed amount? Or is that a function of the price of the device or something else?.

In the case in Indonesia was a fixed amount, in other discussion we have, we haven't signed yet, but in other discussion we have its a little bit mixed model. One of them particularly for example is a percentage of the total sale and in some cases it's the fixed amount but tiered pricing..

Okay.

And in terms of the assets that are held for sale, what exactly are you selling there?.

The data centers that we own Simona..

The data centers?.

Yes..

Okay.

And just lastly, when you talked about the 81% of the software segment being recurring, are you including the $18 million of amortized deferred revenue in there?.

Well definitely the denominator - the denominator would be the total reported software number, so I think the answer to your question is yes..

So the numerator, the 81%, does that include that $18 million as well?.

No..

Okay. Thank you..

Thank you. And I am showing no further questions at this time. I'll like to hand the call back over to John Chen for any closing remarks..

Okay. Thank you. So to close, I again like to thank James wishing him the best in everything he does. You know Steve will be joining James on all the analyst one on one call to follow and thank you everybody for joining the call and have a good day..

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