BlackBerry Limited (BB) Earnings Call Transcript & Summary

Hello, everyone, and thank you so much for joining us here today, on day 3, the final day of Citi's TMT, Technology, Media and Telecom, West conference. I'm Jim Suva, the IT hardware and tech supply chain analyst here at Citigroup Investment Research. We're very pleased for this session to have the company's management from BlackBerry. Before going into the details in our interactive Q&A, I want to let you know a few housekeeping items. First, no media or press are allowed on this. If you are media or press, please disconnect. We also note that any investors that are subject to MiFID II, please ensure that you have the applicable research agreement in place. Finally, do note, there are disclosures and safe harbor statements associated with this. They can be found at the log-in registration site as well as at the Citigroup Investment Research and the BlackBerry Investor Relations website where there are safe harbor statements and forward-looking commentary to be aware of. We do want to note that we are making this interactive. However, all investor lines are put on mute. This ensures the good quality of audio-visual and it also allows, if you do want to ask a question, please email me, [email protected], and we hope to get to them towards the end of this discussion. We will not be opening up lines, that way we ensure that people aren't talking over each other or no sound/video challenges. Here with BlackBerry, we have several people joining us. We have the Chief Financial Officer, Steve; as well as the Head of the BTS Department or Division, which is John. They are both joining us. We have prepared a few items, but I want to officially introduce them. It's my pleasure to introduce Steve Rai. He's the Blackberry Chief Financial Officer; and John Wall is Blackberry's Co-Head of BTS. Blackberry has successfully transformed their business in recent years, and is now leading a security-focused enterprise software and services provider with a number of interesting growth drivers over the next several years, and we'll get into those, including enterprise security software, connected cars, critical event management and global licensing opportunities. So thank you so much for joining us here on this virtual event, and we really hope that next year, we can be back live in Las Vegas, having this over tea or coffee and in front of the investors who have connected virtually to be live. So maybe to kick it off, maybe Steve, probably a best question for you as Chief Financial Officer is BlackBerry has undergone a significant transformation in its business in the recent years. For the benefit of investors who are reengaging with the story and who may be now know BlackBerry better for its smartphones, could you please give us an overview of the business today?

Sure. Happy to do so. Thanks very much, Jim, and thanks for hosting. I joined the company about 6 years ago. I think John Chen has been at the helm for 7 years, I believe. It certainly is a major transformation, I mean, going from hardware to software. I mean, that's 180 degrees in my book. So it's -- it doesn't happen overnight certainly, and a lot has gone into that, including some acquisitions along the way is transforming -- in addition to transforming the core operations of the company. The M&A, we've been quite active in the last 6, 7 years. And Good Technologies was -- probably that was the main one that kind of kicked off the transformation, I would say, and further additions such as AtHoc and Secusmart and probably the most recent and actually, which was the largest acquisition that the company did in its history was the acquisition of Cylance. I'll speak a little bit further about that shortly. And even the Cylance acquisition now has been -- we're coming on to about the 2-year mark. Obviously, a lot of work gone into integrating the technologies brought by these acquisitions as well as the continued development that the company has done on its own. A lot of innovation has kind of come together. And I think it's culminated in a very compelling and exciting solution set. At this point, we put out data annually. I think the last reference was indicated that we're in about 500 million end points, including about 175 million vehicles to date. And that -- and this sort of vision of securing all end points, we very much continue down that path. And I would say, John has remained very much consistent and in line with that strategy that he set out when he joined the company. From an overall revenue standpoint, I mean, we report revenue in 2 primary categories. We've got our Software and Services. And then we've got our licensing, which is predominantly our IP licensing. The largest component of the Software and Services is represented by Spark. Spark is our platform, which provides end point security and end point management. And this really ties in all of the software businesses and technologies, including the leading sort of next-gen advanced artificial intelligence and machine learning. Intuit has been incorporated. And that really was a -- a large part of that was contributed by the Cylance acquisition. So really some strong differentiated products that feed into the way things are evolving as a necessity. There's sort of zero trust architectures, continuous authentications and really just intelligent security in various forms. UES is Unified Endpoint Security, really is a significant challenge that's out there for enterprises. At the moment, there's a significant amount of point players and point solutions that are kind of aggregated together to kind of form that security perimeter. But really, the Spark platform assists in a huge way to kind of bring that all together in a consolidated and coordinated fashion that's highly effective. And we see, just in general, I mean, the coming together of the UEM and the UES space. The next largest component that we've got is BTS. The BTS is comprised primarily by the QNX, real-time safety critical applications that we have. And John Wall will be speaking to that later on in this session. Again, industry-leading position in the auto sector, but also a lot of application there in the general embedded space, be it medical, industrials and so forth. And next, we've also got the secure communications, I mentioned AtHoc and SecuSUITE. AtHoc is a 2-way kind of multi-channel crisis communications platform, and SecuSUITE really brings our secure voice communication solutions. And again, this is all kind of melds under the Spark platform as well. The other category that I mentioned was the IP licensing business. I think that the legacy of the company is contributed to building up a pretty huge arsenal of patents. And this represents a very significant asset. And again, when John joined the company, John Chen, it was under his leadership that this -- we started to kind of monetize this asset, and that has been a very strong contributor for -- in recent years and continues to be still, several years of strong runway remains in that. So at a high level, Jim, that's how I sort of describe the company at this point.

Thank you, Steve. And maybe as you grab a sip of coffee or tea, maybe we can actually give John Wall a chance to talk about QNX, the business. John, could you explain to us what QNX does? And importantly, what differentiates it from competitors?

Absolutely. I'd be happy to. Thanks for having me, Jim. So QNX in a nutshell is foundational software. So the like -- the way I'd like to describe it, obviously, it's an operating system and a set of middleware components. And primarily, as Steve mentioned, our primary market is automotive. And so where we've been very successful in the past has been being the foundational software for infotainment systems. So if you think of cars that has iCloud connectivity, navigation, those type of things to center screen in the middle of your car deck, QNX had a very, very dominant position in that area. So if you had a Mercedes, if you have an Audi, BMW, GM, Ford, that's where you would find our software, operating system, multimedia software, embedded software within the vehicle. In the last few years, what we've seen that has been very interesting is the car today is made up of many electronic control units. And these are small single-function computers within the vehicle that control things, such as transmission, engine control, door locks, automatic braking, if you have that type of system in your vehicle, and lane departure. So what we're seeing is as electrification of the vehicle, as autonomous drive advances, as digitization of the vehicle continues to advance, we're seeing a change of architecture within the vehicle where instead of having all these small ECUs, we're consolidating them to what we call high-performance compute platforms. And you can think of these high-performance compute platforms as the types of compute platforms that are there in your laptop, your desktop, your phone, Qualcomm, NVIDIA, Intel and the like. And so we're seeing the car becoming much more of a software platform and is now demanding a high-performance, high-complexity operating system, which QNX is. QNX only runs on the high-performance computer platforms. QNX is what we call a real-time operating system. And what that basically means is the operating system responds to signals in a very deterministic way, which means it always behaves the same way. So if there's an alert that comes into the operating system, you will always have a consistent response. That's very important when you're dealing with mission-critical systems within the vehicle. The other thing that our operating system has that's differentiated from the competition is we have the highest level of functional safety. And that is a level of certification that is mandated for systems that control anything within the vehicle, that control steering, braking, acceleration, anything that could influence how the vehicle behaves, requires this highest level of functional safety. And then on top of that, we have the BlackBerry pedigree of security. So when you put this together, you put together the real-time deterministic nature of our product, the highest levels of functional safety, the highest levels of security, it makes our product very well suited to be the foundation of the next-generation vehicle, controlling everything from autonomous drive, safety systems, chassis control, digital instrument clusters, surround view cameras, anything within the vehicle that demands that high level of security and safety. And so what differentiates us from our competition is we have compared -- so I would break the competition into 2 categories. The category is kind of the traditional players that we compete against. We have a much more modern operating system coming from the higher complexity world. And then if you look at some of the high-complexity operating systems out there like Linux, we have all the safety pedigree and the security pedigree that Linux doesn't have. So we really -- we have -- we're in a very unique position where our software offerings for embedded software are best of breed.

Thanks, John. I think a lot of people on the call are very familiar with maybe just the infotainment part of the screen that pops up to tell you where to pick up groceries or incoming call from spouse or mom and dad. Can you talk a little bit about -- yes, QNX is the leading operating system in the automotive sector, but what are the key trends here? And where does that play in the position for BlackBerry? I'm kind of thinking there's kind of the infotainments, but there's also the safety side of things. Are they kind of combined together? Are they different legos right now and pieces because we're at the very early innings of the automation of automobiles?

Absolutely. And -- so you're absolutely right. Today, these are very disparate systems. If you look at -- and to use exactly your point, I think, to illustrate this, if you look traditionally in a car, you have your infotainment system. It's a standalone ECU. It runs on its own processor. It's stand-alone. In the vehicle cockpit, you may also have a digital instrument cluster, which is instead of having mechanical gauges, you have an LCD panel that is a representation of your gauges, a representation of the PRNDL, park, reverse, neutral, drive, turn signals. These are typically and generally speaking separate systems and for very good reasons because your digital instrument cluster has a safety requirement, whereas your infotainment system does not have a safety requirement. It's not controlling anything within the vehicle. You could imagine with your digital instrument cluster, if you put your car into reverse and the digital instrument cluster were to indicate to you, you were in drive, there might be some bad consequences of that. And so there are safety considerations to make sure that doesn't happen. The trend that we're seeing within the automotive industry is to take these 2 separate systems that have different safety requirements, consolidated on one actual high-performance compute platform. And so we call that mixed criticality systems. And what BlackBerry is bringing to the table, we talked a little bit about our operating system, highest level of safety, highest level of security, we've also developed a system called a Hypervisor. So a Hypervisor is a software -- a piece of software that runs even below the operating system that allows you to run virtual guests on that processor, any number of virtual guests. So we are able to bring together, let's say, an Android infotainment system in conjunction with a safety certified digital instrument cluster on QNX. We're able to provide a surround view safety system, and all of these are running on one high-performance compute platform. And the QNX software or Hypervisor is safety certified to the highest level. It's also got the highest level of security. This allows us to bring these systems together. And the advantage of this is that you save the OEM dollars by reducing the complexity of the hardware, by leveraging the power of the hardware, you reduce weight within the vehicle, and you're able to provide a much more cohesive experience in the cabin. We're seeing this across the whole vehicle. This example that I'm talking about is just in the cabin, but the same thing is happening with safety systems, instead of having my lane keep assist, blind spot detection and automatic braking as 3 separate ECUs, we're bringing that together onto 1 ECU, combining that functionality. And actually, by combining that functionality, that's how you evolve towards autonomous drive in a very gradual way. You keep increasing the safety systems and you gradually introduce people to more automated driving.

Got you. Thanks so much. Maybe we can give you a chance to catch your breath here, and maybe we can turn it over to Steve with a question. As we look back, 2021 -- or 2020 was a really tough year. COVID hit us. We're doing this investor contacts all through virtual. We normally would be doing this in person. The automobile sector went through productions completely being turned off in the Bay Area as well as around the world. Steve, could you talk to us a little bit about given the significant impact of COVID on the auto industry, how should investors be thinking about QNX revenues and the outlook for that?

Yes. Certainly, as you mentioned, Jim, a significant impact. We've been pretty transparent with respect to those impacts, in particular, on the QNX business. And really, it's the royalties driven by production, as you said. Production at one point, I believe, was virtually ceased essentially completely. Since continues to recover, still a little ways to go there in terms of that recovery. So I think, overall, the impact is a temporary one. To some degree, even where OEMs have -- may have decided, for economic reasons, to defer some investment, we still view it as exactly that a deferral rather than a loss per se. So this is why I say it's temporary and it's timing, and we will recover. I think in the coming fiscal year, we should be getting back to what's kind of been normal levels or kind of, if I can put it that way, pre-COVID levels. The overall theme and direction of where things are going, I mean -- and I'm not referring to IVY. John Wall will speak to IVY a little bit later on in this session. But just if we look at the trends in the vehicle, I mean, there's -- a vehicle is such a rich endpoint. There's so much data in it that needs to be managed. There's an increasing amount of interaction and -- of communications, not only within the vehicle, but within -- with the vehicle and outside the vehicle. Things like the proliferation of natural evolution moving to over-the-air updates, things like that. Those will continue. So the way I look at it, even if global auto production were to stay constant, there's still a lot of growth that could be achieved from these enhancements -- these feature enhancements working their way down through lower-priced vehicles. My daughter purchased a vehicle in the mid-$20,000 range a couple of years ago, and it's got pretty impressive safety features as well as a digital cockpit in there. And so this is the way things are going. So this bodes well, I think, for the expertise that we have and the strong relationships with the OEMs, and the hardened safety certified applications that we bring. So the impact overall, I'll come back to is, I think, a temporary one. And I think I'll take this opportunity just to kind of remind people that the financial model or the economic model, I should say, for QNX, really, first, there's the design phase. In this design phase, we would -- as part of securing the design win, you get a sale of development seats for the -- to support the development effort. That can take 2 to 3 years in the context of auto. It can be shorter from a general embedded standpoint. And during that time, there's professional services that are also provided. And then, eventually, the product is completed, goes to production and then the royalty phase begins. So this cycle is a fairly lengthy one, and the trends that we're seeing that John will continue to speak about, really is getting a bigger share. If you think of it sort of as ASP on a per vehicle basis as well as greater penetration within global vehicle production as well, which currently, I believe, the latest stat that we had is we're in excess of 175 million vehicles per -- globally.

Thanks, Steve. John, turning it over to John. An area that investors are interested in right now, you recently made an announcement with AWS or Amazon Web Services about co-development, co-marketing agreement. Could you give us an overview or a high-level summary about what this is all about?

Absolutely. I think you're referring to IVY or IVY announcement that we made. And so IVY stands for Intelligent Vehicles everYwhere, highlighting the Y in everywhere. So IVY is a cloud connected and cross-platform, multi-OS, multi-cloud in-car software that allows automakers to access a vehicle sensor data in compliance with safety and security requirements. It then takes that data and process it with updatable code to create new vehicle insights and then share those insights with developers through a consistent and simple in-car API mechanism. One of the things -- one of the very strong tenants of IVY is AWS or BlackBerry do not own the data. The OEMs remains in full control of the data. So what does that exactly mean? What we're talking about doing here is creating a middleware component that exists in the car within the embedded systems of the car to be able to take sensor data, whether that sensor data is cameras, LIDAR, anti-lock brake, whatever sensor data is available within the vehicle to be able to take that sensor data, do some edge processing on that sensor data and be able to create insights into the vehicle with a consistent API to external developers. And so really what that means? And when we talk about sensor data, it's not necessarily 1 sensor for data that we can expose. It can be, in a lot of cases, taking multiple sensors, creating what we call a synthetic sensor which is the amalgamation of multiple sensors, doing edge processing to be able to create an insight into the vehicle. So as an example of that, a very simple example is, I have a camera within the vehicle cabin, and I have a seat sensor. Using these 2 sensors, I can determine if there's somebody sitting in the back seat, and whether that person is a child or not. That's an insight. So the idea here is to provide a consistent way of developers, whether it's app developers for in-vehicle applications or whether it's cloud developers or whether it's smart cities, et cetera, to have a consistent way of accessing data from the vehicle.

That's very interesting, John. What do you bring and what does AWS bring to this partnership or agreement?

Yes. It's a good question. So I think, obviously, BlackBerry brings the deep embedded knowledge of the vehicle, how to access the vehicle in a functionally safe and secure way, how to do a lot of the plumbing to talk to the sensors. Amazon, obviously, or AWS, is obviously bringing some edge computing knowledge, but also bringing the ability to drive an ecosystem. So the real power behind IVY is, every car company has been doing what we are talking about to a certain extent, they have been developing applications for their vehicles. One of their challenges is, there is no consistent way to do it across vehicles brands, not even across vehicle lines in a lot of cases. It is all proprietary. So what we -- the real power of IVY is to create that ubiquitous ecosystem environment to be able to leverage the vast network of developers out there across a much larger opportunity. So the idea behind IVY is that, whether I'm talking about a GM vehicle or whether I'm talking about a Volkswagen vehicle or I'm talking about Ford vehicle, that the API or the interface would be consistent for a given use case, for a given set of sensors that we would abstract it to a known API. So the way I like to translate that is think about Android, whether I'm writing an application for a Samsung phone or an LGE phone or a BlackBerry phone or whatever the case may be, those applications are the same. You're not writing applications for LG, you're not writing application for Samsung. The goal of IVY is to create that large, consistent ecosystem for developing apps for the vehicles so that the OEMs have an easier way of monetizing the data that their vehicles generate. And so you could see this as being very important. For instance, if you want to talk about smart cities, a smart city that wants to leverage automotive data can't be worried about whether the car is a Volkswagen or if the car is an Audi or if the car is a BMW. They want a consistent way of getting the data that they're looking for. That is the goal of IVY.

Got you. That's very insightful and interesting. What about AWS' side, are they committed to providing resources to this? I know AWS does many, many, many things. How should we think about that?

So this -- yes, it's very interesting. So this is -- it's a 50-50 split of doing the development. So for X amount of people that we have developing on the platform, Amazon have put in X amount of people helping to develop the platform. They're very committed. This is -- I would say, yes, it's a 50-50 development. We worked with Amazon. It probably took about 2 years to get the right people within Amazon. We had a vision of creating this kind of ubiquitous ecosystem. And when we finally navigated through Amazon, as you can imagine, it's a big company, very big company. And we hit upon the right people that shared the vision. And I think it's fair to say both sides are very excited to be working on this, and it's a real joint collaboration.

And John, how does this separate you from, say, competitors? And who are the competitors out there?

So there are a lot of competitors. Like I say, this -- the idea of extracting data from the vehicle is not new. The OEMs know they're sitting on a gold mine of data. The differentiator, I would say, is scale. It's the ability for us to scale this across multiple OEMs and to get buy-in from multiple OEMs to start to grow a de facto ecosystem that can become standardized. I think that's the real differentiator is scale. There's companies that do this. They're smaller companies. They're working with individual OEMs. They -- it's very difficult for them to scale at the same rate that we can working with AWS.

Great. Thanks, John. Steve, as CFO, maybe we turn it back over to you. How should we think about the financial model of BlackBerry, specifically to IVY and the things that John is doing with QNX?

You are on mute, Steve.

Steve, are you still connected? And are you on mute by chance?

Sorry about that.

Great.

Yes. I mean obviously, we've got a couple of years to go here before we get to revenue. Obviously, the -- our goal is to build a recurring revenue base. And so whether it's subscription or usage based, we'll work through that. I think the initial customers are likely expected to be the OEMS, as John described, and for performance and use cases that really enhance performance and safety for the vehicles, there's probably a larger opportunity for apps and services, and this is really coming to the ecosystem community and just leveraging the much broader opportunity from the developer community. I mean if we kind of look at the app stores of the major players out there. I mean the contributions by the app developer community is enormous and coming up with ideas that nobody even thought of before, right? So we'll see what the next killer app is going to be from a -- that's got applications within the vehicles. So certainly, a lot of opportunity here, but our focus will be on generating a recurring base of business. And this is, as John described, cross-brand, cross-model platform, I think, positions it very well to do that.

And Steve, how can we measure the progress or milestones? Will you be announcing new customers when you sign them? Or do we wait to buy the car in the market and press the button and start to see some integration? Or how should we think about that?

I think, certainly, our intention would be to provide insights along the way as we get to kind of key milestones. And if we're able to announce customers when they're signed, we'll do that. But we'll certainly work through that.

Great. And for John, so far your discussion has mostly been about QNX on the automotive side of things. Is there opportunities for QNX outside of automobiles?

Absolutely. And it's actually something that's very exciting for us. So QNX is pedigree before automotive was what we call generally embedded. And that's things like industrial automation, controlling conveyor belts in factories, robotics, medical. When people think of QNX, they don't realize this, but most MRI machines in the world run QNX. If you see a wind turbine, most wind turbines that you see in the world run QNX because you have to control the pitch of the blades, and that requires a real-time operating system and functional safety. So what we're seeing, the evolution that we're seeing in automotive of higher complexity, higher automation, connected, the exact same thing is happening in the other industries, whether it's rail, medical, robotics, these things are getting connected. There's more levels of automation. If you look at robots of the past, if you look at robot on a build line for a car, you'll normally see it very isolated. There's nobody around that robot. It's doing sheet metal work. But if you start to think of robots in the context of factory floors or warehouses, you're going to start seeing the robots are more interacting with humans on the floor. So now you have a safety concern, a functional safety concern. You're also going to see these devices are more connected. So a lot of the things, a lot of the properties that I talked about in automotive, safety, determinism, security, this is starting to pervade into other markets, and we see a huge opportunity for QNX in these markets. Think about this if you -- one of the next big use cases for medical as we enter the world of 5G is medical robotics, where you'll be able to do remote procedures. I mean these are going to require the highest level of real-time deterministic operating systems, highest levels of security, highest levels of functional safety, complete sweet spot for QNX and for BlackBerry, and we see more and more of these use cases happening. And we're also seeing precision agriculture, drones. I think the way I try to look at it, what gets me excited about working here is the world is going to become more dependent on software, not less. And that's going to be a great thing for QNX.

And John, to wrap it up on this topic of QNX, how do you perceive the competition or the competitive threat to QNX? Players that use like Automotive Grade Linux or somebody e-mailed me asking about what about Apple CarPlay, but I believe Apple CarPlay is probably -- is on the forward-facing and not the infrastructure.

That's a different thing.

But can you talk about the competitive threat, maybe automotive or industrial-grade Linux?

Sure. Just to clarify that point about CarPlay. So Android Auto or CarPlay, these are pieces that we support. They're part of the connectivity to an infotainment system. But to your point, there is competition. There's what I like to call the traditional competition, which is the Wind Rivers, Green Hills. These are players that have traditionally been on the safety side. And then there's the new competitors potentially, which are Linux, which come from the high-complexity side. When I look at the competition, the traditional competition, I think we have an advantage because we come from the high-complexity side. We have a much more modern operating system, much more -- our operating system looks like Linux from an interface perspective. They define that as POSIX, which is how you interface the calls to the operating system. We look a lot like Linux, even though architecturally we're very different. The challenge with Linux, which -- and just to be clear, Linux is probably the biggest competitor. It's hard sometimes to compete with free or perceived free. It isn't free because you have to maintain it. Linux doesn't have a very good story when it comes to functional safety. One of the things that makes Linux a good thing is it moves very quickly because of the community contribution. You've got lots of people contributing to Linux. So it moves very fast. That's what a lot of people like about Linux. It's always on the forefront. But that actual property is what makes Linux difficult to safety certify because safety certification requires a very methodical view of how the software is maintained, where the software comes from, who developed the software, all the design documentation that goes along with it, all the artifacts that go along with it. So if you try to safety certify Linux, you can do it. But at the end of it, you don't have Linux anymore because you're not at the forefront of the development of Linux. So the way we compete with this is we try to grow our safety portfolio as quickly as we can. And that means adding more and more components that are safety certified, whether it's communication, graphics, file systems, whatever would be, we try to add more layers of safety certification. And then we also try to make sure that our performance stays ahead of the competition. So we take our competitors very, very seriously and always on our mind.

Gentlemen, as we wrap it up now, maybe since we're a little short on time, I'll just target this specifically to Steve as Chief Financial Officer. Steve, what's maybe the 1, 2 or 3 things that you really want to leave investors with about why they should be buying BlackBerry and owning BlackBerry stock? And why you're there as CFO, what gets you excited? Steve?

Well, BlackBerry has always been synonymous with trust and security. And that, as John said, is always on our mind, and that's what we do. And there's -- when I sit back and think about the company, I mean, there's a reason why the largest security organizations in the world continue to rely on our solutions. And security never gets old. So I think it just positions the company very well to continue to contribute and do well in a very large and growing market. That's what excites me.

Well, we're out of time. I thank you so much. I wish we could have this discussion much longer. And I know some investors did send in some questions. I encourage you to reach out to their IR team. But I do hope we can have this in person in the future. I want to thank BlackBerry presenting their representatives. And thank you, and we hope you and your family and loved ones, a happy new year. And hopefully, in 2021, we'll get together to shake hands in person.

Thank you very much.

Thanks, Jim. Buh-Bye.

Thank you.